Oaktree Specialty Lending Corporation (OCSL) Q2 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Second Quarter 2012 Fifth Street Finance Corporation Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to Mr. David Harrison, Director of Legal and Compliance. You may proceed.

Thank you, Francis. Good morning and welcome everyone. My name is David Harrison, and I am the Director of Legal and Compliance of Fifth Street Finance Corp. This conference call is to discuss Fifth Street Finance Corp’s second fiscal quarter ended March 31, 2012. I have with me this morning Leonard Tannenbaum, Chief Executive Officer; and Alexander Frank, Chief Financial Officer. Before I begin, I would like to point out that this call is being recorded. Replay information is included in our April 10, 2012 press release and is posted on our website, www.fifthstreetfinance.com. Please note that this call is the property of Fifth Street Finance Corp. Any unauthorized rebroadcast of this call of any form is strictly prohibited. Today’s conference call includes forward-looking statements and projections, and we ask that you refer to our most recent filings with the SEC for important factors that could cause actual results to differ materially from these forward-looking statements and projections. We do not undertake to update our forward-looking statements unless required by law. To obtain copies of our latest SEC filings, please visit our website or call investor relations at 914-286-6855. The format for today’s call is as follows. Len will provide an overview, and Alex will provide an update on our capital structure and summarize the financials. Then we will open the line for Q&A. I will now turn the call over to our CEO, Len Tannenbaum.

Thank you, David and good morning everyone. Let me quickly restate our outlook from our last earnings call. We believe taxes will increase next year, unless Republicans win The Oval Office and secure majorities in both the house and senate. While the election odds consistently evolve through the year, we anticipate election results one of the material impact on our M&A activity. The tax increases that are anticipated to come to pass next year as the Bush tax cuts expire, together with the extra tax from ObamaCare, is encouraging business owners to pull forward in to 2012 any sales plans they had originally laid out for the next few years. We are also noticing the initial stirrings of Basel III coming into play as the big U.S. banks start to ease-off on lending and advance the new standards taking effect. Finally, we believe the immense deleveraging of Europe in the need to amass hundreds of billions of dollars in equity to shore up its delicate banking system will also contribute to the drain on global liquidity. As noted during our last earnings call, we believe a counterbalance to these effects is Quantitative Easing. QE is the latest craze with everyone in the fray. It’s difficult to predict how this might offset and drive capital close. What we have Fifth Street financial control, however, is how we optimize our shareholder value. So we are closely monitoring the actions of our lending partners, trends in the market, and as in years past, ensuring we have the capacity and deal flow to pivot strategically among the changing capital flow cycles. We have ongoing flexibility to capitalize on what should be a building year for new deals, thanks to an equity raise of just over $100 million earlier this year, executed at a net price above book value. Rather than ask for permission from our shareholders in sell below book value, as many of our peers have done, we issued stock above book value despite the volatile market climate. It is our sustained belief that selling stock below book value is rarely justified. Our initial outlook for 2012 is not substantially changed. As we consolidate our Sumitomo facility, we are actively steering the portfolio towards a range of 70% to 80% first lien loans. At the end of year, we are targeting leverage of 0.6x on average, excluding our 10-year, fixed, non-recourse SBA debentures. For the quarter, we delivered $0.29 per share of NII, which is consistent with our quarterly dividend rate. We anticipate that repayments will continue as the portfolio matures; this should favorably impact on our earnings, thanks to a recognition of exit fees, prepayment penalties and on occasion, equity realizations, not to mention uptick in up-front fees. It is our expectation the origination volume through the year will continue in the range of $100 million to $300 million per quarter with deal flow increasing as the year progresses. Given that the previously mentioned tax changes, the fourth calendar quarter could set a new Fifth Street origination record. Compared to last quarter, the pace of activity thus far for the quarter ending June 30 has improved. Net investment income of $0.29 per share for our second fiscal quarter represents a strong quarter that outperforms the consensus. Our capital structure was sub-optimal though, as we had to hold cash from prepayments in our SBA subsidiary from much of the quarter, in addition to incurring significant unused line fees from our pay down to credit lines, stemming from our January 2012 equity offering and subsequent investment realizations. Looking ahead, we expect to better harness our earnings power, thanks to continued velocity in the portfolio, though at a much slower pace from the quarter ended March 31, 2012. Our capital structure is more efficient, and we are beginning to monetize some of our equity investments as well and collect prepayment penalties, as well as some exit fees. As we meet with investors, we appreciate their strong desire for us to leverage to our target of 0.6x debt-to-equity not including our SBA subsidiary. As opportunities arise, our goal is to continually diversify and realign the right side of the balance sheet, better matching our targeted leverage, enhanced utilization of our credit line, and ongoing reallocation of the portfolio assets should fuel additional earnings power. Our bias towards financing larger companies persists. We believe they are intrinsically safer with a typical borrower, having EBITDA in the $10 million to $30 million range. Should the economy suffer another pullback, we believe that our high first-lien exposure combined with investing in larger and more stable portfolio companies and our rigorous diligence and portfolio management processes, will result in heightened portfolio stability. In our opinion, pricing is at historically average levels right now, which marks a further improvement over the previous quarter where we saw frothiness in the market. Both the lower middle market and upper middle market currently offer value due to what we see as a continuing shortage of capital available from traditional lenders in these sectors. As the year progresses, however, we first see an ongoing positive shift in the supply/demand equation for lenders and with it, an improvement for us in pricing. The credit quality of our assets remained stable. As of March 31, 2012, Category 3-, 4- and 5-rated securities continue to comprise about 2% of the portfolio at fair value. This positive trend makes us well-positioned for the next down cycle and potentially allows us to increase our ROE. As one of the most transparent BDCs industry wide, we will continue to provide regular updates to our investors, including the ongoing release of debt-to-EBITDA for our rating tranches. Through the balance of the year, we plan to continue to add many strong, experienced, institutional credit and operating numbers to our team. I am pleased with the response and caliber of individuals we continue to attract. Fifth Street strives to build a broad institutional platform both in terms of technology and team members to service our clients. Our strong-branded relationships allow us to command premium pricing over the market, balance sheet capacity, namely hold size, and the ability to grow with our clients’ platform companies has emerged as a differentiator. This year we have led and escheated an increased number of transactions and have also expanded our capital markets presence through the development of strong syndicate relationships. Our large and expanded credit capacity, supported by our investment grade rating by 2 different agencies, reassures our clients that we will provide expansion capital when needed. Fifth Street’s market share and reputations in middle market lenders should continue to grow as we enhance our institutional platform and consistently deliver a high level of service to our private equity sponsors. We are extremely pleased by the attractive middle market opportunities we see and our expanded presence in the Chicago market. We also believe BDC capital will continue to have increased role as part of equity sponsor led by us. At this point, I will turn the call over to our CFO, Alex Frank.

Thanks, Len. We are pleased to announce that we have had several positive developments with respect to our credit facilities since our February earnings call. In late February, we amended our $230 million ING-led credit facility to extend the maturity date by 2 years through February 2016. As part of this amendment, we also increased the potential future expansion of facility from $350 million to $450 million. In addition, our Wells Fargo facility was amended in April. We expanded the size of the facility from $100 million to $150 million an extended the maturity by over 2 years through April 2016. We also increased the potential future expansion of the facility from $150 million to $250 million. We’d like to thank all of our lenders for their continued support and flexibility, which has allowed us to grow our business to where it is today and put us in a strong position competitively. During the 6 months ended March 31, 2012 we repurchased $11 million principal of our convertible notes in the open market for an aggregate purchase price of $9.4 million. In April, we made additional repurchases with a face value of $9 million, which makes our total repurchases for the fiscal year $20 million at face value. We will look to potentially make additional repurchases when market conditions provide favorable opportunities for our shareholders. We ended the second fiscal quarter of 2012 with total assets of $1.2 billion, an increase of $197.7 million from the year ago period, reflecting growth in net new originations. Total assets have remained relatively flat as compared to our 2011 fiscal year end at $1.2 billion, which is primarily due to new originations being offset by portfolio exits. Portfolio investments were $1.1 billion at fair value, and we had available cash on hand of $115 million. Our cash on the balance sheet is above historical levels, which is mainly due to the unusually high level of deal exits during the quarter and, as Len discussed, cash in our SBIC subsidiary that we are in the process of recycling. Net asset value per share remained relatively stable at $9.87 versus the prior quarter NAV of $9.89. Total investment income was $42.1 million for the 3 months ended March 31, 2012, including $32 million of interest income from portfolio investments and $10.1 million of fee income. Payment in kind interest remained a low percentage of total income at $2.9 million for the quarter, declining to 7% of total investment income as compared to 12% for the year ago period. Net investment income per share increased 8% to $0.29 for the quarter, as compared to $0.27 in the same quarter last year and in line with the prior quarter. The net realized and unrealized losses on our portfolio investments for the 3 months ended March 31, 2012 were $2.7 million or less than 0.3% of the portfolio. We had 5 portfolio company refinancings during the quarter, including our 2 largest, all of which were exited above par at an average price of 102% at par. We also exited our investment in occurrence at a loss but at a price equivalent to our fair value as of December 31, 2011. The weighted average yield on our debt investments decreased slightly to 12.4% as of March 31, 2012 as compared to 12.8% in the same quarter in the previous year, while the cash component of the yield remained relatively stable at 11.2%. The average size of our portfolio investment was $19.2 million. We originated $143.9 million of investments in the quarter across 6 new and 4 existing portfolio companies, which brings the total companies in our portfolio to 67 at March 31, 2012. As previously mentioned, we also received a $166.6 million in connection with the exits of 6 of our portfolio companies. The level of early repayments experienced in the previous 2 quarters was historically high and we do not expect repayments to continue at this rate for the remainder of 2012. Approximately 98% the portfolio by fair value consisted of debt investments; 70% of the total was in first lien loans and 66% of the debt portfolio was of floating interest rates. We continue to monitor and prove the diversification of our portfolio by industry, sponsor and individual company. Our exposure to the healthcare sector, which is the largest single industry exposure, declined from 32% to 26% over the course of the second fiscal quarter, as a result of a number of successful exits of healthcare investments. Our largest portfolio company concentration is currently 4.03% of the total assets. The investment portfolio credit quality remains strong, and the credit profile is stable versus the prior quarter. We rate our debt investments on a 1 to 5 rating scale, and the highest performing 1- and 2-rated securities were 97.8% of our portfolio versus 98.5% as of September 30, 2011, and 97.2% a year ago. We had 4 investments in the portfolio that we stopped accruing income on at March 31, 2012, versus 3 investments at the same time the previous year. Turning to the credit rating agencies. Over the last 2 months Standard & Poor’s assigned us an investment grade rating of BBB- and Fitch reaffirmed our investment grade BBB- rating. Having investment grade ratings from 2 nationally recognized rating agencies puts us in a select group with few other BDCs and improves our access to the capital markets, which is necessary to expand our business platform and enhance shareholder value. Our board of Directors has declared monthly dividends for July through September of 2012 of $0.958 per share, reflecting a continuing annual rate of $1.15 per share. The dividend rate continues to be set at a level commensurate with our earnings capacity that, as been the case over the first 2 quarters of this fiscal year. Now I will turn it back to David.

Thank you, Alex. Before I open the lines for Q&A, I’d like to remind everyone that for the months that Fifth Street does not report quarterly earnings, we generally release a newsletter. If you’d like to be added to our mailing list and receive these communications directly, please either call Investor Relations at 914-286-6855 or send a request email to ir@fifthstreetfinance.com. Thank you for participating on the call today. Francis, please open the line for questions.

[Operator Instructions] Your first question is from the line of Jason Arnold representing RBC Capital Markets.

I was just curious if you could comment on the yields on lending terms you’re seeing in the market in both the senior and subordinated-ins of the equation. And then perhaps update us on the timing of the trajectory you anticipate to get the 80% senior and 20% junior kind of mix in the portfolio?

So starting with the first question, it’s really interesting to watch some of the deals in the market, and we basically stayed out of a lot of the frothiness in the first quarter, and I think that was similar to some of our peers after reading the earnings calls. And but we were able to accomplish some loans primarily with the sponsors that we’ve really worked on the relationship. So I think we gained some good alpha in the first quarter for loans that we did. I would say today the pricing, the pricing is much better, the pipeline is much better, we’re seeing the deal flow, and I’m going to tell you a lot of the deal flow is still at the investment bank level, which means my prediction of year end real boom in M&A activity is going to come true because the banks are full and full of deals. Pipeline is –- near getting very close to a record, in addition we’re hiring another deal team to be able to staff ahead of the December push, which we see coming. As for the 80/20 mix in senior and sub, because we consolidate the Sumitomo facility -- Sumitomo is all first-lien loans. We have a higher than normal first-lien exposure as we said the previous call, the SEC is not allowing deconsolidation at all, they’re not allowing leverage to be taken in subsidiary level and not be consolidated for a new BDCs. So for while we have a 2-to-1 leverage, very cheap, great vehicle in the 1-to-1 levered BDC. Having said that, our target is 70% to 80% first-lien sub-debt and I think if we find good sub-debt opportunities, we’re going to take them, and that’s our target range. Right now, we’re towards the bottom of that range at 70%. So it just depends on how much often -- how good the opportunities are. One big swing factor between 70% and 80% is the one-stop solution. Soon as the one-stop solution comes back into favor, which we’re seeing right now due to the deal volume, you can see the first-lien go up. And if one-stop is out of favor you will see first-lien go down.

Okay. And then just one quick follow-up on the addition of the S&P rating of course, obviously giving you great benefit from the debt issuance into the equation, but I was just curious if you anticipate any incremental improvements on the rates and terms on your outstanding credit facilities as a result as well.

In the near-term we just extended both facilities to be 4 years out, which we really wanted to make sure that nothing expired before 2016. You want a lot of runway, a lot of flexibility given the uncertainties in Europe. So I don’t think you’re going to see a lot of rate benefit except that we borrow at LIBOR plus 225 in Sumitomo, we borrow at LIBOR plus 275 in Wells Fargo, but I think the LIBOR plus 300 currently with our main facility will stay constant. I saw Aries revise theirs lower in the 3-year facility. What I think you will see though if we move on and get the second SBIC license and everything always takes longer than you expect, with 10-year treasury down at 1.8% and spread over 10 years treasuries where we lock it, we do expect if we’re able to draw that over the next year to achieve pretty great rates of return for 10-year fixed security.

Your next question is from the line of John Bachman [ph] from Wells Fargo.

First is, one quick question related to your increasing capital markets presence. Len, could you update us on the build out? I know you mentioned a syndication team you were working on last quarter, and maybe talk about how that complemented your origination franchise this quarter.

So, more and more as we are able to go up and down market, your syndication team, your capital markets business, which doesn’t get built overnight, becomes more and more critical in terms of allowing you to get into deals, allowing you to hold the bigger deals and syndicate them down, and also just getting market intelligence to where yield spreads are going, what syndicate leaders are doing and agent like us, and getting agent titles and agent control and agent document control when you are doing upper middle market deal. So which really successfully -- I am really happy about successfully building out that business, and I expect that business to get better. It does allow us to get syndicate fees. It does allow us get into deals that others can’t get into. It allows us to start developing relationships with firms like Jefferies and Credit Suisse, which lead a lot of middle market deals.

Okay, great, just 2 more questions. First on the equity raise, maybe give us a little color around the decision to raise capital particularly in light of the fact you had about $70 million of cash on the balance sheet and perhaps some idea that repayment activity was likely going to be elevated in the first quarter of 2012.

So for the repayment activity actually we were really surprised by the level that we received and we sort of had on the radar screen a lot of these were 1-rated securities, so they were outperforming. And one of the securities by one of our really good partners got refinanced and then put up for sale immediately, but they refinanced that rates much, much lower than we were offering, because that was a 2009 security and we took advantage of that vintage. And we were very happy for our partner, and we got paid a nice prepayment penalty when we exited. So we were a little bit surprised that it was that high. We do not expect anything close to that in this quarter. Having said that, we still decide to raise equity because we saw net premium to book value and there was another couple of issues that we had that caused the equity raise which I really don’t feel like going into super details on this call. But needless to say that there were competent restrictions that we did need to raise some equity to get around, which all have been solved and when we redid the facilities, I got to say the advanced rates are better, the minimum equity requirements are better, the facilities are just much better, much easier to be used than it was before. So another thing that -- I know you guys didn’t see that necessarily in the change of numbers even though we went from a $100 million to $150 million in one facility and 3 years to 4 years in both facilities, really occurred behind the scenes, it’s much more flexible usage of the facilities, better advance rates, better hold sizes, all sorts of better things buckets for Canadian, buckets for mezzanine that we just didn’t have before. And so I think as people recognize as we’re institutional firm and we get these investment grade ratings, it does help our lenders to give us better terms and better flexibility. Having said that, the $100 million was necessary I went on a Non-Deal Roadshow; I heard from 12 straight investors that they were upset about it. We used to say we’ve $500 million of capacity, we have no need to raise more equity at this time. We are not even close to thinking about raising more equity, no matter what the stock prices, and we are really in great shape though to take advantage of this year, which should be terrific M&A activity, we are already seeing our sponsors line up with us at reasonable prices for one-stop transactions.

And then last question related to dividend coverage. Looking at the cash flow statement, I see that about $22 million of dividend this quarter, obviously covered by NOI, but when we start to back out the $2.8 million in PIK and then $10 million in fee income, we are only getting to about maybe $10 million of stable cash flow, which is less than maybe half the dividend that was paid in that quarter. Maybe some color on how you view the dividend in relation to that stable cash flow number, particularly going forward?

Well I’d say that’s relative to our peers, first of all, PIK as a percentage -- I wanted Alex to mention this in his part but we sort of left it out, but PIK as a percentage of our total income, which is the real issue with BDCs paying out PIK, but not collecting it, and a number of BDCs that may be accruing massive amounts of PIK into income, which always gets them in trouble, I think, is I think we are among the lowest in the industry where 7% of our income is PIK, is that right, Alex?

Yeah, we –- it’s in the...

Oh, it was in the script? I wasn’t paying attention close to your part right. And I think that -- let’s compare that against everybody, you’re the analyst, you compare it against everybody else and what I think you’ll find is our quality of income is really high. In addition, we did not take all of our upfront fees into income within the quarter as others do. And by the way, all you do is recharacterize it and you can. So that also is a more conservative statement of our income in that you can look at our accumulated, but unearned balance, which is still very, very hefty, it has to come into income at some point. So that also increases the quality of our income. There’s no doubt in this quarter, we got some prepayment penalties, but we’ve been expecting velocity for a long time. I think you’re going to see velocity every quarter. And what that means is prepayment penalties will be a normal part of our income stream just as originations are a normal part of our income stream. The good news is when we get repaid, we are also being able to capture the original points upfront that haven’t been amortized, as opposed to many of our peers, which take them all into income to start, so I think we are going to have an earnings lift in future quarters that many of our peers won’t have.

Now, just kind of checking one item, when I do look at the fee income that you received in cash and add that back, we are still getting to about $17 million, maybe $18 million, still well below the $22 million in dividends paid in cash. So you’re saying that over time, you are going to expect that fee number to grow or you would expect perhaps the interest income coming in from a cash to increase materially to cover the dividend?

Alex, do you know whether it’s just a cash -- I don’t know understand what the fee income coming in cash, I thought it all...

You break it out in the cash flow statement, so it’s about $7.6 million that came back to you in the form of cash this quarter, however you recognized into income about $10 million, and I understand the whole amortization thing. Just curious of that stable cash number and how you look at the dividend policy, when it would seem to us that certainly we’re below taxable income and dividend coverage is key for our and a number of large BDC investors.

I see what you mean. So I think the disparity we’re talking about is the fact that we collect cash up front, call it points up front, but we do not recognize all of it into income. As companies get recycled or paid back, enough of that money, then, if it comes back early, gets pushed into income, but we have already collected the cash for it. So the years past everybody dinged us for not earning our dividend, right, but they are easily covered through distributable income. Now it’s the opposite, we have the cash already than we had in previous years, we just haven’t been able to take it into income, so what you are going to see in a stable environment is our earnings are going to do much better and our cash is going to be good, but our earnings may exceed our distributable income.

Right, in the higher level of originations level relative to exits.

Right.

Helps that balance. Right. We had our origination exit was as you saw it was flattish for the quarter. So you have a different dynamic on either side of those in terms of what’s collected in cash. In a typical quarter, as the business grows, our originations exceed our exits, we receive the cash fees up front on the originations. So as Len mentioned typically in our history we’ve actually had more cash coming in on a steady state basis as the business has grown.

That’s right.

Your next question is from the line of Troy Ward from Stifel, Nicolaus.

Len, on the prepayments because obviously that was the big kind of a differentiator from our models, I think this quarter, as I was looking through your release, one thing I did notice was your investment grade Number 1 bucket in the September quarter was around the $80 million level and then it popped up in the December quarter to like $160 million and now it’s back down to $80 million. Can you give us some color on the movements there; I’m assuming it has to do something with the sale?

Sure, I mean number ones are most at risk for prepayment at anytime, so, because they have outperformed our model substantially. So when we have a high level of prepayments like we did in that quarter, most likely the 1’s are going to drop and in the quarter where you don’t have a lot of prepayments, hopefully 1’s go up as the companies in general -- I mean we address credit quality s being relatively stable, but I’ll tell you across the board, except for very trouble securities, things are doing very well. Each month as we monitor, we collect monthly. We get monthly results; I mean the portfolio is doing well. So we expect 1’s to increase on balance as long as we don’t have heavy prepayments.

So the increase between September and December from the $80 million up to the $150 million was you just some of the clarity you had -- you think on some of the prepayments that were coming?

Exactly, right. And that’s how we monitor here, is when we see our 1-rated securities spike or do very well, we’re always watching over our shoulders and saying uh oh, when are these things going to get repaid and what can we do to adjust the interest rate may be 50 basis points down to try to keep the loan outstanding, because it’s really performing well? And sometimes, as you saw in the previous quarter, it’s out of our control and you just have very heavy level prepayments.

Okay. And then moving on to the portfolio looking at couple of them, obviously it became public in mid April that the traffic control did file. Can you give any color regarding your position in that capital structure and how you feel about potential recovery through this process?

Certainly. As you can tell, Bernie is not on this call, it’s not because he is not a very active President but because he is dealing with that issue today. Traffic control filed in the court, there has also been some other filings, we’re going to make our filings somewhere -- the response filing somewhere in the next 10 or 15 days. The filing was done and we believe through valuation work, there’s an independent investment bank selling in the company, and we believe our valuation is correct for the security as of this point. The company filed for a variety of reasons, I don’t go into the detail, because it’s still in the miss -- the bankruptcy court filing, but I do not view it is a negative at all. We’ve had filings before in our history and they usually turned out to be positives not negatives.

And then one more portfolio related question. Can you provide an update on Trans-Trade -- it’s not actually one I’ve ever really focused on much before, but it looks like the term BP’s is under some valuation pressure?

Absolutely Trans-Trade -- it was continually under pressure. Here is the advantage of being a sponsor-led lender. We have a sponsor that’s paying a lot of attention to it who’ve known -- I’ve known for a 10 years and this sponsor is continually working on the issue, has now stabilized the company and true to their word has put a substantial amount of additional capital in supporting loan. So we feel very good about our APs, the BPs became under valuation pressure, because some of the capital came in with us at the BPs and probably pursue with us and we just felt the conservative approach which is the right approach on the BPs, but we really secured the APs even more than before.

Okay and then one last one. We take a look at the schedule of investments. And at the end, you gave great disclosure and we always applaud for that. You always give to that little table at the end that talks about the portfolio companies where you made slight adjustments to rates and things like that. Tegra Medical showed up on that for the last 2 quarters. One day apart, you had 2 different amendments, first of all, what I wanted to know what maybe that was just an oversight and it should have just appeared once or is there anything going on with Tegra?

I’m not sure.

Okay. It’s just a half -- it just 50 basis point on the Term Loan B and in last quarter, it was December 30, and then it showed up again this quarter as a January 1 amendment and just -- there is nothing, Tegra seems to be doing fine in your opinion?

I think Tegra continues to do fine. Fortunately Tegra is with our very good sponsors, the Riverside Partners and it’s stable-to-improving. Actually we have a little bit of a capital issue in that they’d like some more capital to expand their business and we’ve offered more capital, but cash flow is strong enough that they haven’t taken it from us. So, yeah, I think that’s a good indicator that the company is doing well.

And your next question is from the line of Robert Dodd from Raymond James.

Just on outlook, if you can Len, can you give us any color where you expect pricing to go set for the mix -- obviously you talked about pricings here to average now versus roughly last quarter, and expect some reduction and you -- amount of liquidity going forward as Basel III et cetera comes through, but I mean, do you expect terms pricing multiples, et cetera to be getting better as you go through the course of the year, at the same time deployments increase or do you think the amount of loan bank capital is going to hold prices down?

I think pricing looks pretty good going into the end of the year. I think right now it’s good enough that we should have pretty good deal of, not amazing not terrible, but good solid deal flow at the right price. We just won’t price securities too low, because we want to make sure the investors get a good risk-adjusted return. And when it drops below thresholds that we’re willing to price at, we just let them go and let the people that -- or the lending firms that are very aggressive that need origination in order to make a quarterly number, we are just not focused. We never really do focus as you guys well know quarter-to-quarter to make a number. We are focusing on long-term plan, at least a one-year plan in terms of what our earnings are and our earnings capacity is. So we just never have been short term oriented firm and we are never going to be, but there are some firms that are on a treadmill or that have to make short term numbers that have to originate and then in order to do so, when there is not enough deal flow, they are too aggressive on terms and we just won’t go there.

Just looking at the portfolio, if we look at the Rail Acquisition, I mean it’s already obviously substantially marked down, it took a little bit more of a mark down this quarter and made it on to the non-accrual list, what’s changed there or how do you feel about the stability of that business going forward?

I think before September 30 this year, we are going to make a conscious effort to clean up. You guys always write about the number of non-accruals and we are talking about such a small percentage of our assets. The real dollar amount at NAV of our non-accruals is just very, very, very small, and I met number of firms -- the way they manage their non-accruals and magically say that they have 0 or 1, which is not possible if your interest rates are as high as some of our peers, because I’ve been in this business since 1998, it’s just not a realistic number, but one thing you can do is quickly sell them, dispose of them, throw them somewhere else, do all sorts of things. We just don’t do that; we try to actually turn them around we’ve an active portfolio management team in process. Having said that, there are couple like Rail, Lighting by Gregory that are just so small and frustrating that you can expect us to dispose of them one way or another by September 30. I will say Rail is too different loans. So Rail -- one of the loans is fully secured by accounts receivable and inventories from very credible places.

Net cash current pay.

Net cash current pay, and we have tightened our advance rates and we feel very good that’s, in any scenario, a very safe investment. And there is the other part that’s our non-accrual which clearly isn’t in difficulty as the business model has changed for Rail, and it’s very frustrating to us, and we’re going to rationalize that hopefully by the end of fiscal year. As for Lighting by Gregory, the only reason this continues to be in there at all, as we had a tax problem that we have to solve, and it’s taken as longer than we expected, and we think we’re going to be there, it’s nothing to do with the fact that we wouldn’t have disposed of this a year ago, it’s a single light store in New York, which does, by the way slightly cash flow positive, but it doesn’t belong in the portfolio.

And the other thing that we do help you guys on transparency is, we split out these tranches, we’re giving you complete disclosure and also identifying accruals versus non-accruals on a per tranche basis.

And at this time, there are no other questions. Ladies and gentlemen, we thank you for your participation in today’s conference call. This concludes the presentation. And you may now disconnect.