Q4 2019 Earnings Call

Acquire operator assistance during the conference. Please press Star Zero on your telephone keypad today's call is being recorded at a replay will be available approximately two hours. After the conclusion of the call on the company's website at Www Dot Bering Sea DC Dot com under the Investor Relations section.

Please note that this call may contain forward looking statements that include statements regarding the company's goals beliefs strategies future operating results and cash flows.

Although the company believes these statements are reasonable actual results could differ materially from those projected in forward looking statements. These statements are based on various underlying assumptions and are subject to numerous uncertainties and risks, including those disclosed under these sections titled risk factors and forward looking statements in the Companys annual report on form 10-K for the fiscal year end.

December December 31st 2019, as filed with the Securities and Exchange Commission Bering Sea D.C. undertakes no obligation to update or revise any forward looking statements unless required by law at this time I will turn the call over to Eric Lloyd Chief Executive Officer for bearings BDC.

Thank you operator, and good morning, everyone. We appreciate everyone joining us for today's call. Please note. The throughout this call will be referring to work fourth quarter 2019 earnings presentation is posted on the Investor Relations section of our website.

Oh, the cold today, I'm joined by bearings, Bdcs, President and co head of global private finance in power, all Mcdonnell managing director of portfolio manager.

How are you want great.

She was chief financial Officer, Jonathan Bock.

In the jobs for your fourth quarter results provide work it out in a few minutes well begin todays call with some high level comments about four.

Please turn to slide presentation reconsider your fourth quarter High works overall results were consistent with the third quarter as we increased proprietary after exposure remained active in reducing or broadly syndicated loans.

I've mentioned on prior calls our investor rampant study and deliberate.

Since August 2018, we've invested approximately $660 billion and middle market investments, averaging $110 billion per quarter.

Middle market investments totaling 165 million fourth quarter of 29 team.

Additionally, remembers fourth quarter originations I hope the 169 billion of net broadly syndicated loan sales repayments, bringing our total beautiful exposure to below 50% of the portfolio at December 31st.

I want to 2020, we remain on track with the study deliberate transition.

I think the average $100 million are proprietary origination per quarter and normalize markets to drive us towards our 8% yield expectation.

For the quarter NAV per share was $11.66 increase primarily by appreciation of our broadly syndicated loan portfolio. While our net investment income was 15 cents per share driven by sales are broadly syndicated loans late quarter middle market loan fundings and lorillard work.

We continue to have no long ball nonrecurring and the overall credit performance of our portfolio remains strong.

Our middle market does portfolio was valued at 99.9% of cost at December 31st and are broadly syndicated woke up one it was probably that 96.5% of cost.

The PEO soldier boy appreciate appreciation was widespread with 80% of <unk> positions of increasing the value during the quarter.

We did recognize 2.9 billion of net realized losses on what sales within our broadly syndicated loan for boys during the quarter as we continue to analyze this portfolio and the market, we will actually the DSL position that along and we believe we can realize a higher risk adjusted return on the capital by reinvesting in another position.

On slide six we summarized from additional financial highlights for the last five quarters.

Yeah, we'll discuss market conditions in more detail no bigger investment pace is always measured against the market opportunity set.

The direct lending environment today require significant investment discipline, a wide frame of reference at a high degree of shareholder alignment to be successful.

Bearings as a 338 billion dollar investment manager has a large investment funnel across global markets and books Wassa classes. Additionally, our unique ownership by massmutual and commitment to industrialize <unk> what is to create a remarkably fee structure with a high investment hurdle low basebands would be no upfront fees.

The script that this structure gives us more flexibility to generate attractive risk adjusted returns to investors well at the same time focusing on high quality true first lien senior secured investments.

Before turning the call over to the Oh continue at this point of alignment and provide an update our share repurchase program. Please turn to slide seven.

As a reminder, the share repurchase program, we announced for 2019 and reach or repurchase up to 200% outstanding shares when bearings BDC stock traded at prices below NAV repurchase up to 5% outstanding shares the event to start I'll turn the prices low 0.9 of them based on our Charlie levels the top.

Hi, good amount worked with Nike repurchases was 4.5% of outstanding shares we reached that target generating seven cents per share of NAV appreciation for the year I'm also happy now that our board has improved to share repurchase program for 2020 operation the company to repurchase up to a maximum of 5% of the outstanding shares.

During the year shares trade below NAV.

Subject to liquidity and regulatory constraints.

With that Oh at the end to provide an update our investment portfolio and trends, we're seeing in the middle market.

Thanks, Eric and good morning, everyone jumping to slide nine you can see a summary of our investment activity for the fourth quarter.

New middle market investments totaled 165 million the sales repayments of 28 nine.

As you can see from the trend over the last six quarters, we have maintained our expected 100 million poorly middle market loan origination pace.

Funded by DSL sales and borrowings under our credit facility.

New investments included 15, new platforms and a follow on investments.

Five of these investments for European platforms, and we expect to continue ramping in Europe as we see very favorable terms in that market and believe it is an excellent way to diversify the bdcs portfolio.

On Slide 10, you can see that at the end of 2019, we were invested roughly 606 million of private middle market loans and equity, which included 49 million of unfunded commitments liquid broadly syndicated loans were down to 510 billion, which as Eric mentioned makes this the first quarter.

Directly originated portfolio exceeded our BSL portfolio.

Our portfolios high quality with 97.6 senior secured first lien assets the weighted average senior leverage for the total portfolio remain consistent with last quarter and 4.9 times <unk>.

Focusing on the middle market portfolio statistics as of year end, our 557 million funded no market portfolio was spread across 53 portfolio companies as compared to 422 million across 38 portfolio companies that uses a third quarter.

Underlying portfolio company fundamentals remain strong with weighted average senior leverage of 4.7 times and weighted average interest interest coverage of 2.7 times.

Oh, the 53 middle market investments.

If you want more first lien investments to we're selectively chosen second lien term loans comprising less than 1.5% of the portfolio.

Average spreads were up this quarter from 519 basis points at September Thirtyth to 528 basis points at December 31st.

Despite the increase in spreads overall yields remained flat at 7.2%, primarily as a result of lower life or.

A substantial portion on the spread increase was due to higher spreads associated with the five new European investments.

As we've said before our focus continues to be on credit spreads if that is ultimately our compensation for risks our middle market portfolio remains well diversified as the 53 investments are spread across 17 industries.

No single investment exceeding 2.3% of the total portfolio [noise].

Turning to Rvs Alf portfolio weighted average spread was 349 basis points and yield at fair value, 5.6% at December 31st.

Consistent with the middle market portfolio, well the spread was up 329 basis points at the ended the quarter.

The yield remains flat at 5.6% due to lower LIBOR.

As Eric mentioned as part of our liquid exposure, we did recognize 2.9 million losses on the sales have a selection DSL.

Subsequent reinvestment that capital, including 1.5 million related to the sale of a portion of our position Mallinckrodt, which we believe our positions and portfolio for appreciation going forward.

Our top 10 investments are shown on slide 11, and reflects another aspect of the overall diversity of our portfolio as the top 10 positions represent only 20% of the overall portfolio.

Turning to slide 13 of the presentation here you will see two graphs showing direct lending volumes in spread differentials between unit tranche and traditional first lien secondly structures.

The first key takeaway here is a well bank led syndicated no market loan volume was down in the fourth quarter. It was one of the past quarters since 2014 for the direct lending market.

Sponsors focused on direct lending execution to reduce risk.

By volatility in the first lien secondly market with a particular focus on unitranche transactions in the fourth quarter.

This shift stands out if you look at the graph on slide 14, which shows unitranche volume by quarter with a fourth quarter hitting an all time highs for both middle market March corporate deals.

With a shift in the focus of capital heavy managers to large mega Unitranche executions, we've seen a positive dynamic in the middle of the middle market for transactions that allow us to be selective.

Better access to deals across the spectrum within our target markets.

Our fee structure does not for us I see you're chasing return with higher risk and our focus is a principal investors to select the best risk adjusted return.

On Slide 15, you can see that as you know tranche volumes have increased spreads have fallen reaching historic lows at the end of 2019.

Well this graph this not break out the spread space on company size.

The unitranche spread compression is clearly more impactful for higher EBITDA companies.

Spreads for other structures generally increase during the fourth quarter, highlighting the importance of focusing on each individual issuer and structure when pricing risk.

Looking ahead.

We continue to remain highly selective keeping a tight focus on our core sponsors end markets across the U.S. and Europe. This investment frame frame of reference allows us to continue the pace of our shift from BSL to middle market and proprietary assets without an overemphasis on.

On product.

The gore or geography.

In this market, we cannot stress enough the value of choice and with a large investment funnel across high quality Obligors desperate Astra asset classes and this geography.

We continue to be deliberate and focus on deploying capital to achieve strong risk adjusted returns.

I'll now turn turn the call over to John to provide more color fourth quarter results.

Thanks, and good morning, everyone on Slide 17, you can see to bridge the company's net asset value per share from September 30 into December 31st 2019.

Is there pointed out our NAV was up by eight cents this quarter to $11. A 66 cents per share. This increase is primarily due to net unrealized depreciation of 13 cents, partially offset by six cents of net realized losses, both of which were primarily attributable to activity in the DSL portfolio.

Our net investment income for the quarter matched the dividend and our share repurchase program resulted in one cents accretion.

As previously stated our board approved program for 2020 to purchase up to 5% of our outstanding shares demonstrating our long term alignment with shareholders. Additionally, buying our shares below net asset values accretive to all shareholders and demonstrate our belief in our own underwriting.

Slide 18 to 19 show our income statement balance sheets for the last five quarters I like to highlight a few items here.

First our total investment income decreased approximately $900000 compared to the third quarter like war and the timing of our continued portfolio transition led to lower interest income one time fees also declined as we had no middle market investment repayments in the fourth quarter second on the expense side lower lives were helped total.

Interest expense decreased by $226000 quarter over quarter, despite slightly higher total borrowings well our base management fee was virtually unchanged for the quarter Gionee expenses were up by approximately $115000 also lets not shown separately on slide 18, you will see on the income statement in our form 10-K that.

The net realized and unrealized losses on foreign currency transactions totaled approximately $1 million for 2019. These foreign currency transactions relate only to our foreign currency borrowing and hedging transactions and will not ship well not reported separately. Please be aware that the net realized and unrealized gains.

On investments include approximately $1 billion related to foreign currency appreciation for those investments summit. The net impact of foreign currency fluctuations was effectively zero or neutral for 2019, which we would expect given our hedging programs in place including for borrowing foreign currencies.

Fine foreign currency investments.

You can see on slide 19, our balance sheet trends as putting our short term investments total investments at fair value were down approximately $30 million compared to the third quarter due to the rotation out of Rps helped portfolio as can often happened at the end of the corridor, our cash and short term investment balances at year end were transitory.

And primarily result of quarterly BSL sales, where we were taking advantage of favorable market conditions.

A portion of these proceeds was used to partially we pay our BSL credit facility in January.

During the fourth quarter, we lowered the commitment on this BSL facility from 177 to 150 million and further lowered it to $80 million subsequent to quarter end to rightsize the facility relative to our remaining DSL portfolio last week. We also extended the maturity of that the self facility by one year to August 2021.

And also during the fourth quarter $22 million at the CLL class eight one notes, where we paid bringing the total CLL debt principal down to 318 million at year end details on each of these borrowings are shown on slide 20, and our leverage as of December 30, Onest 2019 was 1.17 times.

4.9 times after the adjusted cash and short term investments as well as the net im sale transactions.

Slide 21 updates are paid in announced dividend since bearing took over as the advisor to the BDC, We announced yesterday that our first quarter 2020 dividend a 16 cents a share will be paid on March 18 to 2020. This marks our sixth consecutive increase and aligned our dividend what the earnings power in the portfolio.

And as you think earnings trajectory in 2020 remember that when we closed the transaction in August 2018 to become the external manage the BDC, we implemented a fee structure that steps up to 1.375% in 2020 from 1.1% to 5% in 2019 and 1% at the onset.

We are now more than halfway through the ramp to our directly originated portfolio and at year end only about 150 million of the remaining 510 million BSL portfolio was held outside of our static CLL.

Our portfolio ramps continued in 2020, and slide 23 summarizes our new investment activity since the start of the new here.

Since Jan one we've made approximately a 108 million up new middle market private debt commitments of which 73 million have already closed end fund as well as buddies approximately 5 million for previously committed delayed draw term loans.

Assistant with our investment tenets. These investments were primarily first lien floating rate loans with an average three your discount margin of 6.2% and were split roughly two thirds. The last one third in Europe.

Moving to slide 20 for the current bearings global private finance investment pipelines approximately $609 million on a probability weighted basis and is predominantly first lien secured across a variety of diversified industries. As a reminder, this pipelines estimated based on our expected.

Closing rates for all deals in our investment pipeline.

Finally, I'd like to provide an update on our joint venture with state of South Carolina retirement system.

As mentioned on prior calls this vehicle allows us to leverage the broader bearings platform and increases the investment diversity within the BDC.

We ramped the vehicle it will drive shareholder returns through the effective use of our nonqualified asset bucket by investing in a wide variety of liquid and illiquid assets across multiple geographies at year end. The bdcs investment remain $10 million as we continue to ramp the JV portfolio using its subscription leveraged facility.

That portfolio was about 94% first lien senior secured assets with roughly 70% of the portfolio invested in the lesson, 30% in Europe.

Liquid assets made up the bulk of the portfolio at 80%, while the remaining balance of illiquid assets being 40%, 6% Europe.

Middle market loans at 37% U.S. middle market loans, as well as 17% in private asset backed securities and we expect a joint ventures wise investment frame of reference we'll try to uncorrelated returns over time, and we continue to evaluate opportunities in areas such as European credit structured credit and make investments in these areas when they.

We have attractive risk adjusted return profiles and with that operator, we'd like to open up the line for questions.

Thank you, ladies and gentlemen, we will now be conducting the question and answer session.

I'd like to ask a question. Please press star one on your telephone keypad the confirmation timely because your line is my question Q you May press star to if he would like to remove your question from the Q.

All participants using speaker equipment and may be necessary to pick up your hands up before pressing the star keys one.

Well for questions.

Thank you. Our first question comes from the line of Finian O'shea with Wells Fargo. Please proceed with your question.

Hi, Good morning, Thanks for having me on a first of all ask Eric on the earnings ramps you opened up talking about the spending on pace.

And and that is outlook should continue.

On the earnings sense.

So it's.

Obviously since you took over here LIBOR has moved against you and others.

Theres probably a.

You probably have a more cautious outlook today at this point.

In terms of taking on risk so how would you.

How would you describe to us.

No you're positioned to ramp and grow earnings.

Over 2020, given todays real time market environments.

Okay.

You're right then I mean, obviously LIBOR has moved against US which has made a challenging kind of philosophically.

I'll address it and then kind of get more specific you know from day, one I've said to shareholders that we're not going to reverse solve for what assets, we need to generate in order to hit a certain targeted aro is.

You know that just so I think leads people to chasing risk in order to generate a certain return we come out the other way, which is we're going to do what risk we think as a prudent risk adjusted return forgiven asset and look at that brand from an asset level. So as we sit here today right with our or pre buy.

Idled.

Spreads the or are we would be more challenging than would have been 18 months ago now a balanced that with one of the benefits of the entire bearings platform, which is something that in these kind of markets really can benefit shareholders right. We have added in Tom's here recently, we have a really large liquid.

Investment platform that is able to capitalize on market volatility and technicals in the market you combine that with a very strong special situations group that has proprietary asset flow the combined really attractive yields for assets and that come into the portfolio.

Third leg of that could be are structured credit business right and in these type of markets. When you see loans. So off materially you can see certain triple B Tran through this year lows really trade off materially in some cases, even more so with those technical bigger broad attractive returns.

Our balance all that out to say that are only source of opportunity isn't just the middle market direct lending, it's really the power of the $330 billion platform that we have.

As we sit here today, John referenced the pipeline and he and I mentioned the market. Obviously a lot of people are putting a lot of transactions on hold right people are unsure of what are the economy is going to look like or or.

Oh, thank drivers, it's a lot of unknowns right now and so is it a more challenging environment most likely over the course of the next month or two whatever period of time for direct originations yeah, it's likely to be a more challenging period of time that has been in the past, but I don't believe that means that they are not opportunities for us on our platform to invest and.

So I can't tell exactly what that means as far as what that Aro hearings will be but I think frankly these times of volatility.

Really play the flavor of someone like our platform.

[noise] I appreciate that color and your willingness to go across two platform more liquid businesses and take advantage.

[music].

With that I'll ask I'll ask a follow on for E and you gave some context on.

European assets improving your spreads.

Can you.

Give us color on what sort of like for like.

Risk premium you get on on a you know say apples to apples European versus U.S. deal today.

Yes shirts and good morning, So a couple things first of all.

As I mentioned, it's important just in terms of diversification accessing that market from a portfolio construction perspective, so theres theres that benefit today, if you actually look at B b assets themselves basically in the your European markets.

It's the deals that we do in that market. The deals that are done in that market are maybe you know a quarter of a turn to maybe half a turn deeper in terms of senior leverage with no leverage behind it. So it's it's one tranche with higher spreads and higher Oh I DC Foy. These in the European deals are about a one.

Three basis points more on average than our North American deals and if you just think about the velocity that's occurring in the market whether it's here overseas in terms of the average duration of these loans compressing.

From three to have to four years on average to two to three years on average now getting that that pickup in no I'd actually retort creates a return live.

Sure.

Appreciate that and thanks for taking my questions.

Thank you. Our next question comes from the line of Kyle Joseph with Jefferies. Please proceed with your question.

Hey, good morning, guys. Thanks for taking my questions and why I commend you on the ongoing sharing purchase activity.

I'd like to start out just on yield dynamic in the quarter.

Reported yields appeared pretty stable I know you mentioned there with them.

As they come back waiting in terms of the middle market origination can you give a sense for that.

Any any color there like 75% of the deals were completed in December or something like that just to get a sense for yield dynamics in the quarter.

Yeah sure. This is a block Kyle so to number one do you see the over $180 million BSL sales.

There's a two part two part equation right, new reducing BSL consistently throughout the quarter.

Heavy announced early and say roughly two thirds of our deals closed.

Near the end of December right. So you start to find that double whammy on both sides led to the timing difference.

As well as in as little more pressured earnings so for us.

Thats, probably good round numbers to look at care for the fourth quarter.

That's helpful.

Okay.

Oh man.

Next question.

As we think about the forward curve.

Think about your your balance b cells versus middle market loans.

From a modeling perspective, how are you guys thinking about consolidated yields going forward and I guess, maybe helpful to talk about this sort of corona buyers to impact.

Yes, the unknown right. So again I think.

He had mentioned that.

Really focus on his credit spread and upfront fees and basically the combination of those two things.

And I'll go through we don't think the winning model is to play the interest rate game and kind of take the gas or speculation on what those interest rates or you look at our blended spreads from Q3 to Q4, the blended spreads increased from four owed to the other Q3 to 443 agenda Q4.

That's correct, we can control that what we can't control is what's going to happen in live war or other situations like that. So then then we have to look at getting back to the volatility question what opportunities does that provide we also know that we have a target Toro read that we want to generate for shareholders of what were the single largest one by a large margin.

I want to generate that for ourselves too and so thats, where I think the comments I made earlier defense question around the platform and the other places that we can find attractive yields that can complement and helped offset some of the pressure on earnings and return that might work ridge.

That's very helpful. Appreciate the time and answering my questions. Thanks, guys.

No.

Thank you. Our next question comes from the line of Robert Dodd with Raymond James. Please proceed with your question.

Hi, guys I've I've got a couple that first yes congratulations.

Thanks.

Extending the a the repurchase plan I think that that's good fit shareholders of which as you know the biggest what.

Next on Kalona virus, it's early days I'm, all cobot 19, or what I'm supposed to call. It. It's early days, obviously right now.

I can give us any carla on on potential.

Portfolio impacts, obviously, you don't lend directly to Chinese companies. So all but you know, it's expanding but my China from Im trying to it but if I look at sea getting a top 10 industries for example, a.

The top 10 investments at transportation cargo now I presume those on shipping coming a container ships and.

Applying the a the China U.S., but.

But any color you can give us on on the sensitivity.

To the supply chain, the in direct impact et cetera [noise].

Hey, Robert it's Derek I'm going to take a crack at this at first then I'll turn it over to it and see if Tom has any comments also so let's take a step back person and I know this provided the third time I'm now going to reference the platform and the benefit of it.

Haven't investment office in Shanghai, We haven't <unk> investment office in Seoul, We have a large investment office also in Hong Kong, So our access and knowledge in those Asia Pacific markets is materially different I believed in a number of other managers, who have a very domestic centric focus the only information, they're getting us through potentially portfolio company.

Which are maybe getting a second or third hand from somebody else. So again I think our from knowledge is one that I think of brings to bear so what does that mean as far as you know specifics.

We look at it across the liquid and illiquid asset classes, because those same impacts the impacts could be the same in some cases. They also could be different in some cases right. It more typical bit our larger companies a company with five six 700 million EBITDA, it's going to have a more global type of revenue source as well as potentially more global type books.

Supplier source, you balance that with our middle market companies are more typically to have a U.S. centric revenue source and potentially a more limited supplier source. They also probably have lost they also have less resources to adjust towards potential challenges. So what are we both been focusing on you did it on supply chain really.

How far off the supply chain, Jim can we go to kind of get information.

I'd go down the path or sharing what our teams in China and the like.

Communicated to us because I think thats, the information that we need or.

Cheaper than within the bearings family, but I can tell you that we're all over it.

What we haven't done as speculate as to what exactly is going to me for a given Trump and you hit the logistics fights companies right, obviously goods moving around the world is going to slow and so there are going to be an impact, but we just don't know what that is today I'll come back to the last point on diversification I believe our large.

This position in the portfolio is about 2.3% or so right from day, one I've made the representation that we're going to run a highly diversified portfolio.

The expense of ramping faster right, we could have put larger holes into the BDC ramp more middle market assets that would have helped ROI. We Oh, we were Walker, we would open up with a position that was 5% or 6% or 7% and that's inconsistent with how we believe portfolio construction should be done.

Yes, I think I think aired hit on all the key points and obviously the situation is fluid and expanding we had our team do a review of the portfolio months ago.

With companies that had any exposure to any supply chain Kelly from from China. Some of this gets back to just slight good underwriting because you have any company out there that is locked into one source of manufacturing or one source of supply without diverse.

Vacation, that's just not a really good credit and I know of one company in the margin on our portfolio and went to market and as they went to market, 100% of their manufacturing and will on and so obviously that deal was coal.

And so.

We don't have any companies in our portfolio with like material direct.

Exposure to China, and we were in touch with management teams in terms of of our portfolio companies to make sure that they have plans in place to the extent that they have any exposure to two grown a virus issues and again I come back to portfolio construction that Eric mentioned.

And good underwriting.

We added deal in our investment committee other days, a commercial cleaning business hundred percent of its revenues us.

Domestic.

But you need to look at do they have a concentration in.

Legs as God forbid somebody happens in L.A. in and that market shuts down everyone goes home. So it just becomes back to diversification within the portfolio within the companies.

Yeah, I'll, just I'll chime in as Tom will chime in from the high yield sign. So we're seeing now yesterday really first cracks in our market with real real selling I think it was very orderly for the first couple of days a week.

So now we're starting to see a little bit more of a sell off in loans on the high yield side. So what we're doing evaluate clearly there's a you've kind of a first order impact I'll call with travel companies Airlines gaming companies things like that that immediately are backing up in price and then the second order impact which were trying to evaluate which is sort of the summer.

Fly chain, and then concentration to customers in China, you know the broadly syndicated market is more of a worldwide market. So youre going through all that now and so what we're doing the team in our sectors are just going through you know names that we've clearly identify that may have an impact right and so identify where where they sit from liquidity perspective, whereas leverage.

What kind of sponsor support might be there. If this thing turns into more of a prolonged and a situation where they see massive disruption in revenues and cash flow.

Lastly, I would say is if you're going to have disruption from the middle market perspective, it's fair to have it.

In the slow part of the year first two quarters than than the last half of the year, which is where we pick up most of our volumes.

I I appreciate that color, well really really helpful and kind of.

Then flows into to the next question I know you talked about the platform and the potential to take take.

Advantage of some market disconnect with the.

With in the liquid side or special situations or things like that and I know yet you know.

Generally in the business a market timing, but obviously there is a disconnect going on now.

At what point would you be either that those are the avenues and not something if it's really exploited within the BDC yet.

What time is appropriate to do that given.

As the old catching a falling knife thing and we don't know level. This stopped so how bad going about it gets.

Yeah, Roberts's, Tom I'll wait and that is we're kind of actually going through that right now and so we've got a targeted list of names and we watch bids fall away for some of these names it might not even necessarily be impacted by by the situation right. So you've got outflows now occurring out of mutual funds EFS potential forced selling of names right now it hasn't.

It's not really broad across all sort of.

Ratings categories. So we're looking at that first we've got a number of of names that are on our target list of that we have target prices for and so as the beds back up on those we see the conditions.

If you can favorable for those kind of purchases were in the process of actually doing that right now and Robert This is box. So on slide 15, just to take a look is one illustrative example, well we outlined there is it spreads that occurred in middle market. So those are produced by refunded and as well as overlaid the credit Suisse Levered loan index, a single week one.

And it's really important I know you've heard Eric can you mentioned it we are principal investor first and so when you think about how were owned right, where where loans effectively go we always have a view that one we should never take liquid term and liquid price and put it in guild liquid wrapper.

So to that point, you've lost the true value of illiquidity and so if you look in the fourth quarter of the 18, you can see win win win that yield gapped out and liquid market oftentimes the middle market doesn't move as you start to have to ask yourself a question as to which is better from a relative risk relative value perspective and that's.

Very important because right now it all you are as monochromatic in your focus and all you see as black and White direct lending. This is a world of Technicolor and it requires a very wide frame. So that you cannot only price your middle market loan appropriately, but then look to Tom or other areas of the platform that can generate good risk adjusted return.

Just going to wrap it up with hundred Sterling, Tom and John said and all I can tell you is we won't get it perfect right.

Look at an opportunity and if we think the right entry point is 75 or 80, and Thats, a really attractive place to invest in that we're going to do that and if that means the next trade downs five points that's life.

We can't control, but where we can control is where we under it and the risk return. We think is attractive at that time and the technical will be what they are.

Got it.

Okay that color one more if I can on on the.

The unit tranche versus first lien second lien kind of synthetic blend.

Obviously, the eight unitranches gotten.

Competitive.

Shall we say.

So to to a degree that there may not be.

Ed Van eight eight total return premium.

Which is arguable in the first place when you look at your portfolio, obviously, you've been in a more on the on that the kind of the traditional firstly do you think you know is anything changing ignoring that that the cobot stuff and everything else right now.

Anything changing in terms of your appetite to do first lien versus second lien versus unit tranche, given that's been though those putting big dynamic shift in effective spreads et cetera.

In the fourth quarter.

Yes, Great question, Robert and so just just a couple things one that the key is when you think about portfolio construction is to really focus in on the credit metrics. We've laid out so when we build that portfolio, we're trying to get to around four and a half time.

As average weighted spread in the portfolio that will include some deals that are deeper in the capital structure and will include other deals that are not as deepen the capital structure. It all boils down to the opportunity that you're looking at and making sure that you're getting paid for the risk I think what we're really trying to avoid here and the kind of use.

No one dimensional seem even within the middle market is making sure that we're getting a price for the risks that we're taking so to the extent, we see an opportunity and then example, I think I've used in the passes.

Software deal, that's 20 times enterprise value in someone's out there with a seven times units Raj, we want to bifurcate that risk because seven times is not senior debt RIS and so we want to bifurcate into a firstly and secondly, and then we'll pick which sizes more attractive and we'll look at both sides of that equation, that's where we.

Differentiate as a capital solution provider as opposed to someone that's force based on their fee structure and their return on need to go out and just push unit tranche and the problem that you're seeing in this market right now is as everyone's force in that type of structure, there competing on price and when you see.

Unit tranche that used to carry a premium over traditional firstly and secondly completely a road that that premium and art is even now being priced less than that you know at the end of the day, what's really been given up as you're not getting paid for that imply junior capital risk.

Got it I appreciate it thanks, a lot guys.

Thank you. Our next question comes from the line of Casey Alexander with Compass Point. Please proceed with your question.

I have.

Three quick questions one the European loans that you've been originating input on balance sheet. This quarter should we expect to see some or all of those matriculate into the JV. After they've spent a quarter on the balance sheet.

Yeah Casey Great question. This is box. So so the answer is no not not all what we're doing is there is an important part we're trying to manage the 30% bucket test. So you can probably see will take some greater than 50%, but not but not all effectively being transferred because our goal is to make sure that one we want exposure.

Right and we can get exposure to these asset class two way through our equity investment in the JV as well as having some given right now we have no.

Ample capacity in the 30% bucket owning some on the BDC balance sheet as well just also being smart to pace the growth of the bad asset bucket to make sure that it's in line, but still delivering that return so expect the transitions down but also.

But do not expect full sales.

Okay, great. Thank you secondly.

While the topside limit of the share repurchase program.

Continues to be 5% it looks like some of the technical language has changed could you explain has the share repurchase program become more tactical in what what.

Way is the share repurchase program changing sure well number one I think if you remember last year, where we had outlined very programmatic means to repurchase shares where we purchased 2.5% as shares above the navy.

Five in half a 5% of the shares below any d. and we looked at in on a daily basis terms of where the stock price traded to determine that number a number one right. We establish that program our commitment to use to outlined we can do what we say we're going to do right. Because there is often times situations, where folks are happy to announce share buybacks, but not execute them.

We would expect a similar level in similar focus in 2020 as we didn't 2019. However, once you start to see the geopolitical effects that are occurring as well as a potential for volatility in the markets. It's really important to make sure that we have free range to to make sure that we're going to maximize the ability to repurchase those shares at the right price for you.

Having understood that we do what we say, we're going to do which we demonstrated in 2019. So there is little bit attached to it but are underlying philosophical view of finding investment opportunities in our assets as well as our own shares hasn't changed.

Alright, great. Thanks for that and last question.

And I guess this is kind of the million dollar question is.

We're clearly seeing some on settlement in the markets and if spreads start really blowing out.

And obviously it looks like cost of liabilities may even be decreasing more would you be willing to considering the fact that those spreads are widening in the broadly syndicated loan market also lever up a little bit higher to take advantage of spreads blowing out Oh Wow.

The cost of liabilities is low.

Yep.

Yes, I think thats exactly the way, we thinking about managing.

Premier business and so we took I'm going to take a step back fourth quarter, Tom and team as they saw the technicals and broadly syndicated loan market to be attractive they sold reasonably aggressively into those attractive because that's really benefited us as we sit here right now at sub one to one leverage right, which is lower than what we've said, we buy target or go to it.

So it gives us what's this code or quarter turn or so of flexibility that we could capitalize on these technicals without having to sell anything.

Which would benefit shareholders, but I want to make sure. We're really clear that we'd have no intention to discuss aggressively increased leverage into this kind of technical dynamic right I think the optionality of having that leverage the optionality of cushion rehab optionality. The diversification that we have on our liability structure or all positives I think upgrades the flexibility to do that.

When the times right.

Alright, great. Thank you very much that's all my questions.

Thank you. Our next question comes from Robert Brock with West family investments. Please proceed with your question.

Good morning, and thanks for taking my question could you talk a little bit of two things one LIBOR floors and is there any pressure to remove them at all and how long they've gone.

Secondly, could you talk a little bit about whether the kroner virus, if you've seen any signs affecting your businesses, particularly those in Europe and third maybe just generally you're talking about your spreads could you just talked about a little bit how the evolved over the fourth quarter. I know you gave a number for the three months, because which direction script, you're going thank you very much.

It's in Fowler I'll cover the first two and let others.

Jump in so in terms of.

The European.

Assets. There are that we went through the same exercise there that we went through with our North American portfolio. There are no material issues with any those portfolio companies and like I said earlier this is a fluid and.

From a geographic standpoint, expanding situation. So it is dynamic we're looking at the portfolio.

Constant basis and were in touch with.

Management teams in the portfolio and make sure that.

They had plans in place of their directly impacted.

Turning to the LIBOR floors majority of our companies do have enjoyed at about 1% floor in the portfolio I think where you start to.

To lose that floors, when you move up market and it's one of the reasons why we stay in the middle of the middle market.

Now I'll just highlight because we have spent that much time talking about our European business rolled back to when we closed on the transaction in August 28, Jane You said you at that time, there are certain industries that we don't like to invest in retail restaurants oil and gas.

Certain certainly airline type of companies in the like right that's consistent in our European business too. So these companies that are in there are higher free cash flow type services. They are not restaurant retail.

Gathering places for individuals and so the consistent credit mindset that we have.

You asked as applied to our European business also.

Finally, Robert in answer to your question on spread so we continue to see spread both stable to slightly increasing the way, we outlined slightly increasing it given the mix shift with ASEAN outlined focus on Europe right. When you start to see the ability to deploy it attractive risk adjusted returns there strong allied ease and strong DNC you end up finding that really the.

Overall portfolio mix moves higher as Eric outlined moving from a for a two to 443 basis points over live work and then also on new investment deployments, given Europe that part of that transaction dynamic we're seeing roughly 525 at higher we've been very very fortunate to see spread stable to increasing even while linerboards decline.

I just want to wrap up on the spread one goes up a little ones I'm going to sit here and say well next quarter is going to go from for 43 to four six to its going to be what its makes most sense from a risk adjusted return opportunity in the market no back to where I started which is we're not going to reverse solve for an asset flow that fits a search.

Return profile, because I think that can this lead you to change to chasing risk rather than having the discipline what makes the most sense and I mean, I think we're going to continue this environment, we'll see some spread.

Widening potentially but if we sold certain amount of assets into the JV the European assets that have a little higher spread and the U.S. flow is not as strong and we don't see the opportunities that I referenced earlier in more discounting broadly syndicated loans or special situations and maybe that that for 43 numbers for 40 and they reinforce the I don't know would it.

But as the ones that we've highlighted this I don't want people to model with a 40 basis point increase into the next quarter, because that's not how we run our business.

Any other questions.

Okay with that just wanted to say thank you again. Thank you for your support and trust in US in 2019, as we sit here going into 2020.

No that were being good stewards of your capital and know all these questions around Florida buyers and other things.

We're all over that from a platform perspective, but really making sure we're managing a portfolio prudent when I think dr. comments I made a couple of times right really starts with underwriting as Ian said, and then really starts with diversification and prudent portfolio construction.

And I know at times I can be frustrating as far as this piece a pace of the ramp but I think the flexibility that we generated by running right now at less than one to one leverage.

Having single waters acid be 2.3% of our portfolio really puts us in a good position for whatever the situation might be I can't promise with the LCOS will be but believe we enter that in a strong position. So thank you for all your support.

Ladies and gentlemen, this does conclude today's event. We thank you for your participation and you may disconnect. Your lines at this time.