Oaktree Specialty Lending Corp (OCSL) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2011 Fifth Street Finance Corp. Earnings Conference Call. My name is Ann, and I will be your coordinator for today's call. As a reminder, this conference is being recorded for replay purposes.

(Operator Instructions)

We will be facilitating a question-and-answer session following the presentation. I would now like to turn the presentation over to Stacey Thorne. Please proceed.

Good morning, and welcome, everyone. My name is Stacey Thorne, and I'm the Head of Investor Relations for Fifth Street Finance Corp. This conference call is to discuss Fifth Street Finance Corp's fourth quarter and fiscal year ending September 30, 2011. I have with me this morning Leonard Tannenbaum, CEO; Bernard Berman, President; and Alex Frank, 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 12, 2011 press release and is posted on our website, www.fifthstreetfinance.com. 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 portion of the call, I'd like to call your attention to our customary Safe Harbor disclosure in our October 12, 2011 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 our capital structure, and Alex will summarize the financials, and then we will open the line for Q&A.

I will now turn the call over to our CEO, Leonard Tannenbaum.

Thank you, Stacey. This has been a year of rapidly changing debt markets. Pricing has fluctuated quickly from frothy to normal and back again during the entire year as elevated levels of market volatility have become the new normal operating environment. So far, we have been premature on our view of interest rates as the Federal Reserve seems determined to keep interest rates near zero. However, we do remain well positioned to realize an earnings benefit when interest rates eventually begin to rise.

I will point out that having about 67% floating rate securities in our portfolio has had a temporary negative effect on our earnings per share as interest rates have not risen. Our investment grade rating and expanded lending capacity are beginning to pay dividends both in terms of our relationships with lenders, as well as the private equity community.

Our rating of BBB minus allows us to lower our cost of capital still further and latter-out our liability structure. The increased size and flexibility in our financing vehicles also enables us to offer more complete solutions for our clients with senior only, one stop, second lien, mezzanine and equity co-investments.

We are proud to announce this quarter our partnership with Sumitomo Bank, Japan's second largest bank by assets and one of the world's largest and healthiest financial institutions. Sumitomo was originally investor in our second fund at January of 2005 and has served on the advisory board of that fund since then. We expect to continue to grow this valuable relationship overtime. LIBOR plus 225 seven-year money now allows us to cost effectively originate senior middle market assets.

Our fourth quarter, net investment income of $0.28 per share was in the middle of the range of previously issued guidance. Going forward, we expect our earnings power to be better realized. As we have increased velocity in the portfolio, are starting to realize some of our equity investments and are collecting prepayment penalties and exit fees on occasion, we have a much more efficient capital structure.

We also anticipate that part of the additional earnings will come from better matching our targeted leverage of 0.6 times debt-to-equity excluding the debt of the SBA, part will come from better utilization of our credit lines and part will come from reallocating our 78% first lien, 22% second lien assets towards the more efficient capital lines for those securities, whether it be our SBA, Sumitomo, Wells Fargo or ING-led facilities.

We continue to move into larger securities, which we believe are inherently safer with the typical investment having EBITDA of between $10 million and $30 million.

We believe that our high first lien exposure, coupled with investing in larger and more stable portfolio companies, and our robust diligence in portfolio management process will result in greater portfolio stability should the economy pull back again. At the same time, we feel comfortable that the decline in our weighted average yield to 12.35% at September 30, 2011, will stabilize now that we have reached our targeted portfolio mix.

Alex Frank has been a great addition to our team this past quarter. His 22 years experience at Morgan Stanley culminating the role of Head of Global Operations gives Fifth Street assistance in three important areas; risk management, institutionalization operational growth and investor engagement.

Our expectation is to continue to add strong and experience institutional credit and operating members to our team. I'm so far pleased with the response and caliber of individuals attracted to organization. To service our clients, we continue to build a broad institutional platform, both in terms of technology and team members.

A quarter which ends December 31, 2011, is off to a good start, and I expect that Fifth Street team will be very busy closing deals through calendar yearend. We believe spreads are above average and are finding value in both lower and middle market due to continued scarcity of capital available to these markets from traditional lenders.

Origination guidance remains very consistent with our ability to generate between $100 million and $300 million of gross originations per quarter. This is, of course, a lumpy business, and deals can easily be delayed from one quarter to the next. As our Chicago presence continues to ramp, our platform should continue to expand. We also plan to add a deal team in Chicago in conjunction with our new Chicago office in 2012.

We have seen continued positive momentum in the credit quality of our assets. Categories three, four and five rated securities now account for less than 2% of the portfolio at fair value as of September 30, 2011. This is a positive trend that positions us well for future down cycles and potentially allows us to increase our return on equity.

Following our approach to be one of the most transparent in our industry, we will continue to release the debt-to-EBITDA of our rating tranches, as well as update our investors on a regular basis.

Before I hand the call over to our President, Bernie, I would point out that Fifth Street is one of the few BDCs that did not ask for permission to sell stock below book value this year. In our view, raising money below book value is rarely the best interest of shareholders.

I will now hand the call over to our President, Bernie Berman.

Thanks, Len. In September, we closed a new seven-year $200 million credit facility with Sumitomo Mitsui Banking Corporation. The facility bears interest at a rate of LIBOR plus 225 basis points with no LIBOR floor. The new facility continues a longstanding partnership between Fifth Street and Sumitomo, which is an investor and an advisory board member of a private affiliated front. We look forward to continuing to grow our partnership with Sumitomo and to putting the facility to work.

As we mentioned in our August earnings call, we also amended our ING-led credit facility during the quarter, reducing the interest rate to LIBOR plus 300 basis points with no LIBOR floor at all times while we were at least 35% drawn, and LIBOR plus 325 basis points with no LIBOR floor at all other times. We want to thank all of our lending partners in this facility for their continued support and working with us to grow our business and reduce our cost of capital.

We are currently working towards an amendment of our Wells Fargo credit facility, which will reduce the interest rate under that facility. We expect to have an announcement on this in the near future. During the quarter ended September 30, we repurchased convertible notes with a face value of $17 million and in the month of October, we repurchased convertible notes with a face value of $10.5 million for total repurchases of $27.5 million at face value.

All of the repurchases were completed at a discount to par value. We were very pleased with the opportunity to make these new purchases at a discount and to generate the resulting gains for our shareholders.

We continue to make progress toward our second SBIC license and remain optimistic that we will receive a second license in the near future. Our first SBIC bonds have issued $150 million in debentures, which bear a weighted average coupon of 3.567% per annum, which rate is fixed for 10 years.

I'm now going to turn over to our CFO, Alex Frank.

Thanks, Bernie. We ended the year in a strong financial position with total assets of $1.2 billion, an increase of $557.8 million over the past year, reflecting the growth in our business platform. Investments were $1.1 billion at fair value, and we had available cash on hand of $68 million.

Our sources of funding are well diversified by lender, maturity and type of instrument. We had $463 million in debt outstanding including $178 million of borrowings under our credit facilities, $150 million of SBA debentures and $135 million of convertible notes. The weighted average maturity of our outstanding borrowings was over five years, and the weighted average coupon on our leverage source is 3.4%.

Total investment income for the three months ended September 30, 2011 was $37.7 million, including $32.7 million of interest income and $5 million of fee income. Payment-in-kind interest represented less than 10% of total investment income. After expenses, net investment income was $20 million. Net investment income per common share was $0.28 for the quarter consistent with our previous guidance range.

Net unrealized depreciation on our portfolio investments for the three months ended September 30, 2011 was $42.2 million. This represented a decline of 4% in the overall value of our investment portfolio. We experienced performance related write-downs in the portfolio and like others in our industry, valuations were adversely affected by the steep spike in market risk premiums that began with the US debt ceiling stalemate in August and continued in September with fears around Eurozone sovereign debt.

The weighted average yield on our debt investments at September 30, 2011, was 12.4% versus 12.6% in the prior quarter, while the cash component of the yield was a relatively constant 11.1%. The average size of our portfolio investment was $20.4 million. We originated $172.5 million of investments in the quarter across eight new and five existing portfolio companies, bringing the total companies on our portfolio to 65 at September 30, 2011.

We also received $45.5 million in connection with the exits of four of our portfolio companies, $45.4 million of which were exited at par, 98.2% of the portfolio by fair value consisted of debt investments and 78.1% was in first lien loans, 67% of the portfolio was at floating rates. The overall credit quality of our portfolio has continued to improve.

As Len discussed, we rate our debt investments on one to five rating scale, and one and two rated securities were 98.5% of our portfolio versus 97.7% as of June 30, 2011 and 91.1% a year ago. We had four investments in the portfolio that we stopped accruing interest on at September 30, 2011 versus five investments at the same time the previous year.

As we previously announced earlier this month, our Board of Directors declared monthly dividends for January through March 2012 of $0.0958 per share, reflecting an annual rate of $1.15 per share. The Board stated in our announcement that our dividend rate is set at a level consistent with our earnings capacity, and we are confident that our dividends going forward will be covered by net investment income.

Now, I turn it back to Stacey.

Thank you, Alex. Before, I open the line for Q&A. I'd like to remind everyone that for the month that Fifth Street does not report quarterly earnings, we generally release a newsletter. If you want to be added to the newsletter list, to receive the communications directly, please either call me at 914-286-6811 or send an email request to ir@fifthstreetfinance.com.

Thank you for participating on the call today. Ann, please open the line for questions.

Thank you. (Operator Instructions)

And our first question comes from the line of Greg Mason with Stifel, Nicolaus. Please proceed.

Great. Good morning. Len, I wanted to dive into your liquidity a little bit. First, I applaud you for not wanting to raise stock your below book, but as we look at your capacity you've got $530 million of capacity in your credit facilities, you borrowed $178 million, so you've got about $350 million left. Based on your current equity base, how much of that $530 million of total capacity do you think you can use today, kind of what you view as your liquidity availability today?

I think our liquidity availability is certainly less than that total amount. It's probably closer to $200 million. But I'd add that we're seeing increased velocity in the portfolio. So, as we get back deals and before the good thing -- the good news also is that we're putting out new deals at a rate either equal to or better than the deals we are getting back.

So, a number of deals have amortized down their APs that are trading at two times debt to EBITDA, and they can go now for back financing at sub 8% and that's great. I mean we have equity in some of those deals so we route for our equity sponsors and we're happy to be taken out. At the same time, we are able to put back out those deals between 10.5% and 11%, and those additional capitals should provide additional liquidity for us to invest.

Okay. And then in the Q, you highlight your unfunded commitments of $110 million. Obviously some of those are determinate by reaching milestones or certain events happening. How much of that unfunded commitment do you feel like you need to keep capacity for, of the $110 million?

Some of it is simply LCs and LC capacity. We just list it all as unfunded commitments. In prior history, looking over the last two or three years, it's very rare that most of it gets drawn. I think we have about $20 million to $30 million reserved against that that will just keep liquidity at all times, but most of these are unfunded revolvers that are backed up by LCs that we're backing up.

Okay, great. And then of the $67 million of cash you have on hand, what do you view as your cash needs for working capital on a kind of a long-term basis?

I think you're looking at a snapshot of cash at the end of that quarter. We don't normally keep $68 million of cash on hand. But on any given day, we may have more or less cash depending on when deals are getting funded. In fact, if the deal doesn't get funded on time, we may carry cash balance for a period of time. But we charge our equity sponsor whatever our cost of capital for that draw is. So, that comes back into income and offsets the interest expense.

Okay, great. And then, one last question and I'll hop back in the queue. Rail Acquisition Corp. got marked down this quarter. I think it's marked at like $0.25 on the dollar. Just looking in BDC land historically, we typically see these loans go on non-accrual or get sold for losses losing that earnings power. Can you talk about that investment and the risk that that goes on non-accrual in the near-term given where it's marked?

We have it on PIK non-accrual or we will have it on PIK non-accrual. That's a very good question. We are collecting cash from Rail. We are secured against assets, receivables and inventory. We took over in a restructuring the control of the assets from CIT because we found it necessary to control the company especially in the state of distress.

I think this quarter we definitely took the conservative approach regarding most of our securities, and I'll bring up unfortunately we lost our money in Premier Trailer. I mean, we thought we would have a recovery, and the bankruptcy judge decided unbelievably against us and it's now zero and gone. I mean, this is a 2007 early asset. So, I think this was a quarter of which any of our distressed securities got marked down quite a bit.

Okay, great. Thanks, Len.

And our next question comes from the line of Dean Choksi with UBS. Please proceed.

Good morning. Len, in your comments, I think I heard you mentioned that you're seeing value in the lower and middle market. Several months ago, some of the market participants were saying that the lower middle market wasn't attractive. Are you seeing more opportunities there? And could you kind of talk about the pipeline you're seeing going forward?

Yes. I would have thought when maybe a month or two ago when I was on the road that we were out of it -- we're actually out of the lower middle market. And all of the sudden, we're seeing lower middle market deals personally in one stops come right back. And we're getting yields of about 12% or 12.5%, two and half times deep, three times deep in small deals.

And I think as long as you have control and you stay lightly levered in these smaller deals and you're working with good equity sponsors, it could really create some value. Having said that, while we see value in the lower middle market, these are very small deals. So, the predominance of dollars that we're investing is still in the middle and upper-middle market just because the dollars are just so much bigger there.

Thanks. And can you talk about what happen at occurrence in the quarter?

Occurrence has been a distressed security, okay. So, we're still working, believe it or not, 2007, small securities maybe it's early 2008, January, February. And occurrence has just been in and out of restructuring for years. And we finally decided, the equity sponsor doesn't have capital to invest in this. The fund is not doing well, and we decided it's just time to exist.

Occurrence has a sale on the table for $4 million or $3.5 million net to us. It's a terrible recovery, but we would like to get our cash back and redeploy it in the healthier asset. So, we marked it right to where we have the letter for the sale of the company, and the sale process is so far moving forward. So, the valuation committee marked it to the best valuation you can have, which is a third party sale for the company.

What are scheduled like 2012 maturities? And how does that overlay with I guess unamortized fee income and exit fees?

Very few securities from what I recall are maturing in 2012, but some of them are maturing starting in 2013. And equity sponsors typically do finance things not (inaudible) all the way to maturity. You know the healthier companies where you could see 98% of our portfolio is healthy, get refinanced earlier.

But the way our loans are structured is typically have the Term A and the Term B, and the Term A amortizes, the Term B is a bullet. And if the Term A amortizes, if the company is at or greater than the EBITDA, which we underwrote, it's constantly delevering. As it delevers to a point, we have a choice, we either can cut rate of loan or we get repaid.

And what we're finding is that in number of loans we are getting repaid, but we have prepayment penalties and exit fees and equity and other positive items for the shareholders, and that's okay where some go ahead repay us, especially because we don't plan on raising capital below book, we're going to recycle our capital that we have, which should generate some good earnings.

Thank you.

And our next question comes from the line of Jason Arnold with RBC Capital Markets. Please proceed.

Hi, good morning. Len, I was just wondering if you could give us an update on the 75% senior, 25% junior portfolio target as we get kind of closer to those levels. Specifically, maybe what the terms and pricing you're kind of witnessing in both segments and kind of what would make you a shift focus or if you'd just like to stick with that mix for now?

Well, that's our targeted mix for the past year, year and half, and we've got the target about six months ago today. Obviously, it doesn't stick exactly at 75-25. I think today it's 78% or something first lien, and 22% second lien. So, maybe you'll see a little bit of a shift, but I think that's the right mix for our portfolio.

But every BDC has a different target and different portfolio and different desire for risk, and I think this is our -- after being published since 2008, this is our desire for risk in the portfolio. And this reflects a strong number that we can still generate good earnings power and as I said in my comments, our weighted average yield should stay steady right around the 12.25% area.

Okay. And then just in terms of pricing in each segment, mix wise, 12% like you mentioned it seems like what you're saying about maybe just between the two categories. Could you give us a little more color there?

Sure. I mean second lien and mezz typically is 14%-ish money, and first lien one-stops are 10.5% to 11%, and first lien senior only's are 8%. So, it just depends on where you are.

Okay. And then just one quick follow-up, it seems like the rationale behind the convert repurchase was that it was a great opportunistic buy. But just curious if you could comment a little bit further on the repurchases and if you'd expect to buy back more bonds assuming they're still cheap?

Look, if the bonds are cheap enough, we like to buy them back. First of all, the typical -- I learned a little bit about the convertible bond market after we did offering. Look, it was our first convertible bond offering.

First thing I learned is many of the bond holders take a decent size short position called delta hedging [out their] position. And we effectively by buying back the convertibles satisfy two things. One, it lowers our debt cost of capital especially if we buy the discount. Two, it forces, not forces, but I mean they'll cover their short positions as we buy back the convertibles.

So, we think it's a good use of capital and its switching debt-for-debt anyway. We don't have any extra credit, having convertible debt or having the 3% revolver debt. So, instead of [5.375%], we get to pay 3%, that's good, and we get to make a gain for our shareholders on the purchase of the discount.

Can't beat that, it makes sense. Okay, thanks a lot.

And our next question comes from the line of Casey Alexander with Gilford Securities. Please proceed.

Thank you. My question was the convertible question, but one other question is can you kind of parse out your unrealized losses for the quarter in terms of how much was performance related write-downs versus how much is market spread related adjustments?

Alex?

Yes. It was -- if you take out the effective Premier, which was something that was unexpected, but if you take the effect of that out, it was roughly split kind of evenly between the two. Although I should say there is no clear bright line because even in the valuation on an unrealized basis, it's some of the distressed investments. In some cases, we're looking at market risk premiums and companies, which were also affected by what happened. So, that's kind of the best. I can say that it's roughly even.

Okay, great. Thank you. That's my only question.

And our next question comes from the line of Joel Houck with Wells Fargo. Please proceed.

Good morning. Just to clarify on Rail acquisition, you said it wasn't -- it is not on non-accrual at the end of September, but it is going to be put on non-accrual?

We're still collecting cash, so cash doesn't go on non-accrual. We're still collecting cash on a monthly basis funded security, but we will not accrue PIK next quarter.

Okay.

We'll not accrue any incentive fee on the PIK either.

All right, maybe I'm just not getting it, but back in my bank regulatory days, it seem to me like if you have any doubt in collecting principal, which clearly you do as market $0.25 a dollar. How can you accrue interest even if they are paying it? That seems like it's a somewhat aggressive relative to what investors are used to in companies that lend money.

It's current cash payments. So, any current cash that you collect is no chance that you are not going to have the cash because you get and you collect it. Therefore, just the accounting rules are, you have to recognize that.

I would say as you all know many of our -- there are peers of ours that collect full PIK securities, and they accrue into interest and they wouldn't even put these things on PIK non-accrual marked down to this level. So, we historically have been very conservative.

And even, for example, of Premier Trailer, let me point out since we didn't pointed out in our speech, this has been on PIK non-accrual for two years. We have not collected anything into income and we have not collected any incentive fee on Premier Trailer for two years.

And as you all know, there is a number of securities that other BDCs have had on PIK only and largely PIK securities that they collected not only in the incentive fee but put into income. So, we think we've always taken the conservative approach.

Okay. I understand now. That's helpful. We talked about -- I mean, it looks like a lot of the leases we kind of digested the information in the Q. A lot of the credit related issues are related to kind of '07, '08 vintages that were in the IPO portfolio. Can you talk about fundamental differences whether it's underwriting structure, industry verticals that you guys have been doing the last year or two versus kind of that IPO portfolio?

I think almost all the problems, they are about done, which -- they still -- probably 1% of the problems left are in the 2007 and very early 2008. And the differences in the portfolio for; one, these are much smaller deals with smaller equity sponsors some which have gone out of business. Two, these are almost all mezzanine loans. So, you have small companies with mezzanine loans with small equity sponsors.

Three, they immediately went through the down cycle. So we have no chance of amortization, we have no chance that the company actually outperform EBITDA. It went right to 2008, and that was just terrible timing.

And unfortunately -- fortunately, the ones that survived through the crisis got refinanced because it's coming up -- it came up a maturity. And those that didn't get refinanced are what you're seeing in the legacy portfolio. And we definitely took a hit that's why we have $60 million of NOLs.

You saw us taking equity gain this quarter. And the good news for the shareholders is that there is no incentive fee on this equity gain, because we have plenty of losses to offset it and this could be no taxes to the shareholders because it's a capital gain against plenty of capital loss carry forwards. And this was our first quarter of realizing significant equity gains, and we expect over the next year to realize other ones. But it takes longer time to get these equity gains and to get debt repayments.

Okay. I think it's very important for people to understand the difference in that IPO portfolio versus what you've been doing in that, and that's good color. The last thing is just on the SBIC timing. Can you give us a sense for when you might expect the second license?

Yes. We'll find out somewhere in the near future, but we got green lighted, right, Bernie?

We got green lighted approximately six months ago. We continue to have a good dialog with the SBA. Dealing with government agencies is always a little nebulous in terms of timing, but we are progressing. We are in constant communication, we've answered a few rounds of questions, and we're moving forward.

Let me just correct one thing I said actually, we did announce an equity gains but it was not in the September 30th quarter, it was in the current quarter. We received our first reasonably sized equity gain from the refinancing -- the positive refinancing of IDI and the equity gains was a 3x return on our equity.

All right, very good. Thanks for the answers, guys.

And our next question comes from the line of Robert Dodd with Morgan Keegan. Please proceed.

Hi, guys. Len, can you give us a bit more color on how you've approached to the syndication market? It looks like you got a little bit more aggressive there recently obviously with these larger deals, et cetera, there's more opportunity. Can you just give a bit color on how you're approaching the opportunity to harvest some syndication fees, and then also on the origination color you give $100 million to $300 million. Is that gross on that syndication?

So, $100 million to $300 million is gross per quarter. And you are right. We started ramping up this indication effort about a year ago. It is just starting to bear fruit in terms of generating some, what they call, skim income or syndication fees. And we do expect that to grow overtime, and we are working on that effort and that especially happens when deals exceed our [whole] size and grow positively.

And, for example, one of our deals is a platform acquisition, and we are not going to increase our whole size dramatically, but we are -- it's a terrific company at the right rate, and we will be able to sell down significant amount of the loan and generate some income on that.

Thanks.

(Operator Instructions)

And our next question comes from the line of Mickey Schleien with Ladenberg. Please proceed.

Good morning, Len. I have three questions. My first is when you lowered the dividend or announced the lower dividend, you indicated you were comfortable with the $1.16 consensus for fiscal year '12. Are you still comfortable with that figure?

Absolutely. I mean, look, in order to reset the dividend, we've listened to the comments from all of the analysts and the investor community. In fact, unfortunately, we lost one of our favorite institutional investors over the fact that our dividend was in excess of NII. And I think may be a little bit thick headed at times, but I think it finally got through that our dividend has to be consistent with our net investment income.

And the Board then asked for some very detailed models and backup in supporting where we think our net investment income is going to be not just 50/50 view, but relatively conservative view. And the Board determined that $1.15 was the right number consistent with where the Company believes the earnings can be. And fortunately, actually, analyst consensus was right on target at $1.16. Look, we are not trying to get to the penny, right? It's somewhere in that very close vicinity, but the $1.15 represents a number that we believe that we are going to earn.

Fair enough. Secondly, given Alex's remarks on the split between regarding unrealized losses, between credit deterioration of marks to market and the fact that the markets rebounded in the current quarter, can you give us a sense of how much NAV would recuperate at this point in time everything else remaining equal?

I think, obviously it theoretically should lift NAV. We just went through this process. And I don't want to take the valuation committees -- try to preempt them by telling you where a number is going in advance. But, sure, if the indexes go up, that factor of valuation should contribute positively to valuations.

Okay. And lastly, you've been pretty, I don't know if the word is pessimistic or you weren't very optimistic let's say on the outlook for the economy, but lately we started to see some more positive numbers around the holiday sales and things of that nature. So, overall, are you still pretty down beat on the economy, or are you becoming more optimistic?

I am surprised -- I am positively surprised the resilience of the American economy to what I think is some real big external shocks in the -- two what are big external shocks in the system. And I think as long as you have global liquidity as you saw today entering the market with consorted effort on part of lot of different countries to make sure that the European massive deleveraging is a relative smooth process.

If that happens, I think the American economy wants to balance, and we are seeing that across our portfolio of 65 companies that EBITDA is doing pretty well, and these companies are performing. Me, personally, I am still thinking that I am very cautious. So, we are not taking any excess risk and we just have no desire to take excess risk.

Okay, thanks for your time this morning.

No problem.

And we have follow-up question from the line of Greg Mason with Stifel, Nicolaus. Please proceed.

Great. Thank you. Len, could you talk about on your three credit facilities Wells, ING and Sumitomo, what types of -- are they set up where they would accept different types of investments? Or, what are the advanced rates on those three credit facilities? Just how do you view those -- beyond just interest rate, how do you view utilizing those three facilities?

So, there are three -- that's a great question. And the SBA -- let's put that one in there. There is three, four different, very different facilities that all have different advanced rates and different composition of assets with different requirements and different pricing. And what we have never had until now is all four facilities.

So we've had senior-only loans at call it 8% that are in the one facility and that obviously would more be cost effectively levered in Sumitomo at 225. And by the same idea, we have 13%, 14% loans that could be better levered in another vehicle.

So, as we reallocate over the next two years into -- the proper loans into the proper vehicles to achieve the best advance rate and the best cost of capital, you'll see an earnings lift now. That's going to take some time because it's basically the amortization on these loans, and as they come due and get refinanced that allows us to re-jigger what's in one facility.

Okay, great. And then can you give us some color on the fourth quarter? How does the origination pipeline look? Are investment yields changing since September 31st?

Since September 31st, investment yields have gotten better. I think as you've seen, it may not happen for very much longer, the business development companies have been shut out of the capital markets. You have not seen a lot of equity raises.

I think the banks have shifted to their C&I exposure adequately. So, you're not seeing over shift by the regional banks into C&I forcing yields down. At the same time, EBITDA remains steady or increasing so M&A activity is decent. And this is always the best seasonal quarter for M&A.

So, you're seeing pretty good pricing out there for us. I mean, in some levels, we've turned down deals because they said, oh, we can get 8% pricing or 9% pricing, and they've come back to us in the 10s. So, that means that there is a demand for capital currently, and this could change in weeks, but the current week is exceeding the supply of capital.

All right, great. Thanks, Len.

No problem.

Ladies and gentlemen, there being no further questions in the queue, this does conclude our question-and-answer session. We would like to thank you for your participation in today's conference. This concludes the presentation, and you may now disconnect. Have a good day.