PhenixFIN Corp (PFX) 2013 Q2 法說會逐字稿

Good morning, ladies and gentlemen and welcome to Medley Capital Corporation's second-quarter fiscal 2013 financial results conference call. Today's call is being recorded for replay purposes. (Operator Instructions).

This conference may contain statements that, to the extent they are not recitations of historical fact, constitute forward-looking statements. Actual outcomes and results could differ materially from those forecast, due to the impact of many factors. The Company does not undertake to update its forward-looking statements unless required by law.

The second-quarter 2013 investor presentation is available in the Company's investor relations section of the Company's website at www.MedleyCapitalCorp.com.

I would now like to turn the call over to the Company's Chief Executive Officer, Mr. Brook Taube. Please proceed, Mr. Taube.

Thank you very much, and welcome, everyone, to Medley Capital Corporation's quarterly earnings conference call. We appreciate you taking the time to join us this morning.

And as a quick agenda for the call, in our normal manner we're going to discuss the following. First, the origination for the quarter, including the activity for the March quarter and an update on activity and targets for the current June quarter. We'll also discuss our liquidity and capital availability for new investments for the balance of 2013.

Second, we'll discuss the recently declared $0.36 dividend and our outlook for the dividend in the next several quarters. Third, an update on the issuance of the 10-year notes and the expansion of the revolving and senior term facility. Then finally, an update on our SBIC license and the SBIC activity.

First, on originations during the quarter ended March, we originated $123 million in eight new investments and seven existing investments. We received amortization and repayments on $53 million, resulting in a net portfolio growth of $70 million.

And as we've communicated in prior calls, we had a concern, I suppose, that we might experience lower origination volume in this first calendar quarter of 2013, compared to the prior quarter in December. We are pleased that the first-quarter origination volume was strong, and the pipeline, as we sit here today, is strong as well.

With the completion of our equity issuance in early April, the issuance of our baby bonds, and the further expansion of the credit facility, we're well positioned in terms of capital availability.

With respect to pricing and structure, we've seen relatively stable yields in the nonsponsored deal flow. And as we've communicated now on several calls, we are seeing more aggressive structures and pricing tightening in sponsored transactions.

However, on balance, we continue to find attractive risk-adjusted returns in the market. Our deal flow remains strong, and we expect to continue to deploy capital in a steady and consistent manner.

Turning now to the dividend, we're pleased to report that the Board has declared a dividend of $0.36 per share for the March quarter. The dividend will be payable on June 14 to shareholders of record on May 27.

As we've stated previously, we expect net investment income will meet or exceed the current dividend as we look forward in this quarter and further into 2013, assuming we're able to deploy capital as planned.

Turning now to the senior notes and the credit facility, in March we issued $63.5 million of 10-year notes priced at 6.125%. This pricing was 100 basis points tighter than the seven-year notes we issued last March. We continue to see our overall cost of credit declining as we ladder and diversify our sources of financing. The proceeds of the most recent issue were used to pay down the revolver, as well as fund new investments.

In late March, we amended our credit facility by increasing the accordion feature to $400 million from $300 million. We have subsequently closed $30 million and $15 million of additional commitments from JPMorgan and AloStar Bank, respectively. The combined $345 million credit facility is comprised of commitments totaling $230 million on the revolver and $115 million on the senior term facility.

Turning now to the SBIC, in March we received approval for an SBIC license. This past quarter, we contributed $50 million in regulatory capital to the subsidiary, which will allow us to borrow as much as $100 million from the SBA. We may in the future increase the regulatory capital in the subsidiary to $75 million, which would allow us to borrow an incremental $50 million from the SBA for a total usage of $150 million from the SBA.

We expect to begin utilizing the SBA leverage once we have fully invested the regulatory capital.

Over the past few years, we've successfully implemented a strategy of diversifying our liabilities by funding source and maturity. We now have credit availability of as much as $598.5 million when you combine the revolver, the term loan, the baby bonds, and the SBIC facility.

I'd now like to turn the call over to Rick Allorto, our Chief Financial Officer, to review the second-quarter financial results.

Thank you, Brook.

For the three months ended March 31, the Company's net investment income and net income were $10.4 million and $11.5 million, or $0.36 per share and $0.40 per share, respectively. The net asset value per share was $12.73 at March 1, compared to $12.69 at December 31.

For the quarter, total investment income was $20.2 million and was comprised of $16.7 million of interest income and $3.5 million of fee income.

Total operating expenses were $19.8 million -- sorry, $9.8 million, and consisted of $2.5 million in base management fees, $2.6 million in incentive fees, $2.9 million in interest and financing expenses, and $1.8 million in professional fees, administrator expenses, and general administrative expenses.

For the quarter, the Company reported net unrealized appreciation of $1 million and net realized gains from investments of $152,000.

During the March quarter-end, the Company invested $123 million in eight new investments and seven existing investments, and as of March 31, the investment portfolio consisted of 64% in senior secured first-lien investments, 35% in senior secured second-lien investments, and less than 1% in equities and warrants.

As of March 31, the Company had investments in 51 portfolio companies across 22 industries with an average portfolio company investment size of $12 million. As of March 31, the credit quality of the existing portfolio remains stable and no loans were on nonaccrual status. The weighted average yield to maturity on the portfolio at March 31 was 13.9% and the weighted average loan to value was 55%.

That concludes my financial review. I'll now turn the call back over to Brook.

Thanks, Rick. Overall, we're pleased with the performance in the beginning of 2013. The team remains focused on originating a portfolio of high-quality loans at attractive yields that will continue to generate a stable and consistent dividend for the shareholders in the quarters ahead.

I'd like to thank all the shareholders for their continued support, and we can now open the call for questions.

(Operator Instructions). Troy Ward, KBW.

Brook, can you just speak kind of on the market what you're seeing specifically related to nonsponsored and sponsored? And then specifically on the first-quarter closings, what percentage of those were nonsponsored transactions, as well as the backlog that we saw in the slide deck?

Sure, let me start in reverse. So it was about 50% direct and then 50% participation, what I would call sponsor. I can get more specific, but it was pretty balanced.

It's interesting. On the market, we looked at, I think it was, 205 investment opportunities in the quarter. It was evenly balanced between first and second lien. We did close -- the prior quarter was, as you may recall, larger first lien versus second lien. So the quarter-over-quarter pricing for our origination was about flat. I think it was minus 10 to 12 basis points on the cover yield. So flat would be the description of what we've seen.

However, if you look at the pricing of that whole pipeline of 205 million -- 205 investment opportunities, we clearly saw continued downward pressure, although Q1 was not as significantly down as we saw in Q4 of last calendar year.

In terms of pricing, we get enough data points with our pipeline I think you could say the direct yields are approximately 250 basis points wider than the -- what we call the sponsor flow. It's not -- I don't want to get too scientific here, but it's significant, and I think what we're seeing now, which is what we had anticipated and has been our focus obviously for years at Medley, is that the direct channel provides extra return. It's harder work, for sure, but in this type of market, you're going to see continued differentiation as you have the capacity to do direct loans. Does that answer the question, Troy?

Yes, it does, thank you. And then, on one of the -- I guess it would be considered an add-on (multiple speakers) Calloway transaction, it looks like Ampersand added on the Willow Laboratories in Boston. Can you speak to that transaction and whether or not that's kind of going down the path of a rollup in the industry? And also, I saw the Willow in the 10-Q was actually marked below cost. So can you just talk about what's going on with Calloway in particular?

Sure. There was an additional fund raising of just over $5 million. It was funded disproportionately by the equity. We did participate, but the equity came in disproportionately on that incremental funding.

Willow was sort of merged into the platform, and it is a low-cost provider and I think what you'll see is it's going to allow the company to transfer some of that lower-margin unprofitable accounts, and the estimate is up to $6 million of potential savings as a result of the integration.

We, like everyone, are always cautious in modeling all of the synergies that might occur. But it's clearly going to provide cost synergies.

I think -- the background of the story, however, is idiosyncratic in this case, and it remains under pressure, on balance. Reimbursement rate cuts among the commercial insurance providers, and we've seen some -- in this case, pain care segment has had slightly below plan.

So, it's on the watchlist. We're watching it carefully. It actually, on balance, appears to be doing fine, but like all of these, it takes a lot of careful attention. Does that give you enough color on it, Troy?

It does. And then, one last portfolio company, and then I'll let --- I'll get back in the queue. But on Geneva Wood Fuels, we saw that looks like that's under pressure as well. Can you give us an update there?

Yes, sure. So the story with Geneva is we had been in the market on financing. What we told you guys last call was that we had looked to refinance the company, but instead it's been put up for sale.

So all of our valuations are FAS 157 compliant. The valuation of the asset is clearly below par at this point. We will have more information in the coming few months about where the realization occurs, but that asset is for sale. It's in a process, and I expect we'll know the realized gain or loss on the sale within the next several months.

Great, thanks.

Jonathan Bock, Wells Fargo Securities.

Good morning and thank you for taking my questions, and congratulations on the SBIC. That's great news, of course.

Now with that meaningful SBIC capacity, I'm just curious as to how you really want to grow the balance sheet. Because on the one hand, you could place more second-lien, mezzanine, lejt's call higher-yielding types of securities in that facility and boost your operating income meaningfully. But of course, on the other hand, you could focus more on senior secured debt that would still likely allow you to maintain your dividend yield, maybe not grow it as much, but meaningfully improve the perceived risk profile, if I could call it that, of the book of assets.

So Brook, how do you balance between those two in light of the opportunities you are seeing and the funding sources that you now have to deploy capital?

That's a good question. Thanks, Jonathan. I don't think you'll see Medley change its stripes based upon financing. We have a measured approach to the market. We've kept it the same for now 11 years as a team.

It appears that the market, as we all can see, is getting tighter, but the direct channel is presenting -- still presenting attractive opportunities. I don't have a specific comment about the future of that subsidiary, but I think the general comment is I wouldn't expect significant deviations from what is the core strategy here.

But I --- they're very valid points. We're looking at it carefully and we'll keep you posted as the next several quarters unfold.

Okay, that's great. Thank you for the color.

And then as we look at a few portfolio investments, obviously Troy hit on a few. Modern Video, in terms of VideoFilm, just a question there in light of the recent mark, and I understand things move up and down. The only reason I ask the question is because it was a relatively recent origination in September of 2012, so maybe perhaps a little color. Was it operating or more mark to market as it relates to the slight downdraft this quarter?

It was both.

Okay.

I think we saw a slowdown at the end of 2012. Part of it was the fact that the customers for the company were not active during the last part of December, and we think it's partly Christmas and New Year's and timing. But it wasn't anything that I would call dramatic, but it is softness on the topline and cash flows as a result. We're watching it carefully.

The Company is incidentally, unrelated to this quarterly outcome, it's focused on cost reductions. So we have reason to believe that we'll see stabilization and a turn here. We're starting to, but I think nothing dramatic but softness in the last quarter.

Sure, and then, maybe another more broad portfolio question. Brook, with some meaningful exposure to what I'd refer to as kind of general commodities in the form of Harrison Gypsum or U.S. Well, how are you gauging the commodity risk in the portfolio in light of the volatility that we've seen just across the commodity space? And maybe just to explain kind of the risk mitigation that you have in both of those assets and how you look at commodity risks, just because they're a decent size of the portfolio, in our opinion.

Well, we don't share your opinion on that fact. I think we look at the direct exposure as modest and not significant.

I think the exposure in each of those assets, it would be a derivative exposure. But we do balance it. I think if you look at the entire portfolio construction, it wouldn't occur to us that there is a --- even an outsized weighting or a concern we have.

But we've seen balanced credit performance across the portfolio, including those assets. The structures remain sound, and at this point, we're looking at the overall market. This is a big part of the economy, it's capital intensive, and there's opportunities if you're careful and selective in how you deploy capital.

Casey Alexander, Gilford Securities.

One of the deals that you closed in this quarter, Flexera Software, has a coupon, a 5% coupon, at least in the presentation deck, that makes it look sort of like an outlier in relation to the traditional deals that you do. What was different about that? Is there an offset to the low rate with some equity that was taken or how did that one come about?

That was bought and sold in the quarter, Casey. It's not really trading. We were in the credit and it refinanced, and we were very comfortable and we just thought it was an opportunity to support the credit, to participate. It traded well, and it was never intended to be a long-term position.

So it's not a trading activity. It's supporting an existing borrower and it was a good outcome.

And so, it's already gone?

Correct.

He asked the commodity question. I think that's it. I think I'm good. Thank you.

John Hecht, Stephens.

Thanks for taking my questions. The first one is, Brook, you talked about the competitive markets. You guys have had a pretty consistent pipeline, a pretty consistent capital deployment through the last several quarters.

I'm just wondering at a higher level, where do you think the drivers of the investment opportunities are going to be in calendar-year 2013? I mean, as you guys survey your direct and sponsored pipeline and relationships, do you think you're going to see an increase to middle-market buyouts? Is this expansion financing? Is it refinancing? Where's it going to come from and how is it going to be in the context of recent years?

Wow, predict the future. Tricky. I think --- we'll try to give you our general flavor.

It's probably more driven by data that we're seeing in our pipeline. So without going too far and getting too --- giving you all too many armchair ruminations here from Medley, if you look at the refinancing wave that still remains in the middle market, if you put a pin in the average amount of volume that might be in our potential market, it's sort of $80 billion to $90 billion per year from 2013 through 2016.

This is a refinancing that has not been fixed by Bernanke and the large levered loan market. Our view is that presents an opportunity, so if anything, our anticipation of forward deal flow we would expect, and it wouldn't surprise us if a meaningful contributor was just normal run-of-the-mill refinancing activity. So we're looking at that.

I think as a direct lender, you may in some capacity have more access to it because the private equity guys are not necessarily going to participate on the buy side of all of this stuff.

Second comment on acquisitions, this is again by data. We have a lot of institutional relationships here over a number of years, and it appears to us that the middle-market private equity players, the ability to raise additional capital -- meaning the number of funds and the amount of capital that's going to form in the lower- and middle-market private equity space, there's a headwind to that, and I think it falls into the bigger getting bigger backdrop.

So it wouldn't surprise us, I suppose, if it looked like there were fewer private equity -- small private equity funds and smaller dollars. That's on the radar. It's tough to predict, but it's on the radar.

In terms of growth and acquisition, I think our view, and we've said it now for probably six to eight quarters, is we're modestly optimistic about the economy. We see it in our borrowers. We see topline and EBITDA growth, on average, ahead of GDP at this point. If that holds or even turns a bit, you're going to see growth. You're going to see acquisition financing, plant expansion, et cetera.

So the three buckets are refinancing, acquisition, and then growth. They've always been the same three, from our perspective. If there's a shift, it's probably more refi, smaller private equity sponsor, and then we hope for a meaningful growth story here, but I think we all kind of do. And we can keep you posted on how our views here change, but does that answer the question?

No, I think that's great color. I understand it's tough to predict the future.

Second question is you did -- again, you commented on the competitive markets and the structural changes in deals, but has there been any shift in where the competition is coming from, any emerging new competitors, or is it pretty much the same over the last couple quarters?

Yes, it's been pretty balanced. This answer is -- probably will sound a little self serving, and that's not the point. But we'll give you the color we see.

A number of players that used to do deal sizes that were kind of $25 million to $75 million have really vaulted to $100 million, in some cases $200 million and even $300 million deal sizes, and that's a reflection of the fact that they have grown their asset base and, practically speaking, they need to focus on larger deals. Doesn't mean they can't do our deals, but just our observation is we're seeing them less, in some cases not at all. So that's been pulling a number of high-quality prior competitors higher.

We've seen a few new players and we have the same folks that you would expect to see around.

The capital formation in the limited partnership world is slow. Our observation is that the private capital formation to come after our stuff is not as much as you would expect. And secondly, smaller players getting bigger, there's some headwinds to that as well.

So we feel pretty good about the competitive dynamic, although, as I said, we are seeing some pressure on the sponsor deals. But on balance, we feel pretty good in a market that on the headline public credit looks like it's getting more challenging.

Okay, that's great. And then, last question, historically you've been fairly balanced between fixed- and floating-rate investments. And I know you have a fairly fixed liability structure, but just given your outlook on the interest-rate environment and kind of portfolio planning, should we expect the mix to be consistent or is there any targets internally there or is it deal by deal?

As we've said, we're going to be balanced. If you look today on our liabilities, if you kind of aggregate all potential debt, you'd have 40% fixed and 60% floating.

Right now, as you can see, the revolver is what's used last, so you see more fixed rate and from a utilization standpoint, which is also slightly higher cost. As we scale and diversify and get more usage on the revolver, we'll migrate towards 40% fixed and 60% floating on the liabilities.

So balance is the word, as usual. That's a little bit more organic. We don't have a strategic plan here, although I think having -- generally having a balanced approach makes sense. It certainly has for us as we built the portfolio to date.

On the fixed/floating side of the assets, as we've commented, we're going to migrate toward more floating, on balance, but again I'd say still 60/40. We ended the quarter, if I'm not mistaken, at 60% --- at about 40% -- excuse me, just under 50% fixed. It was just a smidgen under 50% fixed. That's down from, I think, mid-50%s fixed as of 12/31.

So we are shifting to more floating. It will take time, and I think you'll see more floating on the assets and a balanced approach on the liabilities. But again, given the duration of our assets and the growth of the portfolio, by being balanced we're not going home at night with significant concerns about interest-rate exposure. Does that answer the question?

Absolutely. Thanks a lot.

JT Rogers, Janney Capital Markets.

I have a question on -- more generally. What is the quality of the borrowers you're seeing coming to market? Looking through some of your new loans, there are some -- I see a retailer in there that's been somewhat troubled and a couple of other credits that are higher on the LTV side. I was wondering just generally, as competition increases, are you seeing the quality of potential borrowers stay the same or decline?

We don't really shift -- again, I'll get back to the more broad answer for us, which is we don't really shift how we look. In any given quarter, we've seen some, depending on the origination pipe, so much more first lien last quarter. There was a little bit more risk, if you will, this quarter.

I wouldn't characterize a strategic shift as taking more risk. Our view on the credit today is the overall backdrop is favorable, as I mentioned. We're at a stable market environment. Loan-to-values are sensible. Credit metrics are sensible, and I think clearly all of the positioning in the market, it has a higher loan to value or higher debt to EBITDA than we did 18 or 24 months ago, but in the context of historical levels, I would say we are at or slightly below average in terms of overall credit risk.

There's certainly a trend. We're watching it. We feel very comfortable deploying capital today, and I wouldn't read too much into any given quarter on a signaling basis. We kind of look at this stuff on a longer arc. So that's my answer to that.

Okay, great. And then, just one other question, there was a $150,000 organizational expense during the quarter. I was wondering what that was and if there is any -- if that is something that is recurring?

No, it's the SBIC, so nonrecurring.

Okay. All right, great. Thanks for taking my questions.

Chris York, JMP Securities.

This is [Kevin Chung] for Chris York. My first question is threefold. First, what is your mix of sponsored versus nonsponsored investments?

Secondly, could you briefly talk about the process of sourcing your nonsponsored investments? And lastly, are nonsponsored operators demonstrating a resistance to covenants or personal guarantees, given they potentially avoid them in the middle market?

Sure, I'm going to pull up the sponsor number. It's generally balanced for us with the majority of nonsponsor. But I don't have the number in front of me.

In terms of sourcing, we've talked about this with most, but I'm going to reiterate. I will do it quickly. We have three basic channels. They're pretty balanced in terms of the number of deals that we get in the pipeline.

As I said, the reason it's balanced is because if you point your attention, you get what you look for. So we look in the sponsor world. So one-third of our volume tends to be sponsors.

One-third is by an intermediary of some kind, so this would look like a deal broker, a small investment bank, or someone else, previous relationships we have. I would categorize -- the average intermediated deal is not a process. It's not a big bank book that's already been written, but it's rather a referral in and of itself. So the intermediation process in the lower part of the market does not look like a classic investment banking process in the upper market -- part of the market.

And then, the final is a repeat and referral. This is the channel where we have network in place over 11 years as a team and over 20 years in the business for our senior guys. We do focus on referrals and we do look to finance repeat borrowers, as well as repeat management teams. So those are the three channels. It's important. The mix is typically 70% nonsponsor and 30% sponsor.

And then, in terms of pricing or structure in the nonsponsored world, look, I think if anything today the perception that a deposit-taking institution or other capital is going to form here has not entered the market. What that means is borrowers are aware that their alternative source of capital is somebody like Medley that has a cost of capital that's either a private fund or a public market cost of capital for a company like a BEC.

So although we've seen topline pricing come in a bit, we have not seen any concern or any diminution in our ability to get structures and terms that we think are appropriate. Like any large pipeline, if we look at 205 deals this quarter, there will be some that we don't get there on because of structure, but that's -- it doesn't get through our funnel to a worse structure or worse terms, and I don't think -- I think I'll be able to say that consistently for quite some time.

In terms of the mix today, I think from a sourcing, I just have the numbers here. The sourcing of the sponsor piece migrated higher this quarter. I guess that's not a surprise because we're all aware the equity guys are more active, and that's been the case for the last couple quarters. So since Q4, which was about one-third, maybe it was a little higher than one-third, I think 45% of our total volume -- that was the 205 investments we talked about -- came from sponsors.

The intermediated part was slightly down, and so was -- our repeat and referral was pretty constant, which is not a surprise, at about 20%.

So, slight uptick in volume from the sponsors. That ebbs and flows. I think from our perspective, we don't see that as an indicator, necessarily. It was actually higher volume than we would have anticipated at, frankly, post the tax change that we thought might have pulled deals into Q4.

So, interesting. Whether that is a signal about the economy is for other people to decide, but we're seeing good pipeline and we're seeing a balance between the sponsor and nonsponsor. Does that answer the question?

Yes, that's more than helpful, thank you. Just one more question. How do you think about the trade-offs between investing in your portfolio companies versus refinancing or extending investments to current portfolio companies? And also, how were the Quarter 1 loans reflected?

We just have a very disciplined, mechanized credit process. So I think in the big picture, a credit has to come through the system and be scrubbed clean every time.

On balance, I think -- and this is probably true for any investment, if you know the management team and you've had experience with it, it's going to be easier to make the decision, but we don't really change a process. The re-underwriting process, which happens for us really quarterly at Medley, it's pretty much the same process as a de novo, the caveat being it takes less work to re-underwrite a known credit.

So I think if you could just do that on the good credits, it certainly makes life easier, but the process and the level of work doesn't really change.

Great. Thank you for the color and for taking my questions.

Mickey Schleien, Ladenburg.

A lot of questions this morning, but I just want to quickly circle back to the SBIC. Can you give us a sense of what the all-in sort of rates you're expecting on the debentures to be? Whether the target leverage for the Company changes now that you have the SBIC license? And given the pace of your originations, how quickly do you think you can exhaust the funding available in the SBIC subsidiary?

We don't know. If you look at it now, the pricing on a fixed-rate basis was in the low twos. They price it semi-annually. So as we originate and use leverage in the quarters ahead, we'll join the group that prices at the next fixing.

So I don't really have a comment. I mean, all in today, it's probably high twos, low threes fixed, if you look at the predecessor six-month tranches that they are issuing. So from a modeling perspective on a static basis, you guys can kind of --- my sense is we use historical.

I think the forward curve is pretty steep. So you should anticipate based on the forward curve, which is not a very good predictor of future rates, but clearly it's steep right now. But it's certainly cheaper than what we have in our current fixed rate and it's long duration with no covenants.

We've said in prior calls, and I'll reiterate, the relationship with the SBA is now -- is something we're glad to have. We've worked hard at it and it's been a very positive experience to date. As we use the capital, I think it will give us comfort to use more leverage on the balance sheet, but it's not --- I wouldn't anticipate we're just going to necessarily step on the gas and expand it and go much higher in risk.

Maybe we'll -- we'll think about it as we deploy it and we'll address it in the quarters ahead, but you should think that our leverage will creep slightly higher.

But you are still targeting the sort of 0.6, 0.7 (multiple speakers)

Yes, 0.6, 0.7 would remain the target on balance sheet. Maybe we'd migrate to the lower end of that range.

We're still in the issue and grow phase, so it kind of -- as you -- it's a little bit leapfrog quarter to quarter, but we've been able to manage it. We've committed to getting levered before we issue, which we've done successfully and we'll continue to do.

Fair enough. And you've got a very healthy backlog. It seems --- I don't know within the backlog how many of those deals may fit within the SBIC, but it seems like you could use that capital relatively quickly. Or am I missing something there?

Yes, I mean, our guess, and I think this is a good proxy, two-thirds of our flow, maybe 70%, typically would be SBIC compliant. So we're going to be measured in how we do it and -- but I think you would expect us to use that facility in a measured way in the quarters and years ahead.

Fair enough. Thanks for your time, Brook.

Thanks, Mickey.

Casey Alexander, Gilford Securities.

Sorry, I did have one more question. Within the SBA, because there are specific type of loan structures that are more appropriate for the SBA, does that lend itself better to direct origination-type deals where you maybe can control the structure of the loan a little better, or is there something about sponsored deals that works better there?

I don't think it matters, Casey.

Okay, great. Thank you.

Troy Ward, KBW.

Thank you. Brook, a follow-up, something you said. You talked about how certain players have grown the asset base, which has pulled them upmarket. If we look at slide nine in the investor presentation, the right-hand side of that, obviously it's the portfolio growth for you. And now granted, I understand this has been a growth process since you came public.

But you've doubled the portfolio from 300 to roughly 600 in the current quarter. So how do you view your portfolio growth and your ability to kind of stay within your kind of target market without having to move up?

I think we are years away from having to move up.

Why? That's a bit surprising. I mean, for years -- I mean, what is the optimal size of the balance sheet, in your opinion, for you to be able to stay in your sweet spot?

Well, I don't know what optimal is. You guys can decide that. I think it's an origination question at its core.

If you look at our average deal size over 11 years, it's about $23 million. I think if you looked at the -- if you took that as an average, meaning we stayed in basically the same deal flow and you could have on a fully loaded basis somewhere between 80 and 100 names, you're talking about a portfolio that's over $2 billion, practically. At some point, you get an amortization off of a book that size.

We have the good fortune of having to distribute all of our net investment income, so there's no in-place growth in the book, and at some point the expected annual deal amortization would meet expected annual origination volume. So I think there is -- if you stayed at the exact same deal size, there is a moment in time when you find a happy balance there, but as I mentioned, that's a long time away for Medley.

You think you could run a portfolio of 100 names with kind of a $25 bite size, that's doable?

I think that's right, 80 to 100. Our team is scaled already, it has been, to do that business. We're producing at a velocity that's consistent with our history. Not more, not less. And we have more resources than ever.

So as we sit here positioned in the market, Medley does not need to experiment, expand, or do anything to achieve that objective. And I think -- I look at page nine, and to me, that's measured and consistent. I think -- I agree with your statement it's doubling, but that would be very consistent with our annual production and the resources we have.

Okay. And then, one last question again on slide nine, obviously if you look at those two graphs side by side, you've seen the asset growth continue to move, like you say, measured and at definitely an upward slope. And the left-hand side is the dividend, which follows closely with the earnings. Obviously, they've leveled off. When can we expect the shareholders that that would start to follow the asset trajectory?

I'm not sure. It occurs to me that you -- with paying out your net investment income, you will achieve a stable --- that would have to stabilize. So one graph cannot follow the other in a limit. Or am I missing something? Sorry.

Well, as you grow the portfolio through new equity and levering that equity, our hope is it would be accretive to shareholders, and therefore you should see some growth to that dividend. I was just trying to understand how you view the correlation between the two -- between balancing (multiple speakers)

I see what you're saying. I think the sector as a whole, we see multiple stable or expanding, and issuance is accretive, which I think is true, then I think you definitely would see net investment income could go higher. I think at some point if you have constant origination, even the NII has to stabilize.

So I think -- we clearly think there's room. You look at last quarter, NII was higher. But on a stabilized basis, our assumption is you can't bank on accretive issuance. It's not something we're planning for as we grow. If it comes, it will certainly inure to the benefit of the shareholders and we will definitely deliver net -- excess net investment income back to shareholders. That's for sure.

Put another way, you have done three equity offerings. I think your first one was August of last year, in December, and then one beginning of April. Are those going to be accretive to the earnings and dividend for the shareholders? And if not, if it just keeps us stable, how do the shareholders benefit?

Well, the book value grows, does it not?

Yes, because it's accretive. But at the end of the day, I mean, like you said, the BDC is a net game on the book value, other than against slight accretion from equity above book, but shouldn't those equity offerings with additional leverage provide earnings growth at some point?

I think -- like I said, I think you're right. The net investment income can go higher if that persists. There's no question, and we will definitely return that excess net income -- net investment income to shareholders. We have no intention of keeping that.

In terms of dividend policy, we're not going to tell you how at this point what that means because that's projecting the future, but I think everyone should feel very comfortable if net investment income exceeds a dividend for a period of time for any reason -- performance, accretion, growth in the book, we're going to return it to folks.

Okay, great. Thanks, Brook.

Jonathan Bock, Wells Fargo Securities.

Brook, I appreciate your discussion previously with Troy. Maybe trying to boil it down is right now with the SBIC and your current debt and cash debt capacity, what is the target leverage limitation -- or what's the target leverage that you're employing on a regulatory basis, and now with the SBIC on a non-regulatory basis, and how do you view equity capital in light of where you are? I know -- we all understand the bumps, the fits and starts of the business, but maybe just give us some sense of target ranges because that allows us to fully model earnings growth going forward because as leverage is employed, earnings do go up.

Sure. I think I said it before, and I'll repeat. We're going to keep the on balance sheet target at 0.6 to 0.7. And you should expect the SBIC debt to come on to -- into the Medley sphere off balance sheet on a measured way after we deploy the regulatory capital.

Okay, great. Thank you.

This concludes the question-and-answer session. I would now like to turn the call back over to Mr. Brook Taube for closing remarks.

Thank you, everybody. I appreciate the time. We're always available and look forward to speaking as necessary, and if we don't hear from you, we'll speak to you on the next call three months out. Thank you very much.

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