Triangle Capital Corporation (NYSE:TCAP)
Q2 2017 Earnings Conference Call
August 3, 2017 09:00 AM ET
Tommy Moses – Vice President and Treasurer
Ashton Poole – President and Chief Executive Officer
Steven Lilly – Chief Financial Officer
Ryan Lynch – Keefe, Bruyette & Woods, Inc.
Joseph Mazzoli – Wells Fargo Securities, LLC
John Hecht – Jefferies
Leslie Vandegrift – Raymond James & Associates
Christopher Testa – National Securities
Good morning, ladies and gentlemen, at this time, I would like to welcome everyone to the Triangle Capital Corporation’s Conference Call for the Quarter Ended June 30, 2017. All participants are in a listen-only-mode. A question-and-answer session will follow the Company’s formal remarks. [Operator Instructions] Today’s call is being recorded and a replay will be available approximately two hours after the conclusion of the call on the Company’s website at www.tcap.com, under the Investor Relations section.
The hosts for today’s call are Triangle Capital Corporation’s Chairman and Chief Executive Officer, Ashton Poole; and Chief Financial Officer, Steven Lilly.
I will now turn the call over to Tommy Moses, Vice President and Treasurer, for the necessary Safe Harbor disclosures.
Thank you, Oliviya, and good morning, everyone. Triangle Capital Corporation issued a press release yesterday with details of the Company’s quarterly financial and operating results. A copy of the press release is available on our website.
Please note that this call contains forward-looking statements that provide other than historical information including statements regarding our goals, beliefs, strategies, future operating results and cash flows. Although we believe these statements are reasonable, actual results could differ materially from those projected forward-looking statements.
These statements are based on various underlying assumptions and are subject to numerous uncertainties and risks, including those disclosed under the sections titled Risk Factors and forward-looking statements in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016 and Quarterly Report on Form 10-Q for the quarter ended June 30, 2017, each as filed with the Securities and Exchange Commission. TCAP undertakes no obligation to update or revise any forward-looking statements.
At this time, I’d like to turn the call over to Ashton.
Thanks, Tommy, and good morning, everyone. Last quarter in my prepared remarks, I indicated that 2017 had gotten off to a rapid start for TCAP, as we had originated over $145 million in new portfolio company investments. I’m pleased to report that since the beginning of the second quarter, we have maintained a healthy pace of activity as we have originated approximately $90 million of new portfolio company investments. And as we have signaled very directly in our annual Investor Day presentation on June 22, a copy of which is posted on our website under the Investor Relations tab.
We are continuing our migration away from legacy mezzanine investments and into more senior oriented investments which contain greater lender rights and protections, which we believe are prudent to pursue at this point in the economic cycle. To be more precise of the eight investments we have closed since April 1 of this year, six of them are through second lien or unitranche investments.
I’d like to compliment our origination team on its success in expanding TCAP’s brand name and market presence into new channels as we gained greater recognition and traction with larger financial sponsors, who are looking for a trusted partner with meaningful committed capital and a long-term relationship based out of investing.
From a strategic standpoint, I’m also pleased to report that in light of our migration from a predominately mezzanine oriented investment strategy, close to 50% of our current investment portfolio is now comprised of first lien, second lien and unitranche investments. In addition, over 40% of our investment portfolio is comprised of floating rate investment structures poised to provide higher yields [sure that’s apprise] continue to rise. And by the end fiscal 2017, I expect that approximately two thirds of our investment portfolio will be comprised of these more up balance sheet structures.
During the second quarter, we recognized net realized gains across our investment portfolio totaling $5.2 million which consisted primarily of gains totaling $8.3 million on the sales of three investments offset principally by a loss on the write-off of our investment in power direct marketing in the amount of $2.7 million. Since our inception in 2007, our net realized gains across our investment portfolio totaled approximately $11.8 million.
From an investment portfolio standpoint, during the quarter we experienced pretax net unrealized depreciation on the current portfolio in the amount of $22.9 million. Our non-accrual investments totaled 5.4% of the cost basis of our investment portfolio or $67.5 million and included one new non-accrual account or $17.7 million investment in Community Intervention Services, Inc. which was moved from pick non-accrual status to four non-accrual status during the quarter.
In addition, we had two new big non-accrual assets during the second quarter. We placed both our $14 million subordinated debt investment in Capital Enterprises Inc., and our $12.6 million subordinated debt investment in Eckler Holdings Inc., and big non-accrual status.
As we look towards the second half of 2017, we continue to see strength in the M&A market, this financial sponsors look to make attractive add-on acquisitions for their existing portfolio companies, as well as to add strong performing platform companies to the overall investment mix. To be clear most auctions are competitive and well shot.
However, we are fortunate partner with quality financial sponsors we are still willing to capitalize there portfolio companies with sufficient equity capital while they till before more senior [indiscernible] which include senior unit tranche and second lien securities. These types of financial sponsor relationships where the financial sponsor has meaningful spend in the game our quarter, our current and future investing strategy.
Finally, our strategic decisions over the last 12 months to expand Triangle’s liquidity positions are serving as well as we have cutting more relevant to more financial sponsors across the wider percentage of the market. As we continue to pursue our up balance sheet strategy, I am pleased with our ability to find attractive investment opportunities that will become the backbone of our investment portfolio over the coming quarters.
And while we are not abandoning high quality well-structured mezzanine investment opportunities. I continue to instruct our investment team not to address sacrificing investor capital, simply in an effort TCO. In my view we are two beep into the current economic cycle and market demands for increased financing options for debit focusing on one type of investments structure.
And with that, I’ll turn the call over to Steve.
Thanks Ashton. During the second quarter we generated net investment income per share of $0.41 our NII was $0.04 lower than our divided on per share basis, primarily moving to the short-term operational dilution from our February 28, 2017 equity offering. The effect of the new non-accrual investments Ashton mentioned in his opening comments and lower than average one-time fees and dividends from our portfolio companies.
From a quarter-over-quarter perspective as you compare the quality of our revenue during the second quarter with the first quarter of this year. We will note that we recognized approximately $1.5 million of non-recurring dividend in fee income from portfolio companies during the second quarter as compared to $1.8 million of non-recurring dividend in fee income during the first quarter.
Indeed $3 million of non-recurring dividend of fee income during the fourth quarter of last year. This trend of declining non-recurring dividend fee income has been a topic we’ve discussed frequently and prior earnings calls and as we believe a natural phenomenon that occurs in the latter stages in a credit cycle. As Portfolio Company growth and revenue and EBITDA is harder to come by and therefore fewer dividends are paid to the equity holders of these companies.
From an efficiency ratio standpoint, with efficiency ratio being defined as total compensation and G&A expenses divided by total investment income. Our second quarter efficiency ratio was 15.2% as compared to 18.1% during the first quarter of this year. Our second quarter annualized compensation and G&A expenses as a percentage of average assets totaled 1.5% as compared to our first quarter annualized compensation and G&A expenses as a percentage of average assets of 1.8%.
Our net asset value or NAV per share as of June 30 was $14.83 as compared to $15.29 at March 31 and $15.13 per share as of December 31, 2016. The primary driver of the NAV declined this quarter was unrealized depreciation on our portfolio investments partially offset by our net realized gains.
During the second quarter has Ashton mentioned we recognized net realized gains totaling $5.2 million primarily related to the sale of three portfolio investments, a $3.7 million realized gain on our equity investment in AGM all noted LLC, a $1.7 million realized gain on our equity investment and Comverge Inc. and $2.9 million realized gain on our equity investment in [indiscernible].
These three gains were partially offset by realized losses of $3.1 million including primarily a $2.7 million realized loss on the write-off of our debt and equity investments and [indiscernible].
From a valuation perspective, we recorded net pre-tax unrealized depreciation on our current investment portfolio totaling $22.9 million for the quarter, largely driven by underperformance in our investments in CRS Reprocessing, Women’s Marketing, Frank Theatres, GST AutoLeather, and Community Intervention Services. These drive downs were partially offset by write-offs of strong performing companies such as Agilex Flavors & Fragrances and in the products.
From a liquidity standpoint on May 1, 2017 we amended our senior credit facility where we increased the total commitments by 45% from $300 million to $435 million and we extended the final maturity to April 30, 2022. In addition on July 31, we accepted an additional $30 million commitment to our senior credit facility, which increased the total capacity to $465 million.
Our large credit facility provides the Company with a more streamlined ability to borrow to support our investing and operational activities. And including the effects of our expanded credit facility, our total liquidity as of June 30, 2017 is an excess of $500 million.
And with that, I’ll turn the call back to Ashton for a few comments before we open the call to questions.
Thanks, Steven. As of June 30, 2017 we had investments in 93 portfolio companies with an aggregate cost of $1.25 billion and total fair value of $1.17 billion. The weighted-average yield on our outstanding debt investments was approximately 11.4%. The weighted-average yield on all of our outstanding investments excluding non-accrual debt investments was approximately 10%. The eight new investments we have made since the beginning of the second quarter, totaling approximately $90 million and have the weighted-average debt yield of 10.3%.
As we continue to pursue more senior oriented investment structures, and as we continue to experience repayments of existing higher yielding investments, our investment portfolio’s weighted-average yield will likely continue to decline. And while we can’t protect, how rapidly repayments across our investment portfolio will continue to occur, I do believe it is likely that over the next 12 months, our weighted-average debt deal will move closer to a range of 10.5% to 11% as opposed to the 11.4% level we probably are reporting.
This investment portfolio turnover naturally will affect our future earnings per share both in the normal course of repayments, a prior yielding investments coupled with the deployment of the capital and lower yielding more senior oriented structures.
As a result, as we have communicated to our Board and as we communicated in our Annual Investor Day presentation, our strategy of focusing first on strong credit decisions and second on overall investment deal should provide us with a less volatile investment portfolio over time.
And to pinpoint on the natural question of how this investment portfolio activity may influence, a quarterly dividend for share? I’ll say upfront in less conviction that in the future as we find our investment portfolio and corresponding liquidity position are not sufficient to permit us to earn our quarterly dividend of $0.45 per share that I will recommend to the Board that we adjust our dividends by level that conservatively corresponds to our future earnings power.
The investing market today is extremely competitive and trying this position in the market is strong, but I will not sacrifice Triangle’s quality the reputation by stretching for investments and yields that are not appropriate for long-term investments. That present, our quarterly dividend remains $0.45 per share.
As the investing market continues to evolve and as our position in the market continue to growth, we will continue to seek to award our investors by providing the highest per share dividend, while simultaneously seeking to protect shareholder capital.
With that operator, we will open the call to questions.
[Operator Instructions] Our first question coming from the line of Ryan Lynch with Keefe, Bruyette & Woods. Your line is now open.
Good morning. Thank you for taking my questions. The first one, if I look into your portfolio there’s several assets that are still on four accrual status that have significant markdowns looking at Front Street, CRS, [Number Cork], PCX Technology Corps. Those are all investments that are marked at basically 80% of cost or low, but are still on four accrual status. So how should – how can investors I guess get comfortable with the future credit outlook at TCAP given this large pipeline of potential new non-accruals or investment that are probably at higher risk of receiving further write-down?
Ryan, it’s Steven. Good morning and thank you for your question. I think as you look at the portfolio from a macro standpoint, your first conclusion would be that almost 50% of the fair value and the cost basis of the investments we have today have been made – since what we would call TCAP 2.0. That is since the second quarter of last year. And if you look at our non-accruals there approximately 5% of our portfolio in the investments that you just mentioned that are carried at 80% of cost or below an incremental sort of 5 percentage points.
So about 10% of the portfolio would be in these two buckets. You then would have an incremental 10 percentage points of the portfolio that would be valued below cost, but above 80% of cost which is historically been a breakpoint for us in terms of when credits are moving more south versus just more of a short-term phenomenon in terms of a company working through a specific issue or a specific problem.
In terms of the non-accrual accounts that represent 5% of the portfolio, obviously they are all non-accrual, so they don’t impact our future earnings. They can impact our future NAV if they were to move obviously either up or down. And the investments carried below 80% of cost as I think you will note in the 10-Q, two of those investments are on pick non-accrual this quarter, and that’s Eckler Holdings and Cafe Enterprises.
And I think that would tell you something about the revenue quality and cash flow quality of those companies and our perception right now. And both of those carried kind of the low-70s in terms of a fair value versus cost. We have seen operational improvement in some of the other companies that are still on this list. I think if you were to go back and look over prior quarters at a company, for example like PCX Aerostructures.
That’s the company I think that is actually moved up in value over the last couple of quarters as their outlook has stabilized and improved. So obviously it’s difficult to pinpoint exactly the magnitude of either one might call forward recovery or forward decline in value in these and given that they’re privately held companies. Obviously, we have to be careful as you well know what we say publicly on an earnings call.
But I think if you were to use history as your guide then you would come to the conclusion that of the investments carried between 80% and 100% of costs. I think that eight of those accounts today. That historically the ratios would be that one of those accounts would be reasonably exposed in the next two or three quarters where it might go on non-accrual. And that’s purely just running the averages of prior experience that we would look at with empirical data in our book over the last 10 years.
As you look at companies that carried below 80% of cost and are still accruing – there are five of those accounts I think in the portfolio today. I think from a prior experience standpoint, we would say the average is probably two of those five in the next same time period two to three, four quarters. Again it doesn’t say that I want to be careful because it doesn’t say that is going to happen, but that would be our predictive analysis based on prior experiences. So apologize I was long winded with the detail there, but I wanted to be fulsome an answer in your question. So if you have a follow-up, certainly we’ll try to answer that as well.
That’s really good color. Maybe just kind of a more broader question on the credit process, you talked about TCAP 1.0 versus TCAP 2.0, certainly in the past I know you talked about making some in changes in the investment process for TACP 2.0 around the screening process to expanding investment community which also moving up capital structure larger companies et cetera, which all helps new portfolio companies that you guys are placing or new companies that you guys are placing a portfolio of new investments.
Improving hopefully the credit quality of those in the future which those of all how that well so far TCAP 2.0 investments been good, but can you talk about have there been any improvements maybe the portfolio management process where you guys which will help you minimize losses or maximize recoveries from some of these legacy TCAP 1.0 investments?
Ryan, its Ashton. Good morning and thanks for your message. I would like to address actually both sides of the coin there that you’re referenced regarding our investment process and then the portfolio management side of the process. Because I do think they both deserve equal emphasis. We continue to refine and improve the investment process that we put in place with TCAP 2.0 I think we’ve been through kind of that the intricacies of that with you all and others at our annual Investor Day.
And again all of that’s included in the presentation but the revised process of the vetoed rights the multiple checks and balances that go through the process as we currently have it seem to be paying off. And as Steven alluded to earlier roughly half the portfolio now as our investments that are made off of that 2.0 process and currently we are enjoying I think some good results as part of that process. Just one back to what I think it’s interesting and this is something that we share with our Board this week.
If you go back to October of last year and you look at the number of investments that were brought to committee and what we call our prescreen format or better known as STM format. 20% of those transactions that were brought up for the consideration of the committee have been declined. And that is a dramatic shift from where we would have been in the past probably past data points would have been in the low single-digit percentage range call it 2% to 3%.
And so what you’re seeing is a much tighter lens a much more fulsome discussion a much more open discussion and a much better betting of opportunities as we see them and what we feel are appropriate for our shareholders going forward and ultimately that the combination of the process the filter and the improved way that we’re managing the business seems to be filtering through now to our new investments which again account for about half of our portfolio.
In those same processes and procedures will continue to get employed and we will continue to get refined and we will continue to get improved. So I’m very, very proud of the team and the results that we have experienced to date and so far in TCAP 2.0. And as far as the portfolio management side of the equation I think you all know that Jeff Dombcik, our Chief Credit Officer and as head of our portfolio management process we brought on an additional resource to support Jeff and that effort I would say that Jeff’s done a terrific job of going back through and examining all of our prior tools and screens and processes for getting ahead in forecasting potential trouble spots in the portfolio by industry and by company.
Now have a much, much greater visibility or predictability going forward of where we see potential issues. Jeff is also applied what I think is just incredible focus and attention on the problem situations that we do have and has brought great leadership and trying to work through and work either constructively with sponsors in terms of getting to solutions that benefit our shareholders or in cases where we need to exercise more influence directly on our own accord to generate the best outcome for TCAP and shareholders. So collectively the two sides of the coin or much improved in my view and resulting about our performance for the company for our shareholders.
Okay. Thanks for those comments. And then one more if I can and before I hope in the queue. Steven in the path I believe you talked about and efficiency ratio of kind of plus or minus 20% if you look at the first quarter is around 18% this most recent quarter, second quarter was around 15%. So run rate of sub-17% for the first half of 2017? Can you just talk about do you expect that guidance the efficiency ratio of around 20% the hold or should we expect in efficiency ratio of lower than that going forward?
Ryan thanks, thank you for mentioning what our historical guidance has been of plus or minus 20% of revenues and typically kind of plus or minus 2% of AUM. I will say in this quarter, we are lower from a seasonal standpoint in the year. As a publicly traded Company, we tend to have more expenses from the public side of the business. That flow in the first quarter than the second quarter based on the timing of our annual report, annual meeting with shareholders, all that that type of thing. So there’s a little bit of a change there in the quarter.
The Board made a smaller bonus accrual in the quarter, not by a wide margin or anything of that nature. So historically if you go look at it also on a quarter-to-quarter basis, I think you’ll see that that plus or minus 20% is really a good range. But you also would find if you did this were a quarter-by-quarter analysis that we can be above 20% or write much lower than 20% on any given quarter. It just sort of happens at this quarter is for a combination of reasons is a little lower than average. But I would not change your long-term look there in terms of the models that that you guys are working on and producing for the future.
Okay, thank you. Those are all the questions for me.
Our next question coming from the line of Jonathan Bock with Wells Fargo Securities. Your line is now open.
Good morning, Joe Mazzoli filling in for Jonathan Bock. Guys, your ROE has been dependent on your ability to issue equity at substantial premiums to net asset value with the much lower premium today, what happens now?
Joe, it’s Steven. I would tell you that I think our historical ROE has been in large part driven by the investment performance that we’ve had with realized gains outpacing realized losses for the full body of work if you will for Triangle for the ten and a half years that we’ve been public.
And that we’ve – that ROE has been really dependent or influenced by the fact that we’ve had incrementally higher yields in the portfolio based on our lower middle market strategy. We’ve that incrementally lower G&A based on our internal structure and we have been able to again for the full body of work at Triangle, maintain relatively low losses, again below and – on a realized basis below our gains.
I think what you’re really maybe going to and alluding to in your question is, for the last call at 12 quarters for Triangle, our investment portfolio has by and large declined in value and what we’re seeing is investments that were made in the vantage years of – call it 2013 and 2014 and 2015. We talked about this a little bit on our last call with Jon Bock’s good question.
We’re seeing the effects of some of those where the Company in a – I might say a steadfast way, it held onto a mezzanine strategy perhaps longer than certainly now is what we’re seeing longer than we should have and one of the first decisions when he became CEO that Ashton made was to diversify our investment offerings in the market and to move up balance sheet.
And so I think a couple of things happened when you do that, number one is your initial yield is going to go down incrementally from what I mentioned a minute ago that higher yield we started with your initial yield is going to go down. You maintain the same cost controls in the business that the internal structure can afford you and your credit quality takes up, but it takes a bit of time to move through.
We say in this business a lot that it’s the floodwaters are the highest after the rain has stopped. In the sense that when you make an investment, it takes a period of time to find out that investment is going to perform well or not. And so in our business even though we have – as Ashton said in his comments, we’ve turned the direction of the ship if you will in a meaningful way without the portfolio in new investments and with the new focus that we have, it’s just going to take a little bit of time to migrate away.
So I think all that taken as a picture is really would tell you that I think our ROE is going to be probably in the single digits or one would think probably this year as it was last year and the year before. And I think you would look at the average ROE for BDCs entire industry and I think your average ROE comes up to somewhere around plus or minus 8%.
So we’re moving from a point where we have outperformed in a measurable way for a period of time maybe held on to a investing strategy, a single strategy a bit too long and we’re repositioning now, so our ROE are lower for us and that reflect basically on average of what many other folks are achieving in the industry given the nuances of their investment strategy and their operational structure in terms of G&A.
Final piece of what I’d say Joe is, when you couple all of those things with the fact that we’re fortunate to have a measurable amount of liquidity especially measured against the sort of size of our investment portfolio. One of the larger BDCs maybe the largest reported just a few days ago. If you look at their available liquidity it’s 20% of their investment portfolio. As we sit today with available liquidity, we had about 42%, 43% of the value of our investment portfolio on a cost basis. We just feel like we’re in a really fortunate situation to continue executing on the strategy that was laid out again a little over a year ago for us. So thanks for the question. I hope that gave you some color.
Thank you for that Steven and that’s very helpful. You do mention the liquidity and also I believe you have some substantial ability to grow the SBIC program. So if you could kind of talk about that in the context of some of the new non-accruals and potentially lower yielding portfolio going forward with a more senior focus, could you just quickly again kind of touch on what dividend coverage looks like in the coming quarters because it sounds like there is a path, but there are also some headwinds, of course TCAP is being conservative with new investments which is a good thing, but also could result in a lower yielding portfolio.
Yes. I think the – first just sort of talking on the, as you say the dividend in the comments that we made in the prepared remarks. I think if you were to take the information contained in the 10-Q and you were to say I’m going to try to come up with what you might call a run rate analysis of Triangle. I think you would have a couple of data points there to help you.
One would be, if you look at our NII on a per share basis for the year, I think it’s $0.83. So you would say, okay, if I annualized that that’s around $1.65 something like that. If I then take the current quarter you would say the yielding depth portfolio for Triangle Capital is $1.27 billion.
And you would know from our comments and in the Q that our weighted average yield on that portfolio is 11.4%. So the quick math there would tell you that’s $117 million of revenue on an annual basis, annualized basis. You then would acknowledge that we have total fees both recurring and non-recurring. Our guidance is somewhere between $10 million and $12 million there.
So take the midpoint at about 11. You are at $128 million of total revenue and then you back off somewhere $28 million, $29 million for interest expense and $23 million or so for G&A, and you’re going to get somewhere around $76 million to $77 million of net investment income, and if you divide that by 47.7 million shares then you’re basically at $1.60.
So that would tell you that if you annualize the first two quarters, you come to around $1.65. If you look at sort of an annualization analysis of where we are today, it would be around $1.60. You then acknowledge that we have $500 million of liquidity and you might say – conservatively say use $300 million of that and you invest that at a 5% spread over the cost of your bank facility that’s $15 million of incremental revenue or $0.31 a share.
So as you go through that analysis, you could come to the conclusion okay Triangle you guys can earn if you deploy this capital and you’ll still have remaining liquidity of over 200 million you can get to north of $1.90 a share of NII. Again this is all annualization so it doesn’t take into account repayments in the portfolio, any potential credit issues in the portfolio things like that that could happen in the future.
And so repayments, obviously, will happen, credit issues could happen. So and then the timing of these investment so as you put it all together I think you have to back off some of that and then think about the timing of it. So the communication and I’m giving you today it sounds like I can do it a little bit off the top of my head is because I just have the same bank to our board yesterday.
And this is exactly the analysis were working through and frankly it depends on the phase of repayments, it depends on the phase of new investment, it depends on what happens with credit. Those are the three inputs that I think we analyze and we will continue to analyze. But one thing’s for sure Triangle’s wants to continue to be sure that we earn our dividends that were never in a return a capital situation.
And if there is an adjustment that comes in the future I think you and everybody else on the line would want to know with clarity that we would adjust to a level where the future earnings power of the business is Ashton said can comfortably cover that that dividend level and it’s just one of these things you don’t want to be – you don’t want to stretch for a dividend.
And frankly a couple of years ago and kind of 2014 and 2015 there was a motive if you will to internally to try to maintain what at that time was the highest base per share dividend in the sector. And that’s not a long-term strategy that is as prudent for investors as one of comfortably over earning for a long sustained period of time and achieving that lower volatility. So that’s what we’re focused on now and I hope that gives you a little color as you might think into the future a bit just about the business.
That’s very helpful and that’s it for me. Thank you again for taking my questions.
Our next question coming from the line of John Hecht with Jefferies, your line is now open.
Thanks very much guys. I mean it gets a little bit of follow-on Steven thank you for the detail on the dividend. How much spillover cumulus spillover income do you have any up claim liquidity. How much spillover income do you have on a cumulative basis and it sounds like it’s a quarter-to-quarter decision but you know what are the primary factors that would reach you to make it the dividend decision or change decision in the future?
Sure. John and thanks for the question. If we have $0.23 of the spillover income today, so I would say where we historically have operated with high of about $0.50 and low – I think the low point that we had some years ago was maybe $0.15 somewhere in the kind of mid-teens. So we’re closer to the lower than the high with in the range we again share this information with the board as well.
So I don’t think there’s anything from that standpoint that is influencing us in a material way one way or the other. We would frankly not run that down to zero that’s just not how we would operate. So I think it’s really those three key inputs that I was the same to Joe on his question of – the timing of repayments and what the weighted average yield of those repayments is if we were to experience a meaningful amount of repayments and not find attractive new investments that could influence us.
Likewise if – from a credit standpoint if there were a gap down from a credit standpoint to some of the accounts that we mentioned earlier and Ryan Lynch’s question and that could influence. So it it’s really the influence of those three points as opposed to the spillover that thankfully is not of a driver for us because we try to manage that conservatively.
Okay. And then the second question is related to just the yields I mean Ashton you guys have gone through asset details about the yields, the expected yields. If you like for like if you look at the pipeline of investments in this and that – the competitive market how are yields and other words for a mezzanine investments or senior investment now? Where are spreads relative to where they were three months ago and where do you see that going in a competitive environment?
John thanks for your message. If you just look at – I’ll answer your question in two ways. One I’ll just look at the deals that we actually did in Q2 and give you some reference points there. But then I’ll talk more fully about the market and kind of touch the ends kind of boundary for you if you well.
If you look at the deals that we did in the quarter CIBT, Constellis, Key PRO, LRI, Schweiger, and TAG. The majority of those were just two were units, three were second lien and one was sub debt and the range of yields in those on the debt side 8.8% through 12% on a weighted basis of 10.3%.
I’d say from the senior side in terms of pure senior, we’re seeing kind of L400, L550-ish on the senior route from the unitranche side. I think we see anything from kind of an L6, L650 up to L8-ish – L850-ish. On the second lien side, I’d say that we’re kind of generally the 9% to 10% range and mezz is generally between 10% and call it 12%. So I’d say hopefully that gives you a good sense of the bookends of kind of yields in the market.
My personal opinion as I feel like we have seen yield compression even further over the last couple of months. I know in certain situations, we’ve been blown out of the water and pricing by competition and in some cases 100 basis points and other cases up to a maximum of 200 basis points.
So I referenced earlier that the competition is real. The amount of capital that is still coming into the space is unabated transaction activities relatively constant. It’s down on a dollar basis, but it’s relatively flat on a transaction volume basis in terms of number of deals.
So essentially you got flat transaction activity with incrementally more capital coming into the space and that capital generally that’s coming into the space is more institutional in nature, which that is the basis of investors that prefer a more senior oriented structures as part of their investment. So that’s why you’re seeing the heavy pressure that you’ve seen on mezz and certainly second lien and certainly the market shift towards the preference for more unitranche and senior oriented structures. Is that helps?
Very much, thank you guys, very much.
Our next question coming from the line Leslie Vandegrift with Raymond James. Your line is now open.
Good morning and thanks for taking my questions. Most of my have been asked and answered and I appreciate all the color on that. On the unitranche those you discussed, focusing on recently, how much of your overall first lien senior secured is unitranche at this point?
Leslie as of June 30, if you were just to look at the debt portfolio for us, this is excluding equity. Our portfolio on a fair value basis would be about 54% first lien notes and unitranche – 54% sub-debt, about 20% second lien notes and about 27% first lien notes in unitranche. So again 54% sub-debt, about 20% second lien notes and about 27% first lien notes in unitranche.
And I guess my question is on the 27% that pure first lien versus the unitranche product, what’s that breakdown there?
Leslie, it’s Steven. We don’t have that breakdown in front of us, but we can get to you offline.
Okay, all right. Thank you. And then you mentioned earlier about – again focusing on the unitranche style and then wanting to grow the SBIC and you can go to 350 now. Do you really see on that into the market through unitranche opportunity or that will be more of just pure first lien style?
What will be contained in the SBIC fund will likely be reflective mix of what we see in the greater portfolio. The SBA does have certain definitional requirements around what are eligible portfolio companies. But most of what we invest in quite frankly in the normal course of our business qualifies for SBA eligibility we would say. So I think what you’ll see there is frankly a just a mirroring. I don’t think it’ll look dramatically different than our base portfolio over time.
Okay, all right. Thank you. And then last question on – you talked about yield compression and have you seen a bit of that in last few months. As any of that certainly with – even some of the larger guys moving down market on size and EBITDA, they’re willing to do those lower rate. Have you seen more opportunities for you guys to syndicate with them? Or it just a club deal on a slightly larger deal size than you normally did?
Leslie, I am sorry, I didn’t quite understand the question. The line broke up just a bit there. Do you mind repeating it?
Of course, have you seen more opportunity to do club and syndicated deals – and as part of those as deals come down and you guys have the ability to get in with other larger sponsors?
Yes. I would say and Ash I don’t want to speak for you, but I think we have seen an increased opportunity, frankly more I think just based on the size of our company, having I guess and including committed capital somewhere around $1.7 billion of AUM. We’re able to be more relevant to more sponsors in the market and sponsors that have grown successfully their business over the last 10 years. When we started investing alongside of them many years ago they might have been on funds two or fund three and now they are on fund four or five and their funds are grown because they’ve been successful.
And so we’re able to take those longer term partnerships and transact in larger situations, sometimes those situations might require to your point or to your question the commitment of capital that maybe larger than we would be comfortable holding our balance sheet. One of the things that we think we have been very conservative on over time is hold sizes being very small as a percentage of our assets. We partnered with people frequently we always have, but it’s just a natural part of the business and one that we’re thankful we have many good relationships that lead us to those club deals or syndicated deals. But let me ask, I mean let he say…
Leslie, I’ll just add to what Steven said. I do think as we have gotten larger and got more relevant for a greater percentage of the market. Our ability to be in the receipt of inquiries and participate in club type opportunities or other market opportunities has increased. And we’ve actually done a couple of those.
And in the first quarter for example, we did a couple of club deals. But also any time that we would do that I guess just to reinforce that the predominance of our origination activity will always be based on the direct relationships that we have with the financial sponsors. The club deals and if you want to call them larger middle market maybe more syndicated loan type deals that we have done.
There’s always been a connection either with the company itself with management or with the sponsor that’s behind it. And so again as our sponsor community and relationships have got larger. They have tended to take us along with them and so we felt very comfortable.
We don’t have an active trading desk here to TCAP or that kind of activity, but we are more and more in receipt of inquiries for opportunities to club up or to participate in certain deals, but we’re actually putting a pretty strict filter in place to determine which ones we actually choose to participate in. But again the predominance of our origination activity will continue to be a directly originated.
All right. Thank you. That’s all my questions.
Our next question coming from the line of Christopher Testa with National Securities Corporation, your line is now open.
Good morning. Thanks for taking my questions. So the other year when you guys cut the dividends $0.45 from $0.54 has been under earned for several quarters now. So just have you under earn the dividend because there has been more credit issues and you’ve anticipated or has been greater supply compression when you’ve anticipated combination, just curious how that’s going to deviated from where the dividends been solve?
Chris, it’s Steven. Thank you for your question. Again there is no one item you can point to I think I would mentioned that in the last 12 months. The Company has Ashton mentioned we’ve expanded our capital base fairly meaningfully. So if you were to analyze back in June of last year for example right after we had adjusted the dividend from $0.54 to $0.45 really based on yield compression in the market at that time. Then the two equity offerings that we had undertaken in that period of time would have provided I think $0.54 a share of operational dilution just on their own right. Obviously until those funds are invested.
So as you have – typically for us as you’ve heard us say before we guide the market to say that give us two quarters to invest the money that we raised in the public markets. And so as you look back and reflect on the last four, five quarters you would say will gosh she been for those quarters you have been investing proceeds from one of the two offering. And so I think there’s an acknowledgement there this quarter there’s a penny of lag that we attributed to the fact of in the quarter.
We had $70.7 million of new platform investments and $62 of the $70 million closed in the month of June with one of those closing on majority. So just from a timing standpoint when you’re so close to offering it’s tough to have your NII per share grow out of the normal operational dilution that we in any BDC would have when you raise capital.
So and I think if you were to analyze and look back of your history you would see of the ten or so offerings we’ve done that’s frankly been very true and all of them. So I think that’s really the single biggest factor we have had as you would know some incremental credit issues in the portfolio. But I don’t think that’s been the overwhelming aspect of the under earning as you mentioned.
In the third point on yield, I think we have actually invested, we have guided the board to a 10% weighted-average yield over that time period of these two offerings over the last year and I think the actual true weighted-average yield for all of the investments we’ve done over that period of time is 9.97%.
So it give us the fluctuation there three basis points if you will. We feel pretty good that we hit exactly what we had indicated to our Board on the new investing side. So I think it’s more the equity offerings than anything and that can write itself over time, once again the proceeds now been invested. So I hope that helps and just given you a little color.
Yes, no absolutely. And as there was obviously this is significant spread compression and your earnings under pressure, you guys have been moving up the capital stacks doing more in unitrache and first lien debt. Just curious what’s the pushback on potentially doing senior loan fund where you put lower yielding assets with higher financial leverage and probably be pretty significantly accretive to your earnings?
We’ve looked at that over time and I would tell you that we certainly haven’t ruled anything out historically over the years when we had analyzed that type of opportunity. Frankly the ROE of the business at that point was sufficiently higher than the – what I might call the predicted ROE would be in that structure.
I think to be fair, many people highlight what the fully loaded – fully invested ROE is in those types of structures and they maybe fail to acknowledge and mention as directly as you build up those portfolios and as those portfolios naturally churn and loans payoff and you have to reinvest et cetera.
So the peak potential ROE does look attractive. I think from other operators, we’ve had conversations with they would admit, operator to operator that you rarely achieve that pull some ROE for a very longer period of time in those vehicles. But I would also simultaneously acknowledge that as our business – base business is more senior focused and more unitranche focus going forward that there might be an opportunity to do that and have the ROE match more to the base business.
So again to say, we certainly haven’t ruled it out. We’re not obviously announcing one to this quarterly call, but it is something that is out there and it becomes more in the realm of attractiveness going forward than it has historically. Is that makes sense?
Yes, that’s great color. Those were all my questions. Thank you.
Operator, if there are no further questions then we will conclude today’s call. Thank you all and we look forward to talking with you next quarter.
Ladies and gentlemen, thank you for your participation in today’s conference call. This concludes the program, you may now disconnect.
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