Prospect Capital Corp (PSEC) 2012 Q1 法說會逐字稿

Good day and welcome to the Prospect Capital earnings call. (Operator Instructions). Please note this event is being recorded. I would now like to turn the conference over to John Barry, Chairman and CEO. Mr. John Barry, the floor is yours, sir.

Thank you very much, Mike. Joining me this morning on the call 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 meanings 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 disclosures, see our earnings press release and our 10-Q filed previously.

Now I will turn the call back over to John.

Thank you, Brian. For the three months ended September 2011, our increase in net assets from operations was $39.9 million or $0.37 per share. For the three months ended June 30, 2011, our increase in net assets from operations was $27 million or $0.28 per share. Our operating results increased 48%, and our operating results per share increased 32.1% from the quarter ended June 2011 to the quarter ended September 2011. This increase is primarily due to investment income from new investments made during the June and September 2011 quarters and significant unrealized gains recognized in connection with several equity investments that have shown significant improvement in operating results.

Our net investment income was $27.9 million or $0.26 per share for the three months ended September 2011 and $21 million or $0.28 per share for the three months ended September 2010. Net investment income increased $6.9 million year over year due to a $20.1 million increase in investment income, partially offset by a $13.2 million increase in operating expenses. Investment income was up primarily due to increases of $13 million and $5.4 million in interest and dividend income respectively due to the larger size of our portfolio and an enhanced level of dividends received primarily from our investments in two companies, Gas Solutions and NRG.

We are targeting growth in net investment per share as we utilized prudent leverage to finance our growth through new originations given our debt to equity ratio stood at less than 49% as of September 30, 2011. We estimate our net investment income for the current second physical quarter ended December 2011 will be $0.26 to $0.30 per share. Our net asset value per share on September 30, 2011, stood at $10.41 per share, an increase of $0.05 per share from June 30, 2011. This week we declared our 40th, 41st, and 42nd consecutive cash distributions to shareholders.

Now I will turn the call over to Grier.

Thanks, John. Our origination efforts during the three months ended September 2011 have focused primarily on secured lending, continuing to privatize first-lien loans, although we also continue to close selected junior debt and equity investments.

In addition to targeting investment senior and corporate capital structures with our new originations, we have also increased our new investments in third-party private equity sponsor-owned companies, which tend to have more third-party equity capital supporting our debt investments than in non-sponsored transactions, while still maintaining flexibility to pursue attractive nonsponsor lending, one-stop buyouts and secondary acquisitions.

With our skilled team of more than 45 professionals, one of the largest dedicated middle-market credit groups in the industry and focused on the Company, we are well positioned to select in a disciplined manner a small number of investments out of thousands of investment opportunities sourced per annum.

As a result of these credit risk management initiatives, our portfolio's annualized current yield stood at 12.4% across all long-term debt and certain equity investments as of September 30, 2011.

Nonrecurring distributions from other equity positions that we hold are not included in this yield calculation. In many of our portfolio companies, we hold equity positions ranging from minority interests to majority stakes, which we expect over time to contribute to our investment returns.

At September 30, 2011, our portfolio consisted of 76 long-term investments with a fair value of $1.652 billion compared to 72 long-term investments with a fair value of $1.463 billion at June 30, 2011, and compared to 58 long-term investments with a fair value of $748.5 million at June 30, 2010.

Our asset bases continue to grow and diversify over the past year. Our cyclical energy-related industry mix of gas gathering and processing, oil and gas production, and oilfield fabrication businesses declined as a percentage of the investment portfolio to 12.1% at September 2011 from 13.6% at June 2011 and 29.5% at June 2010, reflecting a significant increase in our industry diversity as part of our strategy to control risk.

During the September 2011 quarter, we completed new and follow-on investments aggregating approximately $222.6 million and received repayment on one other investment. Our repayments in the September 2011 quarter were $46.1 million, resulting in $176.5 million of investments net of repayments.

On July 1 we made a senior secured follow-on investment of $2.3 million in Boxercraft to support the acquisition of Jones & Mitchell, a supplier of college licensed apparel. On July 8, we made a secured senior lien investment of $39 million to support the re-capitalization of Totes Isotoner. On August 5 and September 7, we made senior secured follow-on investments of $3.9 million and $11.8 million respectively in ROM Acquisition to support the acquisition of Havis Lighting, a supplier of products used primarily by emergency response and police vehicles and the acquisition of a leading manufacturer of personal safety products for the transportation and industrial markets.

On August 9 we provided a $15 million term loan to support the acquisition of Nobel Learning, a leading national operator of private schools. On August 9 we made an investment of $32 million to purchase 66% of the subordinated notes in Babson CLO Ltd. 2011-1.

On September 16, we acted as the facility agent and lead lender of a syndicate of lenders that collectively provided $132 million in senior secured financing to support the financing of Capstone Logistics, a leading logistics company. This Company provides a broad array of logistic services to a diverse group of blue-chip customers in the grocery, food service, retail and specialty automotive industries. As of September 30, 2011, our investment is $90.5 million, structured as $41.5 million of Term Loan A and $49 million of Term Loan B first-lien notes.

On September 30, we provided a $23 million senior secured loan to support the re-capitalization of Anchor Hocking, a leading designer, manufacturer and marketer of high quality glass products for the retail, food service and OEM channels. Since September 30 and the current December 2011 quarter, we have completed three new investments and two add-on investments aggregating approximately $40 million.

On October 13 and October 19, we made investments of $9.3 million and $1.4 million respectively to purchase 32.9% of the subordinated notes in Apidos CLO VIII.

On October 24 we made a senior secured investment of $6 million in Renaissance Learning, a leading provider of technology-based school improvement and student assessment programs. On October 28 we made a follow-on investment of $8.2 million in Empire Today.

On November 4, just in the past week, we made a secured second-lien investment of $15 million to support the acquisition of a specialty pharmacy services company in a private equity-backed transaction. On October 31, IEC-Systems and Advanced Rig Services repaid our $20.9 million loan giving us a 2.2 times cash-on-cash return and 35% IRR.

We are pleased with the overall credit quality of our portfolio with many of our companies generating year-over-year and sequential growth and top-line revenues and bottom-line profits. None of our new loans originated in the past four years has gone on nonaccrual status. The fair market value of our loan assets on nonaccrual as a percentage of total assets stood at approximately 3% on September 30, 2011, down from 3.5% on June 30, approximately 2.2% of that 3% related to one investment that we anticipate but cannot guarantee exiting in the current quarter to reduce our non-accruals even further.

Because of the strong results of multiple control positions in our portfolio, we may look to selectively monetize certain such companies if we identify attractive opportunities for exit. If such accidents were to occur, we would look to reinvest such proceeds into new income producing opportunities. We are pleased with the performance of our controlled portfolio of companies and are actively exploring other new investment opportunities at attractive multiples of cash flow.

Our advanced investment pipeline aggregates nearly $250 million of potential opportunities. Primary investment activity has continued to be robust in calendar year 2011 with over $935 million of originations. These investments are primarily senior secured investments with double-digit coupons, sometimes coupled with equity upside for additional investments and diversified across multiple sectors.

We are pleased with the overall credit quality of our portfolio with many of our companies generating year-over-year and sequential growth in top-line revenue and bottom-line profits.

Thank you. I will now turn the call over to Brian.

Thanks, Grier. Our modestly leveraged balance sheet is a source of significant strength. Our debt to equity ratio stood at 49% at September 30. Our equitized balance sheet also gives us the potential for future earnings upside as we prudently look to utilize and grow our existing revolving credit facility, as well as potentially adding additional secured and unsecured term facilities made more attractive by our investment grade ratings at the corporate revolving facility and term debt levels.

In addition, our repeat issuance in the past year in the five-year and greater unsecured term debt market has extended our liability duration, thereby better matching our assets and liabilities for balance sheet risk management. With this enhanced asset liability matching, we have been more willing to add additional leverage to the balance sheet.

We have also significantly diversified our counterparty risk. We currently have 11 institutional lenders in our revolving facility up from five lenders in June 2010, two lenders in June 2009 and one lender in June 2008.

In December 2010 we issued $150 million of unsecured -- five-year unsecured, 6.25% convertible notes due December 2015. On September 30, the 2015 notes are convertible into shares of common stock at a conversion price of approximately $11.35 per share.

In February of this year, we issued $172.5 million of an aggregate principal amount of 5.5 year unsecured 5.5% senior convertible notes due August 2016 for net proceeds of approximately $167.3 million. At September 30, the 2016 notes are convertible into shares of common stock at a conversion price of approximately $12.76 per share.

The 2015 and 2016 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 2015 and 2016 notes have no restrictions related to the type and security of assets in which Prospect might invest. The issuance of these 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. The 2015 and 2016 notes have an investment grade rating by S&P of BBB.

In June 2010 we held a first closing of an extension expansion of our revolving credit facility with a syndicate of lenders to extend the commitments of $210 million under the facility. The facility includes an accordion feature, which with the amendment completed in January of this year, allows commitments to increase up to $400 million without the need for re-approval from the existing lenders.

Since the closing in June 2010, we have been obtaining additional commitments to the facility, and on September 1 we closed the final $25 million upsizing in the facility to reach our $400 million accordion target.

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 for the facility extends through June 2012 with an additional one year amortization period with distributions allowed after the completion of the revolving period. Interest on borrowings under the facility is one-month LIBOR plus 325 basis points subject to a LIBOR floor of 100 basis points. The facility has an investment-grade Moody's rating of A2. We are currently in discussions with our lenders regarding an extension of the facility to a five-year term comprised of three years for the revolving period, followed by two years for the amortization period with distributions allowed.

We anticipate but cannot guarantee an increase of the facility size to at least $500 million with new and existing lenders, a reduction in our spread on borrowings, and an increase in our advance rate and improvement in covenants.

On June 24 we completed a public stock offering for 10 million shares of our common stock at $10.15 per share, raising $100.2 million of net proceeds. On July 18, the underwriter exercised its option to purchase an additional 1.5 million shares of our common stock, raising an additional $14.9 million of net proceeds.

We have deployed the proceeds from the notes and equity issuances and currently have borrowed $219.5 million under the facility. Assuming sufficient assets are pledged to the facility and we are in compliance with all terms, we would have $180 million of new investment capacity based on a $400 million facility size, and $280 million of new investment capacity based on a $500 million facility size. Any principal payments or other monetizations of our assets would further increase our investment capacity.

Now I will turn the call back over to John.

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

(Operator Instructions). Mickey Schleien, Ladenburg Thalmann.

I wanted to go back to the metrics you mentioned on your borrowers growth. I think you said many of your companies are exhibiting topline growth. Could you give us at least within a range what sort of average levels of revenue growth they are experiencing, and could you tell us whether you think on average they are experiencing any compression in their margins?

Sure. We will probably have to come back to more specifics on that, but I will tell you in conversations with Brian looking at the underlying performance, the ratio of greater performing growth to not is about 3 to 1. And so we have been very pleased with the performance of our Company. Of course, we are monitoring them very closely given the global uncertainty, what is going on in Europe, etc. We have not seen that translate into issues with our underlying portfolio. It seems to be more a financial capital markets concern as to what the future might look like as opposed to what is happening in the present.

Anything you would add to that, Brian?

I was just trying to see if I had the average increase.

We will see if we can get that for you in a few minutes.

Do you mean the margin?

Yes, we would have to aggregate some stats here to get you that. We will see if we can get you that later in the call.

Arren Cyganovich, Evercore Partners.

Just following up on Mickey's question, the equity increases that you have are rather against what we have seen in the market, and I know the underlying performance (inaudible) portfolio companies has been stronger. Can you highlight any specifics about the portfolio companies, where you are seeing this growth, and how it justifies the higher valuations in a very tough environment?

Sure. Our controlled investments are a minority percentage of the book. The control book is a little bit more focused on the energy and industrials sector, even though the book as a whole is highly diversified by industry with no single industry more than about 10% or 15% at this point.

But our companies in the industrials and energy sector are doing quite well. We have businesses that have increased their profitability as measured by EBITDA by as much as 5 to 6 fold over a whole period the last several years.

So we are quite pleased with that performance, and in fact, without being too specific, we did allude to in our prepared remarks the possibility for exits out of our controlled book, certainly at the right price and on the right terms. But we are very pleased with that performance, and I think that is why you have seen an overall increase in our net asset value at 9/30, which might surprise some folks that expected things to go in the opposite direction as you have seen with some of our peers given a widening of credit spreads. So the phenomenon of fundamental performance really dwarfed the credit spread win. Brian has a few things to add to that.

Yes, we only saw increases in revenue from 12 of our portfolio companies out of 72, and all of the rest of the companies saw increases I would say that averaged somewhere about -- somewhere between 10% and 12%.

That detail is very helpful. Thank you. The other follow-up I have is the dividends that you mentioned from Gas Solutions Holdings and NRG. Are those more of a one-time occurrence, or are these some more recurring dividends you expect for future quarters?

Well, I will talk about each of the companies separately. NRG is a company with a really phenomenal management team, a phenomenal management team in both companies, NRG and Gas Solutions. They have done a terrific job, and we have got a lot of forward visibility with NRG as measured by backlog for that business. So we expect the future to be very, very bright for that Company.

Gas Solutions has also done quite well, and it has two primary parts to it. There are several parts to the business, but the biggest pieces are processing of casing head gas out of the East Texas oilfield, which is a mature field but a very profitable business for the Company. It has some positive exposure to propane prices, which are reasonably correlated with crude oil. We tended to hedge those exposures in the past by purchasing puts as downside protection. And the other part of the business is processing natural gas in various conventional and unconventional plays in East Texas in the footprint.

So both companies are on track, and if we can say it pretty comfortably here in November, we will have record years in 2011.

So you expect dividends from both of those companies to be similar to the third-quarter level?

Well, we don't really project dividends at in any particular company nor for the overall business. But we are pleased with what the future looks like for both businesses, and as I alluded to earlier, we may explore the possibility for exit as well.

Robert Dodd, Morgan Keegan.

Just looking at the capital structure, as you said, with $400 million in debt, which you are getting -- which obviously you used a lot of in this quarter, as you tap and re-pledge, we would expect you to be able to use basically all of it. I mean can you give us an idea of what your capital structure goals are a little bit beyond the next couple of quarters? You want to expand it to 500, but what about the next 12 to 24 months in terms of how you expect to be funding the business? Because obviously even at 500, at your current deployment rate, you would fully utilize that debt pretty quickly.

Sure. The revolver that you just mentioned as our most efficient form of funding is secured financing. We have delivered and been able to grow that facility. In fact, in the last quarter alone, we increased that facility twice. $500 million is the initial target for the facility upsize and extensions as we have had discussions with the current group that numbers 11 institutions, by the way, a huge increase in diversity compared to many years ago when we had one lender.

We are targeting having an accordion feature in the deal to us to take that as high as $650 million. So we are going to look to add capacity to the facility with the existing group, plus some additional interest participants. That is on the secured side. That is the first stop to manage the business, the working capital, ebbs and flows, repayments, investments, etc. And our goal is to make that a five-year deal to increase the tenor and continue on what we have been delivering on to extend the liability profile of the business.

On the terms side of things, as you know, we are the first company in our industry in many years to do a term unsecured institutional deal 11 months ago and the first ever to do a convertible bond deal. We are working on some other initiatives that we are not going to go into too much detail on now that we will potentially be unveiling in the next few weeks.

But, on the terms side, we are constantly exploring different avenues there, being very, very cautious and careful about a) costs and b) terms as measured by security and covenants. We are not interested in leveraging our balance sheet willy-nilly. We want to be very, very thoughtful about how we do it. Our bias is towards the unsecured side. Our bias is towards longer tenure type of debt. And there is a variety of markets to look into -- institutional, retail, bond loan, private placements, other formats, and we are exploring all of those formats.

In terms of long-term capital structure, when we think about debt to equity ratio, which is, by the way, an important ratio, but just as important as that is matchbook funding as a principle that other peers in years past seem to have forgotten to their detriment. We have always focused hard on that, as well as the terms, cross-defaults and the like of that debt.

Our debt to equity ratio right now is less than 50%. We have almost a couple of hundred million of dry powder in our facility without any expansion whatsoever. If you add an expansion, we will have more dry powder beyond that.

We do expect, Robert, to the extent we exit some of our positions, particularly some of the larger controlled positions, for there to be some recycling in the book. And, of course, we would exit at a price we deem attractive, monetize equity, and then deploy that into more yield-enhancing debt, leverageable yield-enhancing debt as a de-risking and income growth dual strategy in our book. But those exits, should they occur, would be, of course, another source of liquidity to fund additional new portfolio investments without having to raise any additional capital essentially whatsoever depending upon the price of the exit and the timing of the exit. I cannot be more specific about that, of course, because each of the situations is dynamic, dependence upon third-parties to a certain extent, etc. But when we look at the liquidity profile of the business, we are very pleased.

One of the things that gives us a big advantage relative to our peers is the way we have capitalized the business. We have set up our revolver in a secured SPV structure, the rated structure, and as a result, we have about half of our assets approximately across our capital corporation that are unencumbered. I don't think any of our peers can say that they are in a significant scale.

So, from a credit profile standpoint, when folks are looking at us from a risk assessment as an unsecured term lender, they like the profile of our business very much relative to other companies in which really someone is behind a secured lender for those assets.

Is that helpful, Robert?

Yes, that is very helpful. Thank you. Just a couple of others. On the structuring fees, I mean they looked proportionally a little higher than the historic at about 2.5% the origination. Is that tied to the nature of the Capstone Logistics deal as you have been the lead syndicator, and should we expect to see more of those kind of deals and structurally a kind of higher structuring rate in future?

That is -- a good chunk of the structuring fees were from the Capstone deal, as well as others we closed in the quarter. And I think what you see there is a real benefit to our scale. As our balance sheet is approaching $2 billion and we are really one of the largest companies in our industry, we can comfortably hold a decent-sized deal. We are going to pay careful attention to name diversity and, of course, have more than 75 companies in the pool at this point. But because of that, we could have a larger hold. I would not call it necessarily the underwriting and sell-down business, but we can certainly do a larger hold, take a leadership position, drive pricing and terms, drive additional fee revenue to our business, and bring in other folks into deals we did on the Capstone deal and maybe even sell it down a little in the aftermarket as well if we think it is advantageous to do so. There are very, very few peers that can hold $50 million to $100 million plus in one place in our business and we are one of them, and we win a lot of business as a result of that.

Got it. Last question, if I can. I better ask about stock buybacks. You took incremental deployment yield in the quarter, looked to be somewhere in the 11%, maybe 12% range, which is lower than your dividend. I mean why not use the capital to buy back stock instead of deploying it into third-party investments?

The Board passed a resolution to give our Company the option to repurchase stock in the past quarter as we talked about on our last call, and we have continued as a Company to examine the costs and benefits of that approach versus making new investment. There were some severe dips there where it was very hard to get in and buy anything and certainly buy anything in particular volume, which I think is a good thing. There was not a depressed state that persisted of below, say, 80% or 85% of book, and things appear to have rebounded, which, of course, we would strongly prefer as a Company, and I'm sure shareholders would agree with that as opposed to a situation where you have a depressed period of time in the economy and depressed valuation relative to book value and repurchases occurring at that time.

So we are looking at that. We are looking at our pipeline of opportunities and thinking about that. It is not an easy decision. I had a conversation with one investor who said -- and people have very different views about this -- an investor that said, well, I actually don't want you to repurchase stock, the analysis you just went through notwithstanding. And I said, well, why is that? And he said, well, if you are repurchasing your stock, it shows you cannot find any other good investment for the money, except for that. And why would I invest in a company that can find other investments beyond its own stock? And I realize that people can disagree with that and have different points of view on it, but it does show that the analysis is not simple, or at least not as simple as meets the eye.

Greg Mason, Stifel Nicolaus.

Last quarter you mentioned looking at exiting H&M, and my guess is that you hinted at that in your prepared comments. Can you give us any additional comments on the status of H&M today?

That is right. We did refer to that in talking about our non-accruals and anticipating but not guaranteeing a decrease based on potential exit there. But because of real-time conversations, we prefer, as I'm sure you would understand, not to comment on that.

Assuming that you can expand your credit facilities, really the only limitation and leverage is your target level and your comfort of where do you want to take your leverage. So can you give us an update on where you want to take your leverage in the business?

Sure. We are currently at less than 50%, as I said earlier. We do leverage as kind of a band an important analysis, but just as important being matchbook funding and the terms and security of that leverage. It turned out in the last cycle guys were at not too high a debt to equity ratio, but we are running a mismatched book with one-year revolvers financing five-year liquid middle-market loans. That did not work out too well for folks despite a "low debt to equity ratio." So liquidity is just as important as solvency, and we pay attention to both.

Having said that, we have talked with the rating agencies, we have talked to our lenders, we have thought about from a risk assessment standpoint of (inaudible) going to maybe 60% to 65% debt to equity as a long-term target with some type of ban around that. But, again, we have a credit profile which is superior to our peers on an unsecured term basis.

Okay. Great. In the Q, you have a footnote in there about Gas Solutions. Revenues were up big. I think 40% year over your. EBITDA up 66%. Is that being driven by commodity price swings or volume levels? Can you give us any other color around what is going on in Gas Solutions?

It is just good management. Well, it is a combination of things. Bob Bourne, that runs that business, has done a wonderful job as has Steve Kennedy, a longtime operator of the business. We hired Bob as the CEO in the last couple of years.

There have been some additional business development projects that have come on stream that have performed quite well that has driven additional volume opportunities. There has been a boost from commodity prices as well. It has been really a combination of things that has helped that business.

All right. And then the final question that has been a topic of conversation over the last several quarters is the long-term sustainability of the dividend given that you are at $0.26 this quarter. I know you had had the $0.31 last quarter, but can you just talk about the sustainability of the dividend?

Sure. The dividend is something that we reassess as a Board on a quarterly basis. We don't make long-term predictions or projections, as you know. Our dividend has been stable for a while now. We have to pay attention, as you know, in our business to the tax requirements, the distribution requirements associated with income and short-term capital gains, as well as long-term capital gains that also have a payout requirement or used to pay a tax retention. Some of these exits, if they come through in significant scale as anticipated and hoped for, may, in fact, have a payout requirement in our current tax year that ends in August of 2012. So -- and, in fact, there is a possibility we would, in fact, have to have a special dividend, have more dividends where we are paying now, which may surprise folks that reference numbers like you were talking about.

We look at dividends on a long-term basis, not any one particular quarter. You are correct about the last quarter relative to this one, at least as measured by net investment income. Our goal is to continue to grow net investment income with loan growth. We are seeing a pickup in spreads as a benefit of the credit dislocation we have been going through in the last few months. I would say at least 100 basis points on the first first-lien side of things and a couple of hundred basis points for junior debt.

We have had a slight decrease in overall yield, primarily because of our risk appetite, which has diminished over many years. Our risk controls have continued to increase. We have a strong bias towards security, and we have a strong bias towards first-lien debt. And, as a result, I think we have one of the highest secured debt percentages of our assets of any of our peers. It is what, Brian, about 85% give or take, the majority of which is first-lien. It is significantly greater than others, and we think reflects in the results for our non-accruals both on an absolute basis, as well as on a relative trend basis for where we are going.

Greg, it is John Barry. The last time we discussed this I gave you my view that you thought was disingenuous. So I would like to maybe drill into what is disingenuous about my view, give me a chance to maybe speak up for myself. The way we look at it, at least the way I look at it, you heard how Grier looks at it, you will hear how Brian looks at it in a second. We have more than one view at our Company, and I think it makes the Company stronger rather than weaker.

But the way I look at it, as I explained in August, is that in some innings we hit all singles. So in those innings we might not make -- our net investment income might be less than our dividend. We could cut our dividend each time that happens. I'm not aware of anybody who thinks it is a good idea. I'm not aware of anybody who wants to do that. I don't.

Then in some innings, somebody hits a triple or a homerun. Maybe there is people on base. In those innings, we exceed our net investment income as we did in the third quarter of the year just ended. Now this last quarter it is all singles or mostly singles, and so we have not quite made it.

So we were thinking before the call maybe the baseball analogy is not getting through, so we talked about golf. For people who don't understand baseball but understand golf, when you play golf, on some holes you hit par. That would be where we equal -- our net investment income is equal to our dividend. On some holes you are under par. Some holes you are over, and occasionally you might hit a hole in one.

So I don't understand what is disingenuous about that very sincere belief that I have that we should not be moving our dividend around each time we hit singles or we are below par on a particular hole. But maybe you could explain that to me.

I think we can discuss that off-line.

Well, I'm happy to do it. I would like everyone to hear what you have to say that.

Well, so I think the question last quarter was talking about the dividend and I think your comment here was our net investment income was $0.31. So I'm not sure I understand the concern that our net investment income is not keeping up with the dividend. When that was your response to their question, there's clearly been lots of quarters where you have been under-earning that $0.31 dividend. So to not understand the individual's question about why there's concerns around the dividend, we thought that was disingenuous.

Okay, fine. I don't understand why you don't understand the baseball analogy, the golf analogy. I can run through tons of sports analogies, analogies in life. Some quarters are better than others. There is nothing disingenuous about that. Maybe you are having difficulty understanding it. That is your problem. The other people on the call are not.

All right. Well, we definitely want to see the earnings come up to earning the dividend on a sustainable level instead of just once every few quarters. So we are looking forward to seeing that.

Well, my view is that we should not be moving our dividend around because of one inning or one hole where we don't happen to shoot par. My view is we should have a steady dividend, we should work to increase it, we should do our best to have at all times the net investment income exceed our dividend, but we have to recognize that there will be innings and there will be holes when that does not happen. And there is nothing disingenuous about that.

All right.

(Operator Instructions). Casey Alexander, Gilford Securities.

I was just wondering in the discussion about potentially repurchasing your own stock, I was not quite sure that I understood the calculus of your argument that investors of yours have said that means that you cannot find suitable investments for the portfolio. Is it really the calculus as to whether or not investing your capital into new investments in the portfolio makes as much sense as buying your stock at a 25% discount, which is essentially investing in the deals that you have already invested in at 75% of face value? Isn't that really the calculus that you should be judging whether or not to repurchase your own shares by?

Yes and no. There are several factors that I think are not being taken into account. One is the use of leverage on an investment return. Just because we are investing at 10.5%, 11.5%, that is not a return. When we apply leverage to that, our return is more like 15% or 16%. I think you need to look at that also. And I also think that --

But that was not the argument that you made when you answered his question before.

To be fair, that was not our argument. We are just passing on other people's views on the topic.

Okay.

And also I think you -- the ability to purchase our stock at a 25% discount has been very, very limited. I think there may be one or two days that there was actually a chance to do that, and there was very little shares available at that type of a discount. Our stock is trading at about 90% of NAV right now, and we don't believe that right now it is a prudent use of our capital to buy back shares at that level. (multiple speakers)

But there was a period in time during the quarter where about 10 million shares traded below $8 a share. (multiple speakers). I'm just pointing that out. (multiple speakers)

I will also point out that I believe that most of that period that that was available we did not have authorization to actually make repurchases at that time. We did not have the ability to do it until we mailed our proxy on, I believe, September 9. (multiple speakers)

Okay. Well, that is fair. (multiple speakers)

It has only been the last 2 months that we have actually had the ability to do it. (multiple speakers)

(multiple speakers). That is fair. Let me ask you one other question. Do you have authorization to sell new equity below NAV?

We have authorization in both directions, purchasing and selling.

Okay. Great. Thank you.

It appears that we have no further questions at this time. We will go ahead and conclude our question and answer session. I would now like to turn the conference back over to management for any closing remarks.

Okay. Well, we are delighted we could get all those things out there on the table, different points of view, people get to ask questions, and we do our best to answer them straightforwardly, genuinely and sincerely the best we can. If no one does have any additional questions, then we are happy to end the call, and we wish everyone a nice lunch.

Thank you.

And we thank you, gentlemen, for your time. The conference is now concluded. We thank you all for attending today's presentation. At this time, you may disconnect your lines. Thank you.