SLR Investment Corp. (SLRC) Q3 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Quarter 3 2013 Solar Capital Ltd. Earnings Conference Call. My name is Kathy, and I will be your operator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. I would like to turn the call over to Mr. Michael Gross, Chairman and CEO. Please proceed, sir.

Thank you, and good morning. Welcome to Solar Capital Ltd.'s earnings call for the quarter ended September 30, 2013. I'm joined here today by Bruce Spohler, our Chief Operating Officer; and Richard Peteka, our Chief Financial Officer. Rich, before we begin, would you please start by covering the webcast and forward-looking statements.

Of course. Thanks, Michael. I'd like to remind everyone that today's call and webcast are being recorded. Please note that they are the property of Solar Capital Ltd. and that any unauthorized broadcast, in any form, are strictly prohibited. This conference call is being webcast on our website at www.solarcapltd.com. Audio replay of this call will be made available later today, as disclosed in our earnings press release. I'd also like to call your attention to the customary disclosures in our press release regarding forward-looking information. Statements made in today's conference call and webcast may constitute forward-looking statements which relate to future events, or our future performance, or financial condition. These statements are not guarantees of our future performance, financial conditions or results and involve a number of risks and uncertainties. Actual results may differ materially as a result of a number of factors, including those described from time to time in our filings with the SEC. Solar Capital Ltd. undertakes no duty to update any forward-looking statements, unless required to do so by law. To obtain copies of our latest SEC filings, please visit our website or call us at (212)993-1670. At this time, I turn the call back to our Chairman and Chief Executive Officer, Michael Gross.

Thank you, Rich. Amidst continuing but modest improvement in U.S. macroeconomic data, the credit markets were volatile in the third quarter of 2013, driven by talk of Fed tapering, gridlock in Washington and offshore troubles. In spite of increased volatility and uncertainty, market technicals remain supportive of issuers during the quarter. Investors appeared willing to stretch for yield by taking on more risk. This trend spilled over from the syndicated market to the upper end of middle market leverage lending. In the current environment of elevated risks and compromised structures, Solar Capital continued to be disciplined and highly selective with its new investments. During the quarter, we invested approximately $66 million in 5 portfolio companies. Investment sales and prepayments for the quarter totaled approximately $350 million or roughly 25% of the fair value of our portfolio investments at June 30. Of this amount, approximately $237 million came from the previously announced repayment of our 2 largest investments and legacy investments in MidCap Financial and DS Waters. In response to both the large and constituted repayments and a challenging reinvestment environment, we had announced a third quarter dividend of $0.40 per share, down from the previous quarterly dividend of $0.60 per share. We believe it's prudent in the best long-term interest of our shareholders to downsize the dividend for what we hope will be a temporary period of time, rather than to materially increase the risk profile of the portfolio by investing in assets with structures that do not meet our strict investment criteria. Importantly, the dividends aligned with the expected near-term run rate net investment income of what we believe to be a lower-risk, more diversified, high-quality portfolio. In addition, we announced that our Board of Directors authorized a share repurchase program for up to $100 million worth of Solar Capital common stock. The share repurchase program provides us with greater flexibility to generate incremental net investment income per share and is an important and complementary tool in deploying our available capital. We expect repurchase program to be in place until the earlier of January 31, 2014, or until $100 million of the company's outstanding shares of common stock have been repurchased. In the third quarter, we repurchased approximately $15.8 million of our stock. Repurchases remained at an average price of $21.99 per share, representing a 1.2% discount to our September 30, 2013, net asset value. We have approximately $84 million available for future repurchases under the current program as of the end of the third quarter. In September 30, 2013, we believe our portfolio had a lower risk profile and is more diversified than -- at any point in our public history. The recent large repayments have significantly reduced our issuer concentration and have substantially eliminated our pick income. We deliberately migrated the investment portfolio to a meaningfully higher percentage of secured floating rate investments in anticipation of expected changes in market conditions. At the current stage of this credit cycle and with the possibility of a rising interest-rate environment as the Fed altered its monetary policy, we think the current portfolio is defensively positioned to generate attractive risk-adjusted returns, and importantly, maintains the flexibility to be in the position to take advantage of credit market dislocations should they occur. Solar Capital's net asset value at the end of the third quarter was $22.25 per share. Excluding nonrecurring charges resulting from the amendment of our credit facility and extinguishment of another revolving credit facility, net investment income would've been $0.53 per share. Third quarter net investment income was favorably impacted by onetime prepayment fees and accelerated amortization of upfront fees associated with the monetization of these large positions during the quarter. We believe the current run rate net investment income for the portfolio continues to be approximately $0.40 per share. Therefore, consistent with our previous guidance, we expect that, that company's net investment income will meet or exceed dividend of stockholders for the second half of 2013. During the third quarter, we made further enhancements to the term and cost reliability structure. In July, we announced the amendment of our revolving credit facility that resulted in the reduction in the interest rate from LIBOR plus 250 to LIBOR plus 225, and importantly, extend the maturity, 2 additional years through June 2018. We also retired a higher cost $100 million credit facility price at LIBOR plus 275. At the end of the third quarter, our net leverage was 0.14x debt to equity. As a result, we have over $500 million of capital available for investment in new opportunities, as well as to make opportunistic repurchases of our company's common stock. Finally, our Board of Directors declared a quarterly dividend of $0.40 per share for the fourth quarter, which is payable on January 3, 2014, to stockholder of record on December 19, 2013. At this time, I'll turn over the call back to our Chief Financial Officer, Richard Peteka, to take you through the financial highlights.

Thanks, Michael. Solar capital's net asset value at September 30, 2013, was $986 million, or $22.25 per share, compared to $1.0 billion, or $22.40 per share, at June 30. At September 30, our investment portfolio had a fair market value of $1.13 billion, down significantly from $1.42 billion at June 30. The reduction of size of our investment portfolio was driven primarily by the significant early repayments as noted earlier. For the 3 months ended September 30, 2013, gross investment income totaled $43.0 million. This compares to $39.1 million for the 3 months ended June 30. The increase in gross investment income for the quarter was primarily due to the receipt of significant prepayment fees and the accelerated upfront fee amortization related to the investments that repaid early, partially offset by a lower weighted average yield on the overall income-producing portfolio. Expenses totaled $21.4 million for the 3 months ended September 30, 2013. This compares to $19.9 million for the 3 months ended June 30, 2013. The increase in expenses for the quarter was primarily due with $2.6 million nonrecurring expense related to both the amendment of our existing credit facility as well as our extinguishment of another revolving credit facility that was underutilized. Accordingly, the company's net investment income totals $21.6 million, or $0.48 per average share, for the 3 months ended September 30, 2013. This compares to $19.3 million, or $0.43 per average share, for the 3 months ended June 30, 2013. If the expenses related to the amendment of the company's credit facility and the extinguishment of the other revolving credit facility were excluded, the company's net investment income for the quarter would've been $23.7 million or $0.53 per average share. Net realized and unrealized losses for the quarter totaled $11.1 million compared to $19.3 million for the quarter ended June 30. Ultimately, the change in total net assets resulting from operations increased by $10.6 million, or $0.24 per average share, for the quarter ended September 30, 2013.At this time, I'd like to turn the call over to our Chief Operating Officer, Bruce Spohler.

Thank you, Rich. Overall, the management teams across our portfolio companies continue to be optimistic about their respective businesses. However, they remain cautious regarding the economic fundamentals and the ongoing macro uncertainties. Operating trends remain relatively stable with steady deleveraging in the continuing and muted topline growth environment. At September 30, the weighted average yield on our income-producing investment portfolio was 11.6%. Portfolio is 98% performing. The weighted average investment risk weighting remained at approximately 2, measured at fair market value, based on our 1:4 risk rating scale, with 1 representing the least amount of risk. Investment activity in the third quarter further diversified the composition of our portfolio. At the end of Q3, our portfolio consisted of 40 companies operating in 24 industries. Measured at fair value, approximately 60% of the income-producing investments are floating rate. Including Crystal, portfolio consist entirely of senior secured loans. Close to 70% of the portfolio exposure is in secured investments. Before I discuss our Q3 activity, let me update you on Crystal Financial. As a reminder, Crystal is a specialty commercial finance company that provides asset base and other secured financing solutions to mid market companies. At 9/30, Crystal had a well-diversified senior secured loan portfolio totaling approximately $350 million, which consisted 23 funded commitments to 19 different borrowers. All Crystal's investments are floating rate. The average exposure per issuer is approximately $18.5 million, and the weighted average yield on the loans is 12.5%. The Crystal portfolio is 100% performing. At the end of the quarter, total debt on the Crystal portfolio approximated $87 million for debt-to-invested-equity ratio of 0.3x. And Crystal had over $185 million of available capital subject to the borrowing base limitations under its credit facility. During the third quarter, our investment in Crystal paid us a cash dividend of $7.8 million, which approximates an 11.3% annualized cash-on-cash yield. Turning to our origination efforts. Despite the challenging market challenging conditions, we exceeded in sourcing approximately $66 million in 4 new and 1 follow-on investment that we believe offer attractive risk-return profiles. Importantly, these new investments further diversify our portfolio and meet our objectives of investing secured assets that are both cash paid and carry floating rate coupons. Let me touch on a few of these investments. We funded a $25 million investment and a second lien term loan for TriNet, a leading PEO with over 200,000 worksite employees. Solar's investment supported the refinancing of the company's capital structure. Importantly, we have credit experience with TriNet. We sold our senior capital's previous investment in the company's first lien debt tranche, which was recently repaid through the company's recapitalization. Leverage to our second lien investment is approximately 5.3x and our all-in yield on this investment is 9.25%. We also funded a $15 million investment into the second lien term loan of GENEX Services in support of recapitalization of the business. GENEX is a national managed care services firm that provides medical cost containment and disability management solutions to the workers comp and auto insurance industries. Leverage to the second lien investment is in the mid-5x and it carries an all-in yield in excess of 9.5%. During Q3, we had aggregate repayments in sales of approximately $350 million. Of this amount, $237 million in repayments came from our previously announced transactions involving the sale of MidCap Financial and DS Waters. Remainder or approximately $113 million of proceeds came from additional repayments. As we noted earlier, we had approximately $150 million in proceeds from our senior preferred units and second lien term loan investments in DS Waters upon the closing of the sale to Crestview Partners this past August. Solar earned in excess of 10% IRR and a multiple on invested capital more than 1.5x over the life of our investment in DS. We also realized approximately $87 million in proceeds from our investments in MidCap Financial. Solar made an initial $25 million investment in MidCap back in 2010 and continued to increase our exposure until we got to $85 million. To refresh our memories, MidCap is a leading specialty finance lender into the healthcare industry. Our investment was redeemed at a premium to par and produced an IRR in excess of 16%. Additionally, we received repayment of our $22 million investment in ProSieben, Germany's second largest privately owned television company, which is controlled by KKR and Permira. The repayment of this 2,000 investment at par takes our legacy asset that was low yielding. The depths of the credit crisis, we had value ProSieben at 3% at par. And a testament to our long-term patient capital, we were able to realize 1.5x multiple on invested capital, resulting in just under 10% IRR on this investment. Additionally, during Q3, our $43 million investment in Trident Health Services was redeemed at a premium to par. Our investment generated a 17% IRR. And finally, we were repaid also at a premium to par on our $41 million investment in ViaWest, which is one of the nation's largest privately held data center operators. Solar originally invested in ViaWest back in 2010 in connection with Oak Hill Capitol's acquisition of the business, and we subsequently made 3 follow-on investments to fund new data center buildouts, as well as acquisitions. The IRR in this investment exceeded 16%. Let me close by reiterating a key tenet of our investment philosophy. During our underwriting process, we focused on assessing the company's ability to generate free cash flow as our primary driver to de-risk and repay our investment. We do not intend to sacrifice credit quality nor accept loose structures and terms just to be more fully invested and generate incremental yield. Our experience across multiple credit cycles has taught us to remain grounded in our investment principles. We believe this is the best way to preserve long-term shareholder value. We continue to be confident of our ability to selectively source and structure proprietary investments that meet our underwriting requirements. Now let me turn the call back to Michael for concluding remarks.

Thank you, Bruce. In closing, we are pleased with the underlying performance in credit quality of our overall investment portfolio. During the quarter, we further diversified and continued the migration of the portfolio to secured floating rate assets while substantially eliminating our exposure to pick. Following the exit from several of our largest legacy investments, we view the current portfolio as more highly diversified and defensively positioned to preserve shareholder value on delivering compelling risk-adjustment returns. In addition, we took advantage of the continued liquidity driven markets and our strong record to borrower to further reduce our funding costs while increasing flexibility under our revolving credit facility with a diversified consortium of lenders. We continue to look opportunistically at different ways to provide a highly efficient, low-cost and low -- and long-term capital structure. The cycle repayments we experienced for the last 2 quarters, coupled with our highly selective and patient approach to reinvestment proceeds, has resulted in a smaller portfolio. Rather than place pressure on the investment team to redeploy the capital in an environment of elevated risk, we made the decision to realign our dividends to $0.40 per share, a level that represents our estimate of the current run rate of net investment portfolio today. As highlighted in our Q2 earnings call, the income associated with our size of repayment during the quarter favorably impacted our earnings in the third quarter, resulting in NII above our anticipated run rate. We expect Q4 net investment income will approximate $0.40 per share and continue to have confidence that our second half 2013 NII will meet or exceed our dividend payments for the same period. As a complement to our origination platform focus on underwriting investments, we continued to evaluate control equity investments in specialty finance businesses that can provide us with asset -- differentiated asset classes, proven management team, and diversified sources of income. Our recent investments in Crystal Financial and Gemino Senior Healthcare Finance at Solar Senior are good examples of these efforts. After 10 months of operating experience with Crystal Financial, we remain very comfortable with the steady run rate of 11% to 12% return on invested capital. This niche specialty lending business is not subject to the vagaries of the syndicated lending markets and provide the diversified portfolio of senior secured loans having attractive risk-adjusted returns. It is natural to experience a high level of prepayments in the sustained liquidity-led, technically driven market environment where evaluation seems to have gone to the extreme. While we will continue to be patient and highly selective in redeploying our capital, our objective is to grow net investment income per share by prudently increasing the size of our investment portfolio and through opportunistic purchases of our common stock at prices that can be accretive to shareholders. Once we've achieved what we believe is sustainable net investment income growth through the prudent deployment of our available capital, we hope to increase our dividends. At 11:00 a.m. this morning, we'll be hosting earnings call for the third quarter 2013 for Solar Senior Capital or SUNS. Thank you for your time. Operator, please open the line up for questions.

[Operator Instructions] The first question comes from the line of Stephen Laws of Deutsche Bank.

Could you maybe comment on -- I'm not sure if the best way to think about it is maybe what you expect in the current environment for either net portfolio change or what kind of growth we should see or given -- I know we had two early repayments that were fairly sizable. I think, the large repayment risk is removed with mainly smaller investment sizes, but if you can't really predict the repayment side, maybe what a gross investment pace would look like in the current environment?

Yes, I think, historically since our IPO, we've averaged about $100 million over the quarter of investment activity. And keep in mind that it is an average. It moves around an awful lot. This last quarter, we originated $65 million. So I think when we'd say -- if the current environment continues, that lower number is probably a more representative size of what we've been doing. If the market changes, we're doing substantially more.

Great. And...

I'll caveat all that by saying it's very lumpy and if certain things hit it can be much different.

Sure. And following up on that. I may have asked this question a year ago, but is there any seasonality in the fourth quarter we should think about, the people slowdown and disappear around Christmas? Is it the other way? And people are looking to get things done before the December 31 year end or delaying until next year. Kind of any seasonality we should think about in the fourth quarter?

I think on the margin, Steven, sometimes you see a little bit more elevated activity in Q4 as the year end might drive motivations to consummate transactions before year end for tax or other reasons. And then Q1, as you know, can be a little bit quieter as the engine restarts, because there's a long lead time. As you know, particularly in the M&A driven transactions. So I'd say on the margin a little bit more in Q4, a little less in Q1, but that does vary year-to-year.

Great. And I guess, one last question, which is kind of built on that. With some prepayment income being in the third quarter or [indiscernible] the too early repayment, and then, given the portfolio growth which should drive leverage and increase, is it a safe assumption that things -- that net investment income is likely to drop in the fourth quarter and then we should expect that portfolio growth to drive net investment income off the fourth quarter levels?

The answer is assuming we have net investment in growth on go-forward basis, it should grow.

The next question comes from the line of Greg Mason of KBW. Greg M. Mason - Keefe, Bruyette, & Woods, Inc., Research Division: Could you talk about what the market is like for sub debt right now? I know that's in the past been kind of your bread-and-butter spot, but now, obviously, you're moving to a little more lower-yielding senior secured. Can you just talk about what's going on in the sub debt market?

Sure. I think more broadly, you've really seen sub debt dry up and being replaced by predominantly second lien investments, and to a lesser extent, unitranche or a single capital structure solution. Mezzanine seems to be harder to come by. And I think, from our perspective, as you know, from a risk-adjusted perspective, we'd rather move up cap structure into either second lien or unitranche structure. So there really hasn't been much in mezzanine in terms of the broad market. I think there's a little bit more at the lower end of the mid market where the banks and the sponsors might be looking for some unsecured paper in the capital structure, but that's not our core market. Greg M. Mason - Keefe, Bruyette, & Woods, Inc., Research Division: And then, we've seen a lot of repayment activity here. Do you think is the -- as the -- if you look of the pipeline, is it more -- is the pipeline more continued refinance opportunities or are we starting to see some actual M&A growth capital opportunities?

I think the refinancing market, to your question, as you know, ebbs and flows with the consistency of the liquid credit markets. And so to the extent that there's no dislocation there, sponsors will continue to opportunistically tap into that market to try to drive down pricing and improve their terms. So that market will come and go, although, it's been, as you know, rather strong this year. I think the important thing to your question is we have seen M&A activity pick up in the second half of the year. And importantly, I think the sponsor community is looking to create value themselves and trying to find more unique transactions for platform acquisitions, be it carveouts or add-ons, things where they can create value rather than just buy a business and put financial leverage on it, which is a bit of a commodity in today's market. So we are seeing some more creative opportunities coming out of the sponsored community which creates the opportunity for us to be that much more creative and customize our solution, but not all of these are ready to go to the liquid credit markets, and so we have seen that pickup. Greg M. Mason - Keefe, Bruyette, & Woods, Inc., Research Division: Okay, great. And one final kind of last clarification question. You said that you think you can earn 11%, 12% off of Crystal. Is that off of your original cost basis of the $275 million or the current value, the $294 million?

The original cost basis.

Your next question comes from the line of Rick Shane. Richard B. Shane - JP Morgan Chase & Co, Research Division: You talked in some context about a heightened risk environment and I'd love to put that in context because you also basically say fundamentals within the portfolio are fairly stable. It looks like spread compression has started to, at least, abate -- I don't think it started to widen. Would you talk about where you're seeing that risk? Is it fundamental risk in what's out there in the market or do you think it's structural within deals that are available?

It's structural in terms of the actual structure of that transaction itself, but more importantly, it's the leverage ratios. Richard B. Shane - JP Morgan Chase & Co, Research Division: Got it.

Issuers have been able to push buyers who are hungry for yield to take leverage off it. As a private equity sponsor, if you can leverage the company as much as you can, as safe as you can, you're going to do that.

But I think to your point, we feel good about the fundamentals. As you know, we don't underwrite growth. We're underwriting stability and strong free cash flow generation. And that will de-risk our investments, to Michael's point, assuming you have prudent leverage on that capital structure. I think what gives us pause is not only opening leverage today, but also where those structures will allow people to take leverage the day after you fund your financing transaction. Historically, there have been significant constraints where our company needs to show deleveraging on any pro forma basis to take more debt on. And today, we're seeing transactions where the moment you close, you can actually increase leverage even further. So that's definitely extreme for us.

And I think kind of the fundamental issue for us, if you step back all of our investment activity, whether it's senior or subordinated, our investment premises, the companies that we invest in, has to be able to de-lever through the rolling operations, through free cash flow in a very reasonable scenario, not a downside scenario. And as you push leverage up from 4.5x to 6x, that ability to generate free cash flow becomes compromised. And so there's no value creation to the investor, and now you have to bet on growth in order to get that deleveraging and as credit investors that’s not what we do. We're not equity investors. Richard B. Shane - JP Morgan Chase & Co, Research Division: Got it. I mean, look, you guys are definitely walking the walk. You're deleveraging at the moment that you're seeing leverage go up across the portfolio. What do you see is the opportunity there? I mean, what would you guys be looking for it to become more aggressive?

I think, really, it's more prudent leverage levels at the opening and more case [ph] of the documents, and those are the 2 things. And look, the good news is, historically, whether it was last year with Greece or this past spring with Bernanke, there -- a little bit of dislocation. The first thing that adjust generally speaking in the marketplace are the structures and the terms, pricing tends to come a little bit later. We're a little less concerned about pricing at 9.5%, 10%. I think in the context of close to 0 interest rate environment, but I think we really need the structures and leverage levels to adjust. And I think they can happen quickly, but that's what we're watching for.

The next question comes from the line of Vernon Plack. Vernon C. Plack - BB&T Capital Markets, Research Division: Given the current portfolio, could you talk about your thoughts on potential NAV per share accretion at this point?

Yes, I think, Vernon, today, we're looking at NAV as being stable. I think there is some upside, but that's not something that we're focused on at the moment. As you know, everything we're doing is around preserving shareholder value and protecting NAV. So -- and I think we feel very comfortable about that.

I think the other -- I think just adding on about NAV, in terms -- if you think about what we've done by rotating the portfolio to floating rate and senior secured, what it does is that it really insulates us from when they're-- if and when there is a correction from any real significant asset write-down. Because when you're higher up the capital structure but lot less volatility in asset values, and when you're heavily in floating rate when rates increase, you're not going to have the technical re-evaluation that should take place if one were to have a fixed rate portfolio.

The next question comes from the line of Chris York of JMP Securities.

Just one question for me this morning. Earthbound Farm's been rumored to be pursuing strategic alternatives. Could you comment on your expectations for the potential prepayment of this credit? And any other investment that you think could prepay?

Yes, I think, generally speaking, as we mentioned, 25% of portfolio during last quarter, I think that prepays will abate some. They're not going to disappear, because, again, I think anything you see in our portfolio that seems to be attractive, so do others, and so we expect continue to repay something like in Earthbound. But I can't comment specifically on that one other than to say that we feel good about the investment. As you know, we've been in it a couple of years, and our hope is that our duration gets extended there, so more to come.

The next question comes from the line of Jonathan Bock, Wells Fargo Securities.

Michael, real quick. As we look at the senior secured portion of your assets in the portfolio, we -- I'm happy to break these out, we can calculate it on our own, but I wanted to see if you'd be able to give us the general sense as what percentage is actually true first lien and what is second?

Yes, good question. I think there is an important distinction when we talk about Solar Senior Capital where that is, I would say, very traditional senior secured leveraged through about 4x. Our senior secured is a combination of stretched senior, unitranche and second lien.

Yes, so I think it's fair to say, Jonathan, that because we're not competing with Solar Senior's marketplace doing traditional first lien bank debt, all of Solar's secured is a combination of stretched senior, unitranche and second lien.

And I think importantly, with our Crystal portfolio about $360 million, that is all first lien, senior secured backed by receivables and inventory and everything that these companies own. That's even better collateral, I mean, if I'd say that we'd get in Solar Senior Capital, for an example. That's a significant part of our senior secured exposure.

Good. Got it. And so to again, maybe stepping a little bit closer to the line here. Let's bookmark it. What's the actual percentage of second lien in the senior secured asset bucket in Solar?

Yes, we haven't disclosed that in the past, but it is, to Michael's point, more when you capture Crystal into the equation. It is more first lien and stretched first lien.

Okay. Then one additional question. So if there is a decent amount of second lien as a part of that mixture that you mentioned, I'm curious as to second lien performance versus what is truly mezzanine. Because some would argue that that's the second lien mezzanine in the senior wrapper at a much lower coupon that can be sold to a CLO. So can you give us a sense of second lien and the potential risks that surround it? And is that effectively the new mezz market for the moment -- for the time being?

Sure. Just to reiterate -- I'm sorry if I wasn't clear. The majority is first lien, not second lien. Having said that, to your follow-up question about second lien, second lien has replaced mezzanine in the large end of the midmarket. Obviously, in some cases, they just go to the unsecured high-yield market if that market is open to them. But I think importantly, the second lien market, when we saw this back in '05, '06, '07, when it was equally strong and developing, is really basically meant to give you a much better recovery relative to a mezzanine unsecured investment in the context of your relationship with the first lien lenders to the extent that there is a work out to be had. Having the lien subject to the specifics of your credit agreement directionally gives you a seat at the table that you wouldn't otherwise have as an unsecured lender. So while I don't think it's akin to being first lien, you still have that debt ahead of you. I think, effectively, the recoveries have historically been higher for second lien debt in the event of a recapitalization than if you're in unsecured seat.

I appreciate that, Bruce. And then turning to Crystal, there was, I think, the dividend paid last quarter, and please correct me if I'm wrong, it was about $8.3 million down to $7.5 million. And there are a lot of factors that go into that. But maybe perhaps, just walk through why -- what that -- what was accounting for that potential delta quarter-over-quarter?

Sure, yes. And that will move a little bit quarter-to-quarter As you've seen $7.8 million is what it was in Q3. It's approximately what is what in Q1. Went up to a little bit to your point, Jonathan, in Q2. And what we're trying to do there is smooth out within that sort of 11% to 12% range quarter-to-quarter the earnings that we see coming out of Crystal. As you know, Crystal is a high-velocity business, fair bit of churn in that portfolio that creates a little bit of variability quarter-to-quarter in terms of income, but we're trying to smooth that out over the course of the year.

Got it. So if income this quarter was $6.8 million at Crystal and the dividend was $7.8 million, can you walk through -- I guess, I mean, obviously, that's coming out of an equity counter, some sort of reserve cash balance. It's down, the actual entity itself. So can you maybe walk through maybe just particulars around the amount that's retained at that entity in light of the fact that the dividend exceeds what net income was reported at Crystal this quarter?

Jonathan, this is Rich. We did add the 408 language that we were giving guidance on. We don't find it terribly informative. As a matter of fact, it may end up being more confusing than anything. We're just trying to meet the guidance that's currently out there, and I think that will sort itself out. As you know, Crystal is not an investment company. It has a very different P&L. And to Bruce's point, it's pretty volatile. It includes a lot of noncash items. There's timing differences. Again, this is not a true investment company by any means. So when you look towards those numbers, the following sentence in that disclosure is "Hey," it really says, "don't really rely too much on this." So that $6.8 million includes things like if they made new investments and they added a loan loss provision on it because that's what they're required to do. That's a noncash item that will reduce net income but doesn't really reflect the yield on the portfolio. I think the yield in the portfolio, as Mike and Bruce have explained, has been truly 11% to 12%. The size of the portfolio varies quarter-to-quarter. The timing of new adds and the leads obviously impacts cash earnings. But what we have done is look to distribute, on a recurring basis, what we feel good about with regard to the cash earnings of the business, interest income. And as you see, the portfolio size is a little bit down this quarter. And I think that the dividend, being down from $8.25 million in Q2 to $7.8 million in Q3, kind of pegs along with the current size of the portfolio. So if the $7.8 million is not explained [ph] as a return of capital, there are true cash earnings, there's a bunch of noise in the net income number of these types of commercial finance companies that really are probably more confusing than anything else. But there is cash in excess of what we've distributed. There's no intention currently to pay out more than the current cash earnings of the business. And that -- I think I'd leave at that.

Somewhat the year-to-date is probably to look at it. And to Rich's point, the cash dividends are actually exceeded by the cash earnings of the business.

Okay. I appreciate that. And I also would imagine that you guys are looking to comply with the spirit of 408 and 309, which, to the extent you're able to provide more enhanced kind of cash disclosure on this, would likely be extremely well received and in line with what the SEC intends. But then, one last question. As it gets to maybe the overall value proposition where we do want to make sure that people are rewarded for doing the right thing as bringing down leverage, et cetera, but we're trying to not be duplicative. Then I guess, the question is Crystal has been an excellent investment and as has some of the others, MidCap, et cetera, and there were issues as it relates to the nonqualified asset bucket with that effectively being very, very close to full even today. That's probably been one of the best ways to grow earnings. And as we kind of hear it, it doesn't seem that the new investment market is really that exciting and/or attractive based on your conservative nature. So with almost -- probably be fair or would it be fair to assume that, really, earnings aren't going to grow and neither will that dividend near term just because goes you're not seeing a lot of great opportunities out there? What would you say to that?

Well, I'd say we still don't expect the dividend to grow next quarter or 2. I think it's not entirely correct to be saying that just because our $0.30 bucket is "full" that we can't find other interesting things like Crystal to do. Not everything has to be deemed a finance company. And as we mentioned earlier, we are looking at other specialty finances, but there are other structures and things out there that we can do things on our off balance sheet that can make a lot of sense for us. So I know everyone gets hung up in this $0.30 bucket and about filling it and what goes in it. And I think there's frankly just too much attention paid to that constraint because it's not necessarily constrained.

Fair enough. And I appreciate you guys leading the way with these Crystal type transactions which are absolutely additive in the current environment. So that's my question.

The next question comes from the line of Doug Mewhirter of Robinson Humphrey.

I just had 2 bigger picture questions mainly related to our government, which is doing a lot of things right now. So it's a 2-part question, and you can answer it in any way you want. First, health care reform, has that affected any of your portfolio companies? And has it affected your appetite positively or negatively for investing or continuing to invest in these companies? And the -- I would ask the same thing about the effects of the government shutdown.

Yes, I think, in the health care side, I will talk a little bit more about this in a couple of minutes over at Solar Seniors in terms of our investment in Gemino Healthcare. And as you know, historically, at Solar, our investment in MidCap, we have found the specialty finance area a very good way to gain access to the health care sector, which, regardless of the Affordability Care Act, is clearly growing sector with a lot of tailwinds. I think you have to be selective in how you play the sector in terms of being mindful of reimbursement risks, but I think we feel very good about doing what we've done to date, which is tapping into that sector through an asset base orientation and leveraging the expertise that both MidCap and Gemino have in that sector. I think as it relates to the government shutdown, it's too soon to know. We haven't seen any short-term impact in our portfolio of companies.

[Operator Instructions] The next question comes from the line of Mickey Schleien. Mickey M. Schleien - Ladenburg Thalmann & Co. Inc., Research Division: Just a couple of questions at this point. Rich, maybe you can quantify for us the amount of prepayment fees and accelerated amortization fees just to get a sense of what the portfolio yield looked like on that basis. And lastly, given the tone of your description of the market, which is consistent with the last couple of quarters, it really feels like your -- you view your existing portfolio more positively than potential new investments. So I'm curious whether you have any appetite to repurchase stock, perhaps, even at a slight premium to your last reported NAV per share.

I'll answer your last question first. So I think it's highly unlikely that we will buy stock above book. We just don't think it's additive to shareholder value. We'd rather be patient with our capital and wait for dislocation either in our old stock or frankly in the new investment market. With regard to your first question, we historically have not disclosed our prepayment penalties, but I'll answer it for you in a different way. When we resize our dividend earlier this summer at $0.40, we talked about how we did it to kind of approximate what we thought the run rate of our portfolio was post repayments for what we expected in Q3. And then -- and that we expected Q4 to be approximately that kind of run rate. So if you kind of look the delta between what we reported at $0.40 and the fees from the credit facility, you'll get to the right place.

Thank you for your question. I would now like to turn the call over to Michael Gross for closing remarks.

No more closing remarks. We look forward to continue to speak with you and speak to those of you who will participate in our Solar Seniors Conference Call in 10 minutes. And we wish you all a happy Halloween.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.