Oaktree Specialty Lending Corp (OCSL) 2014 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fiscal Q1 2014 Fifth Street Finance Corp conference call. My name is Mark, and I'll be your operator today. At this time all participants are in a listen-only mode. Later we'll conduct a question and answer session. (Operator Instructions). As a reminder, this call is being recorded for replay purposes.

I would like to turn the conference call over to Dean Choksi, Executive Director of Finance and Head of Investor Relations. Please proceed.

Thank you, Mark. Good morning and welcome to Fifth Street Finance Corp's fiscal first quarter 2014 morning call. I'm joined by Leonard Tannenbaum, Chief Executive Officer; Bernard Berman, President; and Alexander Frank, Chief Financial Officer.

Before we begin, I would like you to note that this call is recorded. Replay information is included in our January 14, 2014, press release and is posted on the Investor Relations section of Fifth Street Finance Corp's website, which can be found at fsc.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 call includes forward-looking statements and projections. 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 provide an update on our capital structure. Alex will summarize the financials, and I'll provide high-level commentary on the BDC sector. Then we'll open the line for Q&A)

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

Thank you, Dean. We are pleased with our December quarter results, which benefited from robust originations leveraged within our target range and the covering of our monthly dividend with net investment income. Our investment pipeline began building in late summer and early autumn, as sponsors were motivated to complete transactions before calendar year end.

Several deals we expected to close in the September quarter slipped into October. This provided a solid start for the December quarter, which has historically been our strongest quarter for new originations.

We found attractive opportunities despite the competitive environment by utilizing our sponsor relationships and offering a broad range of debt financing solutions across the capital structure and in [hold sizes] up to $150 million. We remained disciplined on loan pricing, choosing to lose many deals as one-stop pricing temporarily dropped below the 8% threshold.

For the December quarter we reported $0.26 of net investment per share, which exceeded the current quarterly dividend run rate of $0.25 per share. We also reached our target leverage range, albeit the low end of the target range, of 0.6 to 0.7 debt to equity, excluding SBA debentures, after funding approximately $645 million in originations for December quarter. We anticipate maintaining leverage in the March quarter within our target range based on the current investment pipeline and anticipated exits.

We are focused on covering our dividend with net investment income per share. To demonstrate their confidence and dividend level, our Board of Directors declared this morning monthly dividends for an additional three months from June through August of 2014 at the current run rate of $1 per share or $0.0833 per month. At yesterday's closing stock price, this implied a dividend yield of about 10.5%.

We continue to see better value in the senior secured part of the capital structure. The credit performance of the portfolio is strong, and we reported three quarters in a row with no loans non-accrual. This excellent credit performance is a result of our deep bench of the experienced underwriters and portfolio managers and our multi-million dollar investment systems.

Our overall portfolio remains healthy, as borrowers are benefiting from a modestly growing economy and support from the private equity sponsors.

We are moving forward on several initiatives intended to improve net investment income per share over time. While the progress has been slower than expected, we continue to move in the right direction and expect these initiatives to collectively benefit growth and net investment income in future quarters.

One of these initiatives is the venture lending team, which is gaining momentum since joining the Fifth Street platform six months ago. Our Palo Alto- and Dallas-based team closed another deal in the December quarter and have several deals in the final stages of documentation that are expected to close in the March quarter.

Our entry into the market has been well received by the venture capital community, resulting in the solid pipeline of potential opportunities. We believe venture loans are attractive because they generally -- they are generally senior in the capital structure, have higher yields than our core portfolio, and may include warrants, which could contribute to NAV growth over time and help offset existing capital loss carry-forwards. While still small relative to our over all assets, our venture debt and warrant portfolio should make an increasing contribution in growth and net investment income and NAV over time.

Another initiative is our aviation financing team, which continues to find transactions with attractive yields by focusing on the lower risk part of the market. Our total investment in First Star Aviation increased to $44 million at quarter end, with additional deals in the pipeline. We intend to grow First Star at a conservative pace, which is consistent with its strategy to focus on niche transactions.

Our capital markets efforts are gaining traction. We closed of three small syndications in the recent weeks and in advance discussions on several more syndication and back-levering opportunities. The ability to syndicate and back-lever loans enables us to enhance the investment yields on the investments we retain and better manage concentration risk and liquidity.

Our capital market initiatives have taken longer than expected to develop due in part to the complex nature of the loan agreements between the different parties involved. As we complete initial transactions with different parties, future transactions should be more efficient.

We are also in the very early stages of forming a partnership similar to the senior secured loan program, which is managed by some of our peers. If successful, we would be able to add higher-yielding assets to our portfolio that havestructural protections similar to [first lien] loans .

The yield on the SSLP will be higher yielding. The loans themselves are actually lower yielding loans with lower risk profile. Others in the industry are also exploring [similar structures].

Our flexible and low-cost liabilities enable us to originate assets across the debt capital structure to finance them in an efficient manner. We continue to work on expanding our access to debt capital. lowering our debt funding costs, and improving the terms and flexibility of our borrowings, which Bernie will discuss in more detail.

We recently mailed our 2014 proxy to our shareholders, which once again did not include a request for authorization to issue stock at prices below NAV per share. Fifth Street is only one of a handful of BDCs that do not ask for an authorization to issue stock below NAV per share.

I will now turn the call over to our President, Bernie Berman, to discuss our capital structure in more detail.

Thank you, Len. In 2013 we improved the terms of our debt capital, reduced the cost of our revolving bank debt, increased our access to debt financing, and extended the maturity of the portion of our liabilities.

Since the end of the December quarter we increased the size of our syndicated credit facility, led by ING to $620 million. We are confident the facility will continue to grow in year. We are also considering adding more unsecured fixed rate term debt to our capital structure to better position our balance sheet for rising interest rates.

I'm not going to call over to our CFO, Alex Frank.

Thank you, Bernie. We ended our first quarter of fiscal 2014 with total assets of $2.5 billion, an increase of $382 million from the previous quarter. Portfolio investments were $2.4 billion at fair value, and we had available cash on hand of $42.6 million. Net asset value per share was stable at $9.85 at quarter end.

For the three months ending December 31, 2013, total investment income was $71.3 million. Net payment in kind income, PIK accruals recorded in excess of PIK payments received, a key indicator of earnings quality, was a low $1.4 million for the quarter or only 1.9% of total investment income. Net investment income increased to $36.2 million for the quarter, a 36.4% increase as compared to $26.6 million in the same quarter the previous year.

We had a number of portfolio company exits and sales during the quarter. Five of the debt investments were exited at or above par, and all were in line with previous fair value marks. This reflected the credit quality of the portfolio, which remains strong with an over all net loss of $2.5 million or only 0.1% of the investment portfolio.

The weighted average yield on our debt investments was 10.9%, with the cash component of the yield making up 9.9%. The average size of a portfolio debt investment was $24.9 million at December 31, 2013, an increase from $22.1 million in the prior quarter end.

We had record gross originations of $912.7 million, $643.5 million of which were funded at close, in 23 new and eight existing portfolio companies, bringing the total companies in our portfolio to 111 at calendar quarter end -- calendar year end. During the quarter we also received $155 million in connection with exits and sales of investments. We believe we are very conservatively positioned as compared to our peers, with 95% of the portfolio by fair value consisting of debt investments, 81% of portfolio senior secured loans, 72% of the debt portfolio consisting of floating rates securities, and no CLO equity.

The investment portfolio continues to be very well diversified by industry sponsor and individual companies. Our largest single industry exposure continues to be healthcare, including pharmaceuticals, at 22% of the total portfolio.

Our investment in HFG, our healthcare finance portfolio company, is our largest single exposure at only 4.8% of total assets. And HFG itself holds a diversified portfolio of asset-backed receivables. Our top ten portfolio company investments represent 32% of total assets.

The credit profile of the investment portfolio continues to be as strong as ever. 100% of the portfolio is ranked in the highest one and two category, which is favorable versus a year-ago period. During the quarter ended December 31, 2013, we had no investments in the portfolio on which we had stopped accruing income, as compared to two at December 31, 2012.

Our Board of Directors has declared monthly dividends through August 2014 of $0.0833 per share, reflecting an annualized rate of $1 per share.

I'll now turn it back over to Dean.

Thank you, Alex. As more investors learn about BDCs, one frequent question they ask is how BDC are you different from traditional closed end funds. Although BDCs are a special type of closed end fund, there are several important differences between BDCs and exchange traded registered closed end funds which we believe makes some BDCs for attractive to certain investors.

One, an origination platform. A handful of BDCs, including Fifth Finance Corp, are affiliated with leading origination platforms. This provides select BDCs with access to investments at origination. In contrast, many traditional closed end funds purchase their assets in the secondary market. The benefits to BDCs with access to an origination platform may include a more active role in structuring the transaction,potential fee income, and a discounted price for the asset, which is referred to in our market as an original issue discount for OID.

These benefits are generally not available to investors in the secondary market. Fifth Street Management, our investment adviser, is one of the leading middle market origination platforms.

Two, disclosure. BDCs generally disclose a greater level of information more frequently than traditional closed end funds. BDCs final annual and quarterly reports with the SEC, with a detailed schedule of investments and a discussion of the results. Many BDCs also host conference calls to discuss quarterly results, like this one, and file 8-Ks and press releases in between quarter reports to provide additional information.

At Fifth Street Finance Corp we also file regular newsletters, providing updates on trends in our business. The reporting requirements for traditional closed end funds generally include less information and are more -- limited to annual and semi-annual reports and a quarterly schedule of investments.

Three, leverage. BDCs generally operate with leverage of up to one times debt to equity versus traditional closed end funds, which are generally limited to a regulatory leverage of 0.33 times equity.

Traditional closed end funds use structural leverage, which typically consists of issuing preferred stock or bank debt, and portfolio leverage, which typically includes certain types of derivatives, reverse purchase agreements and tender option bonds. The type of leverage utilized really depends on the underlying assets in the closed end founds. Larger BDCs generally have greater diversity in their capital structure and do not utilize derivatives for leverage.

For example, Fifth Street Finance Corp has several bank credit facilities with different costs, terms and maturities, secured debt provided by the Small Business Administration, and unsecured debt at different rates and maturities. The diverse funding sources for larger BDCs like Fifth Street Finance Corp help them to efficiently fund different types of investments and manage interest rate and liquidity risk.

Finally, while not specific to the structure themselves, there are more brokerage research analysts providing coverage of the BDC sector. This third-party research is available to help investors navigate a growing industry that is filling the void in middle market finances as traditional lenders retrench.

Thank you for joining us on today's call. Mark, please open the line for questions.

(Operator Instructions). The first question comes from [Terry Marr] from Barclays. Please proceed.

Hey, thanks for taking my questions. Can you just give us some color on your fee income this quarter? It was a little higher than I was expected.

It reflected the fact that we had a robust quarter for originations, which is typical for us. The fourth calendar quarter is typically our seasonally largest quarter.

Okay, and can you maybe just give us a sense of how your originations were spread out in the quarter, whether or not they were back end weighted or not?

Actually, this is one of the few quarters -- [and] the fourth quarter -- that it was evenly spread out throughout the quarter.

Okay, and can you maybe give us a little more color on this SSLP [guide] you're contemplating, how it's going to be structured and what -- who the potential partner may be?

Obviously it will be a positive if we can get it done. We're not going to give you more color on this call now, but we did want to introduce the fact that we're exploring this option and have proceed it down the road with a number of parties in talking about it. Obviously this is -- a couple of other BDCs with SSLPs, so you can look at those structures, and it is going to be something similar.

Okay, thanks.

Your next question comes from the line of Rick Shane, JPMorgan. Please proceed.

Thanks for taking my questions this morning. One thing we should address is -- and, Len, you've been very clear in terms of your policy about both your interest and your actual governance issues around issuing stock below NVB. At this point the stock is trading below NAV, and you've had a really strong pipeline. What flexibility do you have as you move through the quarter if the stock price doesn't improve?

That's a great question, and actually it's a similar question for both of our public entities, both FSC -- as we manage FSC and FSFR. As we get into our leverage target range, fortunately many of our assets can be sold at a premium, because we're originating the assets below par and we can actually sell them above par.

Even better, now that we have a full syndication effort with Fred Buffone, who is -- who ran syndication over at TD Ameritrade before -- TD Bank, sorry -- before he joined us, has taken a little bit to ramp, but we're able to syndicate down and skim fees from a number of parties. In fact, we have a nice backlog of that. So this quarter you can expect us -- well, in the March quarter I think you can expect us to churn a number of assets, so while we're still going to have healthy originations, we're also going to be selling assets in the same quarter.

Terrific. Very helpful. Thank you, guys.

Your next question comes from the line of Andrew Kerai of National Securities. Please proceed.

Yes, good morning. Thank you for taking my questions. The first thing that I had, Len, is so you look, you had $650 million of fundings in Q4. That's roughly a quarter or so of your portfolio if you look at it as of December 31. So I know the yield was down modestly, about 20 basis points in the quarter, so if you run the math on that compared from the 11.1% from last time, that implies the yields on your new loans were roughly about 10% to 10.5% on the quarter. I was just hoping to confirm my math and logic on that.

Your logic is right on. Nothing really to comment on.

Okay, great. Thank you. And then just kind of given that Q4 obviously is a seasonally strong quarter for loan demand, assponsors kind of look to close deals, I was just kind of hoping to maybe get some color on -- to the extent you guys feel like you can kind of hold the yield steady, kind of moving along here, given that you're not going to have the yield support that the strong demand in Q4 kind of typically brings.

A lot of Q4 deals, first we close our deals and then syndicate our back lever. So I think a lot of those deals will have yield enhancements during the March quarter. I don't know that -- the timing is always very difficult. There is something called an AAL or agreement among lenders that has to be negotiated.

But we expect to stabilize -- as I think I've said in the past, we're stabilizing our weighted average yield, and the way to do that is by efficiently levering what we have in the portfolio andstaying levered through the quarter. We still -- just because we ended the quarter at the low end of our leverage range, we weren't through the quarter on average in that leverage range.

Staying an entire quarter in leverage range should generate additional income, first, from [left side use] fees, which we pay, and second obviously from a higher average balance that is going to earn excess income. So I think those -- a combination of those two things the shareholders should be enjoyed in the quarter.

Great. Thank you. And then just a question from what you guys have been hearing from your sponsor partners in regards to kind of their outlook and appetite for M&A and what pipeline for deals kind of looks like here as 2014 kind of moves along?

The pipeline is there, the multiples are higher, and we're staying very disciplined. Looks, you saw our senior secured percentage go up over 80%,and it sent up over 80% not because I don't like mezzanine loans. I personally -- this is not a Fifth Street view, but I personally do not believe that lower middle market, middle market mezzanine loans are a good risk adjustment return yielding 11% seven times deep. It just doesn't make any sense to me how the reach for yield in those types of products.

So we've taken the yield degradation and moved up the structure while efficiently levering that part of the structure and working on skimming or using our syndications capital market efforts to drum up the additional yield. I think you'll see that consistent in the March quarter, and [you're going to see us] do a lot of first lien and a little bit of second lien loans. I really don't see in the current pipeline a lot of mezzanine loans.

Sure. Thank you. My last question, Len, just as you look at the [debenture] lending market, from your experience so far what have you encountered from your ability to kind of compete with some of your -- a couple of your BDC peers that have been more entrenched in that market over obviously a longer period of time?

So -- look, the market was dominated with one or two players, or three players for a long time. You have several entrants to the market -- new entrants in the market. The market yields have to come down. All of our other market yields have come down. This is coming down too.

We -- but yet they're very, very juicy relative to the other business units. It takes a long time. These are smaller deals. In fact, it takes a big crew to go do this. To open Palo Alto it costs us quite a bit of money. It costs the management company a lot of money, but well worth it, because as you see -- as we see these deals starting to close, you'll see some announcements in the March quarter on this topic. These are very interesting deals from the yield perspective but also from an equity upside perspective.

So I'm really excited. And look, the only way we could have entered this is to acquiring the talent that we did. Many -- I think Michael David, who runs the group out of Palo Alto, was at Orix for 12 or 15 years, Alex?

Yes.

Something like that. And so he had to have -- him and his crew had to have those deep relationships for many years in order for us to be able to enter this at all. There's high barriers to entry in venture lending.

Yes, certainly. Thanks for taking my questions, guys.

Your next question comes from the line of Robert Dodd from Raymond James. Please proceed.

Hi, guys. Congratulations [on covering the dividend. Very good.]On the SSLP discussion, kind of continuing that momentarily. I mean, as you said on -- you don't particularly find mezzanine attractive. You have got a lot of senior. Implicitly an SSLP type structure, where you're taking mezzanine certificates or however we want to define it, you would be moving your portfolio much more towards -- well, less straight first lien in that mix. Have you -- what is your target there,whether it's through an SSLP vehicle or something else, in terms of how much pure vanilla, if I can put it that way, first liens and senior secured you're looking to keep on the portfolio?

So, Robert, when you look at the statistics, that may be technically correct, but what underlies all the assets of an SSLP for us the way we're considering is all senior assets. Almost all senior floating assets. So regardless of what shows on the balance sheet, what's backing it up and what's generating the income is all senior floating assets.

Now, the yields might be 7% or 8% or 6%, but these are bigger companies three, four times deep in the structure, often rated -- often have recovery ratings of three or less. So I mean, these are great companies -- I'm sorry, great assets that just need to be properly levered in order to generate the ROEs necessary for FFC. And there are some other BDCs out there that are very successful in doing this, and we're going to also enter this and be able to create the higher ROEs.

So I don't agree. I think I consider this the same as HFG, which is one of our assets, in fact our largest asset. We spoke to the rating agencies about it, and they often view it as a look through, right? HFG is consisted of -- even though it shows up as a portfolio asset of ours, it's consisted of senior loans. In fact, the senior revolvers, and HFG in 15 years hasn't lost money on one of them. So hey look at that underlying asset base, not necessarily the asset that's on the books.

[Okay, fair enough.] On the fee component, if I can just go back to that thought for one moment. If we look at the fees to originations, it's about 2.5%. Obviously that's actually [lower] than it was last year. But can you give us any indication about the trends you've seen on upfront fees recently, whether those are coming down or stable, et cetera?

So upfront fees in the middle market, where we are the originator of almost the majority of the securities, are pretty stable around 2% for us. We have seen the compression, as you can point out. The upper middle market and upper market, the upfront fees have trended to 1% actually, but we're not in that -- FSC, which is this conference call, is not in that market. And we're enjoying the 2% spreads, and we're getting about a point in syndications.

Okay. Appreciate it. One last question if I can. On the -- the question of where a dividend is versus where earnings look to be going, frankly, because [obviously you over-earned] by $0.01 this quarter. When I fiddle through my numbers, obviously not your opinion necessarily, look to be that next quarter if maintain the leverage and [comparatively] maintain income yields, not just portfolio yields with more fee income, et cetera, it looks like you're in pretty good spot to significantly over-earn the dividend next quarter. So what is the reasoning necessarily for, A, cutting it in the first place just a couple of months ago, if there seemed to be visibility that you were actually going to deliver on your target and actually catch back up; and, B, declaring it all the way to August if you may well be significantly over-earning over that timeframe?

Look, we appreciate the shareholders want us to return to the previous dividend level, and obviously last quarter weearned $0.24 and we paid $0.24. In this quarter we earned $0.25 -- $0.26, sorry, and paying $0.25. So yes, we're up by a $0.01.

Until we can meet or exceed the dividend for a couple of quarters and give that confidence, then we can't increase it back to a level. We want to make sure that it's sustainable and this multi-point plan is working. I believe -- I hope, right? -- as I did last year that -- and we see the trends of it working, and if we do exceed the dividend in earnings for a couple of quarters, we look forward to increasing it towards that other level that we're at.

Okay, thank you.

Your next question comes from the line of Ron Jewsikow from Wells Fargo Securities.

Good morning, and thank you for taking my questions. First off, I appreciate the move not to ask for the ability to issue below NAV. With that, you talked about the potential for future syndications or back levering, freeing up liquidity? What do you think the current opportunity for that is on your balance sheet?

I think there is an enormous opportunity on the balance sheet. The deals that we have done, really our average EBITDA is $25 million. These are more -- solidly middle to upper-middle market deals.

They're high demand. They're almost all sponsor-backed. They are all nice yields. So we have no shortage of demand for people that would like our assets.

We had a conference of BDC -- I was talking with one of the other BDC CEOs, and we were really surprised that assets in the market -- if we were to buy these assets today from any else, they would trade 1.5 to two times book value, and how our assets trade at a discount to book value. Both of us were saying we just don't get it, because if we were to actually just be purchased -- the assets be purchased, they're worth that much more.

These are very difficult to create assets, and it's very difficult to create a portfolio of 100 securities, which I would say 90% is sponsored-backed. So it's really a valuable portfolio, and so any time we need liquidity we can get it.

Yes, that's good color. And then you mentioned pricing pressure in one-stops kind of this quarter. Has that continued into next -- into the current quarter, and what is driving that pressure? Is it more players or just more aggressive pricing?

More aggressive senior pricing is -- What happened a month or two ago is the senior pricing got aggressive. And when senior pricing gets aggressive, the blend doesn't make sense at the right rate for us, and then market had a little bit of turbulence a few days ago and more deals came on our pipeline from one-stops.

So it takes market dislocation, and a market dislocation -- I called a couple of banks that I know and I said did you just drop your lending from a half to one turn because of the dislocation? "Oh, yes."

So what happens in these dislocations the banks drop back to debt to EBITDA they're willing to lend through, which makes the blend more one-stop friendly. And so we're back. Right now in this environment we're back in business on one-stops, but we certainly were out of it for about a month as yields dropped below our tolerance level.

All right. That's great. Thank you for taking my questions, guys.

Your next question comes from the line of Troy Ward from KBW. Please proceed.

Thank you. Len, following up a little bit on Ron's question on the fee side, can you -- maybe you've done this in the Q and I haven't come across it. Can you give us break out of what was the original fees versus the [negated] fees in the quarter?

Do we break that out, guys?

We don't break that out.

I don't think we're going to break it out on the call if we don't break it out in the document.

Okay. Len, you mentioned that kind of an average fee on syndicate on back levering is 1%. So if we use the amount of sales -- and I assume in the press release the sales number that you give I think is $109 million -- are all those sales related to back-levering transactions?

Actually, none of those sales are related to back levering. Back levering transactions are going to generate a lot more fees than 1%. Not only -- because back levering is basically turning our first lien security into a last out first lien. I mean, that's what back levering is.

It's similar to a SSLP, which is the same thing. You turning a first lien security into a back levered first lien. It's just a more cumbersome way of doing it because we don't have a SSLP operating.

And what that does is it really increases the interest rate, right? Because if the bank, for example -- I'm just giving you numbers for illustrative purposes, not necessarily a transaction -- but we do a deal at 8%, and half of the deal -- the first half gets refinanced at 5%, and then the back -- our piece -- now becomes 11%. That's just basic math, right?

Because we capture three extra points on the front end. We own half of the piece still. It goes on the back end. So now we've turned an 8% yielder into a 11% yielder. That's back levering.

We're hoping to complete, believe it or not, our first back levered piece this quarter. It's taken a long time, and there is no certainty that we'll even be able to do that, but we're optimistic.

As for the syndications that you're talking about, that syndications to third parties. It could be and often is other BDCs, smaller BDCs, or private funds, and that typically is a skim of %1. Sometimes we're able to also get an interest rate increase there too, if we sell the A piece and keep the B piece, because the amortizing piece is often more attractive to other parties.

Maybe that answers your question longer than expected.

No, I appreciate that color. Just to clarify, then the $109 million that you [decide] in the press release in sales, that -- what is that piece?

It was a combination of cap market sales and the syndication of our -- actually at the time I think it was one of our largest deal, wasn't it, Steve? Right. One of the larger hold size is for us for greater diversity. As our target hold size really is 5% at maximum, we sold down a piece of one of our large deals. I think we got a 1% fee for that.

Okay. And then you also talked, Len, about potentially adding some -- you're looking at adding additional unsecured term debt? I think I heard that in your prepared remarks. Can you talk of the current market availability for that and the current pricing?

Well, I mean, unsecured term debt can come in many forms. We're looking at the market in general. I don't want to -- again, I don't want to front run anything that we're going to do, but we are looking at that area.

Obviously Ares completing some excellent unsecured term debt transactions, and every BDC has watched those transactions occur. So we're very encouraged that Ares was able to get what I would consider, especially on the re-offer, terrific pricing. So maybe you could use that an idea range on where we could issue.

That's helpful. And then one last one on the venture lending. Just curious, when you enter your venture transaction, I think there's kind of two schools of lending thought as a VC lender. Some lenders like to go in and they're the only debt, there's not even a revolver in front of them, in which you have to kind of carve out a piece of your balance sheet for undrawn revolvers at all times. And other ones team up with other revolving -- revolver providers like Silicon Valley Bank. What -- when you do your venture debt lending, kind of what path does your typical transaction follow?

As you mentioned, Silicon Valley Bank is the 800 pound gorilla of venture lending. They're well received. They have a great reputation. They have a lot of clients. It is very difficult to win anything over Silicon Valley Bank.

Having said that, they're also a good partner. Once you get an agreement with them, they can take the senior, we can fall behind them. They actually -- when you really think about a venture capital transaction, as I've gotten the space, giving another illustrative example, there could be $100 million of equity invested in the company. They're trying to really bridge -- the way to think of venture capital lending is bridging to that next round. It may take only $15 million of [topping] structure, and it could be a $5 million revolver from Silicon Valley Bank, and it could be a $10 million term note from Fifth Street.

So it's -- you're very, very senior in structure, and you have lots of equity supports. In fact, one of the more interesting things -- even more interesting things I've found about ventures, a number of venture companies that we lend to actually have positive EBITDA. So they cross over into the lower middle market I guess from an EBITDA standpoint. They don't relate to the lower middle market because of the massive amounts of money that the venture capital firms have invested in their security.

Great. Thanks.

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

Good morning. Your unfunded -- I realize your originations were [awfully high] for the quarter. Your unfunded has gone up 60%, which is as he just is sort of a lien on your balance sheet. Is there anything in this quarter that some of that is going to get peeled off that was just delayed as deals close and traunches or anything like that?

Unfunded went up it $239 million from -- is that a year ago, Steve? Last quarter it was $149 million. And -- but it's revolvers and other things.

It's still less than -- when I look for the unfunded liability benchmark for us, I want to keep it at 10% of assets as my general benchmark. So, yes, we sort of started approaching that 10% of assets. We take very good care of trying to predict how we're using the unfunded [from being drawn]. And I could show you -- I mean, I can't show you, but our models predictive models are excellent at determining where we think in each quarter how much draw is going to be and where they're going to draw, but yes --

And we stress those models too, assuming that they are significant outlier events. Stress [those].

That's a good point, Alex. So we feel really comfortable with the level that we're at.

Okay. Secondly, is it possible to share with us in terms of your senior secured what percentage is first lien and what percentage is second lien?

I don't think we break that out any more. But you have to understand one of the reasons that we lumped them together, beside the fact that a number of other BDCs have lumped them together, is I think the senior secured -- the second liens -- and we're going over this with rating agencies -- but second liens are not all created equal.

Lower middle market second liens has [payment] blockage. And upper middle market second lien doesn't have payment blockage. Often the second liens in the upper middle market are better than the first liens of a lower market. So just because it's first or second lien is not that big of a thing.

I will say I think the majority -- I know the majority of our loans are first lien, but I don't think we can break them down any more.

Except that the SOI, which has all the individual --

Okay, you can break it down. [If you go loan by loan you can find out whatever you want]. I mean, you just have to break it out loan by loan.

I would like to turn the call over to Dean Choksi for closing remarks.

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