Oaktree Specialty Lending Corp (OCSL) 2009 Q4 法說會逐字稿

Good day and welcome to today's Fifth Street Finance Corp. Q4 and fiscal year-end earnings conference call. Today's call is being recorded. At this time I would like to turn the conference over to Stacey Thorne.

Good morning and welcome everyone. My name is Stacey Thorne and I am the head of Investor Relations. This is the conference call to discuss the results for Fifth Street Finance Corp. for the fourth quarter and fiscal year ended September 30, 2009.

I have with me this morning Leonard Tannenbaum, CEO and President; Bernard Berman, Chief Compliance Officer, Executive VP and Secretary; and William Craig, Chief Financial Officer.

Before I begin, I would like to point out that this call is being recorded. Replay information is included on our press release released yesterday and is posted on our website. Please note that this call is the property of Fifth Street Finance Corp. Any unauthorized rebroadcast of this call of any form is strictly prohibited.

Before we go into our earnings, I would like to call your attention to the customary Safe Harbor disclosure in our press release sent yesterday, December 9, 2009, regarding forward-looking information. Today's conference call includes forward-looking statements and projections, and we ask that you refer to our most recent filings with the SEC for important factors that would cause actual results to differ materially from these projections.

We do not undertake to update our forward-looking statements unless required by law. To obtain copies of our latest SEC filings, please visit our website or call Investor Relations at 914-286-6811.

The format for today's call is as follows. Len will provide an overview. Bernie will provide an update on the SBA. Bill will summarize the financials, and then we will open the line for Q&A. I am now going to turn it over to our CEO, Leonard Tannenbaum.

I am pleased to report the continued improvement in the economy is represented by the general EBITDA improvement in our portfolio companies. We publish the Fifth Street Index monthly, which now has shown two consecutive increases. This continues the improvement in the middle market fundamentals that we have been highlighting for the past two quarters.

We had a successful fiscal year 2009 relative to the challenging economic conditions. During fiscal year 2009 we originated $66.3 million worth of deals, 82% of those were first lien, 14% second lien, and 4% other in equity. We also successfully replaced our one-year line of credit with a three-year line from Wells Fargo, and progressed with our SBA license, which Bernie will talk about later.

I reminded everyone in our monthly newsletter two months ago that while we were disappointed with the pace of origination, we had a high quality $1.4 billion pipeline, and we were optimistic that we would see a pickup in M&A activity and additional lending to private equity sponsors.

In the November newsletter we announced $75 million of signed term sheets and $6 million of closed deals. We now expect to close by the end of the year, or in January, $195.3 million of first lien deals, minus some syndication, including the $75 million we announced last month.

All of these deals are with strong equity sponsors. On average these deals have about 50% sponsor equity, IRRs in the mid teens, and just under 50% of the loan amounts are floating, with a LIBOR 3% floor.

On average, debt to EBITDA of these deals that we have signed is 3.3 times deep. The increase in floating rate loans with floors will begin to serve as a hedge against the substantial increase in interest rates over the coming years. We also plan to swap part of our LIBOR exposure on the Wells Fargo lime in the near future.

Although Fifth Street originates 100% of our securities, we plan on partnering with a large reputable lender on one of the loans, and we have strong interest by syndicate partners for $15 million to $20 million of our largest single exposure. This strong conversion of our pipeline into signed term sheets is due to our ability to commit to the entire loan without syndication risk, by utilizing both the credit line and the SBA facility. And the desire for sellers to close by the end of this year due to the potential for increase in the income tax rate next year.

We believe that these events, coupled with our strong brand and relationships, have allowed us to capture premium pricing over the market. We believe the opportunities in the middle market are large and growing, as lenders still have not returned to the middle market with substantial capital. In fact, several have exited.

We plan on continuing to take advantage of this environment to gain marketshare with top quartile private equity sponsors, as well as capturing strong risk-adjusted returns. We do expect weighted average yield to decline for several reasons.

One, the formula weighted-average deals does not account for the substantial amortization that we have in each of the loans that we have signed term sheets for.

Two, these loans are to companies that are bigger in size, could be viewed as safer, with substantial equity contributions from private equity sponsors, as I mentioned before, almost 50% contribution. And three, all of these loans are first lien.

We do expect, however, to have a weighted-average yield substantially higher than our competition. We reiterate our plan to have 65% first lien exposure as a total part of the portfolio by the end of calendar 2010.

Since all of the $195 million of new signed term sheets are composed of first lien investments, and our substantial pipeline is almost all first lien unit tranche loans, we believe this goal may be reached earlier.

Our Board of Directors declared the increase in the dividends this quarter to $0.27, up from $0.25 the previous quarter. Due to the increased pace of originations just noted, coupled with the use of leverage, we anticipate the dividend should increase during the next calendar year, beginning with the next calendar quarter.

As the velocity of deals begins to return to normal we also expect to be able to realize some of our $6.8 million of exit fees. We are also putting in substantial prepayment penalties to offset reinvestment risk as the market begins to recover.

We are working with several syndicate partners on expanding the Wells Fargo line and potentially adding an additional line of credit. While there is no guarantee that these parties will participate in our lending facilities, we are optimistic that we will be able to get additional partners in the near future.

I am very pleased with the substantial progress on the origination front and the strong performance of our team members. We are continuing our hiring process to add to our underwriting, portfolio management, and marketing divisions. And look forward to continuing to deliver a strong product offering to the private equity community, along with growing returns to our shareholders.

My partner, Bernie, has been working on many projects, including leading the important SBA process that we began last November. To talk about where we are with the SBA licensing process and the deployment of our SBA equity capital, I would like to hand the call over to Bernie Berman.

We continue to progress through the SBIC licensing process, which is a long and comprehensive process that we have been working on for a little over a year. We are now in the final stages of the process, and we are cautiously optimistic that we will receive a license within the next 30 to 60 days.

The remaining steps are the approval of the divisional committee and the agency committee. So far we have made it through every step of the process without any glitches.

We have already closed one prelicensing investment, which will count toward our $75 million of regulatory capital should we receive a license. And we have received approval for a second prelicensing investment to be part of our regulatory capital.

The closed investment is Trans-Trade and the approved deal is one of the term sheets we recently signed. We have also just recently asked that two of our pending investments be approved to be part of our regulatory capital. If they are approved and all the deals closed, then we will have invested $73 million of our $75 million in regulatory capital.

We have also asked that we receive a leverage commitment on an expedited basis so that, hopefully, we would be able to begin drawing leverage for additional investments in early 2010. We are cautiously optimistic that we will be able to do that.

I am now going to turn it over to our CFO, Bill Craig.

With respect to our balance sheet ending September 30, 2009, total assets were $415.9 million, which included investments of $299.6 million at fair value and cash and cash equivalents of $113.2 million. Liabilities were $5.3 million and stockholders equity was $410.6 million.

As of September 30, 2009, we had no borrowings outstanding. Our weighted average yield on investments was 15.7% at September 30, 2009, which includes a cash component of 12.9%.

Our net asset value per share at September 30, 2009, was $10.84.

I would like to review our earnings. For the quarter total investment income was $12.5 million and total expenses were $4.7 million, resulting in net investment income of $7.7 million.

We ended with net investment income per common share of $0.26 and earnings per common share of $0.25.

We waived the entire management fee that we would have received on September 30, 2009, on uncommitted cash. The amount of the waived management fee was $172,000.

We continue to internally value all of our investment on a quarterly basis. For the three months ended September 30, 2009 we had $2 million in unrealized appreciation. This consisted of $1.9 million of reclassification to realize losses and $0.1 million of net unrealized appreciation on equity investments.

At September 30, 2009, approximately 5% of our debt investment portfolio at fair value, and 4.9% of our debt investment portfolio at cost or interest at floating rates. All of our floating-rate loans carry a minimum interest floor of at least 9%, which protects our return in a low rate environment.

With respect to the portfolio, during the three months ending September 30, 2009 we invested $11.9 million across one new and two existing portfolio companies.

At September 30, 2009, our portfolio consisted of investments in 28 companies, 26 of which were completed in connection with investments by private equity sponsors, and two of which were small limited partnership interest that were unfunded as of September 30, 2009. These investment at fair value consisted of 48% first lien loans, 51% second loans, and the remaining 1% is equity and other investments.

As of September 30, 2009, we have stopped accruing PIK interest and original issue discount on five investments, including two investments that had not paid their scheduled monthly cash interest payments or were otherwise on nonaccrual status.

With respect to our ratings at September 30, 2009, the distribution of our debt investments on the 1 to 5 Investment Rating scale at fair value was as follows. Investment Rating 1 investments totaled $23.0 million, or 7.7% of the portfolio. Investment Rating 2 investments totaled $248.5 million, or 82.9% of the portfolio. Investment Rating 3 investments totaled $6.1 million, or 2% of the total portfolio. Investment Rating 4 investments totaled $16.3 million, or 5.5% of the total portfolio. And Investment Rating 5 investments totaled $5.7 million, or 1.9% of the total portfolio.

If you include cash in the above calculations, our rated 3, 4, and 5 investments are 6.8% of the total investment portfolio plus cash. The percentage of 1 and 2 rated investment securities for September 30, 2009 was 90.59% versus 86.48% for the prior quarter ended June 30, 2009.

We are closely monitoring all of our investments and continue to provide managerial assistance as needed to help the companies navigate through the current economic downturn.

With respect to recent developments on October 2, 2009, Storyteller Theaters Corporation draw $250,000 on its line of credit. Prior to the draw, our unfunded commitment was $1.75 million.

On October 8, 2009, we funded $153,972 of our previously unfunded limited partnership interest in Riverside Fund IV, LP upon receipt of first closing notice of the fund.

On October 16, 2009, Elephant & Castle Inc. repaid $3.9 million of principal outstanding under its term loan to us. The balance of the loan was assumed by Repechage Investments Limited, the equity sponsor's holding company. We received a first lien on the assets of Repechage, and a guarantee on the balance of our debt.

On October 21, 2009, we invested an additional $6 million on the second lien debt in Western Emulsions Inc., an existing portfolio company, to support its growth initiatives.

Since October 26, 2009, we have executed nonbinding term sheets for five investments totaling $195.3 million in commitments. All term sheets are first lien investments and are subject to the completion of our due diligence approval process and documentation, and may not result in completed investments.

We may syndicate a portion of any of these investments. Further details can be found in the earnings release and in our Form 10-K.

On November 12, 2009 we declared a $0.27 per share dividend to common stockholders of record as of December 10, 2009, payable December 29, 2009.

On November 12, 2009 we executed a letter agreement for the potential sale of our second lien term loan in CPAC Inc. and our 2,297 shares of our common stock of CPAC Inc. We received a nonrefundable deposit of $150,000 in connection with this letter agreement.

On November 16, 2009, we entered into a three-year credit facility with Wells Fargo and Wachovia Bank in the amount of $50 million, with an accordion feature, which will allow for the potential future expansion of the facility up to $100 million, and will bear interest at a rate of LIBOR plus 4% per annum.

On November 23, 2009 we received a cash payment in the amount of $0.1 million, representing payment in full of all amounts due in connection with the cancellation of our loan agreement with American Hardwoods Industries Holdings LLC on August 3, 2009.

With that, let me turn it back over to Stacey.

Earlier in the call Len referred to the Fifth Street Index. We release this index monthly, on the first of the month with a two-month lag. You can access the index by visiting our website, www.FifthStreetFinance.com, and then clicking on the Small Business Index tab.

Over the past few months there has been an increased interest in our monthly newsletter. For the month that Fifth Street does not report quarterly earnings, we release a newsletter. If you would like to be added to our mailing list and receive these communications directly, please either call me at 914-286-6811 or send a request e-mail to IR@FifthStreetcap.com. Alternatively, e-mail alerts can be set through the shareholder tools link under the Investor Relations tab on our website, www.FifthStreetFinance.com.

Thank you for participating on the call. I will now turn it over to Gwen to open the line for questions.

(Operator Instructions). Chris Harris, Wells Fargo Securities.

Thanks a lot for taking my questions. I guess first off maybe just should start a little bit looking at the portfolio here. You talked about potentially signing, or selling your interest in CPAC back to the company. I am just wondering, is it safe to assume that you're going to be selling that interest at a loss here? I am looking at the value, and it looks to be written down by about 50% of cost. What is the strategy for that investment if that sale does not come through?

CPAC, obviously, has been one of our more distressed securities. It has come back on accrual recently. The portfolio group did a really good job with it. They sold parts of the units to overseas firm, and they continue to do that. It is just a long process.

The price at which we are going to exit the investment is close to the price that we have it marked at. And I can't really say more than that, because it really depends on the timing of the investment close, as we receive a little bit more as time goes on. And it also depends on the continued progress of the company. But I feel relatively confident that the price we are going to exit is close to the price we have it marked.

That is very helpful, Len. Thanks for that. Then just to follow-up here in regards to the dividend, I know you talked about it, Len, but I just want to make sure I heard you correctly. Are you anticipating potentially raising the dividend in the next quarter, so that will be a quarter ending in March?

Yes, the dividend -- I believe the dividend will increase. Of course, the amounts all depend on timing of closure of deals, and deal pipeline, and expansion of credit and a lot -- there is lots of toggle points to how much dividends increase. But I feel confident now that we have $195 million of term sheets, signed really terrific first lien loans, that the dividend will increase that quarter and will continue to increase next year.

Okay, last question here, because I'm sure there are others in the queue. But I noticed here -- you talked about rather -- that you have two investments here in these limited partnerships. I guess none of them have been funded yet. But I am just wondering if you could talk a little bit about how those investments work. And I noticed here that the industry concentration is multisector, so maybe just talk a little bit about what those investments will be allocated toward.

So I think I have talked a little bit about these strategies. But we have top quartile private equity sponsors that we have developed as core sponsor relationships. Because their underwriting process incorporates both the credit and the sponsor -- and we really do underwrite the sponsor in very high detail -- we are able to hopefully discern successful sponsors from non-successful sponsors.

Through our cour sponsor relationships we are going to dedicate over time 10 -- right now the plan is 10 $1 million investments that are going to be commitments into their new fund. What that allows us to do is first capture some of the upside that we believe these sponsors are going to generate over time in their equity investments, while giving us high diversification.

Just as importantly for us, is the information that gives us about our sponsor partner, and the dedication that we have to them and they have to us. So it increases that relationship tie. So we really look forward to that. It is not going to be a material amount to the portfolio. I am talking about a $10 million overall commitment, of which so far we have done two of these relationships. And it is going to happen over a four-year investment period.

So it is really almost -- it is very small relative to the overall portfolio, but I think it is critical to our strategy of partner sponsoring -- of sponsor partner partnering.

Greg Mason, Stifel Nicolaus.

Len, could you give a little bit more on the syndication proceeds? You said $15 million to $20 million in your largest deal. When you look at all five of these deals, what is your hope in terms of syndication capital from those total five deals?

I think the idea is to have a diversified portfolio. To that extent, we have one of our commitments, which is relatively large, with a core sponsor that we believe we have received premium pricing on. We have gone out to four or five syndicate partners on this one deal. Believe me, if we had a double the size or triple the size portfolio, I don't know that I would want to syndicate any of it. I think it is a perfect deal.

But in light of the fact that we don't have that large portfolio yet, we think it is prudent to syndicate a part of it. We have received strong interest from 3 to 4 parties in the range of $15 million to $20 million. So we are going to do that.

Another deal, which is in the term sheets -- in the $195 million, is double the size of our commitment. And we are splitting that investment with a large reputable lender, which everybody on this call would know, but I don't feel like announcing it until the deal closes. And in partner with that lender, we are learning something about each other and learning that we could be good partners too.

So while in the past we have really only syndicated one loan, which was Caregiver Services, to our partners at Unitrin, which they own one-third of that loan, we haven't really syndicated much. And I think going forward, as you do large first lien uni-tranche loans in the middle market that are far safer, these are larger companies, you may see us partner with other BDCs that we view as reputable, strong BDCs. And I think that is a positive for us and it is positive for the industry.

Then of the $195 million in term sheets, it looks like $36 million is in revolving credit facilities. Will those be undrawn at the time of closing? I'm just trying to get to how much actual cash will be going out the door if and when these deals all close?

I can't say yet. I think there might be some small draws. Almost all of it is underfunded, as typical for a lot of our loans when they close, because we want to make sure that there is a lot of opening availability in the loan. And so we insist on opening availability on each one of our deals. So my assumption right now is almost all of it is underfunded, but there might be some small funding (multiple speakers).

So when you look at that $36 million of unfunded, plus your other unfunded commitments, can you remind us how much unfunded commitment lines are out there? And how much capital do you need to have on hand to cover potential near-term draws on those unfunded credit facilities?

I think that the -- we have several other things we are working on should we need additional cash with different parties. Safe to say that we wouldn't sign term sheets that we couldn't fund. So I am a little surprised at our hit rate here in that a number of factors converge to allow us to convert a lot of the pipeline at once. And we held rates and held pricing premiums on all of our deals, because we were -- we had that strong a pipeline. But these are really great deals and we have to close them.

We have enough cash -- it does use all of our cash, obviously. We have enough cash and availability to close on all of these deals. Safe to say that without an SBA license and without an expansion to the credit facility, we won't be closing a lot -- we won't be signing a lot more term sheets until those two events happen. But as Bernie said, we anticipate those events will happen.

One last question, then I will hop back in the queue. So since you use a lot of your cash, what are your thoughts towards additional capital raises? What do you feel like you need to accomplish or approve before you go back to the market and raise additional capital?

It is nice to say that we have signed term sheets. By the way, 23 of our last -- I think it is even a higher number than that -- 23 of our last 23, or maybe 27 of our last 27 term sheets that we have signed converted into closed deals. So we have a high degree of confidence that these terms sheets are going to convert to deals. Obviously, if they're closing by the end of the year these things are documenting.

Some of them -- one or two of them might close in January. It is hard to say exact timing of anything. But before we raise capital what we have told the investors is, look, we want to use -- we want to go into leverage. Because when you raise capital, we haven't had that ability in the past, the ability to pay down leverage makes it much more accretive to shareholders.

The second thing is we have said that we don't want to raise capital until we have actually gotten approval for an SBA license. I know it is a critical part of the overall investment strategy. It is one of the big drivers of earnings for the next three years from us. And we are going to accomplish that goal as well.

Assuming we accomplish that goal and we go into leverage, the opportunities in the middle market are terrific. The marketshare we are capturing is great. These new private equity sponsors are large, they are reputable. And it is important that we choose the right ones to partner with and to become integrated with them, and we want to satisfy their deal flow.

So we will raise capital in the future. I can't tell you when, but I know that I want to accomplish the two events of leverage and the SBA license before we do that.

Casey Alexander, Gilford Securities.

I can review the call and do the math, but if you can tell me if you did the syndicated -- the amount of these deals that you ideally wanted to, what would your net investment takedown be of the $195 million?

That is interesting. We are looking for a syndicate partner for a larger deal of $15 million to $20 million, which I think I have said on the call. We may or may not syndicate some other small pieces to lenders, which we don't need to syndicate to them, but the equity sponsors have some relationships with some smaller lenders that we may want them to participate.

But needless to say, look, if I could keep all of these deals, I would. And I think they are all great deals at great premium pricing with 50% new equity, all in first liens, all very high in the capital structure, but I think it is prudent to do some syndication.

How many of the deals that you have signed term sheets here are for new sponsors that you haven't worked with before?

We have known a lot of these sponsors for a while. In fact, we know every sponsor that would fit our box -- it is our job -- and they know us. I think what happened here is Casey, when we hired him from Churchill -- and he really has the reputation that we know he had, and he is bringing over a log of soft additions to the Fifth Street reputation, as well as great relationships -- really had a great three months.

So a lot of these relationships, like I can think of one 200 -- a 300 something million-dollar fund that I wanted to work with for a long time. They have known us. And Casey came over and they said, okay, we are going to work with Fifth Street. And the senior partner came here twice. We have had multiple conversations throughout the firm. Those are the type or partnerships we really want and look forward to, and that is one of our signed term sheets.

And their pledge to us and our pledge to them is, look, we are going to look at every deal with you going forward. And we are going to continue developing a deep relationship, because now we are going to be one of their two primary lenders.

That was the case again with another one of these signed term sheets. So one of the biggest deal though is with one of our core sponsors. I might as well disclose this one, which I think is fine, which is Riverside Fund IV, which is also one of our LT investments. And Riverside, we anticipate Riverside and [Marwith] to be our two leading core sponsors in the near future.

And Riverside -- I was reading one of these magazines -- Private Equity Magazine, I think or Bias Magazine, and I think they said it was a wildly, wildly oversubscribed fund. This is a top quartile fund. They are on Fund IV. We are investing $1 million. That was the draw that Bill talked about. And he has talked about the draw in Riverside Fund IV.

And I think David Belluck runs an amazing -- and Phil Borden and others -- ran an amazing firm. Their diligence is terrific. They are healthcare focused. And so we are really pleased to be their lead relationship in terms of lending.

There was obviously an increase in class 4 classifications during the quarter. Was there any common theme to that by industry or by nature of the market that you can see that drove some investments into class 4? So can you give us some color as to how your conversations with those investments are going in terms of an advisor and trying to help advise and manage them back up to class 3?

I think the game -- first of all, there is no apples-to-apples comparison among any BDCs as to what is a 1, 2, 3, 4 or 5. In fact, we could call a class 4 a class 4, or we can call a class 4 a class 5, or we can call a class 5 a class 3. And I can point references to large BDCs that they would recharacterize them differently.

I think the way I look at this is I don't differentiate between class 3, 4 and 5. It is one bucket. And that bucket, as Bill said, if you count cash in, in total it is 6.8%-ish of the portfolio. And I think you're going to see a lot of fluctuation between 3, 4 and 5.

One example we pointed out on analyst day, and I know a lot -- all the analysts are on the phone, was Lighting by Gregory. Lighting by Gregory is fully owned by Fifth Street. It is a class 5 rated security. We said that on the analyst day.

It is doing better. Could we upgrade it? Sure. Is it -- but we don't view it that way. We view it as a bucket, a distressed bucket of 3, 4 and 5. So if you look bucket over bucket there really wasn't a lot of movement. $17 million -- at September 30 -- the '08 numbers, Bill -- but '08 to '09 --.

The way that you would look at it is you had 86% class 1 and 2 at the end of your third quarter, and you now have better than 90% class 1 and 2.

And I think the portfolio is getting better. I think the problem children, as I classify them, are getting reconciled. And you can see that from CPAC agreement. And so one way or another this is going to get reconciled in the next few months. And I feel really good about the fact that our problems are -- we are working through our problems now.

Just because we worked through our problems and we are going to have less problems, does not mean that I'm not going to expand the portfolio management team. We are going to expand this team so that in the next cycle, which could happen in 2011, we are able to take more companies if we have to, and take -- and handle more distressed situations.

So we are building for the future, but yes, the problems are lessening. Our portfolio management group has clearly less problems than they did a quarter ago.

You answered my next question, so I will check out. Thank you.

Jim Ballan, Lazard Capital Markets.

With the larger commitments that you're making, are you finding that there are different challenges in working with larger companies or larger dollar amounts? Is it a different kind of process or is it pretty much steady as she goes?

It is so much easier. I can't tell you how much easier it is to work with companies which already have their finance team already in place, with a robust financial process, with multiple legs to their business. With private equity sponsors that are robust, have lots of available capital, great reputation, funds 3s, 4s and 5s, that have been down all through the cycles and know how to deal with them.

The larger deals -- I mean, Wells Fargo likes the larger deals far better than the smaller deals. Just from -- this is what they are used to. I think the middle market is so much easier than the lower middle market in terms of closing deals and doing deals and working with sophisticated partners with really terrific management teams.

So if anything, it is less taxing to our team to close these five deals than probably two years ago when we closed five $10 million deals or $8 million deals. Especially with second lien loans, where you have to deal with intercreditors and a bank and a smaller PE sponsor that may be only doing one deal year versus these private equity sponsors that are doing multiple deals every year.

Then the other thing I wanted to ask about, it sounds like your conversion rate from signed term sheets to closing has been pretty good in the past. What has historically been the timing to -- from getting the term sheets signed to actually closing the deal? And do you think that will be, again with these larger companies, do you think it will be similar or faster or slower?

I think the normal timing is about 30 days, but there are exceptions to that in the transaction itself. For example, an education company might take longer, because an education company, if (inaudible) is to regulatory issues, etc.

When there is regulatory issues or some government hurdles or dealing with IRB bonds or anything like that, it just -- you may delay the process. Of course, our timing is dependent entirely on the private equity sponsor's timing. So if the private equity sponsor -- also the other delay could be if the private equity sponsor or us through our accounting due diligence find anything. It comes up and there is often a renegotiation with the seller over something.

So that renegotiation has to take place and that often delay deals. So while I think a lot of these -- the five deals, or all of the five deals would say, we would like to close by the end of the year, it easily could slip into January.

Got it. Len, that's great. Thanks a lot.

(Operator Instructions). [Rob Blakely], [Prospero Clark].

I was looking at your press release that you put out yesterday, just to kind of get into a little more detail about the five or so deals that you're announcing. That $41.25 billion deal that you are doing for the post-secondary education company kind of popped up, just because there has been a lot of high-profile issues in the for-profit education space on the public side, i.e., revenue recognition, questionable marketing practices.

I am wondering if you could just give a little bit more detail on this particular one? I know it is not closed yet, but can you give a little more detail why you think it is a good investment?

We looked in the pipeline at six or more education deals -- so many. And we have mapped them all against each other. We did some real heavy industry analysis on Title IV funding, on the amount of money they spend on marketing versus other, and all of the metrics that the government is looking at. And actually the government came out with some new guidelines to what they are looking at and how they are going to evaluate these firms.

In addition, really the Obama administration I think is spending more -- would like to spend more on education, and would like to increase the funding to education companies, cognizant however of some companies which just market for a degree that is not -- may not be all it is cracked up to be.

The education company -- with all of that in mind, the one that we are doing -- done all the work on it, and the private equity sponsor obviously has done even a better job than we have, not only fits all the buckets, but easily fits the buckets. Has a lot of cushion, because the company really does deliver a good product to its students that is valuable -- value-add and proven value add. I think that is the key.

And also student retention is very very high, and that is the other key, and graduation rates and things like that. So I think -- while I don't think before a year ago -- you said was Fifth Street an expert in the education space, I would have said, well, not really. We sort of know it, but we haven't done a lot. I would say over the last six months we have become comfortable in the space with the pluses and minuses and the different factors that affect these companies.

Okay, appreciate it.

Greg Mason, Stifel Nicolaus.

Can you talk about -- we have been hearing that upfront fees are a big part of new investments these days -- could you talk about what you're seeing on the upfront fees on the five deals that you closed? And are those funded on -- are those fees based on the full $195 million commitment or just what you fund?

Good question and I don't have definitive answers, I can give you general direction. An industry leader, which you cover, Greg, basically is loaning at 3 points upfront, and we're following that industry leader. A lot of our loans, while they have previously been 2 points upfront, you know, or between 2 and 3 points upfront. And so we are getting an increase in the upfront fee, which is good.

But the upfront fee typically gets shared with syndicate partners pro rata, or to a large extent gets shared with syndicate partners pro rata. So, yes, it is what we find, not the gross amount.

Usually the collateral management fee, which we charge on each loan, is able to be kept by the partner that originates the loan. But again, that is not -- we haven't been done with our documentation of the syndicate partner, so when we get done, we will know the answers.

As we understand it, there is some leeway in GAAP accounting where you can recognize those fees either the quarter they are received or amortized over the life of the loan, and different BDCs do it differently. What is your approach to the accounting policies for those upfront fees?

What do we, Bill -- traditionally we have amortized them over life of loan, right Bill? And, yes, we have been notified also that --.

Other people do it differently.

That there is variation within the industry of how they are characterized. I don't know that we are going to shift that policy right now, but we clearly have been alerted to the fact that you can do both.

Now correct me if I'm wrong, but for tax purposes those do get recorded into income and have to be distributed. Is that correct? And if so, how does that impact your dividend policy, especially if you take the GAAP accounting where you amortize those, so your GAAP earnings wouldn't go up as high, but your taxable income can be higher?

You're right. Distributable income will be very high as we ramp. This is what I have said for the past couple of quarters. As we ramp the portfolio, and at least double the size of the portfolio in the next year, which is something else I have said, which obviously now given $195 million of signed term sheets looks very likely, we are going to generate a lot of distributable income.

And you are right, it should be distributed in the taxable year that it is incurred, or it can get carried over from year to year. And we may do some of that, depending on how much closes this year, literally December 31 versus January 2. It if it is pushed to January 2 it becomes distributable income next year.

So our policy in dividends is to earn our dividend. One of the big things we focus on is even when we have PIK in the securities, we amortize many of the securities with PIK in them so that we actually receive cash to distribute it. I think that it's really important that when we distribute these increased dividends we are earning -- we receive this cash. So we are not distributing phantom income.

Just to clarify, so your tax year ended December 31, even though your fiscal year-end was September, that's correct?

No.

No, the tax year-end for certain taxes is 9/30, and then for excess taxes, 12/31. It is calendar year.

But for carryover distributable income it is 12/31.

Yes.

Okay, got it. Then you were just talking about amortization. And earlier you mentioned the amortization level on your new loans is going to be significantly higher. Can you talk about what that level is? And does it distinguish between amortization on the term A part versus the term A part that you break out in your press release?

We haven't gotten into the details of the actual -- some of those are term sheets that are under negotiation and I haven't fully computed the duration of all those. But it would include differentiation between A and B.

And finally, can you give us a feel for -- if assuming all these potential deals close, what portion of your portfolio would then be floating rate versus fixed rate?

I haven't done the math, but I think Bill said about 50% of the -- we missed it. One of the term sheets, we should have some floating too and we sort of ended up (inaudible). But the subsequent four term sheets we have signed have a floating component.

I think you're going to see that from us going forward is that we are going to have a substantially increased floating component, as we're going to continue to attempt to hedge against an increasing interest rates by changing -- basically what we have had before is a fixed-rate portfolio to a mix between floating and fixed.

But 50% of the $195 million is floating and 50% is still fixed. And I think going forward you'll definitely see an increase in the floating.

That concludes our question-and-answer session for today and our conference call. We thank you for your participation.

Thank you.

Thanks everybody.