Joe Alala - Chairman and CEO Jack McGlinn - COO, Treasurer and Secretary Steve Arnall - CFO.

Christopher Nolan - Ladenburg Thalmann Chris Kotowski - Oppenheimer.

At this time, I would like to welcome everyone to Capitala Finance Corp.’s Conference Call for the quarter ended December 31, 2017. All participations 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 Web site 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 February 27, 2018 with details of the company's quarterly financial and operating results.

A copy of the press release is available on the company's Web site. In addition, the company posted a prerecorded podcast of its quarterly results February 27, 2018 on its Web site.

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 uncertainties and risks, including those disclosed under the section titled Risk Factors and Forward-Looking Statements in the company's Annual Report on Form 10-K. Capitala undertakes no obligation to update or revise any forward-looking statements.

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

Thank you, operator. Good morning, everyone. Thank you for joining us. I’m dialing in from a nice cold Berlin, Germany, but we have Steve and Jack in a conference room in Charlotte, North Carolina. Yesterday, we released our results for the fourth quarter and the full year of 2017.

Net investment income was $0.26 per share covering our fourth quarter distributions. Net asset value per share was $13.91 at year end. We originated 43.1 million of investments during the quarter, 40 million of debt, 3.1 million of equity, 96% of debt investments were first lien structures for the quarter.

For the year, 91% of all debt investments were first lien. Moreover, 82% of all debt investments made since the second quarter of 2016 were first lien structures with a weighted average yield of 11.8%. This is in line with what we have been telling you for the past six to eight quarters and reflects our investment shift to senior structure deals.

We reduced non-accrual loans slightly during the period and remain committed to working through underperforming credits. Two recent underperforming first lien energy credits; U.S. Wealth Services and Sierra Hamilton were successfully restructured during the year and have generated approximately 13 million in net asset value growth since restructuring.

Along those lines, we recently announced the addition of Peter Sherman to our team as Chief Risk Officer with oversight of both underwriting and portfolio monitoring. We have significantly enhanced our underwriting process in an effort to ensure that we are investing our capital in the best risk adjusted return opportunities.

During the quarter, we received 6.2 million for our equity investment in Brunswick Bowling Products, Inc. generating a gain of 2.5 million. We anticipate additional equity exits in the normal course of business and continue to explore other opportunities to allow us to reduce equity as a percentage of our investment portfolio.

We continue to have significant liquidity to allow us to be active in the lower middle market focusing on first lien investments. Our pipeline remains robust. However, we are being cautious from an underwriting standpoint as we may be approaching the later stages of the credit cycle. At this point, operator, we will open the line for questions..

Yes, sir. [Operator Instructions]. Our first question will come from the line of Christopher Nolan from Ladenburg. Your may begin..

Hi, guys. The addition of Velum Global Credit to non-accruals, that credit matured 12/31/17.

Is it still on the book in the first quarter?.

Yes. We’re in ongoing discussions with them, so we’ll have lot more news on that when there’s news on it..

Great.

And then the equity appreciation during the quarter relative to the third quarter, any particular driver for that?.

In any particular name or just in general?.

Just in general. I’m trying to think about – given the tax law changes, I would think that for the type of companies you invest in, equity might be a benefit – the equity value could be a beneficiary of that.

Just want to see whether or not that was a factor?.

No, I don’t think that was a big part. Again, as Joe had mentioned, U.S.

Wealth and Sierra Hamilton were a nice piece of that as the restructured energy investments that again was a conversion to equity and that equity is appreciated that we funded [ph] with the higher and more stable prices, and then some other appreciation continuing in the portfolio.

And I would say those reserved to EBITDA improvements or acquisitions within those companies that continue to help them grow. But we are certainly happy with that appreciation..

Yes.

And Jack, my final question is are there any other changes to the underwriting processes that you guys are implementing aside from the ones that Joe referred to?.

Yes. We continue to and we will always continue to improve the underwriting process. So again, some of that was the shift to doing more first lien and that was six to eight quarters ago.

So that was kind of a material change as we looked at risk adjusted return, but just from a process standpoint we continue to improve and again we’re adding new resources and new ways of thinking about things too. And that’s always an area that we want to keep focusing on. As far as are there dramatic changes or different things we’re doing, no.

It’s gradual improvement and doing a better job of it and more accountability at all levels of the underwriting team..

Okay, great. Thanks for taking my questions..

Our next question comes from the line of Ralph Reuben [ph]. You may begin..

Hi, guys.

Could you give me an update on Cedar Electronics and how their recent quarter was?.

Their recent quarter was about on par with budget, so there was no real surprises either positive or negative there. There is a new management team in place and they’re optimistic at where the company’s going to go and we have been working with them in this quarter and trying to nail down a restructuring of that investment..

Okay. And then I’m hearing a lot of good news in the truck industry.

Does that flow through at Kelly's? Are they having better results?.

Yes, certainly better than the ones last year at this time. So yes, with rates are up. And this is still across the industry hard to find drivers, so that’s still an issue. But yes, definitely the rate increase has helped and they have seen better performance..

Okay.

Are there any like new additions to your watch list that you could share with us?.

The 3s and 4s is how we look at it have been pretty stable; and looking at a deeper end of that list, the most recent investment in the 3s and 4s category dates back to mid-2015. So we have seen some kind of stabilization there and having a more manageable list. So there is nothing that was kind of added into the 3s category that’s new..

Okay. And then the favorable adjustment from income taxes, I assume that doesn’t impact NII. That’s below the line..

That’s correct..

Great. That’s it for me. Thank you..

Thank you..

[Operator Instructions]. Our next question comes from the line of Chris Kotowski from Oppenheimer. You may begin..

Yes, I was wondering about the equity positions you’ve been working to monetize and I know that you’re mainly dependent on the controlling sponsors. But I was just wondering with all the kinds of new pools of capital and secondary market in the private equity investments has developed in recent years.

Can you give us I guess the pros and cons of monetizing some of your equity investments in the secondary market?.

Yes. Chris, this is Joe. That’s a great question. We spent a lot of time on this issue. We actually do and often are approached by larger secondary groups. I think that’s what you’re referring to. It can take a secondary transaction.

As you recall, we did one of these secondary transactions in the summer of 2016 where we sold a strip of debt and equity in the BDC at fair value. And so we have done this before and we continue to look at that.

I think when you start looking at fair value of debt and equity with a lot of debt, it’s a much easier process for these secondary groups than when you’re looking at a dozen to two dozen minority equity positions.

With minority equity positions you typically – those are a much different dynamic on fair value and when you monetize to fair value especially when you don’t control those positions. So we do have an infrastructure in place that we could do a secondary sale. We’ve proved that infrastructure out back in the summer of '16.

We do receive interest and offers on that minority book. We’re still evaluating them.

We do think in the normal course of business, some of these should monetize the next quarter or two and that’s really the balance that you’ve got to look as you got a secondary offer that you know they’re going to have a structure in there that’s not going to probably give you 100% fair value day one in the couple dozen minority positions.

However, there’s probably a way to get the fair value or plus depending on earn-out type performance. But if we monetize them, like we have in the past like we just did in Brunswick, we typically monetize them right at our fair value, maybe slightly above, maybe slightly below. But typically, our fair value has been right on point.

And if we can monetize those naturally in the next quarter or two, that really makes a difference. And I think if you look, there’s really several names in there; four to five that are the bulk of that equity appreciation.

And those ones, if you could monetize the larger ones or few of the larger ones, that really can make a difference and we can take that rotating in the first lien yield and really grow our earnings.

But we spend a tremendous amount of time – one of the reasons I’m over here in Berlin, Germany talking with other groups, secondary groups, these big master funds, looking at secondary opportunities for this bucket of equity..

Okay. All right, that’s it for me. Thank you..

I’m showing no further questions at this time. I would now like to turn the call back to Mr. Joe Alala for closing remarks..

Thank you, operator. We thank you for your time today. We are focused, I just want to reiterate, on first lien securities and also the focus on our underperforming credits. And lastly, we are focusing on the rotation of our equity investments and the yield to grow our earnings.

Steve and Jack are around all day if you have follow-up questions, please call. I will be back later this week. And we thank you for your time. Thanks, everyone..

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