SLR Investment Corp. (SLRC) Q2 2014 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Second Quarter 2014 Solar Capital Ltd. Earnings Conference Call. My name is Denise, and I'll be the operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I will now turn the conference over to Mr. Michael Gross, Chairman and CEO. Please proceed.

Thank you, and good morning. Welcome to Solar Capital Ltd.'s earnings call for the quarter ended June 30, 2014. 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 off 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 broadcasts, in any form, are strictly prohibited. This conference call is being webcast on our website at www.solarcapltd.com. Audio replays 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 condition 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'd like to turn the call back to our Chairman and Chief Executive Officer, Michael Gross.

Thank you, Rich. Credit market conditions continued to be challenging, particularly in the liquid leverage loan and high-yield markets. Investors are grappling with pervasively low yields, high leverage levels and lose credit protections. These technicals, coupled with rising geopolitical risks, the prospect of rising interest rates and the taper of quantitative easing have created an environment in which credit investors should be more diligent than ever. In recent weeks, we have seen evidence of a pause in the irrational exuberance, both low- and high-yield funds have experienced redemptions. However, these outflows from credit funds were mitigated by continued high CLO activity. In the middle market specifically, conditions have also been favoring borrowers. The average leverage level for middle market LBOs is at the highest since before the last recession and the trend toward covenant-light deals has continued to escalate but the effect remained less pronounced than in the liquid markets. Pundits continue to offer their views on whether or not the capital markets are fully valued and that we've entered bubble territory. As credit investors focus on principal preservation and long-term success, we're leaving this debate to others and instead focusing on absolute risk levels. We've continued to construct the portfolio defensively. At June 30, including Crystal Financial, 74.3% of our portfolio is invested in secured loans and 71% of our income-producing investments are floating rate, both measured at fair value. Currently, we're seeing the best risk/reward in senior secured loans, including unitranche loans. As we mentioned on our first quarter earnings call, we are seeking to build strategic relationships with partners willing to commit significant capital to a joint venture that would strengthen our presence in the unitranche loan space. Our objective is to be able to provide a one-stop debt financing solution to our middle market clients. A unitranche loan program will enable us to better serve our clients, as well as provide us with additional avenue for growing our portfolio via secured floating rate loans, which we expect would improve return on equity for our shareholders. Additionally, last month, we were granted exemptive relief by the SEC to coinvest and negotiate transactions with our sister fund, Solar Senior Capital. Solar Senior predominately invests in traditional senior secured loans but it does have a basket for more stretched senior secured loans with higher yield, which fits Solar Capital's investment mandate. The ability to speak for a larger portion of a financing through coinvesting should enable us to win more mandate and achieve better terms. During the 3 months ended June 30, 2014, we repurchased $19.5 million of our common stock at an average price of approximately $21.93 per share, representing a 2.3% discount to the net asset value at June 30, 2014. In total, we repurchased $56.6 million of the $100 million authorized. This share repurchase program ended on July 31, 2014, and we are not renewing it at this time. As we've been evaluating strategic initiatives for the second half of this year, we determined that we expect there to be more accretive uses for our available capital. The addition of 2 senior investment professionals at the beginning of this year has increased our deal flow. Our third quarter pipeline is strong, with a few deals committed shortly after second quarter end, and based on current visibility, repayment should be modest in the third quarter. Finally, our Board of Directors declared a quarterly distribution of $0.40 per share, which will be paid on October 1, 2014 to shareholders of record as of September 18, 2014. At this time, I'll turn the call over to our Chief Financial Officer, Rich Peteka, to take you through the financial highlights.

Thank you, Michael. Solar Capital Ltd. net asset value at June 30, 2014 was $952.9 million or $22.44 per share compared to $972.3 million or $22.43 per share on March 31. Our investment portfolio at June 30 had a fair market value of $984.1 million, compared to $1.03 billion at March 31, 2014. At June 30, we had investments in 43 portfolio companies across 30 industries, versus 43 portfolio companies across 28 industries at March 31. The weighted average yield on our income-producing portfolio was 10.5% at June 30 versus 10.9% at March 31 measured at fair value. For the 3 months ended June 30, 2014, gross investment income totaled $28.0 million versus $32.6 million for the 3 months ended March 31, 2014. Expenses totaled $11.9 million for the 3 months ended June 30 compared to $15.2 million for the 3 months ended March 31. The company's net investment income for the 3 months ended June 30 totaled $16.1 million or $0.38 per average share versus $17.4 million or $0.40 per average share for the 3 months ended March 31. Net realized and unrealized gain for the second quarter 2014 totaled approximately $1 million versus a net realized and unrealized loss of $3.7 million for the first quarter of 2014. Ultimately, the company had a net increase in net assets resulting from operations of $17.1 million or $0.40 per average share for the 3 months ended June 30, 2014. This compares to $13.8 million or $0.31 per average share for the 3 months ended March 31, 2014. At this time, I'd like to turn the call over to our Chief Operating Officer, Bruce Spohler.

Thank you, Rich. As Michael highlighted, our Q2 investment activity furthered our objective of maintaining a predominantly senior secured floating rate portfolio. Overall, the financial performance of our portfolio companies remained steady, and we've seen a pickup in both their organic growth initiatives, as well as tuck-in acquisitions. Across the sponsor community, we've begun to see a tapering of refinancings and dividend recapitalizations and an increase in M&A activity and new platform acquisitions. At June 30, the weighted average yield on our income-producing investment portfolio measured at fair value was 10.5%. The weighted average investment risk weighting of our total portfolio remained at approximately 2, measured at fair market value, based upon our 1:4 risk rating scale, with 1 representing the least amount of risk. At the end of the second quarter, our portfolio consisted of 43 portfolio companies operating in 30 industries. When measured at fair value, our portfolio was comprised of approximately 44% senior secured loans, excluding Crystal Financial; an addition of 30% including Crystal Financial; 18% subordinated debt; 2% preferred equity; and 5% common equity and warrants, excluding Crystal. Including Crystal Financial, whose portfolio consists entirely of senior secured loans, approximately 74% of our portfolio exposure is in senior secured investments. As of June, 71% of our income-producing investment portfolio is floating rate, while 29% is fixed rate, measured at fair value. For the quarter, we originated approximately $89 million of investments across 9 portfolio companies. All of these originations were in senior secured and floating rate assets. Investments prepaid or sold during the quarter totaled approximately $138 million. Before I give an overview on our activity during Q2, I'd like to update a few existing portfolio companies. As we mentioned on our Q1 earnings call, subsequent to the first quarter, a prospective buyer of 1 of our portfolio companies, Quantum Foods, defaulted on the purchase contract. Since then, Quantum Foods has been undergoing the liquidation of its assets and we, in Crystal Financial, have been pursuing all possible avenues to maximize our recovery. During the second quarter, Solar was repaid close to $60 million by Quantum Foods at par, reducing our remaining cost basis to $7.2 million at June 30. When the company's performance began to deteriorate, we actively manage our investment and dramatically reduced our investment size. At the end of the quarter, the aggregate remaining exposure to Quantum, on a cost basis between Solar and Crystal, was just over $14 million, down from an original cost basis of $75 million. Based on our June 30 fair value, we expect to, at a minimum, breakeven on this investment on an IRR basis. And with our ongoing efforts to maximize our recovery, we believe there could be some potential upside on our recovery relative to our June 30 fair value. Additionally, during the second quarter, TIAA-CREF announced an agreement to purchase our investment in Nuveen Investments. At June 30, we marked our investment in Nuveen up to $27 million from $17 million at March 31 to reflect the value that we expect to receive from the closing of the transaction in the fourth quarter this year. We believe there may be additional upside in the final prize for our Nuveen equity, relative to the June 30 mark. At its trough, position was marked at 15% of cost versus our current mark of 87%. Now I'd like to give you an update on Crystal Financial. As a reminder, Crystal Financial is a commercial finance company that provides asset base and other secured financing solutions to mid-market companies. At June 30, Crystal had just over $350 million of funded senior secured loans across 24 issuers, with an average exposure of $14.6 million per issuer. During the quarter, Crystal funded new loans totaling just over $5 million and had approximately $68 million of loans repaid. All of the commitments from Crystal are floating rate senior secured loans. At the end of Q2, total debt on Crystal's balance sheet was approximately $150 million or debt to invested equity ratio of 0.55. Additionally, at June 30, Crystal had approximately $150 million of available capital, subject to borrowing base limitations under a $300 million credit facility. For Q2, our investment, Crystal, paid Solar Capital a cash dividend of $7.3 million, which is the equivalent of a 10.6% annualized cash yield. Let me now highlight some of our second quarter investments. We made a $25.5 million second lien term loan investment for Xand Corporation, which is a regionally focused provider of data center and outsourced IT solutions. ABRY Partners originally made its platform acquisition of Xand in October 2011, and has since acquired 5 additional data center facilities. Our capital came in to help finance part of this acquisition strategy. We also made a $27 million investment in the second lien term loan for Emerging Markets Communications, which is a global provider of satellite communication services to remote, difficult-to-reach locations. We provided the entire second lien tranche in this transaction, enabled us to negotiate terms directly. The all-in yield on this investment is approximately 10%. During the quarter, we increased our exposure to Landslide Holdings via secondary purchases, resulting in the total exposure for Solar of $16.3 million. As a reminder, the company, which is owned by Thoma Bravo, does business as LANDesk, provides software tools that enable IT departments to manage and control secure network devices ranging from PCs to a variety of mobile services. Let me now highlight some of our Q2 repayments. The largest repayment was a repayment of $45 million second lien term loan investment, as part of Freeman Spogli and Investcorp's joint buyout of totes ISOTONER from our prior partner, MidOcean Partners. Our IRR in this investment, since inception in 2011, was 12.9%. Given our history with this credit, we were offered the opportunity to reinvest in this new transaction [indiscernible] based upon new capital structure and incentives. We were also repaid on our $20 million second lien term loan to TravelClick, which Genstar recently sold to Thoma Bravo. The IRR since inception on this investment was 10.5%. We also had the opportunity to reinvest in this transaction but declined because of the less attractive capital structure in today's environment. Our second lien term loan to McLarens International was redeemed at a premium to par in conjunction with the company's refinancing with an all-Senior capital structure. The IRR on this investment was just over 15%. Our sister fund, Solar Senior, leveraged our platform's insight into this company to invest in this new first lien term loan issued by McLarens. And finally, our $50 million investment in the second lien term loan of GENEX Services was also repaid at a premium to par, resulting in an IRR just over 13.5%. Based on our activity thus far in the third quarter, and our current visibility for the remainder of the quarter, we expect repayments to be minimal, resulting in net portfolio growth during this quarter. Now I'd like to turn the call back over to Michael.

Thank you, Bruce. In conclusion, I would like to reiterate that we're continuing to exercise patience in line with the heated credit market conditions. Our focus remains on maximizing long-term shareholder value, with our origination efforts centered on finding higher quality investments that we believe will protect our net asset value. As demonstrated by the current high percentages of our portfolio in senior secured and floating rate investments, we will not lower credit standards to achieve growth that may not benefit our shareholders in the long run. We will not sacrifice investment standards and so we recognize the need to maintain strategic flexibility to deliver strong results in a prolonged, heated and low interest rate environment. We're continuing to evaluate initiatives with prudent risk levels that we expect will be accretive to net investment income. As I highlighted before, we're exploring alternatives for expanding our unitranche capabilities. We believe that in today's heated credit market, the senior secured unitranche loan structure with risk and ability for us to actively negotiate terms provides compelling risk/reward opportunity. A strategic unitranche initiative will expand origination platform, which we enhanced at the beginning of this year, with addition of 2 senior investment professionals. We anticipate using a dry powder to fund potential strategic initiatives, as well as traditional investments with an emphasis on senior secured floating rate loans to grow our portfolio. At 11:00 this morning, we'll be hosting an earnings call for the Second Quarter 2014 operation for Solar Senior Capital, or SUNS. Our ability to provide senior secured financing through this vehicle enhances our originations capability to meet our clients' capital needs. We continue to see benefit with this value proposition in Solar Capital deal flow. Thank you for your time. Operator, at this time, please open the line for questions.

[Operator Instructions] Our first question comes from Arren Cyganovich with Evercore.

Maybe just talking about the opportunity to coinvest with SUNS. Is that a big deal? Or is it just another avenue that you can help to maintain -- you've had relatively robust originations, I guess, all things considered?

I think that it's something that -- it's important for us to have as we look to increase the size of our opportunities that we can take down in a given investment. More often than not, we do find that there might be more capital. And selectively, there are situations that fit both the investment strategies for Solar and Solar Senior. More often, on a stretched senior basis, where there would some overlap on the appropriate risk and return.

Okay, that's helpful. And then in terms of the partnering with a unitranche product, how far along are you in that process? Have you talked to many potential investing platforms that you can help work with? And when do you think that we might be able to see that come forward?

We continue to have ongoing discussions. I think we're hopeful that we will be able to come to a closure sometime this quarter.

Great. And then lastly, the yield compression that we've seen over the past couple of quarters has been relatively large. Do you feel that, that should abate somewhat now that we've gotten down to a relatively low level? What are your thoughts on yield compression going forward?

Yes, I think it's, obviously, it's a combination of new investments we're putting on, which feels to be somewhat stable in terms of where pricing is coming out. I think, generally, you're seeing us put assets on in the 8.5% to 10% range on a yield-to-maturity basis, although I think as you can see with our repayments, as I highlighted some of those yields, the expected yield tend to be more in that 10% to 12% given the shorter duration or shorter hold periods than actually holding these to maturity. And I think the other side of the equation being the existing portfolio, there aren't many high or off-market interest rates on our current investments in the portfolio. There is 1 or 2 that I think you could see come out of in the next 6 to 9 months as companies look to take down their cost of capital. But I think a lot of it has been taken out of the portfolio at this point, given the churn that we've seen.

Our next question comes from Troy Ward with KBW. Troy L. Ward - Keefe, Bruyette, & Woods, Inc., Research Division: Just a follow-up a little bit on Arren's question there about the unitranche fund. Can you give us a little color on maybe the potential sizing you're thinking of that? Obviously, with your investment capacity, where it is today, can you just say how much maybe you're thinking new joint venture may use?

I don't think we're prepared to disclose that number at this point, but the way to think about it is, our belief is, to be in this market is irrelevant. And typically, unitranche facility is anywhere from $100 million to $200 million. And without an ability to raise -- to write that kind of check, you're just not relevant in the marketplace. So our goal is to create something of a size where we can be relevant from that perspective. Troy L. Ward - Keefe, Bruyette, & Woods, Inc., Research Division: Okay. And Michael, the first 2 or 3 minutes of your prepared remarks really focused on the challenges of the current environment. And then you got into the fact that you didn't renew the buyback authorization. Can you just reconcile those 2 seemingly contrasting positions? Especially with the stock where it is today now, you don't have that ability. Can you just talk about the buyback and the decision not to renew that?

Yes, I think we discussed it at the board meeting recently and I think in light of the pursuits we're having about -- in the unitranche, we want to see that play out first, see where capital is needed and then the board is going to revisit putting buyback back in place, it will make sense to do so at that point in time. Troy L. Ward - Keefe, Bruyette, & Woods, Inc., Research Division: And what are the mechanics of putting a buyback in place? If that was something they chose to do, how long does that typically take for that to happen?

A 5-minute board meeting. I mean, it's not days, not weeks or months.

We can just send out a notice. Troy L. Ward - Keefe, Bruyette, & Woods, Inc., Research Division: Okay. And there's no real procedural problem there, then?

No. Troy L. Ward - Keefe, Bruyette, & Woods, Inc., Research Division: Okay. And then, on the Quantum, very good to see the paydown, and especially the paydown across both of the platforms. Did the paydown of your investment and Crystal's investment, did that use the proceeds from the liquidation of the assets to the Iowa company? Or are those proceeds still available for potential fair value?

No, those are the liquidation proceeds coming from the disposition of the company's working capital assets, although there's a little left to be liquidated, as well as the plant and equipment out in the Midwest. So a lot of liquidation has occurred. There is some residual assets there in the process of being liquidated. So we expect to take down our exposure further in Q3.

Our next question comes from Richard Shane with JPMorgan. Richard B. Shane - JP Morgan Chase & Co, Research Division: Wow, that's a new one. My question really falls on Troy's. I just like to explore a little bit further, why not at least give yourself the optionality of having the authorization to buy back shares in place. It seems to me that there's no cost to having that in place. And when you see dislocations having an additional tool in your -- or arrow in your quiver in terms of ways to deploy capital, why not have that?

Rick, this is Rich. We did speak with the board. They're ready to act. They're actively engaged throughout the quarter, just not on a quarterly basis. And again, we're looking to see these things play through. I think the only difference is, really, that, that board meeting, which is just really a follow-up to our preceding Board Meeting as well as a quick mailing, which, the letter is drafted. So it's pretty easy to execute. It's just, to keep that going, is just another mailing for the shareholders and some costs involved. But really pretty minor either way. Richard B. Shane - JP Morgan Chase & Co, Research Division: Okay. I'm not necessarily sure I still get it at this point, but we'll follow-up offline.

Our next question comes from Chris York with JMP Securities.

I don't necessarily want to beat a dead horse here with Troy and Rick's questions already. But considering that your stock is trading at a discount of about 13% to book value. What are your return expectations for the other uses of capital that you thought would be more accretive?

Well, I think, we believe if we do -- conclude kind of unitranche structure, that the ROE on capital deployed into that business is low double-digits, which is much greater than where our -- we've been buying stock on a yield basis. And we think there's a big benefit to -- as opposed to buying back stock is to growing the portfolio and diversifying it more as opposed to returning capital, which means you, by definition, you end up being less diversified because you can't deploy as much capital.

Sure, that's helpful. And then it seems like the limitation for the amount of capital that you could invest in the joint venture is roughly about 7% to 8% of assets considering that you already have 22% of assets in nonqualified. Is that kind of consistent? So the back of the math there is roughly in line with what you already said that your size is that kind of consistent to what you're thinking, maybe $100 million to $150 million in size?

I would think of it a little differently. I think the rules require, because our business ebbs and flows, you see the repayments. So it's a lumpy business. I think the rules just require that you have at least 70% of your assets in qualifying securities, qualifying assets before you make such an investment, and then once you've made that investment and gone over it, you're prohibited from making follow-ons after that.

So to make a long story short, we don't view ourselves as constrained today. We have capacity to do whatever size we -- size we plan to do.

Got it. And this question may be better take off line, Rich. But I'm trying to reconcile the base management fee to what base you're using for average assets.

Real simplistically, you should include the government security that we have on the balance sheet at quarter end in your calculation.

You can call me offline. If you want, we can go through it.

Our next question comes from Jim Young with West Family Investments.

My questions pertain to the share buyback program, and I think that they've been adequately addressed at this them. But I would just reiterate our interest in seeing a program put in place to provide you the flexibility.

Our next question comes from Doug Mewhirter with SunTrust.

Most of my questions have been answered. I just had one quick follow-up. With the -- if you could just remind me, with the exception of Quantum Foods which is in the process of being worked out. Do you have any other loans or securities that are considered to be on nonaccrual or nonperforming?

No.

No.

We -- in fact, we didn't have any other ones on credit watch.

Our next question comes from Vernon Plack with BB&T Capital Markets. Please proceed. Vernon C. Plack - BB&T Capital Markets, Research Division: Could you help me to understand the differences in net income for Crystal from Q2 versus Q1? I think in Q2, it was -- what was it? $7.6 million in -- Q1, it was $7.6 million; in Q2, it was $1.8 million.

I'm sorry, Vernon, can you repeat that? Vernon C. Plack - BB&T Capital Markets, Research Division: Yes, I'm trying to understand the differences in net income at Crystal. I think Crystal's net income was stated in the Q as $1.8 million for Q2; and in Q1, I think it was $7.6 million.

I think, we can chat offline. I have to reconcile with the CFO of Crystal. But I knew that they were making some adjustments, some of it related to Quantum and how they were recording, and the timing. But I'll follow up with Josh over at Crystal and then if you want to chat later, we can go into the recon. Vernon C. Plack - BB&T Capital Markets, Research Division: Okay. I know that you mentioned that Crystal paid you $7.3 million in Q2. Can you remind me what they paid you in Q1?

$7.8 million.

[Operator Instructions] Our next question comes from Mickey Schleien with Ladenburg. Mickey M. Schleien - Ladenburg Thalmann & Co. Inc., Research Division: I wanted to understand how the extension of the unitranche platform, if it happens, would affect how you would manage SUNS and SLRC together, given that unitranche would operate both in the first lien and second lien world. Would it be a situation where Solar might originate the unitranche loan and then sell the first piece to SUNS? Or what can we expect in that regard?

I'll answer the first one. The answer to your last set of question, we can't do what you suggested. It's not allowed by the '40 Act to have 2 related entities own different securities in the same company. So that will never happen. As you know, to be relevant, your unitranche -- you have to write checks of 100 to 150. SUNS balance sheet could never be able to do that. There is a scenario where, through our coinvestment relief that we could put some overflow pieces into SUNS to coalesce alongside Solar. But Solar will always be taking a lead position in that. And if we were to do that, they'd be buying the exact same security at the same time at the same price. Mickey M. Schleien - Ladenburg Thalmann & Co. Inc., Research Division: Okay. So we could see pieces of unitranche, whole unitranche deals and up the SUNS portfolio?

Possibly, yes. Mickey M. Schleien - Ladenburg Thalmann & Co. Inc., Research Division: Okay. And just a follow-up on Vernon's question about Crystal's net income, Rich, wouldn't that have something to do with the fact that you restructured Crystal's balance sheet and now Crystal's paying interest to Solar and, therefore, depressing, at least on paper, the net income of the company?

No, not at all because that restructuring at the holding company. And the financials we're alluding to was at the operating company of Crystal.

[Operator Instructions] We now have a follow-up question from Troy Ward with KBW. Troy L. Ward - Keefe, Bruyette, & Woods, Inc., Research Division: Michael, you mentioned when someone asked about Quantum and credit watch, that no other company was on credit watch. And of course, you mentioned on the last conference call that you're expecting Quantum to take a fair value mark this quarter, and we've seen that. Can you talk about when Quantum was identified internally to be going on credit watch? Because it was always held at par and it was never on nonaccrual until this quarter. When did you start seeing internal issues at Quantum?

We put it on credit watch in Q2. As you may remember from our last call, we had an agreement or the company has had an agreement to be sold to a private equity firm. That contract, they walked away from after putting up good faith deposit. And so it was expected that had that sale gone through, we would have been taken out for full value, plus all accruals. So it was when that sale fell apart post Q1 that we bought it up on our Q1 conference call and began to take an alternative approach, led by the folks at Crystal in concert with management, to liquidate the underlying assets of the business. Troy L. Ward - Keefe, Bruyette, & Woods, Inc., Research Division: So because Quantum obviously went through a bankruptcy process, we have the ability to read all the public filings. And looking at a timeline for Quantum, I mean, as early as May of last year, the credit facility with Crystal had to be renewed because they had lost 3 of their top 5 customers. The vendor financing was canceled, so they had to pay for all the raw materials in cash. I mean, this seemed like an investment, reading through that script in the bankruptcy, that it was greatly troubled throughout last year. At what point did something like that hit an internal watch list?

Yes. Be mindful that Crystal, by and large, is an asset-based lender in these situations. So when it hits our credit watch and Crystal's credit watch, it's not when there are amendments and waivers that tends to be ordinary course for them. It's when we believe that the collateral may not be fully covering our principal exposure. And so it's really looking at the underlying borrowing base, at which point, we begin to have some concerns. And again, we really didn't have that concern until we got into Q2 and the sale fell through.

I think just add, if this was a more typical Solar loan, cash flow loan, you'd be absolutely right. The fact that this is kind of Crystal's ordinary course, that's what they do day-to-day. And when they get amendments, they charge higher fees. And if we look back to its revolver loans, there's probably an amendment every 3 to 6 months to every loan they have. But I think the net-net of this is we're going to end up with still a positive IRR in the investment and that's kind of the reason we bought Crystal, for instance, when things go wrong, that, that's what go wrong, you get your money back effectively, on a worst case scenario.

Our next question comes from Jonathan Bock with Wells Fargo Securities.

Maybe, first, just trying to reconcile 1 item, is that if you are expecting to earn low double-digit returns, let's say, between 10% and 11%, yet the buyback is effectively the same in terms of what you would have to deploy assets at, and you have parity between stock buyback and the unitranche fund. Can you explain why, I mean, outside of diversity, I mean, I guess that makes some sense. But we understand that you stand by your portfolio today, why a buyback really wouldn't be a good thing to do.

Well, look, a couple of things. One is, we already filed through a buyback. We bought back close to $60 million of stock. We shrunk our capitalization by 6%. I think we're kind of in a rarefied group of BDCs who have done anything like that, if any. Second of all, I think you kind of hit on the point. If -- and it's a big if, if we found unitranche opportunities that met our credit criteria, that we liked as much as the loans we have in our current portfolio and we can invest those at mid to low double-digit yields, then the benefit of getting the diversification and entering that business becomes very strategic for us in the long run. And so that's, we think, that's a better use of our capital than to continue to shrink our capital structure.

Okay. Well, then, I guess in terms of the gross of that, Mr. York touched on it. But Rich, it sounded like what you were saying is it would be your intention to exceed the 30% bad asset bucket capacity, particularly, if one was going to be required to write large $100 million plus unitranche loans or in an off-balance-sheet entity. Is that your intention? Because I'd imagine that while the letter of the law might allow that to happen, I'm sure that really wouldn't comply with the spirit.

I'm not sure, Jonathan. Like we said, the business ebbs and flows. You have to look at the total portfolio. As you see, if we were operating at 0.75 leverage, I think that that's a different perspective. But when you're operating at effectively net leverage of 0, you still take a portfolio approach. And so the fact that we're sitting on that $700 million or so is pretty significant to that calculation. So again, we shortsighted to manage the 70-30 basket. Conservatively, when you're under-levered at $1 billion when you're sitting on another $700 million and you really can't dictate the timing of closings as you're working with your sponsor community. Today, we're going to close 70% assets. Tomorrow, it's a 30%. The next day, it's, "Oh, wait. Please, sponsor, wait for me to close next week on that 70% basket item." You really can't take that "one at a time" approach. So it's really a portfolio approach and it's within the spirit as well as the guidelines that the SEC puts out. So it's not about exceeding it, it's about looking at your whole portfolio, looking at 70-30 and where you expect to be and not going beyond that.

Got it, okay. Okay, that's very helpful, Rich. And then, just another question. I know you're very clever in terms of how you put on balance sheet the cash securities, and you only have that payable, effectively, a repo to kind of provide you more. Is there a reason to think -- I mean, I know there's an implicit cost with that but I'm under the impression that is that effectively limitless? Are you able to grow that at whatever size in which you want? What are the governors on your ability to do that, Rich?

We're very specific. We do it to reflect what our invest -- what capital is. So we take our equity capital, plus our debt facilities, and we subtract out what's available and then we give an amount that better reflects our investable capital on a go-forward basis.

And Jonathan, you can look through the bottom of the P&L on a quarter-to-quarter basis and see that given the relationships that the firm has with the Street, these are very cost-effective transactions for us that haven't added, at all, to our negative -- negatively to our P&L. So you can track that on a quarter-to-quarter basis and see there's really nothing hitting there that you can't reconcile with your portfolio of investments. It's actually much more efficient than it would be to use other methods.

Yes. No, I totally agree. But what you're doing is trying to reflect the investment capacity on the balance sheet and kind of in that cash number today, then that would imply that you would only have 8% of your bad asset bucket or effectively $134 million equity chunk to invest. And if that's kind of your -- so are you trying to tell us that the overall portfolio size in the future is going to be something well beyond what is implied by that $680-some million in cash on the balance sheet today when you add that to your assets? Because that's kind of how I think... I'm sorry?

No, not exactly. Not exactly. I meant something slightly different. But again, keep in mind that we have a pretty good insight, not perfect, but pretty good insight into our inflows and outflows and how we manage that business. And again, it's lumpy. So right now you should expect that we will continue to operate, live in the spirit of the guidelines. And we have counsel, we have a lot of things at our disposal. So it's not straightforward like that and I'm happy to talk to you offline. But it's a complicated calculation and it ebbs and flows.

We have no further questions. I will now turn the call back over to management for closing remarks. Please proceed.

Thank you, everybody, and thank you for your thoughtful questions. And we look forward to [indiscernible] on Solar Senior in 15 minutes.

This concludes today's conference. You may now disconnect. Have a great day.