Prospect Capital Corp (PSEC) 2011 Q1 法說會逐字稿

Welcome to the Prospect Capital Corporation's first fiscal quarter ending September 30, conference call. All participants will be in a listen-only mode.

(Operator Instructions)

Please note this event is being recorded.

I would now like to turn the conference over to John Barry, Chairman and CEO. Please go ahead, sir.

Thank you, Andrea. 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 securities laws that are intended to be Safe Harbor -- subject to Safe Harbor protection. Actual outcomes and results could differ materially from those forecast due to the impact of many factors. We do not undertake to update our forward-looking statements unless required by law. For additional disclosure see our earnings press release and our 10-Q filed previously.

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

Thanks, Brian. For the quarter ended September 30, 2010, our net investment income was $21 million, or $0.28 per weighted average number of shares for the quarter. Up from $16.6 million, or $0.25 per weighted average number of shares for the quarter, ended June 30, 2010, and up from $12.3 million, or $0.25 per weighted average number of shares for the quarter ended September 30, 2009.

New and follow-on investments in excess of $137 million closed in the September quarter, contributing to the improved results.

For the quarter ended September 30, our net assets resulting from operations increased by $25.6 million, or $0.34 per weighted average number of shares for the quarter. Up from $14.6 million, or $0.22 per weighted average number of shares for the quarter ended June 30. Our net asset value per share on September 30, stood at $10.24 per share.

In addition, we have revised upward our results for the second quarter of our fiscal year, ended June 30, 2010, to reflect the final settlement of all accrued liabilities assumed in connection with our acquisition of Patriot. Which had been estimated on a tentative basis at the time of the acquisition of Patriot in the December, 2009 quarter. The settlement of these accruals at less than the estimated cost resulted in an increase in our net investment income per share for the December, 2009 quarter of $0.01. Increasing from the previously reported $0.32 to $0.33.

We estimate that our net investment income for the current second fiscal quarter ended September 31, 2010, will be $0.26 to $0.30 per share.

Yesterday we announced upcoming cash distributions, our 28th, 29th and 30th consecutive cash distributions to shareholders for November, December and January. We expect to announce the next three distributions in February.

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

Thanks, John. At September 30, our portfolio consisted of 57 long-term investments with a fair value of $830.2 million. Compared to 58 long-term investments for the fair value of $748.5 million at June 30. Since June 30, we have completed four new investment, aggregating more than $130 million.

On July 14, we closed at $37.4 million first lien, senior secured credit facility to support the acquisition by HIG Capital of a leading consumer credit enhancement services company.

On July 23 we made a secured debt investment of $21 million in SonicWALL, a global leader in network security and data protection for small, mid-sized and large enterprise organizations.

On July 30, we invested $52.4 million of combined debt in equity in the acquisition of Airmall, a leading infrastructure-like developer and manager of long-term contract airport retail operations.

On July 30, we closed a $21.5 million senior secured credit facility for NMS, a leading dental practice management company in the southeast Florida market.

During the quarter ended September 30, we recognized $4.0 million of interest income due to purchase discount accretion from the assets acquired from Patriot. Included in this amount is $1.1 million of accretion resulting from the $12.8 million repayment by Impact Products. We were also repaid in full on our $25.8 million loan to Regional Management Corporation.

In addition, we recapitalized our debt investment in NMS, with our new loan issued at market terms comparable to other industry transactions. The cost basis of the new NMS loan was recorded at par value, precipitating the acceleration of $1.6 million of original purchase discount which was recognized as interest income.

Since September 30, we have closed on one additional investment and received repayment on two other investments.

On October 12, we made a senior secured debt investment of $32.5 million in ICON Health and Fitness, a leading manufacturer and marketer of branded health and fitness equipment.

On September 29, Castro Cheese Company repaid our $7.7 million loan.

On November 3, TriZetto Group repaid our $15.5 million loan.

Our investment pipeline currently aggregates more than $1.5 billion of potential opportunities. Including more than $300 million of advanced opportunities targeted by counterparties to close during the next 45 days for tax rate change and other time-sensitive reasons. These investments are secured and unsecured investments with double-digit coupons, sometimes coupled with equity upsides through co-investments or warrants, and diversified across multiple sectors. While we cannot guarantee the volume of transactions we will close before quarter end, we anticipate a busy period of closings in the near future.

We are pleased to have increased our liquidity in the past few weeks to prepare ourselves for this anticipated surge in closings. As we have throughout 2009 and 2010, we also continue to evaluate potential acquisitions of lending and other financial services platforms, portfolios and assets, utilizing our significant liquidity and balance sheet strength to go on offense to drive shareholder value.

We are pleased with the overall stability of the credit quality of our portfolio, with many of our companies generating year-over-year and quarterly sequential growth and top line revenues and bottom line profits. Our multiple loan payoffs in the past few months have continued our track record of successful realizations, while adding prepayments and accretion income, as well as providing additional liquidity for new loan originations.

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

Thanks, Grier. On June 11, we held a first closing of an extension and expansion of our revolving credit facility with a syndicate of lenders who extended commitments of $210 million under the facility. The facility includes an accordion feature, which allows an increase of up to $300 million of commitments without the need for reapproval from existing lenders. Since June 30, we have closed on an additional $50 million of commitments with one existing and two additional new lenders, raising the total commitment under the facility to $260 million.

We will seek to add additional commitments to the facility in order to reach the maximum size. While we are optimistic about these planned facility size increases, we cannot guarantee them. The facility has an investment grade Moody's rating of A2.

As of September 30, we had $46.6 million of borrowings under the facility. Since September 30, we have paid down the credit facility to $14.3 million, and our available liquidity as of today is currently in excess of $200 million for new investment activity. Our after-market stock distribution program has proven to be a cost effective source of new equity capital to fund investment activity.

During the September quarter we sold 9.1 million shares of our Common Stock at an average price of $9.74 per share, and raised $88.2 million of gross proceeds. During the period from October 1, to November 3, we issued an additional 4.9 million shares on our Common Stock at an average price of $9.86 per share, and raised $48.6 million of gross proceeds.

With a debt-to-equity ratio currently less than 2%, our modestly leveraged balance sheet is a source of significant strength.

Our equitized balance sheet also gives us the potential for future earnings upside as we prudently look to grow our existing revolving credit facility at additional secured facilities and evaluate term debt solutions made more attractive by our investment-grade facility ratings at both the corporate and facility levels.

With significant expected near term originations, coupled with recently successful peer group term debt issuances, we are actively exploring potential term debt issuance as a means of accretively expanding our balance sheet while lengthening our weighted average debt maturities. Our discussions include both public and private debt, on both an unsecured and secured basis, with expected maturity of five years or more. We believe that historically low treasury rates make the current environment an attractive period for a strong, diversified and scaled balance -- scale balance sheet Company like Prospect to consider term debt issuance during the near and medium term. Now I'll turn the call back to John.

Thank you, Brian. We can now answer any questions.

We will now begin the question-and-answer session.

(Operator Instructions)

Our first question comes from Greg Mason of Stifel Nicolaus. Please go ahead.

Great. First, a couple of income statement questions. On the structuring fees, last quarter you did about $115 million in originations and $1.3 million of structuring fees, this quarter you did $140 million of origination but had about $4 million in structuring fees. I was just curious about what the difference was in originations versus last quarter, to generate such high fee income this quarter?

Thanks, Greg. And, by the way, just for the benefit of the rest of the group, we really appreciate -- Greg has sent us several of his questions in advance so we can make sure we had answers prepared for this call, and we really do appreciate that.

So to answer your question, Greg, we had higher fees from structuring in the September quarter than the June quarter. In significant part, in addition to having more originations, because we had more Prospect agented deals and at higher fees associated with some of those deals.

So do you expect to continue to run high structuring fees going forward as you look at your pipeline into the Fourth Quarter?

Our structuring fees tended to be in the average of 1.5% to 3%, somewhere in that range, and the vast majority of our business -- the business model -- is Prospect agented deals, as you know. Which includes Prospect buyouts, direct lending, sponsor loans that we agent. Occasionally we'll buy into a club deal or an illiquid syndicated deal where we see attractive returns and there may be less of an up-front fee there. But generally going forward, yes, we expect that type of income.

Great. And then on H & M, one of your portfolio companies in the cue, you said 60 days past due. But in the commentary it states you expect a full repayment of interest. Can you talk to us about what is happening at H & M, and why we should not be concerned about that?

Sure. H & M is an oil and gas company that's focussed in west Texas. They have certain drilling obligations to drill wells periodically to support their leasehold positions. And currently are using available liquidity to fulfill those obligations and deferring interest. We expect for that interest to be paid.

Furthermore, we're comfortable with capital going into the ground for further drilling because it enhances collateral to support our loan, which we view as covered. The company's working on various deals, H & M, that is, to enhance liquidity with third parties, including ones to cover those drilling obligations that I mentioned. And in recent transaction comparables in west Texas, there have been dozens of such asset and in corporate M&A deals over the last six, 12, you know 24 months, are quite favorable to support our collateral here.

Okay. Great one last question and I'll hop back in the que. One PCAP, the amortization, how much of that amortization is still left from the PCAP transaction?

$27.1 million.

Great. Thanks, guys.

Hey, Greg, one thing to add in on the H & M, too. If you keep an eye on hydrocarbon prices and where they've been moving, I think that's another ingredient in our view that we should be money good there.

Okay. Great, thanks, guys.

Our next question is from Jason Weaver from Sterne Agee.

Good morning. Thank you for taking my question. I was wondering if you could comment on the pricing of the new investments made during the quarter versus what you're seeing in the market right now?

Sure. We are focussed, as you know, primarily on the lower middle market and middle market, range of companies that generally range between $5 million and $50 million of EBITDA. What we have seen is on the larger end, and certainly above that range, spread compression factors come into the marketplace, the more liquid part of the credit markets.

But in our core footprint in area focus, we really have not seen much compression in the last few weeks, in the last few months. That is not to say that there couldn't be a compression as we move into 2011.

Certainly there is a hunger for yield out there, but that's coupled with a recognition that there is still a limited number of players with the right capital platform, i.e., permanent capital that could do illiquid lending.

And really we're not seeing a return of hedge funds into the lower middle market, or middle market, arena that we saw in 2006 which really was a big driver for spread compression, especially with leveraged field capital which is certainly not the case in the current environment.

The other aspect is -- I mention in our prepared remarks that volume is surging. We call it a "pig and a snake," "pig and a python," because it feels like every deal that we're working on, just about every deal, has to close by 12/31. Not just for tax-driven reasons, but just a desire to complete a deal before year-end, for balance sheet finalization purposes, track-record realization purposes, and the like.

And we see, by the way, that even if the current tax rates were to be extended in the next few days, next couple of weeks, not sure if anyone is banking on it happening that quickly, the deals that we're working on have so much momentum that people anticipate those dividend checks clearing and change of control checks clearing. So there is a significant surge of activity and I think when you have that much activity that is time sensitive, spread compression factors are diminished as well.

Okay. Thanks, guys.

Our next question is from Robert Dodd of Morgan Keegan. Please go ahead.

Hi, guys. Just two. First on Gas Solutions and your dividend income. I mean, that's been -- continued to drop again. Can you give us any color on where that's going to level out, or turn higher, as this hedge is still expiring at Gas Solutions, or contracts expiring, or any color you can give us on that, please?

Yes, we -- we purchased puts to protect on the commodity front for downside protection of Gas Solutions in the spring. We have been focussed on growing value with the new CEO that came on board earlier this year, for both organic growth as well as M&A. We completed an add-on acquisition in this past quarter, as well, one which we think will help to drive cash flows in the current quarter and going forward. So our expectation is to see an uptick on those dividend distributions from the September quarter, but we're not certainly guaranteeing or promising that.

All right. Got it. On capital structure for you , looking at the -- obviously you're talking about term and further expansion of the facility, but if we put it bluntly, over the last two years, equity base is up almost $400 million and your credit -- max credit capacity currently expanded to about 60.

When are we going to see materially greater usage of debt to leverage the equity base that you got available, and to drive, obviously, greater returns and greater NII?

Right, and this is something we're very focussed on, Robert. First, our plan is to utilize existing availability on our secured revolver, which we have been increasing in size, and we've added two banks in the last couple of months, and increased that from $210 million to $260 million.

We're working with additional lenders, as well as existing lenders, to continue that up-sizing. We'd like to take it to $300 million and potentially beyond that.

And the dynamic is of getting in relationship warranted lenders, and then growing that relationship over time with additional credit. That's worked very well.

Beyond our revolving capacity, we have spent a significant amount of time having discussions about potential term debt issuance, and putting the building blocks in place for that issuance, which includes rating agency work that we've done over the last year, resulting in our investment grade rating as a public company at the corporate level, in addition to our high investment grade rating at our facility level. Putting those building blocks in place, having discussions, and in really looking to capitalize on market conditions as they continue to improve. And they have improved significantly in the past 12 months.

As folks are probably aware, a year ago there were a couple of companies in the peer group that went through some debt restructurings. No payment defaults, but technical defaults that led to restructurings. And we've had to walk into that investor base, talking about our company, which is dramatically different, which has an almost fully equitized balance sheet of close to $1 billion of capital, and have a very different focus and philosophy for how to drive -- for how to drive value in our business.

That message has been resonating very well. It has also helped that in the last couple of months two term debt deals have printed in the peer group with other companies. One is a secured deal, and one an unsecured deal. And we're doing a significant amount of price and structure checks into the marketplace related to secured versus unsecured, institutional versus retail, five-year tenor versus longer-dated, seven, ten and 30-year tenor, and thinking about the right way to grow the top right hand side of our balance sheet efficiently.

We view each of these decisions, Robert, on the term debt side, as somewhat irreversible decisions. Because of call protection that comes into arena, the arena prepayment premium, and we want to make sure that we are very, very, very careful on that front, and do the right deal with the right structure that is protective to our shareholder interests.

Okay. When would be the exact time frame to do a term deal?

We're working very actively on it. I can't say for sure if that would occur this quarter or next, but it is something that is top of mind in the short and medium term.

Thanks. One last, last thing on that. Can you give us any -- and obviously you don't want to give too much away -- a ballpark in kind of sizing, what you would be looking to do, the minimum you could do for term is probably $100 and, obviously, you can't push too close to equity base, because that elevates the risks we don't want to see. So, can you give us any color on roughly the size you're looking for?

Well, we have messaged in the aggregate our total debt-to-equity ratio of being comfortable long-term in about the .5% debt-to-equity range. Which, based on our current equity base, would put us somewhere in the $400 million to $500 million level.

And if you look at our revolver growth, we're talking somewhere in the $200 million to $300 million of term level. That is an approximate ballpark.

There are certain size considerations related to liquidity and pricing. For example, if we were to pursue an unsecured institutional bond issuance, there might be liquidity index minimum-driven reasons to size that at $250 million plus, for example. If we were to do retail notes issuance, or some type of private secured deal, perhaps there is a little bit more flexibility surrounding size and you might have a number that's smaller than that. We may pursue more than one option, as well. We think for a company like ours to have diversified access to capital of all types on the equity front, as well as on the debt front, is highly desired and beneficial.

Okay. Thanks.

Thank you. Our next question comes from Jasper Burch from Macquarie. Please go ahead.

Good morning, gentlemen. Thank you for taking my question. Following up on your capital structure -- just a couple more things. First of all, looking at the term debt, I guess why five to seven years? And, also, what percentage of your assets are pledged under the revolver? And that is looking at maybe in terms of doing another secured financing? And then, also, is CDO debt on the table longer term or is that something that you're steering away from?

Okay. Let me try to address each of these, and then I'll ask Brian to weigh in on the collateral pledge question.

So five to seven years, why five to seven years? Well, our loans generally in the range of five years, six years. Weighted average life in the book might be about four years. Our revolving facility is just under three years to run. We just extended that in June. So, issuing five to seven year liabilities results in a matched book on a weighted average liability basis. That doesn't mean that we wouldn't be interested in issuing longer dated debt than that. Certainly there are compelling arguments to be made about where treasuries are, and I don't think they can go too much below zero. Maybe TIPS can, but normal treasuries probably wouldn't. And you can talk about spreads that we think continue to narrow for financials. But we're open to different tenor, less than five would probably be less interesting to us on the term front. We would rather grow the revolver than go out and refinance that in a short amount of time.

Pertaining to securitizing assets and the stay low market, we also continue to monitor that, pursue and receive periodically warehouse facility term sheets with an anticipated securitization takeout. We're very careful about those because -- taking capital markets risk would not be all that interesting to us, and we would be hesitant to do a warehouse deal and find that the term takeout was that there. So we are going to look at the maturity, the tenor of such officers carefully.

Our observation is that the CLO marketplace is continuing to get more attractive spreads, are tightening, and leverage is increasing. Not back to 2006 levels, mind you. It is still very much a senior secured market for securitization. So,if we were to pursue that it would be for a portion of our assets, for the senior first lien assets. Not for second lien assets, and not for any unsecured debt, although we have very little of that in the portfolios. Primarily secured lending book of business, as you know. But it is something that we continue to monitor and have discussions with. That is very much on the table, as well. I should have included that in my laundry list of different liability option discussions.

In terms of your question about percent pledged -- Brian, you want to tackle that one?

Sure. We have about 60% of our current assets pledged to the facility.

I want to temper that a little bit in that over the next six to eight weeks we plan to close a lot of new deals. Which, most of which will not be pledged to the facility because they will not add borrowing capacity, since we're pretty much maxed out until we get some more lenders. So, we will be building a war chest of unpledged assets that will be accumulating for a potential -- another term deal. So, if we were to add more lenders to the current facility we would then pledge the assets.

Okay. Thank you. That's all helpful. Moving on , looking at your core recurring income, you had $5.6 million of purchase discount accretion, and, obviously, a good portion of that is recurring, $3 million from the PCAP deal alone. How do you look at right now your recurring income? And also, how do you plan on increasing that and making up for that difference as the purchase discount runs off? Is it simply by continuing to lever up the balance sheet?

Well, I would add to that, Jasper, that we often get prepayment premium income, as well assisted with loan repayments. And we expect the velocity of the cycling to pick up as the credit markets improve, as deal volume activity picks up. And we're never unhappy to be repaid on the loan because generally we're getting additional income associated with it.

So, origination fees, as we put capita to work and simply recycling, we view as recurring part of the model. Certainly deploying capital assisted with our available liquidity would be as well.

In terms of accelerated accretion for the Patriot book, it is hard to anticipate and plan for that exactly, since you're never sure exactly too far in advance if the loan might prepay. But, certainly, we have provided the remaining discounts to be accreted over the next approximately two to three years, in some cases four years, of the Patriot portion of the book.

Okay. And then, first of all congratulations on a lot of high originations this quarter. I think it was your second highest quarter to date. Looking at the structure of your actual team, the management team, could you talk to, one, how your origination team has changed and what sort of capacity you think you have origination? And, also, how your portfolio management team has changed over the last couple of quarters?

Sure. We have continued to make investments in people, in infrastructure. Our head count as an organization is -- I'm talking about a combined basis, Prospect Capital Management and Prospect Administration -- is now more than 40 people. We have multiple floors here in our New York offices, offices in Westport and a presence in Houston, as well. And we have hired a lot of people in the last 12 months. As we continue to grow the business and we continue to have a good pipeline of recruits that we interview everyday.

We have right now -- to give you a sense of capacity that is in the system and how we're deploying it people-wise -- we have of the pipeline that's now approaching $400 million of what we call Category A deals, that are either explicitly under term sheet or counter parties have told us we are the designated financing party, that's approximately 12, 13 deals, give or take.

And our team is able to comfortably simultaneously process that volume of deals. It tends to be more on a per-deal basis necessarily than a dollars basis, because we certainly wouldn't do any less diligence if it a $15 million financing as opposed to a $40 million financing.

And even with the 12 or 13 deals now in that category A that I mentioned, we have a deep bench and resources to do more deals than that. And we're getting calls everyday, it seems, "Can you close by 12/31?" out there.

In terms of portfolio management, the way we run our business is -- we call it an A to Z model -- in which, when a deal lead professional, supported by team, sources -- selects, structures, diligences, closes a deal -- that team or teamlette owns the deal through the lifecycle until the exit. We don't chuck the deal over the wall to somebody else. We think, for us, at least, that is the right way to run the business. And it means if a mistake is made on the front end, which we work intensively to avoid, but occasionally they happen, that the folks in the front lines are the ones to help to fix it. It tends to cause folks to work even harder on the front end to avoid mistakes as a result.

And we've also deepened our bench in resources for internal for internal credit to support those processes both on the front end as well as ongoing basis with an active portfolio in which we are the agent and have to deal with frequent amendments and waivers and other aspects because we tend to have highly structured and tight deals. So we have added additional resources, as well, to that side of the equation.

Did I answer your question about the organization?

Yes, it's definitely all really helpful and I definitely think -- as long as you guys have the capacity, it is just a matter of having the capital put to work and, obviously, the deal flow. And, in that sense, you have given some good color on 4Q, on having elevated deal flow again, deal volumes, again. I was just wondering. Do you have much visibility into next year? Especially given your comments that a lot of people want to close on deals this year.

It is John Barry. I wanted to add before you go on to the next topic. And that is, for the life of our company we've always had a place for really good, strong athletes, credit athletes, Grier likes to call them. We're always looking for good people, we're always bringing good people into the company, and that is really at every level. And so, as Grier said, we have steadily grown our capacity.

I will say right now that the people working at the company are at full bore, and we have a lot to do between now and the end of the year. Much of it is tax-driven. Much of it is track record and other variable-driven. My expectation is that a non-trivial amount will flow over into next year.

What happens is, you have a meeting of all your people, you say we're going to be liquidating these things, we've got, for example one sponsor instantly jumps to mind , a good counter party for us who has put -- I think they put their entire portfolio on the market in an attempt to resell or recap it. What happens is, if those things can close between now and the end of the year and there is no changes in the tax, the tax situation continues to be motivator, people work very hard for that. But even if the tax rates go up early next year, the momentum to get things sold is significant, and therefore we do believe that the First Quarter will also be a strong First Quarter for us.

Add to that, Jasper, we have in the aggregate pipeline more than $1.5 billion right now, We call it Category B deals, or ones where we put term sheets out and are not quite as advanced as the category A deals.

So many of those, we expect to be converted into category A deals, to become March quarter deals, plus there likely will be some slippage, as John mentioned.

And, again, the tax driver aspect is just one piece of it. We're also seeing recovery out there in terms of portfolio companies' performance, and natural liquidity events and pent-up demand for those liquidity events from private equity sponsors, from closely held companies, and the like. So, even if the tax piece weren't there, there should still be a fair amount of volume. And those trends should sustain activity well into 2011.

Okay. Well, that's what I was looking for, so thank you, guys, for all of your commentary.

Our next question is from Jim Stone of PSK Advisors. Please go ahead.

Good morning. I wonder. Can you share with us now what the average yield is out of the current portfolio? And then, you were talking about what you expected to close over the next 45 days, what that average yield will be?

Jim, good morning, thank you for your question. Our average yield is approximately 13% to 14%, which is fairly consistent with our expectation going forward. Depends on where we're playing in the capital stack, and if it is a sponsored versus a non-sponsored deal. Our yields tend to range from the low double-digits to sort of the mid double-digits. So that's a pretty good average.

Okay. So, you're saying, basically, then, you would expect that in that group that the yield would stay at roughly the same range?

Approximately. We have existing book and so new originations will adjust the existing books somewhat, but it's fairly stable.

Okay. And I forgot, whether you have any pick in yours, any significant pick, or you're all cash on your yields?

We have some pick. It is a very limited amount, predominantly a cash portfolio. We've -- we like being paid in cash. So I don't know if we have a number, but it's a pretty -- it is a pretty modest amount of our book.

Normally, people that are wanting to pay you in pick are presenting a credit that we are wary of. We way prefer companies that can pay all of the interest in cash.

Right. No, no, I understand that, and--

That's why you're asking the question.

That's right. In terms of equity kickers, or warrants, or buying equity, is -- where does that stand now and in term of the deals that you're looking at, does that change?

Well, it's -- it's a very good question. When we are originating transactions and evaluating them, we don't necessarily have tops-down targets for -- this is a percentage that is going to be buy-outs and equity, this is a percentage that is going to be direct lending, this is a percentage that will be sponsor deals. Every deal we look must stand alone on a positive fashion.

This past quarter, we did close buyout of a business called Airmall, which we purchased from DAA, which is a Spanish infrastructure company. It is an infrastructure-like business because there are decade-long contracted cash flows built into it. So it's -- we call it a debtquity-type deal, hybrid debt and equity deal, with very stable recurring cash flows, a good fit for our capital, one which we hope and expect to grow over time.

When we make those types of investments, because of the nature of our business model, and because of our natural value orientation bent, we don't tend to want to be -- and aren't -- high-priced payers. So the multiple that we would pay for that type of investment would be a modest one, relative to market comparables, usually a couple turns less.

As a result, we pick our spots and do so opportunistically, often times with special situations, negotiated deals, fewer broad option type situations.

We have other deals on that front in the existing pipeline, one that I can think of for example, a couple actually that we're working on very actively, that could close this quarter. So it continues to be part of our business mix. The percentage of it will vary over time. It will never be a majority of our business, because of tax limitations to the structure. But it's one in which we've reached significant rewards over the years. Whether it's buying in the pipeline business of Gas Solutions, many years ago. Or, on a strategic level, as one large buyout, sort of 30 deals in one you can describe it as, our purchase of Patriot last year has been quite rewarding to our shareholders, as well.

So, we're on the lookout for those types of deals. Both operating company deals, as well as one strategically focused in the financial services arena.

Okay. Thank you and keep up the good work.

Thank you. As a reminder, if you would like to ask a question today, you may press star and then one.

Our next question comes from Greg Mason of Stifel Nicolaus. Please go ahead.

Great. When we look at the interest income this quarter, excluding the PCAP accretion, looks like interest income went up about $4 million in the quarter. But based on the yields on the current investments you added, it should have went up $3 million. Were there any one-time fees in the quarter?

We had prepayment premia associated with repayments. And as activity picks up we think prepayments will pick up, and since we have premia on the vast bulk of our deals, we don't mind that recycling at all.

And is that actually prepayment penalties that you're getting in cash, or is that accelerated unamortized fees?

Well, it can be both. But a lot of times it's the former on a cash basis.

Okay. Great. And one other question. On your G&A expense, it was high this quarter. What impacted that and how should we think about modeling other G&A?

Right, so other G&A which is approximately $750,000 a quarter, about two-thirds of that, about $500,000 of that, is a non-recurring number associated with potential acquisition costs that did not come to fruition and hence were not booked into a closed investment.

New sort of software and installation cost related to same and proxy costs. So, the recurring number should be closer to $250,000 per quarter on an on-going basis for that line item, or approximately $1 million per year.

And that potential acquisition cost that didn't happen, was that the Allied deal, or some other acquisition that you were pursuing?

Other.

Okay. Great. Thank you.

Our next question comes from Henry Coffey of Sterne Agee. Please go ahead.

Yeah good morning everyone. I've got a series of questions here. I wanted to make sure I heard this correctly -- the PCAP accrual was $4 million, or $2.9 million?

Well, in terms of what we accrued in the past quarter?

Yes, you said $4 -- ?

$4 million -- I think we recognized $5 million.

PCAP was $4 million, and then the separate, the other credit was $1.1 million.

I know in December and March you gave us enough information so we could do a fairly successful construction of what the PCAP business contributed. In this current quarter, was it just the $4 million, or what was the combined interest and fees realized on the remainder of that portfolio?

I don't have that number with me.

I know you gave it to us in December and March. What's the best way we could get it for June and September?

I'll have to--

I just don't understand your question. You're asking about cash interest -- ?

No, much simpler than that. In the December and March quarter you gave us enough information on your interest and fee income mix, so we could disaggregate what came from PCAP and what came from the original PTech portfolio. And all I'm trying to do is ferret out the continued contribution from the PCAP acquisition. What was the total revenue from PCAP in the June quarter, and the total revenue from PCAP in the current September quarter?

Henry, to be honest with you, we don't look at it that way. They're now all our assets.

So after March you stopped looking at it that way?

Yes, they're all our assets, they are in our books. They're paying off. What we do then--

The information -- I just notice when you broke out the $4 million I was hoping you would give us the interest earned on that total portfolio this quarter.

We haven't broken that out.

Okay. So -- okay. The second issue, you made a comment -- excuse me? You made a comment about pledged assets. Is that 60% of your $830 million of investments, or is that 60% of loans were pledged to the current -- ?

Assets.

Total assets.

So, 60% of the $870 has been pledged? So, you've pledged to the facility approximately $522 million in assets?

About $500 million, yes.

Right. And then, as we draw on our existing availability, Henry, that, of course, will create new collateral, you know, sort of--

Let me stop there for a minute. You've only got $46.6 million of debt against that $522. Can you draw down additional debt against that $522?

Yes.

Correct.

You can go all the way to the facility, which is what -- ?

$260 is our facility size, so we can draw on our availability.

Against the $522, you could draw $260. Or an additional -- ?

$260 is the face amount of our facility right now.

Based on the assets that we have pledged right now, Henry, we can draw about $215 million.

Against the -- so you have $215 million of additional borrowing capacity in place already?

If you draw -- if you drew and you didn't take the collateral from the draw and repledge some portion thereof, that's correct.

Right. That is static. It freeze the clock. We know things change. And then you've raised a significant amount of equity this quarter and then increased the debt facility. What is -- what are -- given -- it looks like you have a lot of borrowing capacity. You have $23 million of cash. You have, by your own accounting, $215 million of debt capacity. So at what point are you going to stop issuing equity?

Well, it's really not -- it is an impossible question to answer right now, because the pipeline continues to grow ahead of us. And as we have messaged earlier, we have a pipeline of category A deals that is now bumping up against $400 million, which is a significant uptick from where it is now.

Our availability is about -- about half of that currently. We're looking at other term solutions.

Is that a company or is that a -- term solutions is a -- ?

Term debt. We're looking at term debt.

And I went through the laundry list of different options there, ranging from unsecured to security debt issuance in varying tenor.

I got all of that. So, at the beginning of the current quarter, what was your -- what is your set of list of potential A deals look like, and how does that compare to where we are today?

So, over the last 40 days or so, what is the compression?

No, between June and September.

You view that on the first day of the quarter if you had, say, $100 million of A deals in June and you have $250 now--

It has increased a lot. It was about $150 million, perhaps, a couple of months ago. And now it's more than doubled and getting close to triple.

You had $150 million of deals in the pipeline in June, and you originated $140 million, so should we expect you to be originating $300 million to $400 million in the current quarter?

Well, it's possible, Henry. I'm cautious because this business and these deals, and things can fall by the wayside. You know diligence doesn't pan out, counter-parties cuff a deal, stuff happens. But it does feel different this go-round, because--

I know--

There's a wall there of people feeling like Cinderella's coach turns into a pumpkin on December 31, and nobody wants that delay.

So I don't know how much is going to convert, Henry, but we have pretty good visibility on category A deals, because --

But of all of it converted you would need to continue to issue equity, then, to -- even if two thirds of it -- if you have $215 million plus -- $21 million -- So, you have, lets call it $230 million to $235 million of borrowing capacity. If you close 75% of your A pipeline, you would obviously need to either expand the banking facility further or issue additional equity, or both. Is that logical?

Our options include expansion of our revolver, issuance of term debt, and issuance of equity, all of which could occur at the same time or in different orders.

But you can't rule out -- I know people are -- I know I'm not the only one who brought this up on the call, but you just can't simply say we're turning off the ATM, we're going to start leveraging, we're going to try to issue more debt than equity, and we'll take it from there?

Well, Henry, what we can say is, first, on the origination pipeline -- we had someone call us up yesterday, they thought they weren't going to go forward and now want to go forward and we're chosen. We seem to be getting a materially higher incidence of people saying, "I'm past the option, you're it." So that is a good indicator.

No, no, it sounds like you could have a -- and I under the year-end phenomenon, because if you don't -- not your point of view -- but if these buyout funds don't invest the money, there are always these clocks that they have to deal wit,h, and it is very difficult to report to your investors that you're not leveraging their capital and you're charging them fees. So there is an incentive to close stuff by year-end.

Plus, when you think about the ultimate impact of QE2 on company valuations, that could drive numbers a lot higher. So, there is a lot of incentives to go out there and close deals and borrow money.

What I want to to express to you is that being on the receiving end of these demands for capital, we want to be sure we can meet them all. Our number one place to go for capital is our bank facility.

As opposed to the last quarter, where it seemed to be the equity market? So you're definitely going to tap into that?

It is our number one place to go, and we would like to see it expanded. We see claims for capital that could easily exceed the existing bank facility.

That is almost guaranteed, based on the numbers you shared with us.

Good, so, we don't feel it would be prudent to shut off the ability or issuances of equity at attractive prices, unless and until we know that we can, in fact, accommodate this wall of demand with the resources that we have. And, that said, we very much would like to see our bank facility increased to take -- to take the pressure off. It is obviously by far the cheapest source of capital, and, of course, you know, these banks they're on the phone, I want them to know, of course, it is also totally money good and it should be a cheaper source of capital. They have a huge equity base underneath them, and we would like to use much more of the bank facility.

You know, Henry, we reap benefits in a couple of other ways, directly and indirectly from the ATM program and share issuance. One is, it is no coincidence that banks that are a part of that program tend to be either current significant credit providers, or --

I think that's called tying. I didn't think you're supposed to do that.

Not if the issuer does it.

You need huge market share. You need to be Microsoft to worry about that. The second is that scale becomes a significant differentiating factor. As we go out and we talk to counter-parties, whether they're rating agencies or potential lenders to the business, and you go and you say, you know, a billion-dollar balance sheet, you know, plus, and it makes a big difference. I can tell you, Henry, in our peer universe, we're the third largest active company that is measured by equity. Lenders notice that, and many of them aren't too interested in doing business with sub $500 million, even sub $750 million market companies. In some cases we want to see $1 billion plus.

So, as we've grown towards that size, we expect to get a big benefit. Especially if you are talking about issuing the more liquid part of the markets, like the unsecured bond market, which are favorable, because there are no maintenance covenants, only occurrence covenants. You can scale the codentures very well, et cetera. So, we are interested in scalability. We're interested in capital efficiency. There has been a bit of a stair-step process to get to that scale, to reach what we think would be an appropriate cost of that capital.

Given the robustness of your pipeline and the way you accounted for the last set of fees, is -- can we just use originations -- can we just take fees divided by originations and use that to project results from the pending quarter?

Fees divided by originations -- ?

As a ratio. Can we use that as a ratio and multiply that by whatever our expected set of originations is, or in subsequent quarters is that kind of fee ratio likely -- is that ratio going to be all that different?

I think Grier gave what he thought the ratios--

Right, 1% to 3%.

1.5% to 3%. I think this quarter we were at the high end of that. I think if you did the calculation, we would be right at the 3%. Something a little bit lower than the ratio from this quarter would be a better estimate for going forward, something in the 2% to 2.5% range.

And, Henry, the other thing I was trying to get to was I don't think it would be unreasonable or unrealistic to assume that our conversion ratio would be at least as good. I'm sitting here thinking --

It was 110% -- or 105%. So--

Why would it be any less robust than it was at the beginning of the prior quarter? I don't see anything leaning to that.

While I've got you on the phone, John, I notice your comment about picking, comment. I did a quick look at your cue. The level of picking in the portfolio doubled from a $1.5 million to $3 million, which as a percentage of your dividend is probably not all that outsized the number. But, is -- given the comment, the specific comment you made to the last gentleman on pick, does that reflect a lowering of the overall quality of the portfolio? Is that an acceleration of payment speeds? What is the driver of that doubling of picking come over the year ago period? Is that just volume? Is it just size and mass? I know you said that you kind of viewed that as a negative measure of company. So I was curious how that benchmarks against your own view of what is going on in the portfolio.

Henry, a large portion of that increase in pick from last year is the assets we acquired in the PCAP portfolio, which wouldn't have been in the 2009--

So a lot of it is coming out of PCAP, then?

Yes.

And I know in -- when you were giving us the data, PCAP was generating a little over $15 million, is it anywhere close to that still, or should we just make our own guesses on that?

I think it's down from that because we've had repayments.

Right.

The one way you can look at it is that you can go back and track which are the PCAP assets.

Right, we can do that.

(Inaudible).

Finally, on Gas Solutions, I notice the valuation is higher than in the June quarter. Can you give us a sense of what -- and we know most of the dividend income comes from Gas Solutions -- can you give us a sense of what the EBITDA contribution from Gas was this quarter and what it was in the June quarter?

When you say EBITDA contribution, you mean dividend from Gas Solutions?

No, I mean the EBITDA generated by Gas Solutions. You used to share that with us.

As our businesses grown and diversified, we've started to move a little bit away from just talking about Gas Solutions every quarter. It's on an aggregate basis less than 10% of our --

You still increased -- dividend income is down and the Gas Solutions valuation is up, so it is obviously a relevant item.

Henry, we didn't recognize any additional unrealized gain on Gas Solutions this quarter. We made a -- we made a funding to Gas Solutions to fund an acquisition that they did of another (inaudible).

Okay.

Property. So the valuation is the same. We just--

You just put more money into it. That is helpful.

We did an add-on acquisition in the last quarter.

Should we assume that all of the dividend income that's in the control investment bucket is coming out of Gas, and that the drop in dividend income is correlated to the drop in EBITDA? I mean if you're not going to share the data with us--

It is predominantly Gas Solutions.

Is there a correlation between EBITDA and paid dividends, or are they doing better than that? Usually -- you gave us the information for a long time and obviously we're still looking for it.

The underlying businesses is doing well. There is some timing seasonality related things in the September quarter. I mentioned earlier we expect -- we're not promising, but we expect -- an uptick in the December quarter versus the September quarter for dividend distribution.

Great.

I can't tell you exactly what that would be right now.

Thank you.

Thank you. This concludes our question-and-answer session and I'd like to turn the conference back over to our speakers for any closing remarks today.

I think we're all set. Thank you very much. Bye now, thank you, all.

Thank you. This concludes today's conference. Thank you for attending and you may now disconnect.