Dayl Pearson - CEO, President and Non-Independent Director Edward Gilpin - CFO, Secretary and Treasurer.

Paul Johnson - 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, August 3, 2017. This call is also being hosted on a 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 would cause actual results to differ materially from these 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 you all for joining today's call. Today, I will discuss our recently announced joint venture with Freedom 3 Opportunities and the related redemption of $148 million of debt.

I will also review some of the highlights from the quarter and provide context for 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 more thorough review of the quarter results and financial condition.

We will then open the line to your questions. A presentation outlining a few of our key accomplishments during the quarter can be found on the IR section of our website. Let's start on Slide 3 of our presentation. For the second quarter of 2017, our NII was $0.07 per share.

As a reminder, we also report a non-GAAP metric called Resources Available for Distribution, which is a good proxy for cash available to shareholders. Resources Available for Distribution was $0.09 per share in the quarter. All of these were affected by an unusual level of professional expenses.

Our second quarter distribution was $0.12, consistent with the $0.12 paid in the first quarter. At the end of the quarter, KCAP had approximately $19 million in investable cash due to repayments over the past few months. We expect to invest this cash over the next few months, which will have a significant impact on income, going forward.

Before providing details on our direct lending business and the performance of our asset manager affiliates, I'd like to discuss the recent actions we have taken to facilitate future growth. On July 20, 2017, we announced a joint venture with Freedom 3 Opportunities to create KCAP Freedom 3.

We contributed approximately $35 million to the joint venture, and Freedom 3 Opportunities contributed approximately $25 million in order to capitalize the joint venture, which, in turn, capitalized a new fund managed by one of our wholly owned investment advisers.

The new fund purchased approximately $183 million of loans from KCAP Financial and $25 million from our JV partner. We then used the cash proceeds from the sale to redeem approximately $148 million in debt from KCAP's balance sheet. The target portfolio when the fund is fully invested will be approximately $300 million.

Entering into this joint venture agreement, which is similar to those entered into by other business development companies, is significant for KCAP.

The redemption of $148 million of debt has provided us with substantial flexibility to further strengthen our balance sheet, which will allow us to purse attractive investment opportunities to generate incremental free cash flow and drive shareholder value.

At the same time as the redemption of the debt on our balance sheet, the joint venture will allow us to have exposure to senior middle-market loans through the new fund owned by the JV and managed by a wholly owned affiliate of KCAP. Let's turn to Slide 4 to discuss the performance of our loan and securities business and the asset manager affiliates.

During the quarter, we invested approximately $18.5 million in new originations, with yields comparable to the current portfolio. We also have a robust pipeline of new opportunities for the balance sheet.

Our credit quality continues to be strong, with only two of our investments on non-accrual, representing 1.4% of our total investment portfolio at cost and approximately 1% at fair market value. In addition, the company has one PIK investment on partial non-accrual.

In terms of the market for new CLO funds, the environment is consistent with Q1; liability spreads continue to tighten across the debt stack and activity in the CLO reset market remains robust. Trimaran is pursuing several reset opportunities during the third and fourth quarter.

As of June 30, 2017, our weighted average mark-to-market to par on our debt securities portfolio was 96, consistent with the mark in the first quarter of 2017, of 95.

In terms of our CLO portfolio, during the quarter our weighted average mark-to-market value to par was 53 as of June 30, the same as the weighted average mark-to-market to par of 53 for the first quarter.

Our 100% ownership of our asset manager affiliates was valued at approximately $37 million, based on the assets under management and positive prospective cash flows. AMAs have approximately $2.7 billion of assets under management, with one CLO 1.0 outstanding and seven 2.0 CLOs outstanding.

Our CLO equity portfolio at the end of the second quarter totaled approximately $52 million. At the end of the second quarter, debt securities totaled approximately $243 million and represented about 69% of the investment portfolio. First lien loans now represent 78% of the debt securities portfolio; junior loans represent 17%.

All CLOs managed by KDA and Trimaran continue to be current on equity distributions and management fees. This income stream from our asset manager affiliates allows them to make periodic distributions to us. During the second quarter there were distributions totaling $650,000.

Additionally, as of June 30, our asset manager affiliates had approximately $2.7 billion of par value assets under management. And now I'll ask Ted Gilpin to walk through the details of our financials.

Ted?.

Thank you, Dayl. Good morning, everyone. As of June 30, 2017, net asset value stood at $5.10, which is down from $5.14 at the end of the first quarter of 2017 and down from $5.24 on December 31, 2016. The company declared a $0.12 distribution in the second quarter of 2017, consistent with the first quarter of 2017.

Net investment income was $2.6 million, or $0.07 per basic share, for the second quarter of 2017, down from $3.2 million, or $0.09 per share, for the first quarter of 2017 and down from $5.8 million, or $0.16 per basic share, for the second quarter of 2016.

Interest income on our debt securities for the quarter ended June 30, 2017, was $4.8 million, compared with $4.6 million for the first quarter of 2017. Interest income on our debt securities was $5.2 million in the second quarter of 2016.

Our debt securities portfolio contribution to total investment income for the quarter was 62%, which compares to approximately 59% for the first quarter and 54% for the second quarter of 2016.

Investment income from CLO fund securities decreased to $2.8 million in the second quarter of 2017, compared with $3.1 million in the first quarter of 2017 and $3.4 million in the second quarter of 2016. We received a distribution from our asset manager affiliates of $650,000 in the second quarter of 2017.

Such distribution is in excess of the AMAs' estimated taxable earnings and profits and is, therefore, treated as return of capital. The AMAs distributed $850,000 in the second quarter of 2016, all of which was a dividend to KCAP.

For the 3 months ended June 30, 2017, total expenses increased by approximately $580,000, as compared to the same period in 2016, primarily attributable to costs associated with non-recurring professional fee expenditures.

The company-recorded net realized and unrealized gains on investments was approximately [$20,000] for the three months ended June 30, 2017, compared with net realized and unrealized losses of approximately $2.8 million, or $0.08 per share, for the three months ended March 31, 2017, and net realized and unrealized losses of approximately $2 million, or $0.05 per share, in the second quarter of 2016.

On the liability side of our balance sheet, as of June 30, 2017, par value of our debt outstanding was $174.4 million, consisting of $27 million of senior notes due in October of 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 rate that resets quarterly.

Our asset coverage ratio at quarter-end was 206%, above the minimum required 200% for PDCs. Again, subsequent to the end of the quarter the liabilities of our on-balance sheet debt securitization were paid off in full, leaving the company with $27 million of debt outstanding.

The company's pro forma coverage ratio would, therefore, be in excess of 700%. The company intends to explore appropriate debt financings to support growth opportunities. For additional information regarding the above metrics for the second quarter of 2017 or the second quarter results, please refer to our earnings release and our recently filed 10-Q.

All of our filings are available online at the SEC, at sec.gov, or on our website, kcapfinancial.com. Now I'd like to turn it over to you for any questions..

[Operator Instructions] And our first question is from the line of Paul Johnson, with KBW. Your line is now open..

Good morning guys. Thanks for taking my question.

I just had a question on you guys' CLO management business, I was wondering did you guys at any time this year have you been able to refinance or reset any of your CLOs?.

We have been actively pursing several resets, I think as we spoke on the last call. None of those – again, these are all private placements, so we're limited in what we can say about those and the progress on those.

But we are actively pursuing those opportunities, and we expect you'll be hearing some announcements between now and the end of the year on several fronts..

Okay. Thanks. And then my other question was actually for the professional expenses and just what drove the one-time sort of unusual amount of professional expenses, I'm just assuming that it had to do with the JV that you guys formed with Freedom 3, but - and I apologize in advance if this was stated in the Q. I just wanted to ask about that..

No, that's fine, Paul. Yes, it's various things. That is one of them. There was legal fees and other fees associated with the JV. We also had some one-time recruiting fees for positions that we now have, and we had other various legal expenses which are of a non-recurring nature..

Okay, great. And then my last question was just on that JV that you actually formed, what's typical the management fee for managing such assets in that JV structure, and I'm just assuming that you guys also have exclusive management rights to that contract, as well..

Yes, the collateral manager will be a wholly owned affiliate of KCAP, and the joint venture will have a certain amount of say in new assets. But generally, the fund is controlled by KCAP's investment committee. And we'll be earning a fee on the $300 million, or approximately $300 million, of 42.5 basis points.

And we'll continue to own approximately 60% of the equity. So again we're now getting 100% of the income on $200 million; we'll be getting 60% of the income on $180 million – 60% of the income on $300 million, which is like 100% on $180 million. Sorry. But it will not – it will probably be the early fourth quarter before we get it up to $300 million..

Okay. Thanks for taking my questions. Those were very good answers. .

Thanks..

Thanks..

[Operator Instructions] And I'm not showing any questions in the queue, sir..

Well, thank you very much, everyone, for the call, and we'll talk to you again in November. Thank you..

And ladies and gentlemen, thank you for participating in today's conference. This concludes the program, and you may all disconnect. Have a wonderful day..