Oaktree Specialty Lending Corp (OCSL) 2010 Q4 法說會逐字稿

Good day and welcome to the Fifth Street Finance Corporation fourth-quarter 2010 earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Ms. Stacey Thorne. Please go ahead.

Good morning and welcome, everyone. My name is Stacey Thorne and I am the head of Investor Relations for Fifth Street Finance Corp. This is the conference call to discuss Fifth Street Finance Corp's fourth-quarter and year-end results for September 30, 2010. I have with me this afternoon Leonard Tannenbaum, CEO; Bernard Berman, President; 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 in our October 27 press release that is posted on our website. Please note that this call is the property of Fifth Street Finance Corp. Any unauthorized rebroadcast of this call in any form is strictly prohibited.

Before we go into our earnings portion of the call, I would like to call your attention to the customary Safe Harbor disclosure in our October 27, 2010 press release 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 could cause actual results to differ materially from these forward-looking statements and 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 each of our lending facilities; and Bill will summarize our financials and then we will open our line for Q&A.

Before I turn the call over to our CEO, Leonard Tannenbaum, I would like to take the time to clear up some information relating to our recently amended dividend reinvestment plan. On October 9, 2010, we announced that our Board of Directors adopted an amended DRIP. This plan allows for a 5% discount on newly issued shares purchased through the plan provided that shares will not be issued at less than net asset value. This plan will be effective for all dividends paid after January 1, 2011.

It has been brought to my attention that there may be some confusion about how to enroll in the plan. If you are an investor and would like to have your dividends reinvested into shares, you should contact your broker directly. While I am happy to speak to investors, I encourage all questions relating to the DRIP to be directed to our plan administrator, American Stock and Transfer Company at 866-665-2280. I will now turn the call over to our CEO, Len Tannenbaum.

Thank you, Stacey. From an economic standpoint, we have continued to experience stable to slightly increasing EBITDA, especially in our 2008 and beyond vintage portfolio. The Fifth Street small-business index, which is published monthly on our website, has increased for 10 consecutive months. The growth in earnings is due both to margin expansion and revenue growth. These indicators of a rising economy are seen across several industry groups.

In addition, since September 30, 2010, TBA and Goldco have been refinanced, totaling approximately $19 million. TBA was at one time a problem security and debt to EBITDA was over 10 times. The careful monitoring of this investment was instrumental in receiving par for our debt and we still hold a piece of the equity.

We also have continued to exit problem securities, including Rose Tarlow during the fourth fiscal quarter. Turnover of investments is an important component of earnings for BDCs as refinancings typically raise short-term earnings for those companies like ours who amortize the original points over the life of the loan. We expect this quarter to be a record quarter for originations. Quarter to date, we have already originated $109 million. Our origination volume has grown every quarter this calendar year and we expect our new Chicago office to contribute additional investment relationships.

Our previous record quarter was in the fourth calendar quarter of last year. As many private equity firms want their deals to close by year-end, we expect to announce additional closings through the month of December.

We continue to have ample capacity to fund investments though the remainder of our SBA facility, our Wells Fargo credit facility and our ING-led credit facility. We are also looking to expand our credit capability in the ING facility by expanding the syndicate and increasing the amounts from the existing syndicate members.

Our 2007 vintage portfolio, which now represents approximately 13% of Fifth Street's total portfolio at fair value, continues to contain most of our underperforming assets. These investments in general are smaller and weaker sponsors as partners and are primarily second lien. We have already taken significant write-downs to many of these assets. At the end of the fourth fiscal quarter, we had five assets on non-accrual. We believe this number will improve in the current quarter.

Consistent with our recent revised guidance, we had earnings in the quarter of $0.21 per share. We expect earnings to increase in the first fiscal quarter and we will give better guidance after the quarter ends. Our goal is to earn our dividend in calendar 2011 and we believe the increased level of originations in this current quarter, coupled with a higher level of refinancing and equity realizations, will be contributors to achieving that goal.

Given our increased confidence in originations through the balance of the calendar year, coupled with a higher distributable income associated with them, the Board has declared the following dividends. $0.1066 in January, $0.1066 in February and $0.1066 in March, which total $0.32 for the quarter. Our Board decided to maintain a consistent dividend of $0.1066 per month. Annualized, this would amount to a payout rate of $1.28 per share. I appreciate all the positive feedback from our retail shareholders regarding our switch to monthly dividends.

Despite recent IPOs in the BDC sector and a long pipeline of them, there continues to be a limited number of our competitors that can complete a transaction for private equity sponsors without any syndication risk and with hold sizes of $30 million to $60 million. This provides us with some additional pricing power and the ability to continue to be a major lender in the middle and lower middle markets. We firmly believe it is still the preference for private equity sponsors to partner with a trusted lender rather than rely on a syndicate group to complete transactions.

I believe that we have seen the turn in credit quality as many of our problem assets have now been restructured or sold. While category 3, 4, and 5-rated securities account for approximately 8% of the portfolio at fair value as of September 30, 2010, we now expect that percentage to drop significantly over the next year.

The investing environment is changing as I highlighted in our recent monthly newsletters. We were fortunate the vast majority of our portfolio took advantage of the higher return environment as we were one of the few BDCs that had ample capital to invest during the credit dislocation. We expect our vintage 2008 and beyond credit portfolio to generate strong returns as the economy recovers.

We continue to be focused on the potential for inflation to increase given the very pro-liquidity stance of the Federal Reserve. Our continued increase in floating-rate loans should begin to serve as a hedge against a substantial increase in interest rates over the coming years. The current percentage of our debt portfolio with floating rates is approximately 39% with the vast majority of our pipeline consisting of first-lien floating-rate securities. We expect that number to increase to over 50% in the coming year, positioning us well to take advantage of an eventual increase in interest rates.

Our SBA leverage will also serve as a hedge against rising interest rates as the interest rate on that piece of debt is fixed for 10 years. We believe that our strong brand and relationships allow us to capture premium pricing over the market. Our reputation in marketshare in the middle market continues to grow and we are adding to our platform. We continue a high level of service to the private equity community. We believe the opportunities in the middle market are large and growing as M&A continues to increase, even as lenders return to the middle market.

We plan on continuing to take advantage of this environment to gain marketshare with top quartile private equity sponsors, as well as to capture strong risk-adjusted returns. First-lien loans currently stand at an all-time high and represent approximately 77% of our portfolio at fair value. Over 90% of our current pipeline contains first-lien one-stop opportunities, so this percentage may experience a further increase. We believe this gives us one of the most secure portfolios of any BDC. We do not plan on investing in unsecured PIK toggled securities or many of the vehicles which we believe generate a higher default rate and provide for a lower recovery rate in an economic decline.

Our strong first-lien position, coupled with further diversification and expansion of assets, should position Fifth Street favorably to reduce its cost of capital over time. I will now hand the call over to our President, Bernie Berman.

Thanks, Len. In September, the pricing on $73 million of our SBA debentures was fixed for 10 years at an interest rate of 3.215%, which we believe is the lowest pricing in the history of the SBA debenture program. We were very pleased to be able to fix a large amount of debt at such a favorable rate.

In addition, we anticipate that our outstanding SBIC debt will increase by an additional $50 million to $75 million before the next pricing in March 2011, which would bring us close to the maximum $150 million of debt our SBIC license permits. Once we get close to utilizing substantially all of our SBIC debt capacity, we expect to start the process of applying for a second SBIC license.

We have also begun to draw on our bank credit facilities. We expect to continue to draw on both the Wells facility and the ING facility during December. We are also in early discussions with our lending partners about expanding our debt capacity and we hope to have something definitive to announce before our next earnings call. I am now going to turn it over to our CFO, Bill Craig.

Thanks, Bernie. With respect to our balance sheet, as of September 30, 2010, total assets were $651.9 million, which included total investments of $563.8 million at fair value and cash and cash equivalents of $76.8 million. Liabilities were $82.8 million, which included the $73 million of SBA debentures payable. At September 30, 2010, net assets were $569.2 million and our net asset value per share was $10.43.

With respect to our operations, total investment income for the three months ended September 30, 2010 was $20 million. This was comprised of $18 million of interest income, including $3.3 million of PIK interest and $2 million of fee income.

Total investment income for the year ended September 30, 2010 was $70.5 million, which was primarily comprised of $64.1 million of interest income, including $10 million of PIK interest and $6 million of fee income. We ended with net investment income per common share of $0.95 and earnings per common share of $0.49.

For the three months ended September 30, 2010, we recorded net unrealized appreciation of $9.9 million. This consisted of $14.3 million of reclassifications to realized losses and $0.2 million of net unrealized appreciation on equity investments, offset by $3.8 million of net unrealized depreciation on debt investments and $0.8 million of net unrealized depreciation on our interest rate swap.

For the year ending September 30, 2010, we recorded net unrealized depreciation of $1.8 million. This consisted of $19.1 million of net unrealized depreciation on debt investments and $0.8 million of net unrealized depreciation on our interest rate swap, offset by $17.6 million of reclassifications to realized losses and $0.5 million of net unrealized appreciation on equity investments.

Our weighted average yield on debt investments at September 30, 2010 was 14%, which included a cash component of 11.8%. Our average portfolio company investment was $16.6 million. This compares to the previous quarter with a weighted average yield on debt investments at June 30, 2010 of 14.9%, which included a cash component of 12.6% and our average portfolio company investment of $15 million.

With respect to the portfolio, during the quarter ended September 30, 2010, we invested $91.8 million across four new and six existing portfolio companies. At September 30, 2010, our portfolio consisted of investments in 38 companies. At fair value, 99.1% of our portfolio consisted of debt investments and 73.8% of the portfolio were first lien loans.

As of September 30, 2010, we had stopped accruing PIK interest in OID on five investments, which had not paid all their scheduled monthly cash interest payments. At September 30, 2010, approximately 32.8% of our debt investment portfolio at fair value [bore] interest at floating rates. Primarily all of our floating-rate loans carry a minimum interest floor of at least 9%, which protects our return in a low rate environment and also serves as a hedge.

With respect to our ratings at September 30, 2010, the distribution of our debt investments on the 1-5 rating scale at fair value was as follows. The percentage of 1 and 2-rated securities for the quarter ended September 30, 2010 was 91.1% in comparison to 93.6% as of June 30, 2010. We are closely monitoring all of our investments and continue to provide proactive managerial assistance.

As Len mentioned, Fifth Street pays a monthly dividend in that regard. To reiterate, earlier this week, our Board of Directors declared the following monthly dividends for our second fiscal quarter of 2011 -- $0.1066 per share payable on January 31, 2011 to stockholders of record on January 4, 2011; $0.1066 per share payable on February 28, 2011 to stockholders of record on February 1, 2011; and $0.1066 per share payable on March 31, 2011 to stockholders of record on March 1, 2011. I will now turn it back to Stacey.

Thank you, Bill. In the past month, we announced a new corporate brand, which included a new logo and update to our website. I encourage you to visit our recently remodeled website and watch the video we have posted on our homepage. This video can be e-mailed and has been referred to as FSC 101.

While at our website, I also encourage you to explore our Fifth Street small business index. Our most recent release marks the 10th consecutive month in which the index has increased.

And finally, as a reminder [for the month] that Fifth Street does not report quarterly earnings. We generally 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 at FifthStreetCap.com. Alternatively, e-mail [letters] can be set up through the shareholder tool link under the Investor Relations tab on our website, www.FifthStreetFinance.com.

Thank you for participating on the call today. I will now turn it over to Cynthia, our operator, to open the lines for questions.

(Operator Instructions). Troy Ward, Stifel Nicolaus.

Great. Thank you and good morning. Len, based on the movements we have seen in the portfolio this quarter and during subsequent events, there has been significant activity in that 2007, early 2008 vintage portfolio. Can you just give us just some insight into internally what you guys are thinking about that? How much of that was market-driven versus how much is a change maybe in how the internal management is looking at that vintage?

Well, it was certainly a vintage that was a tough vintage where we got caught with companies that were smaller, second-lien positions and some [key] private equity firms that we backed in that time period no longer can raise capital, maybe ever again. And that caused a number of problems in that portfolio.

I think with Chad Blakeman joining us four or five months ago -- is it four or five months, Bernie? -- even more, eight months ago? Wow, time flies. Chad has taken a very proactive approach. He has over 20 years experience managing credits. He ran $1.6 billion at Freeport. He was many, many years at GE Capital as a division leader and Chad's approach, dashboards, proactive management and basically -- if you think some people sweep things under the rug, we do quite the opposite. We take a chainsaw right now and deal with our problems as they occur and even sometimes before they occur.

And that approach has caused, I think, a bit of a flux into the category 3, 4 and 5. And if I didn't signal it correctly through my speech, I think the results that we are seeing from Chad's proactive approach, I think you are going to start seeing the benefits as early as the next quarterly earnings call.

Great, thanks. And then Len, I believe -- we talked about this in the past -- the unused portion of your facility, the fee on that portion changes I believe in early 2011. Can you remind us of the details of that and maybe more importantly will your use of leverage basically offset that or do you expect some amount of additional expense related to the unused facility fees going up?

I don't know what the beep was, but we have now had -- is everybody still on? Are you still on, Troy?

Yes, I am. I'm sorry. I was just getting a call on the other line. Go ahead.

We did have this unused ratchet up six months after we started these two new facilities. Clearly, by our raising of capital in June, our expansion of credit facilities prepared us for a very busy fourth quarter. I think you and our investors are going to find out, through the balance of this month and maybe into the first week in January, if I was right or wrong in gearing up the Company for that much capacity going into what we thought would be the busiest M&A quarter in history.

We do believe we are going to hit a record, but I am certainly not going to make a forward statement as to where we think originations are, except to say that on our February earnings call, if you are not happy, I am happy to sit here as long as you want and answer questions because I am very confident that we made the right decision.

Okay, great. And then one more and I'll hop back in the queue. Looking at the fee income and then how that relates to the portfolio prepayments and originations, what do you think about your prepayment volumes in 2011? And what type of prepayment protections are you receiving today and what do you expect from additional fees coming in through the fee income line next year related to prepayments?

That's a great question. So let me answer a little bit in detail. On average, our prepayment penalty when we get it is about 2% and that doesn't mean it starts at 2%. Sometimes it is makewhole for a year or two. Sometimes it is 4%, 3%, 2%, 1%. That means 4% in the first year, 3% in the second year and 2% in the third year and 1% in the fourth year.

It does vary per deal, so -- but if you think about it as we get prepaid on the loan for maturity, we get an average of 2%. I think that is a reasonable assumption. In addition, we receive two, sometimes three points upfront in a transaction that is amortized over the life of the loan. If you look in our 10-K report, I believe it is between $11 million and $12 million that has to come into income at some point. What I mean by that is even if the security goes down, it doesn't matter. This is earned income that we've received cash for with no recourse and this $11 million to $12 million will come into income at some point.

That point is accelerated when a company is refinanced, so that will also add into income. I believe in, 2011, you will see some of these equity gains and equity kickers be realized, which should generate some income for our investors. We do have a tax loss carryforward from unfortunately a very tough cycle, which we took realized losses. So all of these gains should be or most of these gains should be tax-free to the investors. There also will be no carry on these gains since we have to make up our realized losses before we take carry, so these will be very accretive to any (inaudible). And so that should also happen in 2011, at least to some extent.

And the last thing is we do have $7 million of exit fees on the balance sheet and so far, we have not received one of them. So there is a chance obviously that we will receive one of them or more of them in 2011, but as of yet, we still haven't received one.

Great. That's very good color. Thanks, Len.

I'm sorry. Let me just correct that if I am still on. The exit fees, as Steve corrects me, are not on the balance sheet. They are disclosed in the 10-K report, but we have not put them on the balance sheet and we have not flowed them through income.

Casey Alexander, Gilford Securities.

Hi, good morning. When I backed the full year out to get a line on the fourth quarter, I ran into interest expense that was over $1 million for the quarter. Can you explain why that level was so high given the fact that -- I mean you are not deeply out on your credit lines and that the costs, that would presume $100 million out, are you accruing in there for the unused or what caused that to be so high in the quarter?

There are a couple of components there. We are accruing the unused there. We are amortizing the upfront fees that we pay on those facilities in that number in addition to the regular interest expense and the SBA annual charge that we have disclosed as well. So there are several components there. It is not just straight interest expense.

And that was Steve Noreika speaking.

How much is the SBA annual charge?

It is 0.285%.

Okay. Secondly, you kind of have a level of committed but unfunded that is much higher than it has been in the past. I mean can you give us some color on that? Does that have to do with the nature of the deals that you are doing now and the fact that you are doing larger deals? What is creating that?

Well, every deal in a one-stop transaction has at least a small revolver. The revolver typically is undrawn and is not projected to be drawn. In some cases, there are active revolvers that are drawn back and forth and that [needs] liquidity to the company. But in most cases, that is not the case. What would probably exaggerate some of it is we have an unused loan out to JCC Education, which is a deal that we did with Ares Capital, which is performing extremely well.

JCC has a letter of credit that has to be backed up as any education company has and that is $9 million of the total exposure. So it is a variety of things. We budget it by thinking about how much will be used and budget an amount of capital for that. We also charge on used fees on that balance.

I mean I was going to say, even though you don't project it to be drawn, don't you have to reserve some of your own uncommitted capital in the event that it is drawn?

Definitely. And we calculate that and recalculate that each week based upon not only history, but the sponsors really give us a big heads-up if they think something is going to be drawn or something is going to get paid back.

Okay. Next, when I kind of back out the SBA division and the SBA debt and look at the rest of your portfolio, your credit capacity still doesn't get you anywhere near to your regulatory credit limit. I mean to what extent do you feel like you need to open up new or expanded lines on your credit capacity?

If you take us from two years ago to today, we have done a good job expanding our credit capacity. I think if you start even a year ago, it was $50 million. Right, Bernie? And today, we are at $190 million of two different credit facilities, excluding the $150 million from the SBA and I still think that, as we grow and as we get more participants in our credit facilities, we should get closer to our goal, which is 0.5 times levered, excluding the SBA debt.

Okay. So your goal is not really to go much past 0.5 levered?

Yes. I don't think -- if we are going to use additional leverage or start a vehicle that, for example, goes upmarket, let's say for securities, we may do it similar to Apollo and Ares as a portfolio holding of the BDC. But for the base business development company, I think, for us, 0.5 times leverage, excluding the SBA --.

Right, excluding the SBA.

Right.

Okay, that makes sense. Since these were events subsequent to or beyond the end of the quarter, did you receive prepaid fees on TBA and Goldco?

We got prepayment penalty on Goldco and we did not get it on TBA. We actually were very happy to get par for that security, which is an event marketing company that -- I said I think in my speech that it was one time 10 times debt to EBITDA. It was substantially over 10 times debt to EBITDA at one point and it was a workout -- it was a workout with a sponsor to get out of that loan.

Okay, great. Thank you.

Robert Dodd, Morgan, Keegan.

Hi, guys. Just actually a longer-term question. You have given us what color you can about the short-term pipeline. What, if any, color can you give us sort of looking out until -- how your pipeline is building for maybe March of next year? Are you too busy with the level of short-term activity to give us any color on how sharp a drop-off, if any, might you see heading into the second quarter calendar of next year?

I think we are so busy right now with -- I can't -- our team is actually working closely -- we have three separate deal teams, two co-CIOs, working at capacity for the past months preparing this quarter's originations. I think January to March period returns to more normalized numbers, which I am going to give you a very broad range, was 50 to 150 per quarter and it is just such a lumpy business. To predict any more than that is always difficult. But I think that is our normal expectation.

If you look through the four calendar quarters of this year, which we did not have a Chicago office, which we had a ramping relationship with a number of key private equity firms that we have now done a deal with and we are seeing deal number two and three and four from and where we had a bit less capital to deploy. We deployed $30 million something in the first quarter, $50 million something in the second quarter. We just -- third quarter I think was $90 million. Yes, and this quarter is already over $109 million or will be over $109 million. And so you are seeing a ramp-up, you are seeing us take marketshare.

One of the leading private equity fund of funds who I am friendly with and who we use for sponsor diligence or helps us with sponsor diligence said that he is very impressed that Fifth Street is taking marketshare in the middle market and I think we are certainly -- the Chicago market is our next target area.

Great, thanks.

Jim Ballan, Lazard Capital Markets.

Great, thanks a lot. Len, you've covered some of this in your remarks already, but maybe you could talk to us a little bit about a couple of the recent deals that you have done, just how those deals were sourced and just what the competitive situation was in order to get that business and maybe what that -- and the competition there, what impact that has on the rates you are able to charge?

So many other BDCs, and I am not saying one strategy is better or worse than another, are taking much more risk by going to second lien and unsecured at very high rates. And you are seeing that in the weighted average yield. And I was often criticized for that three years ago, which is the funny part.

Today, having lived through the last cycle, and having almost all of my own personal capital invested in the stock of Fifth Street Capital, I -- we are taking a relatively conservative approach by doing only first-lien one-stop transactions and actually we are going to do some senior-only transactions. The good news about first-lien one-stop is that we -- the risk reward ratio is so much better than going for second lien. Let me tell you what that means.

A senior-only security, for example, this is just an example, this is not to say any specific security, would go about 2.5 times deep debt to EBITDA. Our first-lien one-stops are going about 3.5 to 3.75 times deep and the senior mezz or senior unsecured combination can go about 4.5 to 4.75 times deep. The mezzanine in that case in the deal that we actually lost and we are going to buy into a small part of the senior where we -- NXT won the senior in the transaction and I don't want to talk about who won the other ones, it is a different BDC, that was 12%, 2% PIK.

Our blended rate, should we have done the whole one-stop, was about 10.5%. And it would have been at similar leverage levels. They blend cheaper. The private equity firm has three choices. They can do the senior-only and put in more equity; they can do senior mezz and put in less equity. But when they are dealing with senior mezz, they have an inter-creditor, they have multiparty transaction, they have more sets of diligence and when they have an issue, which, look, firms have -- companies have issues, they have to deal with multiple lenders who may have different objectives and/or they can deal with one trusted partner.

And we found, and I think other very good firms like Ares have found, that the one-stop transaction gets between 100 and 125 basis points higher than the senior mezz combination and is preferred by the equity sponsor. So that is basically what our transactions are, though now you're going to start seeing us do some senior-only as well.

Okay, great. Thanks a lot.

(Operator Instructions). Jasper Burch, Macquarie.

Good morning, everyone. Just starting off with -- I noticed you had kind of a significant drop, like 90 basis points, in your reported portfolio yield and that is sort of the first drop that we have seen. I was just wondering what is driving that.

We have been telling everyone it is going to drop and for some reason, for many reasons, it hasn't dropped in the previous quarters. What drove it was we got refinanced out of some of the higher-yielding second-lien securities like Goldco, which was a great transaction and we were in it for three years. It actually was an '07 transaction I think or January of '08. And we got refinanced out of TBA, also a higher-yielding security and we are rotating back into floating-rate first-lien one-stop securities with $10 million to -- typically $10 million to $20 million EBITDA companies with very reputable private equity sponsors usually on there fund 3, 4, or 5. Vary in size from $200 million to $1.3 billion.

So it is a very different client. There is no doubt that yields will start reverting towards the securities. And as you see the December originations, you will see the range of, probably at the low end, 10% cash coupon, which should generate a 13%, 14% IRR over the life of the loan, maybe 12%, 13% and you will see on the higher end, we may do some stuff with 13% cash coupon that will generate a 16% IRR. But in general, those are the types of loan ranges that we are looking at.

Great, that's helpful. And then moving on, looking at your distributable income, I mean you guys still have a shortfall to the dividend of about -- this quarter it was about $7 million, your distributable income versus what you are paying in the dividend next quarter. I was just wondering, and I understand you can't give guidance and it takes time to lever up your balance sheet, but I mean what is your outlook on sort of earning up to that dividend? Do you think you have to get more debt capacity at the Company or do you think that you can do it just organically with what you have now?

So you actually mix the two, right? You mix -- there is earnings and there is distributable income. From a distributable income standpoint, we are only going to talk about the percentage once a year, which is actually this time. So it is on this call and on next year's call, we will talk about it again. Because it is a September test, because it is a September 30 year-end test of how much -- what percentage of your income.

As you know, BDCs distribute, and we have told you we are going to distribute 90% to 100% of our distributable income per year and we actually distributed I think 91% or 92% of our distributable income as of September 30. So maybe we should put that into our comments. I'm sorry we didn't, but it is -- Bill's nodding his head no. But that is what the number was. So we do have some carryover into support the dividend in the future.

Having said that, the beauty of monthly dividends is, for excise tax purposes, because you know carryover income has to pay excise tax, because it is a monthly dividend, the January dividend counts backwards for tax purposes so that our -- you may not see us pay an excise and that is because the first monthly dividend of next year actually counts towards 2010 taxable distributions. So if I knew that, I would have done monthly a long time ago to avoid excise tax because why pay excise tax if you don't have to?

Going forward, the Board of Directors takes a look at and we give them a pretty detailed model of where we expect distributable income to be. Having said that, a separate issue is earnings, earning your dividend. Because dividend is paid off with distributable income, but nobody seems to care that much about distributable income. People care about earnings. I totally understand that today. We are focused -- as I said, my goal is to earn our dividend, which means to try and get to that level.

Now what does it take to get to that level? It takes utilizing our existing credit lines, it takes investing into the FSBA leverage and it takes managing our Company to a default rate that we have expected. And in addition, we should get some normalization of velocity, which means we should get some refinancings because they do help our earnings.

Should we achieve that, which I think is a doable goal, otherwise I wouldn't have just stated it on this call, then we will earn our dividend next year. It doesn't mean we are earning it each quarter, it doesn't mean one quarter is not going to be higher than another as different gains happen, but overall that is our goal for calendar 2011.

Okay. So I mean looking at distributed paying 90% to 95% of distributable income as a dividend, you have like a $4 million undistributed income carryforward. So if we look at it that way, I mean can we -- is that fair to back into -- I am just getting about $65 million of distributable income just looking at the $0.32 a share quarterly run rate minus out the $0.04 and then I guess you would be earning more than that since you're not going to be distributing it all? I mean if you are saying you are distributing 90% to 95% of distributable income, can we look at -- (multiple speakers) -- can we look at your dividend as to sort of gauge where that is going or is that too far to go?

I think we can work through the exact numbers off the call with Bill and with Steve, but to sort of reiterate what I was saying since there seems to be continuing confusion, the Board and I agree now that the dividend stays at $0.1066 or thereabouts until we earn it and that is what we projected, that is what the Board signed up for, unless there is an extraneous event or something, obviously. But that is our goal.

We know we have to get earnings to the dividend level, not distributable income. Distributable income is in excess of the dividend level. But nobody is focused on it and obviously it is an excess because we are going to have some carryover year-over-year and if we have a really big December, the points upfront all come into distributable income, which then gets carried forward.

So that extra distributable income also -- that actually supports the dividend into the 90% to 100% payout ratio. The earnings, which are different -- remember, we have $11 million, which we are going to earn at some point, which sits on -- does that sit on the balance sheet, Bill?

Yes.

Since I got the other one wrong. The $11 million will come into earnings, so that will be part of the factor in terms of earnings matching your dividend. We have just been very conservative in our approach and I don't know if that was the right thing to do to tell you honestly. A lot of the BDCs are more aggressive in the way they calculate earnings. We were a bit conservative in the way we calculate earnings, but it is what it is. We are continuing with the accounting policies that we have set up.

Okay. Well, that's helpful and thank you for the guidance and I will just follow up later I guess.

(Operator Instructions). Troy Ward.

Thanks. Len, you made a comment a few minutes ago in answering a question after you were talking about the one-stop and the mezz and the senior that we may see more senior-only going forward. Can you provide a little color on that statement? I mean how do you look at (technical difficulty) today and the margin that you are able to earn on that product today and how much you expect to do?

So when -- that's -- I didn't want to really address it on this call. I definitely will address it on the next earnings call. But as I have talked about pretty generally, the goal was, as Chad came from Freeport, which was an asset management firm with $1.6 billion of assets, which was very successful and continues to generate good returns, that we wanted to re-create that at some point to have another pocket to benefit our private equity sponsors. And in order to do that, you would have to seed that product, at least the equity of that product with some senior securities. This is safer, B-rated, better rated, small amounts of senior and we have been working on that product or working with a number of banks on that product and we are hopeful that at some point next year we will actually have it.

So when I referred to us doing some senior-only that is what I mean. It is a small part, a very small part of the portfolio. The vast majority is first-lien one-stop with an average of about -- right now, the average is coming out at about 11% cash coupons.

Okay, great. Thanks, Len.

We have no further questions at this time.

Thank you very much for attending and we look forward to reporting -- I actually look forward to reporting those results to you on February 3.

This does conclude our conference call today. We would like to thank you for your participation.