Prospect Capital Corp (PSEC) 2012 Q2 法說會逐字稿

Good morning, and welcome to the Prospect Capital second fiscal quarter earnings release and conference call. (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, Denise. 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 meanings of the securities laws that are intended to be subject to Safe Harbor protection. Actual outcomes and results could differ materially from those forecasts, 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.

Thank you, Brian.

For the six months ended December 31, our net income was $104.4 million, or $0.96 per share. For the three months ended December 31, our net income was $64.5 million, or $0.59 per share. For the September 2011 quarter, our net income was $39.9 million, or $0.37 per share.

Our net income increased 62% and our net income per share was up 60% from the September quarter to the December quarter. These increases are primarily due to growing interest income from additional investments, higher dividend income from our investments in EnergySolutions and NRG, and significant realized and unrealized gains recognized in connection with EnergySolutions and NRG. These companies have delivered significantly enhanced operating results, and NRG has generated realizations in December and early calendar-year 2012.

Our net investment income, or NII, was $64.4 million, or $0.59 per share, for the six months ended December 31, 2011, compared to $40.1 million, or $0.51 per share, for the six months ended December 31, 2010. Our NII was $36.5 million, or $0.33 per share, for the December 2011 quarter, compared to $19.1 million, or $0.23 per share, for the December 2010 quarter.

Our net investment income was $27.9 million for the September 2011 quarter, or $0.26 per share. Increases in the December 2011 quarter were primarily due to growing interest income from additional investments and higher dividends from our investments in EnergySolutions and NRG.

Our NII per share in the December 2011 quarter increased 27% from the September 2011 quarter and 43% from the December 2010 quarter. We are targeting growth in NII per share as we utilize prudent leverage to finance our growth through new originations, given our debt to equity ratio stood at less than 49% as of December 31 and stands at approximately 37% today. We estimate that our NII for the current third fiscal quarter ending March 31 will be $0.53 to $0.58 per share.

Our net asset value per share on December 31 was $10.69 per share, an increase of $0.28 per share from September 30. Our portfolio continued to perform during the December 2011 quarter with increases in the value of our assets. None of our loans originated in over four years has gone on non-accrual.

We have generated cumulative net investment income in excess of cumulative distributions to shareholders for both the current August 2012 tax year, as well as since Prospect's initial public offering almost eight years ago. Depending on future distributions to shareholders, spillback dividend classifications, and other factors, we may retain significantly all or a portion of recent realizations and reinvest them in additional income-producing investments.

This week, we declared our 43rd, 44th, and 45th consecutive cash distributions to shareholders, including 22 consecutive per-share monthly cash distribution increases.

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

Thanks, John.

Our origination efforts during the December quarter have focused primarily on secured lending, continuing to prioritize first-lien loans, although we also continued to close selected junior debt and equity investments.

In addition to targeting [invested] 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 investment than in non-sponsored transactions, while still maintaining flexibility to pursue attractive non-sponsor investments.

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

At December 31, our portfolio consisted of 75 long-term investments with a fair value of $1.717 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.

During the December quarter, we completed new and follow-on investments aggregating approximately $154.7 million. Our repayments in the December quarter were $120.2 million, resulting in $34.5 million of investments net of repayments.

In October, we made investments of $10.7 million to purchase subordinated notes of Apidos. On October 24, we made a senior secured investment of $6 million in Renaissance, 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 the senior secured debt of Empire. On October 31, IEC and ARS repaid our $20.9 million loan.

Prospect earned a 2.2 times cash on cash multiple and a 35% realized cash internal rate of return on its combined investment.

On November 4, we made a secured second-lien investment of $15 million to support the acquisition of Injured Workers Pharmacy, a specialty pharmacy services company, in a private equity sponsor backed transaction. On November 21, we received an equity distribution from the sale of our shares in Fairchild common and preferred stocks, realizing $1.5 million of gross proceeds and a total gain of $1 million.

On December 2, we completed a reorg of Gas Solutions Holdings, renaming the company EnergySolutions Holdings and consolidating ownership of other operating companies owned by us and operating within the energy industry. As part of the reorganization, our equity interests in Change Clean Energy, Freedom Marine, and Yatesville were transferred to EnergySolutions to consolidate all of our energy holdings under one management team, strategically expanding EnergySolutions across energy sectors.

Also on December 2, we made a secured second-lien follow-on investment of $7.5 million to American Gilsonite to help support a dividend recap, and we subsequently received a $1.4 million dividend. On December 22, we made a first-lien loan of $31.1 million to VanDeMark, a specialty chemical manufacturer. Also on December 22, we made an investment of $17.9 million in secured and unsecured notes of CIFC.

On December 28, we made a first-lien follow-on investment of $4.75 million in EnergySolutions for the acquisition of a new offshore supply vessel by Vessel Holdings, a subsidiary of Freedom Marine. Also on December 28, we made a secured debt investment of $10 million to support the acquisition of Hoffmaster and we subsequently received a repayment of our previously outstanding loan.

Also on December 28, we made a secured debt investment of $37.2 million to support the re-capitalization of NRG. After the financing, we received a repayment of our previously outstanding loan. We received a $6.7 million dividend as a result of our equity holdings and we sold a portion of our NRG common stock for $13.3 million, realizing a gain of $12.1 million.

On December 29, Iron Horse repaid our $11.3 million loan. Iron Horse had previously been a non-accruing loan, experiencing significant stress in 2009. Due to our supervision and the turnaround efforts of a new management team that we recruited, this loan returned to accrual status and was repaid in full, representing a 1.2 times cash on cash multiple and 10% realized cash internal rate of return on our investment.

On December 30, we provided $8 million of senior secured debt to Hi-Tech, a provider of nondestructive testing services to detect leaks and other defects in various energy and industrial industries. On December 30, we exited our investment in Mac & Massey and received $10.2 million as repayment of our $9.3 million loan and monetization of our equity position, resulting in a realized gain of $800,000. We recognized $700,000 of accelerated purchase discount accretion in the December 2011 quarter in conjunction with the loan repayment.

Since December 31, we have completed one new investment and one add-on investment, aggregating approximately $35 million. Three loan investments have been repaid since December 31.

On January 4, Energy Solutions sold its gas gathering and processing assets called Gas Solutions for a sale price of $200.5 million, including a potential earnout of $28 million that will be paid based on the future performance of Gas Solutions. After expenses, including structuring fees of $10 million paid to Prospect, Energy Solutions received approximately $148.7 million in cash, with an additional $10 million held in escrow.

Our loans to Energy Solutions remain outstanding and are collateralized by the cash held by Energy Solutions as a result of the sale transaction.

Beyond ongoing interest payments from such loans, further potential dividends to us could be recognized as dividend income to the extent of earnings and profits available as we receive additional future cash payments from Energy Solutions. The accounting for the sale of Gas Solutions has yet to be finalized by Energy Solutions, but will not result in any dividend income or realized gain recognition by us until cash payments are received from Energy Solutions.

Energy Solutions currently has approximately $152 million of cash available for future debt service, distributions, operating investments, or add-on acquisitions. Together with prior cash flows, but excluding both escrow and earnout, the exit price for Gas Solutions produced a 57% internal rate of return and 5.5 times cash multiple for Energy Solutions on its Gas Solutions investment.

On January 9, Arrowhead repaid our $27 million loan. On January 12, we made a follow-on investment of $16.5 million to purchase notes in CIFC. On January 17, we provided $18.3 million of second-lien financing to a financial services processing company purchased by a leading private-equity sponsor. On January 31, Aircraft Fasteners repaid our $7.4 million loan.

On February 2, we sold NRG to a third-party buyer. In conjunction with the sale, our $37.2 million loan was repaid. We also received a $26.9 million make-whole premium for prepayment of our loan, which will be recorded as interest income in the March 2012 quarter. Prospect also received a $3.8 million advisory fee for the transaction, which will be recorded as other income in the same March 2012 quarter.

Not including the escrow, we received net proceeds of $26 million and will recognize a realized gain of $24.8 million in the March 2012 quarter. In total, we received proceeds of $94 million at closing. In addition, there is $11.1 million being held in escrow, of which 80% is due to us upon release of the escrowed amounts. Monies released from escrow will be recognized as additional gain when and if received. Including all cash flows over the life of the investment, but not including escrowed amounts, Prospect has realized a 59% annualized internal rate of return on the NRG investment.

We are pleased with the overall credit quality of our portfolio, with many of our companies generating year-over-year and sequential growth in topline revenues and bottom-line profits. None of our loans originated in over four years has gone on nonaccural status. The fair market value of our loan assets on non-accrual as a percentage of total assets stood at approximately 3.1% on December 31, down from 3.5% on June 30.

Because of the performance of several controlled positions in our portfolio, we had selectively monetized certain such companies and may monetize other positions if we identify attractive opportunities for exit. As such exits materialize, we expect to reinvest such proceeds into new income-producing opportunities. We're pleased with the performance of our controlled portfolio companies and are actively exploring other new investment opportunities at attractive multiples of cash flow.

Our advanced investment pipeline aggregates nearly $300 million of potential opportunities currently. These investments are primarily secured investments with double-digit coupons, sometimes coupled with equity upside through additional investments, and diversified across multiple sectors.

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 December 31 and stands at approximately 37% today.

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 add additional secured and/or unsecured term facilities made more attractive by our investment-grade ratings at corporate revolving credit facility and term debt levels.

In addition, our repeat issuance in the past two calendar years 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.

We also have significantly diversified our counterparty risk. We currently have 11 institutional lenders in our revolving facility, up from five at June 30, 2010, two lenders at June 30, 2009, and one lender at June 30, 2008.

On December 21, 2010, we issued $150 million of five-year unsecured 6.25% convertible notes due December 2015. The 2015 notes are convertible into shares of common stock at a conversion price of approximately $11.35 per share of common stock, subject to adjustment in certain circumstances.

On February 18, 2011, we issued $172.5 million of 5.5-year unsecured 5.5% convertible notes due August 2016. The 2016 notes are convertible into shares of common stock at a conversion price of approximately $12.76 per share of common stock, subject to adjustment in certain circumstances.

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 have enabled us to grow our investment program in calendar-year 2011 and commit to loans with maturities longer than our existing revolving credit facility maturity. These 2015 and 2016 notes have an investment-grade rating from S&P of BBB.

Between January 30, 2012, and February 2, 2012, we have repurchased $5 million of our 2016 notes at 97.5% of par, including commissions. We may look to make additional repurchases of the 2015 or 2016 notes at our discretion, if attractive opportunities become available.

On June 11, 2010, we held our first closing of an extension 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 up to $400 million without the need for reapproval from the existing lenders.

Since the closing on June 2011, we have been obtaining additional commitments for the facility, and on September 1, 2011, we closed the final upsizing of the facility to reach our $400 million 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 of these 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 minimum LIBOR floor of 100 basis points. The facility was recently upgraded to an investment-grade Moody's rating of Aa-3.

We are currently in negotiations with our lending syndicate and additional lenders regarding an extension and upsizing 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, a reduction in our spread on borrowings, an increase in our advance rate, and an improvement in covenants.

We currently have borrowed $119 million under our facility. Assuming sufficient assets are pledged to the facility and we are in compliance with all terms, we would have $281 million of new investment capacity based on a $400 million facility size.

Any principal repayments or other monetizations of our assets would further increase our investment capacity. Any increase in our facility size or issuance of other debts, including term debt, would also increase our investment capacity.

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

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

(Operator Instructions). Arren Cyganovich, Evercore.

Could you just tell me what's included in your $0.53 to $0.58 guidance for the quarter? You listed three fee items that you received. I wasn't sure if the $10 million structuring fee for the Gas Solutions was included in that guidance.

Yes, that's included, as well as the various items related to the exit of NRG.

Okay. And then, the $28 million of earnout that you can get from Gas Solutions, can you talk a little bit about the parameters around that and the time frame? Is this over a one-year period, two-year period? How should we think about that?

Well, there's two components of additional potential value. One is in escrow, which I believe is over the course of the next 12 months, right, Brian?

Right.

And then, the other portion is in earnout that's over a longer period and is IRR based.

And the escrow, how much was that?

$10 million.

And that will be equally distributed over the next 12 months?

That's an asset sale that was done by Energy Solutions in conjunction with the sale of Gas Solutions, so as cash comes back to Energy Solutions from those very streams, then the future of what to do with those streams falls into what Energy Solutions does with the money, which can range from making distributions that may be recognized as dividend income, to the extent there's sufficient earnings and profits, to servicing debt that is still in place, to making additional operating investments in growth opportunities, to add-on acquisitions like the purchase of a new vessel at Freedom Marine that was done late last year.

Greg Mason, Stifel Nicolaus.

Great, thank you very much. First, I just have to say congratulations on the sale of Gas Solutions and NRG. We didn't think you could sell it for the gains you did. So, well done to you and your team.

Wanted to talk, since there are a lot of moving parts regarding those, is there additional upside in book value in on the calendar first quarter versus the fair-value marks as of 12/31?

Well, it's difficult to project what NAV might be in the future for 3/31. We talked about how there are some different accounting items being figured out, so I think it would be speculative to project what our future marks might be for 3/31. Those exits did both occur after the end of last quarter, however, and we obviously marked our book to market on a fair-value basis.

Having said that, it's not the worst thing to underpromise and overdeliver in life, and we try to do just that. And I appreciate your comments at the beginning of your question.

Right, and as we think about the -- in the NRG, the $27 million make-whole premium, just trying to get a sense, is that already baked into the fair-value mark as of 12/31 or would that be some additional income that, again, over and above the dividend, would grow book value?

Brian, do you want to take that?

Yes. That, Greg, was included in the value of NRG at 12/31. So that will increase book value when it's recorded.

Okay, great, and can you talk about -- are there any tax benefits in combining all of these energy companies into one investment, and what was your thought process behind doing that?

We really combined these investments from a business point of view. We had some subscale controlled investments in the energy industry that we thought [anew] would benefit from a consolidation along the lines of managerial oversight, along the lines of monitoring and supervision, cost-sharing, G&A, a number of different factors. That really was our motivation there.

And then, one final question. As your portfolio begins to season, I think it would be reasonable to expect some prepayments to ramp up, kind of like what we saw this quarter. So how are you guys viewing your net portfolio growth going forward versus, call it [lee love], the average kind of net portfolio growth has been $150 million over the last 18 to 24 months. How should we view the net portfolio growth and the repayments impacting your origination net portfolio growth levels?

It's a fair question, Greg. I think it's awfully difficult to predict that on a conveyor belt, as you know, and being an expert in monitoring this industry in asset class.

And they do tend to go hand in hand. As market activity ramps up, confidence improves, M&A picks up, financing opportunities pick up, repayments tend to pick up as well, as the same time.

We've benefited, to a certain extent, in terms of net portfolio growth, because some of the legacy positions tend to be smaller in size. For example, the investments that we purchased as part of the Patriot acquisition over two years ago now was a much smaller book and general on an individual basis.

We announced a couple of those recently, for example, Mac & Massey and Aircraft Fasteners, that were sort of smaller in size. New originations as the scale of our business has grown, reflecting not just the scale of the asset base, but the scale of the team with the nearly 50 people we have working here focused on this business. Then we can, and in fact, have done, larger deals on a new origination basis with more firepower.

The first three quarters on a calendar basis of 2011 had greater kind of net portfolio growth. The fourth quarter was a little bit less, as you saw. I think that reflected the market reality of what happens with the slowdown, with Europe impacting our side of the pond. In August and October, it caused deals that were -- that otherwise would have been 2011 calendar-year deals to slide into 2012.

We have a lot of activity hopping right now, and [in] message to their pipeline is nearly $300 million, which is what we call Category A deals, deals with a higher likelihood -- no guarantees, but a higher likelihood of closing that tend to be under some type of letter exclusivity or higher confidence basis than just all the other stuff we're working on at any given point in time.

So we're seeing a lot more activity now and we're on par with where things were over six months ago.

Great. Good job, guys.

Dean Choksi, UBS.

Good morning, gentlemen, and congratulations on the sale of those two assets. Just a follow-up to Greg's question. You said that the make-whole premium for NRG was baked into the fair value at the end of 12/31. Is that included in the equity? I mean, the common stock's valued at $50 million [of that close] to $48 million premium to your cost basis?

It was included in the equity value, yes.

Is that typical? Why would it be included in the equity value and not the debt which is carried out at cost?

Because at December 31, there was no requirement to pay that prepayment penalty. And the auditors actually required that we keep it in the equity account because at 12/31, that's where they believe that the value was.

Has it always been in an equity account? Because I looking back, like in June, the common equity was carried at $30 million and a gain to cost.

Yes, well, I think if you look at the loan value, the loan value has always been carried at or close to par value.

Okay, and then, can you just remind me what the capital loss carryforward is? (Multiple speakers) 31?

For tax basis, it's somewhere around $20 million.

Okay, and then, what happened with Stryker in the quarter? That was marked down from the 9/30 marks.

Stryker, the markdown came primarily from the change in natural gas prices that happened during the quarter. They had a dramatic effect on the value of that company.

You know, I think natural gas prices, and Grier can correct me if I'm wrong here, came from well above $3.00 to almost $2.00, making the economics of actually some of the gas plays that they had, making the economics for some of them -- they can't even make money getting the oil out of the ground -- or the natural gas out of the ground. So that's what drove the decrease in value.

In the past in Gas Solutions, you did a good job of hedging natural gas prices, generating some incremental value. Should we think of Stryker as unhedged against natural gas prices, then?

Stryker has actually carried hedges going back several years, including at some pretty attractive pricing in the last couple of years relative to current prices.

But you hedge forward for a certain time period, and after a while, prices subside. So it's not as if there were 10- or 20-year, some long-term hedging. I think they were hedging forward maybe two years at a time.

And of course, when you're talking about doing anything other than buying puts, i.e., swaps or collars, there's a counterparty-credit item that also comes into play that can get quite tricky with these middle-market oil and gas companies.

And this is a business we have a loan to. We don't obviously control the business, so that's something that gets worked out with the team.

There's an interesting dichotomy happening there in the energy patch where crude oil and NGL and condensate liquids-related prices are reasonably high, and natural gas prices are quite depressed. And we've actually exited a couple of deals on the strength of the former.

And in years past, it had a greater concentration in energy. Today, after the sale of those two companies, I would say energy is probably, what, Brian? Less than 10% of our portfolio, in fact, arguably we're under (multiple speakers) 8% maybe. In fact, we're arguably underweight in that industry relative to others, which is an interesting place to be and we're happy to be in that place because a low-price environment is a good time to scoop up value, as we've done in the past.

Robert Dodd, Morgan Keegan.

Hi, guys. Let me add congratulations on the sale of Gas Solutions -- or Energy Solutions and NRG.

But I do have a question about structuring because it looks -- just looking back, the aggregate realized losses since inception of the Company are about $90 million in realized losses, and shareholders have borne 100% of that to date. And the structuring of NRG in terms of the prepayment penalty and structuring with Energy Solutions selling assets looks to potentially avoid a realized-gain event, essentially -- reduces the chance for shareholders to catch up on the realized losses they've had and potentially increases fee and incentive fee, management fee income, to Prospect Capital management.

So could you give us a little bit of a clue why you structured them in those particular ways, rather than just plain-vanilla transactions where more of the value, 100%, would've accrued to shareholders instead of the potential 80% that occurs to shareholders, given the structure that actually happened?

Thank you, Robert. I guess there's a few things baked into your question there. First, a point of clarification on realized gains versus losses. We've actually not had substantial categories in the realized loss column in quite some time -- many years, right, Brian?

2008, 2009, 2010 combined were $107 million in realized losses.

Right. With a lot of the -- and of course, in some cases there is an unrealized piece, and you don't take the final realization until after the pain has occurred, but those were 100% related to -- nearly 100% related to a project finance business which we exited, making new investments on, I believe, almost five years ago, not so coincidently relating to the fact that we haven't had any new loans originated in an almost equal time period not going on nonaccrual.

So we have that -- our transition from a legacy project finance book to cash-flowing businesses and focusing on that has served us very, very well. And so, I don't want to give folks the wrong impression on that, to start.

Secondly, we've been told by many constituent shareholders, other stakeholders, that net investment income should be our prioritized area of focus, and so we focus very hard on driving income to the maximum extent possible, through interest, through fees, entering and exiting whenever we do deals. And of course, that reflects the fact that we're a secured lending organization, and that's our primary area of focus.

And if we do a deal on the controlled side, it's where we can get an attractive yield, first and foremost, which means you can't pay a very high multiple for the business, which is why that's tended to be a more opportunistic type of business.

We have had protection on yield in various formats, hard call protection, soft call protection, may call soft call protection, and other types of prepayment. That is a part of our business model. It helps to drive income for our business. It's struck with counterparties in the ordinary course across our portfolio.

And it can cause some lumpiness from time to time in terms of income and earnings, but hopefully lumpiness that we drive towards the upside by having a repayment. We don't necessarily love having a repayment because we've got to go out and find a new asset to replace it, so it's nice to have some time to catch up with exit income in a premium fashion to redeploy capital into a new income-producing asset.

Fair enough. On the NRG asset, can you give us some color on why it was done in two different events? Obviously, they were pretty close together. Were they related or was it just a timing coincidence?

No, they were not related. We did not have any -- I guess you would describe the first transaction as a de-risking one, and we did not have any deals signed up with a buyer of the business until 2012.

Okay. Great. And then, just looking forward, obviously you've done a little bit more in CDO/CLOs, exactly what I'm supposed to be calling them at this point in the cycle, and there seems to be potentially a lot of that coming to a renewal and looking for funding over the next couple of years. What do you think your outlook is and how much exposure is your target mix to those kind of structures versus self-source deals?

Sure. Our philosophy on that business is that it's an attractive business. On a risk-adjusted basis, it's a senior lending type business, but we've approached it from a value-added standpoint.

We've only done a very small number of transactions that aggregate. We've less than 5% of our overall portfolio and we've done so on a partnering basis with third-party collateral managers, putting us in good stead from a consolidation risk standpoint. And get additional protections and rights into the picture as pertains to call rights, call protections, other matters that would not be available if someone were, say, a secondary buyer of a small position.

That marketplace suffered a dislocation with little primary issuance in 2008, 2009, and most of 2010, and really started to regroup in 2011 and here in 2012. I think it will always need to be a small portion of our book, in part because these assets fall into the 30% basket, which, largely speaking, picks up most types of financials, international investments, and public companies with a market cap greater than $250 million, as the rough categories that go into that basket.

But other types of deals already fall into that basket. We've got some Canadian investments. We've got some other financial services type stuff, portfolio companies. So that puts a natural cap on how large this would be and how large we would want it to be.

Our primary focus continues to be our direct-origination focus in a value-added fashion in secured lending for, as our first priority, borrowing base eligible assets for our credit facility.

Loren Ben, Oppenheimer.

Good morning and congratulations on those sales, once again.

Could you talk a little bit -- back in August, you announced a $100 million share repurchase plan. Could you talk a little bit about that, tell us if you've done anything with it? I know that you said you've bought back $5 million of your convertible notes. Is that part of the plan, and what about going forward?

Sure. Well, we announced the repurchase plan, and then we sent out a mailing and got organized for the repurchase. And then, darned if our stock didn't snap back just as we were getting ready to purchase some shares back, which, on the one hand, it's darn it because you want to purchase at attractive prices. On the other hand, I think there's a lot of folks happy when the stocks rebound.

So, but should that window re-emerge, I believe the authorization was good for, what, Brian, six months --

Correct.

-- at the time, so we could ask the Board for authorization again and send out another mailing to shareholders and look to that, and that certainly would be an area to defend value.

On the converse side, we've seen our convertible bonds as attractively priced and did make purchases, and as we messaged in our release yesterday and comments this morning, we could potentially look to make additional purchases at prices we deem to be attractive.

What kind of rates of interest are you paying on those convertible notes?

We have two converts that are extant. We have December 15 notes that are 6.25% notes and we have August 16 notes that are 5.5%, original issue.

Loren, this is John. You might find it interesting to know, and maybe other shareholders would find it interesting to know, that we identified the repurchase of convertible notes as the greatest bang for the buck in terms of the shareholder dollar buying in equity and getting the most per penny spent.

And interestingly, the notes traded X, and then the moment we go out there -- I'm sure everyone on this phone has had this happen, the moment you go out there and try and buy it at X, whoa, suddenly it isn't available.

And we're not disclosing ourselves as principal. We're working through agents. We're an undisclosed principal. So, sometimes we see that our stock, or these notes more particularly, and more recently, appear to be floating around at very attractive prices, and then when you reach to get it, it evaporates. That's why we were able to buy the amount that we were able to buy. We were prepared to buy even more.

So, we just monitor this and we keep an eye on both markets to see when there are opportunities to put money to work, buying in our own stock.

I'm not an analyst or an accountant, but it would seem to me that buying back stock that you would, I assume, be retiring, that even at current rates has an 11.25% yield to it, would be more advantageous to not have to pay the dividends on shares repurchased than to pay 5.5% or 6.5% buying in notes at a 2.5% discount.

Well, first, I was impressed with your ability as an analyst and a CPA. Now that I know that you're not, it's even more impressive.

Well, actually, there are a couple of other angles on this. For one thing, when you buy in the debt, and if you can take out somebody sitting there, supposedly offering your debt at some very high yield when it's really imaginary, if you can remove that person, that has an effect on the cost of debt for the entire company, because people will metric off of that.

So, one single person offering one convert at a yield of 15% is having an effect on our entire capital structure that we think is quite a distortion. So, that's why we get more bang for the buck buying in converts, but tomorrow, like in the past week, two weeks, that could change tomorrow exactly for the reason that you mention.

Part of it, too, is remember, if we -- how can I put this very, very carefully. There is signaling theory in everything people, right? So, if somebody is buying in the converts, they think that it's a better opportunity for the company to buy those in. Maybe we think the dividend will be coming down as a percent of share price anyway.

But with the converts, maybe that wouldn't happen. If you looked at where they trade, the converts seem to trade in this little universe all by themselves with no connection to the rest of the reality of our business.

I just want to be clarify what John said, percent -- dividend coming down as a percent of the share price. He means based on the stock going up. (Multiple speakers)

All right, well, I was just curious about it. You folks have done a number of offerings at below net asset value or below book value, and it seemed as though there was an opportunity to at least purchase some of these shares back at the same below net asset value, or I guess now, we're right at or a little bit above the net asset value.

Right, and you certainly, Loren, when we looked at buying in the converts at effective very low yields, right? They're down -- they may be below 6% now. That was part of the equation.

We're investing in an instrument yielding in our hands, once we buy it, less than 6%, when we could buy our stock in? But which would, in our hands, produced a much nicer yield.

But what I wanted you to understand is that there were actually -- how would I put it? Who was it who said, Give me a spot to stand on and I can (multiple speakers)

Archimedes.

Yes, okay, so there were -- it was a very long lever there vis-a-vis the converts that we did not perceive as existing vis-a-vis buying in a few shares of common.

And Loren, share purchases are definitely on the table as part of our long-term arsenal. I do want to clarify, last year our offerings on a total basis were net accretive relative to book value. You're right, going back a couple of years ago, and we've discussed the offense plus defense reasons why we did so.

All right. Thanks very much, and once again, congrats. Keep it up.

Jasper Burch, Macquarie.

Most of my questions have been asked, and that was really good commentary on the converts right there. Definitely helpful. I guess just one small modeling question. On the make-whole provision on the energy sale, where does that flow through on the income statement? Or will that?

It will be in other. The make-whole will come through as interest income.

It will come through as interest income. Okay. That's all I have left. Thank you.

Showing no additional questions in the queue, I would like to turn the conference back over to Mr. Barry for any closing remarks.

I don't have any. Thank you very much, everyone.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.