Prospect Capital Corp (PSEC) 2010 Q2 法說會逐字稿

Good day and welcome to the earnings call for second fiscal quarter ended December 31, 2009 for Prospect Capital. All participants will be in a listen-only mode. (Operator Instructions) After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to John Barry, Chairman and CEO. Mr. Barry the floor is yours, sir.

Thank you, Mike. Joining me on the call today are Grier Eliasek our President and Chief Operating Officer and Brian Oswald our Chief Financial Officer. 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. This communication is not a proxy statement or a solicitation of proxies and does not constitute an offer to sell or a solicitation of an offer to buy any securities. For additional disclosure, see our earnings press release, Form 10-Q and other documents filed previously with the SEC.

Now I'll turn the call back over to John.

Thank you, Brian.

For the three months ended December 31, 2009, our net investment income was $16.9 million, or $0.29 per weighted average share outstanding. For the six months ended December 31, 2009, our net invested income was $29.2 million, or $0.54 per weighted average share outstanding. Our net vestment income increased 37% and our net investment income per share increased 19%. From the quarter ended September 30, 2009 to the quarter ended September 31, 2009.

We closed our acquisition of Patriot Capital Funding on December 2, while the full quarterly benefits of the Patriot acquisition are not expected to be reflected until the March 31, 2010 quarterly financial results, we did recognize a gain on the Patriot acquisition of $5.7 million. We also recognized $7.5 million of interest income during the period from the acquisition through the end of the quarter. Including $4.6 million of interest income from the acceleration of purchase discounts upon early repayments of three loans, repayments of three revolving lines of credit, and the sale of one investment position.

These early repayments have been full par repayments, comparing favorably to the discount, on our purchase of the Patriot portfolio. We have additional liquidity available that can be deployed into other accretive investments, beyond the Patriot acquisition and are currently moving forward a pipeline of potential, additional portfolio and individual investment opportunities that aggregate more than $3 billion of assets. We estimate that our net investment income for the current third fiscal quarter ended March 31, 2010, will be $0.24 to $0.32 per share. If we have have significant early repayments out of the Patriot portfolio, we have the potential to exceed this range as we continue to recognize the deferred value of the discount associated with our purchase of the Patriot portfolio. We expect to announce our third fiscal quarter distribution in March.

The December 31, 2009 quarter, because of a desire to eliminate excise taxes for the 2009 calendar year, included two, not just one, record dates. Thereby causing a second dividend payable, and a second associated deduction from our net asset value deduction during that quarter. Absent such timing differences, net asset value per share on December 31, 2009 would have been $10.47. Valuation changes virtually all on a mark-to-mark unrealized basis on our equity positions, due to trailing 12 month EBITDA changes in the 2009 recession, comprised approximately [$0.56] per share this past quarter. So far, in 2010, we have seen increases in backlog, increase in order bookings, and increases in other leading business indicators in a number of our portfolio companies. Thank you. I'll now turn the call over to Grier.

Thanks, John. At December 31, 2009 our portfolio grew to 55 long-term investments, with a fair value of approximately $648.1 million. Compared to 29 long-term investments with the fair value of $510.8 million at September 30, 2009. This increase in investments was driven by the acquisition of Patriot, net of post closing monetizations from the Patriot portfolio. On December 2, we acquired the outstanding shares of Patriot common stock for $201.1 million. Under the terms of the merger agreement, Patriot common shareholders received 0.363992 shares of our common stock for each share of Patriot common stock, resulting in 8,444,068 shares of common stock being issued by us. In connection with the transaction we repaid all the outstanding borrowings of Patriot in compliance with the merger agreement. On December 2, Patriot made a final dividend equal to its undistributed net ordinary income and capital gains of $0.38 per share. In accordance with the recent IRS revenue procedure, the dividend was paid 10% in cash and 90% in newly issued shared of Patriot's common stock. The exchange ratio was adjusted to give effect to the tax distribution so that our purchase consideration for Patriot was not affected by this distribution. The merger has been accounted for as an acquisition of Patriot by Prospect. In accordance with the acquisition method of accounting as detail at ASC 805 business combinations. The fair value of the consideration paid was allocated to the assets acquire, and liabilities assumed based on their fair values as of the date of acquisition. As of the acquisition date, the fair value of the identifiable net assets acquired exceeded the fair value of the consideration transferred, and we recognized the excess of the gain. A gain of $5.7 million was recorded by Prospect in the quarter ended December 31, related to the acquisition of Patriot.

During the quarter from the acquisition of Patriot on December 2 through December 31, we recognized $7.5 million of interest income from the assets acquired from Patriot. Included in this amount is $4.6 million resulting from the acceleration of purchase discounts from the early repayments of three loans through revolving lines of credit and the sale of one investment position. During the quarter ended December 31, 2009, one additional investment Resco Products has repaid its outstanding debt to us. Earlier in the quarter, we had purchased additional debt in Rusco at a 40% discount to par and subsequently received a full par repayment of all four debt at the closing. Generating a 16% cash on cash internal rate of return on our overall investment.

Gas Solutions continue to generate free cash flows with no third-party debt. We are discussing opportunities for potential monetization of our position and we recently hired a new senior executive to help drive further revenue and profit growth. As we discussed earlier, we currently have an investment pipeline of potential opportunities, which totals more than $3 billion. This pipeline includes investment opportunities across multiple strategies, including sponsor financings, direct loans, operating company buyouts and strategic financial portfolio acquisitions. We generally announced specifics related to such transactions only upon successful consummate. If a particular transaction opportunity with a public company counter party happens to become publicly known through counter party communication, which may be self interested or distorted, one should not interpret that publicity to mean that we are solely or primarily working on such publicly disclosed opportunity to the detriment of other potential opportunities.

Primary investment opportunity in the marketplace has increased recently, and we are currently evaluating a robust pipeline of potential investments, some is of which have the potential to close this quarter. These investments are primarily secured investments with double-digit coupons, sometimes coupled with equity upsides, or co-investments or warrants and diversified by sector. As compared to competition in 2006, before the credit dislocation began, we see far fewer competitors in our target middle market and are reaping the benefits from having significant access to capital in the current environment. We have a dispassionate and disciplined investment process in which we work on multiple transactions, because the completion of any particular transaction cannot be guaranteed. We prize analysis, data, facts, logic and other rational methods for a deal assessment. We also seek to manage diligence, legal and related costs of prospective investments to protect shareholder value on a probability weighted basis.

Thank you, I'll now turn the call over to Brian.

Thanks Grier. On June 25, we completed a first closing on an expanded syndicated revolving credit facility. The facility includes an accordion feature which allows the facility to accept up to an aggregate of $250 million of commitments. Since that initial closing with two lenders, we have added four additional lenders to the facility, and currently have commitments totaling $210 million. We continue to solicit additional commitments from other lenders to grow the facilities. Multiple lenders are performing due diligence toward committing to our facility and potentially additional independent facilities. The facility has an investment grade Moody's rating of A-2. We are also working with our lenders to reduce the cost of debt finance and extend the duration of the facility.

As of December 31, we had $10 million of borrowing under our facility. With a pledging of additional assets from the Patriot acquisition, we have additional credit availability in excess of $100 million, not including further leverage ability of additional collateral that we could add to our facility with additional transaction activity.

Our virtually unlevered balance sheet is a source of significant strength in comparison to many of our over leveraged competitors. Our equisized balance sheet also gives us the potential for future earnings upside as we prudently grow our existing revolving credit facility, add additional secured facilities and evaluate term debt solutions driven by our investment grade facility ratings at both the corporate and facility level. We are pleased with the increase in desire of counter parties to provide us additional credit at significantly more attractive pricing as compared to what the Capital Markets offered a year ago.

Now I'll turn the call back over to John.

Thanks, Brian. We also understand that there is a lot of interest in Prospect Capital's proposal to acquire Allied. Yesterday we increased our offer in a letter sent to Allied. The terms of our offer and our response to Allied are set forth in a press release we issued yesterday. On this call we will be referring you to the information in our press release on this topic. We can now answer any questions.

(Operator Instructions). The first question we have comes from Jasper Birch with Macquarie Capital. Please go ahead.

Good morning, gentlemen. Just to begin with, looking at your guidance, it seems really wide. Is that just because of uncertain rate of prepayment on the Patriot deal? Or is there something else going on there?

There is a couple of factors going on there, Jasper. It is Grier. One is, the repayment of the Patriot portfolio, but also, it's a wider range because of the pace of origination and his new deal deployment. As always, there is no, it is difficult to guide toward specificity on specific timing of closings there. And that sort of size range is actually fairly consistent with what we have done for quite sometime now.

Okay great. Thank you. In terms of your credit facility, looking on for an extension on that and also taking on additional debt, can we get any more color on either when we'll hear more about your current credit facility and also what types of debt and what rates other lenders are looking at?

Yes, we are looking, this is Brian. We are looking to close that facility either the end of this quarter, or the beginning of next quarter, we don't believe we will go all the way out to the June maturity date, or end of our revolving period on the debt. So that's, I would expect that you know, we would announce consistent with that time frame.

Okay and then in terms of ramping up leverage, how you said you have this over $3 billion pipeline. You said that there is some more primary market opportunities, could you break that down about how much of that pipeline is primary market, how much is just secondary and how much has driven entire portfolios you might be able to snap off?

I don't have the exact breakdown for you, Jasper. But at least half of that is secondary market portfolio purchases.

Okay, great. Thank you guys very much.

Thank you, Jasper.

The next question we have comes from Chris Harris with Wells Fargo securities. Please go ahead.

Great. Thank you. Guys, just looking at your legacy business here, if we strip out the income you received from Patriot, it looks like there was about a $4 million sequential decline in interest income, I was just wondering if you could maybe talk a little bit about what was driving that?

Yes. This is one big factor that comes into that. I mean, we did put two loans on nonaccrual status this quarter. But with putting those two loans on nonaccrual status we also reversed a significant amount of interest that had been recorded in previous quarters. About $2.5 million of revenue. And that accounts for a large portion of the decrease? Interest income on our legacy assets.

Okay and then a follow-up here to the credit line, you guys have mentioned here that the credit availability is about $100 million or a little north of that, subject to the collateral. What do the lenders want to see here to really get that borrowing capacity up? I guess that is question number one and a follow-up to that is how might that affect your origination activity on a go forward basis.

This is Grier answering your question, Chris. As we add additional collateral from the utilization of the existing borrowing base, then the borrowing base goes up, so it is [entertive] calculation it is not as if you have say $100 million of current availability, all you can draw is $100 million. You take the proceeds from that and to the extent you deploy those proceeds into a borrowing based eligible collateral, then that is how you get the size increased on what you can draw to closer to the $210 million level we have currently. What was the second part of your question again Chris?

Maybe how your future origination activity might be impacted, depending on wanting to increase your leverage capacity?

Well, we are in the midst of increasing our leverage capacity, in three important ways. One is by increasing the size of the existing revolving credit facility, two is by working on additional credit facilities, and the interject answering that is one of the things we are very pleased with over the last year from risk management standpoint is increasing diversity. Not just diversity of our asset base by industry and name but diversity of lenders having gone from one lender to six lenders in the past year in our existing facility but having facilities on top of that is also a worthy objective we are pursuing. Thirdly in terms of expanding credit, we are working primarily in the insurance and private placement market on accessing term capital. And having achieved investment grade status at a corporate level, investment grade at our facility level, and having the basically lease leverage balance sheet of our peer group of any meaningful size in our industry we are perceived as very attractive counter party from a credit standpoint. So in terms of originations, we think by growing that credit, we'll be able to deploy a significant amount of capital, $3 billion, of course, needs to be probability weighted. It is difficult to put a precise probability on how much of that would be, would get over the goal line at the end, but some portion of that would get over the goal line we are working on and expect to have and to increase our access to capital over time.

What I have noticed, to me, the biggest change has been whether we went out to extend and expand the Rabo facility almost a year ago, there was a dramatically different market, so we have a early 2009 deal. Here we are a year later, many of the people who told us they were out of the market, their management did not want them booking new loans to financial companies, especially to business development companies, are now back in the market, and are talking to us and presenting us with significant improved terms, which we have shared with Rabo. We want to continue to do business with Rabo. We are always optimistic, right? We are more than the usual optimistic that we will be extend and go expanding that particular facility with new banks, significantly ahead of time. That we will be adding insurance company lenders to that facility, and that we will be that we may or may not close the additional facilities that are independent of that facility, depending on timing, terms and needs. But I will say that for our Company, anyway, the availability of credit on attractive terms has improved substantially since a year ago.

That is great. It is good news. One final one here, if I could. On the Allied offer here, I know you guys might be limited in what you can say, but obviously this newer offer is significantly higher than where you were before. Just kind of curious as to why you assigned an expiration date of next week for the Allied board to respond. Why didn't you kind of leave that as an open-ended offer?

Thanks for that question. As I think you know, we have written letters to the Allied board, Chris, which have been published, have issued press releases, as has Allied, have filed documents, and have filed documents with the SEC with respect to our interest in an offer to purchase Allied, as has Allied. So there is a lot of written information out there as I think you also know, proxy solicitation are extremely highly regulated in ways I am not going to suggest to you or anyone that I am fully or even partially expert. So we are not comfortable on this phone call, at this time, adding to or subtracting from our filed papers, or speculating about the future.

Okay. Fair enough. Thank you.

Thanks, Chris.

The next question comes from Erin [Scanavitch] of [Latenburg Foeman]. Please go ahead.

Hi. I was looking at the monthly accretion from Patriot in the quarter. I guess if you take out the 4.6 of prepayment it leaves a little under $3 million. Is that around what you would expect for the March quarter monthly of around $3 million?

Yes just a little over $3 million per month.

Okay that's helpful. Also last quarter you mentioned you were close to completing a portfolio acquisition. I just wanted to hear if you had any follow-up on what was going on with that?

Sure. Well, as I had said earlier, we work on multiple transactions at any given point in time. Broken up by strategy, but also within a particular strategy, including strategic acquisitions, we are working on, generally speaking, multiple ideas and transaction opportunities at any given point in time. That applies to portfolio purchases as well. In this particular case, we spent a fair amount of time on one opportunity, and but the out some disclosure related to that on the concern that, perhaps, there may or may not be discussion in the marketplace about it through third party communication. So we want to do that to be protective to the business. We have declined to move forward on that particular opportunity.

Okay. Thanks. And then.

I would like to just add that we are very friendly with the people at that company, and we feel that we understand their assets and their portfolio reasonably well, there are some questions that have blocked us from reaching a final agreement, but we remain good friends, and we are still hopeful that maybe if it wasn't a transaction that could close in December, maybe it could close in February. Maybe it could close in March. We stay in contact with the people and we continue to pursue that transaction and others.

This is a fair point we take the long view in this business. In the case of example, Patriot, we first started working on that deal going back to August of 2008. And it had a year gestation period. Sometimes deals have that gestation period, sometimes shorter, sometimes longer than that, the nature of the business.

That is helpful. Then a quick question on your portfolio disclosure, there were a couple of small securities that showed default interest but they were still accruing. Can you explain what was going on there?

Which particular?

I think it was one called [Borga].

That is one of the investments we acquired of the Patriot portfolio. A fairly small investment. With one benefit of having substantial financial covenants, we really did not pursue nor did Patriot the covenant light, covenant not structures to deals. If there is a trip wire in a particular transaction and the ability to earn a greater return on an investment, you know, we are seeking to maximize value and maximize return. And that's commentary that we went by generally speaking.

So it is still paying though?

Well as to Borga, let's say a couple of things about Borga. Borga was a company that was in the Patriot portfolio. Now is in ours. It is a well-run company, it has a nice niche, building something that suddenly nobody wants. Steel structures to be used for agricultural and industrial purposes. And if you can imagine probably the last place in the country you would want to have such a company, since you can't ship these things very far and you identified the Fresno area, you would be spot on and if you knew all about the drought and the smelt there and the closing of the dam and so on and so forth, you would wonder how this company has stayed in business. The company is well managed. The company does have a niche. There is a need, particularly in the dairy industry for these steel buildings. People have held off buying them in the last year and a half. But the sales are picking up again. Some of the competition has left the business. The Company is not in default, but we are happy, it is not in payment default, it is in technical default. And we are happy to collect the default interest and also support the Company.

All right. Thanks. One quick last question, you noticed that, I'm sorry. That the NAV you noted was a little lower because of the double record dates in the quarter, is that supposed to revert in the March quarter? Essentially giving you a benefit in the March quarter?

We have not disclosed precise timing of when the record date determination would be.

Okay. Thanks, guys.

Thank you.

The next question we have comes from Robert Dodd of Morgan Keegan. Please go ahead.

Hi guys. A question about gas solutions, which has obviously been a very good performer for you for the last several years. You say it's still on the block, so if you could give us a little bit more of an update on that. And then also, the hedges they put in place are very well timed, a couple of years ago, and they all come off at the end of April. So what does the, kind of the financial position in terms of ability to pay you the same level of dividends, what does that look like?

Hey Robert, it's good to hear your voice again. Before I start, I believe in giving credit where credit was due, and it was Grier who focused on this and wanted to push the hedges. And I think we would have done them anyway, but the timing could not have been better, as I think anybody familiar with the business knows. What, I think people in our business know financial assets, we are not supposed to fall in love with these things and they are not children, so they are always for sale at an appropriate bid and what's happened in the case of Gas Solutions is that the value of the Company in the eyes of other people has increased tremendously. Two years ago, when we put it up for sale, then it decreased somewhat. While the commodity markets declined. Now it is increasing again as people are not familiar with the value the main value of Gas Solutions is the spread between Natural Gas and West Texas Intermediate and if you look at the propane curve, you will see a good proxy for the value of Gas Solutions, which is why we use the propane curve to hedge.

What we have done is we have considered our conversations with a number of interested parties. And we have let them know that we see a lot of value here and so there may be a value gap between where we are and where they are, rather than be dependent on our own abilities up here in New York, which I think everyone knows are quite limited to work maximize the value of gas solutions, we have a wonderful management team there but we have supplemented it now with Bob Born who has come in from where was he? At Energy Transfer, which is a major mid stream company backed by, I think, Energy Spectrum. And he's got tremendous relationships with Houston Gas Pipeline and many of the mid stream operators down there. They had a meeting with [Exco], just a day or two, and mark hall, our person who keeps an eye on that said you know, we go to a meeting with Exco and there is a small deal on the table and when we leave with Bob, there is a big deal on the table. We are very excited, because I think anyone in our business knows the ability to attract AAA managers and really drive results is what makes the business exciting, fun and also wealth building for our shareholders.

Also spot propane is $1.35, which is very close to our hedge price.

Grier has the propane hedge thing on his screen, every second.

Got it. Thank you, guys.

Thank you, Robert.

The next question we have comes from James Bellessa with DA Davidson. Please go ahead.

Good morning. On this issue of two record dates for the dividend in the most recent quarter, I note that in the June quarter, you didn't have a dividend record date. So I think it's just catch up, getting you back on track where you should be. And I would maintain the record date toward the end of each quarter as a regular pattern, rather than trying to jerk that around. I don't know that it's artificially depressed your NAV, if you look back through that period where you did not have a record date in the June quarter.

It's a fair comment, Jim. As you might be aware new NASDAQ rules came into play last year, requiring a 10-day period in between. The calendar, 10 calendar days in between the declaration date and the record date. We have, for many years, had a policy of waiting until later in the quarter to make our declaration, so we would have as much information as possible on the quarter, from time to time that's resulted in a record date. A couple of days after the end of the quarter. But it is a fair comment you make and we just wanted to make sure that folks have the appropriate disclosure of what was going on.

Thank you very much.

Thank you, Jim.

The next question we have comes from Greg Mason of Stifel Nicolaus.

Good morning, this is actually Troy. Could we just have a quick discussion on taxable income in the quarter? With all the moving parts with Patriot, there is obviously some numbers that are not going to be included in the taxable income. So Grier, could you give us what was the taxable income for the quarter?

Well, I'll give you a general discussion and see if Brian has those numbers. Generally speaking, because of the tax free stock for stock merger with Patriot, the discount associated with our purchase of Patriot, and potential par or greater than a purchase price, payoffs, is nontaxable income as we recognize that accretion over time. And it's worth mentioning, I'm pretty sure we talked about this in the last call, but it bears repeating that the way we have accounted for this transaction is by, basically, valuing the book at pretty close, a very small gain on it, but you know small relative to the overall purchase price here, and the book that we are assuming. So we basically said look, an auction was run, we were the winner of that auction process. Fair value is basically close to what we paid for it, ended up being a little bit greater because we signed the merger agreement in August and time occurred obviously from August to December when the actual closing occurred that is when the value of our purchases calculated based on where a stock was trading at that given point in time. So that is the point of view we have taken on these matters. We understand there can be some discretion in that accounting we are taking a very conservative view toward that accounting. I don't know if Brian has the specific breakout at his fingertips on the taxable versus nontaxable portion, Brian?

Yes, there is two components that are nontaxable with two significant components. The first is the actual gain that we recognized on the Patriot acquisition that would be nontaxable. And also the accretion that we recognize during the quarter, again would not be taxable. So some of the sum of those two numbers is right around $10 million.

Okay great 95.7 and the 4.6? Isn't -- because that is nontaxable, per the rules it doesn't have to be paid out. Isn't that a significant advantage to be able to retain that capital?

Yes, it is. As you know, in our business model, there is a a very, very high taxable income payout required to maintain your tax free status of 90% and 98 to avoid an excise tax, which is repeated every year unless you catch up. And so if you can achieve nontaxable income, that is a good thing and that is something we saw early on in the Patriot potential. And it is also a benefit for our shareholders, at least those that pay taxes, anyway. In that that portion from a tax standpoint as opposed to GAAP is construed as a return of capital distribution, which is a big positive because our big shareholders that would otherwise have to pay taxes do not have to pay taxes on that portion. It's a benefit that I think is analogous to what unit holders of some master limited partnerships might enjoy, whereby, because of depreciation, shields a good portion of the distributions they received are return off capital as opposed to on capital from a tax standpoint, and therefore, there is no taxation related to that portion. In a potentially rising tax rate environment, we think that is a big plus associated with these types of transactions and one of the reasons, I mean, you wouldn't close a deal or overpay for something just for that reason. But it is one of the attractive aspects of these types of deals and one of the reasons why we are looking at other potential opportunities.

And by the way, Brian Oswald is really the person who deserves a lot of credit for making sure that was structured to achieve that goal, which we do think is a significant benefit.

So it sounds like if this capital is paid out as a return of capital to the shareholders in the form of a dividend, then obviously the capital's not going to be retained. At what point does the taxable earnings start to grow closer to the dividend if you are not retaining that capital?

Well, it's a little hard to project that, because there is a lot of moving parts associated with the future of other types of deals we might do similar to the Patriot acquisition, both public companies as well as private companies, for that matter, on a stock for stock basis. So it's really hard to project that.

Then quickly, on the nonaccrual, the two you mentioned, I don't know if you mentioned the names, they are [Dead] Shop and Iron Horse. Iron Horse actually had a maturity date at the end of the year. Is that more a function of why it is on nonaccrual versus underlying distress? I think one of the pieces has actually held at 93. Is that a company that's maybe doing a little better than maybe we would think because it is on nonaccrual?

Well, I think the nonaccrual was really related to some working capital needs for that business, associated with an industrial company that is somewhat captive to the commodity cyclicality. Toward the tail end of 2009, natural gas prices were at the lowest price in many years. And Iron Horse, which is a energy services company in the western Canada sentiment basin, in Alberta, slowed its activity in conjunction with that sharp decline in natural gas prices. Since that time, natural gas prices have increased. And activity and revenue and bookings and leading indicators for Iron Horse has increased as well. So we will be revisiting that nonaccrual decision potentially in the future.

Would there maybe be a timing business from when it was put on nonaccrual when you did the evaluation when you put it at $0.93 a par?

No they were both done at December 31.

Okay. One follow up on Chris's comment.

Let me just answer that. There is substantial collateral value associated with this investment. We own a significant amount of Energy Services equipment. And we do have the benefit of reviewing leading indicators as well sometimes there is a decision associated with the past from an accrual standpoint, but the evaluations a factor in all the information including on a looking forward basis some of these leading indicators.

Brian, do you want to add anything to Iron Horse?

No, as Grier said, the prospects for the business, their backlog is up, I think things have improved significantly, since the December 31 date, and we'll see how their operations perform in the first quarter, and their ability to continue to pay interest.

I would like to say something. It's ironic that here we have a company Iron Horse Coil Tubing, anybody who has been listening to these calls is probably just dying to get the latest installment of the serial story of Iron Horse where the Company did very, very well, so well the former CEO thought it was time to start competing with his biggest customers. What a smart idea. He didn't tell us, of course the customers found out and they cut him off. This was about maybe a year and a half ago, that we discovered that the revenue streams were starting to dry up, and other customers were not stepping in here. And now, here we are valuing that investment, looking at whether it's on accrual or nonaccrual or whatever, and we have, the new CEO in charge there and a new head of sales, these guys have turned down jobs that at least one of them, at [Ancona], they are very excited, they are motivated, they now have two frac spreads when they had at one point one or zero. They are building a backlog of business and everything is finally, finally it looks like we are turning the corner with this Company. And I understand from an accounting point of view, we have to mark it down and we have to put it on nonaccrual. So, let's, Mr. Optimism here believes this Company is on track, finally. To achieve the promise that we've always thought it should have and I want to mention David Bellser, on our team, has spent many hours flying out there, to Medicine Hat, in Alberta, to get all these issues resolved. So we are quite hopeful.

Great. That is great color. Thanks, John. One follow-up you on Chris's commentary on the debt facility. If you use an example of you borrow an extra $100 million and add those assets, what is the typical advance rate you are getting on those assets?

Currently it is just under 50% of the but one of the things we are doing with our facility extension is looking to increase our advance rate. We are looking to increase tenor of the facility, to increase our advance rate, and to reduce our spread on borrowings.

Okay. Do you have, is there an advance rate separate from senior or second lien, or are you getting any advance on second in this facility?

That is sort of a hybrid, you might say weighted average advance rate. Because we do have junior debt positions in our current borrowing base. Whether or not new originated junior debt would get advance within the facility is one of the topics of discussion.

Right. Thanks, guys.

Troy I want to add another point here that you might find interesting about Iron Horse. Notwithstanding that we have 13, $14 million of fair market value of equipment there, and a loan of maybe 18 or 19, maybe it's $20 million now, the entire loan goes on nonaccrual. You are not allowed to say well wait a minute, we could just seal this equipment and -- sell this equipment and get everything back on the most senior 13 or $14 million. So this paints such a picture of the situation. You are not allowed to do that. And it is the case right, Brian? And it is I think the liquidation value of the equipment is 10 or $11 million and the fair market value is 13 or 14. So needless to say, it is frustrating to us to see that be a significant factor in the accruals and the evaluation for our company, but the thing is, that's why we have Lincoln, that is why we have , and it is our business for Grier and myself to work very hard, David Bellser, to try to help these companies perform.

Thanks guys.

Thank you, Troy.

The next question we have comes from Jasper Birch of Macquarie capital.

Two more quick questions. I'm sorry if you already addressed this. But could you just walk us through what that realized loss on investments was, again?

It was primarily or entirely due to the moving of the Cole investment Yatesville into a other than temporary impairment. We have closed down the operations temporarily there until coal prices recover and as such, it's considered an other than temporary impairment and as such, we have taken all the unrealized losses we had previously recognized and moved them into the realized loss position.

Okay. Excellent.

So that is why an increase in unrealized appreciation to offset.

Yes.

Okay.

It is no secret that coal has been very, very difficult for us, as for other people. So, that's the appropriate treatment for that.

That is the coal bed asset now? Yatesville, yes. Coal bed was Conquest. Can you provide what the EBITDA on gas solutions in this most recent quarter was?

We don't have that handy. We'll see about getting that. At some point in the call.

We may have it later on in the call. We have to go look it up.

Okay, thank you guys very much again.

Thank you.

The next question we have comes from James Bellessa with DA Davidson.

On this amortization of the purchase discount for Patriot, I thought you told us originally it was like a little over $17 million a year. Now you are telling us it is about twice that amount or more. What happened? How come it's increased?

I would not say that it's increased. What has happened and what we recognized during the quarter is we had some investments which prepaid early and accelerated the amortization of that discount over a very short period for three specific assets. Which were repaid during the quarter.

I understand that. But I thought we heard that you are on a going forward basis you are looking for $3 million a month or more amortization?

No, not amortization. Interest income and amortization.

I see. Okay. And then finally, there were a few, I think there were a couple small suits filed yesterday, or at least I saw them on your website. How come, why are these important?

All right. It's amazing, but I'm actually prepared to talk about this. Just kidding. Whether we make investments, definitely in the private market, Jim, when we make an investment, the normal process that we follow with discipline is that somebody comes to us and they want to have us invest in their company, buy their company, loan them money or whatever. So we say to the people fine, based on a run through of the information that you have given to us. And we do a little desk due diligence and a little checking. We say these are the kind of terms we would be prepared to extend to you. If those are of interest, we can go the next step.

If they are not of interest, then everybody can avoid spending a lot of time on this, and we can part as friends and maybe you'll bring us another deal, which often happens. So then, when we have an agreement on terms, we say fine, now we are just not going to believe everything you have told us, right? We have to go in, it is trust but verify. We have to go in, we may need to hire consultants, we may need legal help, our people will be traveling to your premises and we will start to incur expenses. Now, if you are just telling us a story, which has been known to happen, we could be wasting all these expenses that we are incurring. So we are not going to take that risk. Yourself interest if you get a loan fine we are self interested to make sure we don't dignity dry holes. So our documents provide that potential borrowers, potential companies being sold to us, pay us our expenses in the event our due diligence turns out to show that the story that they told us was not quite true. Now, in the case of loans, that is a fairly standard, I'm not going to, some of our competitors don't do that, but we do. When you buy a company, it's harder to get that. Because the seller will typically say well, all these people want to buy my company, and none of them are asking me to pay their expenses in the event that this doesn't turn out, in the event that diligence doesn't prove out what I'm saying.

And so, we still attempt, and usually, in the case of purchasing private companies, and this was also the case when we purchased Patriot, thanks to Grier negotiating this, we agree for some, some reimbursement to us of expenses that we incur, in the event that we do not close because the diligence is at material significant material variance to what we have been told. So we had this company down in Kentucky, Sequoia, run by Stanley [Datety]. Stanley is a very nice man. This fellow, [Burleson], his partner, very nice people, ex tolling the benefits of their company we said fine, we will bay the company for I think it was 4.7 times EBITDA, which was a good price and whether we did the due diligence, there was a significant gap between what he and Stanley Burleson told us at Sequoia and what was indisputably the case. So we did not close. We told him he owed us whatever it was 50, 7085, $90,000, I don't know what the exact number is. And they declined to pay.

Well, that was half of, actually, because of the fact that the representations were breeched, we are entitled to get all of our expenses, which I think were like $90,000. If it was an innocent mistake, it was maybe half that. So he seems to think that we are just going to sit here and have him say well no, I'm not going to pay you, come find me. Well, yes, we'll be patient and we'll give him a year and a half, and then we will come find him and that is what we are doing. Stanley sold his company to somebody else, who I suspect is not so thrilled with what that person bought, and so, we know he has the money and we feel he should pay us. And some people might say well, for $90,000, that is not material to Prospect Capital, well we think every penny of our shareholders's money is material, just as a matter of policy, and as a matter of attitude. So we intend to collect it from San Stanley.

We had another guy pull a stunt on us and sued us and he now has agreed he is repaying to us every single penny of our legal expenses. And more. And if you want to go look up what happens to people who think they can jerk us around, the population of people who are getting away with it continues to be zero.

And then finally, this interest income that you are getting from the portfolio investment for Patriot, are they going through your interest income line item? Or are they going down through other income?

Sorry? Which portion are you talking about? The accretion?

No, not the accretion. The interest income from the portfolio investments that Patriot brought to you.

It's combined in the same line item as the prospect book.

Thank you very much.

Thank you, Jim.

The next go we have comes from Dan Mayser of Harvest Capital.

Good afternoon, guys.

Hi Dan.

Just a company of quick ones. I wanted to see how much accelerated amortization is included in that $0.24 to $0.32 outlook for next quarter. It is a pretty wide range for you guys. I imagine you might not be sure what you have embedded in there for right now?

Dan, appreciate the question. For some time, we haven't broken out the component's of our guidance, we are going to decline to do so here, to be protective.

Okay. So it sounds like you have at least one that will be included on what you have done already, and -- whether, okay, just a second question. Maybe you could just kind of walk through [H&M], it, I think your prior sense if something goes 90 days you usually put it on nonaccrual. So I thought there might be something unusual with this one. So you can kind of walk through why you feel good about that one?

Sure.

And it looks like you feel pretty good about fair value or your cost basis.

That's right, Dan. H&M is a primarily crude oil production company. And while as I said earlier in the call, natural gas prices have gone through substantial gyration as of crude oil over the last 18 to 24 months, natural gas has been pushed down a bit more crude oil has still been in the $70 to $80 per barrel range here recently. So we think it is a valuable company, it is a valuable asset. In West Texas, recent comps of trades of assets in the Permian basin have been substantial. There are specific drilling obligations with this company associated with its leases requiring for wells to be certain numbers of wells to be drilled over certain time periods. So there is a discussion on highest and best use of capital to build value that caused an adjustment in the interest payment owed to us. As I'm sure you can imagine we are in significant discussions about that with the ownership of the company, and what to do going forward with strategic direction. Of folks on our team are quite pleased with recent wells drilled, with the value build and this type of a business on a prove reserve basis. We think it is a valuable asset. We are senior secured across all that have collateral and what we'll see and what occurs with the going forward. I'll also add we have a substantial equity position in that asset as well.

Okay. I presume given that outlook you assume that is going to continue to accrue and the out look for next quarter?

Well we don't make projections on accruals for particular investments, we do feel pretty good about the production and proof reserve rampant in this company and commodity price.

Great. Thanks, guys.

Thank you so much, Dan.

The next question we have comes from Tony Reiner with Dominick and Dominick. Pleas go ahead.

And thanks for hosting. I have missed a bunch of the calls so if these questions have been asked, I apologize. There was a question before as to why you set the record date early. I'm curious as to why we didn't launch a tender of the old terms and sore of get a read on that and get a data point, a piece of information in that regard. Was it you know just so anxious to get to the bottom line price?

As we indicated before, we have filed documents, we have mailed documents, we have published documents, we have press released documents, as has Allied. And there is a huge amount of information out there. As a result of these activities. As I think you also know, proxy solicitation are highly regulated, and accordingly, we are not going to be adding to or subtracting from our documents on this call.

Yes, there has been a lot and I appreciate the fact that there has been a great deal of language and all sides have been very thorough that helps us and we appreciate that thorough, certainly better than not. But one of the things that wasn't answered or as clear as to the rationale behind some of the moves. So I'm just asking for a little bit of the thought process or rationale.

Well Tony, let me just reiterate this is an extremely highly regulated, there may not be any higher, more carefully regulated area of the economy. I can't think of one right now. And therefore, we spent time preparing our written documents, which we published, which anybody can read and I'm just not comfortable here today, on a phone call with you, adding to those documents, subtracting from them, enhancing, enlarging what is there. We have said what we mean. The documents speak for themselves.

I can respect that. Okay I appreciate it. Thanks so much.

Thank you.

The next question we have comes from Jim Stone of PSK Advisors.

Good afternoon, gentlemen. I'm relatively new to the Company, so my questions may be relatively simplistic. As we look at the your projections or guidance on payments for the March quarter, the dividends, could you give us a rough feel how much of that is an actual cash transaction to you? And how much is noncash or payment in kind or whatever?

Are talking about the guidance?

In the guidance, right.

Well.

I'm looking just for a relatively broad brush type of feel.

Sure, as a general matter, we have very little in the way of so-called payment in kind. Types of interest in our portfolio, and virtually all our deals done today are of the cash variety. Now the accretion related to Patriot, and I'm going to separate from that cash received on interest. There is a noncash portion of that recognition. However, to the extent we have a repayment the only portion that would be recognized would be the discount. Of course, the balance would be a return of our principal. So we have cash substantially received in excess of the interest we would recognize. And that was the case last quarter, with the Patriot portfolio, in which we had repayments well in excess of the income recognized associated with the discount.

Okay. Can you give me some broad brush feel of? Is it you know like half? Or three quarters is cash? The rest is noncash transactions?

Pick is about 5% of our income.

Okay. But I'm still trying to get a gross feel for that on the guidance, whether it's a quarter, a third, whatever would be noncash, because it's the.

Let me try with an example. So you have a $100 loan that you purchased for $0.50?

No, I understand. I in the discount and the accretion. And I'm just --

You could potentially have cash received well in excess. It could be more than 100% of the income of the cash. I mean, cash is fungible, there is cash associated with income, there is cash associated with principal repayment as well. And I guess, it's a long way of saying it depends, Jim.

Okay. Along the same line, I'm trying to get a feel, if you look at say January 1, 2009, versus December 31, 2009, again a broad brush feel for what caused, what's responsible for the change in the net asset value. And I'm thinking part of it may be the diluting caused by Patriot or whatever.

Patriot we expect to be accretive over time. General categories from January 1, 2009 to 12-31-2009 is a, number one changes in a portfolio evaluation primarily associated with the economic cycle we have been in, that is painfully obvious. Secondly, issuance of additional shares at a discount to prior net asset value per share.

Okay.

Let me put that in maybe more layman's terms. If you look around at our competitors, and where in the group that it's competing with each other, if you've got a portfolio of loans at 12,13, 14% and FAS 157 these are going to be repriced at 17 and a half%, you are going to take a significant hit on the NAV value of your portfolio, even though these are performing loans. Each they they will, we hope, all pay off. So that's one hit to the NAV. A second hit is when you issue shares below net asset value, in order it be sure that you have the liquidity to be able to pay your bank off 100%, which we wanted to be sure we had, some other people took some risks in that category, and I think they wish they had followed the strategy we followed. Thirdly, when you look at buying something like Patriot, it is the gift that keeps on giving, right? You issue the shares below NAV, in order to be able to buy Patriot. And when you buy Patriot.

It comes back, I understand.

But my point is, it takes a long time and that's why the NAV, right now, does not reflect what we believe will be the benefit of owning that Patriot portfolio at a discount. Now, I have to add that if things default in there, and don't pay us back, well then the accretion we are hoping to get we would not get. But we believe that this is a gift that keeps on giving with deferred, in a sense it's a deferred asset.

Okay. And then, my last question relates to the I should say, yes, not dividend is not the correct term there.

But distribution.

Distribution, right. Which is obviously considerably more than what we are looking at as income. And I'm wondering what's vent you are looking at that says yes, that's maintainable, because the following things we are expecting to have happen.

Sure. Well one important consideration, when you are studying our company and set being the broad context of other, similar types of companies, is we have a balance sheet today which has virtually no indebtedness. And we chose to capitalize ourselves that way, in fact to expand our equity base over the past year, as a sign of strength, given the uncertainty of the credit markets. One strategy, other companies have pursued, to their detriment, has been the (inaudible) Baro, Long, Lynch -- .

No I'm well aware of that.

Right. So Baro, (inaudible) with their liquid assets. That was Patriot in a nutshell. Now as the credit markets are improving the ability to drive longer term facilities with more flexible terms becomes more approximate more attractive, our attention is to draw more upon credit and to draw positive spread income over time. Virtually none of that is reflected in the current snapshot of the numbers you see, because we have not leveraged even to a relatively modest extent, our existing, all equity funded pool of assets.

Well, if I can short circuit that a bit. As I'm hearing you say, basically, as we leverage it out, then our earnings will come up to what we are currently distributing? Is that a shorthand? Or is that too simplified?

This is John Barry speaking. I think it is a little too simplified. Because first, we've never made any predictions about -- other than giving guidance and announcing dividends, Jim, at the time that they are declared by the board.

I understand that. But there is an implied in the stock and the stock value that things will continue or they won't continue, and on Prospect Capital of course with the 30 or 40% decline it's had over the last month or so the market seems to be saying it probably won't happen. So that's what I'm trying to understand.

Well, I think the first the correct word is inference, not implication.

Okay

It is an inference you may be making. And you are certainly entitled to make it. We do not imply infer. Look at our track record. What Grier has said and by the way, with respect to the market, I might take a look at the market as a whole. I compare us to the market as a whole. I don't view us as like the lone guy out there.

I understand.

Well there has been certain things happening in the markets the last few couple of weeks, which you might want to get up to speed on.

I'm well aware of it. And have the whip marks to prove it.

So let me go to the next point, Jim. That is what Grier is saying is the traditional model for these business development companies was put all of your equity capital to work, then borrow at much lower rates, and you are getting, in effect, a turbo charge for your net investment income.

Yes.

And what Grier is pointing out is our gas tank is full. Okay? We haven't used our credit. We have the ability to do that. But what we can't do is go from saying our gas tank is full, therefore we know we are going to go in this or that race.

Okay. Got you. I thank you.

Thank you, Jim.

The next question we have comes from Rob Schwartzburg of Compass Point. Please go ahead.

Good morning, gentlemen. I'm a little new to the story, so perhaps you covered this. But I thought that Patriot acquisition was when it's fully ramped up, going to add as much as $0.10 a quarter across-the-board and you did $0.25 in the September quarter. So that to me would mean that you would be somewhere around a $0.35 per quarter run rate when it's fully integrated. It looks like your guidance is $0.24 to $0.32, can you walk me through again what the differences is it somehow less accretive? Maybe you can help me with that?

Sure. I think we had said to folks somewhere in the range of $0.09 per quarter in the past associated with that book. With our guidance we try to be as careful as possible in what we put out there. And there is a reflection there of some of what is going on in the existing book and some of it related to Patriot not expecting any early repayment or accretion beyond that. We had a few cents of some new non accruals we talked about earlier Iron Horse for example being one of those. We are optimistic about the leading indicators for some of those deals. But, we wouldn't necessarily factor that into guidance.

Okay. So in a nutshell, it's if there is somewhat of a reduction from the run rate, that you thought it has more to do with your legacy book than it has to do with Patriot, is that fair to say?

I think that's a fair comment. And of course one aspect that we haven't included there is as I said in reference to an earlier question is by adding, positive spread income from prudent leverage, we have been very careful about leverage as a company which has been the undoing of others, then that should accrete to the bottom line and we really haven't factored that in to much at all in the future.

Okay. But it's not so much a change in expected funding costs or anything like that on a go forward basis?

Not at all. On the contrary, we are managing toward an objective of reducing funding costs. When we did our extension the in the first half of 2009, it was probably the worst time in I don't know, five years? Ten years, you could imagine to be working on an extension. Given where the credit markets were. The credit markets as John pointed out earlier have improved substantially since that time. So we are driving toward a lower cost in the future.

Okay. I mean, I still feel like there is something, I mean, it's a relatively -- as a couple people mentioned, it's a pretty wide range of guidance, 24 to 32, but particularly in the context of the fact you were running at 25 and now you have made this accretive acquisition, would would expect it would certainly be higher than 24 for the next quarter.

Well, it is a fair point. Many of our peers have stopped issuing any guidance whatsoever. We have maintained that to be helpful to folks and we do have a range associated with it.

Right.

If we put in the books new originations for example, that could have significant positive impact.

Right. And by the way, I agree with your strategy of being as unlevered as possible so congratulations to you on that. Thank you.

Thank you so much Rob.

The next question we have come comes from Allen Young of RC Management.

I appreciate you guys taking the time on this. In the Q, you referred to potential synergies with PCAP, can you quantify that at all?

Sure. Most of the synergy has been in a reduction in G&A expenses. Associated with areas like D&O insurance, Board costs, legal costs associated with running their business. They were hiring third party investor relations firms, IT vendors.

How much? Any idea that you can share?

Let's see about getting that number and we'll publicize that on the call if we can get back for you quickly.

Am I correct in an early question the answer was the OID accretion from PCAP was running about $3 million on a monthly basis; is that right?

That is inclusive of a interest income, cash paid interest income out of the book.

So that is cash paying interest plus OID accretion?

Correct.

Can you break out just specifically the part?

The OID portion, I think before somewhere in the range of $4 million to $5 million per quarter. You can divide that. But that assumes, again, that is running it forward to with no early repayment. We have early repayment.

Exactly.

Then we can have significantly faster accretion. Again accounting wise, it is different from how others might account for things we think more aggressively, others might say hey, I bought something for you tow, $50 that was marked at $100, I'm going to take $50 in as an income all this day one. We are not big fans of that approach.

You are treating it as though you bought a bond as at a discount and you are amortizing it over the period to maturity?

Exactly.

A bigger picture of the $650 million portfolio what percentage of that runs off on an annual basis?

Our weighted average maturity is what would you say Brian? About three, three and a half years.

So a full that would be one and.

It is concentrated more toward the back end.

Any idea over the next 12 months what runs off in dollars amount? $50 million?

That is probably not a bad estimate. As Brian mentioned tends to be a little more back ended. We do have amortization under the existing book but not necessarily rapid amortizing structures we put on. In some cases what we do, to protective is we'll have cash sweep mechanisms, such that payments come back to us. It is an interesting exercise that we talk about a lot as we are structure deals the nature of amortization in general we are big fans from a credit standpoint of having more capital come back as soon as possible. But as anyone knows, it's gone out and solicited and structured and closed a credit facility, you can shoot yourself in the foot if you have too much scheduled AM early on, in too heavy a fashion and a company goes through anything and if they miss a principal payment boom it is knocked out of your borrowing base and you say I wish I hadn't done that. Done mean no scheduled am, but you might want to think about having that a portion scheduled but then a portion subject to a mandatory cash sweep based on cash availability. That ends up being not all the time, but wherein a lot of cases we end up.

We currently have about $100 million available on the revolver, and there is an advance rate I think against securities with a market value of some $300 plus million, is that right?

That's correct. As I said earlier in the call, as we take the proceeds of that borrowing base draw, and redeploy it into eligible collateral and then you add that back in the pool, our borrowing base availability goes up and then we can draw more.

So you invest that 100 and it gives you another 50 borrowing capability?

Well you invest the 100 into eligible collateral, yes somewhere in that range.

That is currently priced all the plus 400 and you are working to reduce that?

We are looking to reduce that yes.

Term capital. If you have an advance rate on your existing portfolio, what would term capital, which I presume would be secured, what would they look to as collateral?

Well, the term lenders right now our sense of the market, it's a little choppy to envision unsecured term debt, given interest rates yield curve et cetera, perhaps more that have market will open up and we are monitoring that carefully. Right now the market seems to be much more geared towards wanting security, wanting collateral, wanting to be with the revolving bank lenders and therefore piggybacking off of the same convent, borrowing based calculations, advance rates and the like. But, that could change over time.

Okay. And then finally, if you are looking at new investments in the marketplace, I know it is tough to generalize. But what kind of spreads to lie bore are you seeing when you put new money to work?

We are seeing on our senior secured deals somewhere in the range of 11 to 14% coupons. You might call that stretch senior, unitron senior as well. We are talking about 1000 to 1400 basis points over LIBOR. And then on mezzanine basis, for true junior debt, somewhere in the 15 to 18% range maybe with some warrants as well. The other factor, in addition to where you sit in the capital structure is the size of the borrower. One niche area that we like is the 3 to $10 million EBITDA arranged company. In which there is far lessened competition. And there is still, it is still a great environment in the 10 to $30 million EBITDA range as well. But a tad more people involved. At that company size. We really like that lower middle market, something that Patriot had pursued successfully, in its history as well.

Okay.

Let me just add something, related to the origination and so on, people are wishing we are wishing we had a crystal ball and we could tell how many deals would close each week each quarter. In fact, to give you an example one of our very good originators had nothing that as likely to result in a term sheet anytime soon three weeks ago. So now this week he has four or five deals going to term sheet, going through approvals, it is 150 to $200 million. A lot of time and effort has gone into these transactions. Some went away from us and came back and that the the that is the nature of the lumpiness we now have. We have to give this person more resources so he is able to move forward and close these things. That is part of the explanation for at this point having a wider range.

Big picture again I can see maybe $50 million of existing portfolio running off and probably going back in as you mentioned which is probably better yield than it was giving us before. We can draw on the revolver 100. Invest that that will free up another 50 on the revolver, we are paying LIBOR plus 400 there. I can figure out the spread on that. We have pro forma combined $18.1 million for Q2 PCAP and [PSEC] net investment income. Maybe there is one time OID in there I can subtract out that will give me a sense of a run rate on a fully invested basis and that of course, excludes surprise pay downs. Is that kind of the math as we are trying to run through this?

That is fair, yes. Of course the OID, I would say is not necessarily one time. We expect to get that every quarter for quite some time. And then we take the proceeds from a full par repayment and redeploy those at significantly higher spread. Some of the Patriot book had not just lower spread deals, but they did not have a LIBOR floor. And current deals much more floors and significant spreads attached to them. In our prospect book, we monitored interest rates very carefully and when lie bore was at 500 basis points, we wanted floors and everything we said we don't have a crystal ball but we know during the last recession, LIBOR went down to 100 basis points. Let's put floors in these deals. We are very glad we did so, of course, LIBOR has gone below even 100. Down to 25 basis points. We are happy we have those floors. Buying the Patriot book we bought at a discount and unless someone tells me I can't go below zero, so we have the built in floor of zero now in that book. But as those loans reprice we'll be able to put them out at higher spreads.

Right, now there was that $4.6 million of recognized OID, last quarter, came from pre-payments, is that right? It was accelerated?

Correct.

Okay.

Well, a portion, it was accelerated. A portion we would have gotten in the ongoing course.

Do you know what the division was? If I take that 18.1 million pro forma in the Q, and become out the one time, if you will, from prepay, what would be a kind of recurring number?

Well, actually, the ongoing, would be on the book for just under a month so it wasn't a full quarter, it was called the ongoing accretion. Some where in the range of well Brian has a fuller answer for you.

Yes, the accretion is about a $1 million a month.

Okay. Assuming static portfolio going forward?

Correct.

All right. And that's kind of gets us to the you had said $4 to $5 million a quarter? Maybe a little less than the $4 to $5 million a quarter.

Yes.

That was inclusive of, that is a fair point. We were at about $4 million and then we had some early accretion, so that reduces to somewhere between 3 and $4 million going forward. Was before we had some earlier repayments.

So 3 to $4 million per quarter.

Right. But then again we take the proceeds and put them out.

Okay. I think that's helpful. It seems like everyone on the call is trying to get a sense of what we just walked through. Perhaps that gives us a little more clarity on how we end up earning the dividend which is I guess what everyone is asking a million different ways.

Thank you, Allen.

Appreciate your time guys, very much.

Sure. Thank you.

The next question we have comes from Greg Mason of Stifel Nicolaus.

Just a follow-up. I had a question on the interest expense during the quarter. You had no borrowings last quarter, 10 million this quarter. Yet you had about a 2 million interest expense in the quarter. Can you walk us through what was in that number? Was it something to the PCAP acquisition?

No, it really amortization cost plus more paying on our undrawn commitments.

So those are the up front commitment fees amortized over the life of the facility?

Right. Plus what we pay in commitment fees on an ongoing basis for the undrawn revolver.

Okay. Does that go through the end of the current facility? Which I think is June of this year? Or does that go all the way through the full one year amortization period after the facility matures in June?

The latter and if you go to page 54 of our 10-Q, you can see that laid out chapter and verse.

Great. So we will have this kind of base interest expense and then whenever we borrow, we'll go on top that have number?

Well, not quite. Because if you are paying at an undrawn portion you wouldn't pay that when you draw.

Right okay. Makes sense. And then one other clarification to the last conversation you just had. You talked about you'll be able to take the accreted discount and reinvest those proceeds. How does that lineup with, I think earlier in the call it was implied you will take some of that and pay the dividend? That will be classified as return of capital, can you balance those two statements of taking capital and redeploying versus needing it to pay the dividend?

Well, I guess, you have to break out the components of the cash repayment we are getting a fair amount of principal back as well it is just not the income portion and we are reinvesting that as new transactions and an attractive spread environment. You have to look at the entire cash payment received not just the income portion thereof.

So likely the principal payment you get back reinvests, but the accretion into income, that cash payment will go out the door to the dividend?

Correct. You have got about $45 million of repayments last quarter for example. Well in excess of the income accretion recognition portion.

So you had $45 million paid back, recorded 4.6 of that into income, so roughly you can redeploy $40 million and the 4.6 goes to help pay the dividend?

Correct.

Thank you, guys.

Thanks, Greg.

The next question comes from Louis [Pauareus] Investor. Please go ahead.

Thanks for the good disclosure and lengthy conference call. I have not been able to find anything on your website or elsewhere, as to the results of the proxy solicitation you had for the issuance of additional shares. Are you able to tell us anything about that?

It's in our 10-Q on page 60. The votes were in the affirmative on all the proposals. Page 60.

I'm sorry. I missed it.

Go to page 60 in our 10-Q, the votes were in the affirmative on all proposals.

Thank you very much.

Thank you.

The next question we have comes from Mark Sunderhuse Red Rocks Capital. Please go ahead.

Hi guys, appreciate the time you are taking on the call today. I want to be clear. Admire your business model as you referenced it earlier that you guys have gone about running a BDC in a different capacity. I would have two quick I guess they are comments if you want to take them as questions or common on them, I would be grateful. Given all the different moving parts that exist right now and a lot of the questions around the wide range of guidance, would you be willing either at a conference or maybe to consider doing a mid quarter update? I don't think it is something you have done historically. The basis of shareholders to give a little bit more insight as you kind of work through where you are and what you are doing? And then the second question would simply be speaking generically, have you thought as you make potential further acquisitions of the idea of only on the assets acquired of having a variable fee structure that is commensurate with growth and book value or specificity and dividend growth outside of obviously borrowed dividends. I think it's allowed, after reading both (inaudible) of the prospectus that we are familiar with and would be curious if you guys would consider that? Because it may go a long way to either completing things you may currently be focused on or things in the future.

I'll take the second question first. I heard Obama yesterday stated he was delighted that Jimmy Diamond was getting paid whatever it was. And (inaudible) was getting paid. So maybe we're going to recover from this theory that people who work hard should not be paid a lot of money. I would like to see everybody at this company paid an awful lot of money. A huge multiple of what they are currently paid. They work seven days a week. You should come and sit with us. Seven days a week, we are on the phone, doing things, at 11:45 at night. So what I would suggest is the concept of like my father thinks. If there is billionaire' out there there is only so much money. And the more money one person has, somebody else has to have less. It is like a monopoly game. They only give you so much money at the beginning. We don't subscribe to that. We sub describe to the view people should work hard, perform for shareholders should be paid a lot of money. I want to get that on the table because it is an old fashioned concept that maybe I am the last person in the room to be promoting.

We would fully go a step further if your outperform your peers we have no issue paying yourselves commensurate to the value you had relative to your peer group. It is not a capping question, it really is a theoretical question about maybe a way to derive more support for deals that you may pursue.

So I want to continue on the topic so you understood my position on that. I hope Bentley are surrounding my building when I come in tomorrow. On both topics, though, as Grier said earlier, we always want to consider ourselves rational, logical, objective, data driven, truth seekers. And so, when someone walks in front of us and says you know what? This would all work better for everybody in the situation if we changed it this way or that way or another way, we always listen. And we review these things and we grind them through. And so now, you'll probably be gratified to know we have already looked at both of the ideas you have set forth, and have considered them. And will continue to consider them. And based on your raising both those ideas, we will even consider them harder, than we would have before. As far as variable fee structures and so on, you will be gratified to know that our company has had those going back to 1988, and we've done very, very well with them. Sometimes, some of the investors have issues with them for various reasons. Some people, like you, think they are wonderful. So, it gets down to can you keep, we want to keep as many people as possible happy for as long as possible. But sometimes we find it is very, very hard to keep all the people happy all of the time.

That's that topic. On the presentation. What we should do is let you know, we were just contacted for another one just the other day. What we should do is maybe post it on our website, ask the investment banks that promote these [confab] to make sure that you know about it. Even if they don't, we will make sure you know about it. We believe that the more communication we can have with our shareholders and the more transparent we can be about what we are attempting to do, the wins, the losses, the ties, the lower will be our cost of capital over time, which enables us to be successful competing in a very competitive marketplace. So I really do appreciate the suggestions.

Good idea, Mark, we'll definitely take that under advisement.

Two other quick questions related to macro within your business. With won one if it is -- one would be. If it is out there I can't find it. If you are going to show us a pie chart and we were going to lump things outside of debt investments, be it warrants or converts or what not, maybe you put convert under debt and then break it out, depending on where conversion price is, can you just talk about split right now between debt component and equity? I realize it is heavily if not 90% on the debt and the second component of that would be in this environment and cost of funds and as you grow scale, your thoughts given that equity investments potentially, stressing that word, may pay off in many cases better than some debt investments? I can only think of one in the US that has primarily equity investments and would just like to hear your philosophical thoughts because obviously the way you have to allocate capital too is extremely difference.

Okay. It is Grier, Mark, you can see the full breakout of all the types of assets on page 46 on our 10-Q. Related to the question about equity positions, we think that our business model of having balanced strategies, which means we lend money to health companies, we lend money to private equity sponsor owned companies, and we buy companies, owning both the debt and equity and managing toward sole return. A great strategy to help make money no matter where we are in the cycle. Because if you are just long, take sponsor finance. If you are just long sponsor finance, there are going to be periods of time and we saw it in a big, big way in 2006 and 2007, where being along that strategy and putting capital out is a very imprudent thing to do. And why was it imprudent? Well, in order to quote compete they were dialing up the leverage. They were accepting modest spreads. Doing it just because they had to, to keep up with everyone else. You have to do that. On the balanced approach like we do, you can marry in your own self originated deals to buy companies on a negotiated basis, to lend money, to closely held companies. And those two strategies, why many folks don't do them is they require a lot of work. There is no third-party private equity firm who does the diligence and the market studies and the quality of earnings assessment. You quote piggyback off of that and draft behind that as a lender. Here, we are the primary institution, we have to do all the work. We are not looking to others to do that to study their work. And so, it's a much higher effort type strategy to originate and to screen and to assess.

But it becomes well rewarded and you see that off of how well warrants and equity positions have paid off, on a one time basis for us in the past, as well as on a going forward basis or an ongoing basis with dividend distributions. The area that didn't work out as well which we have discontinued is in the area of project financing left out of the ongoing forward strategy. But right now, here in early 2010, you have a market environment whereby companies with 2009 EBITDA is most likely once unless we have a double dip recession trough EBITDA. So that's a great profitability bogey to be purchasing businesses off of, and we are significantly pursuing our buyout strategy in conjunction with sponsor finance and other forms of lending. We think to put those positions on the books with the associated upside is important. It done mean you pursue deals on what basis value always critical and as anyone that has ever visited our offices knows, we are very value conscious in everything that we do. That means when we buy companies, we are not the folks that chase is, as have others that pursue this sort of equity strategy to find out paying the 8, 10, 12, 14 times multiples to quote win these auctions, it makes no sense whatsoever and you are not going to be able to produce enough gains out of your equity book to make that strategy viable. But if you are paying three to five times EBITDA, which has been our purchase multiple range on buyouts, which is only a little bit more than lending multiple, in some cases less, because we have gotten attractive deals, then you are paying very little for that equity option. That premium strike if you will is very low.

I'm sorry. I particularly like your last comment if you could just on, I went to page 46 at your suggestion. My only question would be, and I don't know if you have given guidance on this historically then. On the top line where you break out control affiliate and noncontrol.

Yes.

I understand the confines of the BDC on control and noncontrol. Can you talk about how much you might stretch that control number to?

Well, we are allowed to go to 50% under the BDC rules as a max. And we retain the flexibility to go well, maybe not right up to 50% anytime we have numbers we guide to we like having a cushion. But to go significantly toward that, it is important to point out we do not have hard and fast allocations for our deal teams. We don't say X percent has to be this type can Y percent has to be this type. We'd rather have each opportunity live or not live on a stand alone basis and be attractive, risk adjusted to us. But having said that, there is an aspect of Rex opportunities and saying hey, we want to be doing more buyouts in the current environment. We are significantly pursuing that strategy.

Okay one last question. On the preferred line and the common stock line of 1.7 and 2.9, how many of those are coupled with debt investments as well? How many of them are stand alone clever common stock? Do you know that off the top of your head by chance?

I don't know that off the top of my head. Because those light temperatures would apply to both noncontrol and control situations.

Great. Maybe at some point we can discuss it further.

Yes.

I appreciate your insights.

Mark, thank you very much.

Thank you.

The next question we have comes from Brian McMann of Thornburg Investments. Please go ahead.

Thank you. Questions have been answered.

Thank you, Brian.

This concludes our question and answer session. I would now like to turn the conference over to management for any closing remarks.

Okay, well we thank everybody and we know the snowstorm has got some people heading for the exits. So we appreciate everybody taking the time and have a wonderful lunch.

Thank you all.

Thank you gentlemen for your time. The conference is now concluded. We thank you for attended today's presentation. You may now disconnect.