Dayl Pearson - President and Chief Executive Officer Ted Gilpin - Chief Financial Officer.

Ryan Lynch - KBW.

Good morning, ladies and gentlemen and welcome to the KCAP Financial Incorporated 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, March 9, 2017. This call is also being hosted on the live webcast, which can be accessed at our company’s website at www.kcapfinancial.com in the Investor Relations section under Events.

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 could 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 at KCAP Financial. Mr. Pearson, you may begin..

Thank you. Good morning and thank you for joining KCAP Financial for a review of our full year 2016 results. Today, I will review some of the important highlights and activities from the year as well as to provide some context of our direct lending business 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 full year operating results and our financial condition at the end of the year. We will then open the line for your questions at the end of the call.

A presentation outlining a few of our key accomplishments during the year can be found on the IR section of our website. To start, let me provide a brief recap of some of the important highlights from the year end, which are summarized on Slide 3 of our earnings presentation.

For the year ended 2016, NII was $0.50 per share, taxable distributable income was $0.40 per share. As a reminder, we also report non-GAAP metric resources available for distribution, which is a good proxy for cash available to shareholders as well as what a sustainable dividend is.

Resources available for distribution, was $0.54 per share for the year end. Our fourth quarter distribution was $0.12 per share compared with $0.15 in the fourth quarter of 2015. 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 year, we invested approximately $73 million in new originations. Almost half of this occurred in the fourth quarter with much of that closing in December. As a result, the impact on our NII was negligible from those originations.

The mezzanine market has remained very competitive this year and therefore we have focused our opportunities in the senior middle-market space, where we believe – which we believe still has attractive risk return profile.

Our credit quality of our portfolio continues to be strong with only two of our investments on a partial non-accrual status, whereby we have recognized income on only a portion of the contractual amounts due. Both of these assets have a cash and PIK interest component.

We are comfortable with our current PIK exposure and note our 2016 PIK income was approximately 3% of total investment income. As always, we continue to maintain our standards as I have previously said and will not sacrifice credit quality or any short-term income goals.

During 2016, KCAP monetizes investments in DVR, which included a realized gain and warrants of approximately $4.5 million. In terms of the market for new CLO funds, the environment has improved in 2016 and continues with positive momentum into 2017.

Our asset manager affiliates closed a $400 million CLO in December 2016, increasing AUM to approximately $3 billion. Although there are some short-term headwinds regarding increased regulations, including risk retention, we expect to continue issuing CLOs in 2017 and beyond. KCAP has the capital available for CLO issuance.

As of December 31, 2016, our weighted average mark-to-market value to par on our debt securities portfolio was 95, consistent with the same mark in 2015.

While the syndicated loan market has experience a tremendous way of re-pricing starting in Q4 2016 and continuing into Q1 2017, the middle-market assets have had fewer re-pricing and spreads on new middle-market senior loans in the fourth quarter were quite attractive.

As far as the CLO portfolio, our weighted average mark-to-market value to par was 54 as of December 31, 2016, an increase in the weighted average mark-to-market to par $0.50 at December 31, 2015.

Our 100%, ownership of our asset manager affiliates was valued at approximately $3.2 million based upon assets under management and positive and prospective cash flows at December 31, 2016. Trimaran 7 was called in Q1 2017 and therefore we are expecting a final incentive fee of approximately $2 million to $3 million in Q1.

Our investment portfolio at the end of the fourth quarter totaled approximately $366 million. At the end of 2016, debt securities totaled approximately $238 million and represented about 65% of our investment portfolio. First-lien loans now represent 84% of debt securities portfolio and junior loans 15%.

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 affiliates allows them to make periodic distributions to us. During the year, there were distributions totaling $2.7 million.

Additionally, as of December 31, 2016, our asset manager affiliates had approximately $3 billion of par assets under management. As always, we continue to evaluate our equity and debt financing options, which allow us to focus on continued balance sheet growth, increasing net investment income and dividend distributions.

And now, I will ask Ted Gilpin to walk through the details of our financials..

Thank you, Dayl. Good morning, everyone. As of December 31, 2016, net asset value stood at $5.24, down from $5.82 December 31, 2015. Net investment income was $18.5 million or $0.50 per basic share for the year ended December 2016 from $24.2 million or $0.65 per basic share for the year ended 2015.

For the full year, 2016, KCAP had cash available for distribution of $0.54 and distributed $0.57 to shareholders. Cash available is made up of taxable distributable income, cash received in excess of taxable earnings on our CLO equity investments and cash in excess of taxable earnings received from our asset manager affiliates.

At this point, I would like to discuss some of the details of our full year results for 2016. Interest income on our debt securities for the year ended December 31, 2016 was $20.8 million, down from $24.1 million compared to the year ended December 31, 2015.

Our debt securities portfolio contribution to total investment income for the year was 58% compared with 53% for the corresponding period in 2015. Investment income from CLO fund securities was $13.2 million for the full year of 2016 compared to $15.7 million in 2015.

Our asset managers made distributions of $2.7 million or $0.07 per basic share during 2016 compared to $9.1 million or $0.24 per basic share in 2015.

Company recorded net realized and unrealized depreciation on investments of approximately $19.5 million, $0.53 per basic share during the year ended December 31, 2016 primary attributable to our investment in our asset manager affiliates as compared to net realized and unrealized appreciation of approximately $42.8 million or $1.16 per share during the year ended December 31, 2015.

On the liability side of our balance sheet as of December 31, 2016, the par value of our debt outstanding was $180.9 million, consisting of $33.5 million of senior notes due in October 2019, with a fixed rate of 7.375% and $147.4 million of our on balance sheet debt securitization financing transaction, which has a stated interest rate that resets quarterly.

Our asset coverage ratio at quarter end was 205%, above the minimum required 200% for BDCs. For additional information regarding the above metrics for the full year 2016 results, please refer to our earnings release and our recently filed 10-K. All of our filings are available online with the SEC at www.sec.gov or on our own website kcapfinancial.com.

And with that, we would now like to turn it over to you for your questions..

[Operator Instructions] And our first question comes from Ryan Lynch from KBW. Your line is now open..

Good morning.

First, I just want to make sure I heard you correct, did you say that you guys expect to receive $2 million to $3 million of incentive fee payments in Q1 ‘17 from calling Trimaran 1?.

Yes. Trimaran 7..

Sorry, Trimaran 7. Okay.

So with that said, I mean as I look at fees dividend distributed from the asset manager, you guys recorded no income in the fourth quarter of 2016 or third quarter of 2016, so what is your outlook for 2017 in terms of cash distributions paid to KCAP from the asset manager as well as the GAAP income to be recognized from the asset manager from those distributions?.

Yes.

So again, what we would expect to come up from the asset managers in 2017 would be not with taxable earnings, but from its cash available for distribution, primarily – as we mentioned last, I think it was last quarter that we have reorganized our asset managers under one primary holding company, which means they have a lot of taxable goodwill and other things that will eat into their taxable distributable earnings.

So yes, what it will be is cash available for distribution, some of that cash obviously from the – for the liquidation or call of Trimaran 7.

I don’t think we have necessarily given guidance on how much cash we would expect, but there will be cash for distribution, we are still trying to determine how much we need to leave down there for risk retention and how much we are going to distribute up..

Okay.

So – but from a GAAP standpoint, you guys do not expect to record any GAAP dividend income from the asset manager in 2017, even though they may actually pay up some cash distributions, correct?.

Correct..

Okay.

And then can you just talk about the environment for issuing CLOs right now, obviously loan pricing has tightened across the market, but we have also heard AAA pricing has really come in really nicely in 120s to 130s range, so can you just talk about the environment for issuing new CLOs and can you provide any guidance on the timeframe for when you would like to close your next CLO?.

Yes. I think you have to be a little bit careful with pricing on the AAAs in early – late ‘16 and early ‘17, because a lot of the transactions, headline transactions are just re-pricing of existing CLOs. And those tend to that much tighter spreads, because you are much – you have to reinvest in period close to the end of the reinvestment period.

So it’s a much shorter duration. So much of the activity in the first quarter has been re-pricings of CLOs as opposed to actually brand new CLOs. And there are couple of reasons behind that, people are trying to obviously improve the economics on existing CLOs, while they can.

Secondly, I think people have been reluctant to be one of the first ones out in the risk retention land because there is still a lot of confusion about accounting and other things and exactly what is risk retention compliant and not. So there is still a lot of people trying to understand what needs to be done to be risk retention compliant.

So I think that’s why you have seen a lot of the agents out there just doing refinancings, they are not doing new deals. They are doing very few newer deals. We think that will start to change as we get into the second quarter.

In terms of timing on our part, we are going to sort of wait to see, let some other people go to the brain damage of deals in the new world. But we have capital available. We have cash on the balance sheet available to do a warehouse, if we want to open one tomorrow. So I would just say stay tuned.

We don’t really have a specific timetable, although we do – I think as we said earlier, we do want to issue a new CLO in 2017..

Okay.

And then just one last one, you guys talked about a $3 million write-down in your asset manager affiliates, can you just provide some commentary on what drove that write-down this quarter?.

Yes. I mean I think that it’s primarily valued on its future – discounted future cash flows as we received cash as those deals wind down and we would add fewer new deals. You will see attrition, if you will on the value. We did add one deal, new deal in December, which helped a little bit.

And so until we replace the old deals with new deals paying same amount of asset management fees, you will continue to – it will sort of remain in some sort of pattern along those lines..

I think part of it is, for – on a conservatism basis, we sort of pushed out – as we say, we will look at sort of not only current deals, but current deals being replaced and we sort of pushed out the rapidity with which we will do new deals in the marketplace for the moment.

And so if you push out those new potential cash flows and you adjust the fees accordingly, that has an impact on your discounted cash flows, which is the primary driver of the value..

Okay. Thank you for taking my questions..

Thanks Ryan..

[Operator Instructions] And at this time, I am showing no further questions..

Okay. Well, thank you very much for participating in our call today. And we will be talking to you again in May. Thank you..

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