Prospect Capital Corp (PSEC) 2011 Q2 法說會逐字稿

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

Thank you, Jill. Joining me on the call today are Grier Eliasek, our President and COO, 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 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 in our 10-Q filed previously. Now I'll turn the call back over to John.

Thank you, Brian. For the three and six months ended December 31, 2010 the increase in net assets resulting from operations was $31.9 million and $57.5 million respectively, or $0.38 per share and $0.73 per share respectively. For the September quarter the increase in net assets resulting from operations was $25.6 million, or $0.24 per share.

Our operating results increased 24.9% and our operating results per share increased 10.1% from the September quarter to the December 2010 quarter. This increase is primarily due to our sale of Miller Petroleum Stock which generated a $5.4 million realized gain. New and follow-on investments of $137.6 million closed in the December quarter.

Our net investment income, or NII, was $19.1 million and $19.3 million for the December 2010 quarter and December 2009 quarter respectively, or $0.23 per share and $0.33 per share respectively. Our NII was $40.1 million and $31.6 million for the six months ended December 31, 2010 and 2009 respectively, or $0.51 per share and $0.59 per share respectively.

The primary source of the higher NII per share in 2009 is our recognition of a gain on the Patriot acquisition of $8.6 million in December 2009. Also affecting NII per share is the accelerated accretion of original purchase discounts of $4.6 million recognized in the December 2009 quarter.

During the September 2010 quarter we recognized $2.7 million of accelerated accretion of original purchase discounts. No accelerated accretion of original purchase discounts was recognized in the December 2010 quarter.

If these two sources of adjustment to NII per share were removed and adjustments made for the related effects on advisory fees, NII per share would have been $0.23 per share and $0.15 per share for the December 2010 quarter and December 2009 quarter respectively. And $0.48 per share and $0.39 per share for the six months ended December 31, 2010 and 2009 respectively.

We anticipate NII per share will increase as we utilize prudent term leverage to finance our growth through new originations given our debt to equity ratio stood at approximately 17% as of December 31, 2010. We estimate that our NII for the current March 2011 third fiscal quarter will be $0.24 to $0.30 per share. Our net asset value per share on December 31 stood at $10.25 per share, an increase of $0.01 per share from September 30.

Yesterday we announced upcoming cash distributions, our 31st, 32nd and 33rd consecutive cash distributions to shareholders for February, March and April. We expect to announce the next four distributions in May. Thank you. I'll now turn the call over to Grier.

Thanks, John. During the six months ended December 31 we originated $281.9 million of new investments. Our origination efforts recently have focused primarily on secured lending, including a high percentage of first lien loans than the recent prior fiscal quarters, although we continue to close selected junior debt and equity investments.

In addition to targeting investments, senior and corporate capital structures with our new originations, we've also increased our new investments and third-party private equity sponsor on companies which tend to have more third-party equity capital supporting our debt investment than in non-sponsored transactions.

As a result of these credit risk management initiatives our portfolio's annualized current yield stood at 14.1% across all long-term debt and certain equity investments as of December 31. Nonrecurring distributions of other equity positions that we hold is not included in this yield calculation. In many of our portfolio companies we hold equity positions ranging from minority interest to majority stakes which we expect over time to contribute to our investment returns.

At December 31 our portfolio consisted of 58 long-term investments with a fair value of $918.2 million compared to 57 long-term investments with a fair value of $830.2 million at September 30. In the December quarter we completed new and follow-on investments aggregating more than $137.6 million, sold one investment and received repayment on four investments.

On October 12 we made a senior secured debt investment of $32.5 million in ICON Health & Fitness, a leading manufacturer and marketer of branded health and fitness equipment. On October 29, Castro Cheese Company repaid our $7.7 million loan in full. On November 3, Trizetto repaid our $15.5 million loan in full.

On November 12 we made a senior subordinated debt investment of $15 million in Snacks Holding Corporation, a leading manufacturer and marketer of dried fruits and trail mixes. On November 29 we made a senior subordinated debt investment of $14 million in Royal Adhesives & Sealants, a leading producer of proprietary high performance adhesives and sealants.

On December 13 we made a follow-on debt investment of $11 million in Royal. On December 1 Qualitest Pharmaceuticals repaid our $12 million loan in full. On December 3 we exercised our warrants in Miller Petroleum and received approximately 2 million shares of Miller common stock. On December 27 we sold approximately 1.4 million of these shares at $3.95 net proceeds per share, recognizing a gain of $5.4 million.

On December 10 we made a $30 million secured second lien loan to American Gilsonite for a dividend recapitalization. Concurrent with the financing we received repayment of a prior loan as well as a $2.1 million dividend from our equity ownership. On December 23 we made a secured second lien debt investment of $15.3 million in Jordan Healthcare Holdings, a leading provider of home healthcare services in Texas.

On December 23 we also made a senior secured investment of $18.3 million as the lead arranger in VPSI, a leading market share transportation services company.

Several new investments that we anticipated closing prior to December 31 were delayed by counterparties when the expiring lower federal tax rates were extended. The subsequent closing of these delayed loans has increased our level of origination activity during the current March 2011 quarter. Since December 31 we've closed on seven additional investments aggregating more than $154 million, received repayment on one investment and sold our remaining equity in one investment.

On January 6 we made a senior secured debt investment of $30 million to support the acquisition of Progressive Logistics Services by a middle-market private equity firm. On January 10 we made a senior secured debt investment of $19 million to support the acquisition of Endeavor House by Pinnacle Treatment Centers.

On January 10 we sold our remaining approximately 616,000 shares of Miller common stock, realizing $4.23 of net proceeds per share and realizing a gain of $2.6 million. On January 21 we provided senior secured credit facilities of $28.2 million to support the acquisition of Stauber Performance Ingredients by ICV Partners. On January 24 Maverick Healthcare repaid our $13.1 million loan in full.

On January 31 we made a senior secured debt investment of $7.5 million to support the recapitalization of Empire Today, the second largest independent provider of carpet and hard surface flooring to consumers in the residential replacement flooring industry. On February 3 we made a senior secured debt investment of $22 million to support the recapitalization of a pharmacy services company by a leading private equity firm.

On February 4 we made a secured second lien debt investment of $45 million to support the refinancing of Clearwater Seafoods, a leading premium seafood company based in Nova Scotia, Canada. And on February 9, yesterday, we made a net follow-on investment of $3 million in the Copernicus Group that increased our total investment to $22.5 million.

We've now closed on substantially more than $500 million of new investments over the past 10 months. Our investment pipeline currently aggregates more than $1 billion of potential opportunities. Primary investment activity in the marketplace increased during the second half of 2010 and has continued into calendar year 2011.

Our pipeline of potential investments remains robust with additional originations expected to close in the current quarter. These investments are primarily secured investments with double-digit coupons, sometimes coupled with equity upside through co-investments or warrants and diversified across multiple sectors.

We are pleased with the overall stability of the credit quality of our portfolio with many of our companies generating year-over-year and sequential growth in top-line revenues and bottom-line profits. Thank you. I'll now turn the call over to Brian.

Thanks, Grier. On December 21 we issued $150 million of five-year unsecured 6.25% senior convertible notes and became the first company in our industry to access this market. The notes are convertible at an initial and December 31 conversion rate of approximately 88 shares per $1000 of principle amount of the notes, which is equivalent to a conversion price of approximately $11.35 per share.

The conversion rate will be increased if monthly cash dividends paid to common shares exceed the rate of $0.101125 per share subject to adjustment. Interest on the notes is paid semiannually in arrears on June 15 and December 15 at a rate of 6.25% per year commencing June 15, 2011. The notes mature on December 15, 2015 unless converted earlier.

The notes are general unsecured obligations of Prospect with no financial covenants, no technical cross default provisions and no payment cross default provisions with respect to our revolving credit facility. The notes have no restrictions related to the type and security of assets in which Prospect can invest.

The issuance of these five-year notes has allowed us to grow our investment program in calendar year 2011 and commit to loans with maturities longer than our existing credit facility maturity. These notes have an investment-grade S&P rating of BBB.

On June 11, 2010 we held a first closing and 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, with the amendment completed on January 13, 2011, allows commitments to increase to up to $400 million without the need for re-approval from the existing lenders.

Since June 30 we have closed on an additional $75 million in commitments with one existing and three additional new lenders raising the total commitment under the facility to $285 million. We seek to upsize existing lenders and add additional lenders 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 amendment signed in January also allows for larger loans to be pledged to the facility and provides a mechanism for pledging loans on an expedited basis. As we make additional investments we generate additional availability to the extent such investments are eligible to be placed into the borrowing base.

The revolving period of the facility extends through June 2012 with an additional one-year amortization period after the completion of the revolving period. The facility has an investment-grade Moody's rating of A2.

At the issuance of the notes in late December we repaid the revolving balance on the facility in full. As of February 9, 2011 we had invested all of the proceeds from the note issuance and we had borrowed $31.1 million under our facility. Our availability as of today is currently in excess of $245 million for new investments.

Our at-the-market stock distribution program has proven to be a cost effective source of new equity capital to fund investment activity. During the December 2010 quarter we continued our at-the-market program, completing the third such program which was initiated on September 24 and embarking on our fourth program on November 10.

Under the third at-the-market program we issued approximately 4.93 million shares of our common stock at an average price of $9.86 per share raising $48.6 million of gross profits from October 1 through November 3. Under our fourth at-the-market program we issued approximately 4.5 million shares of our common stock at an average price of $10 per share raising $45.1 million of gross proceeds from November 16 through December 15.

We have not issued any shares under the program since December 15. Our modestly levered balance sheet is a source of significant strength. Our debt to equity ratio currently stands at approximately 20%.

Our equitized balance sheet also gives us potential for future earnings upside as we prudently look to utilize and grow our existing revolving credit facility and add additional secured and unsecured term facilities made more attractive by our investment-grade ratings at corporate, facility and notes levels. Now I'll turn the call back to John.

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

(Operator Instructions). Jasper Burch, Macquarie.

Hi, good morning, gentlemen. Thank you for taking my call. I guess just starting off with -- on your capital structure. First of all, congratulations on a great deal. What are you looking at in sort of longer-term optimizing your capital structure sort of beyond the revolver and what sort of debt to equity levels are you looking at so we can sort of try and figure out when you might raise additional debt or equity capital?

Sure, good morning Jasper. Thank you for your question. We are at all times constantly exploring our alternatives for debt and hybrid debt/equity solutions as accretive capital to benefit or shareholder base, particularly given our current under leveraged situation with a debt to equity ratio of approximately 20%.

And options that we continue to explore include, but are not limited to -- options such as convertible debt like the issuance we just did at the First Star Industry in December, private placement debt, unsecured straight institutional debt and straight bond issuance, longer-term retail notes issuances and other potential formats. And we're actually exploring all of these.

Private placements we've looked at in the past and have actually turned down potential deals we could have done, because we felt that tying up collateral with a non-callable irreversible piece of paper we saw as not prudent to do at this point in the cycle. We'd rather retain flexibility on our collateral for future secured deals.

We also didn't like the terms in terms of heavy covenants and cross default provisions and just pure cost associated with such deals. And for us it's not just growing the debt to equity ratio which we targeted long-term of approximately 0.5, to answer your second question. We might fluctuate around a band around that, but that's a good long-term target.

But proper risk management we also see as maintaining the appropriate asset liability matching and our convert is a five-year issuance which is a good match with our three year revolver and future debt deals we've looked at have a similar or greater tenor attached to it.

And then the other aspect of risk management which we think is really important, and which others in our sector in past years forgot about, is the importance of cross default provisions and financial covenants. We manage our compliance with covenants rigorously in our revolving facility and pay attention to what tripwires might exist for new issuance that one could put on the books pertaining to that issuance as well as on a cross basis.

So unsecured deals we feel are smart in terms of not tying up collateral and being lighter on the covenant cross default basis. Did that answer your question, Jasper?

Yes, that's definitely helpful. I guess sticking on the topic of debt, but a little bit more technical. If I remember correctly, I think the conversion rate on your convert notes changes if you pay a dividend above I think it's $0.10 a month. Can you walk us through that calculation and will we be seeing any impact of that in this coming quarter?

The conversion price declined as the dividend increases passed the threshold level of $0.101125 per share. And there have been no adjustments as of December 31. We just announced a modest dividend increase yesterday, so you'd see a slight impact, but emphasize the slight, over the next couple of months.

Okay, and I guess I'll just follow up on the specific calculation off-line. And then changing tact a little bit, on your guidance, the $0.24 to $0.30 EPS number, what sort of investment divestiture assumptions go into that range and also what accelerated discount accretion assumptions go into that range? What would it take to be on the low-end or the high-end?

Well, the main driver of the range is the pace of originations that we would close between now and the end of March and that can be lumpy from time to time. We've been on a decent pace here having put on the books just under $300 million of new originations from September 30 last year to the present time. And because we booked fees associated with those originations upfront that would have an impact on the March quarter financials.

In terms of accelerated accretion, we're not assuming that. But if we were to have a repayment of some of the remaining legacy Patriot book loans, then that could have an upward swing factor, a potentially significant upward swing factor depending upon which loans we're talking about.

Okay. So all else equal, essentially if your portfolio -- if you were to shut off investments, which obviously isn't the case, then you'd be sort of towards the $0.24 range and then is upside given given the continued robust investment pace?

That's right. And to give you a sense of our pipeline, I mentioned we've got about a $1 billion aggregate pipeline. We divide that pipeline into a so-called category A and a category B. Category A meaning deals under term sheet where we're still doing advanced diligence and documentation and the like. That's about $200 million right now. Category B is the balance where we put terms out and we're moving deals along in the process.

Things can change quickly and we can add to that fairly quickly. Many of those deals have a long gestation period but sometimes shorter gestation period deals might get moved along quickly as well. So hopefully that gives you a sense.

We think it's going to be an active year. The market took a little bit of a pause in January to digest the huge surge of tax driven deals that we saw in November/December and we continued a pretty decent rate of closings throughout January. But we didn't necessarily add too much to category A in January. And now we're seeing, after that pause in January, new deals again are being added to category A.

Great. Well, thank you for your time.

Troy Ward, Stifel Nicolaus.

Great, thank you. Good morning, gentlemen. Grier, could you give us a little color on the American Gilsonite transaction this quarter, a couple items. First of all, where did that come through on the income statement? I'm assuming that's other income and not dividend income, is that correct?

Well, it shows up in a couple of places and our other exits in the December quarter were driven by M&A and refinancing activity in the marketplace and were paid out. On Gilsonite we participated in a dividend recapitalization and we're very pleased with the performance of that portfolio company. It's been in our portfolio for several years now. And we participated in a recapitalization. We received upfront fees in conjunction with that. We received a payout of our dividend, which I believe shows up in dividend revenue.

Yes, it reduced our cost to zero and the rest was reported as dividends.

Right, so some of it was a return of capital distribution -- right, Brian -- not necessarily hitting the income statement. But benefiting the book overall. And then, of course, we have a larger position going forward in which we're accruing and getting paid on a timely basis on our interest.

I'm sorry, the 1.068 in non-controlled dividend is that and then the remainder came through as capital?

Correct.

And then can you talk about the dividend recap for a second, Grier? I mean, obviously in this environment we are seeing dividend recaps. And that's, with some of these deals -- I know Palladium bought this out in 2008. Can you speak to the leverage levels at purchase back in '08 versus today?

Well, I can give you a general sense, Troy. I have to be sensitive to confidentiality related to an individual transaction. But this particular company, it's I guess one of our favorites in the portfolio you might say, because the business controls the only source of Gilsonite basically in the world in Utah. And it's an essential substance in many energy and in printing and in asphalt and other foundry and other industrial applications with a challenging substitution.

So it's the type of company we like to see with high market share and with pricing power relative to the marketplace. We're very cautious about dividend recapitalizations in general. Obviously because you change the governance aspect in having junior capital with lessened capital now quote, unquote, net at risk or even in some cases zero or negative capital at risk if they've taken some chips off the table. And there have been many situations we've said no to.

We're also very cautious about the amount of leverage we're willing to put on. In this case this business has increased its profitability multiple fold under new ownership. So it's significantly delevered and could comfortably handle increased debt capacity.

But in other situations we're seeing marginal companies in the marketplace seek recaps and we've said no to those situations because we're not sure if the profitability is sustainable into the future. But in general companies out there are benefiting from the general economic recovery, improvement in profits and the majority of companies are reporting significant profitability improvements for 2010 versus 2009.

So when we see the dividend recap effectively take your cost basis to zero we can assume that other larger equity players in the game still have significant skin in the game?

They have skin in the game. I wouldn't say necessarily significant because they've taken some chips off the table. But we're valuing an enterprise we view as much more valuable than when we initially closed the deal several years ago. And it's a company that also did an add-on acquisition, so other things have changed too to the positive benefit of the creditor.

Okay, and then one follow-up on the convertible offering how should we think about kind of is equity or is it debt kind of questions obviously it's trading above the conversion price today. Can you just speak to the type of holder that holds the convertible note and how you view that from a maturity standpoint?

Sure. Well a convertible instrument is of course by definition a hybrid instrument, but there are converts that are closer to the debt end of the spectrum and there are converts that are closer to the equity end of that hybrid spectrum.

I would say with a business like ours that pays a healthy dividend and that created a structure that we really innovated in December, in conjunction with the convert investors who provided very helpful feedback to us as well in the process. We were able to crack the code on something that others in the marketplace had been stymied towards doing for many, many years.

And I would say that passing through dividends, which some have done say in the mortgage REIT industry in years past, is something not interesting to us, a much higher cost of capital type structure, not as accretive and much closer to issuing equity. So we didn't do that and instead we created something closer to a straight debt instrument with say an equity kicker and compensated with a somewhat higher coupon than you would see on a straight convert that would have such pass-throughs and a lower conversion premium to compensate.

So we view it as a wonderful deal for the equity. We also think the investor benefits significantly because they're buying to an investment grade convertible credit when there's a dearth of such product in the marketplace and getting a pretty nice return to boot. And you'd expect a quote, unquote financial like ourselves would have some type of premium over an operating company and that's generally the case.

And our goal is to deliver paper with as low a premium as possible. And the sort of visceral stuff with unacceptable premia a year, year and a half, two years ago -- things are getting much more rational which is why we decided to go ahead and pioneer that in the marketplace.

The other thing I would add is that the type of convertible investor, you can sort of characterize out right investors and technical investors that hedge their position. And our focus was on -- much more on the former, on fundamental outright investors that liked the risk-adjusted position of being in our capital stack as an unsecured creditor getting paid a priority coupon.

And so we structured the deal to be focused on that type of investor. We targeted that type of investor and we're very pleased with the composition of that investor base? And at the appropriate points in the future may look to open up a dialogue with the same investor base and a broader audience to have a similar dialogue as we look to latter maturities in the future and create a right liability structure for a company.

Great, and then a final one on the ATM program. I know you had a 30-day suspension following the issuance of the convertible debt piece. You're past that and I think you said you hadn't issued any since December 15. Is the ATM program something you're going to restart? And I believe you have north of 5 million shares left on the last program.

That's right. We do have some shares at capacity, although I wouldn't read too much into that because when you have an active shelf that's more of a technical aspect. I would say our priority is much more on term debt. Now that we have pioneered the right type of term debt in the industry, turned down private placements that we saw as unattractive, and at least two other companies followed suit and saw our path as the right path in the marketplace, as folks know, last month.

That's our focus, much more on straight term debt, maybe a convertible offering in the future. But we have liquidity available now as well, about $250 million on a revolver, which is our moat most attractive cost of capital to access first. But we're much more focused on prudently growing our debt to equity ratio on the conditions I discussed earlier than on expanding equity immediately as the next step.

Great, thanks guys.

(Operator Instructions). Dean Choksi, UBS.

Good morning, gentlemen. I had a question on the guidance. Is that assuming a basic share count, the March quarter $0.24 to $0.30?

Yes. As opposed to fully diluted for -- yes, that's a net investment income guidance which is a basic share count as reported. It would be operating results, net income per share that you could show basic or fully diluted. That's not the guidance though. It's net investment income guidance.

The other guide for investment companies actually does not allow you to present a diluted earnings per share, believe it or not.

Okay, that's interesting. And then, you guys have had really great loan growth I guess in the fourth quarter and then into January. Can you kind of talk about the changes that you've made internally to transition from the kind of project financed to more the sponsored financed model? And kind of how you generated that loan growth?

Well, we're several years into that and so that transition is parked comfortably in the past, I guess you would say. We really exited the project finance business at least four years ago and have been focusing almost exclusively on existing cash flowing companies with a minimum generally of $3 million to $5 million of EBITDA, but an average of more on the lines of $15 million to $20 million.

The last significant deal we closed was with $40 million, $50 million EBITDA company. So we like that from a credit standpoint. We continue to build out our team and organization. We have approximately 40 professionals in the organization across three locations currently and we feel we have a deep bench to handle our portfolio of about 60 names give or take, as well as to prudently grow the book. So we're happy organizationally with where we're going.

How's the mix been in the deal flow between kind of new sponsor relationships, repeat business and then I guess primary business versus refis?

Well, we've been pursuing both in terms of repeat versus new relationships. In some cases these are relationships we've had for many years on an individual basis, relationships people may have had at prior organizations. And we're closing a transaction for the first time in our book, but in other cases we're doing repeat deals with a number of close relationships with sponsors. And we like the repeat business of that mix.

But I'll also emphasize that the sponsor business, it can get frothy at times and that tends to happen later in the middle market where we focus $5 million to $50 million EBITDA companies, give or take, later than in the syndicated market. But the syndicated market is frothy, you're seeing significant over subscriptions on unleveraged loans. And some of that is starting to enter the middle market which does have us cautious.

And when that occurs we are very happy that we have a balanced strategy as a company that allows, in our minds, for us to focus on making money no matter where we are in the cycle. So we're not one trick pony. And what that means is we can pursue direct lending with non-sponsor owned companies, which many of our peers don't do because frankly it's a lot heavier lifting to do that.

You've got to do your own background checks, your own quality of earnings assessment, your own deep dive diligence. You're not quote, unquote drafting behind anyone in those deals. So we're set up very well to do that, as well as to pursue controlled acquisitions. We closed one of those last calendar year, AIRMALL, which has been a wonderful transaction for us, and we'll selectively look at others as well.

That's an opportunistic strategy, that's a value driven strategy where we're looking to pay a low purchase multiple, put in as little equity as possible and, again, continue our focus on unsecured lending with selected equity kickers where we can. Did I answer your question?

Yes, that was helpful. Thank you.

Henry Coffey, Sterne Agee.

Yes, good morning everyone. The investments that you identified for the March quarter so far, am I doing it right, it's about $148 million total?

Yes, that's what we've closed approximately from January 1 until -- through yesterday.

Right. So that compares to the $138 million you did in December. And again, I mean I'm sort of reading between the lines, but it sounds like there's more to follow by the end of March, is that correct?

Yes, we have about $200 million approximately in category A transactions which are deals where we have an overlap on terms with a counterparty. We're still in documentation and diligence mode on those. It's hard to say -- as you know in this business, Henry, I mean you've tracked us for a long time -- precisely when those deals will close. But more visibility on that than the other $800 million plus in category B.

Let's assume that the number is somewhere between $148 million and $348 million, what percentage of that will you be funding with new equity issuance and what percentage of that will you be funding with leverage?

Our goal is to focus on funding with leverage.

100% and no new equity issuance this quarter or --?

That's our goal. And we have about $250 million of liquidity in a revolver right now. We're drawing about $30 million to $40 million, in that range, currently. It's $285 million. We've been increasing the size of our revolver selectively as well, as you know, over the last several months -- added three new banks to the mix, etc. So that's our first stop on the liquidity tour, Henry, and then selectively looking at other forms of term debt issuance would be the next priority stop.

So we should be reasonably confident that there won't be the kind of increase in share count from quarter to quarter for one or two more quarters?

Well, it depends on originations, Henry, and we're going to be very mindful of managing our debt-to-equity prudently as well. We've had (multiple speakers).

Right now it's nonexistent, so (multiple speakers).

It's about 20% right now and our goal is to increase it to a long-term average of about 50%.

Now, in looking at your guidance, you're talking about making, if I get it correctly -- am I correct -- $0.24 to $0.30 in net investment income for the current quarter?

Correct.

And you're paying out more than that in dividends -- we've been down this path before. How many quarters can you under earn the dividend on an NII basis before you have to reduce it?

We look at the dividend on a long-term basis. We're very comfortable with the dividends just declared on a forward-looking basis.

Right, but you're not talking about earning them next quarter, correct? I mean, we've been -- the last time we went through this we talked about it for about a year and a half and then in the summer you cut the dividend. I was just wondering -- what's the bar that -- at what point do you cross -- what line has to be crossed before that gets triggered.

I'm not sure there is a specific line, Henry. We're focused on accretive growth with prudent leverage and we're comfortable with the dividend levels.

So should we assume that there are other realized gains in the pipeline or -- I'm just trying to reconcile your guidance with your dividend.

Well, I mean we did have realized gains with Miller Petroleum to the tune of -- what was the aggregate in that, Brian? About $8 million? Give or take?

It was $2.6 million (multiple speakers).

And then you sold some more shares this quarter, right? Or is that --?

No, we haven't sold a single (multiple speakers).

Oh, you didn't. I'm sorry. I must've misread something in the release. All right, thank you.

Let me just add a couple things. First, we haven't sold any shares this quarter.

No, no, I checked that, you're correct. You are correct on that, John, I'm sorry. My fault.

But let me give you some color that may be helpful. If you remember, many of the shares that we sold were in the run-up to the Patriot acquisition at a time when we had to refinance the Rabo facility and at a time when it was slow in the marketplace. So three items that slowed the growth of net investment income. Now, we understand we're a little bit behind, as we were before, not as much.

Before the way to move forward and align the dividend with our net investment income in our view was too close additional Patriot type transactions of which there were several that we were very close on. We did not close them because we didn't like the price. Other people bought those portfolios. I think they'll do fairly well as a matter of fact because the market did reflate and we couldn't predict that. We were very conservative and careful.

So as a result we had dry powder that was not fully utilized as everybody knows. I feel that we're in a different situation now where we don't need to do -- we don't need to go catch a whale to grow our net investment income along the track that we anticipate. We need to continue to do ordinary day-to-day originations and fund them as much as possible with debt.

So that's why Grier is able to say that we're comfortable with where we are, even though we are under earning the dividend at the moment which is a situation we'd like to see be temporary.

So if you work on the numerator, which you've done a great job of over the years and I agree with you that the world has changed dramatically, and leave the denominator at 88 million shares you're saying there's a pretty good chance you could get back into earning the dividend again?

Well, that's not only our goal, personally it's my expectation and I think the pieces are there. And I know you can do this, you've got a model. If you assume a certain amount of originations and if they're funded 100% with debt and you look at our cost of debt, just that kind of thing alone gets us there. It's a question of how quickly.

There's another piece and I (multiple speakers).

No, I appreciate your commitment on this issue. And I know, John, you own a lot of stock. So thank you.

Henry I would just add one other piece to benefit you and others listening, which is the benefits to scale as it pertains to seeking investment-grade ratings as a company. Adding to the share count, adding to the equity base, building to our now in excess of $1 billion market, capitalization business has reaped benefits on that front and we enjoy investment grade ratings on our revolving facility as well as at the corporate level.

What that means is, and we have a peer group of 20 or so companies depending upon who you consider a peer. Very few of those companies will be able to access the bond markets, whether it's the convertible bond market or the straight bond market, and those tend to be ratings driven types of markets.

We had said on prior calls we intended upon accessing those and that the increase in the equity base would help with that and that's exactly what we did, obviously, in being able to tap into the convertible bond market in December. But 90% of our peers will never be able to do that at their current size.

Thank you.

Chris Doucet, Doucet Asset Management.

Congratulations, gentlemen, on the progress. This is actually David from Doucet Asset Management, but I appreciate you taking my question. Mr. Coffey addressed my main concern, but one other question related to your new investment origination.

Besides the upfront fees that you receive when the deal is consummated, what's the timing on when the cash flows from the -- typically when the cash flows from the investments start impacting your NII? So you had December, several investments close in December. Will your first payments be quarterly payments that impact Q1? And the same thing for like your January originations. You receive monthly or quarterly payments that impact Q1 or is there some type of lag?

Well, the majority of deals, particularly where we agent which is the vast majority, we get paid on a monthly basis. There are some deals in which we're paid quarterly. But under GAAP we would accrue such income as an investment company. So if you had a quarterly payment due April 1 for example, it's not as if you wouldn't accrue income during the March quarter. You would.

Okay, well that makes sense. That was the only remaining question we had and we appreciate the color.

This concludes the question-and-answer session. I would like to turn the conference back over to John Barry for any closing remarks.

Okay, thank you very much, everyone. See you one quarter from now.

The conference has now concluded. Thank you for attending. You may now disconnect your lines.