Oaktree Specialty Lending Corporation (OCSL) Q4 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Fifth Street Finance Quarter Four 2015 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host, Robyn Friedman Senior Vice President of Investor Relations. Please go ahead.

Thank you, Abigail. Good morning and welcome to Fifth Street Finance Corp's fourth quarter and fiscal year end 2015 earnings call. I am joined this morning by Todd Owens, Chief Executive Officer, Ivelin Dimitrov, President and Chief Investment Officer; and Steven Noreika, Chief Financial Officer. Before we begin, I would like to note that this call is being recorded. Replay information is included in our December 1, 2015 press release and it 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 that reflect the company’s current views with respect to, among other things, future events, and financial performance. Words such as believes, expects, will, estimate, plan, projects, anticipates and future or similar expressions are intended to identify forward-looking statements. These forward-looking statements are subject to the inherent uncertainties in predicting future results and conditions. Certain factors could cause actual results to differ materially from those projected in these forward-looking statements. New risks and uncertainties arise over time and it is not possible for the company to predict those events or how they may affect it. Therefore, you should not place undue reliance on these forward-looking statements. 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. To obtain copies of our latest SEC filings, please visit our website or call Investor Relations at 203-681-3720. We undertake no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise except as required by law. The format for today’s call is as follows: Todd will provide an overview of our results and outlook, and Steve will summarize the financials. Then we will open the line for Q&A. I will now turn the call over to our CEO, Todd Owens.

Thank you, Robyn. For the quarter ended September 30, 2015 FSC generated $0.18 of net investment income per share, covering our dividend of $0.18 per share for the third consecutive quarter. In addition, we operated within our targeted leverage range and executed on our announced share buyback program. We ended the September quarter at 0.72 times leverage close to the middle of our target range at 0.6 to 0.8 times debt to equity, and somewhat higher than the prior quarter. The increase in leverage quarter-over-quarter was mainly driven by closing on $279.3 million of originations as FSC selectively deployed capital into investments with strong risk adjusted returns. In addition, FSC purchased approximately $20 million worth of our shares in the open market. In regard to the credit profile of our loan portfolio, we maintained a strong and diversified portfolio of investments spread across 135 portfolio of companies. On average, our portfolio of companies experienced improving financial results consistent with the modest with growing economy. A little over two years ago we decided to rotate out of the energy sector. At that time, we saw substantial capital flows into the sector driving higher leverage and pressure in price which we believed would not provide adequate risk adjusted returns. In the current challenging environment we are pleased that our energy exposure remains at only 1.8% of total investments at fair value spread across three portfolio companies. More broadly during the September quarter, we only had one immaterial addition to our three loans that were previously on non-accruals, as we placed the answers.com second lien on PIK non-accrual. Although the company is currently paying cash interest given our mark on the second lien debt we have conservatively opted to stop accrual of the non-cash income. The four investments that are on non-accrual comprised 2% of our debt portfolio of share value as of September 30, 2015. We did have a small number of portfolios of companies that experienced deterioration in their financial results. Ameritox, our largest portfolio of company has underperformed over the course of this year primarily due to a significant reduction in medicare reimbursement rates and to a lesser extent lower testing volume. As a consequence, Ameritox has been marked down to 91% of power and we have moved it to a category three asset. Our portfolio management team is working closely with the company’s management and the company’s sponsor owners to improve its operating performance. Subsequent to quarter end, FSC was named as a defendant in a number of putative securities class action lawsuits. FSC continues to believe that claims are completely without merit and we intend to vigorously defend ourselves against plaintiff’s allegations. Additionally, in November FSC received a letter from a stockholder RiverNorth Capital Partners, an investment firm that has recently purchased FSCs shares. In his letter RiverNorth called for change to the composition of the FSC board and additional strategic changes including replacing the investment advisor. While we believe that the -- RiverNorth’s letter and related press release was inflammatory and misleading, the FSC board and leadership team welcomed an open dialogue with our stockholders and are committed to driving enhanced returns to all FSC stockholders. To that end, we have reached out to RiverNorth and look forward to meeting with them in the coming weeks to better understand their recommendations and reasoning. In addition to RiverNorth, we plan to speak with many of our stockholders in the coming weeks to discuss their thoughts on our business as well as our plans for 2016 and beyond. Since I became CEO of FSC in January we have been focussed on generating consistent results, continuing our track record of executing on strategic initiatives and delivering value to our stockholders. We have now generated earnings that exceeded our dividend for three consecutive quarters which allows us greater operating flexibility. Additionally, in August and September, FSC repurchased 3.1 million shares at a weighted average price of $6.48 per share resulting in approximately $20 million worth of share purchased in the open market. Subsequent to the exploration of our previous stock repurchase program on November 30, 2015 our board of directors approved a new $100 million stock repurchase authorization. As always, we were committed to deploying capital in a manner that would choose a best possible return for our stockholders. While we still have a lot of work ahead of us, we are pleased with our overall performance during the September quarter and to some of the initiatives we have implemented during the course of this year. Looking forward to the December quarter we do anticipate some download pressure on earnings due to increased legal and other professional costs associated with the class action lawsuits and the RiverNorth proposals. I would now like to turn our call over to our Chief Financial Officer, Steven Noreika to discuss our financials in more detail.

Thank you, Todd. We ended the fourth quarter of fiscal year 2015 with total assets of $2.6 billion, a decrease of $82.6 million from 2014 fiscal year end. Portfolio investments totaled $2.4 billion at fair value which was spread across 135 companies at September 30, 2015. At the end of the September quarter, we had $143 million of cash on our balance sheet. Net asset value per share was $9 at the end of the September quarter as compared to the revised net asset value per share of $9.15 at the end of the June quarter. For the three months ended September 30, 2015 we generated total investment income of $63.8 million. The quality of our income continued to be high as net PIK which is PIK accruals recorded in excess of PIK payments received represented only 3.7% of total investment income. Net investment income was $28.2 million for the quarter, a decrease when compared to net investment income of $37.5 million in the prior year. During the quarter ended September 30, 2015 we closed $279.3 million of investments and 10 new and 6 existing portfolios of companies and we received $74.7 million in connection with the full repayments of four of our debt investments all of which were exited at or above par. Notably we were repaid at par on our only CLO debt investment and now have no remaining CLO exposure. Furthermore, we received an additional $180.1 million in connection with syndication and sales of debt investments in the open market. The credit profile of the investment portfolio continues to be solid as 94% of the portfolio of fair value was ranked in the highest one and two categories. We believe we are conservatively positioned relative to our peers with 94% of the portfolio at fair value consisting of debt investments, 79% of the portfolio invested in senior secured loans, 77% of the debt portfolio consisting of floating rate securities with no CLO investments and limited energy exposure at quarter end. Our floating rate exposure should also position us to benefit in a rising rate environment. FSCs joint venture with an affiliate of Kemper Corporation continues to perform well generating a 15.4% weighted average annualized return on FSC’s investment during the September quarter. As of September 30, 2015 the joint venture had $419 million of assets, including investments in a range of one-stop and senior secured loans to 34 portfolio companies. For the September quarter, the weighted average yield on our debt investments including the JV return was 10.8% which is relatively flat quarter-over-quarter with the cash component of the yield making up 10.3%. At September 30, 2015 the average size of a portfolio debt investment was $20.7 million, the average portfolio company EBITDA was $37.1 million and our top 10 portfolio company investments represented 31% of total assets. This week, our Board of Directors declared monthly dividends of $0.06 per share for December, January and February this is consistent with the last three quarterly dividends. We expect our Board of Directors to continue to declare monthly dividends on a quarterly basis subject to various factors including company performance, capital availability, level and timing of share buybacks as well as general, economic and market conditions. I will now turn it back over to Robyn.

Thank you for joining us on today’s call. We will take questions during the Q&A session from analysts who cover FSC. As a reminder, the purpose of today’s call is to discuss our earnings results and we would appreciate it if you could please keep your questions limited to that topic. We do not intend to make any further comments or statements during this call related to the litigation or our recent 13-D filing and we thank you in advance for your cooperation in that regard. With that, Abigail, please open the lines for questions.

[Operator Instructions] Our first question comes from the line of Doug Mewhirter with SunTrust. Your line is open.

Hi. Good morning. I had two questions. First, you commented on an issue about recognition of fee revenue where you had to make some restatements. I guess what was the source of that fee revenue recognition? Was it -- I assume that they were recognized prematurely, was it a matter of where they had to be amortized and you thought that they couldn't and were these syndication fees or was it sort of the OID that you make on loans at a discount. Just more color would be helpful there?

Okay. Good morning, Doug its Todd, I’m going to ask Steve to address that topic.

Hi, Doug. Right, these were issues that we discovered during our year-end audit process related specifically to fees that we recognized upfront on a certain batch of loans. It’s a policy that we’ve used over the last several years but we discovered some errors that needed to be revised. We determine that the materiality levels of those revisions were small enough that we did not -- yeah just to be clear it was not a restatement because of the immateriality of these adjustments in prior periods we booked an adjustment in the first quarter of 2015 to reflect all the cumulative amounts. So we revised the current quarters of 2015 with these amounts as well. So you’ll see overtime that the majority of these timing revenue recognition timing adjustments that we made will make their way back into our income and we expect as we accrete them into our income.

Okay. Thanks for that. The second topic, in your newsletter that FSC and FSFR published on your website, you talked about how this quarter was seasonally slow in terms of deal flow and activity, which is sort of industry-wide phenomenon, that wasn't surprising. You said that you expected some deals to get pushed into the December quarter. Are you actually seeing any of that materialize? And as a I guess a question related to that, are you still expecting to continue to grow the SLF at the pace that you've been growing it over the past couple quarters?

Yes, Doug I think Ivelin will address that question.

Good morning, Doug. I think it’s a good question because we look at a market from a number of different perspectives. And I think its something that’s worth pointing out to everybody on the call. Fifth Street is one of the few fully built-out origination platforms out there; we’re not relying on the syndication banks or any other parties to bring loans to us. We have invested in a sales force that’s out there developing relationships with private equity sponsors. We source, underwrite and completely manage our own loans. So by default that takes time to build out that pipeline and sometimes the pipeline shifts quarter-over-quarter, so it’s very tough to predict when deals will come in. We did see some deals push from September to October which will help obviously the December quarter and as you’ve actually seen from prior years, December is seasonally strong for us. The natural phenomenon of people trying to get deals before down before year-end there is phenomenon that banks having dislocation issues during that time. So folks like us are able to step up and help sponsors get their deals done and achieve attracted risk adjusted returns with their efforts. So we are seeing that some of that happened this quarter and that’s also helping the growth of our JV with Kemper. Initially, as you know we funded the JV with some loans that were warehoused on our balance sheet. Over time, as we work with Kemper to our source and underwrite new loans it’s probably a little bit smaller process because we have to go through the finding of the loans, they are underwriting it, Kemper needs to go through their process. We’ve achieve pretty good growth in that JV. We’re happy with where we are today. I think also in this quarter we are able to expand this size of the JV with the additional leverage provided by CS and so we’re excited to keep growing that business. There are certain types of loans that fit the mandate of the JV, so not every deal sourced by the Fifth Street platform works for our partners at Kemper. So that’s a natural barrier to the growth there, but we feel good that over time we should be able to get to maybe 75%, 80% invested hopefully by March.

Okay. Just one quick follow-up related to that. So and it sounds like you have a healthy deal flow, obviously you also -- you have constraints on your balance sheet. I would assume that you would use the SLF as partially an outlet for some of that excess deal flow, and would you use the syndication markets to also sell down -- sell off some stuff to the market to manage your leverage or how generally are you going to keep that leverage?

Yes one of the largest deals done by the Fifth Street Platform happened during the September quarter. It’s a deal called Valet Waste, which was sponsored by Ares Management, and Fifth Street acted as the lead arranger and we syndicated about 50% of the deal pre-close, since closing of the deal we have continued the syndication process deal, so it’s a testament to the success of the platform in growing the business being able to do deals with more key sponsors driving that fee income and also managing the size of our exposures.

Okay. Thanks, that’s all my questions.

Thanks, Doug.

Thank you. Our next comes from the line of Robert Dodd with Raymond James. Your line is open.

Hi, guys. Just going back to the accounting clarification if not restatement, I mean GAAP is pretty clear, origination fees are amortized, structuring fees are taken upfront. And as Ivelin says, you guys pride yourselves on the origination platform and essentially controlling the loan documentation. Can you give us a bit more color on where did the problem come up because obviously, this goes back several years and has gotten past the orders as before? So the question is was there a problem -- were these self-originated loans, was there a problem in passing information between the loan documentation team and the accounting team as to the wording, whether it was origination versus structuring? And I guess then to that point, if they were self-originated, has a third party law firm familiar with loan documentation taken a look at these deals and other deals to see if any of the loan doc wording is ambiguous?

Robert, its Steve. I think a lot of the questions and points that you raised are accurate. This goes back to 2012 and it centers around a certain type of loan like a, a broadly syndicated loan that we might do where the fees should be advertised and the income overtime as you said. And it related basically so we did not have sufficient documentation to support the type of fees that we were taking. So we are working to improve that going forward with PWC. They’ve been very helpful and you’ll continue to see results to that end.

Okay. Got it. And so, just to clarify on that, going forward would the general expectation is where you can structure – you structure loan docs so that these things -- structuring fees and you can take the fees upfront. Would that – should we expect that to continue to be the model or to see more of your fees being amortized in future versus what kind of that trend had been?

Yes. Don't forget that this type of loan and you can tell by the magnitude of the numbers involved here is a very small part of FSC's investment strategy, and we expect we'll continue to be going forward. So, I don't think you'll see any material changes to our forward-looking earnings for this.

Great. Second one sort of unrelated really. What capital structure-wise, obviously I think the ING facility matures next year. You're in the leverage range right now. Any color on kind of what type of capital structure between revolver, term, convert, et cetera, are there going to be any expectations of material changes in that kind of structure for capital that you'd like to see going forward?

Robert, its Todd, thanks for the question. Now, look, we feel good about our capital structure today. Obviously, and we don't expect that there will be material changes in how that looks going forward. Obviously, we have some maturities particularly of the convert coming due in April of this year. We're comfortable with our plans to deal with that maturity. And over time, we will continue to evaluate ways to optimize our capital structure, but we don't anticipate any significant changes going forward.

Okay. Thank you.

Thank you.

Thank you. Our next question comes from the line of Jonathan Bock with Well Fargo Securities. Your line is open.

Good morning and thank you for taking my questions. Todd, appreciate your commentary early and I definitely appreciate the comment of a spirit of open dialogue with investors. And I'm curious both you and Len made a statement as it relates to RiverNorth citing that there are comments for both inflammatory and misleading. And I'm curious, tell us which items that you considered to be both inflammatory and misleading because those seems to be pretty much statements of fact?

Yes, Jonathan, appreciate your time and question this morning. Good morning. Look, we're not going to get in to a debate on the points raise in RiverNorth letter on this call as we said in the preamble. Having said that, I would make a few important comments, number one, we believe that our external manager FSAM is a right manager for this portfolio. We have built over 17 years very strong business that sources, originates managers, portfolio of middle market, assets. We've originated $7 billion in assets over that time period and feel very, very good about how that portfolio is positioned. We have been consistently recognized with industry awards for our position in the middle market. And we think that we have been very prudent in how we have managed our portfolio and feel very, very good about that. So that's one observation I would make. The second observation is we are and have been very open to a dialogue with all of our shareholders including RiverNorth, that's why once we were made aware of their concerns and their letter, we almost immediately reach out to that to enter into a conversation with them and make sure we understood their perspective.

Okay. Appreciate that. I guess getting to the point of management of the BDC itself. I believe if we go back to the FSAM call, Len made a point to point out that the BDC will in effect to be focused on recycling capital at the BDC's in order to fund new originations yet at times Todd we hear that you have a focus on buying back shares. The question really gets to, Todd do you really have control of the BDC and its capital allocation decisions? Or was Lyn's statement about no shareholder buybacks inaccurate?

Well, Jonathan, first of all, I said that Len and I are absolutely on the same page. And as I have said very consistently since they took over as CEO, we are managing FSC in what I would describe is a steady state environment where we are not anticipating raising additional capital, certainly we're not in the position to-date to do that and we are operating that business to optimize the returns for the shareholder. And I think there are two important components on that what you've touched on. First of all, we're going into recycle capital into attractive transactions in support of our sponsored partners. And secondly, we are going to continue to evaluate share buyback as we have just done in the most recent quarter and so shall we do in the future. And hopefully people see in the reauthorization or the new authorization of the $100 million buyback, the willingness to think about additional stock buybacks.

Great. Then the question is because we've seen a number of BDC's institute more programmatic buy such as A cast that would buy automatically at 0.85 times now or below it. Can you explain why something like 10b5-1 plan or direct programmatic share repurchase is not in the best interest of your shareholders at this time?

We evaluate a lot of varieties of share buyback. I think again, as I've said, already once we bought back $20 million a share in this quarter. We have reauthorized our ability to buyback stock and we will evaluate additional buybacks in the future.

Got it. And then two more quick follow-ups and I appreciate you candor. So you did highlight the potential for lower earnings as a result of additional legal expenses or perhaps a bit higher expenses as a result of the several class action law suits that have been file against you. I guess the question is why is the BDC shareholder bearing that expense when it really ties to issues that are tied to your external manager. Why is this not being borne at the external manager level? Explain why shareholders need to pay for that?

Jon, I think some of the costs are going to borne by our external manager and some of them are going to be borne by the BDC. Unfortunately at this point it's impossible to quantify what the costs is going to be, so it's hard to get any more detail from that.

Even though you outlined lower earnings, I guess it just a question on the mind of investors. And then, I guess the last one relates to commentary in your filing where you state that in the even of termination of the advisory contract that could be considered an event of default for your lenders that have your credit facilities. The question is, do you intent to get a waiver from your lenders in the event of termination or in order to get perhaps I'd say a bit of insurance in light of issues that are servicing as it relates to potential proxy battle looming?

Look, I think the scenario you outlined is low probability. I'm not going to speculate on that.

Okay. Thank you so much.

Thanks, Jonathan.

Thank you. Our next question comes from the line of Christopher Testa with National Securities Corp. Your line is open.

Good morning. Thanks for taking my questions. Just with the subordinated debt, the origination's been up this past quarter and the quarter prior. Is this something that's opportunistic from spreads widening? Are you looking to increase the senior secured exposure relative to this going forward? Just your thoughts on the asset mix, it's helpful?

Yes. Hi, it's Ivelin and thanks for the question. It's purely opportunistic. We look for the best opportunities out there for risk adjusted basis. You've seen our performance over the last number of years. We've stayed away from mezzanine and unsecured debt for a while. It's not a space that we feel has attractive risk adjusted returns. We had one investment in this quarter which we supported. We led a second lean syndication for Vista in their purchase of business, private transaction. And so that was an attractive opportunity for us to come in early, evaluate the business alongside the sponsor and understand dynamics there and be able to structure a very nice deal. So, when we have opportunities like this we look to be -- we look to be a helpful to our clients and be able to be paid for that. But its not – we're not [Indiscernible] opportunity. They come to us through our sponsor network on an opportunistic basis.

Okay. And just given the high balance sheet leverage, you now have the $100 million buyback has been authorized the new buyback program. How are you looking at maintaining a fully invested portfolio, doing the buybacks and potentially shedding some assets to pay down the debt and deleverage the balance sheet more? If the opportunities are good enough are you going to keep the leverage as high as it is or what are your plan for that?

Yes. Thanks for the question. It's Todd. Look, we finish the September quarter at a 0.72 times, debt to equity ratio, which is right in the middle of our range and we feel good about the overall leverage. We expect the leverage levels to vary hopefully within that range and obviously in the June quarter it was at the low end of that range and has trended towards the middle part of that range and we're very comfortable with where we are today and we would like to continue operating within that range going forward. I think that they are depending on the origination cycle and the volume of originations and where our stock price is trading, we'll continue to evaluate with our share buyback make sense as deploying our capital. But as we said here to-date the leverage level feels good.

Okay. And what the answers Company not approving PIK, just your thoughts on how the interest coverage looks? What's the risk of cash non-accrual based on where the marks are on this?

This is Ivelin again. Answers is a loan that we'd being tracking for some time. The company got hit earlier this year with a change to some Google algorithms that affected their search results. It’s a business that we know pretty well. It’s a management team that we track for a while and we believe their ability to figure out those changes, make the necessary adjustments and moving forward. Non-accrual was driven by, Steve can probably explain better, by our accounting policy. We don't have any PIK on this loan. It's purely cash paid loan, that's current and has enough interest coverage to continue paying our interest. But Steve maybe you can describe the…

That's right, Chris. The Answers does not have contractual PIK. The small amount of income non-accrual for the quarter which I believe was less than $30,000 related just to an OID accretion that we have on that loan and given the mark. We felt that was the conservative position to stop the accrual of OID for the quarter.

Okay. Got it. That's helpful. And with the Ameritox within the JVs, really drag down the fair value there. You have other healthcare companies just within the FSC portfolio or JV that have a similar type of reimbursement risks?

Yes. That's a very good question, because healthcare in general has been a core focus of the platform. As you guys know we have a dedicated team that track this phase and we spend a lot of time thinking about the different reimbursement issues. And in every deal that we invest in there is different reimbursement issues that affect that business, some times its more state specific. There is a Medicaid reimbursement in the case of a Ameritox in late September, CMS which is the governing agency that prescribe some Medicare reimbursement, came out with pretty draconian use on the rates for the next year. For 2016, the industry was up in arms and went through a couple of rounds of negotiation with the industry, since then those rates have been brought back also to a more manageable state, more manageable place. And so, we're working with the company to figure out what that means with the business going forward. What kind of mitigating cost cuts we can put in place. And also we have some initiatives in place beyond on the offense within this business. If you track those space, there's a large competitor called Millennium that went through pretty public dislocation due to some very questionable practices, they got penalized pretty heavily by the government. Really Millennium is the reason why the government looked into the space that much. They were doing something that was pretty questionable, which were have to be invested in Ameritox which is on the right side of having the regulatory compliance internally and be able to survive this kind of reimbursement cut and grow the business. Our investment piece is there, is still intact. We believe in the team. We believe in the sponsor effects, hence we'll continue to work to make progress in this investment. We had another investment in this space, a company called Aegis that we have sold out of very close to par earlier this year. So we're pretty happy with that outcome.

Okay. Thanks. That's good color. And just with the non-accrual that you have sold rather restructured, just can you give color on that restructuring and what went on there?

Which deal was that, Chris that you're referring to?

The Miche Bag

That was much earlier in the year. Yes, we just had a non event to the case of making it little clear to the reader as to what happen there.

Got it. And what are you're seeing in the sponsor market in terms of what's structures are asking for? Are you finding that sponsor are trying to push the envelope more with higher attachment point leverage in the deals or you generally still seeing consistency in that market where you are?

It's very sponsor specific. We have some people and we don't do a lot of business with those people, but they give us a call and when we hear the leverage ask from them, we move on pretty quickly and then we see that deal getting done by one of our competitors that has tons of capital and they need to deploy it. We – as Todd described earlier, we're in a position to be very selective with our capital and we've always being very selective with our capital and able to take advantage of those opportunities when they present themselves. The people that we do business with and that's I think we keep saying about the sponsor origination platform, those are guys that have been in business for a long period time we've done 10, 12 deals with them over the years. And something you see about the Fifth Street deals, they're pretty consistent as far as where the leverage shakes out, as far as where the pricing shakes out and sponsors like that deal, they like consistency, they like the fact that you deliver on what you promise and that's why they're willing to pay you more versus the marginal player out there, they are just participant in somebody else's facility.

Okay.

Hey, Chris. It's Todd, we appreciate the questions here, but we've had a number of others in the queue. It maybe – if you want to dial back in and hopefully we'll have a time to get you or we're happy to talk to you after the call.

Okay. That's fine. Thank you. I appreciate it.

Thanks, Chris.

Thank you. Our next question comes from the line of Christopher Nolan with FBR & Co. Your line is open.

Hi. Thanks for taking my questions. How much in the fourth -- in the next quarter how much should we expect legal fees to increase relative to the current quarter?

Chris, it's Todd. Good morning. We – its impossible to say at this point how much. We just know that there is going to be cost, as we've already said associated with both the litigation and the RiverNorth proposal.

Todd, what is the priority in terms of covering the dividend with earnings for paying the management fee? Should we expect some sort of management fee givebacks or whoever to ensure that EPS coverage dividend?

Chris, look, we are very – we have been very focus. We continue to be very, very focus on covering our dividend. We set the dividend at a level that we feel confident that we can cover quarter in and quarter out. We've covered it for three quarters now and we hope to continue covering it into the future.

Final question. As we approach -- last year you did Annual Shareholder Meeting in March as I recall. Going forward should we expect the FSC Board to be requesting changes in the terms of the management contracts specifically in terms of incentive fee compensation and things like that?

Chris, it's Todd. I don't want to go ahead of our board or speculate about what the board will do.

Okay. Thanks for taking my question, Todd.

Thanks very much for your time.

Thank you. Our next question comes from the line of David Chiaverini with Cantor Fitzgerald. Your line is open.

Thanks. Good morning. I have a follow-up on the credit performance of the portfolio, can you comment on the overall health of the portfolio and the outlook, and if you have it the revenue and EBITDA trend?

This is Ivelin again. The credit performance is stable. We look at the portfolio as a whole as performing as expected. We have as you know a couple of sectors that we're spending time to figure out idiosyncratic factors affecting companies there. As you know we have three companies in the energy space. We're spending a lot of time with the teams and sponsors there to make sure that we know what's going on with the underlying businesses. And they're managing there structures to surviving in the current energy environment. So that's spending – our team is spending a lot of time there. In the healthcare and we talked about the Ameritox in that space. We have focus that's why the investment is on watch list. We're spending – we're dedicating resources to help that business. But overall when you look at the rest of the portfolio, it's very stable. Companies are growing their businesses, revenues are growing, EBITDAs are growing but they are not growing as their budgets expected. They expected much more robust here. We're seeing that numbers have flat to slight up. I don't have the numbers in front of me for the portfolio as a whole, but I know we have them so. We can get back to you on that. But that's the general sense we get from our weekly PM meetings when the different deal teams talk about the performance of the individual accounts. Its relatively stable environment and people are looking for way to grow their businesses.

In the outlook, how does the outlook look in terms of revenue and how they're tracking relative to internal plan? And as you guys prepare for get into year end and Company start to put their budget for next year. Are they expecting much growth?

That's an interesting question. We haven't seen those budgets yet. But one thing as you know in an origination platform when you get to structure your own documents and we have robust sets of covenants, over time those covenants tighten and those covenants when they set into the outset of the deals, they are set based on some projection that the sponsor and the company put together for the next five years when we made the loan. Now, deals that were years two and three, they performed well. They are above when we did the deal EBITDA, that has grown maybe 10%, 15%, but I got to tell you when sponsors run their models, they expected EBITDA to be up 40% to.50% by now. And so that's where we're spending a lot of time thinking through and looking at each individual business. Okay, it's grown over time. It's expended. So maybe they've done an M&A transaction or attract additional customers, but they are behind original plan that was put together two or three years ago. How do we react to it what kind of change? And that just give us a seat at the table to go back, meet with the team and evaluate the situation. So that's what we're going to be doing basically the next – basically December, January, February, because that's when people are putting forth their next year's budgets.

It's Todd. I would just add a little bit again at a high level. We feel good about our portfolio. As we said in the script earlier in our comments earlier, the overall and as Ivelin just said the overall the underlying portfolio companies are showing kind of modest growth consistent with a modestly growing economy. And the overall portfolio is 79% senior secured, it has a modest level of PIK income and very little energy exposure and so as we head into year end here, we feel pretty good about our portfolio.

Great. Thanks very much.

Thank you.

Thank you. Our next question comes from the line of Troy Ward with KBW. Your line is open.

Great. Thank you. Todd, I want to start off by making the comment, I know at the beginning of this Q&A, it sounded a lot different because it sounds like you're only taking questions from an analysts and not your shareholders, which I find a bit surprising considering on three times on this call, you've said you've welcomed an open dialogue with your shareholders, but it sounds like you're excluding them from this Q&A. I think that's a very poor decision. Follow-up on a couple of the topics that have been brought up, first of all, on the downward pressure, on earnings over the next couple quarters due to legal, again I'd reiterate a couple of comments we've heard as prior about who should bear those costs. But can you just speak to how you think about earnings relative to the dividend, and if earnings fall back below the dividend again, how do you feel on paying a dividend higher than your operating earnings?

Good morning, Troy. Look, again, I know I've said this now at least once and maybe twice. We set the dividend at a level that we think consistently meet or exceed. We’ve exceeded it now for three quarters in a row and I’m optimistic that we will continue to meet or exceed that dividend going forward. I think as you know as well as anybody there are many instances in the BDC landscape, generally and going back prior to this year instances at FSC where we have under earned the dividend for a quarter or two and still maintain the constant dividend level. It’s our hope and expectation that our board will continue to authorize dividends at the current level going forward and as a management team we are comfortable that we’ll be able to cover meet or exceed those dividends from an earnings perspective.

That’s what I was getting at, is more on a quarterly versus annual basis, thanks. And then on the external fee structure, I know as a response to Chris’s question, you put it in response to the board and what you think the board will do. I’d just want to know where you stand Todd. You know you’ve talked about you are the captain of this BDC and you are making the decision, how do you feel about the external fee structure of the BDC and obviously RiverNorth put out some very -- you know they want to see changes, what changes do you think need to be looked at least on a broad scale to get this more inline with what really shareholders are wanting?

Yes, that’s right. First of all I would say we feel comfortable with our structure. I think, I probably already said this as well. The external structure is the predominant structure in the BDC space. We think it’s an appropriate structure for managing our business and we don’t anticipate a need to change that structure as we sit here today, so that’s kind of the first response to the question. I think having said that, it’s important to acknowledge what’s happening in the industry and to sit down and have a conversation with RiverNorth and you know candidly other shareholders who have been with us for a much longer time, we want to collect their views as well and then we as a management team and a board have got to evaluate that and consider what moves if any we should take in regard to our structure.

Great. Thanks.

Thanks, Troy.

Thank you. Our next question comes from the line of Chris York with JMP Securities. Your line is open.

Good morning, most of my questions have been asked. But could you potentially help me understand your thought process in deciding the amount of the new buyback authorization considering that you only use about 20% of the capacity in 2015 and then commentary on the call about recycling capital for new investments.

Sure. We’ve had our -- share buyback authorization has consistently been at the level of $100 million and so the idea here was to re-authorize that. We thought it had provided sufficient flexibility for us to consider share buybacks in the coming quarters and enough -- ample capacity for our board to authorize specific buybacks under that program. So there was not -- to be honest there wasn’t a big debate about whether it should be larger or smaller just felt like the right level of authorization given our float and given the most recent buyback.

Okay. And then one last one here. With the currency of FSAM has compensation down rather significantly and the ability to for FSC to originate investments and -- of the portfolio being limited, I’m curious on how you would describe the morale of the 35 investment professionals that will probably be responsible for the management of FSC going forward?

Thanks for the question. Look, I made a variety of observations, number one, we feel very very good about where we are from a business. We feel like we have a great team on the ground that has been working very very hard to pursue the strategies that we have discussed on this call and we see no reason that that ought to change. I think as with everything we’ve got to be cognizant of the environment and continue to evaluate the impact of that environment on our business model which we do everyday and every quarter as a management team and we’ll continue to do that going forward. But as we sit here today, I couldn’t be more proud of the team and the effort that has been put in over the course of this year, since starting as CEO and I don’t see any reason for that to change going forward.

Okay. Thanks for taking the questions.

Thank you.

Thank you. Our next question comes from the line of Doug Harder with Credit Suisse. Your line is open.

Thanks. My questions have been asked and answered.

Okay. Thanks, Doug.

I’m showing no further questions at this time. I’d like to turn the call back to management for closing remarks.

Wanted to just thank everybody for the questions and the interest and we look forward to continuing the dialogue. Thanks very much.

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program and you may all disconnect. Everyone have a great day.