Oaktree Specialty Lending Corp (OCSL) 2015 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q1 2015 Fifth Street Finance Corporation earnings conference call. My name is Ian, and I'm your operator for today. At this time, all participants are in listen-only mode. We will conduct a question-answer session toward the end of this conference.

(Operator Instructions).

As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Robyn Friedman, Vice President of Investor Relations. Please proceed, ma'am.

Thank you, Ian.

Good morning and welcome to Fifth Street Finance Corp.'s first quarter 2015 earnings call. I am joined this morning by Leonard Tannenbaum, our founder; Todd Owens, Chief Executive Officer; Ivelin Dimitrov, President and Chief Investment Officer; and Richard Petrocelli, Chief Financial Officer.

Before we begin, I would like to note that this call is being recorded. Replay information is included in our January 9th, 2015 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 conference call may include 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 203-681-3720.

The format for today's call is as follows. Len will provide introductory remarks, Todd will provide an overview of our results and Outlook, Ivelin will discuss the portfolio and Rich will summarize the financials. Then we will open the line for Q&A. Due to time constraints during the Q&A session, analysts will be limited to two questions. I will now turn the call over to Len Tannenbaum.

Thank you, Robyn.

Before we begin, as you saw in January, the Board promoted Todd Owens to CEO upon my resignation after over six-and-a-half years at the helm of FSC. Going forward, I will remain involved with the Fifth Street platform in my role as Chairman and Chief Executive Officer of Fifth Street Asset Management, an affiliate of FSC. My resignation and Todd's promotion was a strategic decision that came as a result of both my increased responsibilities as CEO of FSAM following its IPO in the fourth quarter last year and the need to have a CEO solely dedicated to FSC.

Prior to his appointment as CEO, Todd served as President and remains a member of FSC's Board of Directors. Additionally, the Board promoted Ivelin Dimitrov to President. Ivelin will retain his positions as Chief Investment Officer and a member of FSC's Board of Directors. I want to congratulate both Todd and Ivelin on these well deserved promotions.

With these appointments, all managerial and operational decisions at FSC will be handled by Todd and Ivelin. I am confident in their ability to successfully lead FSC going forward and steer the Company in a positive direction for many years to come. I would now like to turn the call over to our new Chief Executive Officer, Todd Owens.

Thank you for that introduction, Len.

I would like to take the opportunity to thank you for leading FSC since its IPO in 2008. Len and the Fifth Street team have built an impressive business with a strong brand and solid foundation. I'm excited to become CEO and I look forward to growing our business and driving value for our shareholders.

As part of the management transition, Ivelin and I, together with the existing team, have begun a thorough review of our business. The process has included conversations with our investors, analysts and other constituents, many of whom are on this call. We undertook this strategic review to focus on driving strong, sustainable performance for FSC shareholders. Our review process is ongoing, but we have already taken an important first step by reducing our dividend to a level that reflects both the current operating environment and a more conservative dividend policy. As we continue to review FSC's business, we look forward to reporting our findings to shareholders and analysts in the coming months.

The first quarter of FY15 was active for FSC and we made progress on several key initiatives. For the quarter ended December 31st, 2014, FSC generated $0.23 of net invest income per share, which was driven by strong originations, the continued funding of our joint venture with the subsidiary of Kemper and operating leverage slightly above the upper end of our targeted range.

At FSC, we continue to benefit from the expanded infrastructure and experienced investment team of our investment advisor. The December quarter is typically our strongest quarter for originations. As a sponsor-backed origination platform, deal closings are difficult to predict and may vary from quarter to quarter. The December quarter was an example of this volatility as we closed all of the deals in our pipeline that were expected to fund before calendar year-end, generating $717 million in gross originations, and funding $722 million of investments across new and existing portfolio companies.

In the quarter, we exited $401 million of portfolio investments, which included $179 million in connection with syndications and sales of debt investments, resulting in net originations for the quarter of $311 million. We ended the quarter at a regulatory leverage ratio of 0.83 times, which is slightly above the upper end of our targeted range. Our leverage ratio may fluctuate due to the timing of deal fundings, repayments, and equity raises that we are committed to maintaining regulatory leverage in a range of 0.6 to 0.8 times debt to equity.

As I mentioned a few moments ago, the Board of Directors has announced a dividend reduction to $0.72 per share annually. This translates into declared monthly dividends of $0.06 per share, or quarterly dividends of $0.18 per share. To reflect confidence in the new dividend level, our Board of Directors has declared dividends for the next six months beginning in March through August 2015. We have elected not to pay a February dividend because our net investment income did not cover our dividend the last two quarters.

The decision to realign the dividend was driven by two things: the challenging operating environment and a broader change in our dividend policy. On the operating side, we continue to execute on our initiatives to increase net investment income, but the progress has been slower than expected, particularly as it relates to the growth of SLF JV I, our joint venture with a subsidiary of Kemper. I'll provide an update on the joint venture later in the call.

In addition, the interest rate environment has remained challenging, with rates on new investments finding lower in the first half of FY14 before stabilizing in the second half. Finally, we have continued to position our portfolio in a more senior secured, lower yielding assets in anticipation of a more normal credit cycle. And at December 31st our portfolio included 82% of senior secured loans. As a result of these trends, our net investment income has not covered our dividend in the past two quarters.

On the policy side, as the newly installed management team at FSC, we believe that it is important to set our dividend at a level that is covered by our sustainable net investment income, which should provide us the flexibility to make decisions that are in the best interest of our shareholders over the long term. By setting the dividend below expected net investment income, we both increase the probability of regularly covering our dividend and hope to achieve greater consistency in future distributions.

In establishing our new dividend policy, we've considered a number of factors. Most important among those factors was to assume that we do not raise additional equity capital and, consequently, that our structuring fees are generated by recycling existing capital rather than deploying new capital. We refer to this as steady state or sustainable earnings. It is important to note that our December quarter included fee income well above steady state due to seasonally high originations, the capital raise that we completed in July and an increase in our regulatory leverage ratios.

The new dividend policy also gives consideration, among other things, to the amount of non-cash or PIKed income that we generate, a continuation of the current low-rate environment, lower regulatory leverage levels, and the potential for normalized higher credit costs. We believe that taking a more conservative approach, in resetting our dividend policy, is a prudent move that will create long-term value for our shareholders. We hope to generate excess income that we can use in a variety of ways including: declaring special dividend, buying back stock, or reinvesting into certain of our portfolio companies. Furthermore, we hope that the excess income will help to offset the NAV decline that has historically impacted our business. We believe that all of these potential benefits are important to shareholders.

Over the last year, we have pursued several initiatives focused on enhancing returns to shareholders such as our joint venture with a subsidiary of Kemper Corporation. We continue to make progress on funding and expanding the joint venture, which had $265 million of assets including investments in a range of one stop and senior secured loans, 21 portfolio companies and generated a 17% weighted average annualized return on FSC's investment during the December quarter.

Together with Kemper, we have committed $200 million of debt and equity capital to our JV. At the end of the December quarter, our investment in the joint venture was $67 million at fair value. Based on the total combined equity commitment of $200 million, and our assumption of a 2 to 1 leverage, the JV has capacity for investments up to $600 million. We are in the process of expanding our existing credit line for the joint venture and expect to increase it from $200 million to $400 million as the need for additional leverage arises. We have ample capacity to grow our existing JV and other similar joint ventures since only 2.4% of our assets were related to FSC's investment in the joint venture at December 31st. We hope to grow this JV and other similar potential JVs as these partnerships are important drivers of our future earnings.

Our capital markets platform is an important component of our business that continues to gain traction. We believe that our ability to originate loans and syndicate them to leading financial institutions is an indication of the strength and quality of our middle market lending platform. Our syndication capabilities provide benefits to FSC including the ability to collect incremental fee income, generate premium yields by committing to larger transactions and improved flexibility to appropriately manage liquidity and concentration risk. In calendar 2014, we closed $286 million in syndications at FSC, compared to $140 million in 2013, and have a robust pipeline of syndications totaling $280 million. Over time, we expect that our syndications business will continue to grow as a component of earnings.

I would now like to take the opportunity to reiterate a point we made on our last earnings call. We intend not to issue stock below NAV at FSC. We recently mailed our 2015 proxy to our shareholders, which once again did not include a request for authorization to issue stock at prices below NAV. We are one of only a few DECs that do not ask for routine authorization to issue stock below NAV.

As I mentioned at the beginning of my comments, the dividend reduction represents an important step in putting FSC on a sustainable path into the future. This is the first step of a broader plan to deliver improved returns to FSC's shareholders over the long term. As FSC's management team, we are continuing the strategic review of our business and I look forward to reporting back to you on our progress.

I would now like to turn the call over to our President and Chief Investment Officer, Ivelin Dimitrov, to discuss the portfolio in additional detail.

Thank you, Todd.

The strategic review process that Todd described has been an important exercise which has allowed us to take a fresh look at our business. As Todd stated, we look forward to reporting back to you as that process continues. Today, I will discuss our specialty lending initiatives as well as the performance of our overall portfolio.

Notwithstanding the write-downs we took in the December quarter, the regular portfolio review reinforced our view that FSC maintains a strong and diversified portfolio of investments. As Todd mentioned, we have continued to migrate the portfolio into more senior secured instruments and feel good about its conservative positioning. From an overall market standpoint, the December quarter was characterized by an amount of volatility not seen in the relatively benign environment of the last couple of years. We saw certain transactions struggle to get executed and some of the more aggressive issuers kept scaled back the size of their proposed dividend (inaudible) or abolished those plans all together.

In this type of environment, our one stop solution became exceedingly valuable, which we deployed on a selective basis to help our sponsor partners execute on new M&A transactions. The one stop product carries an attractive yield profile while preserving the appropriate risk controls due the first lien position. By virtue of our co-investment approval which has been able to increase our hold size and provide the necessary certainty of closed door partners.

We saw increased level of repayments during the December quarter, some of which were self-induced as we sought to exit lower yielding performing investments in order to rotate into higher yielding opportunities with better risk adjusted returns. We will continue to rotate out of assets and redeploy capital on an opportunistic basis as the market continues to be volatile.

We ended the December quarter invested in a diverse group of loans across 137 portfolio companies including our three specialty lending initiatives. During our most recent portfolio review process, we moved five investments to a category 3 rating, which is characterized by investment performance below our expectations and a material increase in risk. The fair value write-down for these investments totaled $38.2 million or $0.25 per share. As of December 31st, 2014, four out of these five investments were placed on non-accrual status including one of our three exposures to the energy sector, expressed in the rate of technologies, also known as CCCG.

The four investments that are on non-accrual comprise 2.3% of our total portfolio at fair value as of December 31st, 2014. The total expected decline in interest income associated with these non-performing credits is $12.7 million, which includes a reduction in cash interest income of $5.3 million, and PIK income of $7.5 million. In addition, we believe it is likely that a fifth category 3 credit, [admenthum], will move to non-accrual status in the March quarter. In the December quarter, we wrote down the fair value of that investment by $10 million or $0.07 per share.

If our investments admenthum moves to non-accrual status in the second quarter, the reduction in net interest income will approximately be $1.9 million or $0.01 per share on an annual basis. As with all the credits, we're closely monitoring admenthum and will continue to provide managerial assistance as needed.

The Fifth Street platform maintains rigorous underwriting procedures and our credit committee has typically limited our exposure to cyclical industries. At times this can be a drag on our weighted average yield when compared to our peers as we do not chase investments, especially in overheated industries with stretched enterprise values and high leverage multiples. The energy sector is an example of this dynamic.

In the last couple of years, as others were chasing yield, we remained highly selective and stayed focus on our core business. As a result, most of our energy exposure was refinanced away from us, and consequently today FSC has a modest level of exposure to energy. At December 31st, 2014, investments in the energy sector accounted for 1.8% of total investments at fair value, spread across three portfolio companies. Our investments in oil and gas and equipment services have been stress tested based on current oil prices and we are comfortable with the fair value of FSC's remaining exposure to the energy sector. Additionally, we have a number of investments in the portfolio which should directly benefit from the recent decrease in oil prices including our aircraft leasing holdings.

Turning our attention to our specialty lending initiatives, Healthcare Finance Group, HFG, is our single largest investment at 4.5% of the portfolio. HFG's an operating Company with a diversified portfolio consisting of 16 individual loans to 40 companies. In 2014, we worked with the HFG team to lower its cost of capital, optimize its business mix, and recruit additional talent to the platform. As a result, HFG continues to deliver consistent returns to FSC.

In the December quarter, we closed two venture debt transactions totaling $10 million which were underwritten by our venture technology platform. At December 31st, 2014, the venture loan portfolio approached $100 million. The venture deals in our portfolio generally hit higher yields than our existing portfolio average, which should be accretive to net investment income per share. Additionally, all of our current venture loans include an equity component which may be accretive to net asset value per share and generate future capital gains. In the December quarter, we realized our first successful exit which produced an IRR in excess of 20%. Our aviation leasing business is performing well and provides strong uncorrelated returns to the overall portfolio. Our team continues to source transactions with attractive yields by focusing on mid- to late-stage aircraft, a niche within the overall aircraft leasing market. Our total investment in First Star Aviation increased to $111 million at fair value's quarter end, with additional deals in the pipeline.

I would now like to turn the call over to our Chief Financial Officer, Rich Petrocelli, to discuss our financials in more detail.

Thank you Ivelin.

We ended the first quarter of FY15 with total assets of $2.9 billion, an increase of $281 million from the fourth quarter of FY14. Portfolio investments totaled $2.7 billion at fair value, which were spread across 137 companies at December 31st, 2014. At the end of the December quarter, we had $111 million of cash on our balance sheet. Net asset value per share was $9.17 at the end of the December quarter, compared to $9.64 at the end of the September quarter. The decline in NAV per share was principally driven by credit related write-downs totaling $0.25 per share, yield related movements totaling $0.18 per share, and a dividend distribution in excess of net investment income of $0.04 per share.

For the three months ended December 31st, 2014, total investment income was $76.3 million. Net PIK, PIK accruals recorded in excess of PIK payments received, was $3.7 million for the quarter, or 4.9% of total investment income. Net investment income was $35.2 million for the quarter, a 2.9% decrease when compared to $36.2 million if in the same quarter the previous year.

We believe we are conservatively positioned, relative to our peers, with over 94.3% of the portfolio at fair value consisting of debt investments, 82% of the portfolio invested in senior secured loans, 75% of the debt portfolio consisting of floating rate securities and no CLO equity at quarter end. The credit profile of the investment portfolio continues to be solid at 97.5% of the portfolio at fair value was ranked in the highest 1 and 2 categories.

Weighted average yield on our debt investments has declined quarter-over-quarter from 11.1% to 10.4%, including the Joint Venture return, cash component of the yield making up 9.7%. The average size of portfolio debt investment was $22.9 million, and the average portfolio company EBITDA was $30 million at December 31, 2014. Our top 10 portfolio company investments represent 28.5% of total assets.

I will now turn it back over to Robyn.

Thank you for joining us on today's call. As a reminder, due to time constraints, we will be limiting questions to two per analyst. Senior management is available and happy to answer any additional questions that our analysts or investors may have after the call.

Ian, please open the line for questions.

Thank you, ma'am.

(Operator Instructions)

And the first question comes from the line of Terry Ma, Barclays. Please proceed.

Hey, guys. Can you maybe just talk about your capacity to originate new investments going forward, given your debt equity ratio is pushing above the high end of your range?

Sure, let me take that, it's Todd. I think that there are really two components of our capacity, two major components of our capacity to originate new investments. We expect, and intend, to be in the market participating and originating new investments. The sources of that will be the normal turnover that you would see in our portfolio. And that generates additional capacity for us to originate assets, and then second, our ability to expand the joint venture gives us substantial capacity to continue to originate in loans on a basis consistent with what we've done historically.

Okay, great. Just a little surprised to see all the unrealized and realized losses, both in magnitude and number of investments. Can you maybe just talk a little bit more about that?

Yes, this is Ivelin. As we go through the review, obviously December was a volatile quarter. So I think you saw in the numbers a portion of the write-down is due to the change in the yields profile in the market as of the December quarter. But a portion of it was also due to some portfolio companies that we've been working with for a time now. And I think you know this is a tenant of how we build the business is always marking our bulk appropriately.

When we went through the portfolio review, the Board decided that we need to adjust the fair value on those companies. We're still working on them actively, as we mentioned, we're offering assistance in a number of those cases. One of them is a company that has Canadian Oil Sands exposure, so they obviously are going through some difficult times. It's a project based business, those are long-term projects.

So we have some visibility, but we felt it was prudent to mark down our investment there. In a number of other cases, we're still actively negotiating with the equity sponsors in the management teams to achieve the appropriate results in our investments. But those are ongoing cases and we wanted to make sure that, as of December 31, we've marked those investments appropriately.

Okay, thanks.

Thank you. Your next question comes from the line of Greg Mason, KBW. Please proceed.

Great, thank you and good morning. I wanted to talk quickly about the non-accruals. You said that $12.7 million of income that's lost.

In the queue it talks about them being all on PIK non-accrual and I think $3.8 million of incomes loss. So can you just reconcile some of the cash income that's lost or is that an annual basis or do you expect those to go on cash non-accrual in the future? Just clarifying that difference.

Sure, Greg, this is Rich. The loans we discussed, Phoenix is PIK only, JTC Education is a cash paying loan, TransTrade is PIK and Express has a component of PIK and cash. If you look at those in total, it's $12.7 million per year.

On an annualized --.

And the cash component of that is approximately $5.1 million.

Okay, great. All right, guys, I appreciate it. Thanks.

Thank you.

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

Thanks, guys. In looking at the origination activity in the December quarter, that's part of the reason that you are at the high end of your -- or above the high end of your leverage target. Curious what happened here, is it just with other participants in the market pulling back that you had a higher pull-through rate? And how do you manage that going forward now that you're really sort of constrained?

It was not really a higher pull-through rate. What happened was -- it's very hard to predict when deals will close. And typically what we've seen is a greater percentage of deals slip to the following quarter than we saw in this quarter. It wasn't really a pull-through rate, these were deals that we expected to close, but usually a percentage of them would have closed in the March quarter.

And we also got hit the other way this quarter on the front end where a number of deals that we expected to close in the September quarter actually closed into the December quarter. Since the end of the year, we have continued with our business and we expect our leverage ratio to come down in this quarter.

And how quickly can you divest? That's the other element of this, how much control do you have over that in terms of being able to manage your liquidity and your leverage ratios?

This is Ivelin. Some of those exposures that we took down in the December quarter, we had already lined up a club of like-minded lenders that took down those exposures post close. Going into December, we knew that we had to close on those deals and we had people lined up to reduce our exposure, which has happened in January and is happening as part of our ongoing capital markets activity.

In addition, as you know, we have a pocket within our business that consists of more liquid upper-middle market loans which track the performance of those loans and, any time when there is opportunistic trading involved we've seen some of those loans trade up and we've been able to sell that exposure and redeploy the cash into higher yielding assets. So that's part of what we're doing, some of the initiatives we're doing on an ongoing basis.

Got it. I'm going to actually indulge in a third question, but I'm curious, what is the execution on those sales in this environment look like versus your carrying values?

You mean in the sell-downs, in the sales in our liquid bucket?

No, you'd said that you continue to sell in January and February. Curious where those sales are versus --.

Absolutely, they are right around par for the assets that we sell.

Which is where we would expect and hope them to be. So we feel good about the sell-downs.

Thank you, guys.

Thank you.

Thank you for your question. Your next question comes from the line of Christopher Nolan, MLV Company. Please proceed.

Hey, guys. What percentage of assets were in the non-qualifying bucket this quarter?

Chris, this is Rich. Approximately 13% of the assets.

That's up from -- that's roughly flat with the prior quarter, roughly 12%, 12.9%.

That's correct.

And what was the reason, Rich, for the decline in investment yields, given, I would think, with more SLF activity your yields would be going up?

Well, the SLF only grew by approximately $10 million during the quarter. It's grown since the end of the quarter. But the yield was driven by two things, by the non-accrual assets and just the mix of the originated assets compared to the repayments.

Great. Okay, thank you.

Thank you for your question. The next question comes from the line of Doug Mewhirter at SunTrust. Please proceed.

Hi, good morning, I just had two questions. The first, in terms of -- you had mentioned the yields in the previous question. What's the general environment look like? Does it look like you are experiencing some spread-widening or more of a buyers' market in the deals that are currently in the pipeline or that are projected to be in the pipeline?

Yes, this is Ivelin. As you know, in the middle market things don't move as fast as what's going on in the BSL space. We've definitely seen in the upper middle market spreads widening and we've seen certain issuers that were just not able to -- it's really to fight to quality. Some deals are getting done and it's a feeding frenzy and everybody's trying to be in it. And there's other deals that are not getting the same kind of reception.

What we found out in this market, and we've seen it before in our history, it pays to be part of an origination platform when you're able to source, underwrite and perform and manage your own assets. It gives you a long-term horizon, it gives you stability in your originations. Also gives you stability in your [yields], and we're able to take advantage in times like this of opportunities where normally those would have gone to a lot more aggressive lenders. So we were able to state then and provide a one stop solution and post-close syndicate down our exposure.

Great, thanks for that. My second and final question, Ivelin or Rich, you may have covered this on the call. The $17 million in realized losses, was that one or two investments? Or was it a scattering of multiple sales that were just below cost or just below cost?

It was largely driven by one asset that was previously on non-accrual that has now been converted to equity.

Okay, great, thank you.

It was previously an unrealized. So that was a swing between unrealized and realized.

Okay. Thank you.

Thanks for your question. The next question comes from the line of Robert Dodd, Raymond James. Please proceed.

Hi, guys. Just going back to the non-accruals and the whole -- the story of obviously first lien, more security in the portfolio. When I look at the four non-accruals, two of them obviously first lien with substantial markdowns. Obviously defaults happen, problems happen, but the two first lien non-accruals now appear to be marked at about 50% of cost.

So can you walk us through, again, what the argument is as to why first lien is going to preserve capital better than some of your other investments, when it looks like the marks here indicate first lien's, frankly, not much better than any of the other credit risks in your portfolio when it comes to a problem occurring and what the possible recovery is going to be.

This is Ivelin again, I'll take this question. In the review of those specific investments, obviously one of them is our Canadian Oil Sands exposure, CCG, and that's a first lien investment, whoever is behind of a revolver provided by a bank that finances the project nature of those cash flows. So from that perspective, there is enough asset coverage and there's enough momentum behind the business, that as we work through it, we feel we should be able to get to a better result. But as of December 31, based on the trends we're seeing based toward the general environment, we're trading off of-- we felt it was appropriate to mark it at this level.

The other investment that's first lien that's marked down, it's a Company that's been in the portfolio for a while and that's one we're working with. It's one of our smaller EBITDA companies. As you know, over the years we've transitioned the portfolio from sub-$10 million EBITDA companies to now, as you see, our average is about $30 million. One of the reasons we did that, when you're working with smaller companies it's very difficult, you have less triggers to pull and you have less things to work with. As you're working with larger companies you have a more sophisticated team, you have you a more sophisticated strategy in place. That's why from a risk management standpoint we've shifted the portfolio towards larger issuers.

That being said, in (inaudible) both of those companies are -- one of the benefits being part of the Fifth Street platform gives us the fact that we have a dedicated workout team, dedicated portfolio management team and that team right now is on the ground to both of those companies, figuring out next steps and how we'll achieve maximum recovery.

Got it, thank you. Just a follow-up, kind of following on from Greg's question earlier, Rich. As you said, the four here are all listed in the queue as PIK non-accrual. So when you tell us the $5.1 million in cash income they generate, is that income going to continue because they're on PIK but not cash non-accrual? Or is there -- have they changed to cash non-accrual status early in the new year?

Robert, this is Rich. When investment pays both cash and PIK and it's on PIK accrual, that implies that it's not -- we're not accruing the cash income as well as the PIK --.

Okay, so it's full non-accrual. Got it.

Thank you for your question. The next question comes from the line of Jonathan Bock at Wells Fargo Security. Please proceed.

Good morning and thank you for taking my questions. Todd, Len, Ivelin just a question as it relates to new originations. Can you explain why yourselves and the Board, as part of a new originations and making new investments, did not see value in buying back your own stock this quarter, given the significant discount to NAV?

John, it's Todd, I'll take that question. As I said in our observations, we are continuing to think about all aspects of our business including share buyback. We have had debates with the Board and we continue to evaluate whether that makes sense for our business and we look forward to reporting back to you in the future on that.

Okay, great, thank you, Todd. And then, one item that I guess is one up for consideration that also does not make sense if we see the dividend trend and the NAV trend on a per-share basis at Fifth Street FSC, can you explain or also maybe give us your thoughts on why it would also be fair to continue to operate under a fee structure that allows the manager to be paid more annually despite net share declines and dividend declines for investors?

Part of the decision that we made here, Jonathan, again, as we said in the call, was to set the dividend level below where we expect our NII to be and to stabilize the dividend and hopefully also to provide more stability to the NAV per share. That was part of the underpinning of the decision process that we went through in resetting the level of the dividend. Again, as we mentioned on the call, we are considering all aspects of our business. You just asked and I just mentioned share buyback. But we continue as we have in the past, we also evaluate the appropriateness of the fees and are thinking about that as a management team and as a Board.

Thank you, we look forward to your answers.

Thank you.

Thanks for your question. The next question comes from the line of Chris York, JMP Securities. Please proceed.

Good morning and thank you for taking my questions. This question kind of follows up on Jonathan's last one. Given that you increased the core dividend in August, could you help us understand what has changed in the financial planning or in the environment over the last six months to now decrease the dividend?

Sure, it's Todd, I'll take that, try at that. Again, we alluded to this and commented on it in our questions. But maybe connect the dots a little bit better here. What we have discovered on the operating side is that, since the dividend raise, that our joint venture has not grown as rapidly as we expected it to. And we have chosen to migrate our portfolio into more senior secured assets and that has put pressure on the portfolio yields. And the result of those two factors principally have meant that we have not covered our dividend.

When we raise a dividend, we expected to be able to cover it, and that has not turned out to be the case. As I mentioned in my comments, also philosophically and by implication, the dividend policy that has been adopted in the past was a little bit more forward-looking. We tried to anticipate what our earnings were going to be and set a dividend level very close to those earnings. I think what we're doing, again from a policy perspective now, is setting the dividend more in a look-back type way and if there is, as we hope, excess net investment income over our dividend, we will find ways of returning that to our shareholders.

Great, thanks for that. That's it from me.

Thank you.

Okay, thank you for your question. I would now like to turn the call back to management for closing remarks.

We appreciate everybody's time and we look forward to continuing this dialogue as we review our business. Thanks very much.

Thank you for your participation in today's conference. This concludes the presentation, you may now disconnect.