Prospect Capital Corp (PSEC) 2009 Q3 法說會逐字稿

Hello and welcome to the Prospect Capital first-quarter 2009 earnings conference call. 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, CEO. Mr. Barry?

Thank you, Amy. Joining me on the call today are Grier Eliasek, our President and Chief Operating Officer, and Brian Oswald, our CFO. Brian?

Thanks, John. This call is the property of Prospect Capital Corporation. Unauthorized use is prohibited. This call contains forward-looking statements within the meaning of the security laws that 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 last evening.

Now I will turn the call back to John.

Thanks, Brian. For the nine months ended March 31, our net investment income was $47.2 million or $1.59 per share, an increase of $15.7 million or $0.18 per weighted average share from the results of the prior fiscal year nine months. For the quarter ended March 31, our net investment income was $11.7 million or $0.39 per weighted average share, a decrease of $1.2 million from the results for the prior quarter. That decrease is due chiefly to the one-time realization during the year earlier quarter of the overriding royalty interest we received in connection with the Ken-Tex Energy Corporation debt investment.

For the quarter ended March 31, our net increase in net assets resulting from operations was $0.51 per weighted average share. Our net asset value per share decreased by $0.24 per share from $14.43 as of December 31, to $14.19 per share as of March 31. The primary driver of the decrease in net asset value per share was the issue of new shares during the quarter ended March 31 at prices below our then net asset value per share. We estimate our net investment income for the current fourth fiscal quarter ended June 30 will be $0.30 to $0.40 per share.

We recently completed an issue of common shares which may have a short-term dilutive effect but which we believe will enhance the Company's financial flexibility and available resources to capitalize on attractive long-term accretive investment opportunities.

We expect to announce our fourth fiscal quarter dividend next month. Our business objective continues to be to generate long-term dividend growth as we have delivered to date with 18 consecutive quarterly dividend increases. We had [under] distributed dividends relative to taxable income in calendar year 2008 resulting in a modest 4% excise tax, which an over distribution of dividends relative to taxable income in calendar year 2009 would help to correct going forward should we so choose.

As of March 31, debt as reduced by cash and money market securities on hand was 17.4% of total assets or 575% asset coverage. As of today, we have reduced our outstanding debt to $129 million and as of today we have increased our cash and money market investments on hand to $48.4 million.

Now Grier Eliasek will comment on our investment activity.

Thanks, John. On January 20, Diamondback repaid our $9.2 million loan in full from the sale of 65% of Diamondback's Rock Springs oil and gas property interest. We have realized an approximately 17% cash on cash IRR on the Diamondback investment. We continue to hold the right to receive 15% of any future Diamondback equity distributions.

On March 31, the fair value of our portfolio of 31 long-term investments was approximately $555 million. As of March 31, our portfolio generated a current yield of approximately 15.1% across all of our long-term debt and equity investments. This current yield includes interest from all of our long-term investments as well as dividends from certain portfolio companies.

During the quarter ended March 31, we continue to evaluate a number of new investment opportunities in the primary and secondary markets. We are currently pursuing multiple investment opportunities including purchases of portfolios from private and public companies, as well as individual transactions. We believe such opportunity if successfully consummated would drive long-term value for our Company and we have recently expanded our capital base with such opportunities in mind.

Motivated sellers including commercial finance companies, hedge funds, other business development companies, total return swap counterparties, banks, collateralized loan obligation funds, and other entities are suffering from excess leverage and we believe we are well positioned to capitalize as potential buyers of such assets at attractive prices.

On May 6, we received a net profits distribution from Charlevoix, a gas marketing company in the Midwest, raising our cash and cash IRR on our Charlevoix investment to 22%. We have previously exited our debt investment at Charlevoix with full repayment by the borrower. We continue to negotiate a sale of Gas Solutions with several interested parties. While we wish to monetize the value we see in Gas Solutions, we do not wish to enter into any final agreement that does not recognize long-term value we see in the Company.

As a hedge midstream asset generating significant cash flows to us, Gas Solutions is a valuable asset that we wish to sell at a value maximizing price or not at all. The multiyear puts purchased by Gas Solutions in 2008 are substantially in the money, providing downside protection against commodity price declines. Gas Solutions has generated approximately $26.2 million of EBITDA during the year ended December 31, 2008, an increase of 67.1% from 2007 results. Thank you.

I will now turn the call over to Brian.

Thanks, Grier. At March 31, borrowings under our credit facility stood at approximately $137.6 million. We are currently seeking an increase in our revolving credit facility from its present size of $200 million. Over the past few months we have worked with rating agencies to structure this expanded facility, which we expect to have an A rating. The closing of this facility is subject to lender syndication and other conditions customary for a transaction of this type.

As of March 31, debt as reduced by cash and money market securities on hand was 17.4% of total assets or 575% asset coverage. As of today, we have reduced our outstanding debt to $129.0 million and as of today have increased our cash and money market investments on hand to $48.4 million. On March 19 and April 27, we completed two offerings of common shares aggregating 5.2 million shares and $40.8 million in gross proceeds.

In the second quarter we announced the authorization by our Board of Directors to repurchase up to $20 million of our outstanding stock. To date we have not made any such repurchases but we continue to maintain the flexibility to do so should we deem the purchases to be in the best interest of our shareholders.

On April 30 we gave 60 days notice to Vastardis Fund Services regarding termination effective June 30 of the agreement with Vastardis to provide sub administration services. The prior cost of this agreement has been approximately $700,000 per year based on approximately $600 million of assets. With the expansion of my team in recent months, we no longer require significant services from Vastardis.

Now I will turn the call back to John.

Thanks, Brian. We can now answer any questions.

(Operator Instructions) James Bellessa, D.A. Davidson Company.

Good morning. I am looking at your guidance for the June quarter, $0.30 to $0.40. It seems fairly wide. What did you get for the profit distribution from Charlevoix?

It was a modest distribution, Jim, about $[75,000]. The reason for the wider range, as you know we have continued to give guidance over the years as other companies we have seen out there have dropped the practice altogether. We find that the folks find it useful particularly for the current quarter. The reason for the range is that we think earnings will be to a significant extent driven by the pace of new originations and the timing of closings for deals that we are currently working on. They may close this quarter or may slip into the following quarter.

And on originations, do you get some type of fee that you book as net investment income?

We often do, yes, taking a structuring fee that comes into net investment income.

And you are wondering about the timing of these acquisitions you are looking at, and so can you give us a magnitude of size of deals over the next three to six months?

Well, our existing pipeline, Jim, is in excess of $250 million of aggregate transactions. We wouldn't necessarily close all of that over the next three to six months and it's hard to forecast precisely how much of that would close. But we recently expanded our capital base, as you know, and so we have significant capital that we are focused on deploying.

In your narrative of the press release you talk about having under distributed dividends last year and then paying that excess tax and then kind of suggesting you might have over distribution over the next four quarters or at least the calendar year 2009. You are currently paying between $0.40 and $0.41 a share, so you are kind of suggesting that is a quarterly dividend rate. You are kind of suggesting you might be a little below that as a run rate for the remaining three quarters of this calendar year. Is that what I should interpret there?

Well, I think there's a few things there, Jim. And as you know, while we don't give guidance on our dividend, we have -- we point towards our track record of 18 consecutive quarterly dividend increases in our objective of long-term dividend growth that is unchanged. We do want folks to recognize that our minimum distribution requirement is 90% of income, but we need to hit a 98% payout to avoid a 4% excise tax, which is not a massive taxation and from time to time we may have an excise tax. We have chosen to be on the conservative side in terms of our distribution relative to our income that triggered that modest excise tax liability. We just want folks to recognize that there is a benefit if from time to time on a going forward basis we do have a slight over distribution. That's not necessarily a bad thing from a slight tax liability avoidance.

Can you ask for a refund of the excise tax that you paid?

I don't believe there's a refund, but it's a going forward amount which you are charged 4% every year and so to reduce that is not a bad thing.

OK, thank you very much.

Jim, it's John. Just to add, in terms of the net investment income in the dividend, it is driven to a significant degree as I noticed both you and Jim Shanahan observed by new originations, new deals put on. There are structuring fees on most of these transactions.

We hope that we are in the twilight end of a period of great caution and conservatism while we get our bank facility renewed and hopefully upsized. We are in discussions with a number of banks. We are moving forward. We are cautiously optimistic that we will be able to wrap this up within the next 30 days. But until everything is signed, sealed and delivered, we are in a very careful mode when it comes to putting money out. And we put things on a slow mode that could be accelerated once we close, as we believe we will, this new facility.

So that's the constraint trying to get that new facility in place and then leveraging yourself up from that point?

Well, it's not the complete answer and the complete constraint, because as Jim Shanahan mentioned, the deal, the amount of deals being done out there in the primary markets at unattractive terms are significantly less than in the past. That is turning around also coincidently with the upsizing and extension of our facility.

Thank you very much.

Robert Dodd, Morgan Keegan.

Hi, guys, if I can just go back to kind of the debt facility question, you hope to get it sorted out in the next 30 days. Could you give us a little bit more color on the precise debt with your current facility? It triggers over to term in early June if you don't get that sorted out. Could you just tell us exactly what the mechanics are there?

Well, as you know, I believe as everybody knows, Rabobank is the lead lender under the existing facility and is also a lender, the lead lender in the proposed extension and upsizing of the new facility. So we are in the process of moving towards a close on the upsizing. If that close does not occur prior to the stated maturity date of that facility, we would expect it would be extended.

Got it. Just two questions about portfolio companies now. On WECO, what's -- what are your plans there now that you've got -- I mean essentially you had control of it before but now full control after the foreclosure auction.

First, I would view the foreclosure auction as a quiet title action primarily. That was the primary motivation of that action, to make it clear to people who thought that they might be able to assert claims that there is no basis and ability to do that. We are now the sole owner of that facility and are looking to sell it.

Have you got any initial bids -- obviously currently carried at $6 million, I think the cost was in the low 40s. Have you got any ideas right now what you think the collectibility is there?

Well, we have talked to a number of buyers and we have had one or more bids in that range and we continue to speak to those people, but we have not yet aimed a definitive purchase agreement and it's not clear to us that we will be right away.

Okay, got it. And then just lastly on Yatesville, can you give us an update on where the permit process is there? You obviously injected a little bit more capital if I remember right in this quarter, but that's to be expected, but where is the permit process right now?

Well, wherever you think the permit process is with Yatesville, it's probably behind that. Every permit that we go for takes longer, costs more money, and is frustrating. Now at some point of course that's going to increase the price we get for our coal so people with a long-term time horizon as we have will eventually see a benefit from that.

In the last -- let's see, since we last spoke to you, we have permitted Gilmore. Roaring Shoals is next. I forgot the names of the other properties that are follow on behind that. As those come on, we then have to examine the profitability of actually mining those properties, which is never a given. As I think some people know, coal prices have declined in the last six to nine months. Some people believe they are going to start to recover as capacity comes out of the industry.

So we may delay resumption of mining at certain permitted areas until coal prices recover or unless we can enter into contracts that make it profitable.

Got it, just one more if I can. It looks like there were no new non accruals in the March quarter. Anything in April/May so far?

There are no new ones in April and May. There were two new non accruals though in the third quarter.

Let me comment on those, Robert. One was AEH, which we think is a temporary phenomenon due to contraction activity and energy services and their footprint of Appalachia. They are gearing up to get a lot of the stimulus bill work for other construction, highway construction and the like. So we are optimistic going forward.

The second is Wind River, which is an oil and gas company, which we believe were covered by the collateral and the companies pursuing a sale.

Just to clarify, those were in Appalachia was in November and Wind River was around that time as well. So in the December quarter, not the March quarter, right?

They went into the nonaccrual status, but they were -- they had effectively not paid interest from November 1 on, so they were retroactively back to those dates.

Right, got it. Thank you.

Jim Shanahan, Wachovia.

Good morning, my ears were ringing there, John. I was hearing my name a lot earlier on the call.

Well I just figured Jim has got all the data here and I hope he doesn't mind if I use a little bit of it on the call.

Well, thanks of course to Chris Harris, my associate, for making sure all of that was accurate. But I had a couple questions and I believe that Chris does too, actually, so we don't want to monopolize the call, but were a lot of things we are curious about.

Number one with Gas Solutions, it honestly feels like every quarter we have to think again about how you might be valuing the Company and what kind of sense that might make for a variety of reasons, number one. You might -- you for example might write up the value of Gas Solutions in a market where comparables are down quite a bit. On the other hand, you still might seem to also be carrying the value of the Company at a significant discount to where market comparables are trading.

It got me wondering about the following question. Is it possible that you are using a market multiple EBITDA multiple, but based upon a smaller cash flow stream maybe associated with the expected EBITDA in an environment where the hedges have expired?

Well, yes, that's possible. But before I get to that, first, remember we are not the people that provide the fundamental puts for the valuation. It's the company working with Lincoln and then our audit committee and then our Board and of course we voice our opinion. That's the first thing.

The second thing that happens, Jim, and the reason there are a number of variables that affect this is if you look at the key variables that drive the value of that business, there are operating variables and the Company does increasingly well on an operating basis. As we indicated '08 over '07, we put on the hedges. That makes the Company more valuable. Were we to sell the Company, we could or might not include the hedges. Those are all variables as far as selling it.

Meanwhile you have a -- from our point of view, things that we can affect. Meanwhile you have a macro environment where the MLPs are not as aggressive in making these kind of purchases. Their access to debt, anyone's access to that is more limited. Hydrocarbon prices are down. Multiple compression and as a result, we are not as aggressive looking to sell it as we may have been in the past.

So why? Because we believe that what goes up comes down and vice versa and we are expecting a more ebullient hydrocarbon market as we get into the end of the year with the amount of money that the Fed is spending and as the stimulus starts to have an impact on the economy. So those are all the things that we are thinking about. Is it possible that the valuation is affected by removing the hedges? Grier, how would you answer that? Because I don't know the answer.

Well, the valuation, which is the third-party process as you know, Jim, looks towards a multiple of -- multiple different approaches. One is a discounted cash flow approach. One is an M&A and trading comparable multiple approach adjusted. And then there is some modest credit given to indications we are receiving from interested suitors in the marketplace. That's usually a modest one until a definitive deal is reached. So it's a combination of approaches there.

What can I -- what are they doing -- do they take the value and add the hedges or do they simply take the value and ignore the hedges and deem the hedges to be a Prospect Capital?

Jim, the way that it has been -- the primary way that it has been done is they take the EBITDA and apply a multiple -- the EBITDA for the hedge income, apply a multiple to that and then add back the value of the hedges, the current value of the hedges. And that's the way that -- the primary driver of the value determination for Gas Solutions.

Does the value of the hedges decline over time the closer you get to maturity?

Yes, it does.

Okay, well this has been helpful.

Only to the extent that you want to sell them in the marketplace. You get the full benefit of those -- of exercising that in the money hedge each month.

But they change the discount rate on the cash flows if the debt -- if there --? If -- it would be more risky or without the benefit of the hedges on a go forward basis? I mean the closer you get to maturity, I mean.

I don't think the discount rate looks already at the underlying cash flow. So that wouldn't change.

Okay, well I have a follow-up question. I was wondering if you had a view on not necessarily your peers specifically, but your industry, and everything that has happened in the marketplace. And I count only two the last time I checked BDC is trading in double digits, still the whole sector below book value. And wondering if you have a view on what the sector might look like in six to 12 months and what the capital raising prospects are for the industry on go-forward basis.

Jim, I'm not sure if you would like to give us a review of all your competitors first. The way we look at it is we're very busy running our business and we work very hard at that. We do occasionally from time to time observe what's going on out there with other companies. From our point of view, there's a few things.

One is that we feel we have been fortunate in the way that we have run our business that we have run a diversified business yes, it has we loan money to sponsors. We also make direct investments. We do our own buyouts. We buy loans from desks occasionally and as a result with the significant decline in the sponsor business and the value of those loans, I believe we were fortunate to be less adversely impacted. That tells us that we ought to be continuing to run a diversified business as we go forward.

The second point I think is that we do see increasingly loans and portfolios available from people who compete with us, whether they are publicly traded or not. And as we indicated in our press release, these are opportunities for us that we believe we can capitalize on.

Thirdly, I think that we have observed some of our competitors entering into transactions that we declined to enter into because we felt the multiples were well above what we felt were long-term sustainable multiples. And we felt that the risk/reward was simply not there. There was more risk than we were comfortable with to principal and we did not feel that the reward was commensurate. And frankly, I would have to ask what reward would justify putting your principal at risk to the degree that we think one does when one buys a company for 14 times EBIT.

So the result of that strategy, which worked apparently for a time, is that certain people who are in the mezzanine business are seeing their net asset values and their stock prices adversely impacted. But what we also see is notwithstanding what we would say -- what we would call some ebullient chasing of deals, all of those companies to my knowledge are able to pay their debts and we continue on with an industry that to my knowledge has never had a payment default. Grier?

Yes, to add to that, Jim, as we look at the industry, we view our competition as broader than just BDCs, it's commercial finance companies, it's hedge funds, it's mezzanine funds. It's a variety of sources, banks from time to time. The letters BDC, it really is a structure. We think it's an advantageous structure, but it is just a structure. And as John pointed out, it's what you do with the structure that's important. We have chosen in our business to apply very low leverage relative to others to do fixed or greater fixed or floating deals, whereas others have floated down several hundred basis points to a decline in LIBOR.

We have chosen to be protective to avoid ebullient markets like the sponsor finance market during the last run up in which we thought people were bidding in their capital lever increasing leverage and tighter spreads. So what you do with it is the most important.

Having said that, I think that the industry will do just fine going forward. As John pointed out, a lot of the pressure in the system has been more created by leverage levels than anything else and folks worrying about lender foreclosure and that sort of activity.

Our sense is that some of those concerns are starting to diminish out there since to our knowledge no lender has lost a single penny. And the expectation is getting more and more optimistic. At least as we talked to some of the lenders to those other companies out there, the concerns seem to be diminishing as opposed to increasing. So that dampening effect you might see loosening up in the coming months.

Thank you, gentlemen.

David Miyazaki, Confluence Investment Management.

Hello. I was wondering if you could walk through the IRR perspective investments that would be required to make your recent equity raises accretive to NAV, considering the leverage levels that you might be contemplating on a more -- not on an immediate basis, but more strategically? And where you might be directing the flow senior mezzanine equity to capture those IRRs?

Absolutely, David. We are looking at both senior as well as junior debt. We are looking at secondary marketplace as well as a primary our marketplace. We talked about each. The IRRs that we are seeing available in the middle market, senior market in the range of 20% to 30% and I will talk in a second about how you build up to that, and for junior debt in excess of 30%. That is unlevered. Leverage would obviously take that higher.

The way you build up to that on your senior basis is -- I will talk up the secondary market, which of course drives the primary market because lenders ask why would I make a primary loan at any term significantly less than what's afforded to me in the secondary market?

So starting with current yield, you purchased an initial original issue in the range of, say, LIBOR plus 350, 400 give or take of vintage paper of the sort of circa 2005 to 2007. These are generally five- to six-year term loans that were put onto credit, so we are sort of two to three years and we have two to three years to run. If you go in and buy those loans at $0.60 on the dollar in the existing market place, you grow up -- gross up the current yield to the high single digits, but then what's happening to a significant extent out there are repricings.

If you need a lender's signature for pretty much anything, in the middle market where you have real covenants, real teeth to documentation and signatures required all the time, just about every loan that we have needs a signature for something, not necessarily major things. Not necessarily worrisome things, but if a signature is required, there is a bit of a lender hold up factor out there in the market where people are determined to get their contracts let's say restored to current pricing levels on a legacy basis.

So you are seeing repricings out there of 300, 400, 500 basis points and up. You see warrants, you are reentering the picture and so you factor that in, gross that up by the discount and you are up into the double digits on a yield basis. And then when you get par restoration from restoring par at maturity for a pretty well-defined maturity schedule for these credits on our range of, say, 18 months to 3, 3 1/2 years, that pencils out very nicely into an IRR profile on the senior side in the range that I talked about sort of 20% to 30%.

Junior credits you can buy at even more attractive discounts oftentimes because junior debt is fundamentally an unleverageable in the existing marketplace and a lot less competition and so you can go in with those with healthier yields to begin with and gross that up to a pretty attractive number. So that's how we think about the return profile relative to recent capital raises, David.

And how much --? I know that part of the reason to raise that equity was to broaden and deepen your credit facilities you are working through the negotiations. But philosophically, where do you see the leverage level? I don't want to get the cart in front of the horse, but where do you see the leverage level going that you would be comfortable with?

There's a couple of pieces there, David. One is our existing business and footprint and our current debt to total cap is in the range of approximately 15% or so on a net basis net of cash. We clearly have debt capacity growing. We are working on expanding that. We would like to take the $200 million to $250 million and beyond that against recent equity. We are working very hard on that and it may be a story of an accordion feature or term facility whereby that increases even post extension.

But the second piece of it, David, it's important to point out is what I talked about there in the return profile relates to many individual credits and transactions that we're working on. There are also a number of portfolio purchases and by portfolio purchases I mean both private companies, both corporate as well as asset deals as well as public companies, both corporate and asset deals. And we are involved in extensive negotiations now related to a number of those deals and I am not at liberty to talk about those to a significant extent, particularly where companies are public in nature.

There was a question earlier about some of our brethren who are suffering from leverage issues in the marketplace may or may not be there for available for sale at an attractive price and we are right in the thick of things to potentially be acquirers of those businesses. And in many cases they come with built-in leverage where we can acquire the portfolio, offer some type of pay down, modest pay down, moderate pay down to be negotiated with an existing lender. We structure the terms of that to our liking. We are not too interested in putting our head into some type of lion's mouth. We want it to be structured attractively with the right terms, the right drive maturities, etc., and where we get the benefits of that sort of built-in leverage on a going forward basis.

So that's kind of how we are thinking about it, David, both to the existing book as well as new deals that we are looking at which we would complete only in an accretive fashion.

Okay and I appreciate you taking the time to answer. I just have one last question. One of the issues sort of plaguing a lot of your brethren is the duration mismatch on the assets and liabilities. So as you go forward with the facility, how do you think that you or the industry should better match the durations of the two sides of the balance sheet?

Well, I think if you are going to utilize a significant amount of leverage, you have got to run a matchbook. If you're going to fund your business with one-year revolvers, you should utilize leverage more from a cash management short duration, a low type of leverage whereby an asset sale or two or an equity raise or two can cover that and pay that off in full.

We have avoided utilizing a bunch of leverage, as you know, so we're just fine in that regard. But if one were to apply more leverage or certainly like in the portfolio situation I mentioned where let's say a lender has an existing borrower on a short leash one year to run, what have you, we would only go in to fund and finance your three-year assets, let's say, with a match book of let's say three years of liabilities utilizing that built-in leverage.

We are exploring other options in the marketplace as well for that longer term leverage vis-a-vis the insurance market, vis-a-vis the term debt market, potentially a preferred market. We are seeing things start to thaw out there, much more so right now than even a few months ago.

So I think this is a marketplace where creativity and forward thinking could help significantly with that issue that you just raised, which is quite an important one to consider in which a lot of folks kind of lost sight of out there. We've always been quite mindful of that ourselves.

David, I don't think you can see as many people in the next 12 months and 24 months going right up to one to one, which we have seen in the past. I think people are going to play the game a little bit more conservatively even with respect to just the amount of leverage.

Sure, sure. Thank you, guys.

Jasper Birch, Fox-Pitt, Kelton.

Good morning. A lot of my questions have been asked, but going back to Gas Solutions, I was wondering how much of the $26.2 million was from the effects of hedging and how much of it was EBITDA before Hedges?

The hedge effect I believe is fairly modest, Jasper, in the range of maybe $3 million to $4 million, somewhere in that range.

Okay and then I also noticed you are EBITDA run rate for Gas Solutions was about $1 million a month for most of the year and then at the end of the year it went up to about $2.5 million in November and December. What was -- why did that occur and what should we sort of look at as a run rate going forward?

Well, commodity price increases and related to locking in some of those benefits vis-a-vis our are put issuance was one of the drivers of that. We are not giving out sort of earnings guidance related to our portfolio company here, Gas Solutions, which in addition to the commodity side, it is obviously more just [out] of the Company's control is working on a number of different growth options and initiatives as well. So it's -- we don't give guidance but the management team has focused on driving value there for sure.

Okay. On a different topic, on your refinancing I think a lot of people are getting pretty comfortable that something is going to get done. In terms of the timing, though, should we be looking for an event before your revolving maturity?

Well, to be clear, Jasper, the facility does not mature.

Well, you used a term out.

Right, for another year. Just want to make sure we are using our definitions correct. What may happen just because of timeframes related to documentation -- the documentation aspect has been significant here because we're basically shifting to a duel agency rated deal which rates each of the underlying credits and then as a facility rating which we expect to come in at about an A rating.

And because the of sort of third-party documentation aspects outside lenders in our control, we might have an interim extension of the existing deal before moving to the following deal of let's say 30 days or so. So we ask folks not to be let's say overly concerned as you get to I guess June 6 and there hasn't been necessarily an announcement related to that because we have done an extension and then we are doing an [upsize] -- the new deal from there.

Okay, and then one last topic and I will let you guys go. Would you mind commenting just sort of on the credit quality and how debt to EBITDA's interest coverage ratios, etc. are moving around within your portfolio? What sorts of industries are you seeing stronger performance in and do you have any new concerns that are arising?

Sure, we recently did a refresh of our debt to EBITDA which is the range of like 2.9 times, which is significantly less than many of our peers. We've seen a modest move -- it might have been around 2.7 a few months ago, which is not surprising given the economic backdrop. But we are pretty happy overall with how the pool is holding together. We are also happy with some of the strategic choices we've made, Jasper, the last couple of years as you know in conjunction with changing the name of the business back in early '07 and adding significantly more industry verticals, some of the industries that we have selected like branded food and beverage for example. We have got a business in the potato chip business, which doubled its profits in the last year. It turns out people eat a lot of potato chips during recessions.

We have got another branded food company which is doing well. We have expanded into the specialty minerals business. We have extended healthcare services and companies there are growing their top line and bottom line. So we are pretty happy. A lot of the defensive sectors that you think about have provided nice stability as non-cyclicals to go along with the more historical cyclicals, which we have addressed by essentially keeping the leverage low.

Okay.

You also see -- Jasper, the other thing, this is John Barry -- the other items that we are seeing in some of the cyclicals, the backlog starting to pick up.

Okay, well, thank you, guys. It's good to hear that comfort foods is doing well and I'll let you go with that.

Chris Harris, Wachovia.

Great, thanks for taking my questions, guys. Just a few ones here. The first I guess relates to the dividend. Can you provide us with a dollar amount of the undistributed net investment income you have available to support the dividend?

Around $14 million.

Okay, and then I guess we were surprised a little bit to see that some of the write ups that occurred in the quarter were in the manufacturing industry. Can you maybe comment a little bit on why that occurred? I guess we're a little surprised just considering the economic environment is so challenging out there.

Right, well, you know and manufacturing is a very broad designation and some companies will be doing better than others depending upon the specific vertical. I think you've got an aspect there related to credit quality that drives 157 and you also have an additional aspect related to 157 of marks to market. You have sort of both dynamics that come into play for discount rate assessment that the independent valuation firms use.

And I would say really to the second one of a secondary trading mark-to-market, as folks know, 9/30 to 12/31 was a significant move in discount rates industry wide, which affected others more significantly than ourselves because we have a largely fixed rate or greater fixed or floating portfolio and people sitting on floating-rate deals and lower discount rates were particularly harmed by those moves.

12/31 to 3/31 you had a partial restoration of those marks and even more significant one, actually full restoration since 3/31 to here we are in mid-May looking at comps like let's say the S&P LSCA Index will see obviously where things come in at 6/30. That by the way could be a help for some of our brethren going back to I believe Jim's -- your colleague Jim's earlier question. But we were helped to a certain fashion by an upward movement in those comparables and that the underlying credits had been largely performing.

Okay, that's helpful, Grier. Thanks a lot, guys. That's all I had.

[James Pursley], [Gaya Capital Management].

Hi, guys. How are you doing? You sound particularly upbeat today, John. I have a question about how you are going to choreograph the dance roughly between maturations and new deals over the next six months to a year.

Okay, well, by maturations --

You know, looking at lumpiness of revenues.

When you say maturation, you mean maturations on the existing portfolio?

Your portfolios, right, portfolio maturation.

Well, I am not aware -- I don't have the schedule right in front of me. I am not aware of any stacked up airplanes already to land and maturing in the next -- or next six or nine months, so I don't know that we are terribly concerned about losing revenue. I think what we are looking to be doing is to move from a situation where we had to be very cautious and careful and believe now that we can start opening up our wallet again and getting out there and taking advantage of many of the opportunities that have been created by people who weren't so careful.

You know, James, for a while there, there was a hesitation to purchase anything new because you will just be able to pick it up cheaper the next day. With price stability now settling in in the marketplace, confidence is coming back not just for ourselves but also counterparties on deals that there is sufficient stability to consummate transactions. So we are feeling better about that. The other thing that (multiple speakers)

You know, Jim, our portfolio -- I think back in '05 and '4 there was more lumpiness because when we did our second deal we doubled the size of our portfolio. I kind of have been saying now with 31 or howsoever many companies we have in the portfolio it's not the same effect by each new investment or each company that matures.

And we want to drive the diversity greater going forward as well.

Great. One would like to hear that as an investor. What is your estimation of the possibility or probabilities of the current stability being a feint or a fake out?

In terms of the economy?

In terms of -- right, the sustainability of the nascent feelings of green shoot confidence.

Okay, well first, this is not exactly what our shareholders hire us to do, but let's go right ahead and give our opinions on the general economy.

Great.

First, I believe that the amount of money that the Fed has been injecting, the liquidity into the system and the expansion that that balance sheet is responsible for about 90-some-odd percent of what you are seeing -- well, actually, let me back up. First, I think we all know the economy moves in cycles, whether the Fed or the Federal Government does anything at all. When people use up everything on the shelf, they have to go out and buy some more and there is inventory replenishment.

Number two, the Fed has been injecting a significant amount of liquidity into the economy since the fourth quarter of '08 and I believe that that has also had a significant effect. I heard yesterday or the day before that not a single job has been created by the stimulus yet and then someone here said that they were aware of some and that maybe 4% of the stimulus package was to be spent on shovel-ready projects in '08.

So if you believe the fiscal stimulus is still on the way, then you might believe as I do that what we would be headed into is more likely a significantly overheated economy six, nine, 12 months from now with significant inflation.

Now the bear case there is, well, there may be a lot of Fed liquidity. There may be a lot of stimulus. There may be inventory replenishment, but you have powerful deflationary trends worldwide that are pushing against that. At that point, I say I'm going to go back to just being a credit guy. What do you say, Grier?

Well, look, you know green shoots I guess is the word people are using, but we just look at more of the leading indicators for our own portfolio (multiple speakers) .

Micro.

-- for things like backlog and customer demand, etc., and we are seeing a pickup there, as John mentioned earlier. So I think we look at the fundamentals much more than the sort of financial markets and things look positive there.

We have a company for example that -- Ajax has significant exposure to Timken, SPK, and to Caterpillar. So you say, boy, that company is standing in the exact wrong spot. Well, it turns out the company's orders did not decline as much as you might have expected. It's a very well-regarded company and its backlog has already started to turn around.

That is true of another company, NRG, which makes mud tanks. The management has done an excellent job diversifying their business, so what tends to happen in a portfolio like ours is that if we have chosen carefully management teams and companies that have some special edge or special sauce in their marketplace, we can be somewhat insulated from the economic downturn.

And as I Grier mentioned, the potato chip company, there is a company that I think -- they are going to be disappointed when the recession goes away.

Great, thanks so much. I look forward to seeing what the dividend is going to turn out to be, although I'm not expecting much less than $0.40.

Than you, James.

Great, take care.

[Howard Feingold], private investor.

Thank you. I'm wondering if you can tell us how many total loans are now in nonaccrual, what the total dollar value of those loans are, what you have reserved against it, and lastly, if you have any loans currently on some type of watch list?

Okay, Howard, the best thing to do would be look at our 10-Q. We have a section which outlines I believe the answers to all of your questions. Brian is trying to find the specific pagination right now. I think page 42, somewhere around there.

Page 42? All right, I will do that. Thank you very much.

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

Yes. Have a nice lunch, everybody.

Thanks all.

The conference is now concluded. Thank you for attending. You may now disconnect.