SLR Investment Corp (SLRC) 2013 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the quarter three 2013 Solar Capital Limited earnings conference call.

My name is Kathy and I will be your operator for today.

(Operator Instructions) As a reminder, this call is being recorded for replay purposes.

I would like to turn the call over to Mr. Michael Gross, Chairman and CEO.

Please proceed, sir.

Thank you and good morning.

Welcome to Solar Capital Limited's earnings call for the quarter ended September 30, 2013.

I am joined here today by Bruce Spohler, our Chief Operating Officer, and Richard Peteka, our Chief Financial Officer.

Rich, before we begin, would you please start by covering the webcast and forward-looking statement?

Of course.

Thanks, Michael.

I would like to remind everyone that today's call and webcast are being recorded.

Please note that they are the property of Solar Capital Limited and that any unauthorized broadcast in any form are strictly prohibited.

This conference call is being webcast on our website at www.solarcapltd.com.

Audio replays of this call will be made available later today as disclosed in our earnings press release.

I would also like to call your attention to the customary disclosures in our press release regarding forward-looking information.

Statements made in today's conference call and webcast may constitute forward-looking statements which relate to future events or our future performance or financial condition.

These statements are not guarantees of our future performance, financial condition, or results and involve a number of risks and uncertainties.

Actual results may differ materially as a result of a number of factors, including those described from time to time in our filings with the SEC.

Solar Capital Limited undertakes no duty to update any forward-looking statements unless required to do so by law.

To obtain copies of our latest SEC filings, please visit our website or call us at 212-993-1670.

At this time I will turn the call back to our Chairman and Chief Executive Officer, Michael Gross.

Thank you, Rich.

Amid continuing but modest improvement in US macroeconomic data, the credit markets were volatile in the third quarter of 2013, driven by talk of Fed tapering, gridlock in Washington, and offshore troubles.

In spite of increased volatility and uncertainty, market technicals remained supportive of issuers during the quarter.

Investors appeared willing to stretch for yield by taking on more risk.

This trend spilled over from the syndicated market to the upper end of middle-market leverage lending.

In the current environment of elevated risk and compromised structures, Solar Capital continued to be disciplined and highly selective with its new investments.

During the quarter, we invested approximately $66 million in five portfolio companies.

Investment sales on prepayments for the quarter totaled approximately $350 million or roughly 25% of the fair value of our portfolio investments at June 30.

Of this amount, approximately $237 million came from the previously announced repayment of our two largest investments and legacy investments in MidCap Financial and DS Waters.

In response to both the large and concentrated repayments and a challenging reinvestment environment, we had announced a third-quarter dividend of $0.40 per share, down from the previous quarterly dividend of $0.60 per share.

We believe it was prudent and in the best long-term interest of our shareholders to downsize the dividend for what we hope will be a temporary period of time, rather than to materially increase the risk profile of the portfolio by investing in assets with structures that do not meet our strict investment criteria.

Importantly, the dividend is aligned with the expected near-term run rate net investment income of what we believe to be a lower-risk, more-diversified, high-quality portfolio.

In addition, we announced that our Board of Directors authorized a share repurchase program for up to $100 million worth of Solar Capital common stock.

The share repurchase program provides us with greater flexibility to generate incremental net investment income per share, and is an important and complementary tool in deploying our available capital.

We expect the repurchase program to be in place until the earlier of January 31, 2014, or until $100 million of the Company's outstanding shares of common stock have been repurchased.

In the third quarter, we repurchased approximately $15.8 million of our stock.

The repurchases were made at an average price of $21.99 per share, representing a 1.2% discount to our September 30, 2013, net asset value.

We have approximately $84 million available for future repurchases under the current program as of the end of the third quarter.

At September 30, 2013, we believe our portfolio had a lower risk profile and was more diversified than at any point in our public history.

The recent large repayments have significantly reduced our issuer concentration and have substantially eliminated our PIK income.

We deliberately migrated the investment portfolio to a meaningfully higher percentage of secured, floating-rate investments in anticipation of expected changes in market conditions.

At the current stage of this credit cycle and with the possibility of a rising interest rate environment as the Fed alters its monetary policy, we believe the current portfolio is defensively positioned to generate attractive risk-adjusted returns and, importantly, maintains the flexibility to be in a position to take advantage of credit market dislocations should they occur.

Solar Capital's net asset value at the end of the third quarter was $22.25 per share.

Excluding nonrecurring charges resulting from the amendment of our credit facility and extinguishment of another revolving credit facility, net investment income would have been approximately $0.53 per share.

Third-quarter net investment income was favorably impacted by one-time prepayment fees and accelerated amortization of upfront fees associated with the monetization of these large positions during the quarter.

We believe the current run-rate net investment income for the portfolio continues to be approximately $0.40 per share.

Therefore, consistent with our previous guidance, we expect that the Company's net investment income will meet or exceed dividends to stockholders for the second half of 2013.

During the third quarter we made further enhancements to the term and cost of our liability structure.

In July, we announced the amendment of our revolving credit facility, that resulted in a reduction in the interest rate from LIBOR plus 250 to LIBOR plus 225, and importantly extended the maturity two additional years through June 2018.

We also retired a higher-cost $100 million credit facility priced at LIBOR plus 275.

At the end of the third quarter our net leverage was 0.14 times debt-to-equity.

As a result, we have over $500 million of capital available for investment in new opportunities, as well as to make opportunistic repurchases of our Company's common stock.

Finally, our Board of Directors declared a quarterly dividend of $0.40 per share for the fourth quarter, which is payable on January 3, 2014, to stockholders of record on December 19, 2013.

At this time I will turn over the call back to our Chief Financial Officer, Rich Peteka, to take you through the financial highlights.

Thanks, Michael.

Solar Capital's net asset value at September 30, 2013, was $986 million or $22.25 per share, compared to $1.0 billion or $22.40 per share at June 30.

At September 30 our investment portfolio had a fair market value of $1.13 billion, down significantly from $1.42 billion at June 30.

The reduction in the size of our investment portfolio was driven primarily by the significant early repayments, as noted earlier.

For the three months ended September 30, 2013, gross investment income totaled $43.0 million.

This compares to $39.1 million for the three months ended June 30.

The increase in gross investment income for the quarter was primarily due to the receipt of significant prepayment fees and the accelerated upfront fee amortization related to the investments that repaid early, partially offset by a lower weighted average yield on the overall income-producing portfolio.

Expenses total $21.4 million for the three months ended September 30, 2013.

This compares to $19.9 million for the three months ended June 30, 2013.

The increase in expenses for the quarter was primarily due to a $2.6 million nonrecurring expense related to both the amendment of our existing credit facility as well as our extinguishment of another revolving credit facility that was underutilized.

Accordingly, the Company's net investment income totals $21.6 million or $0.48 per average share for the three months ended September 30, 2013.

This compares to $19.3 million or $0.43 per average share for the three months ended June 30, 2013.

If the expenses related to the amendment of the Company's credit facility and the extinguishment of the other revolving credit facility were excluded, the Company's net investment income for the quarter would have been $23.7 million or $0.53 per average share.

Net realized and unrealized losses for the quarter totaled $11.1 million, compared to $19.3 million for the quarter ended June 30.

Ultimately, the change in total net assets resulting from operations increased by $10.6 million or $0.24 per average share for the quarter ended September 30, 2013.

At this time I would like to turn the call over to our Chief Operating Officer, Bruce Spohler.

Thank you, Rich.

Overall, the management teams across our portfolio of companies continue to be optimistic about their respective businesses.

However, they remain cautious regarding the economic fundamentals and the ongoing macro uncertainties.

Operating trends remain relatively stable, with steady deleveraging in a continuing and muted top-line growth environment.

At September 30, the weighted average yield on our income-producing investment portfolio was 11.6%.

Portfolio was 98% performing.

The weighted average investment risk-weighting remained at approximately 2, measured at fair market value, based on our 1 to 4 risk-weighting scale, with 1 representing the least amount of risk.

Investment activity in the third quarter further diversified the composition of our portfolio.

At the end of Q3, our portfolio consisted of 40 companies operating in 24 industries.

Measured at fair value, approximately 60% of the income-producing investments are floating rate.

Including Crystal, whose portfolio consists entirely of senior secured loans, close to 70% of the portfolio exposure is in secured investments.

Before I discuss our Q3 activity, let me update you on Crystal Financial.

As a reminder, Crystal is a specialty commercial finance company that provides asset-based and other secured financing solutions to mid-market companies.

At 9/30, Crystal had a well-diversified senior secured loan portfolio totaling approximately $350 million, which consisted of 23 funded commitments to 19 different borrowers.

All of Crystal's investments are floating rate.

The average exposure per issuer was approximately $18.5 million and the weighted average yield on the loans was 12.5%.

The Crystal portfolio is 100% performing.

At the end of the quarter, total debt on the Crystal portfolio approximated $87 million, for a debt-to-invested-equity ratio of 0.3 times.

Crystal had over $185 million of available capital, subject to the borrowing base limitations under its credit facility.

During the third quarter our investment in Crystal paid us a cash dividend of $7.8 million, which approximates an 11.3% annualized cash-on-cash yield.

Turning to our origination efforts.

In spite of challenging market conditions, we succeeded in sourcing, approximately $66 million in four new and one follow-on investment that we believe offer attractive risk/return profiles.

Importantly, these new investments further diversify our portfolio and meet our objectives of investing in secured assets that are both cash pay and carry floating-rate coupons.

Let me touch on a few of these investments.

We funded a $25 million investment in a second-lien term loan for TriNet, a leading PEO with over 200,000 worksite employees.

Solar's investment supported a refinancing of the company's capital structure.

Importantly, we have credit experience with TriNet through Solar Senior Capital's previous investment in the company's first-lien debt tranche, which was recently repaid through the company's recapitalization.

Leverage through our second-lien investment is approximately 5.3 times, and our all-in yield on this investment is 9.25%.

We also funded a $15 million investment into the second-lien term loan of GENEX Services in support of a recapitalization of the business.

GENEX is a national managed care services firm that provides medical cost containment and disability management solutions to the workers comp and auto insurance industries.

Leverage through the second-lien investment is in the mid 5 times and it carries an all-in yield in excess of 9.5%.

During Q3, we had aggregate repayments and sales of approximately $350 million.

Of this amount, $237 million in repayments came from our previously announced transactions involving the sale of MidCap Financial and DS Waters.

The remainder, or approximately $113 million of proceeds, came from additional repayments.

As we noted earlier we had approximately $150 million in proceeds from our senior preferred units and second-lien term loan investments in DS Waters upon the closing of the sale to Crestview Partners this past August.

Solar earned in excess of 10% IRR and a multiple on invested capital of more than 1.5 times over the life of our investment in DS.

We also realized approximately $87 million in proceeds from our investment in MidCap Financial.

Solar made an initial $25 million investment in MidCap back in 2010 and continued to increase our exposure until we got to $85 million.

To refresh your memories, MidCap is a leading specialty finance lender into the healthcare industry.

Our investment was redeemed at a premium to par and produced in IRR in excess of 16%.

Additionally, we received repayment of our $22 million investment in ProSieben, Germany's second-largest privately owned television company, which is controlled by KKR and Permira.

The repayment of this 2000 investment at par takes us out of a legacy asset that was low yielding.

At the depths of the credit crisis, we had valued ProSieben at 3% of par.

In a testament to our long-term, patient capital, we were able to realize 1.5 times multiple on invested capital, resulting in just under a 10% IRR on this investment.

Additionally during Q3, our $43 million investment in Trident Health Services was redeemed at a premium to par.

Our investment generated a 17% IRR.

And finally, we were repaid also at a premium to par on our $41 million investment in ViaWest, which is one of the nation's largest privately-held data center operators.

Solar originated invested in ViaWest back in 2010 in connection with Oak Hill Capital's acquisition of the business; and we subsequently made three follow-on investments to fund new data center buildouts as well as acquisitions.

Our IRR in this investment exceeded 16%.

Let me close by reiterating a key tenet of our investment philosophy.

During our underwriting process we focus on assessing a company's ability to generate free cash flow as our primary driver to derisk and repay our investment.

We do not intend to sacrifice credit quality nor accept loose structures and terms just to be more fully invested and generate incremental yield.

Our experience across multiple credit cycles has taught us to remain grounded in our investment principles, and we believe this is the best way to preserve long-term shareholder value.

We continue to be confident of our ability to selectively source and structure proprietary investments that meet our underwriting requirements.

Now let me turn the call back to Michael for concluding remarks.

Thank you, Bruce.

In closing, we are pleased with the underlying performance and credit quality of our overall investment portfolio.

During the quarter we further diversified and continued the migration of the portfolio to secured, floating-rate assets, while substantially eliminating our exposure to PIK.

Following the exit from several of our largest legacy investments, we believe the current portfolio is more highly diversified and offensively positioned to preserve shareholder value while delivering compelling risk-adjusted returns.

In addition, we took advantage of the continued liquidity-driven markets and our strong record as a borrower to further reduce our funding costs, while increasing flexibility under our revolving credit facility with a diversified consortium of lenders.

We continue to look opportunistically at different ways to provide a highly-efficient, low-cost, and long-term capital structure.

The sizeable repayments we experienced over the last two quarters, coupled with our highly selective and patient approach to reinvestment proceeds, has resulted in a smaller portfolio.

Rather than place pressure on the investment team to redeploy the capital in an environment of elevated risk, we made the decision to realign our dividend to $0.40 per share, a level that represents our estimate of the current run rate of the net investment portfolio today.

As highlighted in our Q2 earnings call, the income associated with our sizable repayments during this quarter favorably impacted our earnings in the third quarter, resulting in NII above our anticipated run rate.

We expect Q4 net investment income will approximate $0.40 per share and continue to have confidence that our second-half 2013 NII will meet or exceed our dividend payments for this same period.

As a complement to our origination platform focus on underwriting investments, we continue to evaluate control equity investments in specialty finance businesses that can provide us with access to differentiated asset classes, proven management teams, and diversified sources of income.

Our recent investments in Crystal Financial and Gemino Senior Healthcare Finance at Solar Senior are good examples of these efforts.

After 10 months of operating experience with Crystal Financial, we remain very comfortable with the steady run rate of 11% to 12% return on invested capital.

This niche specialty-lending business is not subject to the vagaries of the syndicate lending markets and provides a diversified portfolio of senior secured loans having attractive risk-adjusted returns.

It is natural to experience a high level of prepayments in a sustained liquidity-led technically-driven market environment where valuations seem to have gone to the extreme.

While we will continue to be patient and highly selective in redeploying our capital, our objective is to grow net investment income per share by prudently increasing the size of our investment portfolio and through opportunistic purchases of our common stock at prices that can be accretive to shareholders.

Once we have achieved what we believe to be sustainable net investment income growth through the prudent deployment of our available capital, we hope to increase our dividend.

At 11 AM this morning we will be hosting an earnings call for the third-quarter 2013 for Solar Senior Capital, or SUNS.

Thank you for your time.

Operator, please open up the line for questions.

(Operator Instructions) Stephen Laws, Deutsche Bank.

Could you maybe comment on -- I'm not sure if the best way to think about it is maybe what you expect in the current environment for either net portfolio change, what kind of growth would you see, or given -- I know we've had two early repayments that were fairly sizable, I think the large repayment risk is removed with mainly smaller investment sizes.

But if you can't really predict the repayment side, maybe what a gross investment pace would look like in the current environment.

Yes, I think historically, since our IPO we have averaged about $100 million a quarter of investment activity.

And keep in mind, that is an average; it moves around an awful lot.

This last quarter we originated $65 million.

So I think we would say if the current environment continues, that lower number is probably a more representative size of what we would be doing.

If the market changes we could be doing substantially more.

Great (multiple speakers)

I will caveat all that by saying it is very lumpy and if certain things hit it can be much different.

Sure, and following up on that, and I may have asked this question a year ago, but is there any seasonality in the fourth quarter we should think about?

Do people slow down and disappear around Christmas?

Is it the other way, and people are looking to get things done before the December 31 year-end, or delay into next year?

Any seasonality we should think about in the fourth quarter?

I think on the margin, Stephen, sometimes you see a little bit more elevated activity in Q4s.

The year-end might drive motivations to consummate transactions before year-end for tax or other reasons.

And then Q1, as you know, can be a little bit quieter as the engine restarts.

Because there is a long lead time as you know, particularly in the M&A-driven transactions.

So I would say on the margin, a little bit more in Q4, a little less in Q1.

But that does vary year-to-year.

Great, and I guess one last question which builds on that.

With some prepayment income being in the third quarter related to the two early repayments, and then given the portfolio growth which should drive leverage and increase, is it a safe assumption to think that net investment income is likely to draw from the fourth quarter, and that we should expect that portfolio growth to drive net investment income off the fourth-quarter levels?

The answer is, assuming we have net investment income growth on a go-forward basis, it should grow.

Great, okay.

Thanks again for taking my questions.

Have a good day.

Greg Mason, KBW.

Could you talk about what the market is like for sub-debt right now?

I know that has in the past been your bread-and-butter spot, but now obviously you are moving to a little more lower-yielding senior secured.

Can you just talk about what is going on in the sub-debt market?

Sure.

I think more broadly you have really seen sub-debt to dry up and being replaced by predominantly second-lien investments and to a lesser extent unit tranche or a single capital structure solution.

Mezzanine seems to be harder to come by.

And I think from our perspective, as you know, from a risk-adjusted perspective we would rather move up cap structure into either second-lien or unit-tranche structures.

So there really hasn't been much in mezzanine in terms of the broad market.

I think there is a little bit more at the lower end of mid-market, where the banks and the sponsors might be looking for some unsecured paper in the capital structure.

But that is not our core market.

Then we have seen a lot of repayment activity here.

Do you think -- as you look at the pipeline is it more -- is the pipeline more continued refinance opportunities?

Or are we starting to see some actual M&A growth capital opportunities?

I think, the refinancing market, to your question, as you know ebbs and flows with the consistency of the liquid credit markets.

So to the extent that there is no dislocation there, sponsors will continue to opportunistically tap into that market to try to drive down pricing and improve their terms.

So that market will come and go, although it has been, as you know, rather strong this year.

I think the important thing to your question is we have seen M&A activity pickup in the second half of the year.

And importantly, I think the sponsored community is looking to create value themselves and trying to find more unique transactions for platform acquisitions, be it carveouts or add-ons, things where they can create value rather than just buy a business and put financial leverage on it, which is a bit of a commodity in today's market.

So we are seeing some more creative opportunities coming out of the sponsored community, which creates the opportunity for us to be that much more creative and customize our solution.

Because not all of these are ready to go to the liquid credit markets, and so we have seen that pick up.

Okay, great.

One final last clarification question.

You said that you think you can earn 11% to 12% off of Crystal.

Is that off of your original cost basis of the $275 million, or the current value of the $294 million?

The original cost basis.

Great.

Thanks, guys.

Rick Shane.

Thank you, guys, for taking my question this morning.

You talk in some context about a heightened risk environment, and I would love to put that in context.

Because you also basically say fundamentals within the portfolio are fairly stable.

It looks like spread compression has started to at least abate; I don't think it has started to widen.

Would you talk about where you are seeing that risk?

Is it fundamental risk in what is out there in the market?

Or do you think it is structure within the deals that are available?

It is structural in terms of the actual structure of the transaction itself.

But more importantly, it is the leverage ratios.

Got it.

Issuers have been able to push buyers who are hungry for yield to take leverage off.

As a private equity sponsor if you can leverage a company as much as you can, as safe as you can, you're going to do that.

But I think to your point, we feel good about the fundamentals.

As you know, we don't underwrite growth.

We are underwriting stability and strong free cash flow generation; and that will derisk our investments, to Michael's point, assuming you have prudent leverage on that capital structure.

I think what gives us pause is not only opening leverage today but also where those structures will allow people to take leverage the day after you fund your financing transaction.

Historically there have been significant constraints where a company needs to show deleveraging on any pro forma basis to take more debt on.

And today we are seeing transactions where the moment you close you can actually increase leverage even further.

So that is really extreme for us.

And I think the fundamental issue for us, if you step back, all of our investment activity whether it is senior or subordinated, our investment premise is that the company that we invest in has to be able to deliver through their own operations, through free cash flow, in a very reasonable scenario, if not a downside scenario.

And as you push leverage up from 4.5 times to 6 times, that ability to generate free cash flow becomes compromised.

So there is no value creation as an investor, and now you have to bet on growth in order to get that deleveraging.

And as credit investors, that is not what we do.

We are not equity investors.

Got it.

Look, you guys are definitely walking the walk.

You are deleveraging at the moment that you are seeing leverage go up across the portfolio.

What do you see as the opportunity there?

What would you guys be looking for to become more aggressive?

I think really it is more prudent leverage levels at the opening and more teeth to the documents.

I think those are the two things.

And look, the good news is historically, whether it was last year with Greece or this past spring with Bernanke, a little bit of dislocation, the first thing that adjusts -- generally speaking -- in the marketplace are the structures and the terms.

Pricing tends to come a little bit later.

We are a little less concerned about pricing at 9.5%, 10%, I think, in the context of close to zero interest rate environment.

But I think we really need the structures and the leverage levels to adjust.

And I think that can happen quickly, but that is what we are watching for.

Great.

That is very helpful.

Thank you, guys.

Vernon Plack.

Thank you very much.

Given the current portfolio, could you talk about your thoughts on potential NAV per share accretion at this point?

I think, Vernon, today, we're looking at NAV as being stable.

I think there is some upside, but that is not something that we are focused on at the moment.

As you know, everything we are doing is around preserving shareholder value and protecting NAV.

So -- and I think we feel very comfortable with that.

Okay, thanks.

I think the other -- just adding on to it about NAV, and if you think about what we have done by rotating the portfolio to floating rate and senior secured, what it does is that it really insulates us from -- if and when there is a correction, from any real significant asset write-down.

Because when you're higher up in the capital structure, you have a lot less volatility in asset values.

And when you are heavily in floating-rate, when rates increase you are not going to have the technical revaluations that should take place if one were to have a fixed-rate portfolio.

Okay, great.

Thank you.

Chris York, JMP Securities.

Good morning, guys.

Just one question from me this morning.

Earthbound Farm has been rumored to be pursuing strategic alternatives.

Could you comment on your expectations for the potential prepayment of this credit, and any other investments that you think could prepay?

Yes, I think generally speaking, as we mentioned, 25% of the portfolio occurring last quarter, I think that prepays will abate some.

They are not going to disappear, because again I think anything you see in our portfolio that seems to be attractive, so do others.

So we expect continued repays on things like an Earthbound, but I can't comment specifically on that one, other than to say that we feel good about the investment.

As you know, we have been in it a couple years, and our hope is that our duration gets extended there.

So more to come.

All right.

Fair enough.

Thanks.

Jonathan Bock, Wells Fargo Securities.

Good morning and thank you for taking my questions.

Michael, real quick, as we look at the senior secured portion of your assets in the portfolio, I am happy to break this out; we can calculate it on our own.

But I wanted to see if you would be able to give us a general sense as -- what percentage is actually true first lien and what is second?

Yes, it's a good question.

Because I think there is an important distinction when we talk about Solar Senior Capital where that is, I would say, very traditional senior secured, levered through about 4 times.

Our senior secured is a combination of stretch senior, unit tranche, and second lien.

Yes, so I think it is fair to say, Jonathan, that because we are not competing with Solar Senior's marketplace, doing traditional first-lien bank debt, all of Solar's secured is a combination of stretch senior, unit tranche, and second lien.

And I think importantly with our Crystal portfolio, about $360 million, that is all first lien, senior secured, backed by receivables and inventory and everything that those companies own.

So that is an even better collateral mix I would say than we get in Solar Senior Capital, for example.

Got it.

That is a significant part of our senior secured exposure.

Good.

Got it.

So to again maybe step in a little bit closer to the line here, let's book market.

What is the actual percentage of second lien in the senior secured asset bucket in Solar?

Yes, we haven't disclosed that in the past.

But it is, to Michael's point, more when you capture Crystal into the equation.

It is more first lien and stretch first lien.

Okay.

Then one additional question, so if there is a decent amount of second lien as a part of that mixture that you mentioned, I am curious as to second-lien performance versus what is truly mezzanine.

Because some would argue that that is effectively mezzanine in the senior wrapper at a much lower coupon that can be sold to a CLO.

So can you give us a sense of second lien and the potential risks that surround it?

And is that effectively the new mezz market for the moment, for the time being?

Sure.

Just to reiterate, I'm sorry if I wasn't clear.

The majority is first lien, not second lien.

Having said that, to your follow-up question about second lien, second lien has replaced mezzanine in the large end of mid-market.

Obviously in some cases they just go to the unsecured high-yield market if that market is open to them.

But I think, importantly, the second-lien market -- and we saw this back in 2005, 2006, 2007, when it was equally strong in developing -- is really basically meant to give you a much better recovery relative to a mezzanine unsecured investment in the context of your relationship with the first-lien lenders, to the extent that there is a workout to be had.

Having the lien subject to the specifics of your [credit] agreement, directionally gives you a seat at the table that you wouldn't otherwise have as an unsecured lender.

So while I don't think it is akin to being first lien, you still have that debt ahead of you, I think effectively the recoveries have historically been higher for second-lien debt in the event of a recapitalization than if you were in an unsecured seat.

Okay.

Appreciate that, Bruce.

Then turning to Crystal, there was -- I think the dividend paid last quarter, and please correct me if I am wrong, it was about $8.3 million, down to $7.5 million.

And there are a lot of factors that go into that.

But maybe perhaps just walk through why -- what was accounting for that potential delta quarter over quarter?

Sure, and that will move a little bit quarter to quarter.

As you have seen, $7.8 million is what it was in Q3; it is approximately what it was in Q1; and it went up a little bit, to your point, Jonathan, in Q2.

But what we are trying to do there is smooth out within that 11% to 12% range quarter to quarter the earnings that we see coming out of Crystal.

As you know, Crystal is a high-velocity business, a fair bit of churn in that portfolio that creates a little bit of variability quarter to quarter in terms of income.

But we are trying to smooth that out over the course of the year.

Got it.

So if income this quarter was $6.8 million at Crystal and the dividend was $7.8 million, can you walk through -- I guess, obviously that is coming out of an equity account or some sort of reserve cash balance that is down at the actual entity itself.

So can you maybe walk through maybe some particulars around the amount that is retained at that entity, in light of the fact that the dividend exceeds what net income was reported at Crystal this quarter?

Yes, hi, Jonathan.

This is Rich.

We did add to the 408 language that we were giving guidance on.

We don't find it terribly informative.

Matter of fact, it may end up being more confusing than anything; but we're just trying to meet the guidance that is currently out there.

And I think that will sort itself out.

As you know, Crystal is not an investment company.

It has a very different P&L.

And to Bruce's point, it is pretty volatile and includes a lot of non-cash items; there is timing differences.

Again this is not a true investment Company by any means.

So when you look through at those numbers, the following sentence in that disclosure is -- hey, really it says don't really rely too much on this.

So that $6.8 million includes things like if they made new investments and they added a loan-loss provision on it, because that is what they were required to do, that is a non-cash item that would reduce net income.

But it doesn't really reflect the yield in the portfolio.

I think the yield in the portfolio, as Michael and Bruce have explained, has been truly 11% to 12%.

The size of the portfolio varies quarter to quarter.

The timing of new adds and deletes obviously impact cash earnings.

But what we have done is looked to distribute on a recurring basis what we feel good about with regard to the cash earnings of the business, the interest income.

And as you see, the portfolio size is a little bit down this quarter; and I think that the dividend being down from $8.25 million in Q2 to $7.8 million in Q3 pegs along with the current size of the portfolio.

So the $7.8 million is not, by any means, a return on capital.

There are true cash earnings.

There is a bunch of noise in the net income number of these types of commercial finance companies that really are probably more confusing than anything else.

But there is cash in excess of what we have distributed.

There is no intention currently to pay out more than the current cash earnings of the business.

And I think I would leave it at that.

To sum up, the year-to-date is probably the way to look at it.

And to Rich's point, the cash dividends are actually exceeded by the cash earnings of the business.

Okay.

Appreciate that, and also would imagine that you guys are looking to comply with the spirit of 408 and 309, which to the extent you're able to provide more enhanced cash disclosure on this would likely be extremely well received and in line with what the SEC intends.

But then, one last question.

As it gets to maybe the overall value proposition, where we do want to make sure that people are rewarded for doing the right thing, as bringing down leverage, etc., but we are trying to not be duplicative.

And I guess the question is, Crystal has been an excellent investment, and as has some of the others, MidCap, etc.; and there were issues as it relates to the nonqualified asset bucket, with that effectively being very close to full even today.

That has probably been one of the best ways to grow earnings.

And as we hear it, it doesn't seem that the new investment market is really that exciting and/or attractive based on your conservative nature.

So it would almost probably be fair -- or would it be fair to assume that really earnings aren't going to grow and neither will that dividend near-term.

just because you are not seeing a lot of great opportunities out there?

What would you say to that?

Well, I would say, we certainly don't expect the dividend to grow next quarter or two.

I think it is not entirely correct to be saying that just because our 30% bucket is, quote, full that we can't find other interesting things like Crystal to do.

Not everything has to be deemed a finance company.

And as we mentioned earlier, we are looking at other specialty finances.

There are other structures and things out there that we can do things on or off balance sheet that could make a lot of sense for us.

So I know everyone gets hung up on the 30% bucket and about filling it and what goes in it.

I think there is, frankly, just too much attention paid to that constraint, because it is not necessarily constrained.

No; fair enough, and appreciate you guys leading the way with these Crystal-type transactions, which are absolutely additive in the current environment.

So that's my questions.

Thank you very much.

Doug Mewhirter, Robinson Humphrey.

Hi, good morning.

I just had two bigger-picture questions, mainly related to our government, which is doing a lot of things right now.

So, it's a two-part question and you can answer it any way you want.

First, healthcare reform.

Has that affected any of your portfolio companies?

And has it affected your appetite, positively or negatively, for investing or continuing to invest in these companies?

I would ask the same thing about the effects of the government shutdown.

Yes, I think on the, healthcare side -- and we will talk a little bit more about this in a couple minutes over at Solar Senior, in terms of our investment in Gemino Healthcare, and as you know historically at Solar our investment in MidCap -- we have found the specialty finance area a very good way to gain access to the healthcare sector, which, regardless of Affordability Care Act, is clearly a growing sector with a lot of tailwinds.

I think you have to be selective in how you play the sector and in terms of being mindful of reimbursement risk.

But I think we feel very good about doing what we have done to date, which is tapping into the sector through an asset-based orientation and leveraging the expertise that both MidCap and now Gemino have in that sector.

I think as it relates to the government shutdown, it is too soon to know.

We haven't seen any short-term impact in our portfolio of companies.

Okay.

Thanks.

That's all my questions.

(Operator Instructions) Mickey Schleien.

Good morning.

Just a couple questions at this point.

Rich, maybe you can quantify for us the amount of prepayment fees and accelerated amortization fees, just to get a sense of what the portfolio yield looked like on that basis?

Lastly, given the tone of your description of the market, which is consistent with the last couple of quarters, it really feels like you view your existing portfolio more positively than potential new investment.

So I am curious whether you have any appetite to repurchase stock, perhaps even at a slight premium to your last reported NAV per share.

I will answer your last question first.

I think it is highly unlikely we would buy stock above book.

We just don't think that is additive to shareholder value.

We would rather be patient with our capital and wait for dislocation either in our own stock, or frankly in the new investment market.

With regard to your first question we historically have not disclosed our prepayment penalties.

But I will answer it for you in a different way.

When we resized our dividend earlier in the summer at $0.40, we talked about how we did it to approximate what we thought the run rate of our portfolio was, post repayments, for what we expected in Q3; and that we expected Q4 to be approximately that kind of run rate.

So if you look at the delta between what we reported on that $0.40 and the fees from the credit facility, you will get to the right place.

Okay, I understand.

Thanks for your time, Mike.

Thank you for your question.

I would now like to turn the call over to Michael Gross for closing remarks.

No real closing remarks.

We look forward to continuing to speak with you and speak to those of you who will participate in our Solar Senior conference call in 10 minutes.

And we wish you all a happy Halloween.

Thank you for your participation in today's conference.

This concludes your presentation.

You may now disconnect.

Good day.