Sixth Street Specialty Lending Inc (TSLX) 2015 Q3 法說會逐字稿

Good morning and welcome to TPG Specialty Lending Inc's September 30, 2015 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, including with regard to TPG Specialty Lending Inc.'s proposal to acquire TICC Capital. Statements other than statements of historical facts made on this call may constitute forward-looking statements and 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 TPG Specialty Lending Inc.'s filings with the Securities and Exchange Commission. The Company assumes no obligation to update any such forward-looking statements.

Yesterday, after the market closed, the Company issued its quarterly earnings press release for the third quarter ended September 30, 2015 and posted a supplemental earnings slide presentation to the investor resources section of the website, www.tpgspecialtylending.com. The earnings presentation should be reviewed in conjunction with the Company's Form 10-Q filed yesterday with the SEC. 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 will now turn the call over to Josh Easterly, Co-Chief Executive Officer and Chairman of the Board of TPG Specialty Lending Inc.

Great. Thank you, Ashley. Good morning, everyone and thank you for joining us. We are going to change it up a little bit today. My partner, Mike Fishman, will give a brief overview of our quarterly highlights and then we will turn the call over to our partner, Bo Stanley, to discuss our originations and portfolio metrics for the third quarter of 2015. After that, I will discuss our quarterly financial results in more detail and conclude with final remarks before opening the call to Q&A. With that, Michael.

Thanks, Josh. I am pleased to report strong financial results for the third quarter. Net investment income per share was $0.48 for the third quarter of 2015 as compared to $0.46 per share for the second quarter of 2015. Third-quarter NII included a one-time charge of $0.06 per share due to the acceleration of deferred financing costs associated with the termination of our SPV Asset Facility during this quarter, which Josh will discuss in more detail. NII per share for the third quarter, excluding this one-time charge, was $0.54, an increase of $0.08 per share versus the second quarter of 2015.

Net asset value per share as of September 30 was $15.62 as compared to $15.84 as of June 30. This decrease was largely driven by unrealized losses related to widening spreads and continued market volatility in the energy sector. The third quarter of 2015 saw a widening of credit market spreads and risk premiums across asset classes due to concerns about global growth.

LCD first lien spreads increased by approximately 50 basis points and LCD second lien spreads increased by approximately 180 basis points during the third quarter. We believe that fair value is not solely an accounting principle. It is a critical risk management tool providing early warning signs into our portfolio and also investment opportunities. While we believe it is appropriate to reflect the impact of spread widening in our calculation of fair value, we don't believe it impacts our ability to be repaid in full.

As announced on last quarter's call, our Board of Directors declared a third-quarter 2015 dividend of $0.39 per share payable to shareholders of record as of September 30, which was paid on October 30. Our board has also declared a fourth-quarter dividend of $0.39 per share payable to shareholders of record as of December 31 on or about January 29. Our board has established a dividend policy reflective of the high-quality earnings power of our business over the intermediate term at a level that we believe can be consistently earned and which maximizes cash dividends to our shareholders.

During the third quarter of 2015, we over-earned our dividend on a net investment income basis by $0.09 per share or $0.15 per share after adjusting for the one-time charge associated with the termination of our SPV Asset Facility. We have over-earned our dividend on a net investment income plus realized gains basis every quarter since our inception, reflecting our strategy of consistent and sustainable dividends.

We are pleased to report that we had no loans on nonaccrual status at quarter-end. Our first lien investment in IRG was restructured during the third quarter into a $25 million performing credit investment, a $4 million equity investment and a $10 million performing credit investment collateralized by a separate guarantor. As noted on last quarter's earnings call, we believe our control of the bilateral credit agreement allowed for a swift resolution of this nonaccrual and that the collateral value underlying our investment, including real estate, provides substantial downside protection.

Subsequent to quarter-end, the bankruptcy court overseeing the Chapter 11 proceedings of Milagro confirmed the company's reorganization plan. We have received full repayment of the DIP credit facility subsequent to the third quarter-end. As mentioned on last quarter's call, the yield maintenance premium associated with our Milagro investment was recognized in Q2 2015.

We are also pleased to report that the A&P bankruptcy proceedings are progressing as anticipated. A&P store sales are underway for expected proceeds of approximately $700 million, which far exceeds the $263 million of first lien term loan obligations as of the bankruptcy filing date. Consequently, we expect to receive a full repayment of our term loan during the fourth quarter, including a 3.5% prepayment premium, which was contractually earned during the third quarter.

During the quarter, we also received full repayment of our investment in Metalico, a scrap metal recycler with operations concentrated in the Northeast United States. We underwrote our investment in Metalico assuming some degree of end-market cyclicality and commodity price volatility, but believed our first lien investment was protected by substantial collateral value and secondary sources of repayment due to the segmentable nature of its asset base. Following industry softness in 2014, the company was not in compliance with its leverage covenants. By October 2014, we completed a comprehensive amendment of Metalico's senior credit facility and in connection with the amendment, the company reduced our term loan exposure to approximately $20 million from the proceeds of the sale of its Lead business. Upon the sale of the company in September, the remainder of our facility was repaid in full, along with a prepayment premium. Our implied loan-to-value at exit was 40% and our gross unlevered IRR was approximately 35%.

We believe that the resolution of our investments in Metalico, IRG and Milagro, and the expected resolution of our investment in A&P, demonstrate our expertise in comprehensive investment structuring and proactive risk management. The results of these investments highlight our ability to navigate complex credits and to opportunistically structure high-quality risk-adjusted returns.

Turning now to the liability side of our balance sheet, subsequent to quarter-end, we favorably amended the terms of our revolving credit facility, conforming to various market-leading terms. These changes included increasing the aggregate commitments, extending the final maturity date, and a 25 bps pricing reduction if certain conditions are met. With over $355 million in undrawn commitments, we believe our current liquidity positions the company well into 2016 in light of a solid pipeline for new investment opportunities, coupled with our high degree of investment selectivity.

With that, I'd like to turn the call over to Bo Stanley, who will walk you through our quarterly originations and portfolio metrics in more detail.

Thanks, Mike. Q3 was a strong originations quarter for us with gross originations and commitments of $185 million. These investments were distributed across six new portfolio companies and five add-ons to existing portfolio companies. Of the $185 million of new commitments made during the quarter, approximately $164 million was funded. For the past four quarters, we have generated average quarterly originations of approximately $217 million and average quarterly fundings of approximately $145 million. This is a level of growth that we continue to feel is prudent in the current market environment.

During the quarter, we had $148 million aggregate principal amount in exit and repayments due to 5 investment realizations, 1 partial pay down and the partial sale of a level II investment. This volume of repayments is higher than our average quarterly repayments over the past four quarters of $95 million due to idiosyncratic events at our portfolio companies that have led to early repayment of our loans and the recognition of prepayment premiums. Net of repayments, our quarterly funded activity is approximately $50 million based upon the past four quarters. Since inception, through September 30, we generated gross unlevered IRR of 16.4% on exited investments totaling $1.1 billion of cash invested.

We continue to believe that our ability to provide flexible, fully underwritten financing solutions and to hold significant positions is a key competitive advantage benefiting both our borrowers and our shareholders. Per the terms of the SEC Exemptive Relief that we received in December 2014, we are able to provide larger commitments and certainty of execution for our borrowers due to co-investments from TSSP and TPG-affiliated funds. Co-investments made by affiliated funds are on the same economic terms and in the same part of the capital structure as TSLX. TSLX will continue to receive priority allocation on every US middle-market loan origination investment opportunity.

Through our direct originations efforts, approximately 90% of our portfolio was sourced through non-intermediated channels. This enables us to control the documentation and investment structuring process, and to maintain effective voting control on 82% of our debt investments. As evidenced in IRG, Milagro and Metalico, our control position enabled us to swiftly take action to protect and maximize shareholder value.

As of September 30, our portfolio totaled $1.4 billion at fair value, roughly flat to June 30. At quarter-end, 87% of investments by fair value were first lien and 96% of investments by fair value were secured. At this point in the credit cycle, we are primarily focused on investing at the top of the capital structure, and in keeping with our focus since early 2014, our junior debt exposure remains below 13%.

The slight increase in our junior debt exposure during Q3 was primarily due to our second lien investment in AvidXchange, an investment that is effectively first lien risk in nature due to our position behind a small undrawn revolver, implying dollar one attachment point on our second lien position. To a lesser extent, our junior debt exposure increased due to incremental purchase of certain level II investments as technicals in the broadly syndicated markets presented attractive buying opportunities in companies we knew well. Additionally, since the beginning of 2013, we reduced our exposure to non-energy cyclical industries from approximately 31% of the portfolio at fair value to approximately 7% at third quarter-end.

The portfolio is broadly distributed across 44 portfolio companies in 19 industries. Our average investment size is approximately $32 million and our largest position accounts for 4.9% of the portfolio at fair value. At this point in the economic cycle, we are focused on industries with low exposure to cyclicality and an ability to perform throughout the credit cycles. Our largest industry exposures by fair value at quarter-end were to Business Services, which accounted for 15.8% of the portfolio at fair value and Healthcare & Pharmaceuticals, primarily healthcare information technology with no direct reimbursement risk, which accounted for 15.4% of the portfolio at fair value. After giving the effect to the Milagro realization that occurred subsequent to quarter-end, our Oil and Gas exposure represents approximately 4% of the portfolio at fair value. That said, we believe there may be opportunity in providing conforming first lien reserved-base lending for upstream companies that have significant hedged collateral value at current price levels.

The weighted average total yield on our income-producing securities at amortized cost at September 30 was 10.5% versus 10.4% at June 30, 2015 and 10.6% at September 30, 2014. The weighted average yield of new investments made during the third quarter was 10.7% at amortized cost. This yield will vary quarter-to-quarter as originations in any single quarter are idiosyncratic given our direct originations model.

Our investment focus is to mitigate both credit and non-credit risks. We seek to mitigate credit risks by investing in companies that are scaled and relevant to their supply chain. As of September 30, our core portfolio companies have weighted average annual revenues of approximately $140 million and weighted average annual EBITDA of $32 million. Our target borrower profile has inherent downside protection features that may include a high degree of contractual recurring revenues and/or hard asset value depending on the borrower's industry and our investment thesis.

Non-credit risks that we seek to mitigate include interest rate, foreign currency and reinvestment risk; the latter of which is mitigated by call protection that we structure in our investments. We mitigate interest rate and foreign currency risk by match-funding our assets and liabilities. Approximately [95%] of our income-producing securities are floating rate, typically subject to interest rate floors, and 100% of our liabilities are floating rate (company corrected after the call). And when we fund investments in currencies other than US dollars, we borrow on our revolver in local currency as this provides a natural hedge of our principal value against foreign currency fluctuations. To address the topic of a potential rise in rates, we generally benefit from a rising rate environment given our predominantly floating rate portfolio once rates rise above our LIBOR floor.

With that, I'd like to turn it over to Josh to discuss our quarterly results in more detail.

Thank you, Bo. Great job and congrats on your inaugural earnings call. We ended the third quarter of 2015 with total portfolio investments of $1.4 billion, outstanding debt of $539 million and net assets of $844 million. Our net investment income for the third quarter was $0.48 per share, which includes a one-time charge of $3.2 million or $0.06 per share due to the acceleration of deferred financing costs associated with the termination of our SPV Asset Facility.

Our average debt-to-equity ratio for the three months ended September 30 was 0.65x, as compared to 0.63x for the previous quarter. As always, we take into account both our unfunded commitments and our forward pipeline when managing our financial leverage. As a further point, we maintain sufficient borrowing capacity within the 200% asset coverage limitation to cover any outstanding unfunded commitments we are required to fund in addition to our forward pipeline.

As it relates to the right side of our balance sheet, subsequent to quarter-end, we amended and extended our revolving credit facility, increasing commitments under the facility by $40 million to $821.3 million, extending the revolving period to October 2019 and the maturity to October 2020. We also amended the stated interest rate on our facility from LIBOR plus 200 to a formula-based calculation, resulting in a stated interest rate of either LIBOR plus 175 or LIBOR plus 200 depending on certain conditions. As of today, under this formula, the stated interest rate on the facility is LIBOR plus 200. We greatly appreciate our lenders' continued support. We have significant liquidity heading into year-end with approximately $355 million of undrawn commitments prior to regulatory leverage constraints, and we believe we remain match-funded from an interest rate and duration perspective.

As you can see on slide 8 of our earnings presentation, during the three months ended September 30, we had a number of factors impacting our net asset value per share. In August, our DRIP issuance had a small positive impact on NAV as shares issued under this program were at a price above our net asset value per share. During the 25-minute period on the turbulent market trading day of August 24, we repurchased a small number of shares in accordance with our Company's 10b5-1 plan, resulting in a small positive impact to NAV. As we've discussed before, this plan automatically repurchases shares based on threshold pricing beginning a penny below NAV. We added $0.48 per share to net asset value from net investment income, our dividend was $0.39 per share, reducing net asset value, and we had a $0.01 reduction in NAV from the reversal of unrealized gains and losses from the full or partial realization of six investments. There were two other factors impacting net asset value in the third quarter. $0.13 per share can be attributed to unrealized losses from widening credit spreads and $0.17 per share can be attributed to other unrealized and realized gains and losses during the quarter. Of the $0.17, $0.11 was related to idiosyncratic negative credit adjustments in our portfolio -- over 90% of which were driven by our energy-related investments in Mississippi Resources and Key Energy, which are approximately 4% of the portfolio as of today. At quarter-end, the weighted average performance rating of our portfolio was 1.5, on a scale of 1 to 5 with 1 being the highest, as compared to 1.6 for the second quarter of 2015.

Moving on to the income statement on the next slide, total investment income for the quarter ended September 30 was $46.8 million. This is up $1.4 million from the previous quarter. Our PIK income remains low at approximately 2% of total investment income year-to-date.

On the next slide, slide 10, you'll find a more detailed breakout of our revenues. Our "Interest from Investments - Interest Income" was $37 million for the quarter ended September 30. This is up $2 million from the previous quarter or approximately 6%. As you can see, we continue to generate strong, consistent "Interest from Investments - Interest Income".

Our "Interest from Investments - Other Fees" was $9.1 million for the quarter ended September 30. This revenue line will be uneven over time as it is generally correlated to movement in credit spreads and risk premiums. During 2014 and the first half of 2015, we broadly experienced strong levels of "Interest from Investments - Other Fees", driven in part by the call protection embedded in our portfolio and in part by the acceleration and amortization of upfront fees from full or partial pay downs. This trend continued in the third quarter for 2015. With an annualized ROE of 11.3% on net investment income for the nine months ended September 30, we are right in line with our annualized ROE target of 10.5% to 11.5% on net investment income.

For the quarter ended September 30, net expenses were $20.5 million. This is up from the previous quarter, primarily due to higher interest expense as we approach our target debt to equity range and a one-time charge related to the pay down of our SPV Asset Facility, offset by lower incentive fees as a result of unrealized losses booked during the quarter. Our fees this quarter reflect the voluntary waiver of our base management and incentive fees related to our investment in TICC. Additionally, net expenses of $0.02 per share were attributable to a one-time write-off of a debt issuance cost related to a contemplated opportunistic unsecured bond offering that we chose not to pursue due to market conditions and the expenses related to our involvement in TICC.

On slides 15 and 16, we discuss our debt funding profile. A few things to point out here. We feel there is little to no funding risk in our business. As detailed on the bottom of slide 16, 54% of our earning assets are funded by permanent equity capital. The remaining 46% of our earning assets have a weighted average maturity of approximately 2.2 years versus our debt financings, which have a weighted average maturity of 4.9 years, adjusted for the extension of our revolver maturity date.

We had another solid quarter. As of September 30, we have an estimated $0.71 per share in [undistributed] distributions on a tax basis (company corrected after the call). We continue to generate strong, consistent earnings driven by a high quality of income from embedded economics in our portfolio.

Shifting now to our views on driving shareholder value. Our long-term focus is the guiding principle behind our dividend policy, capital raising philosophy and capital allocation decisions, and the alignment of interest we foster with our shareholders. This long-term perspective is the motivation behind our practice of match-funding our assets and liabilities, as well as our stock repurchase programs. It is our belief that in managing our Company with a long-term perspective, we are acting in the best interests of all of our stakeholders. Our definition of stakeholders extends beyond our own constituents to include those of the sector. We believe that the broader perception of the sector that we operate in has an inseparable impact on our ability to create value for our shareholders and directly affects our cost of capital.

To that end, I would like to take a few moments to provide color on our involvement in TICC this quarter. Those familiar with our history and investment philosophy understand that it is not in our nature to be public market equity activists. We have reluctantly assumed this role with respect to TICC as our industry is going through an inflection point, and we believe that our ecosystem can only thrive in a culture that fosters real value creation for shareholders.

Preceding the Benefit Street Partners announcement, TICC persistently traded at a considerable discount to NAV due to its poor investment track record and board stewardship. We began acquiring shares of TICC on August 5, the day after TICC announced the sale of its external manager to Benefit Street Partners. Our initial investment thesis was that TICC's stock price would migrate towards NAV as other shareholders emerge to correct the unjust value transfer to an underperforming external manager of a largely liquid portfolio of level II assets. By August 24, we had acquired nearly 3% of TICC's outstanding common stock.

After conducting further analysis and recognizing the commercial opportunity for our shareholders, we privately approached the special committee of TICC's Board of Directors with an offer to purchase TICC in a stock-for-stock transaction at $0.87 of TICC's net asset value per share, representing a 20% premium to the undisturbed trading price of TICC's common stock. The special committee rejected our nonbinding offer without engaging in substantive dialogue or diligence and after careful consideration, we decided to make our offer public on September 16.

Upon our announcement, TICC's stock traded up approximately 12% and since then, all the major proxy advisory firms, five out of six of TICC's own equity analysts, as well as several significant shareholders have called on TICC's Board to pursue a more robust sales process to maximize shareholder value.

Our proposal represented both a commercial opportunity for TSLX shareholders, as well as TICC shareholders. Our proposal would be immediately accretive to TSLX's net asset value in the range of 6-8%. Additionally, we feel strongly that a combination of our two businesses would be in our mutual interests. It would offer an immediate and upfront premium to TICC shareholders and provide a clear path of long-term value creation through our track record of superior risk-adjusted returns and stable dividends and potentially increase liquidity by owning shares in a combined company with an expected pro forma market cap in excess of $1.3 billion.

Our view is that TICC's current portfolio of primarily liquid loans and CLO equity is ill-suited for our investment strategy. Specifically, as it relates to CLO equity, the cash flow uncertainty driven by default is inconsistent with the stable, long-term distribution requirements of a BDC; we also want to avoid its mark-to-market volatility that amplifies changes in net asset value. Further, except in certain opportunistic scenarios, BDCs are generally the high-cost producers of CLO and liquid loan risk / returns. In our view, BDC managers that invest significantly in these assets destroy shareholder value and thus upon completion of the TICC transaction, our plan would be to rotate TICC's portfolio into less liquid, but higher earning credit investments that have superior risk-adjusted return profiles. In the event that we are unable to efficiently redeploy capital, we would return capital to shareholders to protect the NAV accretion created in the transaction.

Over the past few months, there have been several groundless accusations implying that incremental fee income is the primary motivation behind our TICC proposal. Our discipline in capital-raising despite closing above NAV every day since our IPO and our ongoing shareholder repurchase program speaks greatly to our commitment to shareholder alignment. To further this point, we voluntarily canceled more than $900 million in equity commitments, which would've been fee-paying assets for our pre-IPO shareholders. As evidenced, the motivation behind our TICC proposal is to establish a culture of accountability and delivering real value to shareholders -- both goals that will ultimately promote the advancement of our sector.

On October 5, we filed a definitive proxy urging TICC shareholders to vote against the BSP transaction. On October 23, TICC was ordered by the US District Court for the District of Connecticut to postpone the special meeting that was to be held on October 27 and revise its proxy statement disclosures to remediate several important deficiencies, including disclosure of its payments being made to TICC management in the BSP transaction.

On Monday, we announced an updated offer to purchase TICC in a stock-for-stock transaction at $0.90 of TICC's net asset value per share as of the date of a definitive agreement. We believe that our updated proposal gives TICC shareholders increased value for their shares and demonstrates our commitment to realizing the value of the transaction for TSLX and TICC shareholders. It's now time for the TICC's Board of Directors to hold themselves accountable and to act in their shareholders' best interest by engaging in a substantive discussions with us.

Returning now to TSLX, a central theme underlying the results this quarter and our successful track record since inception is our focus on identifying, mitigating and managing credit and process risks in our portfolio. For the three months ended September 30, we generated an ROE based on net investment income of 12.1% and for the nine months ended September 30, we generated an ROE based on net investment income of 11.3%.

Based on our current asset level yields and as we continue to operate within our target leverage ratio, our target return on equity is 10.5% to 11.5% over the intermediate term based on our 12/31/2014 book value. This corresponds to $1.63 to $1.79 per share on net investment income, which compares to our annualized dividend of $1.56 per share.

Finally a few points in closing related to the senior management changes discussed on last quarter's call. Again, we would like to thank Alan Kirshenbaum for his help this quarter in closing the books. We are excited to announce that Ian Simmonds has agreed to join us as the Chief Financial Officer effective November 30. A Chartered Accountant, Ian brings over 20 years of experience in accounting, finance and asset management to the position. Before joining TSLX, Ian spent over 10 years at Bank of America Merrill Lynch where he was most recently a Managing Director in the Financial Institutions Group, including as an advisor to TSLX for the last three years. We believe that Ian will immediately be a valuable leader for our business given his deep accounting and financial experience, combined with his demonstrated leadership and capital markets acumen. We are confident that Ian will build upon the culture of excellence and strong financial policies that have been the foundation of our business since inception, and we look forward to introducing him on our next quarter's call.

On behalf of the TSLX team, which includes, Bob Ollwerther, our interim CFO, Mike Fishman and Bo Stanley, thank you for your continued interest in TSLX and for your time today. Ashley, please open up the line for questions.

(Operator Instructions). Mickey Schleien, Ladenburg.

Good morning, Josh. Just one question. We've seen spreads tighten considerably in the liquid markets so far in the fourth quarter as investors I think have digested the news out of China and have just gotten more comfortable with the economic outlook. And I'm just curious how that's affecting terms that you are seeing available in the less liquid markets where you operate and your appetite for investing this quarter.

So I'm not sure "considerable" would be how I would frame it. I think first lien loans from the quarter-end to 10/30 decreased by 10 basis points and second lien loans actually widened by 27 basis points. So I still think we are kind of in this risk-off period for risk assets; although I think there is less volatility.

Our pipeline has been pretty good in Q4 -- given anytime there's volatility, people come to us for certainty. So we feel pretty good about, at least the short-term, opportunity to find high risk-adjusted returns for our shareholders.

Just one follow-up question. Can you give us a sense of the portfolio's debt to EBITDA and LTV?

Yes, sure. So on a weighted average basis, we attach at less than 1.0x EBITDA and our last dollar risk is about 4.4x EBITDA and our LTV is probably 50%. We typically finance higher-quality businesses. As you can tell, $140 million of revenue, $32 million of EBITDA. So very high EBITDA margins and free cash flow margins in high-quality businesses.

Terrific. Thanks for your time this morning.

Rick Shane, JPMorgan.

I'd just like to talk a little bit about dividend policy and perhaps how it interacts with the proposed TICC transaction. Josh, as you pointed out, you have over $0.70 of spillover dividend. Last two quarters, you've substantially over-earned the dividend and you just declared a dividend of $0.39 for the fourth quarter, which is flat with where you've been and below the last couple of quarters of earnings.

I am curious if potentially bringing on a lot of new shareholders is holding you back as you want to digest what the shareholder base is going to look like over the next six months before you alter the dividend policy.

Yes, so that's a good question. It really is not affecting how we think about the dividend policy given I think, even with TICC's lower yielding portfolio, which we would rotate into higher earning assets, we still would over-earn our dividend-- at least based on our models.

I think our dividend policy is just a function of always trying to set a policy that we have a very, very high confidence level of meeting. We have been against special dividends as special dividends really don't benefit long-term shareholders of the business and so I think you would see us raise our dividend prior to having any special dividends. I know you are going to ask about a special dividend.

And then we look at our dividend policy over the intermediate term. Obviously there is a, as in our 10-Q and our 10-K, until we get to our floors, there will be a little bit of spread compression on our earnings. So we obviously think about that, but clearly we keep on over-earning our dividend, which the system is closed, so that obviously increases NAV all things being equal. So the benefits still remain with shareholders. Did I answer your question, Rick?

Absolutely. Thank you very much.

Chris York, JMP Securities.

So with shares trading at a premium to book value, you don't face the franchise risk that some other BDCs may grapple with right now. With that said, given that you had another strong quarter of new deals, I would be curious to learn if sponsors have communicated their understanding of the situation with you and are considering this in their selection of a lender.

Yes, look, we live in a very competitive environment and I will let Bo answer this and Mike. We live in a very, very competitive environment. I think sponsors -- about 60% of our business is sponsor, 40% is non-sponsor. I think sponsors typically choose us because we provide certainty and we understand the industries they operate in.

Obviously, I think a lot of sponsors plan to be acquisitive and having capital available from their lenders is helpful. I think that goes a little bit into their calculus and us being in a position to provide that capital obviously I think probably goes into that calculus. But I am not making those decisions and so, Bo, what are your thoughts?

Yes, I would agree with that statement. I think what we've seen over the previous quarter is that the recent volatility in the markets did put a much higher premium on certainty. So that's why our relationships are turning to us and I think having a stable funding base is always on their minds, but I would agree with you.

And I would also dovetail on that, the recent choppiness in the syndicated loan markets really highlight lenders like ourselves that can underwrite larger credit facilities and provide certainty in credit facilities of size.

Great. Chris, did we answer your question?

Yes, absolutely. All that makes sense. And then lastly here, so this one is kind of maybe more for you, Josh. So it's my understanding that you were one of a couple BDC industry representatives to visit with Mary Jo White and the SEC. Could you share with us some of those discussions at the meeting and maybe your personal takeaways as it relates to regulation related to the vehicle of BDCs?

Yes, so, look, the gossip channel is alive and well I guess. But I think the industry that was well-represented from diverse members of the industry did have a meeting with Commissioner White. I think that meeting was productive. As you know, there was, I think, legislation that is in the Committee and the House. The SEC I still think has some questions and hopefully we will be successful in working through those questions for the SEC. I think the feeling right now is that it has decent bipartisan support, and we hope that will continue and we think it's a good thing for all participants in the industry, specifically issuers and shareholders.

That's helpful. That's it for me. Congrats on another good quarter. Thanks, guys.

Doug Mewhirter, SunTrust.

I just had a couple clarifications of your earlier -- first, the termination of the SPV facility, I just wanted to clarify, you set it up to do a -- is this the one where you set it up to do a potential deal where you later pulled out or did I completely miss that?

You completely missed that. By the way, I am happy as long as you don't call me quirky this morning. I think you called me quirky last time. We had basically three financings prior to this quarter. One was obviously the convert; the second was our revolver. The third was a financing provided by Natixis that we refer to as the SPV financing that used securitization technology.

I think as we talked about on previous calls, that facility was effectively out of its reinvestment period and all proceeds from collateral on repayments were going to pay down that facility. As we modeled out that facility, although it had, I think, an original 10-year contractual life, it felt like that facility was going to have a shorter life and we just decided to move it. It was a LIBOR plus 235 financing -- we decided to move it to our cheaper LIBOR plus 200 financing as it was going to prepay by its nature in any event.

Okay, great. That's very helpful. And the second, just to clarify on Bo's remarks about the portfolio activity, you commented about a few investments moved down the capital structure, but I just wanted to sort of make sure I was understanding them correctly. You said there was a couple, I guess, more liquid assets that were either second lien or subordinated you picked up. I also noticed an equity investment. Was that as a result of the IRG restructuring, or is that a completely separate investment?

So a couple things for you. So AvidXchange is technically a second lien investment; although there's a small first lien unfunded revolver provided by a bank, so effectively we are first dollar in the capital structure. That size of that facility is about $30 million, so that was what impacted it the most.

We also had an equity co-invest in AvidXchange of $3.8 million, so that was added to the equity bucket. As you know, on occasion, we will do equity co-invest on transactions that we really like the fundamentals of. Avid was one of those. Then the restructuring of IRG added about $4 million to the equity bucket. And then we've been involved in a company called APX, which was actually a company we used to own the equity at Goldman, which is now Blackstone-owned and when there's been dislocations, we do purchase -- it's a level II asset -- we do purchase in the secondary market parts of that capital structure, including the unsecured notes.

So it was a combination of a little bit, tiny bit of APX, AvidXchange between the second lien and the equity co-invest, and IRG -- the restructured equity. But the largest portion of that was AvidXchange.

Great, thanks. And just the last clarification, you said that the A&P prepayment fee was recognized this quarter or would not be recognized until next quarter or until it closes?

It's recognized this quarter. It was contractually earned this quarter. It was contractually earned upon a filing of the Company.

Okay, great. Thanks. That's all my questions.

Terry Ma, Barclays.

I just wanted to get your outlook for the investment environment going forward. There was a large middle-market lender and commercial lender yesterday that indicated it was seeing a much weaker outlook for the economy. So I was just curious to see if you shared that view and how you are thinking about it going forward.

I actually think that the US economy is in pretty good shape, so just to think about Q3 GDP was 1.5%, but that was effectively due to changes in inventory. So when you normalize that, it was probably closer to 2.5% to 3%, but the consumer and business investment was much higher. Consumer spending is 70% of GDP at an annualized growth rate of 3.2%. The labor market is in stable position with real growth in income for the first time and cheaper gas prices.

So I would say that the fundamentals of the US economy are in decent shape or in good shape. So I think we are -- there is volatility around the world, especially given asset prices and worried about the commodity sector and China. I don't know who made that remark. My guess is if that lender is capital-constrained, they might be talking their book a little bit, but I don't know who made that remark yesterday, but the fundamentals of the US economy are in decent shape at the moment.

Fair enough. Are there any sectors that you find attractive right now?

Yes, we continue to find business services, healthcare that doesn't have direct reimbursement risk so healthcare IT. We have surely stayed away from cyclicals. For example, we have no auto exposure on our book. Autos, I think the SAARs number is going to be 17 million cars and light duty trucks, which, on an annualized basis, that feels kind of peakish for us, so we've stayed away from auto exposure, but we generally like business services and healthcare that is mostly healthcare IT.

Okay. That's helpful. Thank you.

(Operator Instructions). Jonathan Bock, Wells Fargo Securities.

Good morning and thank you for taking my questions and, Josh, congratulations on being a handsome face in front of the Chair of the SEC, so congrats on that. First question just relates to fees. Understand that some of the prepayments, particularly Rogue Wave and then we also saw a few items out of Metalico, just want to make sure, what was the dollar amount of fee that entered into income from Metalico and the close to the dollar amount that entered into income from the Rogue Wave investments this quarter?

So Jonathan, the dollar amount for income between the call premium prepaid fee for Metalico was $2.3 million. The accelerated OID was about $1.7 million. So you had total fees of about $4 million on Metalico. And then Rogue Wave, which was much smaller, was about $1.6million, $1.7 million.

Great, great, great. All right. And now just turning to one of the new investments that you made in the third quarter looking at American Achievement, one question we always like to ask ourselves when we see something that has a bit more of a club feel to it is what's necessarily different, like what did you or Bo or others kind of find, or Mike, that was attractive with this deal, particularly when we read that they were having issues perhaps earlier on in terms of how they were trying to finance themselves?

So if you could give us just color on what brought you to what appears to be more club-like when really you've just done a great job at more kitschy opportunistic solid financings. This seemed a bit outside the box and please explain to me how I'm either missing it and/or what makes it attractive.

I don't think it was outside the box. Look, we will do club deals. I think obviously American Achievement had an over-levered capital structure and the transaction we participated in, it de-levered through a new equity investment from a sponsor. And so the "old" American Achievement, given the capital structure, is not necessarily the "new" American Achievement.

And look, it was a business that we spent a lot of time thinking about modeling on a volume and price basis and got very, very comfortable with the precut cash flow profile of that business and its long-standing customer relationships. And its demonstrated pricing power and as everything we underwrite to a severe downside case, and we feel like our principal is significantly protected. And so, generally, what we try to do is find value and spend time where other people will not to create value for our shareholders and I think that's consistent with our theme. Mike, do you have anything to add?

I think you covered most of it. I think, as Josh said, we spend a lot of time doing our own independent diligence actually on the business sector, understanding kind of the long-term outlook for the business in modeling that and the free cash flow metrics of the business and liked where we were in the capital structure and the free cash flow metrics to our security.

Got it, got it. Great, thank you. And one small cleanup on energy just as it relates to Mississippi Resources. Saw the markdown. Clearly, you've absolutely more than outperformed with the repayment of the Metalico investment, but just the remaining comment on Mississippi Resources in light of the $3 million mark, which is I guess one of the bigger ones in the quarter.

So I think we've been pretty good with energy when you think about our exposure over time and how we've managed our exposure. Quite frankly, energy's probably our highest returning on an IRR basis both on a realized and on a total portfolio basis. Look, we own -- like we always said with Mississippi -- most of the commodity exposure given we had hedges on were going to be affected by our preferred equity investment. Commodity prices went from basically on the spot basis at 6/30 from $60 to on 9/30 to $45. And so we had a 25% decline on a spot basis and the whole curve moved down.

So it's a relatively limited exposure, but we -- that position is relatively limited, has a fair value of probably 3% of our portfolio, but surely has a little bit of commodity risk, but most of that was born by our preferred equity investment, which showed up this quarter.

Got it. And then, lastly, and this is an October 6 financing, so I believe it's likely -- it's definitely a fourth-quarter event, but Nektar, if you look at the press release that they put out, that's a $250 million senior secured financing at 7.75% or so. That's a big deal for a public company and so I guess the first question is, one, how do you source that transaction? Two, when you think of the size, is it your plan or view to continue to hunt what we kind of outline as elephant-sized, relatively large size transactions in the middle market and is it your view to take down and maintain that risk across your large debt management platform, both public and private?

Yes, so appreciate the question. Nektar has, I think, about $1.6 billion equity market cap, about $1.4 billion EV -- they have a whole bunch of cash. We originated and underwrote a $250 million first lien security there in the capital structure. The interest rate you quoted -- we had sold a first-out piece, so we have a higher effective return on our hold there. So we are excited about that position. We obviously don't comment intra-quarter regarding position size, but typically our largest position is 5% of our total asset base.

That was a transaction that we were able to co-invest across our platform given our Exemptive Relief. If you look at our history, our history is this. When there's market volatility like there was in 2011 and some parts of 2012, we will do bigger deals and we weren't public then, but we did a $215 million deal for Federal Signal, and we did a $130 million second lien financing for Mannington. When there isn't market volatility and when the high-yield market and leveraged loan market are going on all cylinders, it's very efficient capital to compete with and we don't compete there and we kind of do our bread-and-butter $30 million EBITDA businesses that have enterprise values between $100 million and $400 million.

Given the recent market volatility, there is an opportunity to do bigger deals. It was a non-sponsored transaction. We have -- across our platform-- direct calling efforts and people in the flows and direct sector approaches where we have sector themes. And one of those happens to be in pharmacy where we can underwrite royalty streams that don't have any operating risk and provide a lot of downside protection to our investment.

Got it. Great. We look forward to seeing the new investment as it enters in in the fourth-quarter financials and again, thank you so much for taking my questions.

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

Great. Thank you. Happy Veterans Day -- I think that is next week, so thanks to all the veterans out there. And also hope people enjoy their Thanksgiving holidays with their families, and we will talk to people, if not sooner, on our Q4 earnings call.

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