Oaktree Specialty Lending Corp (OCSL) 2015 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Fifth Street Finance Corp. quarter-four 2015 earnings call.

(Operator Instructions)

As a reminder, this conference call is being recorded.

I would now like to introduce your host, Robyn Friedman, Senior Vice President of Investor Relations. Please go ahead.

Thank you, Abigail. Good morning, and welcome to Fifth Street Finance Corp.'s fourth-quarter and FY15 end earnings call. I am joined this morning by Todd Owens, Chief Executive Officer; Ivelin Dimitrov, President and Chief Investment Officer; and Steven Noreika, Chief Financial Officer.

Before we begin, I would like to note that this call is being recorded. Replay information is included in our December 1, 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 that reflect the Company's current views with respect to, among other things, future events and financial performance. Words such as believes, expects, will, estimates, plans, projects, anticipates and future, or similar expressions are intended to identify forward-looking statements. These forward-looking statements are subject to the inherent uncertainties in predicting future results and conditions.

Certain factors could cause actual results to differ materially from those projected in these forward-looking statements. New risks and uncertainties arise over time, and it is not possible for the Company to predict those events or how they may affect it. Therefore, you should not place undue reliance on these forward-looking statements.

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. To obtain copies of our latest SEC filings, please visit our website or call Investor Relations at 203-681-3720. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

The format for today's call is as follows. Todd will provide an overview of our results and outlook, and Steve will summarize the financials. Then we will open the line for Q&A.

I will now turn the call over to our CEO, Todd Owens.

Thanks, Robyn. For the quarter ended September 30, 2015, FSC generated $0.18 of net investment income per share, covering our dividend of $0.18 per share for the third consecutive quarter. In addition, we operated within our targeted leverage range and executed on our announced share buyback program.

We ended the September quarter at 0.72 times leverage, close to the middle of our target range of 0.6 to 0.8 times debt to equity, and somewhat higher than the prior quarter. The increase in leverage quarter over quarter was mainly driven by closing on $279.3 million of originations, as FSC selectively deployed capital into investments with strong risk-adjusted returns. In addition, FSC purchased approximately $20 million worth of our shares in the open market.

In regard to the credit profile of our loan portfolio, we maintained a strong and diversified portfolio of investments spread across 135 portfolio companies. On average, our portfolio companies experienced improving financial results, consistent with the modestly growing economy.

A little over two years ago, we decided to rotate out of the energy sector. At that time, we saw substantial capital flows into the sector driving higher leverage and pressuring pricing, which we believed would not provide adequate risk-adjusted returns. In the current challenging environment, we are pleased that our energy exposure remains at only 1.8% of total investments at fair value, spread across three portfolio companies.

More broadly during the September quarter, we only had one immaterial addition to our three loans that were previously on non-accrual, as we placed the answers.com second lien on PIK non-accrual. Although the company is currently paying cash interest, given our mark on the second lien debt, we have conservatively opted to stop accrual of the non-cash income. The four investments that are on non-accrual comprise 2% of our debt portfolio at fair value as of September 30, 2015.

We did have a small number of portfolio companies that experienced deterioration in their financial results. Ameritox, our largest portfolio company, has underperformed over the course of this year, primarily due to a significant reduction in Medicare reimbursement rates, and to a lesser extent, lower testing volumes. As a consequence, Ameritox has been marked down to 91% of par, and we have moved it to a category 3 asset. Our portfolio management team is working closely with the company's management and the company's sponsor owners to improve its operating performance.

Subsequent to quarter end, FSC was named as a defendant in a number of putative securities class action lawsuits. FSC continues to believe the claims are completely without merit, and we intend to vigorously defend ourselves against the plaintiffs' allegations.

Additionally, in November FSC received a letter from a stockholder, RiverNorth Capital Partners, an investment firm that has recently purchased FSC shares. In its letter, RiverNorth called for changes to the composition of the FSC Board and additional strategic changes, including replacing the investment advisor. While we believe that the rhetoric of RiverNorth's letter and related press release was inflammatory and misleading, the FSC Board and leadership team welcome an open dialogue with our stockholders, and are committed to driving enhanced returns to all FSC stockholders.

To that end, we've reached out to RiverNorth and look forward to meeting with them in the coming weeks to better understand their recommendations and reasoning. In addition to RiverNorth, we plan to speak with many of our stockholders in the coming weeks to discuss their thoughts on our Business, as well as our plans for 2016 and beyond.

Since I became CEO of FSC in January, we have been focused on generating consistent results, continuing our track record of executing on strategic initiatives, and delivering value to our stockholders. We have now generated earnings that exceeded our dividend for three consecutive quarters, which allows us greater operating flexibility.

Additionally, in August and September FSC repurchased 3.1 million shares at a weighted average price of $6.48 per share, resulting in approximately $20 million worth of shares purchased in the open market. Subsequent to the expiration of our previous stock repurchase program on November 30, 2015, our Board of Directors approved a new $100 million stock repurchase authorization. As always, we are committed to deploying capital in a manner that achieves the best possible return for our stockholders.

While we still have a lot of work ahead of us, we are pleased with our overall performance during the September quarter and some of the initiatives we have implemented during the course of this year. Looking forward to the December quarter, we do anticipate some downward pressure on earnings due to increased legal and other professional costs associated with the class action lawsuits and the RiverNorth proposals.

I would now like to turn our call over to our Chief Financial Officer, Steve Noreika, to discuss our financials in more detail.

Thank you, Todd.

We ended the fourth quarter of FY15 with total assets of $2.6 billion, a decrease of $82.6 million from FY14 end. Portfolio investments totaled $2.4 billion at fair value, which were spread across 135 companies at September 30, 2015.

At the end of the September quarter, we had $143 million of cash on our balance sheet. Net asset value per share was $9 at the end of the September quarter, as compared to the revised net asset value per share of $9.15 at the end of the June quarter.

For the three months ended September 30, 2015, we generated total investment income of $63.8 million. The quality of our income continued to be high, as net PIK, which is PIK accruals recorded in excess of PIK payments received, represented only 3.7% of total investment income.

Net investment income was $28.2 million for the quarter, a decrease when compared to net investment income of $37.5 million in the prior year. During the quarter ended September 30, 2015, we closed $279.3 million of investments in 10 new, and 6 existing, portfolio companies, and we received $74.7 million in connection with the full repayments of four of our debt investments, all of which were exited at or above par.

Notably, we were repaid at par on our only CLO debt investment, and now have no remaining CLO exposure. Furthermore, we received an additional $108.1 million in connection with syndications and sales of debt investments in the open market. The credit profile of the investment portfolio continues to be solid, as 94% of the portfolio at fair value was ranked in the highest 1 and 2 categories.

We believe we are conservatively positioned relative to our peers, with 94% of the portfolio at fair value consisting of debt investments, 79% of the portfolio invested in senior secured loans, 77% of the debt portfolio consisting of floating rate securities, with no CLO investments and limited energy exposure at quarter end. Our floating rate exposure should also position us to benefit in a rising rate environment.

FSC's joint venture with an affiliate of Kemper Corporation continues to perform well, generating a 15.4% weighted average annualized return on FSC's investment during the September quarter. As of September 30, 2015, the joint venture had $419 million of assets, including investments in a range of one-stop and senior secured loans to 34 portfolio companies.

For the September quarter, the weighted average yield on our debt investments, including the JV return, was 10.8%, which is relatively flat quarter over quarter, with the cash component of the yield making up 10.3%. At September 30, 2015, the average size of a portfolio debt investment was $20.7 million. The average portfolio company EBITDA was $37.1 million, and our top 10 portfolio company investments represented 31% of total assets.

This week, our Board of Directors declared monthly dividends of $0.06 per share for December, January and February. This is consistent with the last three quarterly dividends. We expect our Board of Directors to continue declaring monthly dividends on a quarterly basis, subject to various factors including Company performance; capital availability; level and timing of share buybacks; as well as general economic and market conditions.

I will now turn it back over to Robyn.

Thank you for joining us on today's call. We will take questions during the Q&A session from analysts who cover FSC.

As a reminder, the purpose of today's call is to discuss our earnings results, and we would appreciate it if you could please keep your questions limited to that topic. We do not intend to make any further comments or statements during this call related to the litigation or our recent 13D filing, and we thank you in advance for your cooperation in that regard.

With that, Abigail, please open the lines for questions.

Thank you.

(Operator Instructions)

Our first question comes from the line of Doug Mewhirter with SunTrust. Your line is open.

Hi. Good morning. I had two questions. First, you commented on an issue about recognition of fee revenue where you had to make some restatements. What was the source of that fee revenue recognition? Was it -- I assume that they were recognized prematurely -- was it a matter of where they had to be amortized and you thought that they couldn't and were these syndication fees or was it the OID that you make on loans at a discount. Just more color would be helpful there?

It's Todd. I'm going to ask Steve to address that topic.

Hi, Doug. Right. These were issues that we discovered during our year-end audit process related specifically to fees that we recognized upfront on a certain batch of loans. It's a policy that we've used over the last several years, but we discovered some errors that needed to be revised. We determined that the materiality level of those revisions were small enough that we did not -- just to be clear, it was not a restatement.

Because of the immateriality of these adjustments in prior periods, we booked an adjustment in the first quarter of 2015 to reflect all the cumulative amounts. So we revised the current quarters of 2015 to these amounts as well. You'll see over time that the majority of these timing -- revenue recognition timing adjustments that we made will make their way back into our income, we expect, as we accrete them into our income.

Okay. Thanks for that. The second topic. In your newsletter that FSC and FSFR published on your website, you talked about how this quarter was seasonally slow in terms of deal flow and activity, which is an industry-wide phenomenon. That wasn't surprising.

You said you expected some deals to get pushed into the December quarter. Are you actually seeing any of that materialize? And as a question related to that, are you still expecting to continue to grow the SLF at the pace that you've been growing it over the past couple quarters?

Ivelin will address that question.

Good morning, Doug. It's a good question because we'll look at the markets from a number of different perspectives. It's something that's worth pointing out to everybody on the call. Fifth Street is one of the few fully built-out origination platforms out there. We're not reliant on syndication banks or any other parties to bring loans to us.

We have invested in a sales force that's out there developing relationships with private equity sponsors. We source, underwrite, and completely manage our own loans. By default, it takes time to build out that pipeline and sometimes the pipeline shifts quarter-over-quarter so it's very tough to predict when deals will come in.

We did see some deals push from September to October, which will help obviously the December quarter, and as you guys have seen from prior years, December is seasonally strong for us. There's the natural phenomenon of people trying to get deals done before year-end. There's the phenomenon of banks having dislocation issues during that time.

So folks like us are able to step up and help sponsors get their deals done and achieve attractive risk-adjusted returns for that effort. We're seeing that some of that happened this quarter and that's also helping the growth of our JV with Kemper. Initially, as you know, we funded the JV with some loans that were warehoused on our balance sheet.

Over time, as we work with Kemper to source and underwrite new loans, it's probably a little bit slower process because we have to go through the finding of the loans, the underwriting it. Kemper needs to go through their process. So we've achieved pretty good growth in that JV. We're happy with where we are today. Also in this quarter we're able to expand the size of the JV with the additional leverage provided by CS.

So we're excited to keep growing that business. There's certain types of loans that fit the mandate of the JV, so not every deal sourced by the Fifth Street platform works for our partners at Kemper. That's a natural barrier to the growth there, but we feel good that over time we should be able to get to maybe 75%, 80% invested, hopefully by March.

Okay. Just one quick follow-up related to that. It sounds like you have a healthy deal flow. Also you have constraints on your balance sheet. I would assume that you would use the SLF as partially an outlet for some of that excess deal flow, and would you use the syndication markets to also sell down -- sell off some stuff to the market to manage your leverage or how generally are you going to [keep] that leverage?

One of the largest deals done by the Fifth Street platform happened during the September quarter. It's a deal called Valet Waste, which was sponsored by Ares Management, and Fifth Street acted as the lead arranger and we syndicated about 50% of the deal pre-close.

Since closing of the deal, we've continued this engagement process there. So it's a testament to the success of the platform in growing the business, being able to do deals with marquee sponsors, driving that fee income, and also managing the size of our exposures.

Okay. Thanks. That's all my questions.

Thanks, Doug.

Thank you. Our next question comes from the line of Robert Dodd with Raymond James. Your line is open.

Hi, guys. Just going back to the accounting clarification, if not restatement, GAAP is pretty clear: origination fees are amortized, structuring fees are taken upfront. As Ivelin says, you guys pride yourselves on the origination platform and essentially controlling the loan documentation.

Can you give us a bit more color on where did the problem come up because obviously, this goes back several years and has gotten past the orders as before? So the question is was there a problem -- were these self-originated loans, was there a problem in passing information between the loan documentation team and the accounting team as to the wording, whether it was origination versus structuring?

And then to that point, if they were self-originated, has a third-party law firm familiar with loan documentation taken a look at these deals and other deals to see if any of the loan doc wording is ambiguous?

Robert, it's Steve. A lot of the questions and points that you raised are accurate. This goes back to 2012 and it centers around a certain type of loan, a broadly syndicated loan that we might do, where the fees should be amortized into income over time, as you said.

It related basically to we did not have sufficient documentation to support the type of fees that we were taking. We are working to improve that going forward with PWC. They've been very helpful and you'll continue to see results to that end.

Okay. Got it. Just to clarify on that. Going forward, would the -- general expectations is where you can structure it, you structure the loan docs so that these things [have] structuring fees and you can take the fees upfront. Should we expect that to continue to be the model or to see more of your fees being amortized in future versus what the trend had been?

Don't forget that this type of loan, and you can tell by the magnitude of the numbers involved here, is a very small part of FSC's investment strategy and we expect it will continue to be going forward, so I don't think you'll see any material changes to our forward-looking earnings for this.

Great. Second one, unrelated really. What, capital structure-wise, obviously the INGs facility matures next year. You're in the leverage range right now. Any color on what type of capital structure between revolver, term, convert, et cetera -- are there going to be any expectations of material changes in that structure for capital that you'd like to see going forward?

Robert, it's Todd. Thanks for the question. No, look, we feel good about our capital structure today. Obviously, and we don't expect that there will be material changes in how that looks going forward.

Obviously, we have some maturities, particularly of the convert coming due in April of this year. We're comfortable with our plans to deal with that maturity, and over time, we will continue to evaluate ways to optimize our capital structure, but we don't anticipate any significant changes going forward.

Okay. Thank you.

Thank you.

Thank you. Our next question comes from the line of Jonathan Bock with Wells Fargo Securities. Your line is open.

Good morning. Thank you for taking my questions. Todd, appreciate your commentary earlier, and I definitely appreciate the comment of a spirit of open dialogue with investors. I'm curious, both you and Len made a statement as it relates to RiverNorth citing that their comments were both inflammatory and misleading. I'm curious, tell us which items that you consider to be both inflammatory and misleading because those seem to be pretty much statements of fact?

Yes, Jonathan, appreciate your time and question this morning. Good morning. Look, we're not going to get into a debate on the points raised in the RiverNorth letter on this call, as we've said in the preamble. Having said that, I'd make a few important comments.

Number one, we believe that our external manager, FSAM, is the right manager for this portfolio. We have built, over 17 years, a very strong business that sources, originates, manages a portfolio of middle market assets. We've originated $7 billion in assets over that time period and feel very, very good about how that portfolio is positioned.

We've been consistently recognized with industry awards for our position in the middle market and we think that we have been very prudent in how we have managed our portfolio and feel very, very good about that. So that's one observation I would make.

The second observation is we are and have been very open to a dialogue with all of our shareholders, including RiverNorth. That's why once we were made aware of their concerns and their letter, we almost immediately reached out to them to enter into a conversation with them and make sure we understood their perspective.

Okay. Appreciate that. Getting to the point of management of the BDC itself, I believe if we go back to the FSAM call, Len made it a point to point out that the BDC will in effect be focused on recycling capital at the BDCs in order to fund new originations, yet at times, Todd, we hear that you have a focus on buying back shares. The question really gets to, Todd, do you really have control of the BDC in its capital allocation decisions or was Len's statement about no shareholder buybacks inaccurate?

Well, Jonathan, first of all, Len and I are absolutely on the same page. As I have said very consistently since I took over as CEO, we are managing FSC in what I would describe as a steady state environment, where we are not anticipating raising additional capital. Certainly, we're not in a position today to do that and we are operating that business to optimize the returns for the shareholder.

There are two important components on that, which you've touched on. First of all, we're going to recycle capital into attractive transactions in support of our sponsor partners. Secondly, we are going to continue to evaluate share buybacks as we have just done in the most recent quarter and so shall we do in the future and hopefully people see in the reauthorization or the new authorization of the $100 million buyback a willingness to think about additional stock buybacks.

Great. Then the question, just because we've seen a number of BDCs institute more programmatic buys, such as ACAS, that would buy automatically at 0.85 times NAV or below it. Can you explain why something like a 10b5-1 plan or direct programmatic share repurchase is not in the best interest of your shareholders at this time?

We evaluate a lot of varieties of share buyback. Again, as I've said already once, we bought back $20 million of share in this quarter. We have reauthorized our ability to buy back stock and we will evaluate additional buybacks in the future.

Got it. Then two more quick follow-ups. I appreciate your candor. You did highlight the potential for lower earnings as a result of additional legal expenses or perhaps a bit higher expense as a result of the several class action lawsuits that have been filed against you.

The question is, why is the BDC shareholder bearing that expense when it really ties to issues that are tied to your external manager? Why is this not being borne at the external manager level? Explain why shareholders need to pay for that?

John, some of the costs are going to be borne by our external manager and some of them are going to be borne by the BDC. Unfortunately, at this point, it's impossible to quantify what the costs are going to be, so it's hard to get in any more detail than that.

Even though you outlined lower earnings? It's just a question on the mind of investors.

The last one relates to the commentary in your filing where you state that in the event of termination of the advisory contract, that could be considered an event of default for your lenders that have your credit facilities. The question is, do you intend to get a waiver from your lenders in the event of termination or in order to get, perhaps I'd say, a bit of insurance in light of issues that are surfacing as it relates to a potential proxy battle looming?

The scenario you outline is low probability. I'm not going to speculate on that.

Okay. Thank you so much.

Thanks, Jonathan.

Thank you. Our next question comes from the line of Christopher Testa with National Securities Corp. Your line is open.

Good morning. Thanks for taking my questions. Just with the subordinated debt, the origination has been up this past quarter and the quarter prior. Is this something that's opportunistic from spreads widening? Are you looking to increase the senior secured exposure relative to this going forward? Just your thoughts on the asset mix is helpful?

Hi, it's Ivelin. Thanks for the question. It's purely opportunistic. We look for the best opportunities out there on a risk-adjusted basis. If you've seen our performance over the last number of years, we've stayed away from mezzanine and unsecured debt for a while. It's not a space that we feel has attractive risk-adjusted returns. We had one investment in this [quarter] in which we supported.

We led a second lien syndication for Vista, in their purchase of a business, private transaction. That was an attractive opportunity for us to come in early, validate the business alongside the sponsor, and understand the dynamics there and be able to structure a very nice deal. So when we have opportunities like this, we look to be helpful to our clients and be able to be paid for that, but it's not -- we're not out there looking for those opportunities. They come to us through our sponsor network on an opportunistic basis.

Okay. And just given the high balance sheet leverage, you now have the $100 million buybacks has been authorized, the new buyback program. How are you looking at maintaining a fully invested portfolio, doing the buybacks and potentially shedding some assets to pay down the debt and deleverage the balance sheet more? If the opportunities are good enough, are you going to keep the leverage as high as it is? What are your plans for that?

Thanks for the question. It's Todd. We finished the September quarter at a 0.72 times debt-to-equity ratio, which is right in the middle of our range and we feel good about the overall leverage. We expect the leverage levels to vary, hopefully within that range. Obviously, in the June quarter, it was at the low end of that range.

It has trended toward the middle part of that range and we're very comfortable with where we are today. We would like to continue operating within that range going forward. Depending on the origination cycle and the volume of originations and where our stock price is trading, we'll continue to evaluate whether share buyback makes sense as deploying our capital, but as we sit here today, the leverage level feels good.

Okay. And with the Answers company not accruing PIK, just your thoughts on how the interest coverage looks, what's the risk of cash non-accrual based on where the marks are on this?

This is Ivelin again. Answers is a loan that we've been tracking for some time. The Company got hit earlier this year with a change to some Google algorithms that affected their search results. It's a business that we know pretty well. It's a management team that we've tracked for a while and we believe they're going to figure out those changes, make the necessary adjustments, and move forward.

The non-accrual was driven by -- and Steve can probably explain it better -- by our accounting policy. We don't have any PIK on this loan. It's a purely cash pay loan that's current and has enough interest coverage to continue paying our interest. But Steve maybe you can describe the--?

That's right, Chris. Answers does not have contractual PIK. The small amount of income non-accrual for the quarter, which I believe was less than $30,000, related just to an OID accretion that we have on that loan, and given the mark, we felt it was the conservative position to stop the accrual of the OID for the quarter.

Okay. Got it. That's helpful. And with Ameritox, within the JV, it's really dragged down the fair value there. Do you have other healthcare companies just within the -- at the C portfolio or JV that have a similar type of reimbursement risk?

Yes, that's a very good question because healthcare, in general, has been a core focus of the platform, as you guys know. We have a dedicated team that tracks the space and we spend a lot of time thinking about the different reimbursement issues, and in every deal that we invest in, there's different reimbursement issues that affect that business. Sometimes it's more state-specific. There's Medicaid reimbursement.

In the case of Ameritox, in late September, CMS, which is the governing agency that prescribes the Medicare reimbursement, came out with pretty Draconian views on the rates for the next year, for 2016. The industry was up in arms and went through a couple rounds of negotiation with the industry. Since then, those rates have been brought back closer to a more manageable place and so we're working with the Company to figure out what that means for the business going forward.

We're mitigating cost cuts we can put in place and also we have some initiatives in place to be on the offensive in this business. If you track the space, there's a large competitor called Millennium that went through a pretty public dislocation due to some very questionable practices. They got penalized pretty heavily by the government.

Really, Millennium is the reason why the government looked into the space that much. They were doing some things that was pretty questionable, which we're happy to be invested in Ameritox, which is on the right side of having the regulatory compliance internally and being able to survive this reimbursement cut and grow the business.

Our investment piece is there; it's still intact. We believe in the team. We believe in the sponsor effort and we continue to work to make progress in this investment. We had another investment in the space, a company called Aegis that we sold out of very close to par earlier this year, so we're pretty happy with that outcome.

Okay. Thanks. That's good color. And just with the non-accrual that you have sold -- rather restructured -- just can you give color on that restructuring and what went on there?

Which deal was that, Chris, you're referring to?

The Miche Bag?

That was much earlier in the year. We just added a note to the K to make it a little clearer to the reader as to what happened there.

Got it. And what are you seeing in the sponsor market in terms of what structures are asking for? Are you finding that sponsors are trying to push the envelope more with higher attachment point leverage in the deals or are you generally still seeing consistency in that market where you are?

It's very sponsor-specific. We have some people, and we don't do a lot of business with those people, but they give us a call and when we hear the leverage ask from them, we move on pretty quickly and then we see that deal getting done by one of our competitors that has tons of capital and they need to deploy it. As Todd described earlier, we're in a position to be very selective with our capital.

We've always been very selective with our capital and able to take advantage of those opportunities when they present themselves. The people that we do business with, and that's the thing we keep saying about the sponsor origination platform, those are guys that have been in business for a long period of time. We've done 10, 12 deals with them over the years.

And something that you see about the Fifth Street deals, they're pretty consistent as far as where the leverage shakes out, as far as where the pricing shakes out, and sponsors like that. They like consistency. They like the fact that you deliver on what you promise, and that's why they're willing to pay you more versus the marginal player out there that's just a participant in somebody else's story.

Okay.

Chris, it's Todd. We appreciate the questions here, but we've got a number of others in the queue. If maybe we can--

Not a problem.

If you want to dial back in and hopefully we'll have time to get back to you or we're happy to talk to you after the call.

Okay. That's fine. Thank you. I appreciate it.

Thanks, Chris.

Thank you. Our next question comes from the line of Christopher Nolan with FBR & Co. Your line is open.

Hi, thanks for taking my question. In the next quarter, how much should we expect legal fees to increase relative to the current quarter?

Chris, it's Todd. Good morning. It's impossible to say at this point how much. We just know that there is going to be costs, as we have already said, associated with both the litigation and the RiverNorth proposal.

Todd, what is the priority in terms of covering the dividend with earnings or paying the management fee? Should we expect some management fee givebacks or whatever to ensure that EPS covers dividend?

Chris, we are very -- we have been very focused, we continue to be very, very focused on covering our dividend. We set the dividend at a level that we feel confident we can cover quarter in and quarter out. We've covered it for three quarters now and we hope to continue covering it into the future.

Final question. As we approach -- last year you did your annual shareholder meeting in March, as I recall. Going forward, should we expect the FSC Board to be requesting changes in the terms of the management contract, specifically in terms of incentive fee compensation and things like that?

Chris, it's Todd. I don't want to get ahead of our Board or speculate about what the Board will do.

Okay. Thanks for taking my questions, Todd.

Thanks very much for your time.

Thank you. Our next question comes from the line of David Chiaverini with Cantor Fitzgerald. Your line is open.

Thanks, good morning. I have a follow-up on the credit performance of the portfolio. Can you comment on the overall health of the portfolio and the outlook, and if you have it, the revenue and EBITDA trend?

This is Ivelin again. The credit performance is stable. We look at the portfolio as a whole as performing as expected. We have, as you know, a couple sectors that we're spending time to figure out idiosyncratic factors affecting companies there. As you know, we have three companies in the energy space. We're spending a lot of time with the teams and the sponsors there to make sure take we know what's going on with the underlying businesses.

They're managing their structures to surviving in the current energy environment, so our team is spending a lot of time there. In healthcare, as we talked about, Ameritox, in that space, we have focus there. That's why the investment is on watch list. We're dedicating resources to help that business, but overall when you look at the rest of the portfolio, it's very stable. Companies are growing their businesses, revenues are growing, EBITDAs are growing but they're not growing as their budgets expected.

They expected much more robust year. We're seeing that numbers are flat to slightly up. I don't have the numbers in front of me for the portfolio as a whole, but I know we have them so we can get back to you on that. But that's the general sense we get from our weekly PM meetings, when the different deal teams talk about the performance of the individual accounts. It's a relatively stable environment and people are looking for ways to grow their businesses.

And the outlook, how does the outlook look in terms of revenue and how they're tracking relative to internal plan? As you guys prepare for -- get into year-end and companies start to put forth their budgets for next year, are they expecting much growth?

That's an interesting question. We haven't seen those budgets yet, but one thing, as you know, in an origination platform, when you get to structure your own documents, and we have robust sets of covenants, over time those covenants tighten, and those covenants, when they set at the outset of the deal, they're set based on some projection that the sponsor and the Company put together for the next five years when we made the loan.

Deals that were years two and three, they've performed well. They're above when we did the deal. EBITDA has grown maybe 10%, 15%. But I've got to tell you, when sponsors run their models they expect EBITDA to be up 40%, 50% by now. That's what we're spending a lot of time thinking through and looking at each individual business, okay, it's grown over time, it's expanded, so maybe they've done an M&A transaction or attracted additional customers, but they're behind the original plan that was put together two or three years ago.

How do we react to it? What kind of changes -- and that just gives us a seat at the table to go back, meet with the team and to evaluate the situation. So that's what we're going to be doing basically the next -- basically December, January, February, because that's when people are putting forth their next year's budgets.

It's Todd. I would just add a little bit again at a high level. We feel good about our portfolio, as we've said in the script earlier, or in our comments earlier. The overall -- as Ivelin just said -- the overall -- the underlying portfolio of companies are showing modest growth, consistent with a modestly growing economy and the overall portfolio is 79% senior secured. It has a modest level of PIK income and very little energy exposure. So as we head into year-end here, we feel pretty good about our portfolio.

Great. Thanks very much.

Thank you.

Thank you. Our next question comes from the line of Troy Ward with KBW. Your line is open.

Thank you. Todd, I want to start off by making the comment, I know at the beginning of this Q&A, it sounded a lot different because it sounds like you're only taking questions from an analysts and not your shareholders, which I find a bit surprising considering on three times on this call, you've said you've welcomed an open dialogue with your shareholders, but it sounds like you're excluding them from this Q&A. I think that's a very poor decision.

Follow-up on a couple of the topics that have been brought up. First of all, on the downward pressure, on earnings over the next couple quarters due to legal, again I'd reiterate a couple of comments we've heard as prior about who should bear those costs. But can you just speak to how you think about earnings relative to the dividend, and if earnings fall back below the dividend again, how do you feel on paying a dividend higher than your operating earnings?

Good morning, Troy. Again, I know I've said this now at least once and maybe twice, we've set the dividend at a level that we think we can consistently meet or exceed. We've exceeded it now for three quarters in a row, and I'm optimistic that we will continue to meet or exceed that dividend going forward.

As you know as well as anybody, there are many instances in the BDC landscape, generally. Going back prior to this year, instances at FSC where we have under earned the dividend for a quarter or two and still maintained a constant dividend level. It's our hope and expectation that our Board will continue to authorize dividends at the current level going forward, and as a Management team, we're comfortable that we'll be able to cover, meet, or exceed those dividends from an earnings perspective.

Okay. That's what I was getting at, is more on a quarterly versus an annual basis. Thanks.

Then on the external fee structure, I know as a response to Chris's question, he put it in response to the Board, what do you think the Board will do. I just want to know where you stand, Todd. You've talked about, you're the captain of this BDC and you're making the decisions.

How do you feel about the external fee structure of the BDC? Obviously, RiverNorth put out some very -- they want to see changes. What changes do you think need to be looked at least on a broad scale to get this more in line with what we believe shareholders are wanting?

Yes, Troy, first of all, I would say we feel comfortable with our structure. I probably already said this, as well. The external structure is the predominant structure in the BDC space. We think it's an appropriate structure for managing our business and we don't anticipate a need to change that structure as we sit here today. So that's the first response to the question.

Having said that, it's important to acknowledge what's happening in the industry and to sit down and have a conversation with RiverNorth. And you know what, candidly, other shareholders who have been with us for a much longer time. We want to collect their views, as well. Then we as a Management team and a Board are going to evaluate that and consider what moves, if any, we should take in regard to our structure.

Great. Thanks.

Thanks, Troy.

Thank you. Our next question comes from the line of Chris York with JMP Securities. Your line is open.

Good morning. Most of my questions have been asked. Could you potentially help me understand your thought process in deciding the amount of the new buyback authorization, considering you that only used about 20% of the capacity in 2015 and then comments during the call about recycling capital for new investments?

Sure. We've had -- our share buyback authorization has consistently been at the level of $100 million, and so the idea here was to reauthorize that. We thought that, that provided sufficient flexibility for us to consider share buybacks in the coming quarters, and enough ample capacity for our Board to authorize specific buybacks under that program. So there was not -- to be honest, there wasn't a big debate about whether it should be larger or smaller, it just felt like the right level of authorization, given our float and given the most recent buyback.

Okay. And then one last one here. With the currency of FSAM as compensation down rather significantly and the ability for FSC to originate investments and grow the portfolio being limited, I'm curious on how you would describe the morale of the 35 investment professionals that will probably be responsible for the management of FSC going forward?

Thanks for the question. I'd make a variety of observations. Number one, we feel very, very good about where we are from a business. We feel like we have a great team on the ground that has been working very, very hard to pursue the strategies that we've discussed on this call and we see no reason that, that ought to change.

As with everything, we've got to be cognizant of the environment and continue to evaluate the impact of that environment on our business model, which we do every day and every quarter as a Management team and we'll continue to do that going forward. But as we sit here today, I couldn't be more proud of the team and the effort that has been put in over the course of this year, since starting at CEO, and I don't see any reason for that to change going forward.

Okay. Thanks for taking my questions.

Thank you.

Thank you. Our next question comes from the line of Doug Harter with Credit Suisse. Your line is open.

Thanks. My questions have been asked and answered.

Okay. Thanks, Doug.

I'm showing no further questions. At this time, I'd like to turn the call back to Management for closing remarks.

Wanted to just thank everybody for the questions and the interest and we look forward to continuing our dialogue. Thanks very much.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone have a great day.