Oaktree Specialty Lending Corp (OCSL) 2012 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q3 2012 Fifth Street Finance Corp. Earnings conference call. My name is Andrew and I will be your operator for today. At this time, all participants are in a listen-only mode. We will be conduct a question and answer session towards the end of the conference.

(Operator Instructions)

As a reminder this call is being recorded for replay purposes.

I would now like to turn the call over to Dean Choksi, Senior Vice-President of Finance and Head of Investor relations. Please proceed, sir.

Good morning, and welcome to Fifth Street's third quarter earnings call. My name is Dean Choksi and I've recently joined Fifth Street as a Senior Vice-President of Finance and Head of Investor Relations. In my first few weeks, I've been extremely impressed by the quality of the team and the platform and look forward to meeting our shareholders and analysts.

This conference call is to discuss Fifth Street Finance Corp.'s third fiscal quarter ended June 30, 2012. I'm joined this morning by Leonard Tannenbaum, Chief Executive Officer; Bernard Berman, President; and Alexander 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 July 12, 2012 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 in 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 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 914-286-6855.

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. Then we will open the line for Q&A. I will now turn the call over to our CEO, Len Tannenbaum.

Thank you. We're excited to have Dean as our Senior Vice President of Finance and Head of Investor Relations. Dean was our formal analyst at UBS, where he covered both BDCs and mortgage rates. I encourage you to reach out to him, and learn about Fifth Street and BDCs.

US and European Union governments face an immense fiscal challenge as deficits continue to rise. A handful of EU governments are starting to cut spending after being required to do so by bond markets and regulators. On the other hand, US deficit spending is benefiting from record low interest rates courtesy of central bank quantitative easing and investors' flight-to-quality assets. But how long will this last?

Polarized Congress and White House are avoiding the difficult positions on taxes and spending. The lack of compromise is creating a dysfunctional environment in Washington, with the Senate unable to pass a proper budget in over 3 years. But the markets will soon focus on the upcoming fiscal cliff, which we believe will not be addressed by Congress and the White House until 2013.

All of this uncertainty makes long-term planning difficult for investors and business owners. At Fifth Street, we are navigating this volatile environment by focusing where we have a competitive advantage. Our reputation, having the ability to offer a one-stop product, larger hold size and the ability to grow the platform companies commands a premium in the market.

However, the abundant liquidity in the capital markets is increasing bank competition in first lien loans and leading to overall higher purchase multiples. As a result, we are seeing greater value in middle and upper-middle mezzanine loans and anticipate steering our portfolio mix slightly towards mezzanine with a new broader target range of 60% to 80% first lien loans, a change from our 70% to 80% previous target for first lien loans. We will focus on using our currently unused $75 million of SBA debenture capacity to finance the mix shift, which should drive incremental EPS growth.

On the right side of the balance sheet, we are constantly looking for ways to lower costs and improve the terms of our debt capital. Over the long term, we expect regulations such as Basel III to reduce bank competitions for middle market loans as capital charges increase for unrated borrowers. This should lead to a relative funding advantage for BDCs with investment grade ratings in the long term. Fifth Street is investment grade rated in both Fitch and S&P with a stable outlook.

Middle market M&A volumes declined in the June quarter, but our broad platforms still generated $221 million of gross originations, while maintaining our pricing and underwriting standards, enabling us to increase our market share. We are one of the premier middle market leading platforms after several years of investing in our platform and growing and diversifying our balance sheet.

For the third fiscal quarter we delivered $0.27 per share of net investment income, which is slightly lower than the last two quarters, but still ahead of consensus. Higher cash balances from elevated repayments in the March quarter primarily led to the decline in NII quarter over quarter. We should be close to matching our dividend with net investment income for the September quarter and the September fiscal year.

The fourth fiscal quarter is starting out strong, with over $70 million of originations closed as of today, putting us on track to be within our target range of $100 million to $300 million in gross quarterly originations for the September quarter. We are starting to see a pickup in deal flow going into the end of the year, though this is occurring later in the year than we otherwise would have projected. Most of these deals however are still in an auction stage. We look forward to providing an update on our originations outlook in Fifth Street's next newsletter.

Our credit committee remains conservative in its underwriting standards, due to the potentials from market volatility from Europe, and US fiscal cliff and the slowdown of the world economy.

However, we are comfortable continuing to increase our balance sheet leverage to our target of 0.6 times debt-to-equity, excluding our 10-year fixed rate non-recourse SBA debentures due to, one, our substantial diversification with over 60 borrowers, two, a high first lien mix, three, strong credit performance of our 2009 to 2012 vintage loans, four, diversified long-term liability structure and, five, larger borrowing size with an average portfolio company EBITDA of over $20 million.

We anticipate increasing our average leverage closer to our target over the next fiscal year as we prioritize earning our dividend and optimizing our capital structure over raising additional equity. Our net investment income should benefit from moving towards our target leverage, better utilization of our credit lines in our SBA subsidiaries by reallocating portfolio assets and, potentially, negotiating more attractive credit facility terms. Our 24 equity investments, prepayment penalties and potential exit fees are additional sources of upside as our portfolio seasons.

Our NAV is stabilizing. We expect a significant reduction in our non-performing investments as a percentage of our portfolio. Overall, we're seeing healthy performance in our portfolio companies, with the vast majority of the portfolio performing within expectations. These companies are ranked one and two and represent 98% of our portfolio as of June 30, 2012. As one of the most transparent BDCs industry-wide, we will continue to provide regular updates to our investors on our credit performance and on our business as a whole.

In May, our Board approved a $30 million stock buyback at prices below NAV. We have been frequently asked the question at what level would we repurchase shares. We intend to use some of our capital to repurchase shares if the price of the stock were to drop meaningfully below NAV to a level that, in our view, does not reflect economic reality. We are one of the few BDCs to have repurchased shares in the past and to maintain the current Board authorization for share buyback. During the past year, we're also one of the handful of BDCs to not seek shareholder approval to issue equity below NAV.

We are committed to increasing our leverage to our target of 0.6 times debt to equity, excluding our 10 year fix non-recourse SBA debentures. We understand our shareholders' desire for us to operate at a higher leverage level. We also are focused on not issuing equity that jeopardizes our ability to earn our stated monthly dividend. As we and our Board are confident in our ability to sustain our dividends through cash flow and earnings, the Board has declared dividends for the next 5 months through February 2013 after which the Board expects to return to evaluating dividend levels for 3 month periods.

Our available investment capacity and established institutional lending platform are enabling us to gain market share, maintain pricing and underwriting standards, as well as provide the high level of service that our equity sponsors value. Fifth Street continues to grow and attract high caliber individuals to its institutional, middle market lending platform.

I will now turn the call over to Bernard Berman, our President.

Thanks, Len. On May 15 we officially received our second SBIC license. This license along with the leverage commitment we also received allows us to issue $75 million in SBA guaranteed debentures. That is in addition to the $150 million in debentures we issued pursuant to our first license.

We've begun investing our regulatory capital for the second license and we expect to begin utilizing the leverage for the second license in the near future. Based on current rates, the interest rates for the new debentures would be even more favorable than the rate on our existing leverage. This should have a positive impact on our earnings as we utilize the leverage.

We have not made any structural chances to our Sumitomo, Wells Fargo or ING led credit facilities since the last earnings call, but we do continue to grow our investment bases and to ramp up the facilities. At June 30, 2012, our leverage increased to 0.42 times debt to equity, excluding SBA debentures, and we had over $350 million of remaining investment capacity still out for deployment.

Net investment income should benefit in future quarters from higher leverage, better utilization of our multiple credit facilities and potentially negotiating more attractive terms from our lenders.

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

Thank you, Bernie. We ended the third fiscal quarter of 2012 with total assets of $1.3 billion, an increase of $231 million or 21% over the year ago period, reflecting growth in net new originations and the strength of our business platform.

Investments were $1.2 billion at fair value and we had available cash on hand of $106 million. Our quarter end cash balance was unusually high since we held cash in connection with the funding of investments that closed at the beginning of our fourth fiscal quarter.

Net asset value per share remained stable at $9.85 versus the prior quarter NAV of $9.87. For the 3 months ended June 30, 2012 total investment income was $41 million. Payment-in-kind interest remained a low percentage of total income, at $3.9 million for the quarter or 9.6% of total investment income as compared to 11% for the year ago period. Net investment income per share increased 8% to $0.27 for the quarter as compared to $0.25 in the same quarter the previous year.

Turning to the portfolio performance, all 3 of our debt investment exits were at or above par, at an average price of 102% of par. The value of our portfolio was stable and we did not have any material realized or unrealized gains or losses in the quarter. The weighted average yield on our debt investments decreased slightly to 12.1% at June 30, 2012 versus 12.4% in the prior quarter.

The cash component of the yield decreased 0.2% in the quarter to 10.9%. The average size of the portfolio investment was stable at $19.3 million. We originated $220.6 million in divestments in the quarter in 10 new and 6 existing portfolio companies, bringing the total companies in our portfolio to 76 at June 30, 2012 versus 60 a year ago.

We also received $55.1 million in connection with the exits of 3 of our portfolio companies, all of which we were exited at par or better. We did experience a decrease in the level of early repayments from the previous quarter to a more normalized level, which ranges from $25 million to $75 million per quarter, which allowed us to reach a record high portfolio size.

Approximately 97% of the portfolio by fair value consisted of debt investments, 69% of the total was in first lien loans, and 68% of the debt portfolio was at floating interest rates. The investment portfolio continues to be well diversified by industry sponsor and individual company. Our largest single industry exposure is to healthcare at 23% of the total portfolio. The largest single company exposure is only 3.7% of total assets and our top ten investments represent 28% of total assets.

As Bernie stated, the leverage commitment for our second SBIC subsidiary, provides us with cost effective capital to grow and diversify our portfolio mix in the future. With the expanded leverage of our second license, we can fund an additional $112.5 million through our SBIC, bringing total SBIC investment capacity to $337.5 million.

The investment portfolio continues to be of high credit quality and the credit profile was stable versus the prior quarter. We rank our debt investments on a 1 to 5 ranking scale and the highest performing 1 and 2 ranked securities were 98.3% of our portfolio, versus 98.5% as of September 30, 2011 and 97.7% a year ago.

During the quarter ended June 30, 2012, we had 4 investments in the portfolio in which we stopped accruing income which is unchanged from the previous quarter.

Our Board of Directors has declared monthly dividends for October of 2012 through February of 2013 of $0.958 per share reflecting a continuing annual rate of $1.15 per share. The dividend rate continues to be set at level of commensurate with our earnings capacity and we remain confident that our dividends going forward will be covered by net investment income.

Now, I'll turn it back to Dean.

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

Thank you for participating on today's call. Andrew, please open the line for questions.

Thank you.

(Operator Instructions)

Please stand by for your first question. Okay. The first question we have comes from Greg Mason of Fifth Street Finance Corp. Please proceed.

Great, and good morning. And before I ask my question, I just want to say I appreciate the comments on utilizing the leverage and growing earnings before raising equity. We think that's a key part of the story.

Len, I was kind of surprised about your comments on the banks getting more aggressive and you shifting your focus slightly more to mezzanine. I was curious if you could give us a little more color exactly what you're seeing there, and if leverage multiples are going up because of the banks, why do you think mezzanine is the place to play in that scenario?

First, thanks for the question, but I just want to point out that Greg is from Stifel, Nicolaus and not from Fifth Street. Greg, I think what we're seeing - - when you talk about mezzanine in the middle and upper middle market, you're talking about the spread over the first lien and when the banks are being very aggressive, they're doing deals at LIBOR 400.

And if the senior is priced -- on a typical deal it's 3.5 by 5, so 3.5 turns of senior, 5 turns of total leverage. And we just don't do deals as [they've done]. Some deals are stretching to 5.5 and 6. We're just not doing them, typically. We've seen some of our competitors reach for yield and take too much leverage; we're just not doing that.

But the mezzanine piece -- the 1.5 turns of mezzanine in $20 million EBITDA business, is a lot safer than the mezzanine in $5 million EBITDA business. And as we've moved up market, we feel much more confident that the mezzanine is a better risk adjusted return.

But the way we view it -- it's a good question, it's kind of interesting. It's the spread over the first lien. So if the first lien is at LIBOR 400 and the mezzanine is at LIBOR 1000 or LIBOR 1100, that could be a good risk adjusted return rather than being a LIBOR 400 piece of paper, while the first lien is LIBOR 600 and much less willing to do 12% or 13% mezzanine.

So we're seeing the first lien so cheap it's providing a lot of extra cash flow to the Company, which allows and support the mezzanine a lot better.

Great. And then as you talk about you're getting bigger, you are moving up market a little bit, we've obviously seen at some point getting too big or moving too high up market doesn't work. Apollo tried that strategy. Where do you think you go from moving to bigger companies is okay versus you get too big and if the market just becomes too competitive?

So we're --

Do you have a view for that line?

We are all the way through the cap -- up and down the lower middle market, the middle market and the upper middle market. At our size, the great part about being at $1.3 billion in assets, about $850 million of equity is we can go both ends of the market and go wherever the best risk-adjusted returns are. We believe that we start losing that flexibility to go up and down market at about $1.5 billion of equity, $2.5 billion of total assets.

And I've been pretty consistent saying that over the past 3 years. And as we now are in the sweet spot, it's really nice to do what -- we're doing a $10 million mezzanine loan that goes in the SBA that's yielding 14% in a great industry with a good sponsor. And we're also doing a piece of a very large mezzanine loan, with $40 million EBITDA. So we can go both ends. And that flexibility is just great. But if eventually, you're right, we do lose it, but we have quite a bit to grow before we can lose that.

Great. Thank you, guys.

Thank you. And the next question comes from Stephen Laws, Deutsche Bank. Please proceed.

Hi, good morning. Nice originations during the quarter and thanks for the visibility with the dividend. I'm trying to get a little bit better idea looking at kind of net portfolio growth. You talked about a normalized kind of pay down or exit level of $25 million to $75 million. Is there any seasonality in that or any kind of one-time events you guys see can see it in the portfolio that we should think about as we look to grow our portfolio towards your targeted leverage level?

So, I think besides being a little bit blindsided in the first -- a couple of quarters ago with very high repayments, we really do have some forecastability because, unlike most platforms, we're an origination platform. These are our equity sponsors, these are our partners, we're in 3 and 4 and 5 deals with them.

Because of our relationship and because we're not just participating in syndicates, they're constantly telling us when things go to auction, when things are for sale, when they're thinking about refinancing us, whether it's caregiver services, which is currently at auction, we hope will sell for a very good price in this environment, where we now have equity.

They told us they were going to refinance us, so we knew that refinancing was coming for a substantial amount of time. We already see some refinancings coming in the fourth calendar quarter, and we believe right now, given our outlook, that's between the $25 million and $75 million number. I can't tell you -- there is no way to forecast exactly --

Sure.

-- but it's for sure within that number. Just like we feel that the wide range of 100 to 300 in gross is appropriate, because if you're an origination platform, it's taking us over a 100 days from the time a deal enters the pipeline to close the deal, typically.

And because we do all the diligence -- we do the diligence for the auction stage. Our equity sponsor then wins. We then determine whether they want to do a one stop bank and mezz financing. And we may fall into mezz or we may do a one stop depending on the credit underwriting and also depending on what the equity sponsor wants.

Right, so with the 100 day lag on that, you have a good idea of originations that are for the next 3 months, but it's the exits that may be a little bit less clear from a visibility standpoint?

I think yes. Exits we'll know 2 months in advance and originations we'll -- feeling for a little bit more than that.

Great. And then on the SBA side, how quickly can you -- will that new $75 million be deployed? The comments during the call said near future. Is that within the next 3 months or is it more of 9 month timeframe? How should I look at that?

So they can only be deployed in $11 million chunks. And we only -- want to deploy it utilizing some mezzanine. And so, we're carefully putting deals in there that are appropriate to match up against their 10 year fixed horizon. So we're better allocating our portfolio mix among all of our credit facilities, which we believe is going to generate some additional earnings. And so, it's going to take 6 months to 12 months I think to do the second license.

Great. That's helpful. Thanks for taking my questions.

Thank you. And the next question comes from Jonathan Bock, Wells Fargo. Please proceed.

Yes, thanks for taking my question. Len, just on the [Q] about $108 million in unfunded commitments -- can you just give us a sense as to how much powder you want to keep dry in order to fund those in the event that they came to call on your capital?

So, I think maybe you missed it -- it 108, not 180.

No, 108. I'm sorry.

Yes. And the $108 million is really September 30, 2011. June 30, 2012 is $95 million. So actually we've actually reduced our unfunded commitment substantially over the last year. So, I appreciate pointing that out.

And so, what the reason we did that is so that we could optimize our leverage better because we do reserve against our unfunded commitments to make sure we have enough capacity. And so, we've been able to reduce our -- even that we've grown our portfolio, we've reduced our unfunded commitments substantially.

So we really do have around $250 million, $300 million comfortably, to be able to invest, before we're quote unquote, out of money. But -- we've heard some of our peers go to max leverage and use up all of their capacity. We're never going to be doing something like that. I don't think that's ever prudent.

And another thing just as a --

You never know when a cycle comes.

Okay, so it went from 108 to like 98 something like that?

Yes, it's down to $95 million today. September 30, last year it was 108.

Okay . My bad for switching those numbers. Next, when we build out the -- as you're building out kind of the Midwest and we think about the larger platform that you obviously been working towards expanding over the past few months and years, maybe give us sense as to just that office, kind of the additional deal flow and the looks that you're seeing now that they've really been really up and running?

So, the Chicago market was a very tough market to crack. And what we realized a couple of years ago that we needed to hire some veterans within that market. And Sunny Khorana runs that market for us and he bought into our partnership. Sunny is doing a great job. Chicago currently probably accounts for one-third of our originations and we expect it to continue to grow. And that's up from probably close to zero, 2 or 3 years ago.

And that's the Chicago sponsors like Chicago Growth Partners, Beecken Petty, Baird, it's all of them. And it's really a great relationship, and I think they really want that local office so that you can just walk over to their offices and talk about deals, talk about the environment, talk about our underwriting processes.

So it's working very well. I think the next higher for us -- not to telegraph -- I guess I'll telegraph, it will be another East Coast originator to look more up market. Casey Zmijeski is awesome. He's been a partner here for a while and he does a great job and he's actually asked for some help. So, we're in search to continue to expand our origination team.

Okay. Great. And then on the new investments, particularly the sub-debt -- just tagging along with Mr. Mason's question, could you give us the average leverage level kind of through your security and then also that the minimum and the maximum leverage on that the sub-debt transactions today that you originated this quarter?

No, I'm not going to give that level of detail on the call because I don't feel like giving the detail in every call. But what I will say is, we're one of the only -- we are the only BDC to my knowledge to release what the debt to EBITDA of the 1 rated and 2 rated tranches are and I'm sure you can find that in the Q.

And those two leverage levels I think are -- if our peers were to release them, would compare very favorably. And -- while you don't see it for 3, 4 and 5 because it's really not material, 1 and 2 rated securities I think we're 98.2% -- 98.3% of the overall.

So from 98.3% of our portfolio, we know that the rated 1 securities only have leveraged up 3.16 times debt to EBITDA. And the rated 2 securities, which to be honest, the biggest -- I'm reading the wrong one.

Yes, the June 30.

I'm sorry, the June 30 numbers. See, I even read the wrong column. June 30 rated 1 securities were 2.07 times debt to EBITDA and rated 2 securities with 3.89 debt to EBITDA. So that gives you a pretty good sense that we're really staying safe and high in the structure and we are just not reaching for those deep deals. It's just not worth it.

Okay. Great. I appreciate that, and then just two last ones. One, Alex, I think you released the originations to-date. Do you happen to have the repayments to-date if I missed that somewhat this quarter?

No, we haven't really released the repayments to-date yet for this quarter.

Would it be your view guys that repayment activity is again slightly moderate in light of kind of the economic malaise, or --?

Yes it's going to be in the range for the quarter.

This quarter, I think repayments were 55. Right?

So far in September, we've had a couple smaller repayments. We should be fine to be in the range of --

No, not September the June quarter.

No, for the June quarter --

For the September -- for the current quarter.

Oh, are you talking about the current quarter? We think we're right in the middle of the range.

Yes. It's in the range.

Okay. Great. And then, last question relates to equity outside. I know currently in this environment that's an item that people do pay attention to and I notice there's been several restructurings. So perhaps could you give us a sense as to how you look at potential values of equity in realizing values for your shareholders over the next, let's say, near term to maybe a little bit of a longer term for your shareholders?

Well, we still have this capital loss carry forward of $60 million. And we have endeavored over the past few years to make a substantial numbers of equity investments. I think we talked about 24 of them. And some of -- those equity investments take time to mature and to be realized.

It typically takes 2 to 5 years for equity investments to work, and they are starting to mature. As we talked about, Caregiver Services now is up for auction and we have 5% of the company, so we hope to have that work.

The best news that happened this past week is Traffic Control and Safety is going to exit bankruptcy, and we own a substantial amount of the company. It was a very tough turnaround for us. We are very pleased with where it is currently. It still has a lot of wood to chop and it was very much helped by the infrastructure bill passing through this dysfunctional Congress. So the one thing they did pass is something that really helps our largest equity position.

Having said that, we have very conservative mark on the equity. I think it's marked at zero. So can't go any lower than zero. And there's substantial upside to that, but we need to see the company perform first. And we are excited by our new management team -- I mean, our existing management team being re-energized by having substantial amounts to the equity upside and stock options. And I'm sure they're going to work very hard to realizing their stock options.

All right. Great. Thank you.

Thank you. Your next question comes from Robert Dodd of Raymond James. Please proceed.

Hi, guys. Most of mine have been answered, but just on kind of can you give us any color on how fee structures are changing? I mean, just looking at the new originations in the quarter, the coupon, not the all in [yield] -- looked to be about 9.5, which looks low.

But looking at the structure of fees, recognized versus cash income, are you seeing a shift towards more structured exit fees in deals that are being done at the moment, in terms of back-end loaded, or is that me reading things that aren't there?

So, over the past years, one of the comments is we had a young portfolio. Well, our portfolio is not so young anymore. It's sort of a teenager or older. And as the portfolio ages, something normal happens, which is recycles. So, we're getting these repayments.

And these repayments are generating prepayment penalties. It's generating some of upfront fee realization. It's generating some new investments, so you put out new fees. And because of that fee income on a sustained basis -- and we already see it the September quarter.

We're just going to have fee income every single quarter because that's what happens in the normal asset management firm where you have the recycling of assets. We just hadn't had these levels of recycles in 2011 and 2010 because the portfolio was relatively young. These are 5 year assets, typically.

So I think we're going to continue to see all this good income coming and hopefully, we're going to see some capital gains. Even though that's not an NII, what it does for us is it's going to start replacing NAV. And so, we're looking forward to some capital gains as well.

Okay. Yes, but -- and I always hate it when somebody starts out that way. But if we look to last year, right, your cash flow from fees was above recognized income versus this year we're seeing cash flow below. If it's a prepayment fee, the recognition GAAP and cash flow occurs in the same period. So there [to] be a lag there has to be a delta in the accruals. Is that back-end loaded or front-end loaded?

So there always been a -- in the past, we've earned lots of cash and we've -- as you pointed out NII was lower than it might have been. And as those deals repay, you get back the amortized amount or a capitalized amount, which increases your income, but doesn't necessarily increase you cash. So, that's correct.

You're starting to see the reversal out of what we call note 4 which has about $20 million of capitalized -- or it did have roughly $20 million of capitalized income and that's going to come into income over some point. Having said that, we're pretty much seeing, we believe over the next year, which is 2013, not only we're going to cover our dividend with NII but we're looking to cover it with cash.

And so, I think both of those metrics will work for us in 2013 and so we're excited about that.

Okay, got it. Last question if I can -- just a small one. BMC, very small investment in the quarter -- but, can you walk us through the rationale for doing that as a cash coupon of 6%, 6.5%? Seems much lower than your target.

Oh, it's SBA. I mean it's the Sumitomo one, right guys?

Yes.

So the Sumitomo facility, we're going to put some of those -- it matched up against our LIBOR 225 borrowing, 2 times leverage for Sumitomo. So yes, it's a little bit lower yield. The interesting thing with some of these lower yield things that we buy at 98, 97 -- we did one last week for $5 million and we asked some favors of our capital markets teams to give us a nicer allocation. And they immediately traded from 98 to 101.

So I think why you're seeing some of lower yielding things, we're using them opportunistically sometimes and that sometimes, we're just matching them against the very low cost leverage for Sumitomo.

Okay. Got it. Appreciate it.

Thank you. And the next question we have comes from Jason Arnold, RBC Capital Markets. Please proceed.

Hi. Yes, good morning, guys. I was just curious if you could comment on where you'd anticipate rates coming in for the new SBA facility and how would that compare to the current SBA facilities that you have out there?

Well, rates for the SBA facilities are locked in twice a year typically at a spread over 10 year treasury. The spread has been approximately 50 to 100 basis points. So a 10 year treasury is at 1.6, which I believe is artificially low due to the treasury buying 70% of treasury -- during the fed buying 70% of the treasuries. But either event, as we deploy it and lock that amount, we really could experience 2.5% 10 year paper versus 3.6% on average for the first facility.

The other thing which I heard mentioned on a number of other BDC conference calls is, yes, there is a bill passing through. Yes, it would increase the family fund's limit for the SBA. What I'll point out that I don't think has been properly talked about is let's say the family fund's limit goes from $225 million to $350 million as this bipartisan bill, which is actually out of committee, contemplates.

To get the second amount of money you need a second license. So, now we have our second license and we have our second leverage. So what we've been told is potentially our second license could go from $75 million to $150 million if this passes without having to apply for any new license or apply for any leverage.

But there's also another limit to the SBA, which is $150 million limit per license and that's not going to change anytime in the near future. So even though you may see 350 as a family of funds limit, until they raise the per license limit, which they do from time-to-time, we expect to just get another $75 million of leverage in addition. Maybe that will happen in sometime in 2013.

Okay. Good color. Thank you. And then I guess, would you for your older facility have any opportunity to refinance? I know you mentioned some of your peers -- I think one of your peers has done that -- more or less repaid and then took out another line at a lower [lock].

You're talking about our main facility?

Yes, correct.

We are definitely exploring --. Look, we're the fifth largest BDC, the largest, the second largest and Solar just did a very nice facility. I think if you look at Solar's facility, which I thought he did a good job -- Michael did -- negotiating the facility and advanced rates and the unused. We're definitely looking at that type of format for our next facility or to replace or be transferred from the ING line.

But we're not there yet. We're not ready to announce anything, but we're definitely looking at that in that pricing because we're a triple B minus company as well and we think that that's the right format for our size.

Okay, terrific. Thanks for the color.

Thanks.

Thank you for your question. We have no further questions. So, ladies and gentlemen, thank you for joining today's conference. This concludes the presentation. You may now disconnect, and have a very good day.