Q3 2019 Earnings Call
Thank you for standing by and welcome to the <unk> third quarter 2019 earnings Conference call. At this time all participants are in listen only mode. After the speaker presentation. There will be a question answer session asking question during the session you'll need to press star one on your telephone. Please be advised that today's conference is being recorded if you require any further assistance. Please press star zero.
I'd now like to handle a conference over to your speaker today Jody Burfening. Please go ahead ma'am.
Thank you, Josh and good morning, everyone and thank you for joining us for fine.
Corporation third quarter 2019 earnings conference call.
With me this morning Red Rock why this investment Corporation's Chairman and Chief Executive Officer in Shelby Sherard, Chief Financial Officer.
Why this investment Corporation issued a press release yesterday afternoon with the details of the company's quarterly financial results a copy of the press release is available on the Investor Relations page of the company's site it F.D.U.S. dotcom.
I'd like to remind everyone.
Today, that's a this call is being recorded a replay of today's call can be available by using the telephone numbers and conference I'd provided in the earnings press release. In addition, an archived webcast replay will be available on the Investor Relations page of the company's website. Following the conclusion of this conference call.
I'd also like to call your attention to the customary safe Harbor disclosure regarding forward looking information included on today's call.
The conference call today will contain forward looking statements, including statements regarding the gold strategies beliefs future potential operating results in cash flows of fighter since suffice investment Corporation.
Although management believes these statements are regional based on estimates assumptions and project [laughter].
Over one 2019. These statements are not guarantees of future performance time sensitive information may no longer be accurate at the time of any telephonics or webcast replay actual results may differ materially as a result of risks uncertainties and other factors, including but not limited to the factors set forth in the company filings with the secure.
Basic and Exchange Commission.
I just undertakes no obligation to update or revise any of these forward looking statements.
With that I would now like to turn the call. It Birch good morning, Ed.
Good morning, Jody and good morning, everyone.
Welcome to our third quarter 2019 earnings conference call.
All open today's call with a high level commentary on our quarterly results and then I'll cover our investment portfolio performance and conclude with comments regarding our view of the market and activity levels as we move into the final quarter of 2019.
Shelby will go into more detail about the door third quarter financial results and our liquidity position.
Once we have completed our prepared remarks, well be happy to take your questions.
From my perspective during the third quarter, we executed well on our strategy of building, a well diversified portfolio debt and equity investment and lower middle market businesses that we believe will perform well over the long term.
Generate high levels of current and recurring investment income.
And offer us the opportunity to boost returns through the monetization of equity investments.
In addition, we continued to execute well against our primary goals of delivering stable dividends and growing net asset value per share.
Adjusted net investment income, which we defined as net investment income, excluding any capital gains incentive fee attributable to realized and unrealized gains and losses was $8.7 million or 35 cents per share for the quarter.
Compared to $8.9 million for 37 cents per share for the same period last year.
As of September Thirtyth, 2019, or net asset value or in a b was $402.8 million or $16 in 47 cents per share.
On September 22019 fight is paid a regular quarterly dividend of 39 cents per share.
Estimated spillover income or taxable income in excess of distributions was $16.9 million.
Or 69 cents per share.
Earlier this week the board of Directors directors declared a regular quarterly dividend of 39 cents per share and also declared a special dividend a four cents per share both of which will be payable on December 22019 to stockholders of record as of December six 2019.
The Q4 dividends, bringing total distributions this year to $1.60 cents per share and represent the seventh consecutive year paying a special dividend.
[noise] terms of originations, we invested a total of $47 million and debt and equity securities during the quarter.
In contrast to the second quarter third quarter originations were weighted toward add on investments.
The eighth existing portfolio companies, which amounted to roughly $36.3 million of the $47 million.
Substantially all of these add on investments supported M&A activity by our portfolio companies.
Largest of these was a $21.5 million subordinated debt investment in Allied 100.
The remaining amount was invested in a new portfolio company band in fitness, Inc. The largest franchisee of any time fitness gems in the United States were club locations across 11 states.
We invested $10.8 million in first lien debt and common equity.
Subsequent to quarter end invested in another new portfolio Company Hematologic Technologies, Inc.
Leading provider of biologic products, and GMP compliance that say development and testing services.
The biopharmaceutical industry.
We invested $6 million in first lien debt in common equity.
As expected we generated some capital gains during the quarter in terms of repayments and realizations. We received proceeds totaling 20 $623.5 million, which 12.7 million came from the monetization of equity positions in three portfolio.
Companies there were sold the new private equity owners.
In connection with these exits we recorded gains totaling $10.7 million.
In each case, we generated over three times, our initial investment demonstrating the strength of our investment strategy.
Just after the quarter in on October 1st.
We exited our debt and equity investments in simplex manufacturing company.
We receive payment in full of our $4.1 million.
On our subordinated debt investment and sold our warrant investments were $4.1 million, realizing a gain of approximately $2.9 million.
Including our exit in simplex manufacturing, we have received CE proceeds from the sale of equity positions totaling $16.8 million and realized gains totaling $13.6 million since the end of the second quarter.
Turning to our portfolio construction and metrics the fair value of our investment portfolio as of September Thirtyth 2019 reached $729.4 million.
Cool to 105.5% of cost.
On a fair value basis, the breakdown of the portfolio by investment type as of September Thirtyth was as follows.
First lien debt, 11% second lien debt, 52% subordinated debt, 20% and equity 17%.
[laughter].
We ended the quarter was 62 active portfolio companies in for companies that have sold their underlying operations.
This mix of investment types reflects the positioning of our portfolio to provide us with a high level of current recurring income from debt investments along with the opportunity for incremental returns from our equity investments.
As of September Thirtyth 2019, we have that debt investments in two portfolio companies on nonaccrual status.
You Escreen fiber and Oaktree Medical center.
Equal to 1.2% of our portfolio on a fair value basis.
With respect to U.S. Greenfiber in early September we took control of the company the a recapitalization transaction investing $2.8 million, primarily in second lien debt.
Alongside the previous control Investor and a new investor.
This recapitalization is intended to provide the company was sufficient liquidity to execute its strategic plan.
Moving to our portfolio performance, we track several quality measures on a quarterly basis to help us monitor the overall quality stability and performance of our investment portfolio.
First we track to the portfolios weighted average investment rating based on our internal system.
Under our methodology irradiation of one is outperform in a rating of five is an expected loss.
Remember thirtyth the weighted average investment ratio for the portfolio is 1.9 on a fair value basis in line with prior periods.
Another metric we track is a credit performance of the portfolio, which is measured by our portfolio of companies combined ratio total net debt to finance is debt investments to total EBITDA.
For the third quarter. This ratio is 4.7 times compared to 4.6 times for the second quarter.
[laughter].
The third measure we track is the combined ratio of our portfolio of companies total EBIT da.
Total cash interest expense, which is indicative of a cushion in our portfolio companies have in aggregate to meet their debt service obligations to us.
For the third quarter. This metric was 3.3 times compared to 3.8 for the second quarter.
We believe the soundness of these metrics reflect our debt structuring philosophy of maintaining significant cushions to our bars enterprise value.
In support of our capital preservation and income goals.
In closing as we look toward the end of 2019.
We believe business conditions in our targeted lower more middle market remained solid.
Providing us with opportunities to selectively grow our portfolio in a cautious and deliberate manner, while leveraging our experience in relationships.
Our investment strategy in underwriting principles ensure that we remain focused on investing in.
High quality companies that possess defensible market positions in less sick to cyclical business models.
Generate excess cash flow for debt service and growth.
And that have positive long term outlooks.
At the same time, we remain focused on rotating mature equity investments into income producing assets.
Overall, our portfolios in good shape, and well positioned to provide us with current and recurring investment income.
Even with the potential for softening economic conditions on the horizon.
In addition, our equity portfolio continues to show promise.
Solid execution, we intend to continue to manage the business for the long term with an emphasis on capital preservation and generating attractive risk adjusted returns.
Now I'll turn the call over to shell lead to provide some details on our financial and operating results Shelby.
Thank you Ed and good morning, everyone I'll review, our third quarter results in more detail in close with comments on our liquidity position. Please note I will be providing comparative commentary versus the prior quarter Q2 2019.
Total investment income was 19.2 million for the three months ended September Thirtyth 2019, a 1.1 million increase from Q2 2019.
Interest and pick income increased by 1.6 million, primarily due to incremental assets under management.
The income increased by 42 million in Q3, which is more than offset by a point 7 million decrease in dividend income related to an episodic dividends from our equity investment in synergy declared in Q2.
Total expenses, including income tax provision were 11.8 million for the third quarter, approximately 3.4 million higher than the prior quarter, primarily due to an increase in incentive fee.
Capital gains incentive fees increased 2.6 million an income incentive fees increased by 49 million, both primarily related to overall appreciation of the portfolio in Q3 versus the write down and new nonaccrual status of our investments in Oaktree Medical Center in Q2.
Interest expense increased by 44 million and base management fees increased 5.2 million, which were offset by a point 5 million decrease in DNA expenses in Q3.
Q3, typically has the lowest DNA expenses in the fourth quarter, we will incur annual estimated excise tax expense.
Interest expense includes cash interest amortization of deferred financing costs as well as any commitment and unused line fees.
As of September Thirtyth 2019, the weighted average interest rate on our outstanding debt was 4.6%.
As of September Thirtyth, we had 343 million of debt outstanding comprised of 157.5 million if thats the debentures 119 million a public notes.
Exactly 5 million outstanding on the line of credit.
In Q3, we repaid the remaining 21.3 million of Sta debentures for our first FDIC fun and surrendered RSP IP license.
Our debt to equity ratio with 0.85 times.
For six times statutory leverage excluding exempt SBH debentures.
Net investment income arena for the three months ended September Thirtyth was 7.4 million or 30 cents per share versus 39 cents per share in Q2.
Yes, it and I was 35 cents per share in Q3 versus 34 cents per share in Q2.
Adjusted EBITDA is defined as net investment income, excluding any capital gains incentive fee expense, a reversal attributable to realized and unrealized gains and losses on investments.
Reconciliation to then it to adjusted it I can be found in our earnings press release of issued yesterday afternoon and is also focus on the investor in stage of our website.
For the three months ended September Thirtyth 2019 by this out approximately 10.6 million of net realized gains primarily relate to the exit of three of our equity investments as discussed.
We incurred point 2 million of realized losses on extinguishment of debt related to the repayment of SK debentures and associated accelerated amortization expense.
Our net asset value as of September Thirtyth, 2019 was $16.47 per share versus $60.29 per share in Q2, an 18 cents per share increase highlighting the overall health of the portfolio at benefits of our equity strategy.
Turning now to portfolio statistics as at September Thirtyth, our total investment portfolio had a fair value of 729.4 million consistent with our debt oriented investment strategy our portfolio on a cost basis was comprised of approximately 13% firstly that 57% secondly that 20.
Once the <unk> percent subordinated debt and 9% equity security.
Our average portfolio company investment on a cost basis was 11.1 million at the end of the third quarter, which includes investments and four portfolio companies that sell their operations during the process of winding down.
We have equity investments at approximately 92% of our portfolio companies with weighted average fully diluted equity ownership of 6%.
Weighted average effective yield on debt investments was 12.3% as of September thirtyth.
The weighted average yield is computed using the effective interest rates for debt investments at cost, including the accretion of original issue discount and loan origination fee, but excluding investments on nonaccrual if any.
Now I'd like to briefly discuss our available liquidity.
As of September Thirtyth, our liquidity and capital resources included cash to 17.5 million and 33.5 million at $6 million of availability on our line of credit and FMC three debentures, respectively, resulting in total liquidity of approximately 57 million.
Subject to Sta regulatory requirements that approval, we have access to 167.5 million of additional Sta debentures under our third FDIC license.
We're pleased to report that is October we completed a public debt offering at attractive pricing, we issued 63.3 million in aggregate principal of 5.375% notes due 2024, raising net proceeds of approximately 51 million, including the exercise of the over allotment option, which was used to pay.
Down the line of credit.
Going into account subsequent events, including the net proceeds from the debt offering and repayment of the line of credit. We currently have 120.2 million of liquidity now I will turn the call back to add for concluding comment Ed.
Thanks.
As always I'd like to thank our team and the board of directors at fighters for their dedication and hard work and our shareholders for their continued support.
We'll now turn the call over to Josh for today Josh.
As a reminder to ask a question you'll need to press star one on your telephone.
Your question press the pound Keith.
First question comes from Robert Dodd with Raymond James You May proceed with your question.
Hi, I'm just just some questions that on on your comments about the potential softening economic conditions on the horizon and then most of the activity.
In the quarter was follow one.
Two two credits on the obviously you know very well, let you other than the new ones.
That you have to do deals and so I mean is there any.
Connection between the two that has there been a shift that we should expect on a on a forward basis to maybe more follow ones in the near term because you know them Bedouin and the economy's, a little lumpy certain versus new accredit sweat.
That is implicit in the more risk.
Sure Great question, Robert you from a economic conditions perspective, obviously, we've been.
Thinking about it for three four years quite frankly.
The economic cycles long in the too.
What we have seen in our portfolio is slower growth, but it's still in the growth mode.
And so with that I'm, just there is an appropriate level of caution as we enter a new investments and in particular.
Actually companies that have more cyclicality inherent in their business models are ones that were generally staying away from.
In terms of the fact, we only have one new investment.
You know we had a couple of push out we've had a deal recently that didnt qualify from it we won the deal and we're doing diligence and we kind of backed away.
So we are being obviously very prudent.
With.
With the capital base in in being careful as we move forward, but I don't I do think deal flow is quite good right now, but I'll tell you qualities hit or Miss and were.
We're being very careful as we move forward and we're not doing is chasing deals even good deals from a price perspective, we're trying to be very prudent and.
I think thats would that reflects.
Got it cut I appreciate that and then just just Uh huh.
Oh, I am really hard question to as always we payment side I mean ex the.
The the realized gains right easy repayments on debt investments in the quarter was quite low.
Well it typically low last quarter. This well I mean is there anything.
The magnetic going on that things are getting hard for people to meet fiery. So the the cycle stretching a little bit or is it just the normal okay, it's impossible quarter over quarter.
One moment. Please please standby.
[laughter].
[laughter].
[noise].
Hello.
Hello can you get.
Hey, Robert.
We didnt thing, but it sure went dead correctly, so I'm not sure what happened apologize about the yeah and then.
Did you did you cut off the flats that.
I asked about repayments I don't know if I heard the end of the question those about you up resign.
I was just about that meet payment number of an ex the gains the debt repayments in the quarter was quite low and they were last quarter of as well relative to some recent quarters. I mean is there anything thematic going on though is that just random necessarily payments.
I think it's the randomness of repayments what I will tell you is for.
A large majority of our deals both on the.
Run into the business mean originations and repayments.
They are M&A related and so it's somewhat somewhat episodic from that perspective.
Yes, when we have companies that.
Our pay down a bunch of our debt in de leveraged to where they can access the portfolio companies can access a much lower cost of debt capital that happens from time to time.
But you know in this case and just you know is just not a lot of M&A activity.
Where we had debt investments so that's what I would say from that perspective.
Got it. Thank you and then just on on on Greenfiber I've been you. Obviously, you took control of it the this quarter, it's been a a bit of a problem assets.
A few quarters. So was there anything that precipitated the action this quarter and in terms of [laughter] that made couldn't taking control attractive or was that just a timing thing as well.
I don't know it was the timing thing it was to be honest in the works for quite a while.
We were in a situation where the quite frankly, the private equity group.
Did not have a lot of capital left in the funded they invested out of.
And we work through this over a period of time it took longer than it should have unfortunately, but that's what happened they did and best of small dollar amount and this so they're still involved in the with the company, but we did invest the majority of the capital and did take control of the of the business on a go forward base.
Yes.
The you're right the company's had numerous and I'm not going to get into just exhausted units events. If you will.
That impacted the performance, having said that it's a niche leader.
It has real presence and its marketplace and it's a it's a company that you know we think has some staying power and that's why we invested in it and.
You know our hope is that there are better better times ahead, but it remains a fluid situation. Obviously, we've kept it on nonaccrual did pay our cash portion of our interest this quarter, but we've kept it on non accrual for obvious reasons and.
So.
Our hope is that we see good improvement year over time.
Got it got it okay I appreciate it that's all my questions. Thank you.
Great. Thank you are talking to you.
Thank you. Our next question comes from Ryan Lynch with KBW. You May proceed with your question.
Hey, good morning, Thanks for taking my questions first one when you mentioned your your EBITDA cash ratio, while still at a healthy level of 3.3 times. This quarter, you and had a pretty meaningful drop from 3.8 last quarter can you just talk about what drove that change.
Sure sure that's very good question Ryan.
And it's multiple things and I'm, probably not going to go into all of them, but what I'd say is the biggest changes that pinnergy is no longer part of the equation. So this is an average right.
End of our portfolio is almost like treating the portfolio as one.
One company, if you will and energy that has a larger EBIT da than average by.
Multiples.
And a very nominal interest expense left the equation and that's the biggest thing I think.
I also would say over the last several.
Over the last year, we've done more senior debt.
And unit tranche investing and those cases.
Obviously, there is more cash pay.
Theres no pick in those and those investments and.
And so I think theres, a myriad of things here that the taken place, but the biggest one is energy.
And that's because energy debt paid in Q3, that's right that's right.
Okay that makes sense, thanks and energy.
One kind of kind of longer term question, if I just look at.
The equity as a percentage of fair value of your portfolio over the last several years. It has grown from kind of the.
Okay 10, 11% range in 2015 to all the way.
17, 18 percentage this quarter dropped down about 16%.
I would assume that theres been no change in your investment philosophy that you guys try to take some equity positions.
And.
Debt deal that you guys do the growth of that equity portfolio over time is there anything changing over the last several years as far as.
Act equity investments, just now taking a longer time to be able to exit those positions or whats really accounting for the growth of that that portfolio in relation to maybe that the timing or ability to access those.
Sure sure Great question.
With 60 companies or close to 55 call. It that where we have equity investments every situation is obviously a little different so it's hard to generalize I will tell you obviously, our two largest equity investments today have performed extraordinarily well.
And I will say in both cases, there they are not owned by financial sponsors.
We do not control those exits and so those are companies are performing very well, but you know it takes a.
Collective group to engineer those exits on those and then the rest is our and kind of leads into a little bit of the conversation we have with Robert regarding repayments.
Lot of the time, not always by long stretch, but a lot of the time you know we.
We see our debt investments through the maturity or through the.
The exit of the equity as well.
And that does take longer in some cases in the lower middle market and.
And I think our debt turns overlap. So I did I think the you know the length of time, where our equity investments are out our outstanding is just a little bit longer in this market than you might find in the the broader markets.
That's that's the only thing I can think of.
But I do the same time, we're pleased that we.
We've had for exits here recently, we do have.
Several companies that are evaluating strategic alternatives as we sit here today.
But you know that's too early to tell if those transactions will take place we went for before in the last four months or so which is great.
But who knows what happens here going forward.
Sure and yes, certainly recognize that that part of the growth of that bucket is due to the success of those equity investments you know one an increase in fair value. So it's certainly been out a good driver value for shareholders.
Just one last one maybe Shelby you mentioned, an excise tax in a in the fourth quarter I believe last year. It was just around 700000.
No.
You have any sort of estimate for for what you're expecting in the fourth quarter for the excise tax.
I would expect it to be called at around 350000 give or take.
Okay.
Alright. Thank you those are all my questions I appreciate the time today.
Sure. Thank you Ryan good talking to you.
Thank you. Our next question comes from Mickey Schleien with Ladenburg You May proceed with your question.
Good morning, Ed and Shelby Lauren.
I wanted to start of was a top down question. So when we look at the performance of larger companies much larger companies that you're investing in.
We're seeing consistent sort of deterioration in their fundamentals and that's showing up in metrics like downgrades of leverage loans and.
Declines in revenue growth and margins on the other hand, I think as you've pointed out the middle market continues to plug along and do fairly well some interested in understanding would you think is causing that divergence.
That's a tough question Mickey I am.
You know what we are seeing an answer across the board I mean, we really I mean do you see pockets of you know whether a company that.
Manufacturing company has some exposure to tariffs at the end of the day that we see a little bit that yes, but nothing thats overly alarming, that's usually hitting margins more than anything.
Do we see a little bit a slowdown in certain regions. If you will.
On the building products side, I'd say, yes, but it's nominal.
So we are I mean, what we're seeing is continued slow growth in all the different pockets I do think it slowed down I do think earlier in the year there was a.
You know kind of a slowdown on the industrial side of things and we also have seen that.
Our logistic we have a large logistics investment.
Company that does a lot of third party LTL as well as overnight and the company is a good company and continues to grow whereas the industry, obviously slowed and actually backed up a little bit earlier in the year.
But that company for us is continuing to grow so I don't know that I can I'm trying to just go through it here a little bit with you, but I think what we're seeing is high quality businesses that add a lot of value to their.
Sectors into their customers.
Our continuing to thrive in this environment in the lower middle market and.
Finding ways to perform though I do think growth has slowed a little bit definitely from last year and clearly there was a little bit of a slow down earlier in the year, but it's pretty stable at the moment.
If I can follow up and.
Presumably the the middle market and lower middle market companies. Ultimately you know or are related to the larger companies. They may be selling to those larger companies for example.
In your experience is there a point, where we do see a trickle down and and more of an impact or.
Could it be that the companies that you're targeting and many other bdcs are targeting.
Generally are focused on us business and relatively speaking use business is doing better than international and large companies have more exposure international.
I think thats a very good point.
Mickey I do think we are focused on U.S. companies are really a 100% today I mean, clearly some of those companies of international business, but.
We I think that is a extremely good point I think the other thing.
One of the tenants of our investment strategy and we talk about it is invested in companies that have.
More recurring revenues and recurring cash flows in nature.
And so I think that also helps you know companies that are either have a lot of aftermarket content, if you're more on the manufacturing side or.
You know or software names, if you think about it subscription names things like that which is something we focused a lot on here recently I think part of our performance from a portfolio company perspective is the types of companies that were investing in I think thats. The other piece of the bundle.
Okay. That's that's helpful. Just a couple more sort of.
Housekeeping questions I noticed that you reported unrealized depreciation on your debt investments of about 25 million and I just want to confirm that that was a function of the impact of declining interest rates on your fixed rate investments or was it something else like perhaps accruals for prepayment fees.
I don't think we did.
There are.
May have to get back to you on that I don't think we had.
Debt overall that backed up.
We clearly had a couple of names that.
Backed up a little bit and those are more.
Individual situations, where the just more levered today and type of thing than they were last quarter, but.
Joe He's looking inside.
Some information, but I don't think we had.
On the debt side actually we had appreciation as we think about it.
Right Thats that was my question you had appreciation and I just wanted to know understand if that's just a function of movements in interest rates or something else, but we can talk about that offline lastly outstanding.
It's not movement in interest rates I think it's just performance of those companies.
And lastly, I think previously you've talked about a target leverage ratio. This would be total leverage of 0.72 0.9, so you're sort of in that range. Now is that still your target and do you have a target regulatory leverage ratio that you can share with us.
I don't.
I don't think we have a specific target regulatory I think we'd like to position there were a big piece of our dad is SP IC Democrats treated as equity for regulatory purposes, I don't we don't really targeted number there given.
We're so far away from any regular regulatory concerns I would say on the gap leverage that you will we are more.
<unk> 0.7 to one is how we're thinking about it from a target perspective.
<unk> 0.8 to one.
And so that's that's that's where we are at the moment from 11 target perspective, we have a little bit of room to run.
You know.
That's it for me. This morning, Thanks for your time I appreciate it.
Thank you, making appreciate it.
Thank you. Our next question comes from Chris Kotowski with Oppenheimer. You May proceed with your question.
Yeah. Good morning, you mentioned that you paid down and surrendered your first SVR. She license and I was wondering was that a.
Prerequisite for getting the new licenses finalized and can you update us in general on your where you stand in your process with the yesterday.
Sure sure no. It was not a prerequisite and we just to be honest what happens if you don't pay it down the only can pay back debentures twice a year lenses.
Is the end of August and the other ones at the end of February and so.
The other time period, and so we obviously took advantage of that we didnt want it because if you have repayments in the interim the gas just sits there and so you can repay that capital. So is a good time to get a rebate.
And it was not a prerequisite for the third license we received the third license in the Q1 I think.
So we have that it's up and running and.
And but it was not a prerequisite no.
Okay, but you haven't been drawing on the third license is there more to do there.
No we have drawn on the third life and we have seven a half million of SBH debentures outstanding on the third license.
Okay. We're in we're in the very early stages of a of building that building that out.
Okay, and then you know given the then notes offering I assume the immediate use of proceeds to pay down the credit line, and then but and I guess.
It was were modeling out the next couple of quarters and if we're assuming some asset growth.
Just what should we expect on the funding side to the equation should we expect most of the incremental funding to come.
From the DSP debentures or should we expect the just the drawdown on the credit line from here.
I think I think it'll be a majority of of it will probably end up being a drawdown on the line of credit would be my guess, but clearly we are looking for.
Opportunities.
Quite frankly assets that qualify for the VA program.
And when we when they do qualify them, we will obviously use.
That capital, but I would think a majority of will be line of credit.
There may be two thirds or kind of thought process.
Alright.
That's it for me thank you.
Thank you, Chris you're talking to you.
Thank you. Our next question comes from Tim Hayes with B. Riley FBR you May proceed with your question.
Hey, good morning, guys. Thanks for taking my questions. My first one just a follow up on Chris is question there on the SBA debentures at what what's the cost of drawdowns today, and how does that compare to your blended cost from across the street facilities.
So clearly, yes, we I see that is definitely more attractive in terms of or the cost to capital. So its rounds I think it was that our weighted average cost capital in our guessing FC I'd add is about 3.3 versus 4.6 on an overall basis.
And on also keeping in mind, we just did.
No the baby bonds, so we might see the 4.6 pick up to about 1.7.
Florida.
Okay.
And then I wanted to circle back on the question about equity position exits specifically as it relates to energy and fans deal.
I understand you have now might not be the right time and that it isn't necessarily in your control to exit these positions, but how do you had any more conversations with new third parties, whether it be companies interested in M&A or investors potentially maybe looking to take down some of your equity just wondering if these conversation.
And have progress or have you gotten any new ones and are actively working towards that.
Yes, I think the way to answer that is we are I mean I think.
The two names are different as you think about I mean.
Pinnergy, obviously in the oilfield and services.
Performing very well.
But it's a tougher time in that industry the sectors into that a bit of a Malays as you well no.
And so you know working on that is we've got to be patient is how I would think about it.
It's still yes, there are discussions that we are having on a variety of fronts, but I, there's so but theres no telling me exactly where that ends up so were we are working actively on the.
The equity portfolio and looking for ways to.
Monetize it where where possible, but it's it's.
Sometimes easier said than done, but we are we're working hard at it in.
And hopeful that we can make some progress on the overall portfolio you know in the medium term if you will.
Mhm Okay.
Makes sense and I guess in that vein you know just thinking about the dividend interest income was up a good amount this quarter as you've got a full quarter's worth of impact from last quarter's growth and then it looks like a good amount investment activity. This quarter is in the first half of the quarter and then you mentioned you rotate out of some of the smaller.
Equity positions I know you still a good amount of wood to chop, there, but adjusted NII I still came in well below the dividend and I understand the and dividend income can be lumpy as well, but just wondering what your confidence level is on your ability to eventually earn the dividend with adjusted NII and if there's any.
You internally on potential timeframe.
Sure.
Great question, Tim I think there there are two things we need to do.
To get back to covering comfortably and one is we need to grow the portfolio a little bit.
And we are working to do that but we're doing that in a very.
Deliberate manner, if you will and cautious manner. So we're not in a rush.
And but we do think does there will be opportunity over the next you know.
Four or five months to to get the portfolio to a level that we're happy with.
In the second piece of the puzzle is rotating some of these equity investments into.
You know into debt investments or income producing assets and.
So it.
That is a harder.
Equation dissolve and one that is multifaceted in many cases were not in control of that as I mentioned earlier I do think we have several companies the.
Our evaluating strategic alternatives right now so we're hopeful some some.
Good events take place, but that is something we do not control at all.
And then we're doing what we can as well.
And in different situations to try to monetize some equity investments because its critical but I I think it's a tougher piece due to a of the puzzle dissolve and it's one we're not going to.
You move towards in a really.
Irrational man or we're going to right. We're focused on the the long term and long term performance and we want to do it in a very deliberate manner and so.
Yeah, that's a tougher one to answer we're best we can can answer that.
Yeah, so in a manner.
Understood just good to get your thoughts around that Oh, sorry shall be God.
So to say it in the meantime, we do have very healthy amount of spill over income in terms of 69 cents per share.
Right.
Got it thanks.
Good point, where we are obviously have a fair bit a comfort of where we sit here today.
Got it but I appreciate the comments around that and then just turn it back to your your comments about maybe expecting softening economic conditions.
You know you've been going more first lien over the past several quarters I know you mentioned some of the steps you're doing.
Two I guess approach that type of environment, but would you say that going more first lien reflects you guys getting more defensive and on the other hand as many of your other lower middle market lending peers focused on first lien debt does that create opportunities for your second lien strategy.
Sure I'll take that last one first I think it does we are continuing to see second lien.
You know investment opportunities.
Earlier in the year, we had a fair number of a new deployments very high quality situations that.
We were pleased with I think the.
The quality over quantity mantra is definitely there has been there for a long time for us and so thats what you'll see.
As we move forward, but we're clearly still looking for a second lien investments, but its you know it's more episodic and then first lien is.
We are finding.
Nice opportunities either in a first lien dollar one or situation where were the last out we originate the paper and we bring in a someone to play a first out piece of the of.
The transaction.
We are seeing a a fair number those opportunities in the marketplace today and in obviously and that's what you're you're seeing is we're having good success. There. So I think we're looking for both.
And but it's it's more episodic on what deals come in that quarter. So.
Okay got it and then just one more for me.
Around Nash.
When you say you know you're expecting are preparing for softening economic condition is there an internal view that there'll be a big inflection in 2020 I know you also mentioned you've been kind of preparing for this from several years now, but if that's the case what would your outlook for M&A, an exit events being that type.
One.
Sure.
Great question I think.
It's obviously, we were concerned about a slowdown the slowdown has occurred I.
Obviously, the fed is being pretty aggressive and out in front of it and that's helping a little bit in the U.S. continues to chug along relative to the global economy, that's slowing down a little bit more our hope is that it's a softer landing and we don't have anything that's.
You know that.
Anything that's really.
That really hurts the credit World. If you will and we're we're as Weve been careful when we just didn't want to take chances to.
That were.
They were aggressive and we were depending on a soft landing type of thing. So we've been very careful for a.
Long time, so the types of businesses I mentioned earlier these more recurring revenue businesses think software or companies that are aftermarket you know on the manufacturing side. So thats, how weve been trying to play it we're not seeing as I mentioned earlier, we're not seeing.
Any real problems from.
In India.
Tree segments or overall just performance. So we feel good about that you know how do I think the m. in a world right now dealflow as good as I mentioned earlier quality has been hit or Miss and we are very much staying on the quality.
The high end of the quality spectrum, if you will.
I do think as we move towards an election, you know I think m., a naked slow down a little bit.
But the economy right now and what we're seeing as it's pretty vibrant from A.M. and they activity or eliminate opportunity perspective, and you were obviously, hoping to participate in some of those opportunities but.
I think what I'm seeing right now is I think the election could be a period of time, where things do slow down as we get closer to it.
Okay. Thanks for the comments I appreciate it.
Thank you appreciate it.
Thank you are next question comes from Bryce row with National Security see my proceeded your question.
Great. Thanks, good morning.
The morning Bryce.
And he wanted to I, just get a little deeper on the the Monetizations.
Topic, obviously, a strategic Taiwanese executed on here. This past quarter I was I was curious you know looking at the <unk>.
Equity portfolio and some of the you know that I guess, the right up on a handful of your equity investments from you know from second quarter to third quarter. It. It does that reflect yeah, maybe the ongoing.
Process easy that that that you mentioned in terms of.
<unk> particular companies you know exploring strategic options.
In a k. and one or two situations the answer that would be yes, you know where we've you know have some knowledge of a process and again it's.
<unk> across diseases, you well no it's really hard to tell it to deals are going to happen or not but there's there's some numbers that are being thrown out and.
Situations that are you know are positive relative to a where we entered those investments for sure from a multiple perspective and and those we we have reflected that in our you know in in our evaluation to a certain extent. So there is some of that.
I wouldn't say overall, that's what's happened, but there are a couple of names where that's.
The situation.
Okay. That's great I think all the other topic I wanted to cover was well covered to appreciate the thanks.
Thank you Bryce the talking to you.
Thank you as a reminder to ask a question you will need to press star one on your telephone please stand by only compiled the CUNY roster.
And I'm not showing any further questions at this time I would now like to turn the call back over to Ed Ross CEO for any further remarks.
Thank you Josh and thank everyone for joining us. This morning look forward to speaking with you on our fourth quarter call in late February .
Have a great day integrate weekend.
Thank you ladies and gentlemen, this concludes todays conference call. Thank you for participating you may now disconnect.