Joe Alala - Chairman and Chief Executive Officer Jack McGlinn - Chief Operating Officer, Treasurer and Secretary Steve Arnall - Chief Financial Officer.

Mickey Schleien - Ladenburg John Hecht - Jefferies Chris York - JMP Securities Troy Ward - KBW Terry Ma - Barclays David Miyazaki - Confluence Mickey Schleien - Ladenburg George Bahamondes - Deutsche Bank Vernon Plack - BB&T Capital Markets.

At this time, I would like to welcome everyone to the Capitala Finance Corp.’s Conference Call for the Quarter Ended September 30, 2015. All participants are in a listen-only mode. A question-and-answer session will follow the company's formal remarks.

Today's call is being recorded and a replay will be available approximately three hours after the conclusion of the call on the company's website at www.capitalagroup.com under the Investor Relations section.

The hosts for today's call are Capitala Finance Corp.'s Chairman and Chief Executive Officer, Joe Alala; Chief Operating Officer, Treasurer and Secretary, Jack McGlinn; and Chief Financial Officer, Steve Arnall. Capitala Finance Corp.

issued a press release on November 9, 2015 with the details of the company's quarterly financial and operating results. A copy of the press release is available on the company's website.

Please note that this call contains forward-looking statements that provide information other than historical information, including 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 the forward-looking statements.

These statements are based on various underlying assumptions and are subject to numerous risks and uncertainties, including those disclosed under the section titled Risk Factors and Forward-Looking Statements in the company's quarterly report on Form 10-Q. Capitala undertakes no obligation to update or revise any forward-looking statements.

At this time, I would like to turn the meeting over to Mr. Joe Alala. .

Thank you, operator. Good morning everyone. Thank you for joining us for our third quarter 2015 update. As we mentioned over time our strategy has been shifting as we’ve tried to cover our core distribution with NII and cap gains.

We have been shifting that strategy over the past few quarters with our goal being to cover our core distribution with net investment income.

From what we realized over the past quarters is in order to do that we had to reduce our equity percentage of the portfolio at IPO which was 36% and we have been trying to reduce that under 20% over the past quarters, we are now down to 16% equity as a percent of the portfolio. And with that equity rotation we generate a lot of capital gains.

Those capital gains did several things. One thing is it allowed us to pay a supplemental dividend which including the core dividend and the supplemental dividend, our current yield on the stock is 13.8% at NAV. And that represents no return of capital through August.

It also has allowed us to generate capital gains and redeploy those proceeds into yielding product. And what you’ve seen as a result of that redeployment in yielding product is a substantial growth in NII over the past few quarters. Our NII this quarter at $0.48 per share was approximately 45% greater than prior quarter where it was $0.33 per share.

We are proud to announce that we covered our core distribution with NII this quarter. In addition, we had – while our focus is on long term NAV appreciation, we did have NAV appreciation this quarter by the stock appreciating from $17.95 to $18.04.

So those are our stated goals we have been mentioning over the past few quarters, we think this quarter represents that strategy being complete with the equity rotating into yield. Shareholder alignment. This past quarter our stock buyback program repurchased 2.5% of the outstanding shares, that’s a material amount for us.

In addition, which we believe as just as important is insider buying. We had insider purchases over the past quarter of the management and the board of approximately $1 million.

Now if you look at on Form 4 you will see some transfers on my personal Form 4, that is really related to our employee equity compensation plan and we are here to communicate that no employee had ever sold a share of stock.

Also to comment on our investment activity, we continue to focus on our direct origination strategy which is producing very solid results. Our yield for the third quarter on our debt products was 12.6% versus the prior quarter of 11.6%. The aggregate yield at the portfolio level increased to 12.1% from 12.0%. And we are doing this by not chasing yield.

I think we look at these dynamics, you will see we are not increasing our yields by chasing risks. Our leverage at the portfolio company level is 3.9x through our debt. Some data we’ve seen from other industry resources, the average middle market portfolio company debt is approximately 5.5x times, ours currently is 3.9x.

Also we have not changed our mix of senior debt to second lien debt. We are currently still about 45% senior debt, 55% second lien debt in our debt portfolio. These dynamics we believe show we are not chasing yield, however we are finding through our direct origination platform the quality deals and our yields are increasing. Current activity.

We have a solid pipeline of quality deals. We will continue to focus on very strict underwriting standards and to close on the best risk adjusted opportunities that we are finding. We continue to communicate our goal is to cover our core distribution with NII and produce long term NAV appreciation.

And with that, I am going to turn over to our CFO Steve to have more comments on financial performance. .

Thanks, Joe. Good morning everyone. As previously mentioned on November 9, we filed a press release with our third quarter 2015 earnings. In addition, we also posted a third quarter 2015 investor update to our website providing additional details about the company, the investment portfolio and other related trends.

I’d like to take a few minutes to highlight a few items within the earnings release which can be found on the Investor Relations section of our website. During the third quarter 2015, total investment income was $18.3 million, an increase of $7.1 million over the same period in 2014.

Total interest and fee income was $5.6 million higher in the third quarter of 2015 compared to 2014, driven by a larger investment portfolio. PIK and dividend income increased by $1.5 million over the previous year supported by several transactions within our existing portfolio.

Total expenses for the third quarter of 2015 were $10.5 million compared to $7.6 million in 2014. This increase is attributable to an increase in incentive fee of $1.9 million as incentive fees were not earned during the third quarter of 2014 and small increases in both interest expense and management fees.

Net investment income totaled $7.8 million or $0.48 per share for the third quarter of 2015 compared to $3.5 million or $0.27 per share for the same period last year. Management remains focused on this most important operating metric.

Net losses totaled $16 million or $1 per share for the third quarter of 2015 compared to losses of $3.1 million for the same period last year. Unrealized depreciation for the third quarter of 2015 was $16.2 million compared to depreciation of $0.2 million in the previous year.

Please allow me to spend some additional time on this topic as it is important. The impact to NAV related to net losses for the third quarter of 2015 was approximately $3.9 million or $0.24 per share. The remainder of the investment portfolio appreciated approximately $4.1 million or $0.25 per share.

Net realized losses during this quarter coupled with other realized gains and losses during the year aggregate through a net gain of $9.1 million for the nine months ended September 30, 2015.

The year-to-date gains have been beneficial in several ways, including, one, the ability to maintain our normal distribution at $0.47 per share per quarter; two, the ability to declare a special distribution of $0.50 per share earlier this year; three, the ability to report no return of capital for the tax years ending August 31, 2014 and ’15 and lastly, the ability to retain and reinvest the proceeds from exited investments into primarily debt investments to support NII and distribution coverage as demonstrated this quarter.

Jack will provide further information related to realized losses and valuation changes within the portfolio during the quarter. Net increase in net assets resulting from operations during the third quarter of 2015 totaled $8 million or $0.49 per share as compared to a net increase of $0.3 million or $0.02 per share for the same period last year.

Total net assets of $186.8 million at September 30, 2015 equate to $18.04 a share compared to $18.56 per share at December 31, 2014. During the third quarter of 2015, the company repurchased 399,448 shares of common stock under the board approved repurchase program, approximately 2.5% of the shares outstanding at quarter end.

The weighted average annualized yield on the shares repurchased during the quarter was approximately 16.6%. The repurchases were accretive to net investment income by $0.02 per share for the quarter. From a liquidity standpoint, we have cash and cash equivalents of $37.5 million at September 30 2015 compared to $55.1 million at December 31 2014.

SBA debentures outstanding at September 30, 2015 totaled $184 million with the annualized weighted average interest rate of 3.45%. In addition, the company had a $113.4 million of notes outstanding bearing a fixed interest rate of 7.125%.

Lastly, the company has $69 million available under its senior secured revolving credit facility and a regulatory leverage ratio of 0.57 at quarter end. At September 30, 2015 the company’s balance sheet and future net investment income will not be materially impacted by changes in short term interest rates.

Please see our Form 10-Q for detailed information regarding the company’s interest rate sensitivity. At this point, I’d like to turn the call over to Jack. .

Thanks, Steve. At a very strong second quarter deployments we were pleased with our Q3 gross deployments of $55.6 million with the yield of 12.6%, allowing us to raise our total weighted average yield on our debt portfolio to 12.1%. In regards to repayments, for the third quarter we received $34.6 million of repayments.

Most significant repayment related to full exit of our investment in SSCR whereby we received over $14 million of net cash proceeds.

While this exit results in a significant realized loss for the period, we are pleased with the outcome as we are able to work closely with the company to facilitate a third party sale to strategic buyer, begetting any further exposure to the credit, and allowing us to recycle the proceeds into current yielding investments.

Further on realized losses and unrealized depreciation, in order to clarify the activity in the third we provided a more detailed breakout of the significant transactions in our earnings release. That chart shows the impact of the SSCR transaction as well as others.

To summarize, while the full loss realized on SSCR was $11.2 million, we already reserved in the form of unrealized depreciation $9.5 million in the previous quarters. And therefore the Q3 impact was only $1.8 million.

Likewise we realized a loss on market yield [ph] of $5 million and [indiscernible] depreciate that investment by $3.3 million, that was a net debt impact to the quarter of $1.7 million.

On the flip side, we experienced strong appreciation of several of our equity investments in the quarter with the net unrealized depreciation amounting to over $4 million. As we successfully rotated out of our pre-IPO equity positions, we are pleased to report nice growth in some of the newer equity investments made since our IPO process.

So the net NAV impact to third quarter weighted to realized losses was minimal, since we have already depreciated much of those investments and since we have strong offsetting depreciation during the quarter.

As of the end of the third quarter, the Capitala portfolio consists of 58 companies with a fair market value of $588.3 million on a cost basis of $553.3 million. Senior debt investments represent 36.7% of the portfolio. Subordinated debt 44.2%, Senior Liquid Loan Fund 3.3%, and equity warrant value of 15.8%.

In regards to portfolio quality, we continue to maintain a sub two internal weighted average risk rating of 1.96, level with the prior quarter, while average leverage at the portfolio level improved to 3.9x.

At the end of the quarter, there were three debt investments on cash non-accrual with a fair value and cost basis of $10.9 million and $13.6 million. There were also two debt investments on PIK non-accrual with a fair value and cost basis of $9.7 million and $13.5 million respectively.

As an update on investments in the energy space, the five investments at fair value totaled $65.3 million or 11.1% of the portfolio.

As oil prices have remained depressed, we continue to mark down the value of these collective investments, recording additional unrealized depreciation of $3.2 million during the quarter resulting in a fair value of 83% of costs at quarter end. We continue to actively work with these companies.

While the cost cutting and other initiatives implemented at several of the companies was successful in stabilizing the businesses in the short term, as we’ve now exited the year of the lower oil prices, we are having ongoing dialogue to discuss longer term solutions to liquidity and balance sheet issues.

With no identifiable impetus for a significant improvement in oil prices, we feel it is prudent and in the best interest to all parties to seek longer term solutions.

In regards to market conditions, we’ve seen little change in the last quarter as we continue to see strong proprietary deal flow and as several deals that are currently in the diligence phase. With that, I’ll turn it back to Joe. .

Thanks Jack, thanks Steve. And I think this quarter really marks the end of a lot of noise that’s been in our portfolio as over the past quarters we’ve had to, we call it, the equity rotation, really changed the dynamics of our asset mix to reduce equity securities from 36 at IPO down to 20.

We now are currently at 16% and I think we are at a nice place now where we can focus on covering the core distribution with NII and also have long term NAV appreciation as we do still have equity securities in the portfolio and as you’ve seen from this update, we still experienced some significant appreciation of some of those positions.

So with that operator, we are ready to turn it over and have questions asked..

[Operator Instructions] Our first question comes from Mickey Schleien with Ladenburg. .

First question for Jack. You mentioned SSCR was sold to a third party.

What – was Market E's also sold to a third party or what was the result there?.

We have sold Market E's to a third party probably two quarters ago and there was some in-time payment at that point and a note that was to be repaid and there was a default on that repayment which resulted in the additional loss. .

I want to, just philosophically, Jack, what is your – what is Capitala’s view toward trying to work out problem deals as opposed to selling them?.

Well I think there is an opportunity to sell the business where we can minimize our loss. We will look to do that, that is not always the case and sometimes there’s a better longer term value if we can restructure, and kind of rework the company. So it’s really on a case by case basis, there’s not an overarching principle, and each deal is different.

So we approach each one differently and it’s just based on circumstances. .

Just a few more – I think most of the remainder of my questions is on the accounting side.

How high do you – are you willing to take that to equity in the current environment and with the current portfolio structure, total debt to equity?.

From a leverage standpoint or our balance sheet?.

Yes..

I think we will stick to the 0.75 is the leverage ratio, we think it is prudent, one, it gives them cushion for any kind of global disconnect in valuations, but two, it provides us with the kind of optimum earnings capacity. So roughly 0.7 million from regulatory standpoint. .

And Steve, on the senior loan fund, correct me if I am wrong, you are running those gains and losses – you are not dividending up, you are not upstreaming dividends from that fund, you are running it through unrealized gains, losses and realized gains and losses because of the TRS, is that correct?.

No, that’s not correct. We earned roughly $400,000 of dividend income in the third quarter on that fund. So the income that the BDC will earn will be in the form of a dividend. .

There are some disclosures showing all the specific investments held by the fund and other details, but in terms of income for Capitala Finance, we will earn a dividend quarterly..

And it looks like you’ve finished repurchasing shares this quarter, meaning the fourth calendar quarter.

Do you intend to ask the board for more authorization?.

We are in discussions with the board on that topic and we will revert at a later date in that regard. Good, great questions..

And my last question, you syndicated part of Western Window, what kind of fees do you get when you do something like that?.

It varies, we attempt to keep most of the fees as much as we can, that’s always negotiated as part of the syndication effort. But we do attempt to keep at least half a fee when we do that but –.

Our next question comes from John Hecht of Jefferies..

First question is just in terms of this quarter, on the revenue side were there any – in the accruals were there any kind of prepayment or fee income that we should kind of normalize in order to determine the right run rate out of the quarter here?.

This is Steve.

I think on the fee side we had a $1.9 million in fees, a million of that was origination related, 900 was for amendment, other restructuring type fees, and as we’ve kind of talked about in the past we always have some portion of our fee income that is tough to model but it’s pretty predictable and that’s the 900,000 that we had this quarter, the other origination fees clearly would be driven on direct origination deal flows.

So in terms of trying to find a normalization we’ve had in excess of a $1 million of fee income over the past five quarters, again made up jointly of origination fees and or other restructuring amendment fees. So hope that helps. .

And then second, I wondered – you mentioned a strong pipeline, are you going to characterize it, is it either geographical or types of loan, or industry you are focused on?.

John, this is Joe. I think our pipeline is strong. I think there is very diverse geographic sourcing of deals. I think our pipeline currently is representative of the similar mix, its existing portfolio, I mean we are looking at probably 50% of our opportunity to be in form of senior debt, or unit tranche debt and the other half being second lien debt.

So I think it’s very consistent and you will have seen over the past quarters our sort of ratio of senior to second lien debt has been about the same, it’s not increasing and I think our pipeline represents that same type trend, I would also say that a lot of our pipeline we are looking at, or what we are focusing on are lower debt deals, meaning at the portfolio level leverage multiples, so we are looking at deals lower than 3.9x that’s currently in the portfolio.

But other than that, it’s very similar to the past few quarters, it’s a nice pipeline and we are really focusing on picking the best sort of risk adjusted return investment out of that pipeline. .

And how would you discuss pricing and the yields of the different pipeline you are looking at?.

Our yields, especially when you look at it, on the securities, meaning senior versus second lien, but even across all securities we are seeing yields increase and I think you saw that in this quarter where our average yield on basically the same asset mix this prior quarter went from 12.6% from 11.6%.

And our average EBITDA at the portfolio company level is more or less the same, so we are not – what we are trying to really communicate is we are not chasing yield by doing more second lien lending or by doing smaller deals.

More or less it’s the same deals in the prior two quarters but we are seeing pricing increasing almost 100 basis points this quarter. .

And then final question is, if you take out the – excludes the energy exposure, how is that portfolio adding kind of watchlist investments or how would you characterize the EBITDA performance of the portfolio outside of the energy exposure?.

I think like usual it’s a mixed bag, the majority of the portfolio companies that are at acceptable range of budget, there are several that are exceeding budget and several that are behind budget, some of those for reasons like oil and gas or commodity prices and others were performance reasons that we are closely monitoring.

But I think it’s relatively the same mix as we normally have. .

Our next question comes from Chris York of JMP Securities. .

Just one question this morning. So looking at your equity portfolio on Slide 9, I can deduce that you are further in the money positions that could be a source of additional distributions.

But that said, I guess I’d be curious to want to know of any updated views for your dividend policy considering potentially a muted market response for your last special distribution and now that you are covering your dividend from net investment income?.

Well I think what we have been focusing on is we do recognize the muted market response from a very high dividend on NAV which is even higher when you are below NAV which we are but what we’ve done effectively I believe is optimize those proceeds, we did pay the one supplemental but we’ve redeployed the others into higher yielding products and as you’ve seen the results our NII has grown materially.

I think right now we are just going to continue focusing on that path and just redeploying into yield.

As you know right now we are below NAV, we do not have – even though we have shareholder information we have no intent to do a below NAV offering in any kind and so we are going to be very prudent on the deals that we do pursue and all that cash that’s in the BDC now we want to obviously pay the core distribution now, but the rest we want to redeploy into these very high yield investment opportunities.

.

And then maybe you could give us an update on your second JV senior loan fund with CĪON, is there anything new in regards to activity there?.

Well the activity there is right, as you probably arrived [ph] when we announced it, there became some affiliate issues when Apollo tried to buy American Real Estate Co and it created some issues not with us at all but in the sort of affiliate dynamics that that potential transaction was to call.

And that’s still sort of undecided as of now but as far as what we have to do, we are ready to go we reserve some money to deploy into that. We fully deployed our Kemper JV already and we’re just waiting for those – other sort of market dynamics that are not related to us to play out to begin the CION JV. .

Our next question comes from Troy Ward of KBW..

Just a follow up first on Mickey’s question about the Western Window syndication fee.

Just more pointed, do you expect to see a syndication fee in the coming quarters, should we expect that? And if so, how much?.

When we say syndication fees, we are not really – if you are looking at it from perspective we are signing a $100 million syndication and we are going to hold 20 and syndicate $80 million of it and take a big fee, that is not our model.

Our model is really to focus on deploying our dollars into the deals we directly originate, however we are cognizant of our liquidity now and our strong pipeline, and so we’ve decided to do some of our larger deals, is to reduce our exposure in those deals and what we would like to do is we directly originated it, and we under-wrote it and we will continue to portfolio monitor it, it’s to keep a larger portion of those fees but if you’re looking at, are we changing our model where we go to a potential obligor and sign up a $100 million unit tranche rates, where we will hold 20 of it, and syndicate 80 and generate fees, that is not our model at all.

.

To follow up with that, there were no fees in Q3 related to that sale. .

So it’s going to be on the scheduled investment, it’s just going to be smaller and no additional income from other than 12.5% coupon that will come from Western this quarter?.

That’s correct and to help us optimize our whole size as it relates to our borrowing base, and those types of situations, so yes, not a fee income driver, it’s a balance sheet hold issue, just to optimize that. .

On the Southern Pump & Tank exit this quarter, it looks like that your fair value and par were in line with cost basis, about 800,000 there, what line – I am assuming that came through the income statement, the different between your cost and fair value there or did it, and if so, where did it come through?.

Half of that came through in PIK income, we received $4 million in action of that transaction, so half of that was in PIK income, the other was in fee income. .

And then on the second loan fund, just stepping back and thinking about what those assets are and what the market did during the quarter, I was surprised to see that the fair value mark on the liquid senior loan fund wasn’t maybe a little more, so can you speak to the kind of why you saw such strong stability in those marks this quarter?.

The only thing I could say is that they are marked independently by the bank that holds the TRS and there’s multiple marks on a daily basis. So that’s just a fair value of the asset at 9:30..

And then one final one is, can you just give us a little bit color and update on Sierra Hamilton?.

Nothing too specific, one of the companies in that space that are working hard to make sure their liquidity is strong as they continue to bounce, I think they have done a good job of doing that, so they manage their debt levels well and there’s much of anything – there is nothing going in front of us there.

It’s managing liquidity, they are doing a strong job of that. .

Our next question comes from Terry Ma of Barclays..

I just want to follow up on the revenue and EBITDA trends in the portfolio.

Can you maybe just give a little more color on the industrial focused companies in your portfolio and I think recently there was a pretty large commercial lender that suggested its outlook for the industrial economy was weakening and then we’ve had some other people suggest that there is a potential industrial recession in the US.

So can you just maybe share your thoughts there and maybe just give us some color on your industrial companies?.

I don’t think we have seen anything significant, I mean we are obviously conscious of the macro environment. There is none really that are very concerning at this point as far as exposure to a downturn in China.

I think they are all cognizant of where the market is and are cutting back where they need to just to make sure their spend isn’t exceeding their revenue growth. But for the most part it’s been relatively stable and we are still seeing growth some of which is driven by acquisition and which is being done at very prudent debt levels.

So I think everyone is conscious of it but we haven’t seen any direct revenue downward pressure from the macro environment. .

And just on your oil and gas, we just assume $45 oil as the norm for the next two to three years, can you maybe just talk a little bit more about what you can do or what your portfolio companies can do to maybe limit losses and protect shareholders here?.

Yes, I think the basic model is to cut back to that level of revenue that they can count on.

So I guess that’s part of the good news is that they have been in this – there has been a somewhat stable oil price now but at a much lower amount, so they have been able to reduce costs, they have been able to maintain customers at that lower level and have been able to interact themselves more with those customers.

So they have right-sized the businesses, maintaining profitability, there’s some short term advantages to – and as you reduce the size of business, you actually generate some cash flow. So over this period the liquidity has been fine.

So now we are working with them, what’s next, everyone is assuming it’s going to be a longer term environment in this pricing arena. So what do we need to do from a balance sheet longer term perspective to make sure these companies survive and are able to thrive wins, prices do go up again. .

Our next question comes from David Miyazaki with Confluence..

Appreciate your comments on your share buyback and your capital allocation policy with regard to not issuing below net asset value, I think that helps reassure us as investor that the right capital allocation decisions here are taking place with regard to balance sheet management. I did have a question for you, though.

As you – Joe, you talked about the transition of the portfolio from 36% equity, down to 16% and at the same time the debt portfolio being fairly balanced with regard to senior and subordinated exposures with regard to how you’re under-writing the debt.

The gains that you have seen – that you have realized on the equity side have been very helpful that they have been utilized to – in some way to offset the losses that you’ve had on the debt side.

So as the equity side comes down – is lowered by 20% of the overall portfolio, presumably you’d have fewer and smaller gains on the equity side against the backdrop of the same kind of return risk profile that you are going to have on the debt side.

So how do you expect to manage the credit losses going forward with a smaller equity allocation?.

There are some trends in the portfolio that sort of all works together that we try to communicate and we definitely disclose in our MDR. When we went public about – September 2013, our average EBITDA at the portfolio level was $9 million. That average EBITDA now is about $35 million, that’s a very different portfolio company.

Also our mix at IPO of senior debt to second lien debt was much more second lien debt. I don’t have that actual statistics in front of me but my guess, it was about 75 – I don’t know what it was, I don’t want to put a quote on that. But if you look at our trend over the past many quarters is, our senior debt is 45% and our second lien debt is 55%.

So much bigger EBITDA companies, much more allocation of senior credit through second lien credits and we do believe that even at a equity percentage of under 20%, which we are at 16% now that we can generate these significant cap gains that more than offset any losses.

And historically, remember we have been around for 17 years, we came from the SBIC platform, the sort of general rule in the SBIC world is you could have more than 20% of your assets in non-current based securities, to call that equity. So we sort of operated at sort of 20 and under – underwriting sort of investment thesis for 17 years now.

At IPO it was at 36% but our cost basis on those equity securities were under 20%. So we had material appreciation over that time. So we think over our 17 year track record of keeping equities at 20% and under in the portfolio that we could generate material capital gains that were more than offset any losses in the portfolio..

And obviously as you are moving up in size with regard to EBITDA, that will tend to help your defaults recoveries, as you go forward, have you found that – you have to pardon me for not knowing the stuff the top off my heard, that the losses and write-downs that you’ve had thus far, have they primarily come from the smaller companies with less EBITDA, and from the companies, from the positions where you’ve had second lien as opposed to first?.

We actually have – our chief risk officer Chris and I, we review this a lot when we are setting underwriting policy and I think what we found is especially as you get single digit EBITDA that your loss ratio is materially different than double digit EBITDA.

And we are not – we are talking about, we’ve gone from 9 on average over the past two years or so to 35 million, that is a big difference in the EBITDA of a small business or middle market business. So it’s not as if we’ve gone from 9 million EBITDA to 12.

So you’ve seen you’ve gone from single to double digit, we have gone a multiple and greater in EBITDA and we found those loss ratios are materially lower and we do price it differently. When we do an $8 million EBITDA deal, we expect different economics. We are talking about risk adjusted returns. We think that is a riskier deal on average.

So we will demand more economics for that deal. However if we see a $30 million EBITDA deal on average we will think that’s a less riskier deal and the pricing may reflect that.

So we’re really focused here, very focused on risk adjusted returns, we realize and we have the data to prove it over our 17 years of operating history that the smaller deals just have more risks than the larger deals, everything else being the same. .

Our next question comes from Mickey Schleien of Ladenburg..

Just a couple of follow up questions. Steve, it looks like you paid off some of your near term SBA debentures that were coming due, looks like there is a little bit more coming due soon.

Do you intend to redraw those amounts and try to lock in those rates before the Fed does its thing?.

Unless they increase the family of funds, we cannot redraw all those funds, so what you referred is the 8 million we repaid on the September 1, and I think we’ve got another $2 million maturing in March of next year. We will repay that but we do not have the ability to redraw all that, at the BDC as in the current setup. .

What precludes you from redrawing?.

Mickey, this is Joe. So there is an SBA family limit of $225 million, with the debt that’s in the BDC and then what’s in our private SBIC, we are at the max. So we would have to have the family limits – there is a legislation that we try to increase that from 225 million to 350 million.

What we would do if that were to happen is we would immediately go down in the BDC and apply for our fifth SBIC license and that way you go through the process, hopefully you get the license, we’ve already obtained four of them, we think the fifth one would happen and then we’d begin drawing on that facility after that process took place. .

So Joe, are you saying the 8 million that you paid off in the BDC this quarter was used outside the BDC and that’s why you are at the max?.

Correct. When we launched the BDC to take those two SBICs public, we also formed a private SBIC and we had an agreement with SBA and our underwriters of the allocation of that 225 million. So we forecasted that the debt should be repaid at first two years of IPO that would be during the same investment period as the new private SBIC.

So we had an agreement with the SBA of that allocation and those repayments on the first two years of BDC went to the private SBIC, correct. .

And Steve, how much would you say remains that’s coming due within the year?.

Within the next six months is about $2 million and we’ve got larger chunk due in September of 2016..

So barring any – I am not even going to try to guess the Congress is going to do, so barring any changes in legislation the same thing will happen that, that will get paid down and move to the private fund?.

Correct..

And my last question is, Joe or Steve, when you set the special monthly dividends of $0.05, did you budget for the losses of SSCR and Market E’s? What I am trying to understand is where do you stand now on a taxable income basis relative to where you were at the end of last year?.

Mickey, before Steve answers that, I just want to go back to your question on the SBA. We do put it on our MDR which is on our website the sort of our balance sheet, debt, layout, that we are repaying currently to SBA, it’s really high across debt. And most of our debt, I think 80% of our debt is really six years and beyond.

So most of that debt is at the BDC longer term and it’s at the lowest cost. The stuff we are paying off now is really from our Fund II SBIC, higher cost interest rate that we are paying off. .

I mean you had debt that’s even more expensive, I am just trying to understand what the balance sheet might look like down the road..

Mickey, in response to your question, back in March we did not forecast or budget a loss in any specific investment. And the second part of your question, with our tax year on day 31 we are putting final touches on everything but we will have spill-over income in the tune of $6 million to $8 million that we will retain and reinvest.

So – and we are happy to report for that tax year on day 31 that we will not have return of income – return of capital to the shareholders. .

Our next question comes from George Bahamondes of Deutsche Bank..

When we back out fee income of $1.8 million from the $15.9 of interest and fee income generated in the third quarter, we are getting to about $14.1 million in interest income which implies a yield of 11.6% on the average debt portfolio and that’s up from 10.4 last quarter.

I am just wondering if you could touch on what drove the increase and if you think the yield from the third quarter is sustainable going forward?.

This is Joe.

I am talking about the yields, the way we look at the yields is sort of the – on the debt portfolio, we define it 12.6% third quarter, it was 11.6% last quarter, what we are seeing in the pipeline are very similar characteristics, you are seeing a lot of supply of quality investment opportunities especially if they are directly originated and with the average sort of BDC trading below NAV, the liquidity in the BDC market has contracted, so you are seeing this equilibrium shift especially if you have directly originated deals, we are seeing yields widen and we’ve demonstrated on with a 100% basis point increase in the third quarter and we are seeing similar trends in our existing pipeline.

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Our next question comes from Vernon Plack of BB&T Capital Markets..

And Jack, I was looking for a little more color on another question on the energy portfolio, looks as though you added to your US wells in your TCE Holding positions..

So US wells was part of the initial commitment and we had to fund that, they’ve actually been growing and been quite a strong performer, so they had a capital call and debt call and we funded that so that was the growth from that one.

And TCE is part of the ongoing conversations that we have with the company and other parties there to make sure that they’ve got the property liquidity to manage the business. There were some additional funding in there too as part of the general forbearance agreement and ongoing operations. .

So I think you feel good about TCE right now..

Well again back to my earlier statements, it’s prolonged period of low prices and without seeing any reason why they are going to go back up any time soon, it certainly keeps us on edge and we need to keep working through that. So there is certainly work to be done there and we will be working closely with them to get things done.

But there’s no one’s out of the woods in that industry. End of Q&A.

Thank you. This concludes our question and answer session. I’d like to turn the call back to Joe Alala for closing remarks..

We like to thank everyone for participating. We try to be as transparent as we can be. We put a lot of great data on the MDR deck on our website. But we are around all day today.

Please follow up with any direct calls or communications if you have any and we are happy to provide it and we are trying to be transparent and we do believe that the equity rotation is complete now, we can just really focus on NII covering the core distribution and long term NAV appreciation. Thank you..

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..