Dayl Pearson - President, CEO & Director Ted Gilpin - CFO, Secretary &, Treasurer.

Paul Johnson - KBW Christopher Nolan - Ladenburg Thalmann.

Good morning, ladies and gentlemen, and welcome to the KCAP Financial Inc 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, Wednesday, November 7, 2018. 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 Financials 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 introduce your host for today's conference, Mr. Dayl Pearson, President and Chief Executive Officer of KCAP Financial. Mr. Pearson, you may begin..

Good morning and thank you all of you for joining KCAP Financial for review of our third quarter 2018 results. Today, I will review key highlights and activities from the quarter as well as provide context for our direct lending business and the performance of our Asset Manager Affiliates.

I will then turn over the call to our Chief Financial Officer, Ted Gilpin, who will provide a more thorough review of our operating and financial results for the quarter, we'll then open the line for the questions. Our performance in the third quarter was consistent with a year ago period and we're pleased with the stability of our business.

We recognized that while we're continuing to execute on our strategy of lowering our borrowing cost, optimizing our balance sheet and positioning ourselves for growth. We're operating in a highly competitive environment.

This is particularly true of good quality investment opportunities and as the management team, if we're continuing to evaluate a number of actions we can [indiscernible] put KCAP in a better position to put our capital to work prudently and efficiently.

And we've recently touched on our sources of liquidity as what we call we have a credit line off $50 million of which approximately $27 million remained undrawn as of September 30 and we also had cash on hand at September 30, $27 million. So our September 30th dry powder was approximately $54 million.

We have issued a redemption notice for the remaining $7 million of our 7 and 38's bonds which redeem next October, so that would reduce the dry powder to $47 million. We also have a large pipeline of potential new deals with a reasonably higher probability of closing in the fourth quarter and first quarter of next year.

Fourth quarter has historically been one of our better quarters for originations. Now let me give you a high level summary of our third quarter 2019 financial highlights before handing the call over to Ted. For the third quarter, our net investment income was approximately $3 million or $0.08 per share up from $0.06 per share in the second quarter.

NII for the nine months ended September 30 was $0.21 per basic share estimated taxable distributable income for the nine months was $0.24 a share. Some of the improvement in NII came from repayments in exists and investments and also operating efficiencies.

Turning to our performance of our Asset Manager Affiliates during the quarter primary and successfully closed a new $400 million CLO Catamaran CLO 2019-1 during the third quarter. And KCAP purchased approximately 24% of the subordinated securities issued by at CLO.

For the first nine months the AMA's have distributed $1.9 million to KCAP versus $2.2 million for the same period last year. We recognized $750,000 income on our joint venture investment during the third quarter up from $685,000 for the third quarter of 2017. We're pleased with the performance of the joint venture in line with our expectations.

Our third quarter distribution was $0.10 per share the same as the second quarter of 2018. At the end of the quarter we had approximately $27 million investable cash as I mentioned which we intend to deploy and transaction we can generate cash flows we need to fund further distributions to shareholders.

As of September 30, 2018 our weighted average mark-to-market on PAR for debt securities was 93 slightly lower than the market in the second market, in the second quarter. Turning to our CLO portfolio our weighted average mark-to-market to PAR was 71.9 slightly higher than the prior quarter end.

The market for CLO funds continues to be strong and we could see another reset or perhaps two resets in the near future and while we've already done a fair amount of reset, there is always potential to do more. We'll keep you updated on our decisions when they're made.

100% ownership of our Asset Manager Affiliates has valued at approximately $35.8 million based upon assets under management and perspective positive cash flows. The AMA's have approximately $3.2 billion of assets under management with all CLO 1.0 deals we redeemed and six 2.0 CLOs and the JV outstanding.

Our CLO funds securities portfolio at the end of the quarter was approximately $48 million. At the end of the third quarter debt securities approximated $140 million represented 51% of our investment portfolio. Secured loans now represent 96% of the debt securities portfolio.

All CLO managed by our asset manager affiliates continue to be current equity distributions and all management fees. The income stream from our AMA's allows them to make periodic distributions to us during the quarter, there was a distribution of $300,000.

We remain focused on reshaping the portfolio so that we can put capital to work and generate returns for our shareholders. We open minded in avenues that generate value and are constantly looking opportunities to bring shareholder value. And now I have Ted Gilpin to walk through the details of our financials.

Ted?.

Thank you Dayl, good morning everyone. As of September 30, 2018 net asset value stood at $4.66 compared to $4.87 as of December 31, 2017. As Dale just mentioned our net investment income was $2.9 million or $0.08 per basic share for the third quarter of 2018.

Net investment was for nine months ended September 30, 2018 was $0.21 per basic share while the estimated taxable distributable income for the nine months of 2018 was $0.24 per basic share.

Interest income on our debt securities for the quarter ended September 30, 2018 was $4.8 million or $0.13 per basic share compared with $4.3 million or $0.12 per share for the second quarter of 2018. Interest income on our debt securities was $2.4 million or $0.06 per share in the third quarter of 2017.

Our debt securities portfolio contribution to total investment income for the quarter was 67% which compares to approximately 62% for the second quarter of 2018 and 39% for the third quarter of 2017.

Investment income from CLO fund securities decreased to $1.3 million or $0.03 per basic share in the third quarter of 2018 from $1.5 million or $0.04 reported in the second quarter of 2018 and $2.8 million or $0.08 per share in the third quarter of 2017.

We received distribution from our Asset Manager Affiliates of $300,000 or $0.01 per share in the third quarter of 2018 none of which is expected to be return of capital. The Asset Manager Affiliates distributed $800,000 or $0.02 per basic share in the second quarter of 2018, 500 of which was return of capital.

For the three months ended September 30, 2018 total expenses were higher by $480,000 or $0.01 per basic share compared to the same period 2017 primarily attributable to increase in interest expense.

The company recorded net realized and unrealized loss on investments of approximately $1.6 million or $0.04 per share for the three months ended September 30, 2018 compared with net realized and unrealized losses of approximately $3.8 million or $0.10 per share for the three months ended June 30, 2018 and net realized and unrealized gains were approximately $816,000 or $0.02 per share in the third quarter of 2017.

On the liability side of our balance sheet, as of September 2018 we had approximately $107 million our value of borrowings outstanding with the weighted average interest rate of 6.1%. Our asset coverage ratio at quarter end was 259% compliant with the current minimum required 200% for BDC's.

As you know BDC's can increase their leverage under a newly passed Statue and KCAP's Board has approved the adoption of the new leverage which will become effective March, 2019. KCAP will still be restricted in its ability to increase leverage by covenants in our outstanding publicly traded debt.

But of course, the new asset coverage ratios could give us significantly more flexibility in the future. Subsequent to the quarter end, we redeemed the remaining $7 million par outstanding of 7.375% Notes. With that, we'd now like to turn the call over to you for any questions.

Operator?.

[Operator Instructions] our first question comes from Paul Johnson with KBW. Your line is now open..

When I look at your portfolio it appears that portfolio shrink third quarter, 2018 but the CLO investments increased with the new CLO you guys issued.

However when I look at the interest income, it appears that the interest income increased while the CLO income feel quarter-over-quarter and I was kind of hoping that you guys reconcile the two, I mean are there any kind of one-time items fees or flowing through the interest income line to make that [indiscernible] so..

Yes, I think the debt portfolio shrank primarily because of the repayment of the loan we make [indiscernible] the first loss in the warehouse since that warehouse closed out on September 27, with that $23 million is repaid on September 7. So other than that our portfolio was up a bit, if you sort of took that out.

So I think you got to adjust for that, so we had the entire interest for the entire quarter on a $23 million at 9%, so that if you wanted to back that out you can sort of do a pro forma..

And conversely very little earnings on the new investment in CLO..

Correct the investment in CLO closed on the same day, so that $10 million investment we had essentially no earnings on in the quarter, so you have to sort of take that $10 million and put into the numbers for the full quarter to sort of do the complete pro forma..

Sure now that makes sense, that makes sense. And then when I look at professional expenses I mean this quarter was around $900,000 or so. I mean is that a good run rate because we kind of consistently been a little bit under what you guys have put up their but, does $900,000 a quarter is that reasonable..

It should come back down again, there's a few items in the third quarter which raised that, it was about $130,000 [indiscernible] in the third quarter they don't, aren't normally in the quarter. And as you know we've had some other higher expenses through the year, mostly in legal fees. But so we expect that to come down a little bit more..

Okay and lastly, this quarter you guys just a pretty good yield on your JV I think, was around 14.1% annualized yield which is very good. I mean is that, I mean is it reasonable to expect that's what we can get going forward on your JV investment there..

Obviously that's somewhat variable, I think when we upsize the JV in the fourth quarter of 2017 in order to be fully invested we had a fair amount of broadly syndicated loans in that upsize of by about $100 million so those have a lower yields in it and over the course of the last three quarters we've rotated out of some of those lower yielding loans and therefore substituted for those with middle market loans which have higher yields on them.

So I think that's why that yields have move up over the course of the year.

Now we get repayments and then we want to get repayments and another 500 loan we have to keep, so we got to keep fully invested obviously and we would buy L350 broadly syndicated loan that's going to have an impact, so it's going to subject sort to the repetitive repayments and the pipeline of new senior loan middle market loans.

That pipeline news picking up in the line - few weeks and so we would expect to continue to rotate out of some lower yielding loans, but then again they're probably going to be some prepayment, there already have been some prepayment since the end of the quarter. So but we think it's going to be in that..

Range..

That range of what it's been up till now, we like to keep it there. But as you know spreads are under pressure to some extent. You do pick up a little bit with rising LIBOR because your liabilities are not 100% match with your assets and the equity here is a pretty big chunk, so rising LIBOR has a help side as well..

Thanks those are all my questions. Thanks guys..

Thank you and our next question comes from Christopher Nolan with Ladenburg Thalmann. Your line is now open..

Ted, what's the weighted average portfolio yield in the quarter I didn't see in the Q?.

Minus 40 [ph]..

And I guess well Ted looking for that, Dayl are there any plans to redeem the 6.125 Notes?.

Well they're not callable until September of 2019. We're always looking at alternatives and so there's a potential to redeem those notes next year so that we can take advantage of the higher leverage number, but there is - we are not anywhere near our leverage limit at this point. There is not a rush and we can't call them until next September..

And then on the leverage question, your leverage is still pretty low, is the plant, is the headwinds to you just repayments and so forth.

Or are you sort of just other things?.

Yes, well as I think I mentioned you know there's a bit of seasonality in our origination business, third quarter and first quarter being the worst, probably third quarter being the worse in than the first.

So we did have some repayments in the quarter and we would expect that in the fourth quarter we have a pretty robust pipeline of deals and so we expect to start to tap more significantly into our credit facility.

We do have the ability and we've discussed with our banks that they're all very happy and we could potentially upsize that credit facility from 50 to something higher in the future, but obviously that's subject to their approval and subject to our having the assets that we like available to do that..

Sorry it's on the weighted, the yield is on Page 63. That's CLO [ph] portfolio but as of September 30 the weighted average contraction [indiscernible] on the loan to debt securities is approximately 10%, if you just ask for things on partial nonaccrual is more like 8.9%..

Great thank you Ted.

Last quarter you had two picked partial nonaccruals, are those still there?.

Correct..

And then group of HEMA [ph] I mean it continues to be a nonaccrual you marked it down a little bit, I mean what's the outlook for that given everything going on in Puerto Rico..

Well the company has performed reasonably well, the leverage is quite reasonable. It's I think somewhere south of five times leverage, total leverage which is not unreasonable for a hospital chain, they survived the hurricane last year quite well.

I think part of issue they've had has been a liquidity issue, a lot of their accounts receivables folks have been harder hit by the hurricane than they have so there's been a slow to that, they're negotiating through that. I think we're pretty confident that there's a way for there.

I think they just need some time to deal with the receivables, which they're doing a really terrific job of managing, so we're pretty positive on that. the first lien is particularly well positioned we think the second lien again a total leverage of less than five times is pretty well covered at this point..

Great, thanks Dayl..

Well that being said, there's a lot of uncertainty in Puerto Rico and so that's why we've marked it down and that was also [indiscernible] that is reviewed by our outside valuation advisors, so..

Yes to support the economy down there, have an Analyst Day next year down there..

There you go, not in the summertime though..

Yes..

Thank you and I'm showing no further questions in the queue at this time. I would like to turn the call back over to Dayl Pearson for any closing remarks..

Thank you all and we'll be speaking again soon. Thank you..

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude your program and you may all disconnect..