Prospect Capital Corp (PSEC) 2008 Q2 法說會逐字稿

Hello and welcome to the Prospect Capital second fiscal quarter earnings release. All participants will be in listen-only mode. There will be an opportunity for you to ask questions at the end of today's presentation. (OPERATOR INSTRUCTIONS). Please note, this conference is being recorded. Now I would like to turn the conference over to John Barry, Chairman and CEO. Mr. Barry?

Thank you, Amy. Joining me on the call today are Grier Eliasek, our President and COO, Bill Vastardis, our CFO and Robert Kleinman our SVP of Finance, making his maiden appearance today. Rob, thank you.

Before we begin, Bill will review a few legal matters.

Thanks, John. This call is the property of Prospect Capital Corporation. Unauthorized broadcast is prohibited. This call contains statements that constitute forward-looking statements within the meaning of the securities laws. All such statements are intended to be subject to Safe Harbor protection.

Actual outcomes and results could differ materially from those forecast due to the impact of many factors. We do not undertake to update our forward-looking statements unless required by law. For additional disclosure, see our earnings press release and our 10-Q filed previously. Now I will turn the call back over to John.

Thanks, Bill. Our net investment income for the second fiscal quarter adjusted for nonrecurring items was $11.1 million or $0.48 per weighted average number of shares for the quarter, an increase of approximately 146% and 45% from the prior year-over-year quarter on a dollars and per share basis respectively. We estimate our net investment income for the current third fiscal quarter ended March 31 will be $0.45 to $0.53 per share. We expect to announce our third fiscal quarter dividend in March. Now Grier Eliasek will comment on our investment activity.

Thanks, John. At December 31, the fair value of our portfolio was approximately $440 million in 32 long-term portfolio companies. As of December 31, our portfolio generated a current yield of 15.3%, across all of our long-term debt and equity investments, including dividend, net profit interest and royalty income.

Last quarter, we completed seven new investments, which consisted of Resco, [Unitech], Maverick, Shearer's, Qualitest, Deb Shops and IEC, ARS, as well as follow-on investments in the existing portfolios, totaling approximately $121 million. This was a record investment quarter for us.

Additionally, we monetized two positions, CIE and Advantage, for an aggregate of $9.1 million in principal proceeds, not including interest payments. As of today, we now have 32 portfolio companies aggregating approximately $440 million of assets calculated as of December 31 investment portfolio plus additional investments net of repayment.

In December, we announced that we engaged RBC as a financial advisor to explore strategic alternatives, including the potential sale of our largest 100% controlled investment, Gas Solutions, a midstream gathering and processing business in East Texas. Gas Solutions is currently generating approximately $26.5 million of adjusted EBITDA as an annualized run rate. We expect to conclude that process over the next few months and hope to see a significant growth in shareholder value.

Currently, we are pleased with the reward to risk characteristics of potential transactions under evaluation. With the retreat of credit providers from the marketplace, even with the drop in LIBOR, we are seeing diminished competition and attractive spreads across all of our direct corporate lending, sponsored finance, and single stop buyout investment strategies. The vast bulk of our portfolio is either fixed-rate loans or floating-rate loans with a fixed floor as a protection against LIBOR reductions. We expect an active calendar year 2008 after calendar year 2007 with approximately twice the investment pace of the prior year. Thank you. I will now turn the call over to Bill.

Thanks, Grier. At December 31, borrowings under our credit facility stood at approximately $107 million. We are currently in discussions to increase the size of our $200 million facility to at least $400 million in size. On October 17, we priced a secondary offering of 3.5 million shares of common stock at $16.34 per share, raising $57.2 million in gross proceeds. On November 13, the underwriters exercised the overallotment option raising an additional $3.3 million in gross proceeds when 0.2 million shares of common stock were issued. Now I'll turn the call back over to John.

Thanks, Bill. We can now answer any questions.

Robert Dodd, Morgan Keegan.

Hi, guys, congratulations. Could you go -- a couple questions. Could you go over the nonrecurring expenses that you talked about? I assume that it is of the legal side. Then could you tell us what happened with CIE? Last quarter, it was carried at a cost and there didn't seem to be any issues with it and this quarter, it was written down and sold. And then thirdly on Gas Solutions, could you give us any more color about what is going on there in terms of the number of -- if you can disclose the number of indications of interest, etc.?

Why don't I -- hey, Robert, thank you. It's John. Why don't I start with the two items that I will cover and Bill Vastardis will cover the expense items.

In the case of CIE, that is an ethanol facility in southern Illinois that has been under construction for some time. Well, we are not fully aware of the difficulties that were being generated there and the fundamental problem being that Lurgi, which is the contractor, was at odds with the management and once they started fighting, then it created pressure elsewhere in the system, including with respect to the farmers' willingness to live up to their subordination obligations under the corn delivery agreements. And what we discovered was the situation rapidly unraveled and so we were part of the process of trying to get everybody back to the table and in our view act reasonably to complete the plant, which did not work. And when that did not work, we put our position up for sale and even though it was after the bankruptcy, we were able to get, I think, $0.65 on the dollar, right, Grier?

Correct.

So that is the story there. We seem to have gotten out ahead of a bunch of other people who took even bigger losses. With respect to Gas Solutions and the sale of NRG, we can't comment in detail on exactly where those processes stand because, of course, they are fluid, people are looking at Gas Solutions at the facility. They are reviewing materials. We don't have any bids yet. We don't expect any for a while. We expect that to proceed over the next few weeks and possibly maybe a month or two. We are not able to predict exactly how quickly these things go.

In the case of NRG, it is moving along more slowly than Gas Solutions in part because the Company just merged or were purchased -- merge with -- purchased and merged with Dynafab and therefore, they have had to take some time to get their numbers in order. Is that adequate on those two questions, Robert?

Just on Gas Solutions, would you be expecting anything to be done before the end of this quarter or will we be looking at next quarter?

Well, it is hard to predict the future, particularly when it is in the hands of other actors. Looking at this quarter, we are halfway through February. We are talking 45 days. I think it is reasonable to expect that we will know an awful lot more by the end of March. I don't think it is a reasonable expectation to think that we would have closed on the transaction. Typically, as I am sure everybody on this phone call knows, you go out with materials. People come back with indicative bids, then there is some back-and-forth with the top XYZ% of those indicative bids. They come back again. The flock is thinned. You get down to four or five people that you are interested in talking to and the process does take time, so I just don't know. I mean I have seen M&A processes conclude in 60 days and I have seen them take six months.

Okay. Thank you.

So now Bill will comment on expenses.

With respect to the nonrecurring items for this quarter, as we mentioned in the previous quarter, there is a case being handled through the arbitration process and there were some additional costs this quarter related to that. In fact, the large majority of the nonrecurring relates to that and of course, we adjust that expense for the performance of the impact and the net is what we list in our earnings release.

Thanks, Robert. Does that answer your question?

Robert Dodd, are you all set?

I'm sorry. I thought you were going on to another part of the presentation, so I muted him. Let me put him back on talk.

So Robert Dodd, are you all set?

Just a moment. Let me find him.

We can go to the next question if --

Robert, we hope we answered your question adequately. Did we?

Do you want me to go to the next question or do you want to --

We might as well go to the next --

Go ahead and go to the next one. Robert can come back on if he --

Jim Bellessa, D.A. Davidson & Co.

Good morning. I am looking at these losses that you realized and if I heard you right, you took about $0.65 on the dollar for CIE. Is that a $2.8 million loss then if you had a cost basis of $8 million, is that how you'd calculate that?

That's very close. It is about $2.9 million.

And then on Advantage Oilfield Group, you said that you had $18.6 million of total losses, realized losses in the quarter and so the bulk of the losses evidently came from AOG.

Correct.

But I can't track down the numbers precisely and so just if you have any help there that you could --

Yes, let me help you with that. We have had that on our books for about $10.6 million -- 9/30 and we took a further deduct realization of $6.7 million in the past quarter.

How do you get to the total of $18.6 million?

That is the original cost.

Okay. And so you have gone from unrealized losses to realized losses and so that boost -- does that bolster the other -- you report unrealized losses and gains during the period, does that get reduced -- the amount of unrealized losses -- get reduced during the quarter when you take the loss, actually realize the losses, is that what happens?

Jim, this is Bill. That is correct. The AOG unrealized loss from the previous quarter or the cumulative unrealized loss was converted to realized loss. Therefore, while we had approximately $14 million, $15 million --$15 million in realized losses for the quarter, they are on AOG. There was an increase of unrealized depreciation of approximately $8 million, which was how far we had written it down. That $8 million helped us during the quarter with our positive unrealized depreciation.

And that turned out to be just about $5 million, so you must have had depreciations occurring --

On other securities, that's correct.

Others? Okay. And you identified those in the Q by saying those were in Genesis, Whymore and WECO?

Correct.

And do you want to comment on any of those?

Sure, I am happy to comment on those since I've spent a fair amount of time on them. They are my babies now. In the case of Genesis, Genesis is profitable more days than not, which is an improvement from where we were and that is just based off of 2007 pricing, going into early 2008 pricing, which is yet to reflect the significant run-up in coal prices.

Whymore has been more profitable more often than Genesis. Whymore also has yet to reprice its coal supply agreements and we are looking at what we can do to get something more like the $70 a ton that people are now suddenly, quite suddenly paying. So the coal prices have gone up, Grier, what, 50% over what time period?

Over the last three months.

Over the last three months. So we have struggled with these two companies and we have struggled on a fundamental basis to get them to be profitable with the old pricing. We have encountered every conceivable surprise and difficulty, including engineering reports overstating how much coal, how much ash is there, the size of the partings. Honestly, every conceivable thing. If you want a training in fixing companies, this is where you would be sent. So we have maintained these companies at cash flow breakeven to now positive and we have told them we are not giving them any more money. We hope that will stick and we are looking to see the improved situation in Appalachia improve, continue to improve.

Also, we continue to look at other properties and we have other opportunities that are potentially synergistic with those two. So we are not giving up and we still have them on the books, although severely written down. And every time we give them any more money, that is immediately written off as well. Hopefully that is behind us.

In the case of WECO, WECO also has been a test of patience in that all of the predictions by the engineers and by the consultants how quickly that would be amortizing debt and paying dividends have not come to pass, but we have asymptotically approached the point where we can see exactly what we need to do. Instead of having a punch list of 100 things to do, we are now down to three or four and what they are is, this weekend, the boiler [pre] feedwater heater is being changed over so that we will more often be above 20 megawatts than below 20 megawatts. That is important.

Number two, we have, in front of us, an expenditure for the condensers. We need to modernize the condensers there and if we do that, we think we will be exceeding 21 megawatts on a maybe not every second, every day basis, but on a fairly consistent basis and the third thing we need to do is have our average price of wood be $34 per green ton. It is currently in the market $34 per green ton, but we need to have our own in-house wood supply operation so that we're not perceived as being vulnerable to all the wood suppliers up there that we can actually harvest our own wood and the problem we have had to date is that our own wood operation has not been as efficient as the people in the marketplace, the pros who have been doing this for years and years, which is not that surprising.

We have revamped the wood operation in the last month and we have gotten our prices down. I think last it was $44, right, Grier? It's a significant decrease from where we were. So when we look at the grids that we have received from our engineer, they show -- [Greg Blair] -- they show 21 megawatts, $34 fuel and a significant EBITDA. I forget what the exact number is, so that is where we are trying to get. It has taken at least a year longer than we were led to believe, but, every month, we make some discernible progress. Is that responsive, Jim?

Thank you very much. In the Q, you have weighted average borrowings. I hadn't noticed it before, is this the first time it is showing up and if it is the first time, is there a historical chart or table that can be provided to see what the average weighted borrowings were per quarter?

Yes and yes. We did add this new for the first time and we will in future Qs put a table in for comparison purposes.

But is there something for us to help know what the average weighted borrowings were for the past quarters or do we have to wait for them to be reported in the future?

I don't have that information here with me today, so unfortunately you will have to wait. We do show a comparison from this quarter, Q2 of '08 versus Q2 of '07.

Jim, as you know, we have run our business with almost no leverage historically or de minimis leverage abridging to build the equity base of the Company and we are only now reaching a critical size and mass allowing us to have long-term leverage outstanding as a means of driving the dividend and we are just now entering that positive phase of our business, which we hope and believe will be a significant dividend driver going forward. So we wanted to have this weighted average number to be helpful on a going-forward basis.

And in that regard, you talked about having about a $100 million line of credit. Let's see, the credit facility is 107 on the balance sheet, $107 million and your cash position was a little over $26 million. Why did you have any cash?

Well, we maintain cash liquidity at all times. Of course, it is a balancing act between appropriate liquidity to run the business on a day-to-day basis and not excess liquidity, Jim, as a drag on yield. There will be some timing differences, which might make that cash number move up or down based on where we are at a particular month. For example, we take money out of the special purpose vehicle where our credit facility or nonrecourse secured credit facility for Prospect Capital Funding LLC, a wholly-owned subsidiary of Prospect Capital Corporation, which is the borrower for the [Robert Bank] facility. We take distributions out of that once per month. So there will be timing differences, which might have a slightly larger cash number depending upon what part of the month we are in. But in general, our goal is to strike the right balance between appropriate short, short-term liquidity and longer-term. Of course, just liquidity in general, we have plenty of liquidity as a company both to make new investments, as well as to run the business on a day-by-day basis. We also have that capital to, at the end of that quarter, of course, in part to pay the dividend that was paid something like a week later.

Okay. Now I haven't heard of any new investments that you made in this quarter, the March quarter, yet. So after paying that dividend, did you pay down some of your credit facility or did you keep your [parent] facility where it was and maintain your cash position?

Well, again, we used some of that cash for the dividend, which is I think just under $10 million, $9 million or $10 million give or take. So we have maintained some cash for other uses. We have not made a significant number of long-term investments in the last 30 or so days, but that is not at all indicative of the opportunity set that we have in front of us right now, which we are very happy with.

We have a -- we are looking at an array of opportunities; we are sorting through them. It is a buyer's market in a number of ways and we are making sure we are high-grading those opportunities to select the absolute best and of course, deal closings in this business can be lumpy where you have no closings in a particular period and then you'll have three or four or five close at once. So we have a very active pipeline and we expect this to be an active year in general.

Well, I would add, Jim, that the sense that we have on some of the transactions that are being sold is the price gets better, the slower we move and we have seen continued repricing in the syndicated loan market. We have seen continued repricing in the sponsor market and we have seen continuing repricing in the other markets in which we invest. So as we drag our feet on some of these deals, what we find is the pricing improves and frankly, our time to look at them improves also. So what we don't want to be doing is investing in front of a repricing and so far, we have been able to avoid the brunt of that.

Jim, we also made an investment, a follow-on investment in Deep Down, one of our existing portfolio companies the last day of the quarter of approximately $6 million, so some of the cash was used for that as well.

Okay, thanks on that. And then on -- you have in the narrative saying that the pace of investment this year will be twice perhaps last year's. Are you talking about calendar year there when you say years?

I was quoting calendar years. We put out about $150 million approximately in calendar year 2006 and in calendar year 2007, it was approximately twice that, closer to $300 million in aggregate. And if you annualize the $120 million that was invested in the last quarter, that would point towards about a $500 million pace, which is an uptick. We are not promising that exact -- exact pace. There will be some deviation because we are bottoms up, opportunity driven in all cases. But I think that is a reflection of broadening our reach. It is a reflection of having a larger team to capitalize on opportunities. It is a reflection of the opportunities that we are seeing in the marketplace.

Let's just suppose you were able to find half of that amount, a quarter of $1 billion, $250 million, did you say that you are trying to get your credit facility expanded? Is that what I heard?

We are. We are currently working on at least doubling the size of our existing facility from $200 million to $400 million. We will have additional disclosure as that progresses. Those aren't immediate processes. They take time and effort to achieve. But we are happy to have a supportive lender and look forward to growing our facility. That is an L plus 175 facility, which in today's LIBOR is approximately 5% money. So needless to say, we are interested in prudently maximizing that, of course, as a BDC. We are limited to no more than one-to-one leverage and now as we have continued to build up our equity base, build up our asset capital base, our goal is to use that diversity to get closer to one-to-one and drive the dividend further.

As you know, Jim, Raybo is either the only or one of the only financial institutions out there that is AAA-rated and we view our relationship with the people there as a very valuable asset for the Company.

Thank you.

Henry Coffey, Ferris, Baker Watts.

Hi, good morning, everyone. In going through this, I certainly understand how the numbers work, but I want to get them tied down. With Advantage, what was the original carrying value of that loan and how much did you write down and of course, the same question for Central?

$18.6 million original cost, carried on our books 9/30 --

No, no, no, no, no. $18.6 million was the original -- okay, the $18.6 million was the original cost, not the value?

Correct, carried on our books 9/30 at $10.6 million, written down by approximately $6.7 million.

And then Central Illinois the same?

Central Illinois was -- original cost -- $8 million on our books for $8 million on 9/30 written down $2.9 million.

Okay and then -- when we asked you about the rest of the realized losses, you started talking about Genesis and WECO and so -- where did the -- filling in the remaining almost $10 million of realized losses.

Henry, there were no other realized losses. $2.9 million --

Wait, wait, wait. Let me just -- because maybe I had the -- maybe I had the wrong -- okay, you have got -- net realized losses on investments of $18.6 million. Is that figure correct?

That's correct.

Okay. So I am trying to get --

(inaudible) AOG and Central Illinois.

Okay. Okay. So you had a net realized -- you wrote AOG down by $6.7 million? This is what I'm trying to get to. What was your -- I am trying to allocate that $18.6 million and obviously $6.7 million and $2.9 million don't equal $18.6 million.

Well, if we go through the accounting --

Well, let's just focus on the realized losses from --

The realized losses were entirely those two. $2.9 million of it was CIE and the rest was AOG.

What you are seeing -- the reason the number is larger, Henry, is that there has been a reversal where you add back a prior unrealized depreciation that has already been taken in prior quarters.

Oh wait.

That is shown in the realized column now. It is just a movement of categories from what it had already been written.

So you add realized -- in the realized loss column, you had previous realized losses? I am just looking at the $18.6 million.

Henry, they moved from unrealized to the realized category, so you are seeing kind of a cumulative number there on the realized side.

Of $18.6 million, yes.

It includes prior quarters and then unrealized has to compensate for something that we had already taken a mark for in prior --

I understand the unrealized portion. I am just trying to figure out -- so you lost $3 million on CIE and the other $15 million was written down on Advantage, is that the way to understand it?

On a cumulative basis, which approximately $6 million to $7 million of we had already taken --

Right, I am not paying attention to that. That is -- okay, I got it then, so okay. The next question is -- of course, you talked a little bit about what is going on with Gas Solutions. I assume it is the same process with NRG?

Yes, it is. As I said, Henry, the NRG process is moving more slowly because NRG purchased and merged Dynafab into NRG, which requires --

And Dynafab was not -- was it one of your companies or a new company?

It was a new company.

In the past, you have sort of given us LTM EBITDA information on both. Can you give us that and update that to include the Dynafab number?

For Gas Solutions, the run rate, which is approximately last quarter annualized, is about 26.5%.

And what -- and what is that on an LTM basis?

[CTM] I believe is approximately closer to about $20 million and the $26 million [nap] run rate is up from just under $25 million a couple of months ago.

Right, I remember that, yes.

NRG I don't have at my fingertips, Henry. That one is a step slower because of the integration of the acquisition that had been done.

And Dynafab was additive to EBITDA?

Yes, it was --

On a historical basis, not on a --

Yes, it was a follow-on acquisition. It was done something like a three times multiple.

And when was that done?

We had a press release about that last quarter. I believe it was in October if I'm not mistaken.

Okay. Obviously you can't sit down and show us your pitch book and give us a list of all the people you have talked to and company notes and the like, but can you give us some expectation, sense of what your expectations are in terms of how these businesses should be valued and at what point would you just walk away from the sales process?

Well, Henry, I think I have answered the question, but I will try again. We don't have an opinion that is any different from what is in our financials and in the valuations that we go through each quarter. We are going through a process that will possibly lead to a realization with either none of those businesses, both of those businesses, more than both of those businesses, one of them. The future is uncertain --

So you think the combined -- that when you sell it, the combined value for Gas Solutions or the total enterprise value would be $47.5 million plus whatever bank debt is out there?

I am not making any prediction.

Where is the $47.5 million coming from?

It is on page 6 -- it is on page 8 of your 10-Q.

Well, look, we go through -- we have discussed at length in prior quarters --

Right, I know, I am just trying to --

We can't -- Henry, we are not -- we can't be making predictions about the future --

So, you are saying you'd sell the assets for 50 million basically?

We three are very careful running a full process here. We may have potential interested buyers on this phone call. Suffice it to say, we are looking to maximize shareholder value. I would not necessarily say that where an asset happens to be in particular on our books is a reflection of where we would or would not --

But I am just trying to get your sense of what the -- how large a potential disconnect is there between what is on the books and what you're likely to get. I mean is it really a business that is worth 10 or 12 times EBITDA, but you are obviously valuing it at four or five or is it a business that you are valuing at four or five, but it is really worth five or six times EBITDA?

We are not making any predictions.

Okay. And then finally, my favorite company, Regional, your consumer finance company, there was a pretty devastating article in the Wall Street Journal today about lenders in the sort of Mississippi, Florida, Georgia area. Had there been any developments at that company in terms of its loan products and its relationships on the compliance side with people and can you give us a sense of how that company is holding up in the face of all these other issues that we are facing in the subprime market and lots of regulatory noise and the like?

Henry, this is Grier. I know you are an expert on a lot of these alternative financing businesses, payday lenders and the like. Regional is a business where you have a loan to a private equity sponsor and their business is thriving. As you can imagine, with the pullback in credit ranging from mortgages to credit cards to sort of you name it, that credit crunch has opened up a wide array of additional business in a marketplace in the installment lending business that hasn't changed its underwriting standards in decades. And as you know, these are companies that are spin-offs. Virtually these people are from World Acceptance there Greenville, South Carolina, which has been using the same underwriting standards since the early '80s. So their business is doing very well --

So they haven't gotten caught up in the credit cycle? Their customers are holding up?

They are doing very well because they have always been cash flow-based, very, very different from artificial asset inflation associated --

What were credit losses say in December versus where they were a year ago? You don't have to give us obviously the absolute number, but what were the trends like?

I don't have the specific numbers at my fingertips and Henry, I have to be careful because, as a company, we don't control this specific disclosure like that, but I can just say we are happy with how the company is doing.

And nothing on the regulatory front?

Nothing, nothing. Henry, what I would tell you is the company has a budget and a forecast and since we have made our investment, I think every month or every quarter since then, they have been above the forecast with the exception of -- it was either one month or one quarter and I think there was something involving one particular office where there was some defalcation, something like that.

Well, I mean that is a great company and so they are continuing to kind of hold up in the midst of all of this is what you're telling me.

We are not getting any news that there is any problem there.

Thank you.

As you know, they are not lending against homes.

Right, I know that they, do but you are not seeing any -- you are not seeing any spill-down into that sudden niche of lending and they are holding up nicely?

No. We are not and we have I think 40% equity underneath us in that deal, which would bear any lumps should that happen, which is not happening.

Thank you.

I think also, as you know, if you take the numbers back, these companies do somewhat better in recessions relative to the rest of financial services.

Good. Thank you.

Robert Dodd, Morgan Keegan.

Hi, guys. Going back to that credit facility, are we talking about a true revolving credit facility this time or another, for lack of a better term, a bucket list where you have to carefully allocate and it restricts your ability to deploy capital in some cases?

Yes and yes. I mean we have a revolver right now and that will continue. It's a three-year revolver and going forward, we might have it be more like a four-year revolver. We will have to see. I think that -- look, even when we had an on-balance sheet, non-securitized conduit facility previously before this $200 million existing facility we closed in June, we were still subject to various covenants, diversification, concentration limits and the like. So I think that sort of comes with the territory. We don't mind that because we like having a diversified pool anyway as a risk management strategy, but I think what will happen is, as the capital base of the business grows, our ability to meet those concentration limits will be easier, not harder, because we will have a larger base, we will get some of those buckets lifted and we will be able to close a $25 million deal without a $5 million deduct, for example, here or there, which happens from time to time. Folks can see all of our concentration limits. We have some sizes that can be larger and some that are limited in our existing credit facility. So I think that flexibility will increase along with scale, Rob, where we will get kind of a two-for-one benefit.

Okay, thank you.

(OPERATOR INSTRUCTIONS). [Robert Carlson], Janney Montgomery Scott.

Just a real quick question regarding interest rates. Since they have come down so dramatically, does that impede you from getting the return on rates going forward and also do the people you have lent to have the ability to refinance these loans?

Well, two things we would say, the first one is that we are not lowering our return expectations from these loans, but we are increasing our mental note for the possibility of defaults and lower recoveries. So as rates go down, we are not following them down because we think in a recession, there is more possibility of difficulty for these companies.

Number two, we have a portfolio that mostly has either fixed-rate loans or fixed-rate floors so that we will continue to earn absolute returns that we need to earn in order to pay the dividend.

Number three, can they refinance? They can refinance and the vast majority of our loans to refinance requires the payment of a so-called yield maintenance premium, which makes us hole in part for some of the lost earnings that we do lose when somebody refinances before maturity. Grier?

Yes, I mean spreads basically have risen to more than compensate for LIBOR drops in a lot of the market, Robert, which is a big positive for us and we are looking at -- while our portfolio is primarily fixed rate, we are looking at the floating-rate market now, which is a buyer's market and we are pricing deals based on 1% LIBOR, just looking at the bottom point to the last downturn. So if you price deals on that basis then you have pure upside for many periods that are at greater LIBOR than that, either on the front end or on the back end of any Fed loosening or tightening strategy. So we are always mindful of yield protection around here and focus our strategies accordingly.

Great. Thank you.

[David Freed], [Freed] Asset Management.

Good morning, gentlemen. The process to get on the call was a little bit rough and I got on just about a minute before you guys said are there any questions, so forgive this if you have covered this. Did you make any comment about the dividend for the coming year?

David, we did not comment on the dividend and typically do not provide a forward projection of the dividend, certainly not out of full year. What we do attempt to do to give people some visibility into the future is to provide net investment income guidance and we have done so in our press release that was filed this morning in which John had some excerpted comments on at the beginning of the call and our guidance for the existing March quarter that we are in given -- and typically we give ranges -- it is $0.45 to $0.53. That is a range. There was an uptick from our guidance range of last quarter of $0.43 to $0.49 and we came in at $0.48 adjusted, $0.46 unadjusted in the December quarter. We will be announcing our dividend for March in the coming quarters.

I will also point out that, as a business development company, we need to distribute at least 90% of our income in short-term capital gains over the course of the tax year and then there is a spill-back period after the tax year. Gets complicated, but suffice it to say that we have to hit at least a 90% bogey to maintain our tax advantages status and then there is some element of further tax optimization beyond that with the smaller 4% excise tax one tries to minimize that you can by going to 98% distribution. So hopefully the distribution requirements and the guidance give you some indication we have increased the dividend 13 consecutive quarters and our objective is to continue doing that. We are not saying that's an absolute promise on this call, but that is certainly our objective.

David, this is John. There is two policies that we try very hard to adhere to that could perhaps give you some guidance. One is that we try to pay our dividend only out of net investment income and in fact, I don't know, out of the last 14 dividends, I think maybe just a few pennies were not paid out of net investment income and if you look at the dividend that we have been paying and the net investment income that we have been earning, the dividend is currently lagging the amount of the net investment income, which, for us, is a technique of conservatism that we like to keep a cushion in between the net investment income and the amount of the dividend, but as Grier points out, at the end of the year, we do have to be sure to have distributed really 98% of our net investment income.

The second policy that is important to us is to protect this dividend so that in every quarter we are able to at least raise it a modest amount and we have done so, what, Grier, how many 14 consecutive --

13.

13 consecutive quarters. We would like to keep that winning streak going as long as we can, so we evaluate the whole business. We look as far into the future as we can each time we raise the dividend because we know, in our minds, it is a permanent race.

Thank you very much, gentlemen.

Robert Dodd, Morgan Keegan.

Just one more. In the dividend income in the quarter, could you give us some color on where that came from and particularly how much of it came from Gas Solutions?

Sure. Let's see. Dividend income in the quarter was what, $2.2 million Bill? I believe Gas Solutions was about $1.6 million and NRG was $00,000.

Thanks.

You see there that even where we have equity positions, they can oftentimes be yield enhancers, not always, but can oftentimes be yield enhancers in our portfolio.

Thanks.

(OPERATOR INSTRUCTIONS). [Pavlakas Costas], an independent investor.

Yes, thank you, sirs. Just I'll ask you what percentage of portfolio is not performing their loans?

When you say not performing, what specifically are you referring to?

In most (inaudible) show you, we rate them from one to five -- one to four. We have 5% that are not paying, 70% are classified as to receive full payment.

Understood. We have approximately I think it's 1.1% of the portfolio in non-accrual.

Oh, great. Thank you for all your work again.

At this time, we show no further questions. Would you like to make any closing comments?

Thanks, all. Time for lunch, right? Bye.

Thank you for attending. That does conclude the conference. You may now disconnect.