Prospect Capital Corp (PSEC) 2016 Q3 法說會逐字稿

Good morning and welcome to the Prospect Capital third 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, Laura. Joining me on the call today are, once again, 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 meaning 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, 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.

Thank you very much, Brian. For the first nine fiscal months of this year, our net investment income, or NII, was $279.8 million, or $0.79 per share, $0.04 more than our dividends. Our net investment income in the March 2016 quarter was $87.6 million, or $0.25 per share. Our recurring income, as measured by the percentage of total investment income from interest income, was 94% in the March 2016 quarter. We have previously announced monthly cash dividends to shareholders of $0.08333 per share for May, June, July, and August 2016, with the latter representing our 97th consecutive shareholder distribution in our Company's history.

We plan on announcing our next series of shareholder distributions in August. We have generated cumulative, distributable income in excess of cumulative dividends to shareholders since Prospect's IPO 12 years ago. Since that IPO through our August 2016 distribution 12 years later, at the current share count we will have paid out $14.96 per share to initial continuing shareholders, aggregating $2 billion in cumulative distributions to all shareholders.

We have delivered solid returns while keeping leverage prudent. Net of cash and equivalents, our debt-to-equity ratio was 73.8% in March 2016, down 380 basis points from 77.6% in June 2015. Our net asset value stood at $9.61 per share in March 2016, down $0.04 from the prior quarter and $0.70 from June 2015.

We believe this decrease during the fiscal year is primarily due to volatility in the capital markets, rather than to fundamental credit issues. We believe there's no greater alignment between Management and shareholders than for Management to purchase and own a significant amount of stock, particularly when such stock is purchased on the open market at market prices, as with Prospect Management.

Prospect Management is the largest shareholder in Prospect. Prospect Management has never sold a share. Prospect Management, on a combined basis, has purchased at cost over $160 million of stock in Prospect, including over $100 million since December 2015.

Our objective is to drive future earnings through prudent levels of matched-book funding. We are currently exploring initiatives to further lower our funding costs, including refinancing existing liabilities at lower rates; opportunistically harvest certain controlled investments at a gain; optimize our originations strategy mix, including increasing our mix of online loans; repurchase shares at a discount to net asset value; 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 has locked in a ladder of fixed-rate liabilities extending nearly 30 years in to the future, while the significant majority of our loans float with LIBOR, providing potential upside to shareholders should interest rates rise.

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

Thanks, John. Our scale business with over $7 billion of assets and undrawn credit continues to deliver solid performance. Our team consists of 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 and direct non-sponsor lending, Prospect sponsored operating and financial buyouts, structured credit, real estate yield investing, and online lending.

As of March 2016, our controlled investments at fair value stood at 33% 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 multiple origination strategies. Prospect closed approximately $1.1 billion of investments during the past four quarters.

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. As of March 2016, our portfolio at fair value comprised 51.6% first lien, 19.2% second lien, 16.6% structured credit with underlying first lien assets, 0.3% small business whole loan, 1.2% unsecured debt and 11.1% equity investments, resulting in 88% 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 13.4% as of March 2016, an increase of 1.5% over September 2014, 1% over March 2015, 0.7% over June 2015, and 0.1% over December 2015. This yield metric has now increased each of the last six consecutive quarters.

We also hold equity positions in many transactions that can act as yield enhancers or capital gains contributors as such positions generate distributions. 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 are seeking to enhance our yields by capitalizing on higher recent market spreads compared to past years. As of March 2016, we held 125 portfolio companies with a fair value of $6.01 billion.

We also continued to invest in a diversified fashion across many different portfolio company industries with no significant industry concentration, the largest is 9.2%. As of March 2016, our asset concentration in the energy industry stood at 2.9%, including our first lien senior secured loans where third parties bear first loss capital risk.

Our credit quality continues to be solid. Non-accruals as a percentage of total assets stood at approximately 0.5% in March 2016, consistent with the prior quarter. Our weighted average portfolio net leverage stood at 4.12 times EBITDA, down from 4.19 times in December 2015 and down from 4.36 times in September 2015. Our weighted average EBITDA per portfolio company stood at $49.1 million in March 2016, up from $48.6 million in December 2015 and $44.6 million in September 2015.

The majority of our portfolio consists of sole agented and self-originated middle market loans. In recent years we have perceived the risk-adjusted reward to be superior for agented, self-originated and anchor investor opportunities compared to the broadly syndicated market, causing us to prioritize our proactive sourcing efforts. Our differentiated call center initiative continues to drive proprietary deal flow for our business.

Originations in the March 2016 quarter aggregated $23 million. We also experienced $164 million of repayments and exits from several other investments as a validation of our capital preservation objective, resulting in net investment exits of $140 million. We slowed originations in the March 2016 quarter due to market volatility, but expect to increase our investment pace, depending on market conditions, in the coming quarters. During the March 2016 quarter, our originations comprised 10% third-party sponsor deals, 49% online lending, 20% syndicated debt, 9% operating buyouts and 12% real estate.

Our financial services controlled investments are performing well, with annualized cash yields ranging from 18% to 30%. Because of declining unemployment rates and declining commodity prices compared to prior years, we believe the outlook for consumer credit continues to be positive for 2016, boding well for such companies. To date we've made multiple investments in the real estate arena with our private REITs largely focused on multifamily stabilized yield acquisitions with attractive 10-year financing.

Our real estate portfolio is benefiting from rising rents and strong occupancies and our cash yields have increased with each passing quarter. In the past few months, we've recapitalized many of our properties with attractive financing so we can redeploy capital in to other return enhancing avenues.

Over the past few years, we've grown our online lending portfolio directly as well as within MPRC with a focus on super prime, prime, and near prime consumer and small business borrowers. This portfolio stands at approximately $700 million today, including third-party financing across multiple origination and underwriting platforms.

Our online business, which includes attractive advance rate financing for certain assets, is currently delivering a levered yield of approximately 17% net of all costs and expected losses. In the past year we've closed and upsized five bank credit facilities and one securitization to support this business, with more credit facilities and securitizations expected in the future.

Our structured credit business performance has exceeded our underwriting expectations, demonstrating the benefits of pursuing majority stakes, working with world-class management teams, providing strong collateral underwriting through primary issuance, and focusing on the most attractive risk-adjusted opportunities. As of March 2016, we held $1 billion across 38 nonrecourse structured credit investments. Our underlying structured credit portfolio consisted of over 3,000 loans and a total asset base of over $18.5 billion. As of March 2016, our structured credit portfolio experienced a trailing 12-month default rate of 1.16%, or 59 basis points less than the broadly syndicated market default rate of 1.75%.

In the March 2016 quarter, this portfolio generated an annualized cash yield of 27% and a GAAP yield of 17.7%. As of March 2016, our existing structured credit portfolio has generated $634 million in cumulative cash distributions, representing 49% of our original investment. We've also exited seven investments, totaling $154 million with an annual realized IRR 16.8% and a cash-on-cash multiple of 1.42 times.

Our structured credit portfolio consists entirely of majority owned positions. Such positions can enjoy significant benefits compared to minority holdings in the same tranche. In many cases, we received fee rebates in average of a 12% discount to the industry average because of our majority position.

As the majority holder, we control the ability to call a transaction in our sole discretion in the future and we believe such options add substantial value to our portfolio. We have the option of waiting years to call a transaction in an optimal fashion, rather than when loan asset valuations might be temporarily low. We as majority investor can refinance liabilities on more advantageous terms, as we've done four times since the beginning of 2015, and negotiate better terms to remove bond baskets in exchange for better terms from debt investors in the deal, as we've done five times since the beginning of 2015.

In the March 2016 quarter, we sold two structured credit positions at 97% and 94% of par, above both our September 30 and December 31 valuations, and at a 13% cash realized IRR, which we believe validates the quality of our structured credit portfolio. Our structured credit equity portfolio has paid us an average 28.8% cash yield in the 12 months ended March 31, 2016.

As a yield enhancement for our business, in the past two years we launched an initiative to divest lower yielding loans from our balance sheet, thereby allowing us to rotate in to higher yielding assets and to expand our ability to close scale, one-stop investment opportunities with efficient pricing. So far in FY16, we have made four sales of such lower yielding investments, totaling $91.9 million, with a weighted average coupon of 6.1%. We receive recurring servicing fees paid by multiple loan purchasers in conjunction with these divested loans.

We expect similar sales in the future as a potential earnings contributor for the June FY16 and beyond. We have booked $115 million in originations and received exits of $47.4 million so far in the current June 2016 quarter.

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

Thanks, Grier. We believe our prudent leverage, diversified access to matched-book funding, substantial majority of unencumbered assets and weighting towards unsecured fixed-rate debt demonstrate balance sheet strength as well as substantial liquidity to capitalize on attractive opportunities. We're a leader and innovator in our marketplace. We were the first company in our industry to issue a convertible bond, develop a notes program, issue an institutional bond and acquire another BDC.

Shareholders and unsecured creditors alike should appreciate the thoughtful approach differentiated in our industry, which we have taken toward construction of the right-hand side of our balance sheet. As of March 2016, we held approximately $4.6 billion of our assets as unencumbered assets, representing approximately 76% of our portfolio. The remaining assets are pledged to Prospect Capital funding, 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 and revolves till March 2019, followed by one year of amortization with interest distributions continued to be allowed to us. Outside of our revolver and benefiting from our unencumbered assets, we've issued at Prospect Capital Corporation multiple types of investment grade unsecured debt, including convertible bonds, institutional bonds and program notes. All those types of unsecured debt have no financial covenance, no asset restrictions and no cross defaults with our revolver.

We enjoy an investment grade BBB-plus rating from Kroll and investment grade BBB-minus rating from S&P. We've now capped the unsecured term debt market on multiple occasions to ladder our maturities and extend our liability duration up to nearly 30 years. Our debt maturities extend through 2043. With so many banks and debt investors across so many debt tranches, we've substantially reduced our counter-part risk over years.

We have refinanced two debt maturities in the past year, including our $150 million convertible note in December 2015 and our $100 million baby bond in May 2015. Our only significant maturity during the next 19 months is a $167 million convertible note due in August 2016, which we anticipate refinancing through our lower-cost $885 million revolver that is currently undrawn. If the need should arise to decrease our leverage ratio, we believe we can slow originations and allow repayments and exits to come in during the ordinary course as we demonstrated in the March 2016 quarter.

In calendar year 2015, we enjoyed $1.3 billion of repayments, which we view as validation of our strong underwriting and credit processes. On December 10, 2015, we issued a $160 million of 6.25% senior unsecured notes due June 2024. As of December 2015, we had $889 million of program notes outstanding with staggered maturities between October 2016 and October 2043 and a weighted average interest rate of 5.19%.

On July 28, 2015, we began repurchasing our shares of common stock as they were trading at a discount to NAV. Since that time, we have purchased 4.71 million shares of common stock at an average price of $7.27 per share. Repurchases total approximately $34 million to date. As of March 2016, 100% of Prospect's assets across its portfolio are Level 3 assets under ASC 820, meaning such assets are illiquid with unobservable inputs and with a requirement to use estimation techniques.

When Prospect went public in 2004, Prospect's Board of Directors instituted best practice in the BDC industry by employing third-party valuation firms to value 100% of the Company's Level 3 assets for each fiscal quarter using a positive assurance methodology. Prior to Prospect's leading by example, other companies in the industries used self valuations, sampling, and other less-robust methods for Level 3 portfolio valuation. When determining the fair value of portfolio investments, the Audit Committee and the Board of Directors of the Company, including our independent directors, primarily evaluate the range of valuations from three independent valuation firms.

For our structured credit investments, the independent valuation firm primarily utilizes a single cash flow path approach based on our estimated cash flows. In order to validate the results from the single cash flow methodology, the valuation agent also utilizes a multi-path Monte Carlo simulation approach along with reviewing changes in market conditions for similarly trading securities. The Board of Directors looks at several factors in determining where within the range to value each Prospect asset, including recent operating and financial trends for the asset, independent ratings obtained from third parties, comparable multiples for recent sales of companies within the industry and discounted cash flow methods. Final selected valuations have never been outside the range provided by the third-party valuation firms.

We currently have no drawings under our revolver. Assuming sufficient assets are pledged to the revolver and that we are in compliance with all revolver terms, we have $618 million of new facility-based investment capacity, not including cash at the Prospect level.

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

Thank you, Brian. We're ready for questions now.

(Operator Instructions)

The first question will come from Terry Ma of Barclays.

Hey, guys. I may have missed this, but could you comment on the lawsuit that was recently filed and also talk broadly about how you think about the fee structure at Prospect? I think several of your peers have actually reduced base fees and/or incentive fees.

We don't comment on litigation matters on earnings calls. Thanks.

Can you talk about how you think about the fee structure going forward, seeing how a lot of your peers have actually reduced the fees?

Structure what?

Your fee structure.

Terry, we think the best alignment comes from insider purchases and we focused on increasing our insider ownership pretty substantially recently, thinking the stock price offered a compelling value. The management team here has purchased over $100 million of stock since December and it's purchased over $160 million of stock since inception and we [won] the largest insider ownerships of any business development company. I believe everybody at our Company is also a shareholder with no senior manager ever selling a share. That's our thoughts on the matter.

Okay. I got it. I just wanted to touch on First Tower. If I look at the valuation, the fair value has been steady quarter-over-quarter, but I think when I look at public comps and multiples there have compressed three to four turns during the quarter, can you just comment on what kind of valuation methodology you're using there?

The methodology is unchanged since we purchased the company four years ago. I say we, as with all of the valuations at our company, it's a third-party process so the third-party agent uses a variety of typical methods to look at in valuing a business, ranging from not just trading multiple comps and M&A comps, but other types of discounted cash flow performance. We're quite pleased with the performance of Tower. It's a company, remember, that's been in business for, I believe, close to 40 years, with a nice recurring revenue stream business model, hundreds of thousands of loans and nice growth that we've experienced in expanding to multiple states during the course of the time of our investment over the last four to five years with the CEO owning about 20% of the company. We've seen a solid credit and charge-off profile and pre-tax net income growth occur for that business.

One side comment that sometimes creates confusion because we do file financials for that business on an annual basis because of the size of it, is we encourage folks to ignore, at least for cash flow purposes, items like goodwill amortization and similar non-cash items that can lead to the wrong conclusions about the robust profitability we see for that business, which I believe achieved record profitability in the past year and is paying us cash distributions approaching 20%. We're quite happy with that business and our financial buyout book in general.

Got it. I only ask on the valuation because I think in the past you guys have marked up investments, specifically Harbortouch, and referenced public comps multiples there, so I would think for First Tower, during the quarter if public comps have come in three to four turns in terms of multiple, I wouldn't have expected to see some sort of weakness on the valuation there.

When you say you guys, I assume you mean the third-party agent, since we don't pick our own valuations. I feel I have to underscore that based on the question. Harbortouch is, I would say, a little bit different in the sense that there's the possibility of an exit there. We'll see if we have more to announce about that in the coming weeks. It's really premature to say anything right now other than that's a terrific business with recurring revenue and EBITDA, diversified merchant customers and a strong management team bench.

Got it. Thank you.

The next question will come from Christopher Noland of FBR & Co.

Hi. For your American property REIT and national property REIT, it looks like the cost basis went down over the quarter but the -- more so than the fair value. Can you explain what's going on over there?

Sure. A couple of things, Chris. One is we referenced doing some recapitalization transactions, saw a great opportunity in the last few weeks and months to basically take distributions out of those business by capitalizing on attractive GSE financing, add-on financing, which is generally done with the same lender, whether it's Fannie or Freddie, depending on the particular property. That's why you see a decrease in cost basis.

At the same time, you've seen very strong operating results out of these businesses. You see not just low cap rates in the multifamily arena but strong rents and strong occupancies as compared to a historical basis. Also recall that while we acquire properties with a recurring and stabilized yield, there's also a healthy value add component to what we do in focusing on primarily class B units with a little bit of age to them and with the opportunity to generate positive results from unit upgrades, which take some time to come to fruition because you can only upgrade a unit when you have a move-out of a tenant.

Now as this book is seasoning nicely, we're seeing those strong results come through and the investment thesis in which we embarked on those investments validated by enhancing net operating income at the property level from those upgrades. It's really a combination of all those factors, Chris.

Great. As a followup question, Management repurchased $100 million of shares in the quarter but from my observation, does not look like Prospect Capital repurchased any shares in the quarter. Given that S&P put the Company's outlook on negative, are those two factors correlated, that the Company stopped repurchasing shares in the quarter when S&P downgraded its outlook?

I think they are related in the sense that the rating agencies have made it quite clear that stock buybacks are a negative, not just for ourselves but other companies in the industry. We think in the world of specially financed companies, non-bank companies, how you manage your indebtedness and ladder maturities is critically important, almost more than just about anything else. We've intensely focused on that as we've grown our business with a well-laddered maturity by making sure that we keep our leverage within our target. In fact, you a -- I think we added a slide in our updated corporate presentation you can get on our website that shows we've been consistently within 0.7, 0.8, our target band debt to equity in the last several quarters, so we intensively manage that.

When you have substantial volatility, it's maybe easy to forget that on May 11, but on January 11 or February 11, the world was pretty stressed and volatility was pretty high, valuations out there whip-sawing. That made us cautious, not just on the right-hand side of the balance sheet but also on the left-hand side of the balance sheet. We've also have carefully built our business, managing items like our 30% basket, RIC diversity tests, control tests, et cetera, where the denominator is very important, numerator and denominator, for those ratios. So we have to be thoughtful about the impact of that as well.

Having said that, we do have $100 million buyback authorization. We've used about a third of it so far. It's within our option set for sure going forward.

Okay, thanks, Grier.

The next question will come from Merrill Ross of Wunderlich.

Good morning. Online lending has been a very strong driver of value creation and accounted for about half of your originations in this quarter. I guess what my question is, is the CFPB has recently taken its first enforcement action in this space and kind of the prospects for increased regulation appear to be looming. How do you expect this to impact the growth rate of your online lending initiatives?

Thank you, Merrill. The regulatory back drop is critically important in really all the industries in which we invest and as part of the risk factors that we look at. Consumer finance and marketplace lending as a close cousin are no different than that. We think it's important to have a culture of compliance in any business, including those in the consumer finance world and we've sought to reinforce such a culture. None of our controlled financial services companies are payday lenders, which I think is one of the most significant areas of focus right now. Not the only area, but one of the most significant ones.

As it relates to online, we've been overall pleased with our counter-party relationships and investment returns. There's been press the last few days about one of the larger players in the industry. We at Prospect are not presently aware of any material documentation or other issues pertaining to loans we've been involved with. We're interested in furthering and growing our relationship with that company, as well as others in the space. I think it validates our strategy of having diversified relationships, of starting with small fundings, monitoring progress and results, and then deploying more capital as we're pleased with the results we have.

This is a sector that we've spent many, many, many years diligencing. We spent time and due diligence in this space before making a single investment, all the way from 2007 until, I believe, 2013. You're talking about five, six years of intensive work looking at charge-off histories, comping those to credit card receivables going back to the 1980s. We're big believers in doing our research and that's really an ongoing process, not one that's just a one-time up-front endeavor.

We look at the customer value proposition of this space and we think from a governmental and regulatory standpoint, if a consumer has a better experience, can save several hundred basis points in refinancing credit, that's a good thing that should be supported, not torn down. I think the former is more likely with appropriate regulatory and compliance guard rails, of course. So we look at the evolution of that sector and view it as probably expected stop, start, a little bit of growing pains from something that's grown fairly robustly over the last decade.

Thank you. To follow up, do you think that this online lending will again account for the lines here, basically the 49% of your originations in the June quarter?

I think it's unlikely to be that high in a sustained basis. That's really more a function of pulling back on other lending activities because of volatility. Not just ourselves, but this is happening in the overall deal arena, a lot of counter-parties caught off deals, M&A transactions fizzled, buyers and sellers tried to change the price. This is a pretty typical slowdown that occurs when you have volatility, so not just driven by our own (technical difficulty) there.

I think it's more a function of that. Already we picked up our pace here in the June quarter and hope and expect for that continue, so I wouldn't expect that high a number. Recall we do have capacity limits overall in our business, 30% basket, et cetera, limits. We've got some capacity there now but it's really not possible ad infinitum that percentage to hold for a long period of time.

Okay. Thanks for the detailed answer.

Next we have a question from Christopher Testa of National Securities.

Good morning, guys. Thanks for taking my questions. I checked on the multifamily real estate portfolio. Are there any thoughts on potentially rotating out of multifamily a bit given how low cap rates are relative to other types of real estate and possibly diversifying the real estate that you're invested in?

It's a great question. We've already monetized, with a change of control, some of our investments there. The Vista one, in particular, that we closed the end of December. Yes, we will be -- we think very likely we will be divesting other assets and rotating in to newer opportunities, especially as our -- I guess a couple things. There's an opportunistic exit, where you get the proverbial offer you can't refuse, and then there's an aspect of completing a substantial amount of the value-added improvements, boosting cash flow, and being able to sell once we've wrung out those improvements as the owner of these businesses.

We think the multifamily apartment golden age, whatever you want to call it out there, still has pretty significant legs with strong demographic drivers. That includes not just millennials, you have younger folks starting families later, staying in apartments, affordability issues, financing issues for houses, but also baby boomers and retiring seniors downsizing into apartments. There continues to be a strong proposition that constrains supply. We benefit from these class B properties.

So really it's not just about buying in a beta sense any asset multifamily. The ones we buy, we've turned down a huge multiple of that. Our overall book-to-look ratio is a single-digit percentage. It's very small in multifamily as well. We're turning down deals all the time and selecting the best ones. With a yield in credit orientations we have, multifamily is a very good fit for our business model.

Other parts of real estate that have more concentrated tenant risk, lower yields, et cetera, aren't really as good a fit. We do have some self-storage in our business that we think is a good fit. We've looked at assisted living. We've looked at student housing, come close on some deals. It's a very high bar to get deals done around here from a discipline standpoint so we didn't pull the trigger on any of those but they are certainly within the strike zone.

Okay. Great. Just curious as to what you see the impact on LIBOR increases being on CLO equity cash yields and also how do reinvestment prices within CLO equity given the volatility in markets compare to your assumptions previously?

Sure. In general, within our structured credit CLO business, we've outperformed against our underwriting expectations and on a net basis built par since inception. The drivers that you talked about just now in terms of the LIBOR forward curve as well as reinvestment spreads have been two positives outweighing the expected uptick in defaults driven by commodities and as folks know, defaults tend to be a lagging indicator in a cycle and that's no different for the energy cycle we're going through right now.

But the forward curve is what matters, not where LIBOR is this very second, because that's what goes in to the expectation of future returns. That forward curve has been pushed back pretty consistently in the last couple of years as the Fed has not moved quickly. When we underwrote those deals, we used the forward curve, so we already had an expectation of LIBOR going up. That's already built in. It's not like oh, wow, what's this negative surprise? The Fed just tight -- no, hat's already built in. It's really the movement of the curve that's more important than LIBOR just going up on an expected basis within the curve.

From a reinvestment standpoint, your second piece, we've benefited from spreads widening. It's also a function of activity which has been a little bit more muted. You're going to see more opportunities to build par as volume picks up. Last quarter was pretty slow for the reasons I mentioned, not just in the middle market but also the broadly syndicated market. Here there's a lot more activity happening now as you've seen reduction involve and increase in activity out there, which we think will be a good thing because our management teams, among many other positive attributes, tend to get outsized allocations on primary issuance, which is another value creation opportunity for building par.

Got it. But on the forward curve increasing, that impacts your GAAP effective yield, but does it necessarily impact the cash-on-cash yield or is that based upon what LIBOR actually is?

Where LIBOR is will impact cash yields. We saw a little bit of reduction. The change in LIBOR from the Fed move in December repriced loans approximately in April, so this past month. You see a little bit of a change from a cash yield standpoint. But the mitigant, again that's built in to what we expected as we update our models and assumptions on a going-forward basis, but we're still -- I think we're delivering a 27% cash yield right now, so that's obviously a pretty healthy yield.

Yes, absolutely. On the remaining lower yielding investments, are these the prices that you'd be willing to sell at today, given the kind of bounce-back in loan markets and obviously higher marks on those? Or is this still something that you're waiting to repay and recycle into the higher-yielding loans at this point?

It's probably a little bit of each. We're actively selling portions of our books that are lower yielding, these term loan A assets and we've made nice progress with that. We're really just par sellers, or as close of that as possible, of these assets. There's no pressing need. It's all about book optimization.

We've tended to sell those to more passive up stream types of players that don't have their own internal origination capability and purchase those assets, sometimes close to the time of closing, sometimes on a seasoned basis. We receive servicing revenues as well, which is an additional yield enhancement and obviously focus on having an appropriate inter-creditor, et cetera. But that's an activity that we hope and expect to pick up in pace now that the volatility of the late December quarter and early March quarter has dampened somewhat.

Great. That's all for me. Thank you for taking my questions.

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

Thank you. That's all the time we have for questions. As always, please don't hesitate to contact our team if you do have further questions.

Thanks, all.

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