Prospect Capital Corporation (PSEC) Q3 2017 Earnings Report, Transcript and Summary

Good day and welcome to the Prospect Capital Corporation Third Fiscal Quarter Earnings Release Conference Call and Webcast. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please also note that this event is being recorded. I would now like to turn the conference over to Mr. John Barry, Chairman and CEO. Please go ahead.

Thank you, Andrea. Joining me on the call today are, as usual, Grier Eliasek, our President and Chief Operating Officer; and Brian Oswald, our Chief Financial Officer. Brian?

Thanks, John. This call is the property of Prospect Capital Corporation. Unauthorized use is prohibited. This call contains forward-looking statements within the meaning of the securities laws that are intended to be subject to Safe Harbor protection. Actual outcomes and results could differ materially from those forecast due to the impact of many factors. We do not undertake to update our forward-looking statements unless required by law. For additional disclosure, see our earnings press release, our 10-Q, and our corporate presentation filed previously and available on the Investor Relations tab on our website, prospectstreet.com. Now, I'll turn the call back over to John.

Thank you, Brian. For the March 2017 fiscal quarter, our net investment income or NII was $73.1 million or $0.20 per share, down $0.04 from the prior quarter. This decrease was driven primarily by a decline in interest income due to our prepayment fees, a lower coupon first tower refinancing, and reduced yields from certain structured credit investments close to expected call dates partially offset by a decrease in management fees. Our net income was $19.5 million or $0.05 per share, down $0.23 from the prior quarter. This decrease was driven primarily by the factors above and unrealized depreciation in the energy, financial, and structured credit sectors. For the nine months ended March 2017, our NII was $236.4 million or $0.66 per share, down $0.13 from the prior year. Our net income was $201.7 million or $0.56 per share, up $0.54 from the prior year. In addition to deploying capital in new originations, we are also seeking to increase income through extensions, refinancing's and cause in our structured credit portfolio. Realizations in our multi-family real estate portfolio, securitizations and refinancing's in our online lending business, revolver draws to retire more expensive term debt, divestitures of lower yielding assets, improvements in controlled investment, operating performance and enhanced data yields from LIBOR, potential increasing beyond four levels. We previously announced monthly cash dividends to shareholders of $0.08333 per share for May, June, July and August 2017 representing 109 consecutive shareholder distributions. We plan on announcing our next series of shareholder distributions in August. Since our IPO 13.5 years ago through our August 2017 distribution at the current share count, we will have paid down $15.96 per share to initial continuing shareholders; continuing $2.3 billion -- excuse me, feeding $2.3 billion in cumulative distributions to all shareholders. Our NAV stood at $9.43 per share in March 2017, down $0.19 from the prior quarter. Our debt to equity ratio was 78.9% in March 2017, slightly up from 78.8% in March 2016. Our balance sheet as of March 31, 2017 consisted of 90.7% floating rate interest earning assets and 99.9% fixed rate liabilities; positioning us to benefit from rate increases. Our recurring income as measured by our percentage of total investment income from interesting income was 95% in the March 2017 quarter. We believe there is no greater alignment between management and shareholders than for management to purchase a significant amount of stock, particularly management has purchased that stock in the open market paying the same prices as other shareholders. Prospect management is the largest shareholder in Prospect and has never sold a share; management on a combined basis has purchased at cost over $175 million of stock in Prospect; including over $100 million since December 2015. Thank you. I'll now turn the call over to Grier.

Thanks John. Our scale business with $6 billion of assets and undrawn credit continues to deliver solid performance. Our team consists of approximately 100 professionals representing one of the largest middle market credit groups in the industry. With our scale, longevity, experience and deep bench; we continue to focus on a diversified investment strategy that covers third-party, private equity sponsor related, and direct non-sponsor lending. Prospect sponsored operating and financial buyouts structured credit real estate yield investing, and online lending. As of March 2017, our controlled investments at fair value stood at 31.5% of our portfolio. This diversity allows us to source a broad range and high volume of opportunities. Then selected at disciplined bottoms up manner, the opportunities we deem to be the most attractive on a risk-adjusted basis. Our team typically evaluates thousands of opportunities annually and invests in a disciplined manner in a low single digit percentage of such opportunities. Our non-bank structure gives us the flexibility to invest in multiple levels of the corporate capital stack with a preference for secured lending and senior loans. As of March 2017, our portfolio at fair value comprised 48.8%, secured first lien, 20.5% secured second lien. 17.8% structured credit with underlying secured first lien collateral. 0.2% small business whole lean, 0.7% unsecured debt and 12% equity investments resulting in 87% of our investments being assets with underlying secured debt benefiting from borrower pledge collateral. Our secured first lien mix 290 basis points from the prior quarter. Prospects approach is one that generate attractive risk adjusted yields; and our debt investments were generating an annualized yield of 12.3% as of March 2013; down 0.9% from the prior quarter due to the factors previously described. We also hold equity positions in certain investments that can act as yield enhancers or capital gains contributors as such positions generate distributions. We have continued to prioritize first lien, senior and secured debt with our originations to protect against downside risk while still achieving above market yields through credit selection discipline and a differentiated origination approach. As of March 2017, we hold 125 portfolio companies with a fair value of $6.02 billion. We also continue to invest in a diversified fashion across many different portfolio company industries with no significant industry concentration; the largest is 9.6%. As of March 2017, our asset concentration in the energy industry was 2.6% including our first lien senior secured loans where third party sis there, first los capital risk. Non-accruals as a percentage of total assets stood at approximately 1.4% in March 2017 down 0.1% from the prior quarter with approximately 0.3% residing in the energy industry. Our weighted average portfolio; net leverage stood at 4.15 times EBITDA, down from the prior quarter. Our weighted average EBITDA per portfolio companies stood at $49.4 million in March 2017. The majority of our portfolio consists of sole agented and self-originated middle market loans. In recent; years we've perceive the risk-adjusted reward to be higher for agent; did self-originated and anchor investor opportunities compared to the non-anchor broadly syndicated market causing us to prioritize our pro-active sourcing efforts. Our differentiated call center initiative continues to drive proprietary deal flow for our business. Originations in the March 2017 quarter aggregated $450 million, down $20 million from the prior quarter. We also experienced $303 million of repayments and exits as a validation of our capital preservation objective, down $342 million from the prior quarter resulting in net originations of $147 million, up $323 million from the prior quarter. During the March 2017 quarter, our originations comprised 66% third-party sponsor deals, 12% syndicated debt including early look anchoring investments and club investments, 10% real estate, 6% online lending, 4% operating buyouts, and 2% structured credit. Today we've made multiple investments in the real estate arena through our private REITs largely focused on multi-family stabilized deal acquisitions with attractive 10-year financing. In the June 2016 quarter we consolidated our REITs into NPRC. NPRC's real estate portfolio has benefited from rising rents and strong occupancies and our cash yields have increased. In the past year, NPRC has recapitalized many of its properties with attractive financing and exited completely certain properties including Vista, Abbington, and Bexley [ph]; so it can redeploy capital into other return enhancing avenues. We expect both recapitalization and exits to continue. NPRC also recently closed its first portfolio investment in student housing and attractive segments similar to multi-family residential where we've analyzed many opportunities for several years. In addition to NPRC's $2.06 billion of real estate assets; over the past three years, NPRC and we have grown our online lending portfolio with a focus on super prime, prime and near prime consumer and small business borrowers. NPRC NV as of March 2017 had exposure to approximately $786 million, a fair value online loans directly and through securitization interests across multiple origination and underwriting platforms. Our online business which includes attractive advanced rate financing for certain assets is currently delivering more than 12% annualized return, net of all costs and expected losses. In the past four years, we at NPRC have closed five bank credit facilities and two securitizations; including in the December 2016 quarter our first consumer securitization to support our online business with more securitization expected in the future. Our structured credit business performance has exceeded our underwriting expectations, demonstrating the benefits of pursuing majority stakes, working with world-class management teams, providing strong collateral underwriting through primary issuance, and focusing on attractive risk adjusted opportunities. As of March 2017, we held $1.1 billion across $41 million non-recourse structured investments. The underlying structure credit portfolios comprised over 2,500 loans and a total asset base of nearly 20 billion. As of March 2017, our structured credit portfolios experienced a trailing 12-month of fall rate of 1.05%, a decline of 11 basis points from the prior quarter and 44 basis points less than the broadly syndicated market default rate of 1.49%. In the March 2017 quarter this portfolio generated an annualized cash yield of 17.9%, down 3.6% from the prior quarter and a GAAP yield of 13.6%, down 1.2% from the prior quarter. As March 2017, our existing structured credit portfolio has generated $857 million in cumulative cash distributions to us representing 65% of our original investment. To date, we've also exited 7 investments totaling $154 million with an average realized ROR of 16.8% and cash and cash multiple of 1.42 times. Our structured credit portfolio consists entirely majority owned positions. Such positions can enjoy significant benefits compared to minority holding in the same traunch. In many cases we received fee rebates because of our majority position. As a majority holder we control the ability to call a transaction in our sole discretion in the future and we believe such options add substantial value to our portfolio. We have the option of waiting years to call a transaction in an optimal fashion rather than when loan asset valuations might be temporarily low. We as majority investor can refinance liabilities, on more advantageous terms, remove bond baskets in exchange for better terms from debt investors in the deal and extend or reset the investment period to enhance value. Our structured credit equity portfolio has paid us an average 22.6% cash yield in the 12-months ended March 31, 2017. So far in the current June 2017 quarter, we've booked a $109 million in originations and received repayments of $75 million resulting in net originations of $34 million. Our originations have comprised 60% third-party sponsor deals, 18% structured credit, 16% syndicated and club debt, 4% online lending, and 2% real estate. Thank you. I'll now turn the call over to Brian.

Thanks, Grier. We believe our prudent leverage, diversified access to matchbook funding, substantial maturity of encumbered assets, and waiting towards unsecured fixed rate debt demonstrate both balance sheet strength, as well as substantial liquidity to capitalize on the tract of opportunities. Our company has locked in a latter fixed rate liabilities extending over 25 years into the future while the significant majority of our loans float with LIBOR providing potential upside to shareholders as interest rates rise. We're a leader and innovator in our marketplace, we were the first company in our industry to issue a convertible bond, development notes program, issue an institutional bond, acquire another BDC, and many other purse [ph]. Shareholders and unsecured creditors alike should appreciate the thoughtful approach differentiated in our industry which we have taken towards construction of the right hand side of our balance sheet. As of March 2017, we held approximately $4.6 billion of our assets as unencumbered assets representing approximately 75% of the portfolio. The remaining assets are pledged to Prospect Capital funding which has a AA rated $885 million revolver with 21 banks and with a $1.5 billion total size accordion feature at our option. The revolver is priced at LIBOR plus 225 basis points and revolves into March 2019 followed by one-year amortization with interest distributions continued to be allowed to us. Outside of our revolver and benefiting from our own unencumbered assets, we've issued a prospect capital, multiple types of investment grade, unsecured debt including convertible bonds, institutional bonds, baby bonds, and program notes. All of the types of unsecured debt have no financial covenants, no asset restrictions, no cross defaults with our revolver. We enjoy an investment grade BBB plus rating from CROW [ph], an investment grade BBB minus rating from S&P. We now tap the unsecured term debt market on multiple occasions to latter our maturities and to extend our liability duration more than 25 years. Our debt maturities extend through 2043. For so many banks and debt investors across so many debt tranche, as we substantially reduced our counterparty risk over the years. We have refinanced three non-program term debt maturities in the past two years, including our $100 million Baby bond of May 2015, our $150 million convertible note in December 2015, and our $167 million convertible note in August 2016. We recently issued a 4.95% $225 million convertible bond using a substantial amount of the proceeds to repurchase bonds maturing in the upcoming year. For the remainder of calendar year 2017, we have liability maturities of $67 million, I hit on our $85 million revolver is currently un drawn, if the need should arise to decrease our leverage ratio, we believe we could slow originations and repayments and exits to come in during the ordinary course, as we demonstrate in the first half of calendar year 2016. We now have eight separate unsecured debt issue aggregating $1.7 billion not including our program note, with maturities ranging from October 2017 to June 2024. As of March 31, 2017 we had $1.01 billion of program notes outstanding debt with staggered maturities through October 2043. Now I will turn the call back over John.

Okay, thank you Brian. We can now we answer any questions.

[Operator Instructions] Our first question comes from Christopher Nolan of FBR and Co, please go ahead.

Grier, what was the reason for the lower yields in the CLO portfolio, please.

Sure. It really was specific Chris, to four deals that where in the process of calling right now and how our constant yield method works, we're updating assumptions each quarter and uses a levelized [ph] yield methodology. so for those four deals and as the deal gets much closer to call and those are past the reinvestment period, where you can really only reinvest within certain way the average life restrictions were if you have repayments in those particular deals that exacerbate the situation. Really we recognize, we think the income that we will out of those transactions but the good news is that as we take those transactions and call them, we take the capital from those and then reinvent those in other income producing properties. So we see it more than anything else, if you take out those four deals our yields were actually reasonably steady and our CLO book from quarter-to-quarter, which reflects an offsetting fact, and I am talking about GAAP yields here, which reflects an offsetting effect on the negative side assets spread compression, and liabilities costs increasing, due to the Fed hike in December. On the positive side we've been very aggressive and proactive on refinancing deals and or extending deals with lower cost future liabilities. So as those off set, we've been able to maintain a reasonably study we think GAAP or economic yield correcting for those four that we expect to call in reinvest and enhance income. Does that help, Chris.

Yes, it is good detail. And I guess a follow-up. In your comments talking about NPRC you sort of indicated that you're expecting a 12% levered yields, this is a little bit down that mid-teens, I think you guys are talking about earlier, is this a reflection of expectations of rising funding costs with rising interest rates or what's the detail there.

It's more of a timing aspect, we'd like to see those numbers go up to more the mid-teens level, what we're doing is we're repositioning our marketplace online book and we're focusing on certain platforms that have really had the best results for us from a charge-off perspective. And where we've demonstrated a vibrant -- we and others a vibrant securitization market, that can help and enhance our returns. What we've been doing with some of the other platforms is reducing our exposure, declining to -- to reinvest let alone grow those portfolios, and manage to a prudent exit so we can redeploy in other areas. So the 12% reflects some other platforms that kind of drag down that that weighted average, but as we exit those areas and then reinvest into what's worked best, we expect for those numbers to go up.

Okay, thank you I'll get back in the queue.

Our next question comes from Merrill Ross of Wunderlich, please go ahead. Merrill Ross Your line is open.

Good morning. When we look at the level of income at quarter end on the current portfolio. That looks like it's getting tight kind of the dividends next quarter, would you agree with that.

Well, yes and sense that are net invested income came in below the current dividend rate, we look at the dividend a little bit longer term than that as a board. Some of these factors we hope, we can’t guarantee but we hope our temporary nature that we can improve, and I talked in reasonable detail about the structured credit book and how reinvesting some of those deals, we hope will enhance income. We talked in our earnings release about three significant drivers for the reduction in net investment income on a sequential quarter basis, that was one of those. The second one pertained to a reduction coupon in our controlled consumer finance business First Hour [ph] and what we're seeing there is -- there's been an increase in charge-offs in the last year, really the last few months in particular with the biggest driver of that relating to some natural disaster activity, some severe flooding folks recall that, that happened in Louisiana which is one of the biggest states for First Hour [ph] in the second half of 2016. So there were tens of thousands of people displaced in their homes etc., which as you can imagine pressures charge-offs. We're hoping that not a recurring type of activity and it will see improvement there in that business maybe not instantly but over time. And then the third item pertains to prepayment income, our prepayments and exits were substantially reduced in the March quarter compared to December, part of that is uncontrollable in the sense of kind of parties that don't companies pay off or refinance you, and -- and we have some ability to influence that to the extent that we can stay invested in credit, sometimes that's not an option. On the control side, we do look to optimize value in the real estate business in particular we have been exiting certain properties on a prudent basis, and we're looking to do that, we're looking about buy properties as well as exit properties and kind of recycling optimize that book. So those are three drivers there, some of which we have to correct in the future.

Hey, Merrill, this is John Barry. I appreciate your question I have a bit to add. I think about these results on three levels, first we're seeing spread compression everywhere we look it can be aircraft leasing, it can be real estate, it can be sponsors loans, can be on line lending everywhere we look there's spread compression. We do our best to avoid having that spread compression impact our book but there's a limit to what we can do, for example in our CLO book we see quite a bit of refinancing’s and repricing. So the market is enabling borrowers across the board to reduce their borrowing costs, and as a result income to lenders, that's the macro, will that change well, we can't predict the future but what we've noticed over the last 15 really in my case 30 years in this business, is you seem to have a downward trend in asset spread until something happens. I just heard yesterday morning I think the volatility index is the lowest it's been in 20 years, that normally is a sign that it's not going to stay that way, will just have to sit. So that's the macro and everyone on this phone call has an equal ability to predict the future which in my case is zero. Then the next level I look at is what I would call timing differences in our portfolio, sometimes in mark-to-market where there's some volatility around the mean, and there I look at our CLO book there are timing differences, I look at -- I think that's the main area that I would -- that I think of the book is having timing differences income, we would've expected in this quarter, not in this quarter but in the future quarter. So as far as I'm concerned the timing differences just is a timing difference, if we get the money eventually. The third level which is the most frustrating to me is operating problems, because that's where I feel that we have a rule and can always do more. In our case there's two areas of operating problems, one is the energy business, we're just amazed at how loan this -- you -- we sometimes it's a drop and then you expect regression to the mean in most markets, this is not -- has not been at least in our part of the energy market where we are largely services, has not regressed to the mean anywhere near what we would have expected, based on past history. So that has been very frustrating, very disappointing we spent a lot of time on that, it's not that easy to fix problems in an industry where revenue is collapsing and where people are pricing down and desperately trying -- your competitors are trying to desperately stay in business really by pricing below their marginal cost. So that is very frustrating, looking backwards we wish we never invested in energy, right, well, we don't get that opportunity, we are invested in energy, it's only what is it grew 2.3% of our book, thank goodness it is not more, but it's been extremely, extremely, extremely frustrating and upsetting for all of us. Then another part of the operating problem is other companies that are not in the energy business. And while are not accruals low relative to the industry, they really should be a lot lower in my view, and I think we should be doing a lot better dealing with not just energy but non-energy companies, and that has my attention, believe me has everyone’s attention. So those are really the strands I think that have set into a very, very disappointing quarter for me, typically you'll have, I don't know, one or two or three things that are problems and seven and eight things that are going well and they tend to upset each other, this is one of those quarters where it's like you've got a baseball team and your three batters just went up and all three struck out, you say gosh thank goodness the last one wasn't like this and we hope the next inning will not be. But I appreciate your question and as far as a dividends goes, we examine the dividend at least a million times a quarter and we try to size it in relationship to what we think is the long-term sustainable earning power of the company. But we also have to be aware of these macro forces and where interest rates are going the future, as Cain [ph] said, there is two opinions, right; "those from people who don't know where they're going, and those opinions from people who don't know that they don't know where they're going." So we've kept our dividend where it is and we're focused right now on resolving these operating questions, which is the one area where we really can do something and I hope you find that helpful.

One other piece to add, Merrill. Things used to quickly articulate some of the catalyst for -- for what we hope could be earnings drivers on a going forward basis to enhance net investment income. I talked to other CLO business calling deals and reinvesting is one of those more within our control that we're actively doing now, have done already this quarter, and are doing more, we think in about the quarter. LIBOR going up as within our control the Fed determines that, but that would be a positive catalyst now that the floors are finally being exceeded. And on top of that the floor aspect in the syndicated market, the borrower has the ability to let one month or three month LIBOR and asset, so many people selected one month, which has kept the floors from coming to play even longer, whereas the liabilities are pegged up to three months and they never had a floor begin with. So callus one [ph] is their structured credit book, callus two in the online book, we see the securitization market as potentially a key driver, we've already printed one deal in our consumer finance portfolio within NPRC, and we're working hard on another transactions. A recent print in that space was I think three times oversubscribed with lenders who view this as an attractive real market and growing market. Number three with the real estate. We are in the money on a lot of deals and we do forgone IOR calculations deciding whether it is optimal to sell properties, so you'll see us continue to do that, we view that as potentially positive earnings driver. Number four, we talked about our controlled book of particularly on the -- on the financial side with companies like first our and in improving the charge-off profile there, so we cover that. Number five as John mentioned within energy. We're working hard in recovering collateral where there's a liquidation in play and then reinvesting essentially debt income producing money into income producing properties and enhancing operations for the balance. Number six, liabilities, we’ll likely be using our lower cost revolver more to retire near term more expensive term debt, over the next couple of years, you also see a thoughtful and constructive on the term side, we repurchased some a higher coupon liabilities recently and issued a new convertible term bond on more advantageous coupon for example just a few weeks ago. And then in our middle market book, LIBOR going up again not within our control could be positive drivers as floor start to get exceeded. So those are some of the catalyst to potentially look to for the future that we're focused on, Merrill. I have a little more to add to that, Merrill. We from -- from my advantage point we just have to keep doing the best job we can each day, reminds me of my friend John [ph] years and years ago ran a publicly traded mutual fund for us, and I think in 1989, he was the worst performing mutual fund manager in the country, but I guess he was the best in 1989 and then the worst in 1990, and then the best in 1991, and the people said well John, what did you change, he said I haven’t changed anything, I just keep doing the same job I have always been doing, and I've always been trying to do. So sometimes there are market forces that are very strong, we are going to focus on what we can do which is improving the operating performance in these portfolio companies and even in these -- in the ones we control and even ones where we don't control. Another question that you didn't ask but that I would like to address which relates to your overall question. Is our taxable income. In the past we have estimated our taxable income, based on what we know to be the case in our book, but also based on estimates coming out of our CLO book, which come to us through the trustees for this area CLO. And these trustees are providing information which are themselves estimates, and what we have learned is that these estimates are just estimates, and until we get the complete year end information, we should not be distributing, we're cumulating, aggregating these estimates in distributing them as if we have reason to believe that they are doing 1% or 2% of what the final number would be. Could you elaborate on that Brian, or did I state it fairly.

You stated it fairly. The issue really comes down to there is so much activity that's happening inside of each individual CLO portfolio, that the managers just aren't able to calculate the taxable effects of that on -- on a regular basis, we have just decided that we would wait and see what the actual results are when we get the reports from the Trustees at the end of the year.

So Merrill, for example when I mentioned the timing differences and I said we have some of those in the CLOs, I understand for example when a CLO manager has a security trade from say purchases it's a 99, and it trades down to 90, and the manager sells that security and buys another security at say 90 that the manager is more confident in rebounding, what we have is a tax -- we then -- we'll -- in that book we realize a taxable loss, even though it's not clear that that much has happened, if you sell energy company A for 90, and by energy company B for 90, that you think is going to do better. But we book -- we book the taxable loss right then in there realize it and then if we believe there will be regression to the mean in the energy book which is more likely to happen in the CLO book than in the PSEC book wide, because it's more syndicated large cap loans, which have more resources to in fact regressed to the mean, then you may have some feeling well, as the energy markets reflate we're at least at that level, then the security that was purchased is likely to trade back up, but right now we show a taxable loss, causing our taxable income to drop and just from my vantage point as I said I can't predict the future but from my vantage point we're booking a loss that we would not have booked, had the manager in that particular CLO book sat still with that particular security. So these are some of these timing things that affect us.

There's one of the times in fact what John just described, it was a lot of 2016 and we talked about some of that on the last call, these sort of swap trades. The other aspect that's come to play more recently is extending deals and refinancing them, where there is an upfront time zero investment required generally a placement costs with an investment bank to place the liability some legal as well. And then a pretty significant return on that upfront cost through a significantly lower liability spread going forward, and for many cases the refinancing’s going to have embedded IRS of 200% to 400% so they're very good investments to be done, but they do create a time zero hit to taxable income. So in addition to the difficulties of estimation, there's also a lot of swing factor noise that's appearing for at least two significant reasons in recent weeks, months and quarters.

Anyway Merrill, I don’t want to sugarcoat any aspect of this last quarter which was profoundly frustrating and disappointing to me, but what we do want you to know is there's many Weavers, meters gauge that we constantly watch, measure, look at an attempt to optimize and we're hopeful that we will be able to optimize more of them next quarter.

I expect that. Thank you.

Thank you, Merrill.

Our next question comes from Christopher Testa of National Securities Corporation, please go ahead.

Good morning guys, thanks for taking my questions. I'm just wondering just on the structured credit side I'm just wondering if you could give some more detail in terms of how many refinances you're getting and if you can give us an indication of where you're getting the AAA in your CLOs priced, lot of them are going in the 1-20, sometimes and the teens, and also just wondering if you're getting any resets and getting in and being able to extend the investment period by a year or so on any of the structures.

We’re doing all the above. Folks who have access to index can look up all the deals in our book and see the exact pricing deal tranche by tranche [ph] I mean that we've done quite a lot of these at this point, well over a dozen if Brian will brief us. And so we would be [indiscernible] to try to do that through all the deals right out type of the pricing of each tranche. But if you want to talk about some of that offline that would be -- that would be fine, in general we're seeing some pretty significant liabilities spread compression which is -- which is very good news to offset what has been fairly significant assets recompression, and the liabilities spread is also could be a function of tenure. So for if we're giving -- doing a full reset for say four years to a deal of course that's going to be a wider spread than if we're just extending a deal for say two years, on a yield curve spread basis. So it's very hard to answer generically because every deal is different, and we look on at incremental basis what is our upfront cost, which is mainly going to be placement and legal and what's our expected incremental return. So each is considered on individual investment basis and we drive hard to get the best deal we possibly can.

Chris, I have a little bit to add to that. And first of course with Grier is pointing out, each time we do one of these transactions there are upfront friction costs, fees, the legal and accounting, it drag down for us the immediate benefit, nothing new there. So I look at our CLO book and I'm thinking as we go through the quarter, wow this is great we've refined and repriced our liabilities. There's a third word that we're now using, what was that one.

Resetting.

Resetting, okay, three times the transactions refinance, replace, reset, basically lowering the cost of our liabilities and our CLO book, and incidentally I think it's fair to point out that it's our COOs team as majority owner of these COOs [ph] goes to the managers in most of the cases and proposes a transaction to lower the liabilities, we do discounting work, we do the analysis, we do the model and our team lines this up, brings it to the manager, persuade the manager and then we go. So I'm thinking well, so all across our CLO book we are lowering our cost of capital. That's great it doesn't deal, so you would think our net return on equity in our CLO book should be going up, well wait a second, wait a second we need to calculate in a number of items. First we can only do one deal at a time because if market capacity, so the 12 are not all done on one day Jan 1, but they're done sequentially over the last roughly year, that's one item. Meanwhile, on the -- plus we have all the upfront cost which Grier mentioned. Meanwhile, let's take a look over the asset side. Number one, we see all these borrowers repricing, refinance the entire universe is looking to refi, reprice just like we're doing with one big difference, they can all do it on their own schedule, they're not waiting in a queue to get through the capital markets with major COO liability books to be reprice. And typically they don't have to go talk to a few dozen -- a few dozen lenders bond holders, item one. Item 2, so the asset side of the book moves downward more quickly than the liability side, I didn't -- I didn't come -- I didn't anticipate that. Number 2, people borrowers are largely moving from three month LIBOR to one month LIBOR, that first easy low hanging fruit they all see and they can all grab, our numbers suggest to be about 75% will do that. I think last I asked were five nine's [ph] through that process, so hopefully that process of -- I'm going to call it asset thread depression where five nine's, maybe six nine's through that process. And there were some other -- I'm trying to think of with the other doer, few other element relating to the borrower that we hope will have run its course, maybe we're two-thirds of the way through that and this asset suppression in CLO book will have run its course. Grier you had something to add.

Yes, just to give you a flavor Chris, I'm looking at the deal we just refinance that was 160 basis points spread originally for AAA and we refi-ed it at a 120, we’re seeing AAA spread really come down to substantially 30 to 40 basis points where they were before. Most of these we refinanced the AAA The AA, A, we haven't touched as much of the BBB and BB on deals, because the embedded discount margin for those, just haven't seen as much liability compression in those so-called mezzanine tranches for deals, that's really been more of the super senior, most senior tranches of deals that made sense to refinance, and we've got the ability and we've been sure dentures give us tranche by tranche refi rights, a much older generation to get that flexibility and that something that our team has insisted upon for all of our deals that that we've been involved in for years.

Okay, that's a great detail. Thank you guys and just curious, I know you guys are spoken at large about the online lending and the consumer and you guys are generally bullish on the space, I am just curious given the soft guidance and poor results that went in club and on-back, just wondering if any of that is changing your thinking on how much you're investing in that space or just how you're going to go about investing in that space.

Well, we're getting good results in our platforms out of both of the platforms that you just mentioned and have a good relationship with those companies, and their model especially lending club or they are very different from ours in terms of being a pure originator and servicer as opposed to a balance sheet on a credit take a risk as well as beneficiary along the way. One great thing about this business is because you're writing relatively small checks per deal maybe $5,000 to $10,000 for consumer loans, $30,000 to $50,000 for a small business loan. And because they've run off reasonably quickly, you've got the ability to make to pivot to just course and make real time decisions. We've been proactive in sticking to enhance underwriting, to enhance pricing and APRs, so touching both the risk side as well as the reward side. We've also in some cases negotiated the economic relationship we have with some of these platforms as well, and then we've been aggressive about having attractive financing which is really mature with every passing year; a few years ago there was less than a handful of commercial banks who knew anything about this space you could go to get funding; now it's a much deeper market of those relationships and of course, the securitization market has more and more people interested providing warehouse lines and the like given a much more ready takeout upon exit. So we've learned some things; we think we're approving and getting better and really optimizing that book with the types of portfolios that are performed best with the best finance.

Chris, this is John Barry again. For me, I really would like to see lending club to good trends of ours, on-deck to good friends of ours; we feel we have a good relationship. We'd love to see that the companies do well and generate lots of net income and have their stock trade up and all those great things. Fortunately that doesn't directly impact us. We are impacted by the volume of loans that they show us, the credit quality, our ability to discern and select good quality loans; and so while we wish the best, of course for our friends, when in club on-deck and others; we are fortunate, I believe to-date, to be able to continue to buy loans from them and not see any impact from the CEO leaving or a stock price loom or the latest article in The Wall Street Journal or whatever it might be. And we do hope that that continues. At the same time we are always looking at additional platforms and looking at new sources of loans, we do not want to be dependent on any one, two, three, four, five sources. Got it.

Chris, I do think what's important is, we've also determined with this marketplace online business that it's important to have recently scaled position to any one platform. An issue of your spreading out across fairly significant numbers, about half a dozen or so different platforms, and what we realize is that there is a certain fixed cost embedded in each platform and unless you're really going to grow each platform to a sufficient scale, $100 million, $200 million plus, that -- it was really hard to get the target ROE; those ROEs were not going to be achievable and the fixed cost pertains to dealing with the credit facility providers, doing accounting for every SPV, trustee cost, a number of different valuation, administrator, custodian, the number of hands that are outstretched requiring payment is fairly -- let's just put it this way, it's way more than I think anyone would have anticipated. And all of these cost do significantly drag down the net returns; so the antidote is to increase volumes and increase scale without increasing those costs which we had been on-track doing, right Grier.

Correct. We're focusing on fewer platforms. And therefore amortizing -- signing up for fewer fixed costs. Got it, that's all for me. Thank you for taking my questions.

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. John Barry for any closing remarks.

Okay, well I want to thank everyone for coming on the call. I thank the people here and our shareholders where are interested and support. I'm reminded of one of our Directors explaining to me once; Mr. William Graham, "John, trees do not grow to the sky. We will have quarters in the future, we've had them in the past that disappoint us. This one is profoundly disappointing to me." It causes great frustration but it also causes me to be introspective; all of us, to ask what can we be doing better, we are very focused on that. We do believe that we have great quarters in front of us and we just hope that we can make the percentage of great quarters to the percentage of disappointing quarters as high as possible. Again, I thank everyone for joining us on this call. Have a wonderful afternoon.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.