Stephanie Paré Sullivan - Chief Compliance Officer, Chief Legal Officer, General Counsel and Secretary Sam W. Tillinghast - Co-Chief Executive Officer, Co-Chief Investment Officer and Member of Investment Committee Christopher J. Flynn - Co-Chief Executive Officer, Co-Chief Investment Officer and Member of Investment Committee Terrence W.

Olson - Chief Operating Officer, Chief Financial Officer, Principal Accounting Officer, Treasurer and Assistant Secretary James K. Hunt - Chairman.

Leon G. Cooperman - Omega Advisors, Inc. Douglas Mewhirter - SunTrust Robinson Humphrey, Inc., Research Division Gregory Nelson - Wells Fargo Securities, LLC, Research Division Troy L. Ward - Keefe, Bruyette, & Woods, Inc., Research Division.

Good morning, and welcome to THL Credit's Earnings Conference Call for its Third Fiscal Quarter of 2014. It is my pleasure to turn the call over to Ms. Stephanie Sullivan, Chief Legal Officer and General Counsel of THL Credit. Ms. Sullivan, you may begin..

Thank you, operator. Good morning, and thank you for joining us. With me today are Sam Tillinghast and Chris Flynn, our Co-Chief Executive Officers; and Terry Olson, our Chief Operating Officer and Chief Financial Officer. Also joining the call is Jim Hunt, our Chairman of the Board.

Before we begin, please note that statements made on this call may constitute forward-looking statements within the meaning of the Securities Act of 1933 as amended.

Such statements reflect various assumptions by THL Credit concerning anticipated results, are not guarantees of future performance and are subject to known and unknown uncertainties and other factors that could cause actual results to differ materially from such statements.

The uncertainties and other factors are, in some ways, beyond management's control, including the factors described from time to time in our filings with the Securities and Exchange Commission.

Although we believe that the assumptions on which any forward-looking statements are based are reasonable, any of those assumptions could prove to be inaccurate, and as a result, the forward-looking statements based on those assumptions also could be incorrect. You should not place undue reliance on these forward-looking statements.

THL Credit undertakes no duty to update any forward-looking statements made herein. All forward-looking statements speak only as of the date of this call. A webcast replay of this call will be available until November 14, 2014, starting approximately 2 hours after we conclude this morning.

To access the replay, please visit our website at www.thlcredit.com. With that, I'll turn the call over to Sam..

Thank you, Stephanie, and good morning, everyone. Thank you for joining this morning's call, covering the results of THL Credit's Third Fiscal Quarter of 2014.

Our earnings announcement and 10-Q were released yesterday afternoon, copies of which can be found on our website, along with the Q3 investor presentation that we will refer to during this call. I will be providing an overview of our quarterly financial performance and our investment pace as well as a few financial highlights.

Chris will be discussing new investments and overall portfolio. Terry will take us through our financial performance in more detail, and Jim will offer some closing remarks.

We finished the third quarter with 57 portfolio companies valued at $718 million, after investing $40 million in 2 new transactions and follow-on investments in 8 existing portfolio companies. Realizations and repayments were $65 million for the quarter.

Although our portfolio experienced marginal contraction during the quarter, new origination opportunities, screened across our 5 office footprints, were higher. Our continued focus on identifying opportunities that match our strict underwriting standards for appropriate risk-adjusted returns led to a lower hit ratio.

Our underwriting standards have remained consistent and have not changed in this recent period of tightening spreads and higher leverage levels. Philosophically, we do not intend to grow for growth's sake, but instead, we invest when we see opportunities that provide our shareholders with what we believe are attractive returns.

In the fourth quarter, for example, we've seen more opportunities that match our requirements, and as a result, we have deployed capital at an increased pace. So far in the fourth quarter, we have made $76 million of new investments and follow-ons and had $23 million of notable prepayments in sales.

Being patient investors can result in growth that can be lumpy at times, which is the nature of a more mature portfolio and of investing in the middle market, in general. Slide 10 in our investor deck shows the lack of correlation between the value -- between the volume of new investments and repayments as we have grown our portfolio over time.

As you can see from the trends in our portfolio mix, we continue to find the most attractive opportunities and yield profiles in secured investments, whether indirectly originated first and second lien positions with appropriate lender protections, or in last-out unit tranche structures.

In addition, we have recently seen attractive equity co-investment opportunities in both preferred and common equity securities. Now to discuss a few financial highlights from the quarter. Net assets as of September 30 were $450 million or $13.29 per share compared with $13.28 from June 30.

We are proud of the growth in our net asset value from $13 per share at the time of our IPO in April 2010 to its current level, which you can see on Page 16 of our investor deck. Our book value reflects the preservation of shareholder capital, a modest level of retained earnings and accretive capital raises since our IPO.

We are pleased with our financial results this quarter.

Our net investment income for the quarter was $0.36 per share compared to a dividend of $0.34 paid at the end of September, and we are pleased to announce that on November 4, our Board of Directors approved a quarterly dividend of $0.34 per share for the fourth fiscal quarter of 2014 that is payable on December 31.

The overall strong performance of our portfolio continues to provide us with a reliable earnings stream to support our dividend. A summary of our earnings and dividend history is reflected on Page 15 of the investor presentation.

As you will see, we have consistently paid a dividend that is generally in line with our earnings, and we expect to continue to do so. Now I'll turn the call over to Chris to talk more about Q3 investments and the portfolio..

Thank you, Sam. As you can see in our press release, we made $28 million in new investment in 2 companies, Virtus Pharmaceuticals and A10 Capital. Virtus is a pharmaceutical company focused on marketing and distribution of generic prescription products to wholesalers and chain drug stores.

A10 Capital is a specialty finance company originating commercial real estate loans. In addition to these investments, we made $12 million in investments in 8 existing portfolio companies related primarily to revolver and delayed draw commitments funding growth and acquisition initiatives. The weighted average yield on Q3 investments is 11.8%.

This percentage is an increase from both Q1 and Q2. In particular, our Q3 investment in a subordinated debt preferred equity in A10 contributed to bringing up our weighted average yield for the quarter. The weighted average yield on all of our income-producing investments in the portfolio as of September 30 was 11.3%.

Notable assets in the third quarter, which provided accretive fees, included the repayment of our second lien investment in Tectum and TriMark as a result of acquisitions, and the prepayment of our subordinated loan in Trinity as part of a refinancing.

You will see in our Recent Developments section of our 10-Q that we were recently repaid a second lien position in Surgery in connection with an acquisition, and we also sold one of our CLO and -- holdings and a portion of our investment in Expert Global shortly after quarter end. Sam mentioned the credit quality of the portfolio.

I'd like to highlight more in terms of credit quality and provide some color on our non-accrual investments.

As of September 30, 80% of the companies in our portfolio, on a fair value basis, received either a 1 or 2 credit score, which means they are meeting or exceeding our underwriting expectations; as of September 30, one investment with a credit score of 4, Express Courier, and one with a credit score of 5, Wingspan.

Both these investments remain on non-accrual at the quarter. C&K Market previously had a credit score of 4 but has improved to a 3 in Q3 based upon its successful emergence from bankruptcy in August and the stabilization of its financial performance.

Our position was converted to a controlling equity position in connection with the asset from bankruptcy, and is no longer included as a non-accrual.

We noted briefly on Express Courier in the past that we have worked and will continue to work closely with an active and supportive sponsor of the company through a period of financial stress over the last several quarters to stabilize the business. We remain optimistic that we'll recover our capital on this investment.

At the end of the third quarter, our subordinated investment in Wingspan remains on non-accrual status. Shortly after quarter end, together with the senior lenders, we led a recapitalization of the business. Dimont & Associates, previously a subsidiary of Wingspan, became an independent company.

We converted all of our subordinated debt in Wingspan to a controlling equity investment in Dimont in October, and provided approximately $4.5 million of subordinated debt capital to Dimont in connection with the recapitalization.

Similar to C&K, we'd see our controlling equity interest in Dimont putting us on a path to potentially exit this investment in the future at return multiples that preserve shareholder capital. In terms of liquidity, we continue to use both capacity on a credit facility and proceeds from repayments to fund our investment opportunities.

We do not intend to issue stock below book value. We intend to be patient in exploring equity offerings until the combination of pipeline and new investment opportunities in the equity markets allow us to issue shares accretively. As of September 30, our debt ratio was 0.63x, down from 0.7x at June 30.

We continue to be comfortable operating in the 0.6x to 0.75x debt-to-equity ratio, given our current portfolio mix with 72% of our investments in first and second lien securities. With that, I'll turn the call over to Terry to talk about our financial performance..

Thanks, Chris, and good morning, everyone. I'll talk briefly on some additional financial highlights. Net investment income for the quarter was $12.2 million or $0.36 per share.

To highlight the net investment income drivers, we generated $23 million in investment income in the third quarter, of which $20.1 million was from interest on debt securities, which included $0.5 million of PIK interest, $700,000 from prepayment premiums.

We also had $1.8 million from interest income from other income-producing securities, $200,000 from dividend income, and other income of approximately $1 million, which included $700,000 of fee income from our managed funds and accounts and $300,000 that was related primarily to commitment and other administrative fees earned from our investments.

During the quarter, we incurred $10.9 million of expenses, which included $2.9 million in base management fees, $2.3 million in administrative and other G&A expenses, $2.7 million in fees and expenses related to our credit facility, and $2.9 million of incentive fees, which included a small reversal of GAAP incentive fee for a benefit of less than $100,000.

In addition, we recorded an income tax provision related to our dividends and earnings on our equity investments held by blocker corporations as well as on excise taxes related to undistributed taxable earnings totaling $100,000.

During the quarter we also recognized net losses on our portfolio investments of $777,000, primarily related to a $1 million loss on the extinguishment of debt and conversion to equity of C&K Markets, offset by approximately $150,000 in gains from the sale of our remaining interest in Blue Coat.

The C&K loss was offset by an increase in unrealized appreciation. Lastly, we had a net change in unrealized depreciation on our investment portfolio this quarter of 500,000 -- of $0.5 million during the quarter.

This was driven largely by changes in the financial performance of certain companies and the reversal of net unrealized depreciation of investments prepaid or converted to equity in connection with the extinguishment of debt previously mentioned. And with that, I'll turn the call over to Jim with some concluding remarks..

Thanks, Terry. As Chairman, I wanted to share how pleased the Board of Directors and I are with the transition of the business to Sam's and Chris's leadership as co-CEOs. THL Credit remains well-positioned for accretive future growth for our shareholders.

The current market demands the most selectivity by prudent investors than we have seen in recent years. The team has remained true to THL Credit's hallmark of prudence, patience and strong, consistent underwriting. You have heard us say previously we are not legacy investors.

As Sam mentioned earlier, we invest only when we see opportunities that provide the shareholder with an attractive risk-adjusted return.

In sum, THL Credit remains well positioned as a differentiated lender in the middle market, with its deep relationship across the national origination platform that feeds a strong pipeline to capitalize on a market that will continue to grow because they're being underserved by banks, particularly in light of the new leveraged lending standards.

And with that, I'll turn the call back over to Sam..

Thank you, Jim. At this time, we'd like to open the line for questions, operator..

[Operator Instructions] Our first question comes from Lee Cooperman with Omega Advisors..

You've answered actually most of the questions in terms of the rate you're putting money out at.

I'm just curious on -- do you think that the return on equity that we're generating presently is a sustainable return and therefore, the dividend at the current level is sustainable?.

Lee, this is Chris Flynn. Yes, from our perspective, we do. If you look at the overall yield on the portfolio over the last 3 quarters now, we're seeing positive upticks, and quite frankly, we're just being more disciplined in how we want to put capital out. So we want to make sure that risk-adjusted return holds steady..

Do you have additional borrowing capacity that you could leverage?.

We currently have some capacity under our existing facility, Lee, that we continue to do -- use as well as we continue to use the proceeds from natural portfolio turnover, and we also have -- more broadly have probably, I'll call it, greater than $75 million in positions in the portfolio that can provide a level of liquidity as needed when we saw our opportunities..

Well, I guess people just want a higher return, but we're doing fine. You're doing a good job. I appreciate it..

[Operator Instructions] Our next question comes from Doug Mewhirter with SunTrust..

Most of my questions have been answered by that pretty thorough overview. The first question -- and I'm not even sure if this would affect you, but I know that there's -- talking about stricter CLO regulations in terms of how much you have to retain.

I know that you're mostly actually an investor in CLOs, but I know you also have the Greenway fund relationship. I just didn't know if any of that would affect how you approach or participate in a CLO business, or even if there is any indirect effects upon your business..

Doug, it's Sam. In terms of the effect on Greenway, there really is no effect on Greenway in terms of the CLO risk retention rules. I think, overall, it really doesn't affect the BDC. I think there is some speculation out there in the market, I think, that maybe spreads widen over time as, perhaps, there is some future consolidation among CLO managers.

I really don't think that will affect our markets. You know those rules don't take effect fully for 2 years, and I think it's a stretch to think that it would -- that whatever might happen there would trickle down to the lower middle market..

Okay. And probably, a question that's been asked on every BDC conference call.

I mean, everyone has seen the volatility in the liquid markets, and I know you definitely have much smaller targets than those big leveraged loans, and it's sort of different market, but has any of that macro pressure shown up in your spreads in terms of the new deals that you're looking at?.

Doug, this is Chris. It has to a degree. If you look at the band of the broader market, it obviously has higher highs and lower lows. The middle market is much more consistent. So maybe there's been a slight uptick in where are your pricing securities, but the middle market, in general, is just not as volatile, which we view as a positive.

It's still competitive, but it's not as volatile. Maybe you'll see 25, 50 basis points moving here or there, but not a -- it's not a material shift like you've seen in the broader market..

Our next question comes from Greg Nelson with Wells Fargo..

Just on -- obviously, your originations were a little light this quarter, but if I do the math and look at what you've done after quarter end, originations were up there above $70 million and then repayments were a little light. So I think if you calculate pro forma leverage, it's kind of in the 0.74x debt-to-equity range.

I'm just trying to get a sense of how you're thinking about equity issuance. I know you mentioned generating liquidity from the portfolio, but I'd like to hear your thoughts..

I think we remain pretty true to the statements we've made in the past, which was we don't intend to issue equity below book value. We will continue to manage the portfolio and its turnover and capacity in our revolver to continue to fund new opportunities that we think are accretive to the portfolio in general.

So I would say our leverage stays probably just a click below the number you quoted based on the math, but again, we feel comfortable that operating at the high end of that range we quoted, and quite frankly, maybe even just slightly above it, it would be completely prudent given the mix of the portfolio today..

Great. And then just one question on the portfolio. One of your fellow BDCs wrote down a position in the CRS Reprocessing. Obviously, you guys are a little bit higher in the capital structure, but the rate on went -- the rate on that went from 10.3% to 12.5% quarter-over-quarter. They had a slight write-down in it.

I'd just like to hear your thoughts on that position..

Yes, this is Chris, and you're right, obviously, we're senior secured in that position. Given our position and the capital structure, we're more confident in the performance. The increase in rate just reflects the slight uptick in the near-term risk as the business kind of works through a couple of issues that have already been addressed..

Okay, but you feel good about the position, okay..

It's a well-levered position for us..

Our next question comes from Troy Ward with KBW..

Guys, if you can speak just a bit.

I know you guys -- Sam in particular, you have a Houston presence, and to just speak to the energy volatility that we've seen in the marketplace and obviously, over the last couple of years, the amount of new energy credits that have entered the middle market and credit spread -- credit across all the spectrum has increased in the energy space.

How does the volatility in the energy sector potentially impact your portfolio?.

This is Sam. We have 4 transactions in the portfolio that are in the energy space, and we've underwritten all of our energy deals in a certain way. We're first lien in all the transactions. There's no other debt in any of those transactions other than the tranche that we're in.

We're either the only lender or we're teamed up with one other lender in those 3 transactions. All of them are diversified across shale plays and basins. All of them have exposure to both oil and gas. Gas, as you know, had a big price correction just a few years ago.

So it's kind of already gone through the -- what oil is now going through, which is a massive amount of increased supply. So we feel like we're well positioned on those 4 credits. They are all sponsored credits with deep-pocketed sponsors behind us.

So we've really underwritten for this eventuality that oil could drop and we could see some stress to the system. We have seen a lot of transactions, as you say, over the last few years, and we feel like we've been very selective and very disciplined..

And what about more of an indirect potential -- the impact on your portfolio? Do you have any geographies that could be adversely impacted by continued pressure in the energy space?.

I really don't think so. I don't -- none really come to mind..

Okay. And speaking quickly on -- obviously, with both Wingspan and C&K, it looks like you took a long-term approach, and you're going through restructurings and hopefully be able to protect shareholder value with those credits that obviously didn't go according to the original model.

Can you speak to it in the current environment? Have you used the environment -- or to what degree have you used the environment to kind of cull the portfolio of potential issues in the future? Or are you more comfortable with just continuing to step in and do workouts and protect shareholder value that way?.

Yes, this is Chris. I think our portfolio, if you look at it, is primarily a buy-and-hold portfolio. We're either the sole investor, or 1 of 2 or 1 of 3 investors.

So our expectation is to the extent given the opportunity, we'll trim the portfolio if afforded the chance, but for the most part in these situations, we're underwriting these through a cycle.

If you take C&K, for example, obviously, it didn't perform as expected, but the investment thesis that the core business needs to exist and we have a business to restructure around as a debt investor has helped true to date, and I think that's reflected in the market we have in the portfolio.

From our perspective, the -- we're disappointed that went on non-accrual, but from a shareholder perspective, you want to make sure we get your capital back with some form of a return, and we think we'll be able to do that with what you said is the long-term process..

This concludes our Q&A session. I would now like to turn the call back to Sam Tillinghast for closing remarks..

Thank you, operator, and thank you, everyone. We do not have any closing remarks. We appreciate your questions and look forward to speaking with you next quarter..

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone, have a great day..