Sixth Street Specialty Lending Inc (TSLX) 2016 Q4 法說會逐字稿

Good morning, and welcome to the TPG Specialty Lending, Inc. December 31, 2016 fourth-quarter and fiscal year ended 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 this call 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 earnings press release for the fourth quarter and fiscal year ended December 31, 2016 and posted a supplemental earnings presentation to the Investor Resources section of its website, www.tpgspecialtylending.com. The earnings presentation should be reviewed in conjunction with the Company's Form 10-K 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. Unless noted otherwise, all performance figures mentioned in today's prepared remarks are as of the fourth fiscal quarter ended December 31, 2016. As a reminder, this call is being recorded for replay purposes.

I will now turn the call over to Mike Fishman, Co-Chief Executive Officer of TPG Specialty Lending, Inc.

Thank you. Good morning, everyone, and thank you for joining us. I will begin today with a brief overview of our quarterly and annual highlights and will turn the call over to our President, Bo Stanley, to discuss our origination and portfolio metrics for the fourth-quarter and full-year 2016. Our CFO, Ian Simmonds, will review our quarterly and annual financial results in more detail and my partner, Josh Easterly, will conclude with final remarks before opening the call to Q&A.

I am pleased to report strong financial results for the fourth-quarter and full-year 2016. Net investment income per share was $0.47 for the fourth quarter resulting in a full-year 2016 net investment income per share of $1.83. For the fourth-quarter and full-year 2016, we continued our track record of over earning our dividend on a net investment income plus net realized gains basis.

Yesterday, our Board declared a first-quarter dividend of $0.39 per share to shareholders of record as of March 31st, payable on April 28, 2017. We closed 2016 with our all-time high net asset value per share of $15.95, as compared to $15.78 for the third quarter and $15.15 at the end of 2015.

Net asset value movement during the fourth quarter was primarily driven by the over earning of our quarterly dividend and unrealized gains resulting from the positive impact of tightening credit spreads on investment valuations. For the full year 2016, we achieved net asset value per share growth of 5.3% through a combination of over earning our dividend, executing a NAV and ROE accretive equity raise and the aforementioned positive impact of tightening credit spreads on investment valuations.

From a portfolio perspective we had no investments on nonaccrual status at year end. As disclosed on our last call, during Q4 we restructured our investment in Vertellus' prepetition loan, which was our only investment on nonaccrual status at the end of Q3, into a new performing second lien loan and an equity investment. And our position in Vertellus' DIP loan was converted into a first lien loan investment in the new company at the same pricing level.

At quarter end, the overall performance of our portfolio remained steady with a weighted average rating of 1.4 based on our assessment scale of 1 to 5, with 1 being the highest, as compared to 1.4 for the prior quarter and Q4 2015. Across our portfolio since inception through December 31st, we've generated a gross unlevered IRR of 15.3% on fully realized investments totaling $1.6 billion of cash invested.

Consistent with the objective outlined on previous earnings calls, we have made significant efforts on enhancing the right side of our balance sheet. During the fourth quarter we upsized our revolving credit facility and extended the final maturity, and post quarter end we issued $115 million of convertible notes.

Pro forma for the convertible notes offering we have approximately $477 million of undrawn revolver capacity, which we believe positions us well for the year ahead based on the current market opportunity set.

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

Thanks, Mike. Our Q4 investment activity was relatively muted with gross originations of $79 million and fundings of $54 million distributed across one new portfolio company and two add-ons to existing portfolio companies.

While Q4 has typically been an active quarter for us from an origination standpoint, we believe our activity level in the fourth quarter is reflective of an uncertain M&A environment given the US election, as well as our investment selectivity, amid an increasingly competitive lending environment.

In 2016 middle market debt platforms raised twice the amount of capital as compared to 2015. In today's issuer friendly and late cycle environment, we believe our focus on investment selectivity and strong credit documentation plays in ever-important role in the mitigation of credit losses and protection of our shareholders' capital.

Through our direct origination efforts, 89% of our current portfolio by fair value was sourced through non-intermediated channels. This enables us to control the documentation and investment structuring process and has resulted in our ability to maintain effective voting control in 75% of our debt investments, and average 2.5 financial covenants per loan, both calculated on a fair value basis.

During the fourth quarter, we had $57 million aggregate principal amount of repayments from one full investment realization and five partial investment sell downs. With the full realization of our SEK-denominated investment in Jeeves, our foreign currency exposure pro forma for post fourth-quarter sell downs is limited to one portfolio company.

Reflecting on our deal activity in 2016, we were well positioned to capitalize on larger financing opportunities as traditional banks were sidelined amid bouts of market volatility and regulatory constraints. During the past year we, along with our affiliated funds, provided commitments for five financings that were $400 million or greater in size at attractive risk adjusted returns.

Our ability to originate larger commitments through co-investment from affiliated funds has allowed for enhanced shareholder economics by way of syndication fees, which contributed over 30 basis points to ROE in fiscal year 2016. While the magnitude and pace of the potential rollback in bank regulation has yet to be seen, we believe our structural advantage as part of the broader TSSP platform affords us the scale and expertise to participate in larger middle-market financings given our SEC Exemptive Relief.

Meanwhile, should regulatory reform affect the breadth and depth of the financing opportunities for non-bank lenders, we have minimal capital deployment pressures as a result of our direct origination strategy and prudent portfolio growth since inception.

With respect to the secondary markets, you may recall that we opportunistically purchased certain names in late 2015 and early 2016 as we identified what we believe to be outsized risk return opportunities in sectors and companies in which we have a differentiated perspective. During the fourth quarter, we sold $35 million of these secondary market investments as their respective market prices approached our indifference point of holding the underlying security.

The weighted average price of liquid debt investments sold during the fourth quarter was 99% compared to a weighted average price of 95% as of March 31, 2016 for those investments. Year to date 2017, we have continued our theme of rotating out of liquid names in order to maximize shareholder value as BDCs are generally not the low cost producers of liquid loan investments.

Let me take a moment to talk about the risk profile of our portfolio. At fourth quarter end our portfolio totaled approximately $1.66 billion at fair value compared to approximately $1.64 billion at September 30th and $1.49 billion as of December 31, 2015. Our portfolio continues to be well diversified across 52 portfolio companies and 19 industries. Our average investment size was approximately $32 million and our largest position accounted for 4.5% of the portfolio at fair value.

At nearly eight years into an economic cycle, we remain primarily focused on investing at the top of the capital structure in low capital intensive businesses that are scaled and relevant to their supply chain. At December 31st, our core portfolio companies had weighted average annual revenues of $144 million and weighted average annual EBITDA of $31 million. At year-end 97% of investments by fair value were first lien and 98% of investments by fair value were secured. Our junior capital exposure has decreased by over 70% to 3% of the portfolio at fair value as compared to 12% at year-end 2015. From time to time we may look to increase this exposure depending on the opportunity set.

At this latter point in the economic cycle, we continue to focus on borrower diversification in industries with low cyclicality. Our largest industry exposures by fair value at quarter end were to business services, which accounted for 22.6% of the portfolio at fair value, and healthcare, primarily healthcare information technology with no direct reimbursement risk, which accounted for 12.2% of the portfolio at fair value. Since our IPO in early 2014, we have reduced our top 10 borrower concentration from 50% to 36% of the portfolio and reduced our exposure to non-energy cyclical industries from 19% to 6% of the portfolio, both on a fair value basis. It is important to note that our cyclical exposure excludes asset-based loan investments as those loans are supported by liquid collateral values and not underwritten based on enterprise value, which tends to fluctuate with market cycles. Post quarter end, with the sale of our Level II position in Key Energy at a price of 102.5% compared to our blended costs of 96.4%, our exposure to energy is now limited to one investment representing 2% of the portfolio at fair value.

At December 31st, the weighted average total yield on our debt and income producing securities and amortized cost was 10.4% versus 10.3% at September 30th, and 10.1% at December 31, 2015. The weighted average total yield of amortized cost on new and exited debt investments during the fourth quarter were 9.1% and 8.9% respectively.

With that I'd like to turn it over to Ian to discuss our quarterly and full-year financial results in more detail.

Thank you, Bo. we ended the fourth quarter and fiscal 2016 with total investments of $1.66 billion, total debt of $692 million and net assets of $952 million or $15.95 per share.

As Mike mentioned at the beginning of this call, our net investment income per share was $0.47 for the fourth quarter resulting in a full-year net investment income per share of $1.83. This exceeded our full-year guidance of $1.59 to $1.74 per share, which was based on an expected ROE 10.5% to 11.5% applied to beginning NAV.

Consistent with the prior quarter, our leverage ratio at December 31 was 0.73x. And for both fourth-quarter and full-year 2016 our weighted average leverage ratio was 0.80x, the midpoint of our target leverage rate of 0.75 to 0.85x. I will note, however, in periods where we see limited attractive risk return opportunities we may operate below our target leverage range given portfolio repayments could outpace fundings. Historically, in our experience, during those environments we tend to have more fee income related to repayment activity to support ROE, which was the case for us in 2014 and 2015.

Since our last call we have made strides on enhancing and diversifying our funding sources. During the fourth quarter we upsized and extended our revolving credit facility, increasing commitments by $123.7 million to $945 million and extending the final maturity to December 2021 for $885 million of these commitments. We are very appreciative of our lenders' ongoing support and their recognition of our disciplined approach to portfolio construction and capital allocation.

Subsequent to quarter end, we issued $115 million principal amount of 4.5% 5.5-year convertible notes, the net proceeds of which were used to pay down debt outstanding under our revolving credit facility. Consistent with our risk management philosophy, in order to continue to match our liabilities with the floating rate nature of our portfolio, we entered into an interest rate swap matching the notional amount and term of the new convertible notes. This was an opportunistic financing transaction that provided us with efficient access to capital at pricing of LIBOR plus 2.37% on a swap adjusted basis. This leverage neutral transaction provided for an extension of our overall maturity profile, an enhancement to funding diversity through an increase in our unsecured funding mix, and a 30% increase in available liquidity prior to regulatory leverage constraints, all with minimal pro forma drag on ROE. Inclusive of this transaction, we believe we remain match funded from both an interest rate and duration perspective.

Moving over to our presentation materials, slide 8 contains an NAV bridge for the quarter. Walking through the various components, we added $0.47 per share from net investment income against a dividend of $0.39 per share. In addition, $0.23 per share can be attributed to the positive impact of credit spreads on the valuation of our portfolio and $0.14 per share can be attributed to the net impact of other realized and unrealized net losses, of which the majority was related to portfolio company specific events.

Moving to the income statement on slide 10. Total investment income for the fourth quarter was $49.7 million, this is down $4.2 million or 7.8% from the previous quarter primarily due to the elevated level of other income we experienced in the third quarter of 2016.

Breaking down the components of income, "interest and dividend income" was $44.4 million for the quarter, in line with $44.6 million in the prior quarter. "Other fees" was $1.5 million for the quarter compared to $2.5 million in the previous quarter. This revenue line will be uneven over time as it is generally correlated with movements in credit spreads and risk premiums. Other income was $3.8 million for the quarter, a decrease of $3.0 million compared to the prior quarter primarily driven by syndication fees that were related to our role in the financing of Qlik Technologies during Q3.

Net expenses for the quarter were $21.0 million, down from $22.7 million for the previous quarter. This decrease was primarily due to an elevated level of professional fees in Q3 related to our activities in TICC as well as lower incentive fees earned in the fourth quarter.

Now I'd like to take a moment to discuss the unit economics and ROEs of our business. In Q4 and for full-year 2016, we generated an ROE based on net investment income of 11.9%, which compares to 11.2% for full year 2015. This improvement reflects the optimization of balance sheet leverage as well as our continued focus on improving the operating leverage in the unit economics of our business. From 2015 to 2016 we increased our weighted average leverage ratio from 0.64x to 0.80x, decreased our weighted average all-in cost of debt from 3.5% to 3.2%, and reduced our average run rate operating expenses from 74 basis points to 65 basis points.

Over the intermediate term, and including the impact of a rising rate environment, based on our expectations for net asset level yields and cost of funds, in combination with a target leverage ratio of 0.75x to 0.85x, we expect a target return on equity of 10.5% to 11.5%. Based on our December 31, 2016 book value of $15.95 per share, this corresponds to a range of $1.67 to $1.83 for full-year net investment income per share.

Another way to look at our business is dividend coverage from our "Base NII", which we define as net investment income excluding activity driven income and its impact on fees. In 2016 we achieved a "Base NII" per share of $1.56, as compared to $1.32 in both 2015 and 2014. Depending on the market environment and our ability to operate within our target leverage range, we believe our "Base NII" is capable of supporting our current dividend level.

Regarding our dividend level we, along with our Board, perform ongoing assessments to ensure that it reflects the earnings power of the business across an economic cycle, while maximizing cash distributions to shareholders. Among the factors assessed are the investment opportunity set, tax implications, the interest rate environment and expectations for portfolio performance including the potential for credit losses.

At fourth quarter end, the three-month LIBOR exceeded the average floor on our debt investments and the forward LIBOR curve had steepened relative to where it had been in prior quarters. Given that 98% of our debt investments are floating rate in nature and 53% of our portfolio is funded with equity, a rising rate environment provides an earnings tailwind for our business. As disclosed in our 10-K, assuming our balance sheet at year end were to remain constant and we took no actions to alter our existing interest-rate sensitivity, we would expect a positive earnings per share impact of the forward LIBOR curve, excluding the impact of fees, to be approximately $0.03 in 2017 and approximately $0.10 in 2018. As we have stated in the past, we will continue to evaluate our dividend level to ensure it is commensurate with the earnings power of our portfolio. With that I would like to turn it over to Josh for concluding remarks.

Thank you, Ian. The market environment today stands in stark contrast to what it was a year ago when concerns about China's growth and downturn in the energy sector drove over 10% declines in the equity market and spread expansion in the credit markets. By year-end, however, the S&P 500 high yield and leveraged loan indices all achieved double-digit returns as global growth showed signs of stabilization and the outcome of the US election boosted hopes for pro-growth economic policies.

Also during 2016, there were significant fluctuations in the currency market related to Brexit and movements in interest rates related to Fed policy and the US growth outlook. Through the market noise, we remained focused on identifying and managing the impact of risks which we could control for, such as sector and borrower selection, and certain noncredit risk including foreign currency, interest-rate and reinvestment risk, the latter of which is mitigated by call protection on 80% of our investments. As a result of our hedging strategy we experienced de minimis currency-related impact to NAV in 2016.

While sentiment in the broader investment community has been generally positive, our outlook for 2017 remains cautious due to a number of tail- risks surrounding fiscal policy and the protectionist rhetoric that exists. One example is an impact of tax reform on various sectors.

While Wall Street research indicates that potential border adjustment tax could reduce, but would not eliminate corporate earnings upside as a result of tax reform, the impact of the border adjustment tax could vary widely by sector with consumer staples and discretionary as the sectors likely to be most adversely affected.

That said, we believe the value of our retail investments would remain stable despite these headwinds as our loans are asset based in nature and secured by working capital assets. Beyond the policy uncertainty at home we believe there remains a number of political and economic risks abroad, which, coupled with the still unknown risk, support a defensive late cycle minded investment framework. As Bo and Ian mentioned, in the past year we have been able to further de-risk the portfolio while maintaining portfolio yields and improving the underlying operating leverage of our business.

In 2016, we delivered to our shareholders a total return of 26% and since our IPO we delivered to our shareholders a total return of approximately 53%, which represents an outperformance of 41 percentage points versus the Wells Fargo BDC index.

Additionally, we generated an economic return in 2016 of 15.5% as measured by growth in NAV plus dividends. And since our IPO we generated an annualized economic return of over 10%, which far outperforms our industry peers over the same benign credit environment. We are very humbled by our achievements to date and we are highly cognizant of the fact that no one is immune to missteps, the nature and impact of which none of us can yet foresee.

Specifically as it relates to credit missteps, there has been and will continue to be credit events in our portfolio not consistent with our base underwriting case. However, through our origination and underwriting capabilities we have been able to structure embedded economics in the rest of our portfolio and provide a margin of safety in our ability to generate attractive shareholder returns.

To illustrate this concept, the weighted average total yield at amortized cost of our portfolio over the last 12 months was approximately 10.4%, which compares to a return on average assets of approximately 12% on the total investment income basis over the same time period.

Before closing I would like to provide an update on TICC. As most of you know, our activities related to TICC were driven by a desire to capitalize on an accretive opportunity for both TSLX and TICC shareholders. However, given structural limitations for BDCs, we were not able to complete a transaction and as of today, we have exited the majority of our holdings of TICC's common shares.

The silver lining for our experience has been notable corporate governance improvements across the sector. To illustrate this point, in the 12 months following the quarter we announced our involvement in TICC, the amount of BDC stock buybacks more than quadrupled compared to amounts in the 12 months prior, despite the sector trading below NAV across both periods. We are encouraged by the increased level of accountability amongst BDC managers and their Boards and are optimistic about the long-term prospects for health and growth of our sector.

In closing, we believe policy developments will continue to dominate headlines in 2017 and drive periods of market volatility. While we have dedicated extensive human capital resources to understand and forecast the implications of policy reform on consumers, businesses and global economy at large, we are careful to not let this short-term noise drive the long-term orientation of our business.

Our priorities going forward remain employing our proprietary direct originations platform, focusing on less liquid credit investments that have superior risk-adjusted return profiles, and making capital allocation decisions that serve the best interest of our shareholders.

On behalf of the TSLX team, thank you for your continued interest and for your time today. Operator, please open the lines up for questions.

(Operator Instructions). Jonathan Bock, Wells Fargo.

Josh, just talking about the repayment environment given its-- credit markets are fairly buoyant. Can you talk about Highwinds Capital and kind of the net effect that would inert investors to the extent that $48 million at par loan is repaid, what are the dollar and cents impacts?

And then two, taking a 30,000 foot view, if we are looking at general repayment activity and we look at a number of the deals that are trading in line with their call protection at 101% or above of par, would you expect that this environment is likely going to be buoyant enough to see greater amounts of prepayment activity and likely limit your desire for equity capital in the future?

Hey, Jonathan, good morning. Thanks for your questions. Let's take the first question -- let's take your last question first because I think it is a little less straightforward. Look, we are in a pretty tough investment environment, there has been a lot of capital raised, people are pretty bullish on growth prospects. Quite frankly this is where we find that there is the most risk to any investing environment, which is a combination of a lot of capital raised and a bullish consensus. So I agree that there is a possibility of repayment. I think for our business and for the earnings power of our business that is -- we have the ability to withstand that as we did in 2014 and 2015.

So when you look at our portfolio and say the names that are marked above par as candidates for refis, the weighted average call protection on those names are about 103.2%. And so, there is some barrier for those to be repaid. In the event they are repaid there is two economic streams that our shareholders benefit from. One is the call protection and the second is the accelerated amortization of the remaining OID, which also drives ROE.

So in the environment where repayments, as Ian talked about, outpace new fundings, which you could see in an environment which is super competitive, and we are less bullish on the overall environment, or quite frankly we think that there is a high opportunity cost of our capital, in that environment we might be under our target leverage ratio, but in that environment we will have a lot of additional fees or income streams that are able to produce higher ROEs, for example, in 2014 and 2015.

So, for example, I think in 2014 NII was $2.07 a share, in 2015 it was $1.76. In both those years our weighted average leverage ratio was in 2014, 0.50x and in 2015, 0.64x. So did I answer your later question and then we'll get to the first one about Highwinds?

You definitely did. And then just the dollars and cents impact there in terms of is it about a $500,000 fee or --?

Yes, that is generally about right. So it is pretty consistent with the fair value at the end of the quarter. Correct.

All right, great. Thank you for taking my questions.

Chris York, JMP Securities.

So I really only have a couple this morning. But I will begin with a question on your ABL strategy. So when you lend to a retail company like American Achievement or Toys"R"Us that may have some enterprise value that includes IP, in you are underwriting do you need to consider protections so the borrower does not transfer the IP to unrestricted subsidiaries like we saw in J.Crew or Claire's?

Sure. So first of all, American Achievement is not an ABL deal. American Achievement -- and it is not a retail deal. It is a consumer products deal. So we will set that aside. In that case -- the great news about private credit generally speaking versus the syndicated loan market is that the baskets related to restricted payments, incurrence of debt, transfer of assets are de minimis or nonexistent. So you generally don't have that risk. Whereas in the broadly syndicated market those credit agreements are set out to provide the maximum flexibility for borrowers since the diversity of the underlying lender base is very hard to get amendments done when you have 100 CLO lenders. In the private credit landscape where there are bilateral loans or club loans, the flexibility is much less. And so that risk doesn't exist.

As it relates to the ABL credit specifically on retail, that risk wouldn't exist anyway because they are underwritten to the liquidation value of inventory and there is typically not an IP component that you are advancing against. If you are advancing against an IP component, obviously they are unable to transfer that. So they are very different in nature. I don't know, [Fishy] --?

No, or relative to IP on retail deals, you get the IP to use it in a liquidation. So beyond that as Josh mentioned we tend to be fully secured by the inventory liquidation value.

Chris, did that answer your question?

It does, it is very thoughtful. It is a good distinction too. And I know some people were curious about that as it related to your strategy. So, thank you. And then I wanted to talk a little bit about the dividend. So your prepared remarks and the topic were thoughtful and measured.

But earnings has consistently covered the dividend. And now with the prospects of rising rates it should be a tailwind for earnings power. So what do you need to see maybe specifically to have more comfort to increase the dividend as the context also is challenged because investment environment remains difficult?

Yes, I mean you hit it, which is the pluses are -- when you look at our business the ROE -- look, we had this conversation at the Board level yesterday. I think what happens is if you think about how we set our dividend, which is we set it where we have a three standard deviations of confidence of reaching. And if you set it at that low point by definition you are always going to over earn, right? Because if in 99 out of 100 cases you earn it the other -- in those 99 cases the probability that you over earn it is high and so we are kind of in that situation. So the unit economics of our business surely has historically been able to support a higher dividend.

The good news is, is that it hasn't been lost because it gets captured in NAV and we have been able to grow NAV since inception from probably $14.80, $14.90 a share, $14.70 a share to almost $16 a share now. That being said, so the tailwinds is a rising rate environment, a performing portfolio and a -- we have been able to generate historically ROE that exceed our dividend.

The headwinds for surely are the investment environment, possible spread compression given the capital formation and the repayments which lower -- which would lower our effective leverage ratio, which would be a headwind to ROE, offset by the embedded economics in our portfolio, which is the accelerated amortization of OID and the call protection.

So when you put that all in the mix I think we are a little bit in a wait-and-see approach and we are trying to think of some creative ways on how to deal with it. As you know we are not a big fan of specials (dividends) given specials don't reward long-term shareholders, they reward the guys who happens to own it at that moment in time.

So we are trying to think through it and for at least this quarter we are in the wait-and-see approach as it relates to the investment environment. And hopefully, quite frankly, there will be points of volatility like there was in Q1 of 2016 and Q4 of 2015 that will allow us to take advantage and have more visibility as it relates to our dividend. Ian, do you have anything to add or Mike?

No, I think you covered that well.

Thanks, Chris.

Yes, that is it for me. Very thoughtful answer. Thanks, Josh, thanks, guys.

(Operator Instructions). Doug Mewirther, SunTrust.

I guess more of a general question. Your commentary is similar to the commentary of some of your other competitors in that just it is -- I guess the demand for deals exceeds the supply of deals for the traditional middle-market space. And so I'm just kind of wondering where are you looking if there is -- if the traditional sort of enterprise value sponsored deals don't look attractive to you.

It seems like you have to go further and further into the niches or into the -- up into the syndicated. Like are you looking at more syndicated deals? Is the ABL space still fertile? Or is there any other pockets that you are going into that maybe you haven't been in in a while?

Yes, so that is a great question. I will hit it at a high level and turn it over to Bo and Fish. Look, the thing about our business is we tend to be thematic as it relates to our origination strategy. So I will turn it over to Bo and Fish to talk about those themes in general.

Obviously in retail, given what has happened in the secular trends in retail, we think there will be more disruption to that business model which will require more capital or transitional capital I think which will be helpful to our platform, which we have a -- most definitely a core competency in and it is very niche and you need a technical expertise. Monitoring a borrowing base and understanding a borrowing base is not always easy and it's human capital intensive.

As it relates to the syndicated market, to us, given the fee structure in BDCs, if you are using shareholder capital to participate in a broadly syndicated loan market you are actually destroying value, right. So people can access that risk return either through CLOs which are 40 to 50 basis points of AUM, or they can access that through floating rate funds.

And so, given the fee structure of BDCs, if you are the high cost producer of that risk return, which means that you are actually destroying shareholder value. So I don't think you'll see us go into the syndicated loan market. Quite frankly what you have seen us is in our liquid credit stuff continuing to sell that, given that we think it has got to our indifference point of fair value. And so, we have been a large seller and in Q4 on our Level II names between Vivint, which we had a -- sold it limited price of almost par and our blended cost was 86%. So Skillsoft, Toys"R"Us and obviously TICC. So I don't think you will see us go there. Bo and Fish, you want to talk a second about themes, is it FinTech or pharma where we are not taking pricing risks?

Yes, sure, I think just generally we have always been of the belief that thematic originations allows us to put ourselves in positions with -- where we are seeing opportunities that there is less competition, especially in periods of intense competitive pressure like we are seeing today.

So as Josh mentioned, some of the themes that we have developed over the years are pharma, retail ABL, which we have talked about a lot, FinTech, enterprise software. We are continually developing these themes and rotating them depending on the opportunity set. So it is what we spend a fair amount of our time as a management team and as an investment group thinking through and we will continue to do that as opportunity sets change.

And just to add to that, I mean it is somewhat obvious, but what is obvious to everyone else that looks like a good opportunity creates a situation where those investments become less interesting to us. So we have to do a lot of work and we are in the midst of doing it to identify those themes. And it will put us in a position where, look, there is always going to be competitors looking at opportunities. But when you find the right themes we have a differentiated view. And there are very few others that are looking at those same opportunities, we think we can create some interesting risk returns.

Okay, thanks, that is very helpful. And that is all my questions.

Leslie Vandegrift, Raymond James.

You mentioned in your prepared commentary about being mostly sold out of TICC at this point in time. How much is left there? And I guess we are moving out of it right now. Can we see that basically gone in second quarter?

You could expect to see it completely gone in the second quarter except probably a small toehold position.

Okay. And then you have given a lot of great color so far on the repayment activity and lower originations in the quarter and kind of the political reasons behind why it was slow as well as the tepid environment there. But with the uncertainty of the election gone, will we see a bit faster originations and repayments in first quarter than fourth quarter even if we are still in that tougher environment?

Sure. So, look, I read a lot of research out there and a lot of research talks about origination activity. For our business model, origination activity doesn't drive -- have any real impact on unit economics. And so I just want to put that out there, which is what matters in our business is maintaining our financial leverage. And so what really people should key on is the net activity, which the net activity in Q4 was flat.

But there are going to be points of time given the competitive environment where the net activity might be negative. That being said, there has been some public names -- I mean public names. We usually don't disclose stuff, what we have done intra quarter between calls, but there has been public names-we've obviously been involved in the Fred's transaction, who knows if that happens as it relates to Walgreens and Rite Aid. We have been -- on an ABL basis, we have been involved in another public name, which is Model N, and Ironwood which was a pharma company. And so, those are the names that are public in Q1. And so, you've seen activity levels pick up and then, as Jonathan pointed out, you have seen some repayment pickup, for example, Highwinds.

Okay (multiple speakers). No, sorry, go ahead.

So, the only thing I would add to that is it is a good -- it's sort of bridged from our thematic discussions. So all three of those that were mentioned that were public are thematic originations. Public companies that I think a lot of our competitors wouldn't have seen.

Okay. All right, and then on -- just a quick modeling question. On the spillover income, what was that at the end of the quarter?

Sure, Leslie, it's Ian. We actually disclosed that in our 10-K, it is on page 33 --.

Oh, sorry (multiple speakers).

But I will give you the number, it is $52 million in total which is $0.86 a share.

Okay. And then on your portfolio, I know you don't typically break it out, but approximately what percent of that first senior secured investment are unitranch style?

Yes, it is actually -- it is broken out, you can do the math, because there are footnotes by the names that are subject to skim income. And so, about half and half. So, less than half has a small first out either revolver or term loan. But the way, Leslie, that you could pick it up is there is a footnote -- I can't remember what footnote it was -- footnote 5 next to the ones that have -- are subject to some type of arrangement.

Okay. All right. And then just last quick question here. On the quarter you guys give weighted average term and new investments each quarter. And I know again, like you said, net was low and gross originations were lower last quarter. But it went down to 2.4 years. Was that one specific investment that brought that down? Or is that something we are seeing because we have seen at some competitors some shorter-term investments as well?

It was one specific investment which was a retail ABL deal which was Payless that was coterminous with the ABL. And the other thing I would say is we are seeing -- look, we are seeing risk and risk appetite increase across the space. And that means lower covenants, higher leverage, lower pricing. In addition to longer weighted average maturities or longer weighted average life with -- ultimately which will have an impact on fair value if credit spreads blowout.

So if credit spreads blow out and you have a short weighted average life portfolio the dollar impact should be low. If credit spreads blow out and you have a long weighted average portfolio the impact will be high. And so, you are seeing -- we have not materially changed the underlying weighted average life of our book and added duration risk to our risk profile.

Okay, perfect. That is all for me. Thank you.

Mickey Schleien, Ladenburg.

Josh, you spent a good amount of your prepared remarks talking about your view of the credit cycle. And clearly when you look at the quarter and you do the math on that unitranche we see an increased allocation to first lien. It was also the slowest quarter for you on a net basis in a long time.

So that seems to reflect a pretty cautious outlook and as of today it seems that that is still your outlook. But I am curious, what are the key developments you and the management team and the Board are looking for that could actually increase your appetite for risk and maybe take on some more second lien or mezzanine debt?

Yes, so I think for us -- look, it would be volatility and the risk/reward offered on those securities. And so, I think something would massively have to change. The challenge with investing in those securities is not only are you investing at, on a leverage level, the highest attachment points in a long time but you are also financing the most earnings that you have. So you have had compounded earnings growth post cycle. And so, the combination of those two things, high leverage and financing peak earnings, is pretty scary to us. And so I would expect -- you might see big changes on a percentage basis, i.e., we go from 3% to 4% before -- that would be a big change on a percentage basis, 33% or whatever it would be. But you won't see a step function to a portfolio that is 10% to 20% junior capital until you see a washout as it relates to both capital formation and financing kind of more moderate earnings levels.

Okay, I appreciate that and I understand. Just a couple of more simple questions. Looking at the realized loss in the quarter, was that Vertellus or something else?

Yes, that was Vertellus. So, it had no really impact on NAV because that was already -- so it went from unrealized to realized. And so, there was no real impact on net asset value. But given that there is fresh start accounting and given the exit of bankruptcy, you crystallize the unrealized loss.

No, I understand. And lastly, can you just touch on the issues confronting Moroso?

Which name?

It is IRGSE?

Oh IRG, sorry.

IRGSE Holdings.

Yes, yes, so IRG is -- it is in the middle of a turnaround. We control the company, we've put in new management and we are more optimistic than we ever have been. But how we fair value our portfolio, which we believe is appropriate, which is where would we buy that security and the required yield. And how does that -- and what is the dollar price on our security. And so as that business has been a slow return, although it is starting to turn, it is reflected in our valuation.

And what --.

And mostly execution issues. So the business -- so in my view we had a change -- there had to be a management change and mostly execution issues. They are an entertainment business in the sense that they run drag -- one or two and operating national, the section body for operating national drag races and sporting events. So think of it as mini NASCAR. And they were running a lot of negative gross profit events that we have since taken out the schedule.

All right, that is very helpful. I appreciate your time this morning.

And I am not showing any further questions at this time. I would like to turn the conference back over to our host.

Great. So look we appreciate people's time and we will be back on the phone earlier given the cadence of these calls, given from Q4 to Q1 it seems like we'll be talking shortly. But I hope people enjoy their spring and their holidays and Passover and Easter and feel free to reach out to the team if you have any questions.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.