Prospect Capital Corp (PSEC) 2015 Q2 法說會逐字稿

Good morning and welcome to the Prospect Capital Corporation's Second Fiscal Quarter Earnings Release Conference call. All participants will be in listen-only mode. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to John Barry, Chairman and CEO of Prospect Capital. Sir, please go ahead.

Thank you, Keith. Good morning everyone. Joining me on the call today are Grier Eliasek, our President and Chief Operating Officer and Brian Oswald, our Chief Financial Officer. Brian?

Thanks John. This call is the property of Prospect Capital Corporation. Unauthorized use is prohibited. This call contains forward-looking statements within the meanings of the security 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, our 10-Q and our corporate presentation filed previously and available on the Investor Relations tab on our website, prospectstreet.com.

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

Thanks Brian. Our net investment income or NII in the December quarter was $91.3 million or $0.26 per share. Our net income was $86 million or $0.24 per share, a decrease in structuring fees due to lower origination levels and a mix shift toward online loans which do not have structuring fees, but which are currently delivering an expected levered yield of approximately 19% drove year-over-year differences.

In December, we suspended our at-the-market equity issuances for the indefinite future due to unattractive share price levels. This reduction in equity and asset growth has resulted in lower origination volumes compared to prior periods. As a tax efficient regulated investment company, our shareholder dividend payout requirement is based on taxable income rather than GAAP net investment income. Taxable income can decouple meaningfully from such net investment income.

In the December quarter, we generated taxable income of $107.8 million or $0.30 per share. This is $0.05 per share, more than our recently declared dividends. While regulated investment companies may utilize spill back dividends in the subsequent tax year to count toward prior year distribution requirements, taxable income consistently in excess of dividends enhances the possibility of future special dividends in order to maintain regulated investment company status.

As described in detail in our release, our CLO business generates higher taxable income which roughly tracks cash income than GAAP income on a recurring basis throughout the life of each CLO. Our CLO business performance has significantly exceeded our underwriting expectations demonstrating the benefits of our strategy of pursuing majority stakes working with world-class management team, providing strong collateral underwriting through primary issuance and focusing on the most attractive risk-adjusted opportunities.

As of December 31, we held $1.12 billion across our fleet of 34 non-recourse CLO investments. Our underlying CLO portfolio consisted of over 2,900 loans and a total asset base of over $15.9 billion. As of December 31, our CLO portfolio experienced a trailing 12 month default rate of 0.06%, significantly less than the broadly syndicated market default rate of 3.24%. In the same quarter this portfolio generated an annualized cash yield of 20.6% and a GAAP yield of 14.9%. In the December 2014 quarter, we sold four CLOs, capturing a weighted average cash realized IRR of 15.3%. We do not expect significant individual CLO sales in the near future given no CLO in our portfolio goes past the three investment period until September 2016. Recent drops in loan prices provide attractive opportunities for our CLOs to purchase loans at a discount to par, thereby enhancing our potential upside in such investments.

We have previously announced monthly cash dividends to shareholders of $0.08333 per share for February, March, and April 2015, with the latter representing our 81st consecutive shareholder distribution in our company's history. We plan on announcing our next series of shareholder distributions in May. We've generated cumulative taxable income in excess of cumulative dividends to shareholders since Prospect's IPO 11 years ago. From the IPO through December 31, 2014, our taxable income is $39.2 million in excess of dividends to shareholders, an excess of $0.11 per share.

Since our IPO 11 years ago, through our April 2015 distribution at the current share count, we will have paid out $13.62 per share to initial continuing shareholders and $1.5 billion in cumulative distributions to all shareholders. Our NAV stood at $10.35 per share on December 31, down $0.12 from the prior quarter, with most of this difference due to dividends in excess of net investment income, demonstrating a relatively stable investment portfolio value in NAV per share over this time period.

We have delivered solid returns while keeping leverage prudent. Net of cash and equivalents, our debt-to-equity ratio was 74.2% in December, up slightly from 72.9% in June. As of December 31, our asset concentration in the energy industry stood at 4.5%, including our first lien senior secured loans where third parties bear first loss capital risk.

We previously announced a strategy that we've been working on for several months now to spin off certain businesses in our portfolio including our CLO structured credit business, online lending business and real estate business. We believe these dispositions have significant potential to unlock shareholder value through pure play earnings, multiple expansion, moving strategies into faster growing non-BDC formats with reduced basket and leverage constraints and freeing up 30% basket and leverage capacity for new originations at Prospect.

These investment strategies have grown rapidly for us in recent years. We believe these dispositions will provide expanded capacity to continue that growth. We anticipate these non-BDC companies will have tax efficient structures. We will likely seek to divest these businesses in conjunction with capital raises for each such business, with the goal of leverage and earnings neutrality for Prospect. The size and likelihood of these dispositions, some of which are expected to be partial rather than complete spin-offs remain to be determined. We continue to work on structuring these dispositions, including preparation of standalone financial statements and initial registration statements for these businesses that we hope to file in the coming weeks.

We expect to file non-registered investment company offerings with confidential treatment. Our target timing for completion would be in the next several months of calendar year 2015. Prospect Capital will continue as the only multi-line BDC in the marketplace with the continued diversified focus on originations that include the businesses being spun out.

We have substantial liquidity to drive future earnings through prudent levels of matchbook funding. We are currently pursuing initiatives to lower our funding costs, including refinancing existing liabilities at lower rates, opportunistically, harvest certain controlled investments, optimize our origination strategy mix and rotate our portfolio out of lower yielding assets into higher-yielding assets while maintaining a significant focus on first lien senior secured lending.

Our company is locked in a ladder of fixed rate liabilities extending 30 years into the future, while most of our loans float with LIBOR, providing potential upside to shareholders as interest rates rise.

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

Thanks, John. Our business continues to grow at a solid and prudent pace. Prospect has scaled to over $7 billion of assets and undrawn credit. Our team has reached approximately 100 professionals, representing one of the largest dedicated middle-market credit groups in the industry.

With our scale, longevity, experience and deep bench, we continue to focus on a diversified investment strategy that covers third-party private equity sponsor-related lending, direct non-sponsor lending, Prospect-sponsored operating buyouts, Prospect-sponsored financial buyouts, CLO structured credit, real estate yield investing, online lending, aircraft leasing and syndicated lending.

At December 31, our controlled investments at fair value stood at 26.4% of our portfolio. This diversity allows us to source a broad range and high volume of opportunities, then select in a disciplined bottoms-up manner, the opportunities we deem to be the most attractive on a risk-adjusted basis.

Our team typically evaluates thousands of opportunities annually and invests in a disciplined manner in a low-single digit percentage of such opportunities. Prospect's originations in recent months have been well diversified across our nine-origination strategies. Prospect originated nearly $3.2 billion of closed investments during the 2014 calendar year.

Our non-bank structure gives us the flexibility to invest in multiple levels of the corporate capital stack, with a preference for secured lending and senior loans. At December 31, our portfolio at fair value consisted of 55% first lien, 20.2% second lien, 17.2% CLO structured credit with underlying first lien assets, 0.4% small business whole loan, 1.4% unsecured debt and 5.8% equity investments, resulting in 92.4% of our investments being assets with underlying secured debt benefiting from borrower pledged collateral.

Prospect's approach is one that generates attractive risk-adjusted yields and our debt investments were generating an annualized yield of 12.3% as of December 31, an increase 0.4% from the prior quarter. We also hold equity positions and many transactions that can act as yield enhancers or capital gains contributors as such positions generate distributions.

While the market has experienced some yield compression in the past year, we have continued to prioritize first lien senior and secured debt with our originations to protect against downside risk, while still achieving above market yields through credit selection discipline and a differentiated origination approach. We believe such yield compression may have stabilized recently due to trading valuation discounts for peer companies.

Originations in the December quarter were $523 million, across five new and several follow-on investments. We also experienced $224 million of repayments from seven investments as a validation of our capital preservation objective. During the December quarter, our originations consisted of 60% third-party sponsored deals, 19% CLO structured credit, 19% online lending, 1% real estate and 1% operating buyouts.

As of December 31, we held 134 portfolio companies with a fair value of $6.524 billion, demonstrating both the long-term increase in diversity as well as the migration toward larger positions and larger portfolio companies. Our number of companies is up 3% and portfolio size is up 34% year-over-year. We also continue to invest in a diversified fashion across many different portfolio company industries with no significant industry concentration. The largest is about 10%.

Our financial services controlled investments and CLO structured credit investments are performing well, with typical annualized cash yields ranging from 15% to 30%. Because of declining unemployment rates and declining gasoline prices, we believe the outlook for consumer credit is positive as we entered 2015 boding well for our financial services and online lending companies.

To date, we've made multiple investments in the real estate arena with our private REITs largely focused on multi-family stabilized yield acquisitions with attractive 10-year financing. We hope to increase that activity with more transactions in the months to come. In the June 2014 fiscal year, we made three investments in non-controlled third-party sponsor-backed companies that brought our total investment in each such company to more than $100 million. In the last two quarters, we made another three such investments, demonstrating the competitive differentiation of our scale balance sheet to close one stop financing opportunities.

We have also made multiple control investments that each individually aggregate more than $100 million in size. We may look to harvest certain controlled investments in 2015 at a hope for significant gain over our initial costs.

Over the past year, we've also entered and expanded in the online lending industry with a focus on prime, near-prime and sub-prime consumer and small business borrowers. We intend on growing this investment strategy, which stands at approximately $248 million today, across multiple third party and captive origination and underwriting platforms.

Our online business, which includes attractive advance rate bank lender financing for certain assets is currently delivering an expected leveraged yield of approximately 19%. We hope to expand that through securitizations in the months to come.

The majority of our portfolio consists of agented and self-originated middle market loans. In general, we perceive the risk-adjusted reward in the current environment to be superior for agented and self-originated opportunities compared to the syndicated market, causing us to prioritize our proactive sourcing efforts. Our differentiated call center initiative continues to drive proprietary deal flow for our business.

As a yield enhancement for our business, earlier this year, we launched an initiative to divest lower yielding loans from our balance sheet, thereby allowing us to rotate into higher-yielding assets. And to expand our ability to close scale one-stop investment opportunities with efficient pricing.

We expect to close our first par value sale of a lower-yielding assets shortly and expect significant such sales this quarter as a potential earnings catalyst for the future. Our credit quality continues to be strong. Non-accruals as a percentage of total assets stood at less than 0.1% at December 31.

Our weighted average portfolio net leverage stood at 4.1 times EBITDA. And our weighted average EBITDA per portfolio company stood at $20.2 million. We have booked $40.1 million in originations so far in the current March quarter. Our advanced investment pipeline aggregates nearly $200 million of potential opportunities with additions expected, boding well for the coming months. Thank you.

I'll now turn the call over to Brian.

Thanks, Grier. We believe our prudent leverage, diversified access to matchbook funding, substantial majority of unencumbered assets and weighting towards unsecured fixed rate debt, demonstrates both balance sheet strength as well as substantial liquidity to capitalize on attractive opportunities. Our company is locked in the latter of fixed rate liabilities extending 30 years into the future, while most of our loans float with LIBOR, providing potential upside to shareholders as interest rates rise.

We're a leader and innovator in our marketplace. We were the first company in the industry to issue a convertible bond, conduct an ATM program, develop a notes program, issue an institutional bond and acquire a competitor, as we did with Patriot Capital. Shareholders and unsecured creditors alike should appreciate the thoughtful approach differentiated in our industry, which we have taken toward construction at the right hand side of our balance sheet.

As of December 2014, we held more than 4.9 billion of our asset as unencumbered assets, representing approximately 75% of our portfolio. The remaining assets are pledged to Prospect Capital Funding LLC, which has a AA rated $885 million revolver with 22 banks and with a $1.5 billion total size accordion feature at our option. The revolver is priced at LIBOR plus 225 basis points, a 50 basis point reduction from the previous rate and revolves until March 2019 followed by one year of amortization with interest distributions continuing to be allowed to us.

Outside of our revolver and benefiting from our unencumbered assets, we've issued at Prospect multiple types of investment grade unsecured debt, including convertible bonds, a baby bond, institutional bonds and program notes. All of these types of unsecured debt have no financial covenants, no asset restrictions and no cross defaults with our revolver.

We enjoy a BBB rating from S&P and the BBB plus rating from Kroll. We've now tapped the unsecured term debt market to extend our liability duration up to 30 years. We have no debt maturities until December 2015 with the debt maturities extending through 2043. With so many banks and debt investors across so many debt tranches, we've substantially reduced our counterparty risk over the years.

As of today, we have issued six tranches of convertible bonds with staggered maturities that aggregate approximately $1.25 billion, have interest rate ranging from 4.75% and 6.25% and have conversion prices ranging from $11.23 to $12.61 per share. In January, we repurchased $8 million of such convertible bonds at a significantly accretive discount to par. We have issued a $100 million, 6.95% baby bond due in 2022 and traded on the New York Stock Exchange under the ticker PRY.

On March 15, 2013, we issued $250 million of 5.875% senior secured notes due in March 2023. This was the first institutional bond issued in our sector in the last seven years. On April 7, 2014 we issued an additional $300 million of 5% senior unsecured notes due July 2019. We currently have $785 million of program notes outstanding with staggered maturities between 2016 and 2014 and a weighted average interest rate of 4.88%.

With the closing of the facility, one condition precedent to borrowing required an increased level of equity for us to fully utilize the 850 -- $885 million of commitment. Our Board believe that was in the best interest of shareholders to raise the modest amount of additional equity at a discount in net asset value to enhance liquidity and maximize access to low cost facility financing. We raised approximately $147 million of equity capital from September 11 through December 3 at an average price of $9.89 per share.

No issuances occurred at the lower price of $9.50 per share. We currently have drawn $201 million under our revolver. Assuming sufficient assets are pledged to the revolver and that we are in compliance with all revolver terms and taking into account our cash balances on hand, we now have over [$530 million] of new facility based investment capacity.

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

Thank you, Brian. Let's do the questions we have.

Thank you. We are now ready to begin the question-and-answer session. (Operator Instructions). Ryan Lynch, KBW.

Good afternoon and thank you for taking my questions. Given that you guys are bumping up at the upper end of your leverage at about 0.75 debt to equity and you guys have only deployed about $40 million of capital quarter-to-date, how should we think about capital deployment going forward and how do you anticipate funding those deployments?

Sure. Thank you for your question, Ryan. And by the way, in our prepared remarks, our quarter average EBITDA per portfolio company at 29, it's actually 49. We've several levers to pull related to your question, Ryan. We do have debt capacity that we can utilize for originations, but we also are in the process of harvesting certain investments that would fall into at least a couple of categories.

One is our lower yielding assets, we've got about $0.75 billion give or take in lower yielding assets that are yielding in the range of 5.5% to 6.5% typically on a gross basis, which obviously drags down the overall weighted average yield of 12.3%. And if we can divest those assets, that's obviously a significant amount of dry powder that we can redeploy that doesn't impact our leverage ratio in any fashion.

The another store house of liquidity is through the sale of one or more control deals, we've got some companies on our portfolio that were quite pleased about in terms of performance. I'm not going to go into specifics on sell side processes for obvious reasons, but we've got some that we're cautiously optimistic about, that we could potentially monetize and of course redeploy.

So among those three drivers of existing dry powder with our debt capacity, and we have over 500 million that we can utilize in our revolver today, number one. Number two, lower yielding asset sales. And number 3, sale of controlled companies, those are important drivers. And actually a fourth category on top of that would be through potential capital raises associated with the three spin-offs that we've been hard at work on since we announced that initiative in November.

Okay, thank you. And then in the December quarter, you guys raised little bit of capital below book value and it since stopped based on where the current share price is, are you guys planning on waiting till share price rises above book value before raising any additional shares?

And if not, what kind of price level would you be comfortable issuing shares below book value and why?

We have no plans to raise equity capital. When you aggregate the four different drivers that I just mentioned, that's a substantial amount of dry powder and liquidity.

Okay. And then focusing on the spin-offs for a minute, you stated you expect these spin-offs could maybe be partial spin-off rather than complete spin-offs. Is there a minimal -- minimum percentage that you would need to spin off in order to complete these transactions or could you guys spin off as little as 20% or 30%?

I think that the minimum size for any spin-off is going to be a function of making sure that on the other end, you've got a business with enough initial scale, then you can appropriately amortize any fixed cost associated with that nearly spun company. You want a business with minimum scale to attract follow on investor interests in that business, [as in] market capitalization, access to a shelf funding for the future.

So there is going to be some obvious pieces there. But no hard and fast specific. The reason we say, partial spend is take our CLO book, for example, that's a [$1.1 billion, $1.2 billion] of assets. We would be pretty unlikely to spin that entire book in mass all at once, and any partial kind of pro-rata slice across those 30 plus deals is much more likely.

In the case of real estate, where we have a couple of pure play REITs that have about $200 million, give or take of our invested capital, that now becomes more likely a complete potential transfer. And the same thing with the online business that has about $250 million of assets give or take in it.

That would at least be the objective subject to, as always, regulatory and market based feedback.

Thanks. That's all for me.

Thanks, Ryan.

Thank you. Chris Knowland, MLV & Company.

Yeah, hi, thanks for taking my questions. What's the driver for the decline in the spillover income in the quarter?

It's primarily the dividends in excess of earnings for the quarter.

Great. And then, John, when you're commenting on the harvesting of controlled investments, are you talking about spinning off, or excuse me, harvesting, some of the operating buy outs or some of the CLO books? Would this be a function of the issues with the SEC that Prospect had last year?

Well, number one, it's not -- none of the strategies, we've articulated today or any other strategies that I'm aware of are a function of our disagreement with the SEC, which we now see as behind us, unfortunately. I was focusing more on the control operating companies in our book and our belief that more and more may in fact be attractive companies for sale. I think people who've followed us for years have seen us sell gas solutions, NRG and other companies for attractive purchase prices. So we're -- we look across our portfolio and we have some hope and ideas for some of the controlled operating companies there. Nothing definite yet, of course, but we do see promise there.

Great, thank you for taking my questions.

Thank you. Terry Ma, Barclays.

Hey, guys. So, you guys had a significant amount of impairments this quarter, which were then offset by some write-ups of investments, so can you maybe just talk about what drove the write-up of some of your equity investments like [Esselon], First Tower, Harbortouch and also talked about Ajax.

Okay. Sure. Let me try take some of those in turn, Terry. For our aircraft leasing book, what you're seeing with these midlife aircrafts, which comprises the bulk of what we're invested in today is a significant uptick in valuations due to the significant decline in crude oil that's good for our business, because carriers tend to keep older less fuel-efficient planes around for longer time horizon and defer new aircraft purchases. So it elongates the useful life of these aircraft, it elongate the cash flows and increases the value.

For, I believe, you asked about First Tower as well. As I said in my prepared remarks, consumer credit has a significant tailwind behind it, you're entering 2015, everything is not completely perfect in the economy of course but consumers are overall doing better, more money in their wallet as jobs tick up modestly and especially as there has been a nice gasoline dividend in people's pockets. We've seen a pretty significant decrease in delinquencies and charge-offs in Tower as well as our other consumer financially oriented companies. And I'll expand that and saying that our consumer online lending business, we're seeing businesses, our loans trend at significantly lower actual losses compared to our expectations. I think you also asked about Ajax. We sold Ajax last quarter.

Okay, so you guys have roughly 5% energy exposure in your portfolio. Can you maybe just give us a sense of what your total exposure to energy is when you consider the loans in your CLO book or the energy loans in your CLO book?

Sure. I don't have a specific percentage right now. Maybe I can -- I get that from our team here while we are proceeding with the call, but I'm told that our energy percentage is in the low single digit for energy within our CLO book and that energy as a percentage of -- energy in our book as a percentage of total compared to the overall CLO market is less than average. So we are underweight in our business.

And overall, our observation is what's happened -- this is important to understand the CLO business. When you have exposure to the junior most tranche and this is counterintuitive to how some people think about structured credit. Volatility is actually your friend and dips in loan prices are great news, because you can go out and acquire assets at discount to part, of course, all of that discount accretes to you as the equity holder in the tranche. We have that dynamic going on right now over the last 30, 60 days.

You had a sell-off in the loan market for non-energy names completely unrelated to energy, in some cases businesses that are benefiting and not just neutral to the change in commodity prices. So our fleet is out there scooping up those loans at attractive price. We've got many years to run, in terms of reinvestments. That's a good thing. So it's putting us a chance to non-linear relationship. It's not like loan prices dipped so therefore, you multiply that by the leverage of the equity and then that dips as well, that's incorrect math. The correct viewpoint is where option math is saying you've got many years to run, and you can utilize that time horizon to buy on the cheap. And your financing cost is locked in.

So that's how we're looking at energy today and we're also scouring the universe on the direct lending side and by outside for potential opportunity. So I think it's a wonderful time if you are looking at new deal.

Capital has retreated substantially from the marketplace. We're value-based investors; we made a lot of money in valuing distressed over the years. Look at the Patriot deal which was a distressed purchase we made in 2009 at give or take $0.50 on the dollar and we reaped over 40% RRs from that. And you're saying a dislocation energy that has analogs to what you saw in -- from '07 to '09 system-wide.

Just to add to that. I was looking at -- I pulled up the iShares energy ETF and I pulled up the stock chart. You can -- everyone knows how to do this on Yahoo or stockcharts.com. And I compared it to PSAC. And it looked each one was right on top of the other, over the last three months especially. So looking at that I realized that this concern about energy is causing, I think a flight from the high yield market to also from BDCs perhaps and also impacting our stock price. And if that's true, I am happy to send that to anyone you would like me to show you this with a bit of investigation I did yesterday.

If that's true, we think that we may have some two things going for us. One, as the panic over energy recedes, we should benefit. Number two, completing the penalty, as people look into our portfolio and realize that it's 4.5%, which is the lowest I think, Brian, it's ever been in history of our company and lower than the average BDC. I think there's some below us, but I think we're lower than the average BDC.

The people who are worried about energy will realize our portfolio is pretty much insulated from that.

Thanks, that's it for me.

Hey. Thank you so much, Terry.

Thank you. Robert Dodd, Raymond James.

Hi guys. Robert, obviously, first, on some of the legacy stuff, as you said, you exited Ajax and then essentially Boxercraft and some of your older legacy investments this quarter. Can you give us a rundown of why you decided to do that now, obviously you've been hanging around for a while in many cases. And just any color on the decision to do that in this quarter?

Sure. Well, I guess each has its own individual case. Boxercraft was a tiny position that we inherited as part of the Patriot portfolio. We didn't valued it very much coming in and it was occupying significant amount of time. So, we really wanted to divest that in those value of maximizing in tax efficient way as a small position.

Ajax is a forging company has cycled in line with other industrial related businesses, and we basically got a strategic bid that paid us more of a full cycle, more replacement cost type value as opposed to the generic TTM EBITDA multiple financial sponsor viewpoint. And we ran the math on waiting for recovery versus exiting this price, and deem those attractive to exit and also did so in a tax advantaged way. So that was the story on Ajax.

When John and I have talked about potential harvesting here in 2015, we're thinking about positions that are larger and we hope would be more significant in the gain and move the needle category.

Okay. Got it. Thank you. And just some additional questions on the CLO book. On the fall that you decided to exit in the quarter, I mean, can you give us any comment -- of those did you control the coal on any of those CLOs, obviously you've talked in the past about how that's a big thing you look to do. And frankly, if you did control of coal, why did you elect to sell at realized losses versus exercise the coal and potentially generate material realized gains given where the cost and fair value was versus the power of those investments, particularly if your loss rate is so much lower, you would expect it to collect a significant portion of that part amount and realize again. So what was the decision there or is that -- is the coal portion of the strategy in controlling that has that shifted?

Sure. We, the all four deals were control deals and we exited at prices exceeding the, what we would have gotten calling those deals. And it's important for folks to understand the four deals that we exited were very late in their lives, we're very close to ending their reinvestment period and need to be monetized. And what we're doing was we are exiting positions -- in many cases are buying brand new positions the same day with some attractive investment partners as an elongated option value. And -- that's item number one. Item number two, that we exited those deals that are north of 15% IRR cash-in, cash-out on a total basis.

And the other aspect is that we pay, very, very close attention to our adjusted leverage ratio, which is important aspects to maintaining and sustaining our investment grade rating that we've had now for almost six years. And we take that obligation very seriously and making sure that we have ready access to the debt capital markets for not only refinancing our latter debt maturities as they come due in each of the next several years, beginning at the end of this year, but also have the ability to opportunistically refinance right now some of our existing debt. We've been aggressively doing that, we saw some of our converts is very attractively priced and repurchased of those that are huge IRR, just in the last few weeks. And we will opportunistically look to do more of the same if those opportunities present themselves. We've also been refinancing some of our program note that were issued at higher treasury levels and we get a significant bottom line benefit from refinancing by issuing in the market today. And we've got some other debt outstanding that were eyeballing. So all those things, how do they predict at attractive rating with an attractive cost of capital debt, access that's embedded in that rating. So all of those were considerations. And as we put in our prepared remarks, we have no plans currently to divest any further CLOs in the near future as things could change right now. We've no such plans and our next deal doesn't go past reinvestment for, I think the first one (inaudible) bulk of them are years out. So we've got a long runway of positive option value there in our structured credit book.

Okay, understood. But just sticking with these four in particular for right now, three of those four had fair value marked above cost last quarter. In aggregate they were marked above cost last quarter as is the overall CLO book. Yet, they all took realized losses at about 15%, overall between the four about 15% of cost was the realized loss. And the, and you said the IRR on those investment is about 15%, which is about where your GAAP yields on your CLO book is in contrast to your cash yield.

So, I mean was there something particularly problematic about these that changed rapidly from the end of September to the period when you sold these in the first case there in October a matter of about a month after the last fair value update. And I mean is there something we should read into that -- as to the overall book being marked above par when we've got the four most recent cases all, again, in aggregate marked above par, but then took material losses when a realization event actually occurred.

Sure. I would not read too much into that, Robert, there is a few other dynamics at play here, one is that in some cases, I think many cases we receive payments between [930] and when there is a monetization and so that's not reflected in the exit number but would be the significant additional value to make the delta significantly less than the 15% you mentioned. That's item number one. Item number two is, it's little bit of a our -- if you're selling and buying the same day but you think we're selling is more attractive -- what you're buying is more attractive to what you're selling.

On a net basis, you're coming out ahead. Number three, we have embedded into many of our deals certain rebates on costs. As a control investor we can throw our weight around and get a special deal above and beyond buy in at a much more attractive OID level than other investors. And the catch is, those rebates don't necessarily travel with the deals we sell to a third party. So it's in general more attractive for us to hold on the CLOs than to sell them in the market early. We have specific reasons related to elongating the cycle and our leverage ratio that I mentioned that were special to the December quarter only. But we do not expect that to reoccur anytime in the near future. And then related to energy, let me answer to a prior question, the CLO --

(Multiple speakers) For a second, Robert, I was going to say Brian, did your dad [talk if you're] going into research?

No.

You said, I just like him.

Even, after you spell out, the spelling of your name, sometimes it doesn't quite work out.

So, Robert, the other thing I wanted to mention to you is, you might want to take some time to speak to team CLO because there is yet another layer to this onion, which I think Grier adverted to -- and that is that team CLO believes that the opportunity to buy in a dislocated market represented significant economic value in excess of the hit that we would take selling into a dislocated market.

So, first question we had was well, we can buy now and have put on the books some long-lived assets that are going to produce great economic returns. Look at the discounts we can buy.

Then you next thought is, should I want to sell now? Well, okay, let's wait now. That -- and we concluded, we're not going to do that. We're going to match buys and sales and the accounting is not as pretty as we would have liked. But if you talk to team CLO, they will be able to give you the chapter and verse on why our shareholders were economically advantaged in dollars and cents, although it will take time to realize that over the life of the (inaudible) CLOs that we purchased on the same day.

So I did want to make sure you understood that portion. Let me put it this way, if they were, Robert Dodd enterprises, all alone, he would have done the exact same trade we did, we believe.

(inaudible) which we monetized in 2013, Robert, was bought at a dip at its inception for different reasons, one the various European flash crashes that's occurred over the last few years, that wasn't energy-related. But then we exited that one at a 32% IRR could be advantageous to form a new issue CLO even at a higher AAA cost if you know you are able to buy loan assets at pretty significant discounts. Then I was trying to answer the energy question, our CLO book has an energy exposure of 3.9% and I am told by our CLO team that compares the overall loan market at 4.7%. So, we think we're not only underweight energy in our overall piece of that book relative to other BDCs. We are way under way relative to the high yield market, which I think it approaches 20%. And we're also underway in CLOs. So I'd agree with John, that to suggest a piece I get some proxy for in energy fixed income high yield index is a big mistake.

I appreciate that, guys. Thank you.

Thanks, Robert.

Thank you. Jonathan Bock, Wells Fargo.

Hi. Good afternoon and thank you so much for taking my questions. Grier, I actually missed one quick stat, but did you happen to give us the current (technical difficulty).

John, sounds like we lost you. Okay. Maybe we can move on to the next question.

Mr. Bock is actually back in the question queue.

Okay.

Sorry about that, I just picked up the --.

I promise I didn't touch the --.

Yeah. We didn't do that, let's -- just for the record.

No, I appreciate it. Sorry about that --

We didn't send on to the bottom of the line. I want everyone to know that. Isn't that right Mr. Bock.

No, I very much appreciate you take -- thank you for taking my calls. So, just real quick Grier, there was one stat that I missed what you deployed to date subsequent to quarter end. I think you gave that number do you happen to have it handy?

Yes, it's about 40 million bucks.

40 million bucks. Okay. Just a couple. So, regarding the CLOs. I really appreciate that. One question is, as of December 31 the question is could you liquidate that book at that fair value mark?

Well we would want to liquidate our book at that mark, but we feel very good about the values that third party process that looks at exactly that question. And has some pretty intense [in tax] and other related modeling to it. We as managers have very limited involvement in that third party processes. It approved at the independent directors. So, that's where the third parties came out.

Alright. I mean, I appreciate that. But I do think CLO equity is trading between six to eight points lower and so to hold it at par to point when we can pretty easily see that values are down, that's -- it befuddles us. But the only question that we have then is we agree with you Grier, there volatility is attractive for the long run, it's just that you can't keep it at par and still assume that this is going to be a great 17% assets in all markets, right, I mean that's just the question, which we --?

We have a control premium -- you're mentioning certain point, I'm not sure what data you're referring to. The deals we're involved in are more akin to controlled buyouts or your middle market bespoke deals where you get in inefficiency and control premiums. There's no-trade or mark on the deals that we invest in. It's like we'll between 51% and 90% and the management team owns the significant part of the balance and maybe there is a few other small [fry], but the deals we're involved in were quite different from distributed fragmented deals. Then again we get outsized economics that we benefit from. And that option value to call and the cost rebate, the other elements I mentioned had real value to them Jon.

Got it, got it. And appreciate that. So you could, I guess because of the control premium, you could actually liquidate close to the fair value, I guess if you were to sell it, because they are very valuable and different than everything else?

Well, yes, Jon. First, in fact empirically when we look at the pricing on -- this is John Barry, not Grier. When we look at the pricing on the smaller pieces, the expected returns are significantly less as you've observed, as Grier has stated, as I have observed. And it's no surprise that the retail person wanting to buy 500,000 of this or that, doesn't have the negotiating leverage, doesn't command control over the terms, doesn't control the call and as a result, will not earn the returns we've been earning. That's one of them.

No, I appreciate that. I appreciate that. I don't --

And also there's more to it. And I have been hearing about the investment banker who moved from New York to Los Angeles and he hired a broker and bought a house. And the brokers said, well you are not going to get anything for $1 million. And so he finally bought a house and then he got moved back a month later and he put the house on the market and the same broker said there's no way you can get $1 million for this. Okay. So it depends on also, if you are how would I put it, a forced seller which we were in effect were forcing ourselves to sell on a matchbook basis because we wanted to buy new things. You're probably not going to get the same price that you're going to get if you say, I'm going to put this out there, I'm going to give people time to come and bid, and I'm going to tell them I may need to sell, I may not. We made it clear that we wanted to sell on a matchbook basis. So as a result, we left money on the table for those sales. But we believed selling on a matchbook basis is a prudent risk control, because obviously you can get a world of upside down if you don't do that.

Now in the future, as Grier said, we don't anticipate making any sales in order to buy new ones that could change. And therefore, we don't see ourselves as being in a situation where we would be under any how would I put it, time pressure to try to liquidate a position. And that's why I think, the sales that you're looking at as I said to Brad, really Robert Dodd, are anomalous.

Got it, got it. And I appreciate that. And again, look CLOs are very attractive investments, so we appreciate the candour there. One question, I mean, I guess it gets to a point where you're putting out a portion of your book that will be marked as you spin out portions of your online lending book and your CLO book, you mentioned that it was going to be earnings and leverage neutral. I was just curious, will it also be NAV neutral as well?

Well. That's our objective, Jon. And, because if you just do a straight spin of assets and leave leverage behind a PSEC you would obviously be goosing the leverage in a way that that's not too interesting from a risk and other standpoint. So that's why we've messaged that a capital raise would be likely. And the objective would be to take proceeds and redeploy them expeditiously into similar yielding diversified pool of assets, like what PSEC has already invested in. And we're not talking about each of these spends being several billion in size each. So we should be able to redeploy in an expeditious fashion.

So that would be the goal. But as always, the objective has to be measured against what happens from a regulatory and market feedback aspect. We have not filed the registration statements for these three, we've been hard at work since November working on the accounting. It's a lot of work to get the standalone business accounting right and in some cases like for example, real estate, REITs are required to have 12/31 fiscal years. So you actually have to do the audit for 2014. And then you can file. So that elongates things a little bit.

And once we file and start getting feedback, then we can take it from there, but certainly, that's the objective, Jon.

Well, the objective for me in terms of objectives is to have anything we do to be NAV positive, and let's take a look at the online lending book, people seem to be willing to pay a lot of money for those online loans. So let's see where that happens, where that gets done, there are still sticky wickets to get through. But we believe that that's a valuable part of our portfolio that we see elsewhere in the marketplace, maybe I should send an iShares online lending thing around too, that we sell through in the marketplace that people put a premium on that book.

We'll talk about-- let's talk about that too, because this is a consumer book, maybe it has the most upside of the three, we'll find out. If you put aside the tax infused with something more like FIG in disguise company, they traded 40 times book. And well I don't view that as a disappointment even they trade now from offering right. We're here in the FIG world, we'll be delighted for a fraction of the 40 times book. And I'm sure the analysts on the phone would agree with that.

But even if you put aside those and you just talk about traditional bricks-and-mortar consumer finance businesses, they tend to trade it two to three times book value, well in excess of anything corporate credit BDCs tend to see in any period at any cycle. So, perhaps investors will see that and bid these up substantially. It's hard to tell, it's premature, but still lead up to our objective.

I appreciate it on your thoughts. And I just make sure I recap, it's going to be earnings leverage and NAV neutral. So good, glad to hear it. I guess the one issue you mentioned as it relates to leverage, because you said you wouldn't want to spend these out without a capital raise, and that makes total sense and people appreciate that thought.

When I think of the reasoning behind actually raising the additional 90 million of equity capital at a point when the stock was well, well below book value, you mentioned that it was to in effect increase the -- or maximize access to the low cost facility funding as well as enhance liquidity. But my calculation, you only have $200 million outstanding on $885 million of commitments, why do you need new equity to maximize what is apparently should be outstanding to you right now?

I'm trying to understand your question, Jon. I guess, there is a few different elements here. One is, and we don't want to go into all the chapter and verses as a roadmap for things that we've done in a proprietary fashion, so our competitors can copy us. I said this in November as well, and we want to jump advantages for our shareholders, not other company shareholders. But there is certain ways that we would have to do a spend as a ['40] Act vehicle, certain hoops we have to jump through. They cause us to go at a certain direction, Jon, that's item number one.

So your lenders required you to raise that additional equity?

I thought you're talking about the spin-off, I am sorry. I don't think I understand your question. So, on the question of utilizing our facility, we are playing and utilizing our facility in a lot of different ways including refinancing. We've already begun that refinancing some of our higher cost existing debt that can be called. There is other debt coming due here in 2015, we'll be examining that hard and/or where call period start to expire.

And so we want, if we have a certain facility phased amount, right now is around $885 million in size. We want to make sure that we have the sufficient borrowing base in order to utilize that. So we made that determination and remember, we're making plans there, not just for the next five seconds or for a week, but for a multi-year carefully thought out liquidity plan for our business.

And you don't just, you have a bulletized maturity come up on a bond or a convert and not know what to do or wait until 10 seconds beforehand figure it out. We figured out exactly what to do for all of that, and that's part of the plan.

Got it. Okay.

But also related to that, it's very, as Jodi Baer has said, predictions are very hard, especially about the future. And if there's a sell-up in the loan market or opportunities in the CLO market or other opportunities, we don't want to be the person with his nose pressed against the glass wishing he could participate, but he doesn't have enough money in his pocket and he can't fully utilize his facility.

So, you need to plan, hope for the best, plan for the worst. And you need to risk control this business at all times. And that means, making sure we have maximum financial flexibility and are not dependent on outside forces, whatever they might be to mother, may I, let us take advantage of great opportunities that crop up in the market or build in risk controls against maybe bad things happening to us, missiles heading our way.

And we felt that in light of all of the risks that are out there and the attended opportunities that what we did made a lot of sense. It was good for our shareholders. And being one, I agreed.

Yeah. Appreciate that. And then, I guess in terms of -- John, when you talk about being a shareholder, I appreciate your comments. So right now, if you maybe fast forward, rewind a couple of quarters your shareholders were receiving a $0.33 dividend and had a NAV of $2 -- $10.72 and today they're going to receive a $0.25 dividend with NAV obviously lower than that. Yet outperformance fees and incentive fees paid to you went up from $43 million to over $57 million. Is that fair that shareholders can take less and will now receive less while the manager receives more?

Well, John I think we have taken steps to significant -- well first of all, I want to clear a thing. Receive less, if you take a dollar and you keep it in the business as opposed to pay out a dividend, you haven't taken away any dollars of value from a shareholder, I mean that's just flat out wrong to assert that. Okay, I just clear up the value, that a dollar retained is the dollar that goes into the business as opposed out the door. That's item number one.

Item number two is, we did as a board, make the decision in December to adjust the distribution payout. We just didn't view the business is getting appropriate credit anywhere close to it, at that distribution payout rate. We in other [business] we're trading at a pretty sharp discount around that time we said, we're just going out the door, when it could be utilized in the business for better purposes like acquiring new originations at an attractive -- at attractive price.

On from a taxable earnings perspective and as you know, taxable income is what drives a [RIC] payout requirement. You have to pay out at least 90% in order to be tax efficient, 98% in order to avoid excise taxes. Then of course, there's spillbacks, you can use from a timing standpoint, but over the long-term, those are the numbers that need to be hit.

We were within the taxable income of the business and have more than covered dividends, out of taxable income since inception for the company and we continue to do that. But we looked at and said, this isn't really receiving a marketplace credit and there's so much fear of a change, it's better to make a change, retain that capital in the business. But I think what you've seen from a dynamic, I mean, you referenced adjustments in net asset value. We hope to obviously see that correct itself in the future, making a change in the distribution policy is one way to correct that. Another way is through some of the harvesting of investment that I mentioned previously, we're working on to specific seller in 2015. I can't say too much more about that, because we're in the throes of that right now. But we're cautiously optimistic about that.

John, let's talk about fairness for a second and I'm reminded of the senator who said, everybody down here in Washington agrees that we should be seeking fairness. The only problem is no one seems to be able to agree on what it is. Would you agree with me that the statement you made about fairness implying we're doing something unfair, would apply to any business development company that increased its asset base, whether by selling stock or issuing debt or borrowing and had its stock price decline over the last year.

I'll have to think about it. I would probably just suffice to say that, at the end of the day boiling it all down, if people receive less yet managers receive more and receive less is not in terms of stock price, but in terms of dividends or NAV reduction. My guess is the Board would probably always want to look for ways to rectify that through either lower expenses, or I guess another question is if business -- if dollars are supposed to go back in the business, there is an excellent way to do that by buying back your own stock.

Okay. Well, Jon, I actually don't need to think about it for more than a second. Any BDC external manager that increased the assets in the last year, whether by issuing debt or issuing equity and also had its stock price decline, made more money while shareholders saw the value of their shares go down. That's true of many BDCs. It only takes -- I'm sure everyone else on this call figured that out in about one second. But if it takes you longer to think it through, that's fine with me.

Not. That's fair. I think probably people judge us based on the NAVs and distribution assumptions. The things we can't control or -- no, I'd appreciate it, John. I will appreciate it clearly. No, hold on. This way I'll --

I also refer you --. Okay, fine, you want to talk over me.

No, I do not.

I'd like to answer. I'll also refer you to Miller-Modigliani and all the academic research that points down the value of a share in the shareholders hands is not altered by the payout ratio, okay. And what we've done is, we have reduced our dividend to remove any question, whether it would be long-term sustainable, from net investment income, we've been leaving aside taxable income. So that any anxiety anybody has out there worrying in bed at night, oh they might have to cut the dividend. That's not behind us. And we think that's a good thing.

We now think we have a solid foundation of net investment income, even under adverse circumstances whether or not there are many originations, and there are not many structuring fees, and we can still out earn our dividend as we have done in this quarter. And we think that is delivering shareholder value.

I would also add, Jon. We just had two BDCs report that had NAV declines of 4% to 6% with significant exposures to energy, which could get worse before it gets better. And our NAV taking away the distribution policy adjustment, our portfolio of value held up extremely well in the quarter just ended, which is the quarter we're addressing in this call.

So to suggest that somehow our NAV is faring worse than our peers, is just playing wrong. It's the opposite. Our portfolio is holding up extremely well. Any of others who have made unwise credit choices they were paying the consequences for that in real-time.

But Jon, I want to be clear I appreciate the questions, because they gave us an opportunity to respond and explain why we disagree with some of the answers that have been put out there. And we believe that our answers are data-driven and are supported by substantial evidence. You might even look up, I'm going to speculate that your statement about the management company making more money, while shareholders see their share price decline, it's probably true, I'm going to guess of 20 BDCs, that's going to be my guess.

I guess that reference to John. And just to be clear, you can't control your share price, but you can't control your return on equity and your NAV by making proper capital allocation and market decisions. And you can't also control your dividend distribution. Those are the measures that people choose to attach in many cases management fees too over time, particularly as it relates to NAV through realized loss look backs and unrealized loss look backs. If that's the case and you delivered significant value, and we can just cap it with this.

But Jon, you're starting to focus, let's call that our NAV is doing worse than the others. That is just wrong. Well, we just put out in the quarter and a lot of folks have yet to report, when you line up and have a table of NAV performance, PSEC will end up doing better than the vast majority of folks in my prediction.

I appreciate that. What we can easily just say, at the end of the day, if NAV falls, is there a point where if shareholders are somehow receiving less in the form of NAV and distributions, does the incentive fees still need to increase in light of those two facts? That's the question.

I answered -- another [predicative] question. Our incentive fees are not increasing real-time, okay. I said that just there is a number of predicacy on your question. That is incorrect for the audience. First of all, the dividends that when it -- dollars retain the business it's now destroyed, that's not correct. The PSEC's NAV performance is worse than peers, that's false. It's been better than peers, when you look at the last quarter.

Brian has shown me how the incentive fees went down year-over-year in the last quarter. So you made three statements there Jon, which are just wrong, and we have to correct on the record for everybody to hear.

No, we appreciate I think that the dividend is down, NAV is down and fees are up and on an absolute basis.

Fees are not up, they're down Jon. So that's another wrong statement.

Not quarter-over-quarter, sir, I'm talking over a period of one year.

Okay, well Jon, this is an earnings call for December and we're talking about the quarter.

As I've said, any BDC that increase its asset base and has a contract identical to ours, of which the vast majority the industry has, can be tarred with the same brush, but why this is always are being focused on us. I know, you have a story and you're sticking to it. I get it. But again, we're all entitled to our own opinions, but we're not all entitled to our own set of facts. Please look at our financials. And when you make statements, please check our financials before you make them. I would appreciate it. Okay.

We will, and those facts were correct and I appreciate your time today to take the question.

We don't think they were.

They were not correct. Next question please.

We have a follow-up question from Christopher Knowland with MLV & Company.

Hi, I appreciate the back and forth, just now, but I want to applaud Jon Bock. I like PSEC, I have a buy rating on the stock, but the management is also paid at the very highest levels compared to other BDCs. And I think his point in terms of lower dividend, and erosion of book value are well taken. I think the management, the PSEC is quality, but at the same time a dollar retained in this business, actually to a larger percent than other BDCs actually goes to management. So, that's my statement.

Hey Chris, thanks so much for your thought. We really appreciate that. And I think you've (technical difficulty) this company also supports this business with some pretty substantial personal investments as well. But we appreciate your comment. Thank you, Chris.

Thank you.

Thank you. And at this time, I would like to turn the call back over to management for any closing comments.

Okay. So, we don't have any more questions. I appreciated the spirited discussion and I'm looking forward to the next earnings call. And meanwhile, we're going to get back to work, doing the best we can. Thank you all.

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