Dayl Pearson - President & CEO Ted Gilpin - CFO.

Mickey Schleien - Ladenburg Thalmann & Company Troy Ward - KBW Andy Ellner - JMP Securities Andrew Cryan - BDC Income Fund.

Good morning, ladies and gentlemen, and welcome to the KCAP Financial Incorporated Second Quarter 2015 Earnings Conference Call. An earnings press release was distributed yesterday. If you did not receive a copy, the release is available on the company's website at www.kcapfinancial.com in the Investor Relations section.

As a reminder, this conference call is being recorded today, Thursday, August 6, 2015. This call is also being hosted on a live webcast, which can be accessed at our company's website www.kcapfinancial.com in the Investor Relations section under Events.

In addition, if you would like to be added to the company's distribution list for the news events, including earnings releases, please contact Jamie Lillis at 203-428-3223.

Today's conference call includes forward-looking statements and projections, and we ask that you refer to KCAP Financial's most recent filings with the SEC for important factors that would cause actual results to differ materially from those projections.

KCAP Financial does not undertake to update its forward-looking statements unless required by law. I would now like to introduce your host for today's conference, Mr. Dayl Pearson, President and Chief Executive Officer of KCAP Financial. Mr. Pearson, you may begin..

Thank you. Good morning, and thank all of you for joining KCAP Financial for a review of our second quarter 2015 results. Today I'll review some of the important highlights and activities from the second quarter, as well as provide us some context for our direct lending and the performance of our asset manager affiliates.

I will then turn the call over to our Chief Financial Officer, Ted Gilpin, who will provide a brief recap of our first quarter operating results and our financial condition at the end of the quarter. We will then open the line for your questions at the end of the call.

A presentation outlining a few of the key accomplishments in the quarter can be found on our IR section of our website. To start, let me provide a brief recap of some of the important highlights in the second quarter, which is summarized on Page 3 of the earnings presentation.

In the second quarter, our NII was $0.16 per share and our taxable distributable income was $0.17 per share. As a reminder, we also report non-GAAP metrics available for distribution, which is a good proxy for cash available to shareholders, as well as what is a sustainable dividend.

Available for distribution was $0.20 per share in the second quarter. Our second quarter shareholder distribution of $0.21 per share, consistent with the $0.21 paid in the first quarter and our available for distribution for the entire first half was $0.43. So as opposed to a dividend of $0.42.

I would now like to discuss the performance of our loan and securities business and asset manager affiliates in more detail. Turning to slide 4, during the second quarter, we committed Q2 to approximately $30 million in new originations.

About two-third of these closed before the end of the quarter, most of them in the very late part of June the remainder close in the very early days of July. This is primarily funded by repayments and sales of placeholder assets.

Importantly, these new loans had a better yield of approximately 150 basis points higher than the assets that they replaced. However, as I said, almost all of these deals closed at the end of June or early July, and therefore the higher yield is not reflected in earnings for the quarter.

Our credit quality of the portfolio continues to be strong with only 1 nonaccrual loan representing less than 250% - $250,000 a cost. No loans originated since 2008 has defaulted.

As credit markets continue to become more aggressive, we maintain our credit standards will continue to focus on less risky middle market senior loans for take steps in your funding. We continue to strive to produce a healthy balance between our 3 main sources of investment income.

While we continue to see good deal flow in middle market pricing and structure continues to be challenging for both senior but particularly, junior capital investments. As always, we continue to maintain our standards, as I said earlier, and we'll not sacrifice credit quality in order to maintain to make short-term income goals.

KCAP believes that the current asset mix and allocation of first lien secured loans, mezzanine loans and CLO equity is the appropriate balance for our proper risk-adjusted return. In terms of the market for our new CLO funds, the environment has remained robust thus far in 2015, then we've begin warehousing for our next CLO fund.

Our asset manager affiliates have committed $22 million to provide first loss support for this warehouse. We continue to be optimistic regarding our ability to issue a new CLO in the near future. Our supply of new deals on the loan side, which are essential to raising new funds has been challenging in 2015. As of June 30, 2015.

Our weighted average mark to market value on part of our debt securities portfolio has decreased to 98 compared to 99 in the first quarter. As far as the CLO portfolio, our weighted average mark-to-market value to par was 62, a slight decrease in the weighted average mark-to-market of 64 for the first quarter.

Our 100% ownership of our asset manager affiliates was valued at approximately $74 million based upon their assets under management and perspective - positive and perspective cash flows on June 30th 2015. Our investment portfolio at the end of second quarter totaled approximately $474 million.

Looking at the composition of our investment portfolio, our portfolio quality continues to hold up well with no new assets and nonaccrual, which is a testament to our underwriting investment discipline. At the end of the first quarter, debt securities totaled approximately $298 million and represented 63% of the investment portfolio.

First lien loans represents 74% of debt securities and junior loans 26%. Importantly, while we did have one syndicated loan with the significantly on market this quarter, this is a small position in overall credit quality does remain strong. All CLOs managed by KDA and Trimaran continue to be current on equity distributions and the management fees.

The stable income stream for our asset manager allows them to make periodic distributions to us. In the second quarter, there was a distribution of $2.3 million.

Additionally, as of June 30, 2015, our asset manager affiliates had approximately $3.2 billion of par value of assets under management, which is up from $2.9 billion at the end of the first quarter. Importantly, the $3.2 billion more than $2.2 billion represents CLO 2.0 funds and less than a billion represents older funds that are deleveraging.

As always we continue to evaluate our equity and debt financing options, which will allow us to focus on continued balance sheet growth, increasing net investment income and income dividend distributions. I would like to comment on something else, which is generally misunderstood particularly by retail investors.

Every year since 2008 KCAP along with almost all of the BDCs asked for permission to sell equity below NAV. This is considered the best practices and as always been supported by both proxy advisers and most institutional investors. KCAP is never sell shares below NAV in an offering has no plans to do so. Also consistent with many BDCs.

Given the significant stock ownership by management, the board in our internally managed structure our incentives are aligned with shareholders.

Therefore, we would only use this ability to sell shares in case of an unforeseen event that would put our shareholders at significant risk of loss or if we had an opportunity to make an investment that was enormously accretive to earnings.

We do not foresee either these things happening, but see the ability to sell below NAV as an insurance policy, which is consistent with most of other BDCs. In the past, our shareholders barely voted in favor, but it's always been challenging to obtain a form since most retail investors do not vote.

With institutional ownership 50% lower today than two years ago in the BDC sector in general that shows becomes even greater every year for all BDCs. All in all, we are pleased with our first quarter results and the momentum with our business - as in the second quarter. And now I will ask Ted Gilpin to walk through the details of our financials..

Thank you, Dayl. Good morning, everyone. As of June 30, 2015, our net asset value stood at $6.96, which is down 2.8% sequentially from $7.16 at the end of first quarter of 2015 and up slightly from $6.94 at the end of the fourth quarter of 2014. Quarter-over-quarter change is due primarily to unrealized mark-to-market in our portfolio.

Net investment income was $5.8 million or $0.16 - as per basic share for the second quarter of 2015 down $6.5 million or $0.18 per basic share for the first quarter of 2015. And from $4.6 million or $0.14 per basic share for the second quarter of 2014.

Taxable distributable income a metric we believe is more meaningful for rig was $6.3 million or $0.17 per basic share for the second quarter of 2015 down from $7 million or $0.19 per basic share in the first quarter of 2015 and compared to $6.8 million or $0.20 per basic share in the second quarter of 2014.

Resources available for distribution in non-GAAP measure, which is NII plus taxable distributable excess cash on CLO investments plus the cast distributed by the AMA in excess of the taxable earnings was $7.4 million or $0.20 per basic share during the second quarter versus $8.3 million or $0.23 per basic share in the first quarter of 2015 and $8.4 million or $0.25 per basic share the same period of 2014.

Company declared a $0.21 distribution in the second quarter, which is in line with the $0.21 paid in the first quarter of 2015, year-to-date company distributed $0.42 of the $0.43 available for distribution.

Interest income on our debt securities for the 3 months ended June 30, 2015 was $5.9 million or $0.16 per share compared to $6.2 million or $0.17 per share for the quarter ended March 31, 2015 when compared to $5.2 million or $0.15 per share for the second quarter of 2014.

As Dayl just mentioned earlier, investments remain in our debt securities portfolio resulted improve balanced contribution to investment income from our three main areas of business. Our debt securities portfolio continues to contribute roughly half of our total investment income in the quarter.

Investment income from CLO fund securities was $4 million or $0.11 per share in the second quarter of 201, which is down from $4.6 million or $0.12 a share in first quarter of 2015 and up from $3.1 million or $0.09 per share in the second quarter of 2014. We recognized $1.2 million of dividend income from our asset manager.

So it's during the second quarter are $0.03 per share stand slightly from the first quarter's dividend of $1.4 million or $0.04 per share, and compared to $1.4 or $0.04 a share in the second quarter of 2014.

The dividend portion of the distributions from our asset managers is estimated on an interim basis using a projection of annual taxable income for the. Tax attributes of distributions to turn it on a full calendar year basis is finalized at year-end.

The excess cash available for distribution from our asset managers was $1.0 million or $0.03 per basic share. In the second quarter of 2015, $1.3 million or $0.03 per basic share in the first quarter.

Overall, the distribution distributed $2.3 million or $0.06 per basic share in the quarter ended June 30, 2015, compared to $2.7 million or $0.07 per basic share in the first quarter 2015. For more detail on the breakdown of KCAP's components of distributable income, please see slide 5 in the second quarter earnings presentation.

Company recorded net realized and unrealized depreciation of approximately $4.6 million for the second quarter of 2015, as compared to net realized and unrealized appreciation of $7.6 million during the second quarter of 2014.

On the liability side of the balance sheet as of June 30, 2015, our debt outstanding was approximately $224.1 million consisting of $38.6 million of convertible notes, due in March of 2016 at a fixed rate of 8.75%, $41.4 million of senior notes due 2019 at a fixed rate of 7.375% and $144.1 million net of discount of debt securitization financing, which has stated interest rate and resets on a quarterly basis based on the current levels of benchmark three month LIBOR.

Our asset coverage ratio at quarter end was 212%, above the minimum required 200% from BDCs. For additional information regarding the above metrics or second quarter results, please refer to our 10-Q, which was filed yesterday. It's available online with the SEC announced from our website www.kcapfinancial.com.

With that, I'd like to now turn it back over to the operator and answer any questions..

[Operator Instructions] And our first question comes from the line of Mickey Schleien of Ladenburg. Your line is open..

Listen, with all due respect, this week we saw announce that it was selling its external manager in order to pursue a more conventional investment strategy for its BDC.

And then in their words, the market has spoken and just doesn't like to see a low investment strategies within a BDC, so my question is, are you contemplating of shifting your strategy and if you're not what plans do you have to address this persistent discount in your stock price relative to NAV?.

Yes, obviously we're familiar with that and we know the folks pick very well and have a lot of respect for them.

But I think we need to focus on a very significant difference in terms of the strategy that they and others have pursued and the strategy KCAP has pursued and then is the fact that they and others have bought equity positions, control equity positions and third-party managed CLOs.

And so the only income they receive on its positions, the actual return they get on the equity which is there actually as you now can be fairly attractive.

Our strategy is very different in that - our equity investments, which were significantly less in terms of percentage of our asset mix - Are to support our asset management business, and so therefore not only we are generating income on the CLO fund securities, but we're generating significant fees for the asset manager and in turn those are distributed to shareholders, so when you look at it on a total ROE basis.

It's a different, - it's a very different strategy.

And so, yes I'm not necessarily sure that the discount our stock price today is much related to the CLO assets as it is related to the fact that we had a fairly significant, we stated at the end of last year, which I think we're still educating investors on and so we do not anticipate this change in strategy.

I think one thing we've been pretty vocal about for the last three years is focusing more of our attention on the direct lending business. So there were less dependent upon the income from both the CLO management CLOs, and we've done that and we continue to do that so.

As I said, we are in the process of who we are, the asset manager affiliates in the process of warehousing in front of CLO..

Well, I appreciate that. Dale, maybe if I could just have one follow-up question.

In terms of the direct lending, which is a channel that the market appreciates, can you update us on how many investment professionals do you directly have in that, the origination business and what are the channels of their attacking are they are looking to source fuels directly or they're working on building relationships with PE or they working on club sort of relationships, can you just give us an update on that?.

I had a strategy and that are really changes we've focus - we've said in the past our focus of our of our direct lending business is all of the above strategy. We have lots of direct relationships with sponsors. We also have direct relationships with other BDCs and other SBICs and others who are in our business and we do club up deals fairly often.

I think you'll see some of the names that we have on our portfolio are similar to the names of others, that are other BDC portfolios.

So I think we continue to do that, all of the above, strategy and I think we've - and it could be a bit more focused on the senior side recently just because the attractiveness of our KCAP senior funding vehicle in terms of the, cost of the debt capital, the amount of leverage we get and essentially when you look at that as a standalone vehicle and the assets that applies, to that the return on equity is the actually as attractive as not more attractive the mezzanine loans in the market today and obviously from a risk perspective, we think it's a lot lower, but a lot of this comes through our sponsor relationships, some come through our relationships with some of the smaller banks that are out there leading deals BDCs, SBICs and others all so..

So they are given what you just said, we're getting persistent feedback from BDCs that, multiples remained very stretched in terms our or not as tight as folks would like and it's just very difficult to find good risk-adjusted returns, so what - how do you feel about your pipeline and the potential to invest for the second half of this calendar year, given what I just said?.

I think all of that's true. And I think, we said that, in our presentation today.

I mean it's a very difficult market, there is that too much capital, particularly in the junior capital side, again, I think we're finding on a relative value basis, a lot better value in the middle market club sort of senior side and again as long as we consisted it those loans into the KCAP senior funding vehicle is a very attractive returns.

So we have a good backlog of deals, but to be honest with you, the quality up to the year-to-date is not on the mezzanine side, certainly it's not been terrific.

We have a couple of things in the pipeline now but they very early stage, but we would expect, anticipate closing a couple of deals on the mezzanine side between now and the end of the year..

Our next question comes from the line of Troy Ward of KBW. Your line is open..

Just a follow-up a little bit on Mickey's line of questioning.

First of all I think want us in, was the number of origination people you have on the platform they - I didn't hear that, do you have a number for that?.

We have a couple of origination people. We also have the underwriters, credit analysts is about total about 99 people..

How many people are front facing on your direct funding basis on originations?.

All of those people are involved, to some extent originations so..

Okay. And then to go back to commentary in your commentary on the CLO and kind of relationship to take. I think I would like to read make you talking about there.

From a retail perspective, I understand that your business is completely different than taking there is higher value in a position, you have of originating and an issue in the CLO's in getting the management fees, but I would tell you that from our perspective, the structure itself is so complicated.

Lot of institutional investors have a hard time getting their head around what the potential risks are in fluctuations in volatility and quite honestly, they are just kind of on the whole idea. So I think any opportunity you have to be able to simplify your operations.

Obviously, statement doesn't help but again that almost amplifies the problem statement was relative to the CLO business. So I just wanted to reiterate some of those comments.

And then a couple other things, on your dividend versus your cash available for distribution, if I'm thinking about this right, you said your fair value of your CLOs are currently in the 60% range. So when you exit those and realize that loss, assuming that that's what happens and that's CLO equity, eventually is going to decline in value to the end.

What that loss help offset some of the taxable earnings and therefore allow you to be able to retain that capital? So if you pay out that capital now, will that be a detriment value at some point in the future?.

There's traits that there is the --when they sell or when they finally windup they should, in theory, wind up or essentially where they are being carried at fair value. And the unrealized gain or unrealized loss will shift to realized loss. It's not a taxable losses we can offsetting it. Gains are or even the losses we've had before.

income and the tax treatment is always been all the flow through that's brought down some of that value as essentially return principal has been paid out. Because it's taxable income to the risk..

But if you see a little --if you sell it then, that generates a capital loss.

But if it winds down, shouldn't it generate an operating loss to where you should be able to offset the difference between your cost basis and your fair value?.

Now with the election and we chose for the CLO treatment. So yes, we elected the or everything comes in is taxable distributable income, along the way. So all the tax distributor are taking care of before it winds down further others have trade as well..

I'm sorry to interrupt you, what was that?.

Others constructed this as well..

Okay. And then Ted one last question, I know there's a slide in here and you spoke a little bit there. But - the hard number what was number of originations you did in the second quarter and what was the number - the dollar amount of repayments..

Well, the repayments of that 30 million, again funded almost all of the 30 million in originations in June and July from either repayments or sale of assets about a third of that 30 million was repayments and about two-thirds was sale of assets. So, and as I said about....

So you had 30 million of repayments and 30 million of originations, but now closed by June 30?.

Correct. And the difference between that - between the year level was sold or repaid and what we invested is 150 basis points approximately, higher obviously in the new assets..

Your next question comes from the line of Andy Ellner with JMP Securities. Your line is open..

The 7.4 times book value per share, an internal management structure that is more align with the shareholders. What is - in the Board and implementing a share buyback program to drive value for shareholders..

Well, I think that's a great question, Andy. And I think it's something that we and the Board look at on a regular basis and I think mathematically and the short-term I think share buybacks looked like a very attractive alternative. But I think we and the Board manage the business for long-term value not short-term value.

First of all, I would say that based on the analysis that we've seen these share buybacks when they've been done, not really had a significant impact on the share price number one. Number two, is a closed and effectively a closed fund with leverage limitations and we're sort of at or slightly above our optimal leverage.

I think the Board wants to make sure that the significant cushion in case of unforeseen events such as happened in 2008 where you could have a significant sell off and credit markets and all the sudden - without doing anything to be in violation of your leverage covenants, which would be significantly negative for the business.

I think the other important point to keep in mind is the fact that we have $39 million of convertible bonds coming due within the next nine months.

And we want to make sure, we have the flexibility to refinance those bonds and that get to the point where we don't have a liquidity and more flexibility to be able to refinance those bonds in any attractive enough manner, that's accretive to shareholders. So it's something we certainly looked at and we consider on a regular basis.

But I think when you look at the long-term as much as --may make sense mathematically in the short term, we don't think it's the --and the Board doesn't believe it's the right thing for the company at the moment. That to say that we wouldn't do it at some point in the future..

Your next question comes from the line of Andrew Cryan with BDC Income Fund. Your line is open..

Just to reiterate, on the last comment on the stock buyback, it's very Dayl, it's very frustrating from a shareholders' point of view, seeing why your stock is trading. You have a very high mix relative to BDCs have liquid debt investments and I can appreciate the comment on the leverage.

But the reality is, we both know that you can sell some of these loans, which are trading I think a weighted average basis about 98 or 99, pay down some of the convert and simultaneously buyback stock. So I'm not quite clear on the comment of how a stock buyback with a 30% discount to NAV is a temporary benefit.

It is truly accretive to now, frankly, there is no risky investment that's going to get to a 30%, accretion. So if you could maybe just walk me through the analysis of the Board came to the this says the best, not the best to use shareholder capital at this point in time..

I'll just walked to that out. Since I'm not going to comment any further. I'm not going to comment how the board looks at things in detail. Those are things that are discussed at the board level and I have given a broad outline of the thoughts of the Board and I appreciate your comments but I'm not going to comment any further..

Just wanted to reiterate, there are BDCs that are trading at narrower discounts that are now, implementing buybacks. So, we'd certainly like to appreciate it and what has a very high mix of liquid loans. So, thank you..

That concludes today's question-and-answer session. I would now like to turn the call back to Mr. Dayl Peterson for any further remarks..

Thank you all and we'll look forward to talking at the end of the next conference call. Thank you..

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