Oaktree Specialty Lending Corp (OCSL) 2013 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Fiscal Q3 2013 Fifth Street Finance Corp. Earnings Conference Call. My name is Dominique, and I'll be your operator for today. At this time, all participants are on a listen-only mode. Later, we will conduct the question and answer session.

(Operator Instructions)

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to Dean Choksi, Senior Vice President of Finance and Head of Investor Relations. Please proceed.

Good morning and welcome to Fifth Street Finance Corp.'S fiscal Q3 2013 earnings call. I'm Dean Choksi, Senior Vice President of Finance and Head of Investor Relations at Fifth Street. I'm joined this morning by Leonard Tannenbaum, Chief Executive Officer; Bernard Berman, the President; and Alexander Frank, Chief Financial Officer.

Before I begin, I would like to note that this call is being recorded. Replay information is included in our July 17, 2013 press release and is posted the Investor Relations section of 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 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 of our results and outlook. Bernie will provided an update on our capital structure. Alex will summarize the financials, and I will provide high-level commentary on the BDC sector. Then, we will open the line for Q&A. I will now turn the call over to our CEO, Len Tannenbaum.

Thank you, Dean. The sugar high from loose monetary policy from Global Central Banks continues to support risk assets despite recent comments from the Federal Reserve about a potential tapering of quantitative easing, largely improving economic growth and highly accommodative monetary policy should lead to continued money flows into risk assets. We are finding attractively priced in structured assets with favorable risk-reward characteristics due to a recent increase of new M&A volumes.

We are using our investment expertise, infrastructure, relationships and balance sheet to source opportunities where our platform creates incremental value. While higher pre-payments have been a headwind to net assets growth, we are finding more opportunities in the last few weeks than we have seen all year.

Our June quarter results reflect these trends with originations of $266 million coming at the high end of our $100 to $300 million guidance range, but partially offset by elevated pre-payments of $167 million. As a result, we achieved net investment income of $0.26 per share.

Lower net investment income per share was driven mainly by three things -- one -- higher prepayments as borrowers refinance and exit the portfolios. Two -- significant cash drag in connection with our SBIC license. And three -- lower average leverage and credit facility utilization.

We continue to target leverage of 0.6 to 0.7 times excluding SBIC debt and fully understand that we need to increase leverage to improve our return on equity. The credit performance on the portfolio, however, has been very strong, reflecting our underwriting and portfolio management expertise.

We ended the June quarter with no four or five rated credits, and no companies on non-accrual. The team at Fifth Street has planned for potential future expansion into complimentary credit assets for several years. However, only recently are we finding attractive opportunities as banks and other traditional financial institutions, exit certain businesses as regulatory requirements increase following the financial crisis.

We are able to grow our platform and brand in this environment by attracting talent and sourcing uniqueness investment opportunities. Fifth Street remains consistent in its goal of providing a menu of tailored financing solutions to sponsors. Private equity firms and their portfolio companies generate over 90% of our deal flow. We anticipate earnings growth should come from the following five initiatives.

One -- the acquisition of Health Care Finance Group as a portfolio company. Two -- expanding into venture debt lending. Three -- growing our capital markets presence. Four -- better utilization and the reduction in costs of our bank credit facilities. And five -- rotating into higher yielding assets.

To elaborate, number one -- we closed our acquisition of Health Care Finance Group or HFG as a portfolio company in the June quarter. HFG is a leading asset-based lender to the healthcare industry. The acquisition is already performing above our underwriting plan. We are currently working with HFG's management to help them expand their loan syndication capabilities and sponsor relationship. HFG is reaping the benefits of being affiliated with the Fifth Street brand and balance sheet as a portfolio company. We expect our investment in HFG should generate incremental earnings over time.

Two -- we added venture lending to our product offering by hiring an experienced and respected team in the industry. Michael David, formally the co-head and managing director of (inaudible) Venture, will lead our new venture lending team; Fifth Street Technology partners. Michael has over 20 years of industry experience and is joined by four others who will based in our Silicon Valley and Dallas offices. The team will originate loans to venture-backed companies as well as augment our overall technology, underwriting and origination efforts.

Venture debt is an attractive asset class that we have evaluated for several years with higher yields, potential equity upside, low historic average credit losses and a lower correlation to middle-market M&A volumes. Loans to venture-backed companies typically receive higher coupons with yields around 12% to 13% and often include warrants. We expect earnings to benefit as add higher yield venture loans to our portfolio and potential warrant gains may lead to any of the accretion by offsetting our existing capital loss (inaudible).

Number three -- we expanded our capital markets presence by hiring Frederick Buffone as our head of capital markets. I have known Fred for many years and watched him successfully build several middle-market lending platforms, a firm success as CIBC World Markets, Jefferies & Company, and most recently, at TD Securities, USA.

Fred's relationships, credibility with investment banks, credibility with sponsors and investors in the leverage loan market should help us take our capital markets' activities to the next level especially when combined with our existing origination and underwriting businesses and hold size.

We anticipate capital markets' fees will be a significant driver to our earnings over time as we originate and syndicate loans to other investors as well as source assets for own balance sheet.

Number four -- we lowered the cost of our credit facilities and plan to better utilize them going forward. We made multiple improvements in our credit facilities with Wells Fargo, and our ING-led bank syndicate including lower pricing, better structure and in the case of our ING-led credit facility, a 5-year maturity comprised of a 4-year revolving period and a one-year term out.

The recent amendments to our credit facilities also include a greater flexibility regarding eligible collateral and higher advance rates across multiple types of loans. Over time, we should be able to take advantage of the structural changes and better utilize our credit facilities which we anticipate will lead to higher leverage and earnings.

Number five -- we expect to rotate assets into higher yield investments. Over the last several quarters, we have improved the quality, flexibility and costs of our capital structure and having proved the overall credit performance in the portfolio. Looking forward, we intend to shift our portfolio mix towards higher yield, first lien [in] unit tranche, first lien in last-out, second lien loans.

These assets are higher yielding but offer the structural protections and right to being a senior lender. Over time, our portfolio should shift towards a higher mix of these assets to better utilize our credit facilities and to generate incrementally attractive risk adjusted returns for our shareholders. We ended the quarter with a portfolio 79% senior secured loans including the first lien, second lien loans in the basket, 16% subordinated loans and 5% equity of fair value.

These five initiatives should improve Fifth Street Finance Corp.'s earnings power and are only possible after the significant investment in the platform that we have done and are continuing to do.

Our September quarter pipeline is strengthening as M&A activity levels that our sponsors increasing. However, we have ample capacity to fund our growing pipeline, particularly when combined with their near-term expectation of continued higher prepayments. The platform that we have built at Fifth Street is generating attractive deal flow in our core, middle-market lending business, as well as interest from teams and employees and other credit related assets that are looking to partner with an experienced institutional asset manager.

We look forward to updating you on future Fifth Street platform growth as we prudently expand and diversify into asset classes with attractive risk reward characteristics. I will now turn the call over to our President, Bernard Berman, to discuss our capital structure in more detail.

Thank you, Len. As Len mentioned, we are working hard to reduce our cost of revolving bank debt. In the June quarter we announced a 25 basis point reduction in the rate of our Wells Fargo credit facility to LIBOR plus 250 basis points per annum.

Yesterday, we announced significant changes to our ING-led credit facility including a 50 basis points reduction in the interest rate to LIBOR plus 225 basis points per annum with no LIBOR, an increase in the committed facility size to $480 million and an increase in the accordion feature to $800 million.

The amended facility also includes a longer maturity and a greater level of flexibility on eligible collateral. The changes to the facility provide the flexibility we need to grow our portfolio across different parts of the capital structure.

We currently have total debt capacity of over $1.3 billion, including $830 million through our ING, Wells Fargo and Sumitomo credit facilities, $276 million of unsecured debt and $225 million of SBA debentures. Leverage at the end of the June quarter was 0.4 times debt to equity excluding SBA debentures. We continue to target leverage of 0.6 to 0.7 times debt to equity, excluding SBA debentures.

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

Thank you, Bernie. We ended the third quarter of our fiscal 2013 with total assets of $1.9 billion, an increase of $508 million or 37% from 2012 fiscal year end. Portfolio investments $1.8 billion at fair value, and we had available cash on hand of $59.6 million.

Net asset value per share was $9.90 at quarter end, which was unchanged from the previous quarter but an increase of $0.05 from the year-ago period. For the 3 months ended June 30, 2013, total investment income was $58.1 million. The level of gross payment-in-kind interest, a key indicator of earnings quality, declined to 7% of total investment income as compared to 9.6% in the year-ago quarter.

Netpick, pick accruals recorded in access of PIK payments received in cash, was $3.2 million for the quarter or 5.4% of total investment income. Net investment income increased 38.7% to $30.4 million for the quarter as compared to $21.9 million in the same quarter the previous year.

The performance of the portfolio was stable as net realized and unrealized losses were $4.4 million or only 0.02% of the investment portfolio. As a reminder, the realized loss is recognized in the quarter were already accounted for in NAV as unrealized depreciation in prior quarters; therefore, the realized losses had no material impact on either net investment income per share or GAAP earnings per share.

The weighted average yield on our debt investments remain steady at 11.4% with the cash component of the yield making up 10.2%. The average size of a portfolio debt investment was $22 million at June 30, 2013, an increase from $21.1 million at the prior quarter end.

We had gross originations of over $266.3 million in the quarter in nine new and eight existing portfolio companies, bringing the total companies in our portfolio to 98, at June 30, 2013. During the quarter, we also received $166.7 million in connection with the exits of eight of our debt investments, all of which were exited at or above par an average price 102, and were exited in line with previous fair value marks.

Approximately 95% of the portfolio by fair value consisted of debt investments with 79% of the portfolio invested in senior secured loans. The investment portfolio continues to be well diversified by industries sponsoring an individual company. Our largest single exposure continues to be healthcare including pharmaceuticals at 21% of the total portfolio.

Our investment in HFG, our specialized finance portfolio company, represents 6% of total assets. The overall largest single individual company exposure is 6.1% of total assets, and our top 10 investment represent 37% of total assets. The investment portfolio continues to be of high credit quality, and the credit portfolio remains strong. We currently rank our investments on one to five ranking scale, and the highest performing one and two ranked securities, were 98.1% of our portfolio which flat versus previous quarter in year ago.

During the quarter that ended June 30, 2013, we had no investments in the portfolio on which we had stopped accruing income as compared to one at September 30, 2012, and four at June 30, 2012.

Our Board of Directors has declared monthly dividends for September 2013 through November 2013, of $9.58 per share reflecting a continuing annualized rate of $1.15 per share. Now I'll turn it over to Dean.

Thank you, Alex. One area, I believe, is sometimes overlooked by investors in the BDC sector, is earnings quality. More specifically, PIK, our payment-in-kind income. PIK means that interest is generally not paid in cash during the life of the loan, but through an increase in the principle balance of the loan. At Fifth Street, our level of PIK interest has declined from 14.7% at the end of the fiscal year 2008 to around 7% in recent quarters, as a percent of total investment income.

The lower level of PIK interest indicates that we are receiving higher relative levels of current period cash income. In leverage lending, it is not unusual to have some PIK interest. PIK interest is generally included in most mezzanine loans with a typical structure being a 14% coupon consisting of 12% cash interest and 2% PIK interest. Other times, a borrower may request a loan with a greater amount of PIK interest for a specific business reason, such as, to conserve cash flow to fund the increase in capital expenditures.

In our opinion, investors should scrutinize a BDC with a relatively of PIK income more carefully because, one -- PIK interest that is accrued as income must be distributed to investors as dividends even though cash may not be received until the loan repays, if at all. Two -- high levels of PIK interest or a loan may be a sign that a borrower has weak cash flows, particularly, this should be a warning sign if an all cash-paying security is restructured into a security with a coupon with a high PIK component.

We also believe investors should scrutinize companies where PIK interest is not clearly disclosed within our FCC filings. Fifth Street includes a [table] that clearly discloses the level of gross PIK or PIK income accrued in the quarter, and the level of PIK income collected as loans repay.

We also disclose in the table if loans are on cash nonaccrual and -- or -- PIK nonaccrual, in addition to the dollar amount of revenue on nonaccrual status. Looking at our disclosure over time, you can clearly see the quality of our earnings has improved.

Thank you for participating on today's call. Dominique, please open the lines for questions.

Yes. (Operator Instructions). And your first question comes from the line of Rick Shane of JPMorgan.

Hey, guys. Good morning and thanks for taking my question. Just want to circle back about the shift in the portfolio that you're describing, and I actually want to sort of try to characterize it as a shift versus a rotation. And by that, I mean, do you expect that you will shift the portfolio by skewing your future originations, or do you expect to actually, to sell off, some of the Legacy stuff to accelerate that shift.

I think primarily, it's future originations as the shift and, as you know, we've moved up market substantially in the EBITDA of the companies that we're typically underwriting, are in the mid 20s to mid 30s, EBITDA. So they're more safer, more established companies. We are still being very careful about leverage, but we are going to increase our second lien loans. We are going to increase our first lien loans that have to do with venture, which is almost all first lien.

And we are going to reduce, over time, the proportional loans there are 7% and less, on the portfolio. So it's going to be a shift that should create additional yield without significant additional risk.

Got it. And again, I don't want to put too fine a point on it, but from a modeling perspective, it helps us think about things whether it's going to be sort of a static portfolio size and mixed shift within it or dynamic portfolio growth with a skew. And it sounds like it's the latter.

It's mostly the latter. It's amazing, as you've seen, a lot of our loans repay at 102. I think that's what Alex said is our average loan repayment. The senior loan market, our loans are trading very, very well. So when we can opportunistically exit it at 102 or 103, I think we take select opportunities, but still it would primarily new origination.

Got it. Hey, Len, I'm going to apologize in advance if you address this, but you know it's a day we're bouncing between a lot of calls.

Yes.

Love to get your thoughts on where you stand versus the report card that you set up for yourself back in February.

Oh my goodness, I'm not ready to give myself grades yet, but one of the things I will say, that I'm disappointed in the report card, is still, you know, this quarter was short of -- there's no question it's short of the dividend -- we're very (inaudible) other. And I know a lot of analysts modeled in that we'd get there by fiscal year end, and we're still doing our best to get there. So we're working hard to try to do better on the report card. I'm certainly not scoring straight A's, but I still have a little more time to improve my score.

Okay, great. Just remember the market doesn't grade on a curve. Thanks, guys.

Your next question comes from the line of Stephen Laws of Deutsche Bank.

Hi, good morning, thanks for taking my question. Like the previous caller, I've been bouncing around too, so I apologize if you're already covered this. But wanted to really kind of get the perspective from FSC with regard to having the new FSFR vehicle in the market.

Where are you in the process of being approved for co-investments between the two vehicles, and how is that going to change FSC. Is it going to enable you to do larger transactions, change the pipeline. I just kind of wanted to get your comments from the FFC side of things about the new vehicle.

Bernie, why don't you answer the approval process.

So we filed with the FSC for an exemptive order to allow us to co-invest, and we originally filed that -- I believe -- in February. It was definitely in the winter quarter. And then we amended that application in July to include FSFR as part of the application. So we are hoping that we will receive permission prior to the end of the year to co-invest.

So far, the lack of permission to co-invest besides maybe one stock that I would have liked to slip between vehicles hasn't hurt us that much. Some of the transactions that FSFR has recently entered and today we announced $26 million of deals have been done in FSFR to start deploying the equity. Some of them have been mass mutual type deals. Some of them belong there instead FSC, and I think that's part of it.

If you take the FSFR fee structure which is lower than FSC and you take their leverage which is actually cheaper than FSC, and you take their leverage target which is higher than FSC, then for FSFR a lower yielding senior deal makes more sense in diversified manner than FSC, which really doesn't make sense if the yield [was] low to put it into fee structure and leverage structure.

So I think you will see deals that belong there, go there. Deals that belong in both places be split once the FCC approves it, and we think in the next few months we'll get that approval.

Like it's something that's going to be complimentary and may be to leverage some investment opportunities there.

It's pretty exciting because, you know, one of the reasons why we sometimes win deals, in fact, I can name a lot of deals this year that we've won this way, is by participating in the senior with a great sponsor who asked us to do that. And then they go for a refinance and all of a sudden they need to last out senior, or they need a second lien loan, or they need a mezzanine loan.

And the incumbents always have the advantage because they're already in the loan, and they've already done their diligence, and for them to expand it's much easier. So the sponsor would much rather go -- the first choice of any sponsor usually is to go to an incumbent -- unless somebody does something very wrong and then goes out to market.

So by the incumbent in many senior loans, when the opportunity present itself for an acquisition, even for a dividend in cases, we're going to get a first look. And I think that's a really important thing to be is as many loans of our clients as possible, good loans.

Very well. I appreciate the comments on that. Thanks, Len.

Your next question comes from the line of Greg Mason of KBW.

Great. Good morning, everyone. I wanted to see, and maybe you touched on this already, but the return expectation from HFG, what are you modeling out as you -- expect to return there. And then, what is the ability or desire to continue to grow that platform, and how big do you think it could get?

First, the thing we have to do was make sure that everybody was on the right page and take over the brand and help them with branding and help them with -- helping -- see where the overlap between HFG and FSC is to how we can help each other. I got to tell you that several deal were HFG is bidding for the same business we are, and it's great because we're offering the sponsor multiple solutions and multiple cost points and attachment points for their loans.

So that I think, that phase is pretty much done, and HFG is performing above or under what we underwrote them at, so should generate some excess earnings over time. The excess earnings, as you've seen many of our peers be able to do, can be dividended up, better option.

And in addition, if HFG needs more capital, and they actually have pretty incredible leverage lines, that we're still working on lowering cost of capital there, but they still have plenty of capacity too, to expand their business. But if they needed more, we would be happy inject it for the good risk adjusted returns that they are. But they're very well capitalized at the current time, and they're generating some excess earns.

I mean, is that kind of stable earnings and, you know, mid teens range, 12% range, just kind of what are your underwriting expectations for returns on that business?

Well, we're not ready to say, and we can give you -- we've just recently acquired at -- I think we want some history first. Clearly when they generate excess earnings on a sustained basis, we think that it should be able to dividend up to the parent, but we don't know when that will occur. It certainly doesn't occur 3 months later.

Okay, great. I can appreciate that. And then, you said that the September pipeline is building. Can you give us anymore indications on what you're saying is, is pricing holding steady, the kind of mix refinance versus new M&A actively, just a little more color on the pipeline that's starting to build.

I would say 4 weeks ago or 5 weeks ago, I wouldn't have made that comment, and it was actually an adjustment to me making that comment more recently. And it's really amazing that we normally think is August is slow, and everybody is pretty much here saying -- maybe it's just Fifth Street phenomenon, but I know you guys are listening to all the earnings call, that we're seeing a very busy August. So, while everybody thinks it's slows down at the end of and everybody can go to their vacation, (inaudible) spots or whatever.

I don't think that's going to be case here. I think we're going to work hard throughout August. I think we're seeing a variety of deals. It's not one deal, it's lots of smaller deals you're seeing and then, behind that, a lot of M&A coming to market. So we're cautiously optimistic that it continue, but we've also seen start and stop before. So I think we'll try to update for sure in our September newsletter -- we promise -- we plan on issuing a September newsletter, and we plan on addressing M&A volumes and underwriting volumes.

Great, I appreciate it, Len.

Your next question comes from the line of Casey Alexander, of Gilford Securities.

Well hey, good morning.

Good morning.

I was just wondering -- I like to venture debt space quite a bit of, but I was just wondering given the size of your platform and the way you've moved up-market with your platform, is this smaller deal size of the venture lending space efficient for your platform? And you know, sort of what are your thoughts about that?

So that's a very good point, and actually, that was the right characterization. These deals are smaller. General [FFC] has moved toward -- just solidly into the middle market and left the lower market. And so by doing that, we have several vehicles that can utilize the smaller loans and the higher yield rotation will help those vehicles. So I think that was a big positive.

And I think the venture technology look, it's a nonscalable platform, but it's very additive to our current technology effort, a normal technology effort, to have technology experts in Palo Alto, so that's another plus. Could this scale for $200 million or $300 million over the next 2 years, that's what our hopes are, you know, do we think it's going to get much bigger than that. I don't know but we'll add life sciences, at some point, to it.

But we think it's very additive. I think the biggest driver for me, is we have these capital loss carry-forward of almost $100 million of them, and I want to have capital gains to offset capital loss carry-forward, and we do have some really nice capital gains (inaudible) the portfolio, but we don't have enough in diversified matter. I just feel better to having more capital gains. And one great way to generate that is venture.

You answered my second question, so thank you. And the sort of net $4 million of unrealized depreciation in the portfolio this quarter, is that just marked to market for a lousy bond market?

Really, no. It's actually a relatively good news story. A lot of our loans that we exited we had marked up to the par plus the prepayment penalty, because there's a policy we don't mark the investments above bar plus prepayment.

Right.

So when we get prepaid, the prepayment penalty comes into NII so you see just sort of a shift between the unrealized and NII. So that was actually --

So some of the unrealized that we're seeing below the line shows up in the fee income up above the line?

When it's realized.

Yes, okay, great. Got it. Thank you.

your next question comes from the line of Robert Dodd of Raymond James.

Robert?

Mr. Dodd, please check your mute function.

Yes, I was muted, apologies. About leverage, you obviously restructured some of facilities. What has that let you in the lowering the cost. I mean, does that come at the price of changes in advance rates, particularly, if you're looking to do more second lien. How are those advance rates on the new facilities looking, in terms of what you could actually achieve, in terms of a leverage level?

So it actually comes at, not only no-cost to advance rate, but better baskets for everything. And -- look, it's a different environment -- when lenders like -- borrowers like us who are investment grade who are now established at large, are now being able to -- and you've seen this with a couple of our -- one of our peers, Ares, push down their facility, and we pushed a little bit wider pricing than Ares, but as soon as they pushed down ours, we took that opportunity to call since we're a direct comparable.

We said, okay, we'll be a little bit wide, but we want -- here's the list of things we want -- but the most important thing we got was 5-year maturity, which means you can use this leverage revolving basis and not have to worry year to year to year about renewing this facility. So it's a much more stable diversified long-term facility, and actually, our baskets for second lien, our baskets for last-out first lien, are very good.

We'll definitely be able to utilize that, we will be utilized as a much lower cost to 225 instead of 275, which makes a material difference as we get leveraged into that.

Okay. And just one that I know you probably don't want to answer, but what's -- you know -- as you shift the mix (inaudible), do you have a target (inaudible) or a target gross portfolio yield target coupon that you're looking to embed into that mix because, obviously, we can do some math and figure out a number that's necessary to cover the dividend. Do you have particular target in mind?

I think we continue to strive towards generating higher ROEs and earning our dividend, and I think those are the focal points. We're going to do that by having -- obviously -- by having higher yielding assets by additional leverage continuing to diversify. We're going to do that by generating earnings power outright, which is increasing NAV. I mean, all these things all can work together in doing that.

And there's a lot of different toggles to (inaudible). I can't tell you which ones are going to be the best risk adjusted returns to do at any given time, but we're definitely going to try to optimize the capital structure. I mean, one of the things which we talked about, which I'll highlight, is look, we had an issue with cash drag in the SBA, where we carried quite a bit of cash (inaudible) your question, quite a bit of cash against what we pay is 3.5%.

And we recognize that, and so I think, first of all, there's a number of new origination efforts that are going to go against that this quarter. And we're going to rectify a lot of that situation, but it definitely was a problem last quarter and that was due to a number of repayments that just happened to be in that facility. And that cash is trapped. We can't pay down credit lines using that cash.

So I don't want to say that we made a mistake; we just didn't have the originations against that type of facility that we would have liked last quarter and we quickly reacted to that.

Okay, thank you.

Your next question comes from the line of Jonathan Bock of Wells Fargo Securities.

Good afternoon and thank you for taking my question. Len, a few questions on some of the pillars that you outlined. I'll start first with venture debt, and I apologize if I've missed it. I've been part of the same group jumping between conference calls. The venture debt loans themselves will be placed on your balance sheet, correct? And this will not be a subsidiary similar to HFG?

Correct.

Okay, great.

The venture debt will be directly on our balance sheet.

Okay, thank you for that. Just a small housekeeping point there. And then, now FSCusing on higher yield securities, the weighted average yield on new investments, can you give us what -- a ballpark -- what the average yield you are originating at in new investments this quarter?

This quarter meaning --

I'm sorry, in Q2.

I think he said relatively stable so I think weighted average yield stayed relatively constant --

It was flat, yes slack.

Okay. So the weighted average yield you are originating on new investments and not on your portfolio, just your new investments, was at what level?

I think about 11% -- than the weighted average yield but not enough to change the overall yield of the portfolio.

Not huge.

Okay, okay. And if we were to take out the 10% first term lien loan that you're going to be getting on HFG, would you still say the new loans that were there were also very close to the portfolio weighted average yield?

Alex?

Yes, they were pretty close, yes.

Okay, great, thank you. So then as we -- you know -- you mentioned moving into larger transactions, Len, in particular, I mean you highlighted second lien debt. And I'm curious, as banks as well as levered loan funds, et cetera become a bit more aggressive and leverage levels creep up, it was my understanding that they will either be, a) less second lien debt outstanding, right. Or b) the second lien debt that's outstanding is going to be done at higher leverage levels because first lien lenders are more than happy to stretch a bit.

So if you can walk us through how one can keep the risk reward the same given that yields have compressed in this environment, that would be very helpful.

I think last-out first liens are still very prominent and that's always a preferred way to do it. On the upper-middle market loans, second liens are still very prevalent. In fact, you often see multi-tiered structures with even money going below the second lien loans.

We're just being very careful. The whole idea that five times leverage is now seven time leverage, we don't play into that. We're not doing higher levered loans or primarily not. I don't think we're entering any high levered loans. The second liens that we're doing are upper-middle market -- primarily -- upper-middle market second liens.

What that means, and this is why it's materially different than lower market second liens, this is why not all liens are the same is, there's no payment blockage. And that's an enormous differentiator. Not only that, these companies are $30 million in EBITDA or $50 million in EBITDA, so that when there's a problem, if there's a problem and when there's a problem, these are still real companies with real infrastructures and real cash flow paying ability, which is really great.

I'm not saying, by the way, that we're going to become a second lien lender. We're still going to be a first lien lender, but what I'm saying is that the second lien loans as a percentage of the portfolio may increase to some degree, but we're being very cognizant about the unsecured, the mezzanine, the preferred. And we are going to try at least keep equity constant because we do want some equity gains in the portfolio.

Appreciate that. And then, Len, as you've moved up into the upper end of the middle market, I was always wondering about competitive pressures because the more one finances larger businesses, particularly as levered loan funds and others dip down to middle market in order to maintain yield, which is nonexistent on BSL collateral, that would likely increase the competitive dynamic for the types of loans that you're targeting. Have you seen that in recent quarters, and do you expect that to continue?

Well the good news about the past few weeks is there's so much volume in the upper market that we're not seeing anyone down here. So this is great, but yes, 2 or 3 or 4 months ago, we certainly saw a number lenders drop into our markets. So when that happened, we tried differentiate by doing bigger hold sizes and, remember, we're coming direct from sponsor. So for us, in the unitranche transaction, for example, it would (inaudible) in Ares as primary competitors on a senior transaction. They're not really competitors, those club deals, and the smaller transactions that we do with equity sponsors, often they just come to us and one other, and they tell us what we have to do to win the business, and we get last looks or we get primary looks. And we work with them on the bidding process.

So I feel like -- I don't feel any more competition -- this year than last year, but I would say over the last 3, I think, it's been less competitive not more competitive.

I appreciate that and then moving to HFG, I can [mind] the que, but I was just curious if you have these numbers handy, it would very helpful. What is the portfolio size, outstanding right there at the entity today, as of 6.30?

How can we disclose that --

That debt flow is their financials.

Okay, okay. Is that something that you would expect to do over time given that Crystal as well as the GE unitranche and other off balance sheet levered vehicles do have a bit more disclosure, Alex?

No. We wouldn't because the size of the investment isn't material so there's no necessity for doing those kinds of disclosures.

HFG, it represents 6.1%, right?

6%

I think about 6% of our assets.

Okay, okay, I appreciate that. Thank you. And then one last question, on Eagle Hospital Physicians, I just noticed in that first term lien loan actually had a bit of a mark. And I just curious as to where you sit in that transaction and, perhaps, what the outlook is on that investment, in particular?

So Eagle is paid in full and all interest, and we are working on restructuring that investment, and the mark is appropriate. And that's all we can say about it at this time.

Okay, thank you very much.

Thanks, John.

This ends today's question and answer session. I would like to hand the call back over to Dean Choksi, Senior Vice President of Finance and Head of Investor Relations.

Thanks for joining us on today's call. Have a good day.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect and have a wonderful day.