Oaktree Specialty Lending Corporation (OCSL) Q1 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Q1 2015 Fifth Street Finance Corporation Earnings Conference Call. My name is Ian and I’m your operator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Robyn Friedman, Vice President of Investor Relations. Please proceed, Ma'am.

Thank you, Ian. Good morning and welcome to Fifth Street Finance Corp's first quarter 2015 earnings call. I'm joined this morning by Leonard Tannenbaum, our founder, Todd Owens, Chief Executive Officer, Ivelin Dimitrov, President and Chief Investment Officer and Richard Petrocelli, Chief Financial Officer. Before we begin, I would like to note that this call is being recorded. Replay information is included in our January 9, 2015, press release and is posted on the Investor Relations section of Fifth Street Finance Corp's website, which can be found at fsc.fifthstreetfinance.com. Please note that this call is the property of Fifth Street Finance Corp. Any unauthorized rebroadcast of this call in any form is strictly prohibited. Today's conference call may include forward-looking statements and projections. 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 203-681-3720. The format for today's call is as follows. Len will provide introductory remarks. Todd will provide an overview of our results and outlook, Ivelin will discuss the portfolio and Rich will summarize the financials. Then we will open the line for Q&A. Due to time constraints during the Q&A session, analysts will be limited to two questions. I will now turn the call over to Len Tannenbaum.

Thank you, Robyn. Before we begin, as you saw in January the board promoted Todd Owens to CEO upon my resignation after over six and a half years at the helm of FSC. Going forward, I will remain involved with the Fifth Street platform in my role as Chairman and Chief Executive Officer of Fifth Street Asset Management an affiliate of FSC. My resignation and Todd’s promotion was a strategic decision that came as a result of both my increased responsibility as CEO of FSAM following its IPO in the fourth quarter of last year and the need to have a CEO solely dedicated to FSC. Prior to his appointment as CEO, Todd served as its President and remains a member of FSCs board of directors. Additionally, the board promoted Ivelin Dimitrov to President. Ivelin will retain his position as Chief Investment Officer and the member of FSCs board of directors. I want to congratulate both Todd and Ivelin on this well-deserved promotion. With these appointments, all managerial and operational positions at FSC will be handled by Todd and Ivelin. I am confident in their ability to successfully lead FSC going forward and steer the company in a positive direction for many years to come. I would now like to turn the call over to our new Chief Executive Officer, Todd Owens.

Thank you for that introduction, Len. I would like to take the opportunity to thank you for leading FSC since its IPO in 2008. Len and the Fifth Street team have built an impressive business with a strong brand and a solid foundation. I am excited to become CEO and I look forward to growing our business and driving value for our shareholders. As part of the management transition, Ivelin and I together with the existing team have begun a thorough review of our business. The processes included conversations with our investors, analysts and other constituents, many of whom are on this call. We undertook this strategic review to focus on driving strong, sustainable performance for FSC shareholders. Our review process is ongoing and we have already taken an important first step by reducing our dividend to a level that reflects both the current operating environment and a more conservative dividend policy. As we continue to review FSCs business we look forward to reporting our finances, shareholders and analysts in the coming months. The first quarter of fiscal 2015 was active for FSC and we made progress on several key initiatives. For the quarter ended December 31, 2014 FSC generated $0.23 of net investment income per share which was driven by strong originations to the continuing funding of our joint venture with the subsidiary of Kemper and operating leverage slightly above the upper end of our targeted range. At FSC, we continue to benefit from the expanded infrastructure and experienced investment team of our investment advisor. The December quarter is typically our strongest quarter for originations. As a sponsor-backed origination platform, deal closings are difficult to predict and may vary from quarter to quarter. The December quarter was an example of this volatility as we closed all of the deals in our pipeline that were expected to fund before calendar year-end, generating $717 million in gross originations and funding $722 million of investments across new and existing portfolio of companies. In the quarter, we exited $401 million of portfolio investments which included a $179 million in connection with syndications and sales of debt investments resulting in net originations for the quarter of $311 million. We ended the quarter with a regulatory leverage ratio of 0.83 times which is slightly above the upper end of our targeted range. Our leverage ratio may fluctuate due to the timing of deal fundings, repayments and equity raises, but we are committed to maintaining regulatory leverage in a range of 0.6 to 0.8 times debt-to-equity. As I mentioned a few moments ago the board of directors has announced a dividend reduction to $0.72 per share annually. This translates into declared monthly dividends of $0.06 per share or quarterly dividends of $0.18 per share. To reflect confidence in the new dividend level, our board of directors has declared dividends for the next six months beginning in March through August 2015. We have elected not to pay a February dividend because our net investment income did not cover our dividend for the last two quarters. The decision to realign the dividend was driven by two things, the challenging operating environment and a broader change in our dividend policy. On the operating side we continue to execute on our initiatives to increase net investment income but the progress has been slower than expected particularly as it relates to the gross of SLF JV I, our joint venture with a subsidiary of Kemper. I’ll provide an update on the joint venture later in the call. In addition the interest rate environment has remained challenging with rates on new investments binding [ph] lower in the first half of fiscal 2014 before stabilizing in the second half. Finally as we have continued to position our portfolio with a more senior secured lower yielding assets in anticipation of a more normal credit cycle and at December 31, our portfolio included 82% of senior secured loans. As a result of these trends our net investment income has not covered our dividend for the past two quarters. On the policy side, as a newly installed management team at FSC we believe that it’s important to set our dividend at a level that is covered by our sustainable net investment income which should provide us a flexibility to make decisions that are in the best interest of our shareholders over the long term. By selling the dividend below expected net investment income, we both increase the probability of regularly covering our dividend and hope to achieve greater consistency in future distributions. In establishing our new dividend policy we have considered a number of factors most important among those factors was to assume that we do not raise additional equity capital and consequently that our structuring fees are generated by recycling existing capital rather than deploying new capital. We refer to this as steady state or sustainable earnings. It is important to note that our December quarter included fee income well above steady state due to seasonally high originations, the capital raise that we had completed in July and an increase in our regulatory leverage ratios. The new dividend policy also gives consideration among other things to the amount of non-cash or PIKed income that we generate a continuation of the current low rate environment, lower regulatory leverage levels and the potential for normalized higher credit costs. We believe that taking a more conservative approach and resetting our dividend policies is a prudent move that will create long term value for our shareholders. We hope to generate excess income that we can use in a variety of ways including declaring special dividend, buying back stock or reinvesting into certain of our portfolio companies. Furthermore we hope that the excess income will help to offset the NAV decline that has historically impacted our business. We believe that all of this potential benefits are important to shareholders. Over the last year we have pursued several initiatives focussed on enhancing returns to shareholders, such as our joint venture with the subsidiary Kemper Corporation. We continue to make progress on funding and expanding the joint venture which had $265 million of assets including investments in our range of one stop and senior secured loans, 21 portfolio companies and generated a 17% weighted average annualized return on FSCs investment during the December quarter. Together with Kemper we have committed $200 million of debt and equity capital to JV. At the end of the December quarter, our investment in the joint venture was $67 million as fair values. Based on the total combined equity commitment of $200 million and our assumption of a 2:1 leverage, the JV has capacity for investments upto $600 million. We are in the process of expanding our existing credit line for the joint venture and expect to increase it from$200 million to $400 million as the need for additional leverage arises. We have ample capacity to grow our existing JV and other similar joint ventures, since only 2.4% of our assets were related to FSCs investment in the joint venture at December 31. We hope to grow this JV and other similar potential JVs as these partnerships are important drivers of our future earnings. Our capital markets platform is an important component of our business and it continues to gain traction. We believe there are ability to originate loans and syndicate them to leading financial institutions as an indication of the strength and quality of our middle market lending platforms. Our syndications capabilities provide benefits to FSC including the ability to collect incremental fee income generate premium yields by committing to larger transactions and improve flexibility to appropriately manage liquidity and concentration risk. In calendar 2014, we closed $286 million in syndications at FSC compared to $140 million in 2013 and have a robust pipeline of syndications totalling $280 million. Overtime, we expect that our syndications business will continue to grow as a component of earnings. I would now like to take the opportunity to reiterate a point we made on our last earnings call. We intend not to issue stock below NAV at FSC. We recently mailed our 2015 proxy to our shareholders which once again did not include a request for authorisation to issue stock at prices below NAV. We are one of only a few DECs [ph] that do not ask for routine authorisation to issue stock below NAV. As I mentioned at the beginning of my comments, the dividend reduction represents an important step including FSC on a sustainable task into the future. This is the first step of a broader plan to deliver improved returns to FSCs shareholders over the long term. As FSCs management team, we are continuing the strategic review of our business and I look forward to reporting back to you on our progress. I would now like to turn the call over to our President and Chief Investment Officer, Ivelin Dimitrov to discuss the portfolio in additional detail.

Thank you, Todd. The strategic review process that Todd described has been an important exercise which allowed us to take a fresh look at our business. As Todd stated, we look forward to reporting back to you as that process continues. Today, I will discuss our speciality lending initiatives as well as the performance of overall portfolio. Notwithstanding the write downs we took in the December quarter, the regular portfolio review reinforced our view that FSC maintains a strong and diversified portfolio of investments. As Todd mentioned, we have continued to migrate the portfolio into more senior secured instruments and feel good about its conservative positioning. From an overall market standpoint the December quarter was characterised by an amount of volatility that’s seen in the relatively benign environment over the last couple of years. We saw certain transactions struggle to get executed and some with the more aggressive issuers get scaled, by [ph] the size of their proposed dividend we get utilisations [ph] or abolish those plans all together. In this type of environment our launched up solution became exceedingly valuable which we deployed on a selective basis to help our sponsored partners execute on new M&A transactions. The one stop product carries an attractive yield profile while preserving the appropriate risk controls due to the first lien position. By virtue of our core investment approval, we have been able to increase our whole size and provide the necessary certainty of closed door partners. Based on the increased level of repayments during the December quarter some of which were self induced as we sought to exit lower yielding portfolio investments in order to rotate into higher yielding opportunities with better risk adjusted returns. We will continue to rotate out of assets and redeploy capital on an opportunistic basis as the market continues to be volatile. We ended the December quarter invested in a diverse group of loans across a 137 portfolio companies including our three speciality lending initiatives. During our most recent portfolio review process we moved five investments to a category three rating which is characterised by investment performance below our expectations and a material increase in risk. The fair value write down for these investments totalled $38.2 million or $0.25 per share. As of December 31, 2014 four out of these five investments replaced on non-accrual status including one of our three exposures to the energy sector expressed in the way the technologies also known as CCCG. The core investments that are on non-accrual comprise 2.3% from our total portfolio at fair value as of December 31, 2014. The total expected decline in interest income associated with this fee non-performing credits is $12.7 million which includes the reduction in cash interest income of $5.3 million and PIK income of $7.5 million. In addition, we believe it is likely that a fifth category fee credit at Mentum will move to non-accrual status in the March quarter. In the December quarter we rolled down the fair value of that investment by $10 million or $0.07 per share to keep our investments at Mentum moves non-accrual status in the second quarter the reduction in net interest income will approximately be $1.9 million or $0.01 per share on an annual basis. As we go over the credits we’re closely monitoring at Mentum and will continue to provide managerial systems as needed. The Fifth Street platform maintains rigorous underwriting procedures and our present committee has typically limited our exposure to cyclical industry. At times this can be drag on our weighted average yield point compared to our peers as we do not chase investments especially in overheated industries with stretched enterprise values and high leverage multiples. The energy sector is an example of this dynamic. In the last couple of years as others were chasing yield we remain highly selective and stayed focussed in our core business. As a result most of our energy exposure was refinanced away from us and consequently today FSC has a modest level of exposure to energy. At December 31, 2014 investments in the energy sector accounted for 1.8% of total investments at fair value spread across three portfolio companies. Our investments in oil and gas and equipment services have been stress tested based on current oil prices and we are comfortable with the fair value of FSCs remaining exposed to the energy sector. Additionally, we have a number of investments in the portfolio which should directly benefit from the recent decrease in oil prices including our aircraft leasing holdings. Turning our attention to our speciality lending initiatives, Healthcare finance group, HFG is our single largest investment at 4.5% of the portfolio. HFG is an operating company with a diversified portfolio consisting of 6 individual loans to 40 companies. In 2014, we worked with the HFG into lowering its cost of capital, optimizing its business mix and recruit additional talent to the platform. As a result, HFG continues to deliver consistent returns to HFG. In the December quarter we closed two venture debt transactions totalling $10 million which were underwritten by our venture technology platforms. At December 31, 2014 the venture loan portfolio approached $100 million. The venture deals in our portfolio generally set higher yields than our existing portfolio average which should be accretive to net investment income per share. Additionally, all of our current venture loans include an equity component which may be accretive to net asset value per share and generate future capital gains. In the December quarter, we realized our first successful exit which produced an IRR in excess of 20%. Our aviation leasing business is performing well and provides strong uncorrelated returns to the overall portfolio. Our team continues to source transactions with attractive yields by focussing on mid-to-late aircrafts and niche within the overall aircraft leasing markets. Our total investment in First Star Aviation increased to $111million at fair value at quarter end with additional deals in the pipeline. I would now like to turn the call over to our Chief Financial Officer, Rich Petrocelli to discuss our financials in more details.

Thank you, Ivelin. We ended the first quarter of fiscal 2015 with total assets to $2.9 billion, an increase of $281 million from the fourth quarter of fiscal year 2014. Portfolio investments totalled $2.7 billion at fair value, which were spread 137 companies at December 31, 2014. At the end of the December quarter we had $111 million of cash on our balance sheet. Net asset value per share was $9.17 at the end of the December quarter compared to $9.64 at the end of the September quarter. The decline in NAV per share was principally driven by credit related write downs totalling $0.25 per share yield related movements totalling $0.18 per share and a dividend distribution in excess of net investment income of $0.04 per share. For the three months ended December 31, 2014 total investment income was $76.3 million. Net PIK, PIK accruals recorded in excess of PIK payments received was $3.7 million for the quarter or 4.9% of total investment income. Net investment income was $35.2 million for the quarter, a 2.9% decrease when compared to $36.2 million in the same quarter the previous year. We believe we are conservatively positioned, relative to our peers with over 94.3% of the portfolio at fair value consisting of debt investments. 82% of the portfolio invested in senior secured loans, 75% of the debt portfolio consisting of floating rate securities and no CLO equity at quarter-end. The credit profile of the investment portfolio continues to be solid as 97.5% of the portfolio at fair value was ranked in the highest one and two categories. Weighted average yield on our debt investments has declined quarter-over-quarter from 11.1% to 10.4% including the joint venture return and the cash component of the yield making up 9.7%. The average size of the portfolio debt investment was $22.9 million and the average portfolio of company EBITDA was $30 million at December 31, 2014. Our top 10 portfolio company investments represent 28.5% of total assets. I will now turn it back over to Robyn.

Thank you for joining us on today’s call. As a reminder, due to time constraints we will be limiting questions to two per analysts. Senior management is available and happy to answer any additional questions that our analysts or investors may have after our call. Ian, please open the line for questions.

[Operator Instructions] And the first question comes from the line of Terry Ma – Barclays.

Hey guys can you maybe just talk about your capacity to originate new investments going forward giving your debt equity ratios pushing above the high end of your range?

Sure. Let me take that, its’ Todd. I sense that there are really two components of our class, you see major components of our capacity to originate new investments. We expect and intend to be in the market participating and originating new investments. We – the sources of that will be the normal turnover that you would see in our portfolio and that generates you know additional capacity for us to originate assets and then second our ability to expand the joint venture gives us substantial capacity to continue originating loans on a basis consistent with what we’ve done historically.

Okay, great. I’m just a little surprised to see all the unrealized and realized losses both in magnitude and number of investments; can you maybe just talk a little bit more about that?

Yes, this is Ivelin. As we go through the review obviously you know December was a volatile quarter, so I think you saw in the numbers portion of the write down is due to the changing deals profile in the market as of the December quarter. But the portion of it was also due to some portfolio companies that we’ve been working with for the time now and I think you know this is a tenant of how we build the business is always [Indiscernible] appropriately. And so when we went through the portfolio review the board decided that we need to adjust the fair value in those companies. We are still working on them actively as we mentioned we are offering assistance in a number of those cases, one of them is the company of shares [ph] a Canadian Oil Sands exposure so they obviously are going through some difficult times, it’s a project based business, those are long term projects. So we have some visibility but we felt he was put onto mark down our investment there. In a number of other cases, we were still actively negotiating with the sponsors and the management teams to achieve the appropriate results in our investments but that those are ongoing cases and we wanted to make sure that as of December 31 we have marked those investments appropriately.

Okay. Thank you.

Your next question comes from the line of Greg Mason, KBW. Please proceed.

Great, thank you and good morning. I wanted to talk quickly about the non-accruals; I think you said the $12.7 million of income that’s lost. In the queue [ph] it talks about them being all on PIK non-accrual and I think $3.8 million of income loss. So can you just reconcile some of the cash income that’s lost or is that an annual basis, or do you expect those to go on cash non-accrual in the future? Just clarifying that difference.

Sure, Greg, this Rich. The loans we discussed, our Phoenix is PIK only. JTC Education is a cash paying loan transferred as PIK and Express has a component of PIK and cash. And if you look at those in total its $12.7 million per year. And the cash component of that is approximately $5.1 million.

Okay. Great. All right, guys, I appreciate it. Thanks.

Thank you.

Thank you. Your next question comes from the line Rick Shane of JP Morgan. Please proceed.

Thanks, guys. In looking at the origination activity in the December quarter, that’s part of the reason that you are at the high end of your or above the high end of your leverage target. Curious what happened here, is it just with other participants in the market holding back that you had a higher pull-through rate? And how do you manage that going forward now that you’re really sort of constrained?

It was not really a higher pull-through rate. What happened was its very hard to predict when deals will close. And typically what we’re seeing is a greater percentage of deals slip to the following quarter than we saw in this quarter wasn’t really a pull-through rate. These were deals that we expected to close, but usually a percentage of them would have closed in the March quarter and we also kind of got hit the other way this quarter on the front end where a number of deals that we expected to close in the September quarter actually closed into December quarter. And since the end of the year we have continued with our business and we expect our leverage ratio to come down in this quarter.

And how much – how quickly can you divest? That mean, that’s the other element of this. How much control that you have over that in terms of being able to manage your liquidity and your leverage ratios?

This is Ivelin. Some of those exposures that we took down in the December quarter. We had already lined up a club of like-minded lenders that took down those exposures post close. So going into December we knew that we have to close on those deals and we had people lined up to reduced our exposure which has happened in January and is happening as part of our ongoing capital market activity. In addition, as you know we have a pocket within our business that consists of more liquid up from middle market loans. We track the performance of those loans and any time when there is opportunistic trading involved we’ve seen some of those loans straight up and we’d been able to sell that exposure and really pull those assets – really pullout the cash into higher yielding assets. So that’s part of what we’re doing some of the initiatives we’re doing on an ongoing basis.

Got it. I’m going to actually indulge in a third question, but I’m curious, what is the execution on those sales in this environment look like versus your carrying values?

You mean in the sell-downs and the sales in our liquid bucket?

No. You’d said that you’d continue to sell in January and February, curious that, where are those sales are…?

Absolutely. They are right around par for the assets that we sell.

Which is where we would expect and hope them to be so we feel good about the sell downs.

Thank you, Rick.

Thank you.

Thank you for your question. Your next question comes from the line of Christopher Nolan, MLV Company. Please proceed.

Hey, guys. What percentages of assets where in the non-qualifying bucket this quarter?

This is Rick. Approximately 13% of the assets.

Okay. So it’s up from – but that’s roughly flat with the prior quarters, roughly 12% -- 12.9%.

That’s correct.

And what was the reason Rich for the decline in investment yields given that we think with more SLF activity, your yields would be going up?

The SLF only grew by approximately $10 million during the quarter. It’s grown since the end of the quarter. But the yield is driven by two things, by the non-accrual assets and just the mix of the originated assets compared to the repayments.

Great. Okay. Thank you.

Thanks for your questions. The next question comes from the line of Doug Mewhirter of SunTrust. Please proceed.

Hi, good morning. I just had two questions. The first in terms you mentioned that the yields in the previous question what’s the general environment look like? Does it look like you are experiencing some spread widening or more of a buyers market in the deals that are currently in the pipeline or that are projected to be in the pipeline?

Yes. This is Ivelin. As you know in the Middle market things don’t move as fast as what’s going on in the BSL [ph] space, but we’ve definitely seen in the upper middle market spreads widening and we’ve seen certain issuers that we’re just not able to – its really is a flight to quality. Some deals were getting done and it’s a feeding frenzy and everybody’s trying to be in it, and there is other deals that are not getting the same kind of reception. What we’ve found out in this market and we’ve seen that before in our history, it pays to be part of an origination platform when you’re able to source underwrite and perform and manage your own assets. It gives you a long-term horizon. It gives you stability in your origination. It’s also gives you stability in your yields [ph], and we’re able to take advantage in times like this of opportunities where normally would have gone to a lot more aggressive lenders. So we’re able to state then and provide a one stop solution and post close syndicate down our exposure.

Great. Thanks for that. My second and final question, either Ivelin or Rich that you may have covered this in the call, $17 million in realized losses. Was that one or two investments or is it – was it a scattering of multiple sales that were just below cost or just below the cost?

It was largely driven by one asset that was previously on non-accrual that has now been converted to equity.

Okay. Great. Thank you.

And was previously an unrealized, so that was a swing between unrealized and realized.

Okay. Thank you.

Thanks for your questions. The next question comes from the line of Robert Dodd, Raymond James. Please proceed.

Hi, guys. Just coming back to the non-accruals and kind of the whole story of obviously firstly in more security in the portfolio. When I look at the four non-accruals, I mean, two of them obviously firstly with substantial markdowns, I mean, obviously, defaults happen, problems happens, but the two firstly non-accruals now appear to be marked to about 50% of cost. So, can you walk us through again, what the argument is as to why first lien is going to preserve capital better than some of your other investments when it looks like the marks here indicate firstly and frankly not much better than any of the other credit risks in your portfolio when it comes to a problem occurring and what the possible recovery is going to be?

Yes. This is Ivelin again. I’ll take this question. In the review of those specific investments, I mean, obviously the one – one of them is our Canadian Oil Sands exposure, CCG and that’s firstly investment flavored is behind of a revolver provided by a bank that finances the project nature of those cash flows. And so, from that perspective, there is enough asset coverage and there is enough momentum behind the business that as we work through, as we feel we should be able to get to a better results, but as of December 31, based on the trends we’re seeing best over the general environment we’re trading of and felt it was appropriate to market at this level. The other investment that’s firstly and that’s markdown, it’s a company that’s been in the portfolio for a while and that’s one we’re working with. It’s a one of our smaller EBITDA Company as you know over the years we’ve transitioned the portfolio from sub 10 EBITDA companies to now as you see our average is about $30 million. And one of the reasons we did that when you working with smaller companies, its very difficult, you have less triggers to pull on. You have less things to work with it as you’re working with larger companies, you have a more sophisticated team, you have a more sophisticated strategy in place. And that’s why from risk management standpoint we’ve shifted the portfolio towards larger issuers. That being said, actually in both of those companies are – one of the benefits being part of the Fifth Street platform gives us the fact that we have a dedicated workout team, dedicated portfolio management team, and that team right now is on the ground to both of those companies, figuring out next steps and how we’ll achieve maximum recovery.

Got it. Thank you. And just a follow-up, kind of following on Greg’s question earlier that if you can, I mean, as you said, the four here all listed in the Q as PIK non-accrual, so when you tell us the $5.1 million in cash income that you generate, is that income going to continue, because they are on PIK but not cash non-accrual or is there – have they changed to cash non-accrual status early in the New Year?

Robert, this is Rich. When investment pays both cash and PIK, and it’s on PIK’s accrual, what that implies that its not – we’re not accruing the cash income as well as the PIK income.

Okay. So it’s full non-accrual. Okay. Got it.

Thanks for your question. The next question comes from the line of Jonathan Bock of Wells Fargo Security. Please proceed.

Good morning and thank you for taking my questions. Todd, Len, Ivelin, just a question as it relates to new originations, can you explain yourselves and the Board as part of a new originations and making new investments did not see value in buying back your own stock this quarter given the significant discount to NAV?

Jon, its Todd. I’ll take that question. As I said in our observations we are continuing to think about all aspect of our business including share buyback we have had debates with the days with the Board and we continue to evaluate whether that make sense for our business. And we look forward to reported back to you in the future on that.

Okay. Great. Thank you, Todd. And then, one item that I guess is, one up for consideration that also does not make sense, if we see the dividend trend and the NAV trend on a per share basis if Fifth Street FSC, can you explain or also maybe give us your thoughts on why would also be fair to continue to operate under fee structure that allows the manager to be paid more annually despite net share declines and dividend declines for investors?

So I think part of the decision that we’ve made here, Jonathan again as we’ve said in the call was to set the dividend level below where we expect our NII to be and to stabilize the divided and hopefully also to provide more stability to the NAV per share, that was part of the unpinning of the decision process that we went through and resetting a level of the dividends. Again, as we’ve mentioned on the call, we are considering all aspects of our business. I just mentioned. You just asked. And I just mentioned share buyback. But we continue as we have in the past we also evaluate the appropriateness of the fees and are thinking about that as a management team and as a board.

Guys, thank you. We look forward to your answers.

Thank you.

Thanks for you question. The next question comes from the line of Chris York of JMP Securities. Please proceed.

Good morning and thank you for taking for questions. This question kind of follows upon Jonathan’s last one, so given that you increased the core dividend in August could you help us understand what has changed in the financing planning or in the environment over the last six months? Do you now decrease that dividend?

Sure. It’s Todd. I’ll take that, try of that. Again, we alluded to this and commented on it in our questions, but maybe connect the dots, so a little bit better here. What we have discovered on the operating side is that since the dividend raise, that our joint venture has not grown as rapidly as we expect it to. And we have chosen to migrate our portfolio into more senior secured assets and that has put pressure on the portfolio yields. And the result of those two factors principally have met that we have not covered our dividend. When we raise the dividend we expect to be able to cover it and that has not turned out to be the case. As I mentioned in comments also philosophically and by implication the dividend policy that was adopted, is that has been adopted in the past was a little bit more forward looking. We try to anticipate what our earnings were going to be and set a dividend level very close to those earnings. I think what we’re doing, okay, and from a policy perspective now is setting with dividend more in a look back type way and if there is as we hope excess net investment income over our dividend we will find ways of returning that to our shareholders.

Okay. Thanks for that, Todd. That’s it from me.

Thank you.

Okay. Thank you for your question. I would now like to turn the call back to management for closing remarks.

We appreciate everybody’s time and we look forward to continuing this dialogue as we review our business. Thanks very much.