Stephanie Pare Sullivan - General Counsel and Chief Legal Officer Sam W. Tillinghast - Co-CEO and Co-Chief Investment Officer Christopher J. Flynn - Co-CEO and Co-Chief Investment Officer Terrence W. Olson - COO and CFO.

Troy Ward - KBW Kyle Joseph - Jefferies Andrew Kerai - The BDC Income Fund Doug Mewhirter - SunTrust Robinson Humphrey Leslie Vandegrift - Raymond James Christopher Testa - National Securities Jonathan Bock - Wells Fargo Securities.

Good morning and welcome to THL Credit's Earnings Conference Call for its second fiscal quarter 2015 results. 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.

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 SEC.

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. Our earnings announcement and 10-Q were released yesterday afternoon, copies of which can be found on our Web-site along with the Q2 Investor Presentation that we will refer to during this call.

A Webcast replay of this call will be available until August 14, 2015, starting approximately two hours after we conclude this morning. To access the replay, please visit our Web-site at www.thlcredit.com. With that, I'll turn the call over to Sam..

Thank you, Stephanie, and good morning everyone. As an agenda for this call, I'll be providing an overview of our current investment objectives and some quarterly financial highlights.

Chris will be discussing the portfolio and related activity including the senior secured Logan joint venture and Terry will take you through our financial performance in more detail, and I'll wrap up with some closing remarks. Our investment strategy can be summed up as the direct origination of senior secured loans in the lower middle market.

In our experience, winning the businesses with $5 million to $25 million of EBITDA in the lower middle market provides the best risk-adjusted returns. This market is where building trusted relationships really does matter.

While the lower middle market is competitive, it's not as competitive as the upper middle market where the return profile for private equity firms is often driven by maximising leverage and by financial engineering. In the lower middle market, the investment thesis of the sponsors is primarily based upon growth of the business.

To date, our BDC has closed 72 sponsored transactions with 46 different private equity firms across a variety of industries. Our five office footprint has allowed us to build strong relationships with sponsors who often have a preference to only work with a few lenders.

Each of our offices is staffed with a full deal team with deep ties to private equity deal teams in a local and regional basis. This origination and underwriting model leads to early looks on transactions and the ongoing dialog about opportunities in industries.

This further leads to our direct involvement in the initial structuring of transactions and in the creation of capital structures such that we are not so much buying loans as we are creating loans. Our efforts are also focused on investing in senior secured assets.

We believe the legal protections resulting from being secured and more senior in the capital structure will be of utmost importance in the next credit cycle downturn. While approximately half of our portfolio is first lien assets, we are also active in directly originating second lien assets.

In structuring each of our investments, we have focused not only where total leverage is but where our recovery in the capital structure begins as well as financial covenants.

In addition, it's important to note that unlike mezzanine investments, second liens are typically not subject to payment subordination or the blocking of interest payments by senior lenders and second liens have a claim on assets in the event of restructuring. Now briefly on some financial highlights and our dividend coverage.

Our net investment income for the quarter was $0.35 per share compared to an ordinary dividend of $0.34 paid at the end of June. We continue to consistently generate net investment income covering our regular dividend and provide a steady strong return on equity to our shareholders relative to many of our BDC peers.

Our net investment income for Q2 represented a 10.7% annualized return on our first quarter ending net asset value. As of quarter end, we have retained approximately $6.2 million or approximately $0.18 per share of undistributed net investment income on our balance sheet.

We have consistently and cumulatively covered our dividends with earnings since our inception over five years ago, and we are pleased to announce that on August 4, our Board of Directors approved a quarterly dividend of $0.34 per share for the third fiscal quarter 2015 which is payable on September 30.

Given the current equity capital markets are effectively closed to a number of BDCs, including ours based on where we are trading relative to our NAV, we continue to seek to optimize the returns generated by our portfolio and pursue ways to drive strong returns for our shareholders. We will look to do this in four primary ways.

First, we will continue to invest in Logan, our senior secured joint venture. Second, we will redeploy capital from exits of our larger equity positions over time into yielding senior secured loans. Third, we will continue to repurchase our stock as market conditions warrant.

And forth, looking ahead, as our external manager continues building its direct lending platform including the managing of private credit funds, we expect the expenses allocated to the BDC will decrease over time.

In addition to these activities, in order to construct an investment portfolio that is more easily understood by all shareholders and to increase our exposure to lower middle market senior secured loans, we will be exiting our CLO equity positions over time and as opportunities allow.

Both Chris and Terry will be providing more color in these areas shortly. Lastly, as we previously disclosed, our Board approved a share repurchase program that we began to execute in May. We repurchased 304,000 shares for $3.8 million reflecting a 6.2% weighted average discount to the March 31 NAV.

We will continue to repurchase shares under this program as market conditions and other factors warrant, thereby driving uncreative returns for our shareholders. Now I will turn the call over to Chris to talk about our portfolio..

Thanks, Sam, and good morning everyone. I will be discussing our portfolio and renovated activity concluding the Logan JV. In short, we invested $52 million and had $39 million of repayments and sales this quarter.

Overall, TCRD has deployed over $1.2 billion in investment since its IPO and has realized proceeds of $642 million from repayments and sales of these investments, generating an aggregate growth IRR of 18% on fully exited investments with 95% of these investments producing a 10% growth IRR.

As Sam mentioned, we are confident that the best risk-adjusted returns for our portfolio are generally higher in the capital structure. Investments in senior secured loans will continue to be a focus going forward as we recycle capital from repayments, which over the last six quarters has averaged approximately $51 million per quarter.

As noted in our press release, although we are very pleased with the performance of our CLO equity investments, we expect to exit these structured credit products and some of our larger common equity investments over time as opportunity allows. This will provide as with capital to redeploy in senior secured loans.

We recently sold two of our CLO positions post quarter end. We also expect that some of our older vintage subordinated debt investments held since 2002 will roll off over time as a result of improving economic outlook and active refinancing market.

In addition to more senior term loans, we will continue to invest in our Logan joint venture which is invested primarily in senior secured loans and provides an accretive earnings stream to our shareholders. The $776,000 of dividend income earned during the quarter represented a dividend yield of 11.1% based on average equity invested.

As of June 30, we had $36 million of BDC capital at work in Logan. Given our targeted leverage levels and borrowing base considerations, we believe we have enough capacity to grow the BDC position in the Logan JV to approximately $100 million with no additional capital raised at the BDC.

At the fund level, through June 30, the Logan JV portfolio consisted of 68 companies totaling $113 million and was comprised primarily of broadly syndicated loans. Working with our partner, Perspecta Trust, we've begun to cycle in directly originated first lien investments as diversity and scale of the JV build.

Such directly originated loans represented approximately 14% of the portfolio at quarter end. The JV also reasonably upsided its credit facility from $75 million to $100 million and expect to increase this further as we and Perspecta deploy additional equity into the vehicle.

Our overall portfolio remained well diversified across industries and by asset class.

While we are predominantly invested in first and second lien secured loans which as of June 30 comprised 71% of our portfolio, subordinated debt investments represented only 9% of the portfolio, 6% of the portfolio was invested in other income producing securities including CLO equity, and 5% was invested in Logan, and 9% of the portfolio invested in equity securities based on fair value.

As of June 30, 76% of this portfolio was invested in floating-rate loans which we believe leaves our portfolio well-positioned to adjust to a rising interest rate environment.

We expect this first and second lien composition of our portfolio and our investment in Logan will continue to grow as a percent of our total portfolio as we exit CLO positions and our subordinated loans repay over time and our equity positions are realized in the future.

The overall credit quality of our portfolio remained stable with 77% of the companies in our portfolio on fair values receiving either 1 or 2 credit score which means that they are meeting or exceeding our expectations.

While we had one investment move to a 4 category, we expect to recover all the interest and principal in that investment albeit over a longer time horizon. C&K markets continue to perform well as we restructure controlling equity of the position as you can see from the portfolio mark.

With that, I'll turn the call over to Terry to talk more about our quarterly activity..

Thanks, Chris, and good morning everyone. I'll be providing a recap of our investment activity and financial performance during the quarter.

The $52 million of investment activity we had included new directly originated $12 million second lien investment in Merchants Capital Access, LLC, a finance provider to small and medium-sized businesses, $11 million of equity contributions to the Logan JV and $29 million in debt and equity follow-on investments in six existing portfolio companies to support growth and acquisitions.

The weighted average yield on these income-producing investments excluding Logan was 12.2%. Our second lien and subordinated debt investments in Sheplers represent the only repayment during the second quarter.

We also sold part of our first lien debt and equity investments in Igloo which was anticipated at the time of close, and part of our second lien investment in Vision Solutions. Post quarter end we exited our CLO equity investments in Sheridan and Adirondack receiving proceeds in line with our cost bases in each investments.

We currently have three remaining CLO equity investments valued at $19 million as of June 30 that represent 2.5% of the portfolio. Despite the challenging equity capital markets, we will continue to be patient in pursuing future equity raises and no intention of issuing equity below net asset value.

As of June 30, our leverage level is 0.75x NAV which is towards the higher end of a targeted range of 0.6x to 0.8x.

We will continue to use the proceeds from the expected repayments and sales within the portfolio as well as those from our more liquid broadly syndicated investments as better risk-adjusted yields present themselves in newer follow-on investments. We will also make stock repurchases as conditions warrant.

In terms of operating results for the quarter, net investment income for the quarter was $11.9 million or $0.35 per share.

Our net investment income of $23.8 million was comprised of $19 million from interest income on debt securities which included $1.4 million of PIK interest, $2.1 million from interest income on other income-producing securities, and $1.1 million of dividend income from the Logan JV and certain other equity investments.

Other income of approximately $1.6 million included $0.7 million of fee income from our managed funds and separate account and $0.9 million of fees from our investment portfolio.

During the quarter we incurred $11.8 million of expenses including $3.6 million in fees and expenses related to our credit facility, $2.9 million of base management fees, $3 million of incentive fees and $2.3 million of administrative professional and other G&A expenses.

As we continue to build our direct lending platform including the managing of private credit, we expect the percentage of administrative and other G&A cost that our BDC incurs will decrease over time.

Lastly, we had a net change in unrealized appreciation on our investments of $2.5 million this quarter largely driven by changes in the financial performance of certain portfolio investments. As of June 30, our NAV was $446 million or $13.29 per share compared with $13.20 per share on March 31.

Importantly, we have grown our NAV $0.29 per share since our IPO as a result of strong credit performance, accretive equity raises and share buybacks and retained earnings, which we believe based on data we've seen is not typically the case for most BDCs.

The $0.09 per share increase in Q2 was largely driven by changes in unrealized depreciation and to a lesser extent by retained earnings and accretive stock purchases during the quarter. With that, I'll turn the call back over to Sam for some closing remarks..

Thanks Terry. I'd like to make a few summary closing points. We are confident that our strategy of directly originating senior secured loans in the lower middle market and building the Logan joint venture program offers the best risk adjusted returns to our shareholders.

Our share repurchases during the second quarter allowed us to take advantage of lower stock prices and increase overall book value. We expect to exit our CLO equity positions and some of our larger common equity positions over time and to redeploy those proceeds in the senior secured loans.

And lastly, we are proud of our track record since our IPO of producing earnings to fully cover our dividend and delivering a strong return on equity or growing net asset values since our inception. And with that, we'd like to open the line for questions operator..

[Operator Instructions] Our first question comes from the line of Troy Ward from KBW. Your line is open..

Sam, can we talk a little bit about your four-point plan on optimization, really number 2 and number 4, the exit of equity, just kind of give us how motivated are you, how well is your ability to effect an exit, assuming you own mainly non-controlled pieces, can you just speak to kind of how you see the portfolio developing with a perspective on exiting that equity?.

Sure, Troy. We've got about $60 million in common equity in the portfolio. About $35 million of that is 3 positioned, one of which is C&K. We originally had sub-debt in that transaction, took it through a bankruptcy lien and the other initially a sub-debt lender or now the majority holders together.

We don't control that situation completely, there are other folks involved, and I can't comment too much on it but we'd expect that and our two other equity positions over time – and I would measure this in quarters not years, we expect those to be exited fully, all three of them..

When you think about an exit for something that you don't control, does it need to be a buyout situation where the actual company is changing maybe hands or is there a bid for non-controlled equity pieces in the secondary market?.

I think it could be done through a couple of avenues, Troy, certainly a transaction with a new equity player in the mix, other opportunities, although we can't be specific obviously, or through some type of public offering over time as well.

So again, I think it's over the matter of a few quarters we could see some notable dollars come out here that we think could get back into income-producing securities..

Great, that's helpful just as we think about modeling. And then on the CLO, the exit of the CLOs, just like to get more color on your thought process there.

Obviously there was an announcement earlier this week with TICC actually basically making the decision to seems like exit the BDC space and turn that platform over to another manager that will remove just CLOs from the BDC space and there's been a lot of talk both internally and with investors about whether or not CLO equity works inside of a BDC and it seems that the valuation on the BDCs that have CLO equity seems to be less than the peer group.

Can you speak to whether that played into your thought process or if there's something else you see specifically relative to CLO kind of where we are in the cycle but you just don't want to hold them? And then lastly, you said you sold two CLOs in the quarter.

Can you give us a commentary on whether or not that lined up with your June 30 fair value of those CLOs?.

This is Sam again. So our initial investment thesis in investing in CLO equities was that we have a sister group within THL Credit called Tradable Credit that manages CLOs. It's a management team that's been in the business for 25 years and they know the CLO market and the CLO equity market very, very well.

So we saw it as a compliment to the BDC and to our direct lending in the BDC. And as we have talked to investors and equity analysts over the last few quarters, it's become apparent to us that the CLO equity is for whatever reason not appreciated. I think investors feel like they don't understand it very well.

And what we want to do of course is have a transparent easy to understand portfolio. Our CLO equity positions are all performing well and performing at expectation, and to answer your question in terms of the two that we sold, they were and are I think close to our fair market value..

In aggregate, yes..

And what's your ability, I mean obviously CLO equities in folks' portfolio for a reason, is because they have a very nice yields, it's almost synthetic leverage so to speak, what's your ability to exit those and redeploy the assets from an earnings standpoint? It would be hard to replace those yields I would think in senior term debt..

Troy, this is Chris. I think that's right to a degree, but if you think through the Logan JV that we have and our ability to start sourcing more directly originated assets as that equity base grows, our expectation is that the yield differential between the two dollar-for-dollar will be a very close approximation..

Would you consider running with slightly higher leverage on the overall portfolio when the portfolio doesn't include any CLO equity?.

We've looked at the guidance to the range of 0.6 to 0.8, we're near the top end of that range as we moved into more senior secured assets. I don't think we're in a position right now to say we are going to move any higher than 0.8, if that's what you're asking..

Okay. One last question and I'll get back in the queue. On the expense side of the equation, you did say that over time the allocation of the expenses to the BDC will grow and you referenced the overall platform as the overall platform grows.

What is the expectation as we think about modeling for lower expenses at the BDC? I mean how fast do you think the external manager can grow in order to effectively make a difference for the BDC expenses?.

Troy, I think you said we commented that we expect the expenses to grow. We actually expected to decrease of the larger base over which to allocate expenses. So I would envision that happening to a degree over the next several quarters.

Tough to pick exactly just given how we think about the aggregate size of the platform but I'm comfortable that over time as is the case our expense ratio will continue to decline as the private direct – as the direct lending platform grows whether through the BDC or private capital..

Great. Thanks Terry..

Our next question comes from the line of Kyle Joseph from Jefferies. Your line is open..

You guys have seen nice yield expansion in the portfolio.

I just wanted to know what exactly is driving that, is that the rotation of some assets and just your outlook for that going forward?.

That's a good question. Our portfolio yield has increased I think pretty consistently over the last five quarters, just notching up a little bit. I think one quarter it was the same and then it has increased last couple of quarters.

We've been pretty close to the same asset base for about a year now, and so we are very – our origin nation activity is very high. The first quarter it was – when I say origination activity, the number of transactions that they are screening has been very high except for the first quarter really over the last four quarters I would say.

So we're seeing a lot of transactions, is what I'm saying. We get a lot of add back, we can be very flexible on what we buy, we are very involved in the structuring of transactions, so we are not buying assets from a placement agent for example.

And so one thing that we are very focused on is the risk-adjusted return, the return that we are getting from [indiscernible] because we can be very selective and we've got a fully ramped portfolio and the portfolio is at the high end of our target leverage, we can just be very selective on what we purchase..

Okay, thank you for that.

And then your investments in new companies, I think you guys invested in one company, is that a factor of the broader market in terms of wider deal flow or is that more a factor of just you guys focusing on the Logan JV and also given your leverage and valuation?.

This is Chris.

I think the right way to look at it is, as we look across the opportunity set, across the five-office footprint that we have with a limited capital base, we're always moving forward with what we believe to be the best risk-adjusted return and that may be a follow-on investment to a portfolio company that we're going to for a number of years or it could be an increase into Logan or it could be a new investment.

We're making that a standard across all three potential avenues of deployment.

So if for example we have the best risk-adjusted return on all new investments next quarter, that's what we will do, but if we have a scenario where we could put together or pronounce the most risk adjusted high-yielding by just supporting our portfolio and not doing new investments, that's fine as well.

We're just trying to drive that best number as we [indiscernible] each one of those baskets compete if you will for the dollars that we have..

Got it. Thank you for that.

And then can you just talk a little bit about in terms of your portfolio of companies, growth trends you are seeing both in terms of revenues and EBITDA?.

Kyle, it's Sam again. I would say that the majority of the companies are increasing revenue and EBITDA. It's not a huge majority, it's a flat majority, and from what we understand from our valuation firms that it's about on par with what they are seeing kind of across the broader middle market..

Got it, thanks.

And just a modeling question for dividend income, I know most of that's Logan, was the second quarter a decent run rate or should we anticipate some Logan growth driving that a little higher, just your thoughts there?.

For sure we expect it to increase. I think Logan was $800,000 of $1.1 million which represented about 11.1% yield and we'd expect that yield to grow north of 12% heading into Q3 as we move forward..

Okay, that's helpful. Thanks a lot for answering my questions..

Our next question comes from the line of Andrew Kerai from The BDC Income Fund. Your line is open..

Looks like if you look at the Logan JV, as you kind of get to ramp that, the leverage in that structure has increased about 2 to 1 just in terms of the debt to equity it looks like.

Can you maybe just remind me again, I think you've said in the past where you're kind of from just a target leverage perspective, as you continue to grow that vehicle, how we should think about that within the Logan structure?.

This is Terry. We were about 1.5x to 1.6x times at June 30. I think on a math basis the facility will allow us to go to 2 to 1. I think the mix of the assets in there would likely be slightly short of that just given that it'd have to be purely first lien hitting all the buttons to be at that 2 to 1.

So something less than 2 to 1 would be completely optimized as the portfolio is built..

Sure. That's certainly helpful. And then I was looking to the Q, I didn't see it.

Have you disclosed what the rate is on that line from Deutsche Bank?.

We have. It's L 2.50%..

Okay, great. Thank you. That's it for me..

Our next question comes from the line of Doug Mewhirter from SunTrust. Your line is open..

Most of my questions have been answered. Just two I guess, one general question and one a small question. The first general question, I assume, it sounds like sort of the deal flow has picked back up.

I've heard sort of mixed reports about private equity activity in general, some people saying that the firms are actually buying less but there's more strategic buyers. I don't know.

How do you see the general deal flow in this lower middle market and how does it compare to sort of the rest of the market, is it still picking up, do you think it will continue through the end of the year all things, all else equal?.

Doug, this is Chris. I think deal flow for us is fine. I think the unique position that we have with the five office footprint, we are just generating a substantial amount of new opportunities, and we're not a volume shop. If you think about pacing for us, that's 15 to 20 deals per year, so we can be extremely selective.

So when you sit back and think of volume and pace, not to say we're indifferent to it, but we are not trying to close 30 or 40 deals a year, we are trying to close 15 to 20. The current environment for us is suitable for us to hit that mark..

Thanks for that.

And Terry, a question, I think I know the answer to this but if you could confirm, you have your undistributed income, you've retained a little bit of earnings, if the share repurchase gives you credit, is it treated as a dividend for tax purposes or do you not get credit for that in terms of the excise tax or avoiding the excise tax?.

Doug, good question, I actually don't know the tax side of how that factors through the excise tax calculation off the top of my head but I can follow up with you off-line..

Okay thanks. That's all my questions..

Our next question comes from the line of Robert Dodd from Raymond James. Your line is open..

This is actually Leslie Vandegrift in for Robert this morning. So we had a quick question about the unfunded commitments issue that the SEC apparently has been discussing recently, and the majority of your unfunded commitments are actually within your discretion to Logan JV.

I'm just curious if you had any discussions with them or heard any color about how they would treat your unfunded commitments that you can control or how you might change your strategy on that?.

We understand the dialog is ongoing within the staff and also there is some level of dialog with them regarding our getting [indiscernible] effective.

We're of the view that as you had mentioned that the Logan commitments are within our control and are much, much different animals than the traditional unfunded commitments related to a revolver or a delay draw facility assuming we're just talking about maybe with the ultimate bottoming out of unfunded commitments related to just revolvers and delayed draws, there were only about $17 million at June 30 for us, so that has de minimus impact on our debt-to-equity or asset coverage ratio at this point in time, but we understand the matter is still evolving within the staff, but I appreciate your question.

Hopefully that's responsive to you..

It is.

But do you feel like you've gotten good feedback about with that discretion issue or does it seem to be that they – it's kind of all or nothing deal?.

It's an ongoing discussion I think, not just with us but I think across the industry..

Okay. And then another question on a different topic.

I was looking at the weighted average yields for the quarter and your new onboarding yields were the highest they've been for over two years almost, and I was curious what drove the new yields on the follow-ons being at 12.2%?.

Sure. Look, a function of it is the follow-on investments and the size of the dollar that tend to have folks look at the onboarding on a more blended basis just given $15 million coming on at 12% this quarter versus $18 million coming on at 10.6% last quarter. On a blended basis that's kind of in the 11-ish range.

I think it's more a function of mix than anything..

Okay, perfect. Thank you..

Our next question comes from the line of Christopher Testa from National Securities. Your line is open..

Just a couple ones, just with the subordinated debt, how fast do you think that that's going to essentially roll off over the next couple of years, and what's the kind of timeline for the remainder of the CLO equity dispositions?.

This is Terry. You're asking questions really, really hard to answer quite frankly.

We will be opportunistic in exiting the CLO equity which is more in our control than how our sub-debt is positioned to roll out over time, but again as we think of the performance of the credits, we're confident that these companies will move forward to a point where the refinancing of those will avail itself capital to us..

Okay. And just kind of your thoughts on debt to equity short-term? I know you had mentioned you're not going to go above 0.8x.

So I guess for modeling purposes, over the next couple of quarters are you looking to maybe take down the balance sheet leverage here or are you going to try to essentially remain fully invested through the remainder of 2015?.

We're looking to be fully invested. We think it's in the shareholders' interest and quite frankly helping us drive a strong ROE that we're confident with. So we'd expect to stay in that 0.7x, 5x range as we can.

Chris, do you want to add something to that?.

I just wanted to remind folks, if you think through the natural turn in our portfolio, I think as I noted in the prepared remarks, it's about $50 million per quarter. So we have capital to invest each quarter and redeploy.

So even if we stay flat from a leverage perspective, there is still natural change and evolution in the portfolio as we get those repayments and redeploy them..

Okay.

And just a quick question with Logan, just as the second lien composition in Logan is kind of increased here, should we expect that to go much more towards first lien as direct originations take up a greater portion of the joint venture?.

Yes..

Okay. That's all for me. Thank you..

[Operator Instructions] Our next question comes from the line of Jonathan Bock from Wells Fargo Securities. Your line is open..

We'll start with one, it's more bigger picture but it's something that your investors and new investors potentially deal with. A majority of the BDC space is under-book and at times investors feel that if we are approaching book value or slightly above book value, they get hit with a substantial equity raise.

Now say that that happens here, it just does happen in this space, and so we kind of have to manage to the lowest common denominator unfortunately.

And so when I think about CLO equity sales movement into Logan JV, which is also capped given that it's hard to sell out of CLOs and easily redeploy, et cetera, let's paint a scenario where we are at 1.03.

Is that an appropriate level with which to raise equity, and if it's not, what level is?.

Jon, thanks for your question and appreciate that. I guess the first thing on 1.03, I think that's a stretch because 3% is the gross spread and you're not going to do an equity offering without some type of discount..

Many people do that, Terry..

That's fair. I'm just telling you what our perspective is. So I think of it as the minimum of call it 1.05 to 1.06 just to cover your cost to get the thing done. And quite frankly as you look back, I don't know off the top, I think we did our last two at around 1.08 and 1.10, but I could double-check that.

So what's the right level? I would say somewhere north of 1.06 is probably accretive. And Jon, when I put together the math as you do and we look at where we are on a leverage basis and we look at our cost of debt as well as the G&A impact, 1.07, 1.08, you're looking at a total return requirement on new capital a little over 11%.

So I'm comfortable that issuing capital at that level we can find accretive opportunities for the shareholder..

That's fair and I appreciate the answer.

And then as we look to the new investments that you source in particular, Logan also, and setting that aside because that's very attractive and its leverage on first lien debt, but Sam, to your point I think we mentioned a bit of a discussion on second liens, in an environment where 11% yields are relatively difficult to source at low risk profiles, I say that just as a broad student of the industry for all middle-market levered lending, it's not easy, I'm trying to understand how you come to a high comfort level that if you're originating at 11% returns, that the risk that we're taking is somehow a bit lower.

That's a comment for the industry and it doesn't mean that it's specific to the risk in this portfolio, but folks do want to understand, when they think second lien, it perhaps isn't a dirty word and what are some of the additional concepts we need to be thinking about to hit an 11% bogie in an environment where there are few 11% opportunities that carry little risk?.

Jon, this is Chris. I appreciate the question and understand I think what I'll call maybe the confusion. I think a lot of this goes back to a few of the things that we've tried to put through in our prepared remarks. You're right, no one is out there selling us an 11% second lien loan, we have to actually go out and create that.

And in the lower middle market, we are able to step in and take advantage of quite frankly the contraction of a lot of bank balance sheets and their participation in the lower end of the middle-market. They are not as active in doing a capital raise of say $30 million to $40 million to $50 million.

So in that instance when a sponsor comes to us and says, I need to raise $50 million and we control the pen, we can grab the security and maybe turn it into a second lien and control how much first lien exposure is in front of us, leverage that low cost of capital that the bank still has by putting them in a box that they are comfortable with and therefore generating in our opinion very strong risk adjusted return on our second lien loans.

It's not as easy as maybe as it sounds, but again going back to a comment we made earlier, we're not a volume shop, we're looking to do 15 to 20 of these a year. We can effectively deploy that strategy and maintain the pricing discipline that I think we've done over the last six, seven quarters.

So I know it seems unusual maybe on a high-end service but the fact is we've done it consistently and I think it's taken our time to create those securities, and that's been our focus..

Jon, it's Sam.

One thing to keep in mind when we talk about the investments that we do, we are working with – because we are focused on lower middle-market, we're generally dealing with smaller private equity firms and we're not dealing with placement agents, we're not dealing with a capital markets person at a larger private equity firm, we're dealing with the principal on the transaction, the guy who's trying to get his deal done.

He's probably only going to do one or two deals this year and he's very focused on working with people that he knows and he's very focused on someone who will be reasonable through the life of the transaction if he's trying to grow that company. So things like pricing and leverage, they are not at the top of his list.

They are on his list but they are further down. And so crafting a deal, as Chris described, where we come in as a second lien, quite optimally we're bringing in the commercial bank to be that first lien lender. It's those kinds of things and that kind of situation that enabled us to get what's maybe a little bit above market in terms of deals..

I appreciate that.

And then forgive me if this was already asked, I'm more of looking for a number, but when you're raising private capital, it also helps on the public side for folks to understand the size of the private capital base at which you've raised or are currently raising, and that allows us to further our G&A expectations or model them downward and it also is a bit of I'd say boost institutionally to your brand, right, if folks are willing to write very large checks in support of what you're doing which is effectively the same assets shared across the BDC and your private funds.

Chris, how big is the private fund or private commitments to your new private endeavors to date?.

We're unfortunately not in a position where we can size the private fund at this time. I guess all we can say publicly is, we're continuing to work on it and the process is meeting our expectations..

I think what we can say, Jon, is that it will certainly be bigger than the Greenway Fund..

And just total size of Greenway?.

Greenway the first one was 150, the second one I'll [indiscernible]..

187 for the [indiscernible]..

187, yes..

So, certainly well above 300 million to 400 million. Great. Thank you. I appreciate you taking my questions..

Thank you. That's all the questions that we have in the queue at this time. So I'd like to turn the call back over to management for closing remarks..

Thank you everyone. We appreciate your questions and we look forward to speaking with you next quarter..

Ladies and gentlemen, thank you again for your participation in today's conference. This now concludes the program and you may all disconnect at this time. Everyone, have a great weekend..