SLR Investment Corp (SLRC) 2014 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2014 Solar Capital Ltd. earnings conference call. My name is Denise and I will be the operator for today. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

I would now turn the conference over to Mr. Michael Gross, Chairman and CEO. Please proceed.

Thank you and good morning. Welcome to Solar Capital Ltd.'s earnings call for the quarter ended June 30, 2014. 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 off by covering the webcast and forward-looking statements?

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 Ltd. and that any unauthorized broadcasts 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 the result of a number of factors, including those described from time to time in our filings with the SEC.

Solar Capital Ltd. 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 would like to turn the call back to our Chairman and Chief Executive Officer, Michael Gross.

Thank you, Rich.

Credit market conditions continue to be challenging. Particularly in the liquid leverage loan and high-yield markets, investors are grappling with pervasively low yields, high leverage levels, and loose credit protections. These technicals, coupled with rising geopolitical risks, the prospect of rising interest rates, and the taper of quantitative easing have created an environment in which credit investors should be more diligent than ever.

In recent weeks, we have seen evidence of a pause in the irrational exuberance. Both loan and high-yield funds have experienced redemptions. However, these outflows from credit funds have been mitigated by continued high CLO activity.

In the middle markets specifically, conditions have also been favoring borrowers. The average leverage level for middle-market LBOs is at the highest since before the last recession, and the trend toward covenant-light deals has continued to escalate, but the effect remains less pronounced than in the liquid markets.

Pundits continue to offer their views on whether or not the capital markets are fully valued and if we have entered bubble territory. As credit investors focused on principal preservation and long-term success, we are leaving this debate to others and instead focusing on absolute risk levels.

We have continued to construct our portfolio defensively. At June 30, including Crystal Financial, 74.3% of our portfolio is invested in secured loans and 71% of our income-producing investments are floating rate, both measured at fair value.

Currently, we are seeing the best risk/reward in senior secured loans, including unitranche loans. As we mentioned on our first-quarter earnings call, we are seeking to build strategic relationships with partners willing to commit significant capital to a joint venture that would strengthen our presence in the unitranche loan space.

Our objective is to be able to provide a one-stop debt financing solution to our middle-market clients. A unitranche loan program would enable us to better serve our clients, as well as provide us with an additional avenue for growing our portfolio via secured floating-rate loans, which we expect would improve the return on equity for our shareholders.

Additionally, last month we were granted exempt release by the SEC to co-invest in negotiated transactions with our sister fund, Solar Senior Capital. Solar Senior predominantly invests in traditional senior secured loans, but it does have a basket for more stretched senior secured loans with higher yields, which fits Solar Capital's investment mandate. The ability to speak for a larger portion of a financing through co-investing should enable us to win more mandates and achieve better terms.

During the three months ended June 30, 2014, we repurchased $19.5 million of our common stock at an average price of approximately $21.93 per share, representing a 2.3% discount to the net asset value at June 30, 2014. In total, we repurchased $56.6 million of the $100 million authorized.

The share repurchase program ended on July 31, 2014, and we're not renewing at this time. As we have been evaluating strategic initiatives for the second half of this year, we determined that we expect there to be more accretive uses for our available capital.

The addition of two senior investment professionals at the beginning of this year has increased our deal flow. Our third-quarter pipeline is strong, with a few deals committed shortly after second-quarter end, and based on current visibility, repayments should be modest in the third quarter.

Finally, our Board of Directors declared a quarterly distribution of $0.40 per share, which will be paid on October 1, 2014, to shareholders of record as of September 18, 2014.

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

Thank you, Michael.

Solar Capital Ltd.'s net asset value at June 30, 2014, was $952.9 million, or $22.44 per share, compared to $972.3 million, or $22.43 per share, at March 31. Our investment portfolio at June 30 had a fair market value of $984.1 million, compared to $1.03 billion at March 31, 2014.

At June 30, we had investments in 43 portfolio companies across 30 industries versus 43 portfolio companies across 28 industries at March 31. The weighted average yield on our income-producing portfolio was 10.5% at June 30 versus 10.9% at March 31, measured at fair value.

For the three months ended June 30, 2014, gross investment income totaled $28.0 million versus $32.6 million for the three months ended March 31, 2014. Expenses totaled $11.9 million for the three months ended June 30, compared to $15.2 million for the three months ended March 31.

The Company's net investment income for the three months ended June 30 totaled $16.1 million, or $0.38 per average share, versus $17.4 million, or $0.40 per average share, for the three months ended March 31.

Net realized and unrealized gain for the second quarter 2014 totaled approximately $1 million versus a net realized and unrealized loss of $3.7 million for the first quarter of 2014.

Ultimately, the Company had a net increase in net assets resulting from operations of $17.1 million, or $0.40 per average share, for the three months ended June 30, 2014. This compares to $13.8 million, or $0.31 per average share, for the three months ended March 31, 2014.

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

Thank you, Rich.

As Michael highlighted, our Q2 investment activity furthered our objective of maintaining a predominantly senior secured floating-rate portfolio. Overall, the financial performance of our portfolio companies remained steady, and we have seen a pickup in both their organic growth initiatives, as well as tuck-in acquisitions.

Across the sponsor community, we have begun to see a tapering of refinancings and dividend recapitalizations and an increase in M&A activity and new platform acquisitions.

At June 30, the weighted average yield on our income-producing investment portfolio measured at fair value was 10.5%. The weighted average investment risk weighting of our total portfolio remained at approximately 2, measured at fair market value, based upon our 1 to 4 risk rating scale, with 1 representing the least amount of risk.

At the end of the second quarter, our portfolio consisted of 43 portfolio companies operating in 30 industries. When measured at fair value, our portfolio was comprised of approximately 44% senior secured loans excluding Crystal Financial, an additional 30% including Crystal Financial, 18% subordinated debt, 2% preferred equity, and 5% common equity and warrants excluding Crystal.

Including Crystal Financial, this portfolio consists entirely of senior secured loans. Approximately 74% of our portfolio exposure is in senior secured investments. As of June, 71% of our income-producing investment portfolio is floating rate, while 29% is fixed rate, measured at fair value.

For the quarter, we originated approximately $89 million of investments across nine portfolio companies. All of these originations were in senior secured and floating-rate assets. Investments prepaid or sold during the quarter totaled approximately $138 million.

Before I give an overview on our activity during Q2, I would like to update a few existing portfolio companies. As we mentioned on our Q1 earnings call, subsequent to the first quarter, the prospective buyer of one of our portfolio companies, Quantum Foods, defaulted on the purchase contract. Since then, Quantum Foods has been undergoing a liquidation of its assets and we and Crystal Financial have been pursuing all possible avenues to maximize our recovery.

During the second quarter, Solar was repaid close to $[16] million by Quantum Foods at par, reducing our remaining cost basis to $7.2 million at June 30.

When the company's performance began to deteriorate, we actively managed our investment and dramatically reduced our investment size. At the end of the quarter, the aggregate remaining exposure to Quantum on a cost basis between Solar and Crystal was just over $14 million, down from an original cost basis of $75 million.

Based on our June 30 fair value, we expect to, at a minimum, break even on this investment on a IRR basis, and with our ongoing efforts to maximize our recovery, we believe there could be some potential upside on our recovery relative to our June 30 fair value.

Additionally during the second quarter, TIAA-CREF announced an agreement to purchase our investment in Nuveen Investments. At June 30, we marked our investment in Nuveen up to $27 million from $17 million at March 31 to reflect the value that we expect to receive upon the closing of the transaction in the fourth quarter of this year.

We believe there may be additional upside in the final price for our Nuveen equity relative to the June 30 mark. At its trough, (technical difficulty) was marked at 15% of cost versus our current mark of 87%.

Now I would like to give you an update on Crystal Financial. As a reminder, Crystal Financial is a commercial finance company that provides asset-based and other secured financing solutions to midmarket companies. At June 30, Crystal had just over $350 million of funded senior secured loans across 24 issuers, with an average exposure of $14.6 million per issuer.

During the quarter, Crystal funded new loans totaling just over $5 million and had approximately $68 million of loans repaid. All of the commitments from Crystal are floating-rate senior secured loans.

At the end of Q2, total debt on Crystal's balance sheet was approximately $150 million, for a debt to invested equity ratio of 0.55.

Additionally at June 30, Crystal had approximately $150 million of available capital, subject to borrowing base limitations, under a $300 million credit facility.

For Q2, our investment in Crystal paid Solar Capital a cash dividend of $7.3 million, which is the equivalent of a 10.6% annualized cash yield.

Let me now highlight some of our second-quarter investments. We led a $25.5 million second lien term loan investment for Xand corporation, which is a regionally focused provider of data center and outsourced IT solutions. ABRY Partners originally made its platform acquisition of Xand in October 2011 and has since acquired five additional data-center facilities. Our capital came in to help finance part of this acquisition strategy.

We also made a $27 million investment in the second lien term loan for Emerging Markets Communications, which is a global provider of satellite communications services to remote, difficult-to-reach locations. We provided the entire second lien tranche in this transaction, enable us to negotiate terms directly. The all-in yield on this investment is approximately 10%.

During the quarter, we increased our exposure to Landslide Holdings via secondary purchases, resulting in a total exposure for Solar of $16.3 million. As a reminder, the company, which is owned by Thoma Bravo, does business as LANDesk, provides software tools that enable IT departments to manage and control secure network devices ranging from PCs to a variety of mobile services.

Let me now highlight some of our Q2 repayments. Our largest repayment was a repayment of our $45 million second lien term loan investment as part of Primus Foley and Investcorp's joint buyout of totes ISOTONER from our prior partner, MidOcean Partners. Our IRR in this investment since inception in 2011 was 12.9%. Given our history with this credit, we were offered the opportunity to reinvest in this new transaction, but passed, based upon new capital structure and terms.

We were also repaid on our $20 million second lien term loan to TravelClick, which Genstar recently sold to Thoma Bravo. The IRR since inception on this investment was 10.5%. We also had the opportunity to reinvest in this transaction, but declined because of the less (technical difficulty) attractive capital structure in today's environment.

Our second lien term loan from [McLarens International] was redeemed at a premium to par in conjunction with the company's refinancing with an all senior capital structure. The IRR on this investment was just over 15%. Our sister fund, Solar Senior, leveraged our platform's insight into this company to invest in this new first lien term loan issued by McLarens.

And finally, our $15 million investment in the second lien term loan of GENEX Services was also repaid at a premium to par, resulting in an IRR just over 13.5%.

Based on our activity thus far in the third quarter and our current visibility for the remainder of the quarter, we expect repayments to be minimal, resulting in net portfolio growth during this quarter.

Now I would like to turn the call back over to Michael.

Thank you, Bruce.

In conclusion, I would like to reiterate that we are continuing to exercise patience in light of the heated credit market conditions. Our focus remains on maximizing long-term shareholder value, with our origination efforts centered on finding higher-quality investments that we believe will protect our net asset value.

As demonstrated by the current high percentages of our portfolio in senior secured and floating-rate investments, we will not lower our credit standards to achieve growth that may not benefit our shareholders in the long run. We will not sacrifice our investment standards, and so we recognize the need to maintain strategic flexibility to deliver strong results in a prolonged heated and low interest rate environment. We are continuing to evaluate initiatives with prudent risk levels that we expect will be accretive to net investment income.

As I highlighted before, we're exploring alternatives for expanding our unitranche capabilities. We believe that in today's heated credit market, the senior secured unitranche loan structure, with its dollar one risk and ability for us to actively negotiate terms, provides a compelling risk/reward opportunity.

A strategic unitranche initiative would expand origination platform, which we enhanced at the beginning of this year with the addition of two senior investment professionals. We anticipate using our dry powder to fund potential strategic initiatives, as well as traditional investments, with an emphasis on senior secured floating-rate loans to grow our portfolio.

At 11 o'clock this morning, we will be hosting an earnings call for the second quarter of 2014 operations for Solar Senior Capital, or SUNS. Our ability to provide senior secured financing through this vehicle enhances our origination team's ability to meet our clients' capital needs. We continue to see benefit to this value proposition in Solar Capital's deal flow.

Thank you for your time. Operator, at this time, please open the lines for questions.

(Operator Instructions). Arren Cyganovich, Evercore.

Maybe just talking about the opportunity to co-invest with SUNS, is that a big deal or is it just another avenue that you can help to maintain -- you have had relatively robust originations, I guess, all things considered.

Yes, I think that it is something that it is important for us to have as we look to increase the size of our opportunities that we can take down in a given investment.

More often than not, we do find that there might be more capital, and selectively, there are situations that fit both the investment strategies for Solar and Solar Senior, more often on a stretch senior basis where they would be some overlap on the appropriate risk and return.

Okay, that's helpful. And then, in terms of the partnering with the unitranche product, how far along are you in that process? Have you talked to many potential investing platforms that you can help work with? And when do you think that we might be able to see that come forward?

We continue to have ongoing discussions. I think we're hopeful that we will be able to come to some closure sometime this quarter.

Great. And then, lastly, the yield compression that we've seen over the past couple of quarters has been relatively large. Do you feel that should abate somewhat now that we have gotten down to a relatively low level? What are your thoughts on yield compression going forward?

Yes, I think it is -- obviously, it's a combination of new investments we are putting on, which feels to be somewhat stable in terms of where pricing is coming out.

I think, generally, you are seeing us put assets on in the 8.5% to 10% range on a yield to maturity basis, although I think, as you can see with our repayments as I highlighted some of those yields, the expected yields tend to be more in that 10% to 12%, given the shorter duration or shorter hold periods than actually holding these to maturity.

And I think the other side of the equation being the existing portfolio. There aren't many high or off-market interest rates on our current investments in the portfolio. There is one or two that I think you could see come out over the next six to nine months as companies look to take down their cost of capital, but I think a lot of it has been taken out of the portfolio at this point, given the churn that we've seen.

Great. Thanks a lot, guys.

Troy Ward, KBW.

Just to follow up a little bit on Arren's question there about the unitranche fund, can you give us a little color on maybe a potential sizing you are thinking of that? Obviously, with your investment capacity where it is today, can you just say how much, maybe, you are thinking a new joint venture may use?

Look, I think -- I don't think we are prepared to disclose that number at this point, but the way to think about it is our belief is to be in this market, you need to be relevant, and a typical unitranche facility is anywhere from $100 million to $200 million, and without an ability to raise -- to write that kind of check, you are just not relevant in the marketplace. So our goal is to create something of size where we can be relevant from that perspective.

Okay, and then, Michael, the first two or three minutes of your prepared remarks really focused on the challenges of the current environment, and then you got into the fact that you didn't review the buyback authorization. Can you just reconcile those two seemingly contrasting positions, especially with the stock where it is today? Now you don't have that ability. Can you just talk about the buyback and the decision not to renew that?

Yes, I think what -- we discussed it at the Board meeting recently, and I think in light of the pursuits we're having vis-a-vis the unitranche and what we want to see that play out first, see where capital is needed, and then the Board could always revisit putting a buyback back in place when it makes sense to do so at that point in time.

And what are the mechanics of putting a buyback in place, if that was something they chose to do? How long does that typically take for that to happen?

A five-minute Board meeting.

Okay.

I mean, it is a matter of days, not weeks or months.

Okay, I didn't know if there was (multiple speakers)

(multiple speakers) just send out a notice.

Okay, there is no real procedural problem there, then?

No.

Okay, and then on the Quantum, very good to see the paydown, especially the paydown across both of the platforms. Did the paydown of your investment and Crystal's investment, did that use the proceeds from the liquidation of the assets to the Iowa company or are those proceeds still available for potential fair value?

No, those are the liquidation proceeds coming from the disposition of the Company's working capital assets, although there is little bit left to be liquidated, as well as the plant and equipment out in the Midwest.

So, a lot of liquidation has occurred. There is some residual assets that are in the process of being liquidated. So, we expect to take down our exposure further in Q3.

Okay, great. Thanks.

Richard Shane, JPMorgan.

My question really follows on Troy's. I would just like to explore a little bit further why not at least give yourself the optionality of having the authorization to buy back shares in place. It seems to me that there is no cost to having it in place, and when you see dislocations having an additional tool -- arrow in your quiver in terms of ways to deploy capital, why not have that?

Hi, Rick, this is Rich. We did speak with the Board. They are ready to act. They're actively engaged throughout the quarter, just not on a quarterly basis, and again, we're looking to see these things play through.

I think the only difference is really that Board meeting which is just really a follow-up to our preceding Board meeting, as well as a quick mailing, which the letter is drafted, so it's pretty easy to execute. It is just to keep that going is just another mailing to the shareholders and some costs involved, but really pretty minor either way.

Okay. I am not necessarily sure I still get it at this point, but we will follow up off-line.

Chris York, JMP Securities.

Thanks for taking my questions. I don't necessarily want to beat a dead horse here with Troy and Rick's questions already, but considering that your stock is trading at a discount of about 13% to book value, what are your return expectations for the other uses of capital that you thought would be more accretive?

I think we believe if we do conclude the unitranche structure that the ROE on capital deployed into that business is low double digits, which is greater, much greater than where our -- if we have been buying stock on a yield basis.

And we think there is a big benefit to -- as opposed to just buying back stock -- is to growing the portfolio and diversifying it more, as opposed to returning capital, which means -- by definition, you end up being less diversified because you can't deploy as much capital.

Sure, that's helpful. And then, it seems like the limitations for the amount of capital that you can invest in a joint venture is roughly about 7% to 8% of assets, considering that you already have 22% of assets in nonqualified. Is that consistent? So the back of the math there is roughly in line with what you already said in your size. Is that consistent what you're thinking, maybe $100 million to $150 million in size?

I would think of it a little differently. I think the rules require -- because our business ebbs and flows, you see the repayments, so it's a lumpy business. I think the rules just require that you have at least 70% of your assets in qualifying securities, qualifying assets, before you make such an investment, and then once you have made that investment, have gone over, you are prohibited from making follow-ons after that.

To make a long story short, we don't view ourselves as constrained today. We have capacity to do whatever size we decide is the right size to do.

Got it. And this question may be better take off-line, Rich, but I am trying to reconcile the base management fee to what base you're using for average assets.

Real simplistically, you should exclude the government securities that we have on the balance sheet at quarter-end in your calculation.

(multiple speakers) off-line. If you want, we can go through it.

Great, that's it for me. Thanks, guys.

Jim Young, West Family Investments.

My questions pertain to the share buyback program, and I think that they have been adequately addressed at this time. But I would just reiterate our interest in seeing a program put in place to provide you the flexibility. Thank you.

Doug Mewhirter, SunTrust.

Most of my questions have been answered. I just had one quick follow-up. With the -- if you could just remind me if -- with the exception of Quantum Foods, which is in the process of being worked out, do you have any other loans or securities that are considered to be on nonaccrual or nonperforming?

No.

No.

Okay.

In fact, we didn't have any other ones on credit watch.

Thanks. That's all my questions.

Vernon Plack, BB&T Capital Markets.

Could you help me to understand the differences in net income for Crystal from Q2 versus Q1? I think in Q2, it was -- what was it? $7.6 million in -- Q1, it was $7.6 million. Q2 was $1.8 million.

I'm sorry. Vernon, can you repeat that?

Yes, I am trying to understand the differences in net income at Crystal. I think Crystal's net income was stated in the Q as $1.8 million for Q2, and in Q1, I think it was $7.6 million.

I think there is -- we can chat off-line. I have to reconcile with the CFO of Crystal, but I knew they were making some adjustments. Some of it related to Quantum and how they were recording that and the timing, but I will follow up with Josh over at Crystal, and then if you want to chat later, we can go into the recon.

Okay, and can you -- I know that you mentioned that Crystal paid you $7.3 million in Q2. Can you remind me what they paid you in Q1?

$7.8 million.

Okay. All right, thank you.

(Operator Instructions). Mickey Schleien, Ladenburg.

I wanted to understand how the expansion of the unitranche platform, if it happens, would affect how you manage SUNS and SLRC together, given the unitranche would operate both in the first lien and second lien world. Would it be a situation where Solar might originate the unitranche loan and then sell the first piece to SUNS, or what can we expect in that regard?

I will answer the first (inaudible). The answer is, to your last question, we can't do you what you suggested. It is not allowed by the 40 Act to have two related entities own different securities in the same company, so that will never happen.

As you know, to be relevant to unitranche, you have to write checks of 100 to 150. The fund's balance sheet could never be in the position to do that. There is a scenario where, through our co-investment relief, that we could put some overflow pieces into SUNS to call on that long side of Solar, but Solar would always take a lead position in that. And if we were to do that, they would be buying the exact same security at the same time at the same price.

Okay, so we could see pieces of unitranche, whole unitranche deals, end up in the SUNS portfolio?

Possibly, yes.

Okay, and just to follow up on Vernon's question about Crystal's net income, Rich, wouldn't that have something to do with the fact that you restructured Crystal's balance sheet and now Crystal is paying interest to Solar and therefore depressing, at least on paper, the net income of the Company?

No, not at all, because that restructuring is at the holding company and the financials that Vernon was alluding to was at the operating company of Crystal.

Okay. Those are all my questions. Thanks.

(Operator Instructions). Troy Ward, KBW.

Michael, you mentioned when someone asked about Quantum and credit watch that no other company was on credit watch. And of course, you mentioned on the last conference call that you were expecting Quantum to take a fair value mark this quarter, and we have seen that.

Can you talk about when Quantum was identified internally to be going on credit watch, because it was always held at par and it was never on nonaccrual until this quarter? When did you start seeing internal issues at Quantum?

We put it on credit watch in Q2. As you may have remembered from our last call, we had an agreement or the company had an agreement to be sold to a private equity firm. That contract, they walked away from after putting up a good faith deposit. And so, it was expected that had that sale gone through, we would have been taken out for full value, plus all accrued.

So it was when that sale fell apart post Q1 that we brought it up on our Q1 conference call and began to take an alternative approach, led by the folks at Crystal in concert with management, to liquidate the underlying assets of the business.

So, because Quantum obviously went through a bankruptcy process, we have the ability to read all the public filings, and looking at a timeline for Quantum, as early as May of last year the credit facility with Crystal had to be renewed because they had lost three of their top five customers. The vendor financing was canceled, so they had to pay for all the raw materials in cash. This seemed like an investment, reading through that script and the bankruptcy, that was greatly troubled throughout last year. At what point does something like that hit an internal watchlist?

Be mindful that Crystal, by and large, is an asset-based lender in these situations, so when it hits our credit watch and Crystal's credit watch is not when there are amendments and waivers. That tends to be ordinary course for them. It is when we believe that the collateral may not be fully covering our principal exposure.

And so, it's really looking at the underlying borrowing base, at which point we begin to have some concerns. And again, we really didn't have that concern until we got into Q2 and the sale fell through.

I think just to be -- if this was a more typical, fuller loan, cash flow loan, you would be absolutely right. The fact is this is Crystal's ordinary course. That's what they do day to day, and when they get amendments, they charge higher fees.

And if you look at -- if we look back in history of all their loans, there is probably an amendment every three to six months every loan they have.

But I think the net net of this is we're going to end up with still a positive IRR in the investment, and that's -- the reason we bought Crystal for such when things go wrong, but that's what could go wrong. You get your money back effectively on a worst-case scenario.

That's good color. Thanks, guys. It helps put it into context. Thank you.

Jonathan Bock, Wells Fargo Securities.

Good morning and thank you for taking my questions. Maybe first is trying to reconcile one item. If you are expecting to earn low double-digit returns, let's say between 10% and 11%, yet the buyback is effectively the same in terms of what you would have to deploy assets at, and you have parity between stock buyback and the unitranche fund, can you explain why -- outside of diversity, I guess that makes some sense, but we understand that you stand by your portfolio today -- why a buyback really wouldn't be a good thing to do?

Look, a couple things. One is we already followed through on our buyback. We bought back close to $[60] million of stock. We shrunk our capitalization by 6%. I think we are in a rarefied group of BDCs who have done anything like that, if any.

Second of all, I think you hit on the point, if, and this is a big if, if we found unitranche opportunities that met our credit criteria that we liked as much as the loans we have in our current portfolio, and we can vest with those at mid to low double-digit yields, then the benefit of getting the diversification and entering that business becomes very strategic for us in the long run, and we think that's a better use of our capital than to continue to shrink our capital structure.

Okay, then I guess in terms of the growth of that, and Mr. York touched on it, but Rich, it sounded like what you were saying is it would be your intention to exceed the 30% bad asset bucket capacity, particularly if one was going to be required to write large $100 million, plus, unitranche loans or in an off-balance-sheet entity. Is that your intention, because I would imagine that while the letter of the law might allow that to happen, I am sure that really wouldn't comply with the spirit?

I'm not sure. Like we said, the business ebbs and flows. You have to look at the total portfolio.

As you see, if we were operating at 0.75 leverage, I think that is a different perspective, but when you are operating at effectively net leverage of zero, you still will take a portfolio approach. And so, the fact that we are sitting on that $700 million or so is pretty significant to that calculation.

So again, we would be shortsighted to manage a 70/30 basket. Conservatively, when you're underlevered at $1 billion, when you are sitting on another $700 million and you really can't dictate the timing of closings as you are working with your sponsor community -- today, we're going to close a 70% asset; tomorrow, it is a 30%; the next day, it is a 30%. Oh, wait, please, sponsor, wait for me to close next week on that 70% basket item. You really can't take that one at a time approach.

So it's really a portfolio approach and it is within the spirit, as well as the guidelines, that the SEC puts out. So, it's not about exceeding it; it's about looking at your whole portfolio, looking at 70%/30% and where you expect to be and not going beyond that.

I got it. Okay, okay, that's very helpful, Rich.

And then, just another question. You are very clever in terms of how you put on balance sheet the cash securities, then you have that payable, effectively a repo, to provide you more. Is there a reason to think -- I know there is an implicit cost with that, but I'm under the impression that -- is that effectively limitless? Are you able to grow that in whatever size and what you would want? What are the governors on your ability to do that, Rich?

We are very specific. We do it to reflect what our investable capital is. So we take our equity capital, plus our debt facilities, and we subtract out what's available, and then we do an amount such that it reflects our investable capital on a go-forward basis.

And Jonathan, you could look through the bottom of the P&L on a quarter-to-quarter basis and see that, given the relationships that the firm has with the Street, these are very cost-effective transactions for us that haven't added at all to our negative -- negatively to our P&L.

So you could track that on a quarter-to-quarter basis and see there is really nothing hitting there that you can't reconcile with your portfolio of investments. There is nothing -- it is actually much more efficient than it would be to use other methods.

Totally agree, but -- and if what you are doing is trying to reflect the investment capacity on the balance sheet and in that cash number today, then that would imply that you would only have 8% of your bad asset bucket, or effectively $134 million equity chunk, to invest, and if that's your -- so are you trying to tell us that the overall portfolio size in the future is going to be something well beyond what is implied by that $680 million some in cash on the balance sheet today when you add that to your assets, because that's (multiple speakers) how I think -- I'm sorry?

No, not exactly. Not exactly. I meant something slightly different, but again, keep in mind that we have a pretty good insight, not perfect, but a pretty good insight into our inflows and outflows and how we manage that business. And again, it's lumpy.

So right now, you should expect that we will continue to operate within the spirit of the guidelines and we have counsel. We have a lot of things at our disposal. So, it's not straightforward like that, and I'm happy to talk to you off-line, but it is a complicated calculation and it ebbs and flows.

All right, guys. Thank you so much.

We have no further questions. I will now turn the call back over to management for closing remarks. Please proceed.

Thank you, everybody, and thank you for your thoughtful questions and we look forward to chatting with those of you involved on Solar Senior in 15 minutes.

This concludes today's conference. You may now disconnect. Have a great day.