Sixth Street Specialty Lending Inc (TSLX) 2014 Q1 法說會逐字稿

Good morning, and welcome to TPG Specialty Lending, Inc.'s March 31, 2014 quarterly earnings conference call. Before we begin today's call, I would like to remind our listeners that remarks made during the call may contain forward-looking statements. Statements other than statements of historical fact made during the call may constitute forward-looking statements that are not guarantees of future performance or results and involve a number of risks and uncertainties. Actual results may differ materially from those in the forward-looking statements as a result of a number of factors, including those described from time to time in our TPG Specialty Lending, Inc.'s filing with the Securities and Exchange Commission.

The Company assumes no obligation to update any such forward-looking statements. For a slide presentation that the Company intends to refer to on the earnings conference call, please visit the Event Presentations link on the Investor Resources section of the Company's website, www.tpgspecialtylending.com, and click on the Investor Presentations link. TPG Specialty Lending, Inc.'s earnings release is also available on the Company's website under the Investor Resources section. As a reminder, this call is being recorded for replay purposes.

I'd now like to turn the call over to Joshua Easterly, co-Chief Executive Officer and Chairman of the Board for TPG Specialty Lending. Please go ahead, sir.

Thank you, operator. Good morning, everyone, and thank you for joining us today. I especially appreciate the people on the West Coast who got up at 5 A.M. I'm joined here today by Mike Fishman, my partner and co-Chief Executive Officer; Alan Kirshenbaum, Chief Financial Officer; and Bob Ollwerther and Julie Sawaya from our Investor Relations team.

Yesterday, after the market closed, we issued our quarterly earnings press release for the quarter ended March 31, 2014, and we posted a supplemental earnings presentation to the Investor Resources section of our website. The earnings presentation should be reviewed in connection with our Form 10-Q filed yesterday with the SEC. We will refer to the earnings presentation throughout the call today.

As this is our first earnings call following our IPO, I would like to begin by discussing our first-quarter 2014 financial highlights, and then I will provide a brief overview of what we believe our key differentiators are. Mike Fishman will then discuss our origination and portfolio metrics; and next, Alan Kirshenbaum will take you through the quarterly financial results in more detail. Finally, I would like to -- I will close with the outlook -- with our outlook on the new market lending environment and open the call to Q&A.

With that, let's get started. I'm pleased to report that we had a strong first-quarter from an originations perspective, and the portfolio is performing well. We originated $370 million of investments and committed $315 million, of which $288 million was funded post-syndication to other lenders. Net of repayments of $101 million, our net fundings for the quarter totaled $187 million as compared to $137 million in the fourth quarter 2013.

Turning to our financial results for the first quarter, I'd like to first remind everyone that given the timing of our initial public offering on March 21, first quarter and historical results reflect our pre-IPO fee structure. With that being said, net investment income per share was $0.51 for the first quarter of 2014 as compared to $0.46 per share for the fourth quarter of 2013, and $0.40 per share for the first quarter of 2013. Net -- sorry -- $0.46 per share for the fourth quarter 2013 and $0.40 per share for the first quarter of 2013.

Net income per share was $0.61 for the first-quarter 2014 as compared to $0.57 per share for the fourth quarter of 2013, and $0.47 per share for the first quarter of 2013. Our Board of Directors declared a first-quarter dividend of $0.38 per share payable to shareholders of record as of March 31, 2014. We paid this dividend on April 30, 2014.

For the first three months ended March 31, we generated an annualized return on equity, or ROE, of 13.2% based on net investment income and an annualized ROE of 15.7% based on net income. On a pro forma basis, adjusted to reflect our post-IPO fee structure, we generated an annualized ROE of 12.1% on net investment income and 14% on net income. These ROE ratios are calculated based on our weighted average equity during the quarter. Our dividend yield at book value is 9.8% as of March 31, 2014. We believe these metrics are the appropriate measures when considering the nature of our portfolio, of our ability to generate a high-quality, risk-adjusted return for our shareholders, cover our dividend, and build book value over the long-term.

On March 20, we priced an initial public offering of 7 million shares or approximately 14% of the Company at a price of $16.00 per share. Gross proceeds from the initial public offering and a $50 million concurrent private placement from existing investors totaled $162 million. We ended the quarter with net asset value per share of $15.51 as compared to net asset value per share of $15.52 as of December 31, 2013, and $15.41 as adjusted for net proceeds of equity capital issuances from January 1, 2014 to the close of our IPO and concurrent private placement. The change in net asset value per share since the close of the IPO and concurrent private placement is the result of us over-earning our dividend on a net investment income basis, and net realized and unrealized gains during the quarter.

Now I'd like to give a brief overview of TPG Specialty Lending for those of you who are new to our story. TPG Specialty Lending -- or TSL for short, as we like to refer to ourselves -- is a newly-listed company that has been operating as a business development company for over three years. TSL is led by senior investment professionals with significant experience in middle-market lending and investing.

TSL leverages the investment sector and operating resources of TPG Special Situations Partners, the $9.1 billion dedicated credit platform of TPG, the $59 billion global private investment firm. TSL is externally managed by TSL Advisors, LLC with a dedicated team of over 20 investment and operational professionals focused on directly originating and asset managing the TSL portfolio. We believe that our access to the TSSP and TPG platform resources, combined with our dedicated originations and underwriting capabilities, is a key point of differentiation.

The management team is significantly aligned with shareholders; senior professionals of TSL, and my partners at TSSP and TPG, own 5.4% of the Company's common stock. TSL Advisors has also entered into a 10b5-1 plan, under which Goldman Sachs, as our agent, will buy up to 25 million of our common stock through the end of 2014, subject to certain conditions.

TSL primarily focuses on originating non-intermediated credit opportunities in the middle market. Over 90% of our portfolio was sourced through direct, proprietary relationships away from The Street. This includes relationships with sponsors, non-bank intermediaries, and direct relationships with companies. We estimate that 40% of our investments since inception were made to non-sponsored companies. We are highly selective in our investment process. Since we began investing in July 2011, we estimate that we have reviewed 2700 investment opportunities and closed less than 2% of those transactions.

We target portfolio companies in the middle market, which we generally define as companies with EBITDA between $10 million and $50 million, as we believe this segment of the market offers the best risk-adjusted return. As of March 31, the weighted average EBITDA of our borrowers was $33 million. These companies are relevant in their industry, have defensible positions within their value chain. We seek to be top of the capital structure to mitigate reinvestment risk, and -- top of the capital structure and to mitigate reinvestment risk and interest rate risk.

Over 99% of the portfolio is secured, 99% of the debt instruments are floating rate, and 95% of the debt investments have the benefits of -- benefit of call production.

Since inception through March 31, 2014, we have originated over $2.6 billion of investments and funded over $1.8 billion. We have realized over $450 million of invested capital since inception, generating an aggregate unlevered gross internal rate of return of 15% on those investments.

TSL achieves -- TSL has achieved scale with a portfolio of $1.2 billion as of quarter-end. This is important both for our borrowers and our investors. Our scale enables us to provide large, one-stop transactions without syndication risk for our borrowers and provides them certainty. For our existing and perspective investors, our scale means that we have a fully ramped portfolio, a track record of maintaining and earning a stable dividend, access to differentiated liabilities, and the ability to generate additional revenue streams, including, but not limited to, syndication fees, and agency fees, which Alan will walk through in greater detail.

With that, I'd like to turn it over to my partner, Mike Fishman, who will walk you through our originations and portfolio in more detail.

Thanks, Josh. Q1 was our third-largest originations quarter to date since inception. We originated $370 million of investments during the quarter as compared to $261 million for the fourth-quarter 2013. We syndicated $55 million of investments during the quarter, resulting in commitments for the first quarter of $315 million as compared to $187 million for the fourth quarter of 2013.

These commitments were distributed across eight transactions, which included $304 million to six new portfolio companies, and $11 million to two existing portfolio companies. Of the six new portfolio companies, two represented prior portfolio companies that underwent a change of control. TSL's incumbency position and institutional knowledge of the credits enabled us to serve as a lender in the new financing. This incumbency creates value for the companies and sponsors we lend to, as well as for our shareholders. Of the $315 million of new commitments made during the first quarter, $288 million was funded.

During the quarter, we exited commitments totaling $101 million, due to the full realization of three investments, $70 million of which was related to two portfolio companies that were retained as new investments. Net fundings for the first quarter of 2014 were $187 million as compared to $137 million for the fourth quarter of 2013, and net exits of $26 million for the first quarter of 2013.

As of March 31, 2014, our portfolio totaled $1.2 billion of fair value. 82% of investments by fair value were first lien, and over 99% of investments by fair value were senior secured. Senior secured investments include first lien and second lien investments. First lien may include standalone first lien loans, last-out first lien loans, unitranche loans, and senior secured bonds with features similar to first lien loans. Junior capital investments, which include mezzanine and equity investments, account for less than 1% of investments by fair value. Approximately 99% of debt investments are floating rate, subject to an interest rate floor.

During the first quarter, 76% of investment commitments were first lien, 23% were second lien, 2% was mezzanine, and less than 1% was equity co-investment. It's worth noting that the increase in second lien this quarter relates to one new $63 million second lien position that has credit metrics comparable to a first lien security, including a dollar-one attachment point and considerable implied equity cushion behind our security.

From a yield standpoint, the weighted average interest rate of debt investments was 9.8% compared to 10.0% at the end of the fourth quarter of 2013 and 9.8% at the end of the first quarter of 2013. Including amortization of fees and discounts, the weighted average total yield on our debt and other income-producing securities at amortized cost at March 31, 2014 was 10.4% or approximately 20 basis points lower than at the end of the fourth quarter of 2013, and flat to a year ago.

The portfolio is broadly distributed across 30 portfolio companies and 19 industries. On average -- our average investment size is approximately $40 million. Our largest position accounts for less than 6% of the portfolio at fair value, and our largest industry exposure is less than 12% of the portfolio at fair value. Our largest industry exposure as of March 31, 2014 was to business services. We generally target industries with low exposure to cyclicality and the ability to perform throughout credit cycles.

As of March 31, 2014, 97% of our debt investments by fair value were meeting all covenant and payment requirements, and we had no investments on nonaccrual status.

As has been publicly reported, one of our borrowers, Global Geophysical Services, filed Chapter 11 bankruptcy in March 2014. TSL, along with another lender, provided the senior-most portion of the capital structure, a $105 million first lien credit facility, $81.8 million of which was funded ahead of $250 million of unsecured bonds. We underwrote and structured the investment in Global Geophysical with the understanding that the company was over-levered and would likely undergo a restructuring. We underwrote the value of the collateral and believed our first lien security would be fully covered in a downside case. This thesis proved out. Our senior collateral position, along with key negotiated terms, including a make whole provision, were instrumental in our ability to negotiate a settlement with the unsecured bondholders that was approved by the courts and paid to us on April 25. We received 100% of our principal plus accrued interest, fees and a portion of our make whole premium, which collectively totaled approximately 109% of the principal value. Global Geophysical was an opportunistic investment in which we believe we achieved a favorable outcome due to our expertise in underwriting and structuring special situation credit opportunities, as well as our ability to manage investments through credit events. It's important to note that we continued to accrue all interest on Global Geophysical through March 31, as we believed that we were fully secured and would have adequate protection on our pre-petition claim.

With that, I would like to turn it over to Alan Kirshenbaum to discuss our quarterly results in more detail.

Thank you, Mike. We ended the first quarter of 2014 with total portfolio investments of $1.2 billion, outstanding debt of $402 million, and total net assets of $805 million. Our average debt to equity ratio for the three months ended March 31 was 0.73x, as compared to 0.68x for the three months ended December 31, both right in line with our target leverage range of 0.65x to 0.75x debt to equity. We calculate our average debt to equity ratio by using daily outstanding debt, and for equity, we start with our prior-quarter net asset value, and adjust on a daily basis for equity issuances.

At quarter-end March 31, our debt to equity ratio was 0.50x, due to cash proceeds received from our IPO and private placement used to pay down outstanding debt. As of March 31, we had $28.8 million in cash and cash equivalents, an increase of $25.3 million from December 31. This increase was primarily attributable to drawing cash from our credit facility for two existing investments for which we funded upsizes immediately after the period ended, as well as cash received on March 31 from amortization and interest payments, and a partial sell-down of one investment.

As it relates to our credit facilities, we were very active this quarter. We amended and upsized our SPV Asset Facility, increasing total commitments to $175 million, reducing pricing, and extending the revolving period and final maturity dates. We also amended and upsized our Revolving Credit Facility, increasing total commitments to $581 million, and increasing the uncommitted accordion feature, which would allow us to increase the size of this facility up to $956 million.

And finally, we terminated our Subscription Credit Facility. This facility was collateralized by the unfunded commitments of our private phase investors, and those commitments terminated this quarter upon our initial public offering, as outlined in our public filings.

As I mentioned, as of March 31, we had total debt outstanding of $402 million, and $354 million of undrawn. Our average stated interest rate on debt outstanding was 2.5% for the three months ended March 31, as compared to 2.6% for the three months ended December 31, and 2.8% for the three months ended March 31, 2013. Both our Asset Facility and Senior Revolver are floating rate with no floors, and we believe we are match-funded from a duration perspective.

We will continue to focus on the right side of the balance sheet, and over the course of the next 12 months, look to increase commitments through the accordion feature of our Senior Revolver and diversify our funding sources. During the quarter, we also received an investment grade credit rating from Standard & Poor's.

As Josh discussed, we completed our initial public offering and concurrent private placement in March. On slide 8 of our earnings presentation, what we have reflected is the net asset value per share impact of rolling equity through the quarter. As you can see, our net asset value per share of $15.52 as of December 31 was reduced to $15.41 as a result of four equity capital issuances from January through the close of our initial public offering and concurrent private placement. On January 15, our private phase investors funded a capital call, which reduced net asset value by $0.02 per share, as our capital calls were calculated based on the prior quarter's net asset value, which, since the notice went out on December 31, was the September 30, 2013 net asset value of $15.35 per share. Our DRIP issuance on February 13 had no impact on net asset value per share. Our private placement increased net asset value by $0.04 per share, and our initial public offering, which was priced at $16.00 per share, net of expenses, reduced net asset value by $0.13 per share. This net asset value of $15.41 per share increased by $0.10 to a net asset value of $15.51 per share as of March 31, as a result of over-earning our dividend on a net investment income basis, and net realized and unrealized gains during the quarter.

In April, an additional 1,050,000 shares of stock were issued pursuant to the exercise of the underwriters' overallotment option. The impact of these additional shares is not reflected in our March 31 financial results, given the shares were issued subsequent to quarter-end.

Moving on to the income statement on the next slide, total investment income for the quarter ended March 31 was $33.5 million. This is up $5.9 million from the previous quarter, or just over 21%. This increase was driven by strong asset growth, an increase in syndication fees, and an increase in accelerated amortization and prepayment fees, driven by the full realization of three investments this quarter. PIK income was 2% of total investment income this quarter, compared to 2.5% for the prior quarter.

On the next slide, you will see a breakout of revenues where we provide some additional transparency into the revenue increases I just discussed. What we've done here at the top of the slide is split out our interest from investments line between, one, interest income earned during the period, and two, income earned from prepayment fees and accelerated amortization of upfront fees from unscheduled full or partial paydowns, both of which run through interest from investments on our income statement.

As for expenses, net expenses for the quarter ended March 31 were $12.2 million. This is up $1.7 million from the previous quarter, primarily due to higher average borrowing versus the prior quarter, and higher incentive fees due to higher net investment income than in the previous quarter. Also, please note that this quarter our Adviser waived almost $2.5 million in management fees as part of our pre-IPO fee structure, which equates to $0.06 per share on a weighted average share basis. As part of the closing of our initial public offering, we do not expect our Adviser to waive management fees going forward.

Our other operating expense ratio is 74 basis points this quarter, which is based on our quarter-end total investments compared to 81 basis points in the prior quarter, and an average of 77 basis points for 2013. We've targeted a range in the upper 60s to mid-70s for 2014.

A few final points in closing. First, Mike took everyone through our Global Geophysical investment. We believe this will result in an incremental approximately $0.07 per share increase to investment income in the second quarter. Second, although there will be variability quarter-to-quarter, our Board is focused on setting a dividend that can be earned over the intermediate term. We over-earned our dividend in 2012 and we over-earned our dividend in 2013. We continued that this quarter. As of March 31, we have an estimated $0.12 per share in spillover. And finally, our Board of Directors has declared a quarterly dividend of $0.38 per share for shareholders of record as of June 30, payable on or before July 31.

Josh, back to you.

Thanks, Alan. As previously noted, Q1 was a strong origination quarter for us, and we continue to see a healthy volume of new opportunities through our direct originations platform. In the near-term, we are cautious and remain highly selective, given the competitive dynamics that have played out in the liquid market, and to an extent, in our illiquid market, in the form of increased leverage profiles and tighter pricing.

Our focus, as always, is to carefully filter through and analyze as many opportunities we see in order to identify the right opportunities for our shareholders. Our investment culture is premised upon the long-term preservation of our shareholders' capital, and we do not intend to compromise this long-term objective in order to achieve near-term results.

Despite our near-term caution, our long-term outlook for the middle-market lending is favorable. Headwinds in the traditional bank lending model, including recent Fed guidance on leveraged lending and Basel III, are expected to further reduce bank's direct participation in the middle-market. We believe this represents a significant opportunity over the long run for scaled capital providers with a direct -- with direct origination resources and access to a broad alternative asset management platform such as TSL.

Our expectation is the macroeconomic outlook for credit will remain benign through the remainder of 2014. We expect the performance of our portfolio to remain robust, and feel the portfolio is well-positioned given our focus on scaled middle-market companies, relatively low exposure to cyclical industries, and our senior secured floating rate investment profile. Although there are some tail risks that exist in the broader economic ecosystem, we feel confident about 2014.

On behalf of myself, Mike and Alan, and our Investor Relations team, I'd like to take the opportunity to thank you for your time today and for your investment in TSL. Operator, would you please open the line for questions?

(Operator Instructions). Rick Shane, JPMorgan.

So, really, just -- I mean, you guys have addressed the competitive environment. And we are pretty much through earnings season and we've heard this theme a few different times -- actually, we've heard it over and over again. Where are the incremental opportunities? I mean, for example, it seems, over the last few years, everybody has really focused on floating rate loans.

Is there any opportunity in fixed rate paper? Obviously, given the capital structure, you do have the ability to hold that. Are you seeing any niches where suddenly saying, hey, everybody is headed one direction, let's go a different way?

Yes. So specifically, as it relates to fixed rate, I think -- quite frankly, I think, at least our view is, we are not macro guys, but the interest rate environment seems pretty asymmetrical to downside for holding fixed rate paper. And effectively, you're providing -- you're transferring value from our shareholders to our issuers, and taking a view on interest rates. So, I don't -- I'm not sure that's the opportunity, because effectively, on a swap-adjusted basis, you're just destroying value for our shareholders.

Where I would say the opportunity exists is, the opportunity exists for us is that it's originating non-intermediated credit where -- for companies that are both sponsored where there might be a time dynamic, or non-sponsored where it takes a little more work, and it takes a little more effort and resources to look at those transactions. I think how we've constructed the portfolio is that we have less reinvestment risk, I think, generally, from the broader industry, given that I think our average call protection in our portfolio is 104 -- 105 currently. So, we have less reinvestment risk, our portfolio is protected, and so we don't have to push as hard to keep the portfolio funded and our debt to equity ratios.

And then, quite frankly, this is a resource game, or how we think of this as a resource game, we have 20 investment professionals and we have 30 portfolio companies. And we try to leverage those investment professionals across our platform to find as many opportunities as we can that allows us to invest on a good risk-adjusted return basis for our shareholders. I think so -- to answer your question, where the opportunity really exists for us is continuing to leverage the platform to find more niche opportunities or those opportunities that have time dynamics.

On the interest rate side, I think we will continue to shy away from fixed rate investments, given what feels like an asymmetrical proposition for our shareholders. Just to put in perspective, I think the five-year swap rate is 180 bps. So if you're doing a five-year deal and you're effectively giving 180 basis points away to your issuer.

Was that helpful, Rick?

Very. And if I can indulge a second question, and I apologize to my peers listening everywhere else, you'd made the comment that you feel like from a macro perspective, that the risk right now is competition and margin erosion. And then from a macro and final perspective, you feel like it's a pretty benign environment.

We've heard mixed things throughout the earnings season along those lines. We've heard some managements talk about EBITDA erosion within the portfolio companies and some companies basically say the opposite. What are you guys seeing at this point? And if you would just elaborate a little bit more on that comment about benign macro environment.

Yes. So, look. I think when you look at -- just start from the 30,000 foot level. I think when you look at 2014 estimates for GDP, estimates are somewhere between the 2% and 3% range. And so most of our companies have some type of operating leverage. And across their portfolio, on a weighted average basis, we are seeing EBITDA growth.

So, I think the challenge for the sector is, we have -- we are in the business of picking idiosyncratic names, and so you're going to see dispersion across managers in how they invest or what happens into their portfolio companies. As it relates to our portfolio companies, generally we are seeing EBITDA growth and deleveraging. But from a macro level, if you look at the liquid credit market as a proxy, you take out TXU, right? The default which gets you -- the default -- you know, TXU everybody knew that was coming for a long period of time -- the default rates are relatively low.

And then the last point I would say is when you look at -- we are in earnings season, and so when you look at earnings, what you're seeing is, I think, generally, about half - you know, 70% of the companies being earnings on an earnings basis, and 50% kind of missing on a revenue basis. So I still -- you are seeing some softening on the top line, but you are seeing probably some margin expansion and earnings growth. And I think that's pretty consistent with our portfolio.

Is that helpful?

Very. That's excellent. Thank you guys very much. I appreciate the time this morning.

(Operator Instructions). Ken Bruce, Bank of America Merrill Lynch.

[Derek Hewitt] for Ken Bruce this morning. Impressive results this quarter, so, congratulations.

Thank you.

Hey, can you guys provide additional color on the strong fee income that was generated during Q1? I assume that a portion of this was related to syndication activity? And what is your outlook?

Yes. So, happy to do that. So a portion of it, as was related to a syndication fee for a transaction, that portion was $1.7 million. And I think one of the value propositions -- and you've seen that over time in our business that, on occasion, given our ability to underwrite and provide certainty for our borrowers, we're able to drive value to our shareholders with additional revenue streams.

So, out of the $2.2 million, $1.7 million was related to a $100 million underwriting, and then the rest were effectively -- out of those fees -- were effectively reoccurring- some amendment fees, some consent fees, deferred revenue related to our agency fees. But I think, in general, as our balance sheet expands, we will have more opportunity to provide certainty for our issuers and drive -- given our origination platform, drive those revenue streams to our shareholders.

Okay. Great, thanks. And my last question is that yield pressure kind of continues to be a theme that we've seen this quarter for the industry. So could you talk about the roughly 30 basis points of negative yield gap between originations and exits this quarter? And then maybe what's the outlook for closing that gap going forward?

Yes. So, look, again, I think when you look at our portfolio, take a step back, I think we had only about 20 basis points of yield compression from -- on the unamortized cost basis from 10.6% to 10.4%. We -- when you also, just to be clear, we basically put on investments that went out, on a cash-on-cash basis, went out at 9.4%, went in at 9.1%. But that 9.1% does not include -- effectively, that $1.7 million of syndication fees. So, the accounting requires you to take that all into income upfront, so what you would've seen is roughly kind of flat, my guess is, on a cash-on-cash yield basis.

Okay. Great. Thank you very much.

Jon Bock, Wells Fargo Securities.

Good morning, thank you for taking my questions and congratulations on a strong quarter out of the gate. One quick question as it relates to dividend policy. Alan, I know you have the luxury of a dividend spillover and you're constructing a very conservative dividend that will be covered by net operating income. What is your view on spillover versus retaining additional income? Do you see maybe benefits to one or the other? What direction could shareholders maybe think that you might take in the future?

Yes. Hey, good morning, Jonathan. I'll take a shot at it, and then have Mike and Alan take a shot at it. So look, you hit it on the head, right? When you think about how we think about our cost of equity, and our cost of equity reflects really -- should reflect, I think, two things. One is that the beta or the variability in our dividend and if it's earned. And that beta is driven by: are we earning it or not, or is it effectively a return of capital? And then the prospects for NAV growth.

And so when you look at what our dividend yield should trade in the marketplace and our applied cost of equity, it should reflect how protected, how safe is our dividend, which we've tried to construct it very safely, and the prospects for NAV growth. And so when you think about -- there's a couple options when you over-earn your dividend. One is you can -- which we will look at, at the right time, was one, is you increase your dividend, that's going to be a reflection of do we still believe that we can earn that dividend in the intermediate-term? And intermediate-term, for us, I think is 12 to, you know, 24 months. And that I don't think we have a view on margins and credit environment past that. [Two]Can you -- will you return that capital through special dividends?

And the third thing is, how much of that capital do you retain? And that's a function of, is it cheaper to raise capital effectively by retaining that capital? Or is it cheaper to do secondary offerings or do a new share offering? And when you look at the excise tax of 4%, right, it -- to us, it's kind of probably cheaper to retain that capital, ultimately, for our shareholders.

And so, that's how we think about the world we live in, and policy. I don't know, Alan and Mike, do you have anything to add?

I agree with all of those points.

Appreciate that. And maybe taking a few company-specific questions. So I noticed the large second lien deal as it relates to Trident, and second lien investment kind of depends -- I happen to think it gets a bit of a bad rap because we understand that not all deals are created equal. But still sometimes the second lien loan, that sometimes people see more akin to a mezzanine-like security, if you are in the upper middle-market category and it was a widely-marketed deal. Could you maybe give us some touch points around Trident, and maybe what you saw there, considering it was a sizable investment in the quarter?

Yea, and we'll even take it a step further and talk about our second lien portfolio, because I think you hit the nail on the head that not all second liens are created equal, right? So today, just to put this in perspective, we have a second lien portfolio of about -- no, a second lien portfolio of 17% of our portfolio on a dollar basis is -- sorry, $194 million. And when you look at what that portfolio and you look at the sizable positions, there are, I would say, three sizable positions. There's Mannington, there's Kewill and Trident.

And when you look at those positions, when you look across our second lien portfolio, our average attachment point on our second lien portfolio attaches at 1.4 times leverage and goes to 4.1 times. Trident specifically attaches from dollar one, the company has cash on the balance sheet. The first lien revolving credit facility that's in place- the company is in the E&P space- is really to support for hedges that protect our asset value. And so technically, it's a second lien facility. But as Mike pointed out in our comments, it really is -- looks like it has first lien risk characteristics because we are dollar one in assets. And the first lien bank revolver in place, is really there, to support a small amount of working capital and really to support credit support for their hedges.

Very helpful, thank you. And then trying to understand things a bit further, so with the $369 million gross in originations, understand the $55 million of syndications, in that $55 million, if you were to back-end lever a transaction, would that be considered a syndication? How would one be able to understand that transaction? I see it's in Footnote 6, but trying to understand whether or not we see the dollars that come out of an individual loan that come back to you, allowing you to invest more capital in attractive deals.

No, that was a straightaway -- sale on a pari passu piece of the deal.

Okay. Okay. Then the only other question relates to the first lien / mezzanine structure that you set up in My Alarm. The mezz piece is relatively small, and you're getting an outsized return. Could you perhaps give us a sense on why you would choose to maybe bifurcate a first lien and then a mezz in that situation as opposed to a unitranche? And that's all my questions.

Yes. So we were a co-lender on that transaction. And it was a way to get -- it was a marketing tool -- we control -- us and the co-lenders are the same lenders that have the mezz that control -- that are in the first lien on a ratable basis. And when we went to market with a sponsor, and they just wanted to see economics broken out and the call protection broken out. So usually we like to put it in one security; effectively, it is one security in essence, in that us and the co-lenders all hold the ratable portion of the small mezzanine and the first lien facility.

Got it. All right. Congratulations. Look forward to next quarter.

Thanks, Jonathan.

Terry Ma, Barclays.

Thanks for taking my questions. So just going back to the incremental opportunities for a little bit, we've started to see some other BDCs focusing more on specially verticals like oil and gas, venture finance, and aircraft leasing. So I just want to get your perspective on those opportunities and how you view the relative attractiveness there.

Yeah, I'll give you my view of this, Mike will give his view on this. Look, we generally have built out a model that's very sector-oriented. And so we like the sector approach, because we feel like we can be a smart capital provider in those spaces and understand the nuances of those industries and sectors. And so we continue to develop themes around sectors, and those -- and then continue to test those themes on a quarterly basis when we go through our sectors.

I would say that as it relates to oil and gas, we've been a participant in that sector across our careers. And we will probably continue to do some oil and gas that's more asset-based-oriented versus energy services, given kind of the secondary source of repayment.

As it relates to other specialty verticals, I don't see us getting involved in the aircraft leasing business, given the cyclical nature of that business. Over our careers, we've been involved in that; I was involved with it at Goldman. But we are very sector and thematic-driven. I'll give you one, I guess, example in which we had a theme change around a sector. If you look at our track record and go back to our Ks and Qs over time, what you saw was we were mildly involved in the restaurant sector. We probably, I think, had three or four names; we've completely exited those names as we saw consumer spending come back. And the asymmetrical nature of consumer -- of kind of consumer spending had changed. And so, I think you'll see us continuing to develop sector theses and expertise, and then testing those and changing those over time as the environment changes.

Mike, do you have anything to add?

I would say, for us, doing things, I think you are alluding to doing things outside, within the 30% bucket that others are doing. For us, we've stuck to our core investment philosophy. But what we have done is we have utilized that bucket to make investments outside the US. We've seen interesting opportunities in Europe and Canada, although the investments we are making in those jurisdictions are core to our strategy. And right now, we don't intend to vary from that strategy, although we will continue to look at different things.

Yes, that's good color. And I think just one last question. I think in your comments, you mentioned increased leverage and higher pricing. But I think some other BDC's have also mentioned that they started to see some pushback from buyers on more aggressive pricing and leverage on recent deals. Have you guys seen any of that?

Yeah, I mean, I think what you see is -- the middle-market, kind of how -- where we operate, the more illiquid middle-market, tends to lag on both sides. So what you've seen is you saw -- when you saw credit spreads rally in high-yield and the leveraged loan space, credit spreads were slow and capital formation was slow around the middle-market. And so it takes longer to take hold.

As you see pushback in the leveraged loans -- in the liquid leveraged loan space, which I think you're slightly seeing, I think it's probably slightly overblown. I think quarter-over-quarter, LCD first lien decreased 10 basis points. Risk assets, the second lien assets, increased 10 basis points. And so you surely have seen a little bit of pushback, but the illiquid market, because capital formation takes hold and people feel like they have to put it to work, is slow to react.

We just tend to be very selective on what we do. And we will continue to be very selective with what we do. So what I will say is, I think some of that color is true, but the illiquid market tends to be slower to react.

Got it. Thanks a lot.

Thank you. I'm not showing any further questions in queue. I'd like to turn the call back over to management for any further remarks.

Great. Thank you for all your support. We look forward to speaking to you next quarter or at any of the conferences that people may attend. If you have any follow-up questions, please reach out to Mike, Alan, myself or our Investor Relations team, Julie or Bob. In addition, I would like to wish everybody a great weekend and have a happy Mother's Day. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may now disconnect. Everyone have a great day.