Oaktree Specialty Lending Corp (OCSL) 2012 Q2 法說會逐字稿

Good day ladies and gentlemen, and welcome to the second quarter 2012 Fifth Street Finance Corporation Earning Conference Call. At this time all participants are in a listen-only mode. Later we'll facilitate a question and answer session.

(Operator Instructions)

As a reminder this conference is being recorded for replay purposes. I'd now like to turn the call over to Mr. David Harrison, Director of Legal and Compliance. You may proceed.

Thank you Francis. Good morning, and welcome everyone. My name is David Harrison, and I'm the Director of Legal and Compliance for Fifth Street Finance Corp. This conference call is to discuss Fifth Street Finance Corp second fiscal quarter, ending March 31, 2012. I have with me, this morning, Leonard Tannenbaum, Chief Executive Officer, and Alexander Frank, Chief Financial Officer.

Before I begin, I'd like to point out that this call is being recorded. Replay information is included in our April 10, 2012 press release and is posted on our website www.fifthstreetfinance.com. Please note that this call is a property of Fifth Street Finance Corp. Any unauthorized rebroadcast of this call, of any form, is strictly prohibited.

Today's conference call includes forward-looking statements and projections, and we ask that you refer to our most recent filings with the FCC 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 FCC filings, please visit our website or call Investor Relations at 914-286-6855.

The format for today's call is as follows; Len will provide an overview, and Alex will provide an update on our capital structure and summarize the financials. Then, we will open the line for Q&A. I will now turn the call over to our CEO Len Tannenbaum.

Thank you, David, and good morning everyone. Let me quickly restate our outlook from out last earnings call. We believe taxes will increase next year, unless Republicans win the Oval Office and secure majorities in both the House and Senate. While the election odds consistently evolve through the year, we anticipate election results will have a material impact on M&A activity.

The tax increases that are anticipated to come to pass next year, is the Bush tax cuts expire. Together, with the extra tax from Obamacare is encouraging business owners to pull forward into 2012 any sales plans that had originally laid out the next few years. We are also noticing the initial stirrings of Basel III coming into play, as the big US banks start to ease off on lending, in advance of the new standards taking affect.

Finally, we believe the immense, deleveraging of Europe, and the need to amass hundreds of billions of dollars in equity to shore up its delicate banking system will also contribute to the drain on global liquidity.

As noted during out last earnings call, we believe a counter-balance to these effects is quantitative easing. To ease the latest craze with everyone in the fray. It's difficult to predict how this might offset and drive capital flows, but we at Fifth Street can control, however, is how we optimize our share-holder value. So we are closely monitoring the actions of our lending partners, trends in the market, and as in years past, ensuring that we have the capacity and deal flow to pivot strategically among the changing capital flow cycles.

We have ongoing flexibility to capitalize on, what should be, a building year for new deals; thanks to an equity raise of just over $100 million, earlier this year, executed at a net price above book value. Rather than ask for permission from our share holders to sell below book-value, as many of our peers have done, we issued stock above book-value despite the volatile market climate. It is our sustained belief that selling stock below book-value is rarely justified.

Our initial outlook for 2012 has not substantially changed. As we consolidate our Sumitomo facility, we are actively steering the portfolio towards a range of 70% to 80% first lien loans. By the end of the year we are targeting leverage 0.6 times on average, excluding our 10 year, fixed non-recourse, SBA debentures.

For the quarter, we delivered $0.29 per share of NII, which is consistent with our quarterly dividend grade. We anticipate that repayments will continue as the portfolio matures. This should favorably impact on our earnings, thanks to the recognition of exit fees, prepayment penalties, and on occasion, equity realizations; not to mention an uptake in upfront fees.

It is our expectation that origination volume through the year will continue in the range of $100 million to $300 million per quarter, with deal flow increasing as the year progresses. Given the previously mentioned tax changes, the fourth calendar quarter could set a new Fifth Street origination record.

Compared to last quarter, the pace of activity, thus far, for the quarter, ending June 30 has improved. Net investment income of $0.29 per share for our second fiscal quarter represents a strong quarter that outperforms street consensus.

Our capital structure was suboptimal though, as we had to hold cash from repayments in our SBA subsidiary for much of the quarter. In addition to incurring significant unused line fees from our pay down the credit lines, stemming from our January 2012 equity offering and subsequent investment realizations.

Looking ahead, we expect to better harness our earnings power, thanks to continued [glossing] the portfolio. Though, at a much slower pace when the quarter ended March 31, 2012. Our capital structure is more efficient and we are beginning to monetize some of our equity investments, as well and collect repayment penalties, as well as some exit fees.

As we meet with investors we appreciate their strong desire for us to leverage to our target of 0.6 times debts of equity, not including our SPA subsidiary. If the opportunities arise our goal is to continually diversify and realign the right side of the balance sheet. Better matching our targeted leverage, enhanced utilization of our credit line, and ongoing reallocation of the portfolio assets should fuel additional earnings power.

Our bias towards financing larger companies persists. We believe they're intrinsically safer, with a typical borrower having EBITDA in the $10 million to $30 million range. Should the economy suffer another pull back, we believe, that our high firstling exposure, combined with investing of larger and more stable portfolio companies, and our rigorous diligence and portfolio management processes, will result in heighten portfolio stability.

In our opinion, pricing is at historically average levels right now, which marks a further improvement over the previous quarter, where we saw frothiness in the market. Both the lower-middle market and upper-middle market currently offer value, due to what we see as continuing shortage of capital available from traditional lenders in these sectors. As the year progresses, however, we first see an ongoing positive shift in supply/demand equation for lenders, and with it an improvement for us in pricing.

The credit-quality of our assets remain stable. As of March 31, 2012, category 3, 4, and 5 raise securities continue to comprise about 2% of the portfolio at fair value. This positive trend makes us well positioned for the next down cycle and potentially allows us to increase our ROE. As one of the most transparent BDCs, industry wide, we will continue to provide regular updates to our investors, including the ongoing release of debt to EBITDA for our rate and tranches.

Through the balance of the year, we plan to continue to add many strong, experienced, institutional credit, and operating members to our team. I am pleased with the response and caliber of individuals we continue to attract. Fifth Street strives to build a broad institutional platform, both in terms of technology and team members to service our clients.

Our strong brander relationships allow us to command premium pricing over the market. Balance sheet capacity, namely hold size, and the ability to grow with our clients' platform companies, has emerged as a differentiator.

This year we have lead and agented an increased number of transactions and have also expanded our capital markets presents, through the developments of strong syndicate relationships. Our large and expanding credit capacity, supported by our investment grade rating, by two different agencies, reassures our clients that we will provide expansion capital when needed.

Fifth Street's market share and reputations of middle-market lenders should continue to grow, as we enhance our institutional platform and consistently deliver a high level of service to our private equity sponsors. We are extremely pleased by the attractive middle-market opportunities we see and our expanded presence in the Chicago market. We also believe BDC capital will continue to have an increased roll as part of equity sponsor, lead by us.

At this point, I will turn the call over to our CFO, Alex Frank.

Thanks Len. We are pleased to announce that we have had several positive developments, with respect to our credit facilities, since our February earnings call. In late February, we amended our $230 million ING lead credit facility to extend the maturity date by two years, through February 2016. As part of this amendment we also increased the potential future expansion of facility from $350 million to $450 million.

In addition, our Wells Fargo facility was amended in April. We expanded the size of the facility from $100 million to $150 million and extended the maturity by, over two years, through April 2016. We also increased the potential future expansion of facility from $150 million to $250 million.

We'd like to thank all of our lenders for their continued support and flexibility, which has allowed us to grow our business to where it is today and put us in a strong position, competitively.

During the six months ended March 31, 2012, we repurchased $11 million principal, of our convertible notes in the open market, for an aggregate purchase price of $9.4 million. In April, we made additional repurchases with a face value of $9 million, which makes our total repurchases for the fiscal year, $20 million at face value. We will look to potentially make additional repurchases when market conditions provide favorable opportunities for our share holders.

We ended the second fiscal quarter of 2012 with total assets of $1.2 billion, an increase of $197.7 million dollars from the year ago period; reflecting growth in net new originations. Total assets have remained relatively flat as compared to our 2011 fiscal year end at $1.2 billion, which is primarily due to new originations being offset by portfolio exits.

Portfolio investments were $1.1 billion at fair value, and we had available cash on hand of $115 million. Our cash on the balance sheet is above historical levels, which is mainly due to the unusually high level of deal exits during the quarter and, as Len discussed, cash in our SBIC subsidiary that we are in the process of recycling.

Net asset value-per-share remain relatively stable at $9.87 versus the prior quarter NAV of $9.89. Total investment income was $42.1 million for the three months ended March 31, 2012, including $32 million of interest income from portfolio investments and $10.1 million of fee income.

Payment and [ki] interest remained a low percentage of total income at $2.9 million for the quarter, declining to 7% of total investment income, as compared to 12% for the year ago period. Net investment income per share increased 8% to $0.29 for the quarter, as compared to $0.27 in the same quarter last year and in line with the prior quarter. The net realized and unrealized losses on our portfolio investments for the 3 months ended March 31, 2012 were $2.7 million or less than 0.3% of the portfolio.

We had five portfolio company refinancings during the quarter, including our 2 largest; all of which were exited above par at an average price of 102% of PAR. We also exited our investment in occurrence, at a loss, but at a price equivalent to our fair-value, as of December 21, 2011.

The weighted average yield on our debt investments decreased slightly to 12.4% as of March 31, 2012, as compared to 12.8% in the same quarter in the previous year. While the cash component of the yield remained relatively stable at 11.2%. The average size of a portfolio investment was $19.2 million. We originated $143.9 million of investments in the quarter, across six new and four existing portfolio companies, which brings the total companies in our portfolio to 67 at March 31, 2012.

As previously mentioned we also received $166.6 million in connection with the exits of 6 of our portfolio companies. The level of early repayments experience in the previous two quarters was historically high, and we do not expect repayments to continue at this rate for the remainder of 2012. Approximately 98% of the portfolio by fair-value consisted of debt investments, 70% of the total was in first lien loans, and 66% of the debt portfolio was at floating interest rates.

We continue to monitor and improve the diversification of our portfolio by industry, sponsor, and individual company. Our exposure to the health care sector, which is the largest single-industry exposure declined from 32% to 26% over the course of the second fiscal quarter, as a results of a number of successful exits of health care investments.

Our largest portfolio company concentration is currently 4.03% of the total assets. The investment portfolio credit quality remains strong and the credit profile is stable versus the prior quarter. We rate our debt investments on a 1 to 5 rating scale, and the highest performing 1 and 2 rating securities were 97.8% of our portfolio versus 98.5%, as of September 30, 2011 and 97.2% a year ago. We had 4 investments in the portfolio that we stopped accruing income on at March 31, 2012 versus 3 investments at the same time the previous year.

Turning to the credit ratings agencies; over the last 2 months Standard and Poor's assigned us an investment grade rating of triple B minus, and Fitch reaffirmed our investment grade triple B minus rating. Having investment grade ratings from 2 nationally recognized rating agencies puts us in a select group with few other BDCs and improves our access to the capital markets, which is necessary to expand our business platform and enhance share holder value.

Our board of directors has declared monthly dividends for July through September of 2012 of $0.958 per share, reflecting a continuing annual rate of $1.15 per share. The dividend rate continues to be set at a level commensurate with our earnings capacity, as has been the case over the first two quarters of this fiscal year.

Now I'll turn it back to David.

Thank you, Alex. Before I open the lines for Q&A, I'd like to remind everyone that for the months that Fifth Street does not report quarterly earnings, we generally release a news letter. If you like to be added to our mailing list and receive these communications directly, please either call investor relations at 914-286-6855 or send a request email to ir@fifthstreetfinance.com.

Thank you for participating on the call today. Francis, please open the lines for questions.

Thank you. (Operator Instructions). Your first question is from the line of Jason Arnold representing RBC Capital Markets. You may proceed.

Hi, good morning guys. I was just curious if you could comment on the yields and lending terms you're seeing in the market in both the senior and subordinates of the equation? And then perhaps update us on the timing of the trajectory you anticipate to get the 80% senior and 20% junior kind of makes on the portfolio.

Starting with the first question. It's really interesting to watch some of the deal in the market, and we basically stayed out of a lot of the frothiness in the first quarter. I think that was similar to some of our peers, after reading their earnings calls. But we were able to accomplish some loans, primarily with sponsors that we really worked on the relationship, so I think we gained some good alpha in the first quarter loans that we did.

I would say today, the pricings much better, the pipelines much better; we are seeing the deal flow. And now, I'm going to tell you, a lot of the deal flow is still at the investment bank level, which means my prediction of year end, real boom in M&A activity is going to come true because the banks are full and full of deals. Pipeline is getting very close to record. In addition, we are hiring in with the deal team to be able to staff ahead of the December push, which we see it coming.

As for the 80/20 mix in senior and sub because we consolidate the Sumitomo facility, Sumitomo is all first lien loans, we have a higher than normal first lien exposure. As we said the previous call, the FCC is not allowing deconsolidation at all. They are not allowing leverage to be taken at subsidiary level and not be consolidated for new BDCs. For awhile we have a 2 to 1 leverage, very cheap, great vehicle in a 1 to 1 lever BDC.

Having said that, our target is 70% to 80% first lien sub debt, and I think if we find good sub debt opportunities we're going to take them. And that's our target range. Right now we're towards the bottom of that range at 70%, so it just depends on how much alpha and how good the opportunities are.

One big swing factor between 70% and 80% is the one-stop solution. So as the one-stop solution comes back into favor, which we are seeing right now due to the deal volume, you're going to see the lien go up. And if one-stop is out of favor you'll see first lien go down.

Okay. Thanks for the color there. And just one quick follow up on the addition of the S&P rating, of course, obviously giving you great benefits on the debt issue in some the of equation, but I was just curious if you anticipate any incremental improvements on the rates and terms of your outstanding credit facilities, as a result as well?

In the near term, we just extended both facilities to be in 4 years out, which we really want to make sure that nothing expire before 2016. You want a lot of runway, a lot of flexibility given the uncertainties in Europe. So I don't think you're going to see a lot of great benefit, except that we borrow at LIBOR plus 225 in Sumitomo. We borrow at LIBOR 275 in Wells Fargo, and I think the LIBOR plus 300 currently with our main facility will stay constant. I saw [Aries] revised theirs lower in the 3 year facility.

What I think you will see though, if we move on and get the second SBO license, and everything always takes longer than you expect. With 10 Year Treasuries down at 1.8% and spread over 10 years treasuries where we lock it, we do expect, if we are able to draw that over the next year, to achieve pretty great rates of return for 10 year fixed security.

Okay. Great, thanks for the color. I appreciate it. Nice job in this quarter.

Thank you.

Your next question is from the line of John Bockrath, Wells Fargo. You may proceed.

Good morning, gentlemen. First just one quick question related to your increasing capital markets presence. Len, you could update us on the build out? I know you mentioned a syndication team you were working on last quarter. Maybe talk about how that complimented your origination franchise, this quarter.

More and more as we are able to go up and down market your syndication team, your capital markets business, which doesn't get built overnight, becomes more and more critical, in terms of allowing you to get into deals, allowing you to hold their bigger deals and syndicate them down. And also, just getting market intelligence to where yield spreads are going with syndicate leaders are doing and agents like us. Getting agent titles, and agent control, and agent document control when you're doing upper-middle market deal.

So we've really successfully -- I'm really happy about successfully building out that business, and I expect that business to get better. It does allow us to get syndicate fees. It does allow us to get into deals that others can't get into. It allows us to start developing relationships with firms like Jefferies and Credit Suisse, which lead a lot of middle-market deals.

Okay great. Just two more questions. First on the equity raise, maybe give us a little color around the decision to raise capital, particularly in light of the fact you had about $70 million of cash on the balance sheet, and perhaps some idea that repayment activity was likely going to be elevated in the first quarter of 2012.

So for the repayment activity, actually we were really surprised by the levels that we received. And we sort of had on the radar screen, a lot of these were 1 rated securities, so they were outperforming. And one of the securities by one of our really good partners got refinance and then put up for sale immediately, but they refinanced at rates much, much lower than we were offering because that was a 2009 security. And we took advantage of that vintage.

We were very happy for our partner, and we got paid a nice prepayment penalty when we exited. So we were a little bit surprised that it was that high. We do not expect anything close to that in this quarter. Having said that, we still decide to raise equity because we saw a net-premium to book-value; and there was another couple of issues that we had that caused the equity raise, which I really don't feel like going into the super details on this call. But needless to say that there were covenant restrictions that we did need to raise some equity to get around, which all have been solved.

When we redid the facilities, I got to say, the advanced rates are better, then middle equity requirements are better, the facilities are just much better, much easier to be used than it was before. So another thing that -- I know you guys didn't see that necessarily in the change in numbers, even though we went from $100 million to $150 million in one facility in 3 years to 4 years in both facilities. What really occurred behind the scenes is much more flexible usage of the facilities, better advance rates, better hold sizes, all sorts of better things; buckets for Canadians, buckets for Mezzanin that we just didn't have before. And so I think, as people recognize as we are an institutional firm, and we get these investment grade ratings it does help our lenders to give us better terms and better flexibility.

Having said that, the $100 million was necessary; I went on a non-deal road show. I heard from 12 straight investors that they were upset about it. Needless to say, we have $500 million of capacity. We have no need to raise more equity at this time. We're not any where close to thinking about raising more equity, not matter what the stock price is. And we're really in great shape, though, to take advantage of this year, which should be terrific M&A activity. And we are already seeing our sponsors line up with us at reasonable prices for one-stop transactions.

Thanks for the honesty. I appreciate it. The last question related to dividend coverage. Looking at the cash flow statement, I see that about $22 million a dividend this quarter, obviously covered by NOI. But when we start to back out the $2.8 million in [PIK] and the $10 million in fee income, we're only getting to about maybe $10 million of stable cash flow, which is less than maybe half the dividend that was paid in that quarter. Maybe some color on how you view the dividend in relation to that stable cash flow number, particularly going forward.

Let's take us relative to our peers, first of all. PIK as a -- I wanted Alex to mention this in his part, but we sort of left that out. But PIK as a percentage of our total income, which is the real issue with BDC is paying out PIK, but not collecting it and the number of BDCs that may be accruing massive amounts of PIK into income; which always gets them in trouble, I think. I think, we are among the lowest in the industry, where 7% of our income is PIK. Is that right Alex?

Yah, it's in the --

Oh it was in the script.

Yes.

I wasn't paying attention as close to your partner. I think that -- let's compare that against everybody, you're the analyst. You compare it against everybody else, and what you think you'll find is our quality of income is really high. In addition, we did not take all of our upfront fees into income in the quarter as others do. By the way, all you have to do is recharacterize it, and you can. So that also is a more conservative statement of our income, in that you can look at our accumulated but unearned balance, which is still very, very hefty. It has to come into income as some point, so that also increases the quality of our income.

There's no doubt in this quarter we got some prepayment penalties, but we've been expecting velocity for a long time. I think you're going to see velocity every quarter. And what that means is, prepayment penalties will be a normal part of our income stream just as originations are a normal part of our income stream.

The good news is when we get repaid we're also being able to capture the original points upfront that haven't been advertised, as opposed to many of our peers; which take them all into income to start. So I think we're going to have an earnings lift in future quarter that many of our peers won't have.

Great. Now, just kind of checking one item, when I do look at the [C] income that you received in cash, and add that back. We're still getting to about $17 million maybe $18 million, still well below the $22 million in dividends paid in cash. So are you saying that over time you're going to expect that fee number to grow, or you'd expect, perhaps, the interest income coming in the form of cash to increase materially to cover the dividend?

Alex, do you know why there's such a -- I don't understand what the fee income coming in cash. I thought it all --

You break it down in the cash flow statement. So it's about $7.6 million that came back to you in the form of cash this quarter. However, you recognized into income about $10 million. And I understand the whole amortization thing. Just curious of that stable cash number and how you look at the dividend policy. When it would seem to us that certainly we're below taxable income and dividend coverage is key for our, and a number of large BDC investors.

I see what you mean. So I think the disparity we're talking about is the fact that we collect cash upfront, call it points upfront, but we do not recognize all of it into income. As companies get recycled or paid back that money then, if it comes back early, gets pushed into income. But we've already collected the cash for it.

So the years past everybody dinged us for not earning our dividends, right? But we easily covered through distributable income. Now, it's the opposite. We have the cash already that we had in previous years. We just haven't been able to take it into income, so what you can see in a stable environment is our earnings are going to do much better. And our cash is going to be good, but our earnings may exceed our distributable income.

Right and the higher level of origination as well, relative to exists.

Right.

Helps that balance. Right, we had a -- our origination exit was, as you saw, was flatish for the quarter, so you have a different dynamic on either side of those, in terms of what's collected in cash. In a typical quarter, as the business grows, our originations exceed our exits. We receive the cash fees upfront on the originations, so as Len mentioned, typically in our history, we've actually have more cash coming in on a steady-state basis as the business has grown.

That's right.

Okay, well, thanks a lot guys. Appreciate it.

Your next question is from the line of Troy Ward from Stifel Nicolaus. You may proceed:

Great thanks, Len, on the prepayments because obviously that was the big differentiator from our models, I think, this quarter. As I was flipping through your release, one thing I did notice was your investment grade number one bucket, in the September quarter was around the $80 million level. And then it popped up in the December quarter to like $160 million and now it's back down to $80 million. Can you give us some color on the movements there? I'm assuming it has to do something with the sale.

Sure, I mean number ones are most at risk for prepayments at anytime because they've outperformed our model substantially. When we have a high level of prepayments like we did in that quarter most likely the ones are going to drop, and in the quarter where you don't have a lot of repayments, hopefully ones go up as the companies in general --

I mean we address credit qualities being relatively stable, but I'll tell you, across the board, except for our very troubled securities, things are doing very well. Each month, as we monitor, we collect monthly, we get monthly results, I mean, the portfolio is doing well. So we expect ones to increase on balance as long as we don't have heavy prepayments.

So the increase between September and December, from to $80 million up to the $150 million was just some of the clarity you had, you think, on some of the prepayments that were coming.

Exactly right. And that's how we monitor here, is when we see our one rated securities spike or do very well. We're always watching over our shoulders, saying uh oh. When are these things going to get repaid, and what can we do to adjust the interest rate maybe 50 basis points down to try to keep the loan outstanding because it's really performing well. And sometimes as you saw in the previous quarter, it's out of our control. And you just have that very heavy level prepayments.

And then moving on to the portfolio, looking at a couple of them. Obviously, it became public in mid-April that the traffic control did file. Can you give me any color regarding your position in that capital structure and how you feel about potential recovery through this process?

Certainly. As you can tell, Bernie's not on this call. It's not because he's not a very active presence, but because he's dealing with that issue today. Traffic control filed in the court. There's also been some other filings. We're going to make our filings somewhere, the response filings somewhere in the next 10 days or 15 days. The filing was done, and we believe through valuation work there's an independent investment bank selling the company. And we believe our valuation is correct for the security, as of this point.

The company filed for a variety of reasons. I don't want to go into the detail because it's still in the bankruptcy court filing, but I do not view it as a negative at all. We've had filings before in our history, and it usually turned out to be positives not negatives.

Alright. And then one more portfolio related question. Can you [pry] an update on Trans Trade? It's not actually one I've ever really focused that much before, but it looks like that term BPs is under some valuation pressure.

Absolutely. Trans Trade was continually under pressure. Here's the advantage of being a sponsor-lead lender. We have a sponsor that's paying a lot of attention to it, who I've known for 10 years. And this sponsor is continually working on the issue, has now stabilized the company, and true to their word, has put a substantial amount of additional capital in, supporting the loan. So we feel very good about our [APs].

The BPs became under valuation pressure because some of the capital came with us at the [BPs], and we [perry pursue] with us. And we just felt the conservative approach was the right approach on the BPs, but we really secured the APs even more than before.

Okay. And then one last one, we take a look at the schedule of investments, and at the end you give great disclosure. And we're always applaud you for that, but you always give that little table at the end that talks about portfolio companies where you made slight adjustments to rates and things like that. Tegra Medical showed up on that for the last two quarters. One day apart you had two different amendments. First of all, I want to know if maybe that was an oversight and it should have just appeared once, or if there's anything going on with Tegra.

I'm not sure.

Okay. It's just 50 basis points on the term loan B and last quarter it was December 30, and then it showed up again this quarter, as a January 1st amendment. There's nothing -- Tegra seems to being fine, in your opinion?

Tegra continues to do fine. Fortunately, Tegra is with our very good sponsors at Riverside Partners, and it's a stable to improving -- Actually we have a little bit of a c capital issue, in that they liked more capital to expand their business, and we've offered more capital. But the cash flow is strong enough that they haven't taken it from us. So yah, I think that's a good indicator that the company is doing well.

Alright, no problem. Thanks, Len.

And your next question is from the line of Robert Dodd from Raymond James. You may proceed.

Hi guys. Just on outlook, if you can, can you give us just any kind of way you expect pricing to go, separate of the mix. Obviously, you talked about pricings here to average now verses frothy last quarter. Expect some reduction in the amount of liquidity going forward as Basel for the [accept] to come through. I mean do you expect terms on pricing multiples etcetera to be getting better as you go through course of the year? At the same time deployments increase, or do you think that the amount of Norman bank capital is going to hold prices down?

I think pricing looks pretty good going into the end of the year. I think right now it's good enough that we should have pretty good deal flow. Not amazing, not terrible, but good, solid deal flow at the right price. We just won't price securities too low because we want to make sure the investors get a good risk-adjust in return.

And when it drops below thresholds that we're willing to price at, we just let them go, and we let the people or the lending firms that are very aggressive that need origination in order to make a quarterly number. We are just not focused, and we never really do focus, as you guys well know. Quarter to quarter, to make a number, we're focusing on a long term plan. At least a one year plan, in terms of what our earnings are and earnings capacity is. So we just never have been short-term oriented firm, and we're never going to be. But there are some firms that are on a treadmill. Or that have to make short-term numbers that have to originate. And then in order to do so, when there's not enough deal flow, they are too aggressive on term. And we just won't go there.

Okay, great thank you. Just looking at the portfolio, if we look at [vail] acquisition, I mean, is already obviously substantially marked down. It took a little bit more of a mark down this quarter and made it onto the (inaudible) list. What's changed there or how do you feel about the stability of that business going forward?

I think before September 30 this year we're going to make a conscious effort to clean up, but you guys always write about the number of non-accruals. And we're talking about such a small percentage of our assets. The real dollar amount at NAV of our non-accruals is just very, very, very small.

And a number of firms, the way they manage their non-accruals and magically say that they have zero or one, which is not possible if your interest rates are as high as some of our peers because I've been in this business since 1998, and it's just not a realistic number. But one thing you can do is quickly sell them, dispose of them, through them somewhere else, do all sorts of things. We just don't do that. We try to actually turn them around with an active portfolio management team and process.

Having said that, they are a couple, like Rail, Lighting by Gregory, that are just so small and frustrating that you can expect us to dispose of them, one way or another by September 30. I will say Rail is two different loans, so Rail, one of the loans is fully secured by accounts receivable and inventories from very credible places.

And cash current pay.

And cash current pay, and we've tightened our advance rates that we feel very good that, that's in any scenario, a very safe investment. And there's the other part, that's our non-accrual, which clearly is in difficulty as the business model has changed for Rail. And it's very frustrating to us, and we're going to rationalize that, hopefully by the end of the fiscal year.

As for Lighting by Gregory, the only reason this continues to be in there at all is we had a tax problem that we had to solve, and it's taken us longer than we expected. We think we're going to be there, if nothing to do with the fact that (inaudible) of dispose of this a year ago. It's a single lighting store in New York, which does -- By the way it's slightly cash flow positive, but it doesn't belong in the portfolio.

You know and the other thing that we do to help you guys on transparency is you know we split out these tranches, so you we're giving you complete disclosure. And also identifying accruals verses non-accruals on a per tranche basis.

And we appreciate the disclosure. Thanks guys.

Thank you for the question.

And at this time there are no other questions. Ladies and gentlemen we thank you for your participation in today's conference call. This concludes the presentation and you may now disconnect.