Good morning and welcome to TPG Specialty Lending, Inc.'s June 30, 2018 Quarterly Earnings Conference Call. Before we begin today's call, I would like to remind our listeners that remarks made during the call may contain forward-looking statements.

Statements other than statements of historical facts made during this call may constitute forward-looking statements and are not guarantees of future performance or results and involve a number of risks and uncertainties.

Actual results may differ materially from those in the forward-looking statements as a result of a number of factors, including those described from time to time in TPG Specialty Lending, Inc.'s filings with the Securities and Exchange Commission. The company assumes no obligation to update any such forward-looking statements.

Yesterday, after the market close, the company issued its earnings press release for the second quarter ended June 30, 2018, and posted a presentation to the Investor Resources section of its website, www.tpgspecialtylending.com. The presentation should be reviewed in conjunction with the Company's Form 10-Q filed yesterday with the SEC.

TPG Specialty Lending, Inc.'s earnings release is also available on the Company's website under the Investor Resources section. Unless noted otherwise, all performance figures mentioned in today's prepared remarks are as of and for the second quarter ended June 30, 2018. As a reminder, this call is being recorded for replay purposes.

I will now turn the call over to Josh Easterly, Chief Executive Officer of TPG Specialty Lending, Inc..

Thank you. Good morning everyone and thank you for joining us. I will start with an overview of our quarterly results and then hand it off to our President, Bo Stanley to discuss origination and portfolio metrics for the second quarter. Our CFO, Ian Simmonds will review our financial results in more detail.

And I will conclude with the thoughts on the SBCAA and our financial policy along with final remarks before opening the call to Q&A. After market closed yesterday we reported strong second quarter financial results with net investment income per share of $0.56 and net income per share at $0.52.

Both which exceeded our second quarter base dividend per share of $0.39. Our Q2 results and planned annualized return on equity on net investment income and net income of 13.8% and 12.7% respectively.

The difference between the net investment income and net income this quarter was primarily driven by the negative impact of mark-to-market up losses of interest rate swaps related to our fixed rate securities.

Net asset value per share at quarter-end was 16.36, an increase of $0.15 compared to the prior quarter after giving effect to the impact of the Q1 supplemental dividend which was paid during Q2.

Net asset value movement during Q2 was primarily driven by the over earning of our base dividend, the positive impact of net unrealized gains specific to certain portfolio companies. Partially offset by unrealized losses due to the credit spreads quarter-over-quarter and aforementioned impact of our swaps.

Yesterday our Board announced a third quarter dividend of $0.39 per share to shareholders of record as of September 14th payable on October 15th. Our Board also declared a Q2 supplemental dividend of $0.08 per share to shareholders of record as of August 31st payable on September 28.

Since introducing our variable supplemental dividend framework in Q1 of 2017, we've declared a total of $0.36 per share as an incremental dividend as net investment income per share exceeded based dividends per share in each of the past six quarters. Along the way we've increased net asset value by 2.1% from $15.95 to $16.28 per share.

After giving effect to an impact of the $0.08 Q2 supplemental dividends to be paid in Q3. We believe our dividend policy which seeks to maximize shareholder distributions while protecting and steadily growing net asset value over the long term offers a differentiated shareholder experience and distinguishes us in this space.

During Q2 there were a few active [indiscernible] portfolios and I would like to provide updates on namely iHeart and Rex. As shared on the last call iHeart follows the Chapter 11 in late April and in June we refinance our asset based loan upon the funding of the company's new debt [ph] earn possession financing.

Along with the repayment of our loan principal, we received cash payment on post petition interest and prepayment fees totaling 3.6 million which included 592,000 of certain interest income that we reserve against.

In July unsecured credit committee of iHeart had objection of certain portions of income received by the [indiscernible] which we believe to be meritless.

A hearing on that objection is currently scheduled for the fall and we're optimistic that we will be able to recognize our reserve portion of interest income of approximately $0.01 per share upon resolution of the issue pertaining to the committee's objection.

On May 18th Rex Energy filed a voluntary petition for relief under Chapter 11 of the bankruptcy code with the restructuring and support agreement between the company's first lien inventory to the second lien.

The agreement stipulates among other things that proceeds from the sale of substantially all of the company's assets would benefit the entirety of the pre-petition firstly and obligations including ABL [ph].

Since we do not have any visibility on financial proceeds of asset sale of process during Q2, our income reflects a reserve of 3.1 million related to a portion of the Rex prepayment fee. The final bit of the sale process were due likely with an auction scheduled for August 16th.

We're optimistic that we have what it take our fee reserve off during Q3 which will contribute approximately $0.05 per share to next quarters income. Given the milestones of the bankruptcy case we expect to be repaid by the year-end 2018.

With that I would like to turn the call over to Bo who will walk you through our quarterly originations and portfolio metrics in more detail..

Thanks Josh. Q2 mark us second highest reduce in quarter since inception at $944 million resulting in fundings of $222 million distributed across four new investments and six existing portfolio companies.

Of the $944 million of gross originations, $679 million were allocated to affiliated funds or syndicated to third parties and $44 million consist of unfunded commitments. On the repayment front we had four full realizations and sell downs totaling $183 million aggregate principal amount, $117 million which was attributed to iHeart.

As for our investment environment we believe competition is starting to stabilize and quarter-over-quarter first lien LCD spreads widened for the first time since Q4 of 2015.

Our investment strategy in today's late cycle environment has been focused on opportunities where we have a competitive advantage and the ability to structure strong lender protection features.

Nearly a quarter of our gross originations on a dollar basis in Q2 were in existing portfolio companies for our pre-existing knowledge of borrowers in sectors supported our ability to drive pricing and terms.

Further 95% of gross originations on a dollar basis were aided in transactions which we view to be valuable for shareholders given agents important role in managing credits and ability to conduct private equity style due diligence.

We continue to be thematic in our approach to originations, focus on opportunities that correspond to our platform sector expertise and relationships, as well as opportunities arising from market dislocations where our competitive advantage of size and scale given our SEC exempted release allows us to underwrite attractive risk rewards.

A good example of this is the $575 million senior secured credit facility that we completed for Ferrellgas during the quarter which Josh referenced on our last call. Ferrellgas is a publicly traded distributor of propane with an enterprise value of $2.3 billion.

The company has a defensive core business with high return on invested capital and a strong management team but faced refinancing difficulties given the challenging regulatory environment for banks.

Due to our ability to provide a fully underwritten financing solution through co-investments from affiliated funds we were able to structure a first lien last out position at a low attach point of 0.2X at a low net leverage of 1.7X with highly attractive adjusted returns.

Further as we size down our originations amount to the target hold of our portfolio we are able to drive additional economics for our shareholders through syndication income. At quarter-end our investment in Ferrellgas represented our largest position at 4.2% of the portfolio fair value.

Now let me take a moment to provide an update on our portfolio metrics and yields. Despite recent competitive dynamics we remain committed to high documentation standards and meaningful terms that provide robust downside protection.

At quarter-end we maintained effective voting control on 84% of our debt investments, an average of 2.3 financial covenants per debt investment consistent with historical levels.

As for managing prepayment risk, the fair value of our portfolio as a percent of call protection is 95.6% which means that we have protection in the form of additional economics so our portfolio get repaid in the near term.

At June 30th the weighted average total yield on our debt and income producing securities at amortized cost was 11.4% compared to 11.2% at March 31st. This increase was due to the upward movement and the effective LIBOR on our portfolio -- debt portfolio as well as the impact on high yields on new versus exited debt investments.

The weighted average yield that amortize cost on new and exited debt investments during the second quarter were 11.2% and 10.5% respectively. Note that the yield on new investments includes our first lien last out loan for Ferrellgas which has pricing subject to the amount of outstanding under the company's first out revolver.

In Q2 working capital draws on the first out revolver were low given to seasonality in the business which resulted in lower additional spend on our loan.

If the maximum additional spread were to be applied which we would expect to be the case during certain periods of the year, yielded amortized cost of Ferrellgas Investments would have been 11% versus 10.1% and the yielded at amortize cost on new investments for this quarter would have been 11.6% versus a 11.2%.

Overall the upward trend in portfolio yields is reflective of the floating rate nature of assets and rising rate environment supported by a differentiated source of instruction capabilities. At quarter end 99% of our portfolio by fair value was sourced through non-intermediated channels.

As it relates to the portfolio of construction we remain defensive given the late cycle environment. We continue to be first lien oriented with 94% of our investments by fair value being first lien at quarter end compared to 82% in Q1 2014. Over the same period we decreased our cyclical exposure including energy from 28% to 10% at quarter-end.

Adjusted for the expected payoff of Rex this figure would have been 8.3% at quarter-end, our cyclical exposure excluding energy has decreased from 19% in Q1 2014 to an all time low of 3.6% at quarter-end. Our portfolio today is well diversified across 48 portfolio companies and 17 industries.

Over the last 12 months we've enhanced the diversification profile of our portfolio decreasing our top ten investment concentration from 40% to 35% on a portfolio of fair value and our largest industry exposure which is to business services from 23% to 18% of the portfolio at fair value.

From a portfolio quality perspective, there are no investments on non-accrual at quarter-end. Overall portfolio performance continues to be steady with weighted average rating of 1.24 based on our assessment scale of one to five with one being the highest.

Across the portfolio since inception to June 30th we've generated an average gross unlevered IRR weighted by capital invested of approximately 19% of fully realized investments totaling over 2.9 billion of cash invested. With that I would like to turn it over to Ian..

Thank you Bo, we ended the second quarter with total investments of 1.96 billion, total debt outstanding of 875 million, and net assets of 1.06 billion or $16.36 per share which is prior to the impact of the $0.08 per share supplemental dividend that will be paid in Q3.

As Josh mentioned our net investment income was $0.56 per share and our net income was $0.52 per share. During Q2 we chose to operate slightly above the top end of our target leverage range of 0.75 to 0.85 times given our visibility into the timing of the repayment of our position in iHeart which occurred in June.

As a result our average debt to equity ratio increased quarter-over-quarter from 0.84 times to 0.89 times. While we have the ability to issue equity during this period we chose not to in order to optimize ROEs for our shareholders. Finally our leverage a quarter-end remained consistent with the prior quarter at 0.82 times.

Quick clarification, when we quote leverage metrics we use the principal amount of outstanding debt in our calculation rather than the balance sheet amount which is shown net of deferred financing cost. Since our last earnings call we continued to be active in the capital markets.

This quarter on the debt side opportunistically reopening our 2022 convertible notes and increasing the total principal amount outstanding from 115 million to 172.5 million.

The transaction price to the slight premium to par resulting in a swap adjusted pricing on the upsized portion of LIBOR of approximately 160 basis points which is well inside the swap adjusted spread on both the original notes and the spread on our secured revolver.

We executed this transaction because it allowed us to improve our unsecured funding mix with no material impact on our weighted average cost of debt and therefore minimal drag on our pro forma ROEs. Moving back to our presentation materials, slide 8 contains an NAV bridge for the quarter.

Looking through the various components we added $0.56 per share from net investment income against the base dividend of $0.39 per share.

$0.02 per share of accretion was related to our capital markets activity during the quarter both from the exercise of the over-allotment option relating to the equity offering we completed in Q1 as well as the equity component of the additional convertible notes we issued in Q2.

There was an $0.08 per share reduction to NAV as we reversed net unrealized gains from full investment realizations on the balance sheet and took their respective accelerated OID and/or prepayment fees through investment income.

This quarter changes in credit spreads had a negative $0.01 per share impact on the valuation of our portfolio and we had $0.03 per share of negative impact to NAV from unrealized mark-to-market losses related to interest rate swaps.

Other changes including net unrealized gains specific to certain portfolio companies contributed $0.08 per share of positive impact to NAV. Finally applying the declared supplemental dividend of $0.08 per share to our reported NAV per share at June 30 of $16.36 provides a pro forma NAV per share of $16.28.

I'd like to take a moment to talk about our risk management approach specifically as it relates to interest rate risk. At our core we are spread lenders focused on maximizing the net interest spread between our assets and liabilities.

We believe we have limited competitive advantage in making directional calls on interest rates and therefore we mitigate this risk through fixed or floating swaps on all of our fixed rate liabilities.

As discussed on our last call upward movement in the shape of the forward LIBOR cure had the effect of creating mark-to-market losses on our outstanding swaps. These losses will never be realized unless we choose to change our financial policy and unwind swaps prior to their respective maturity dates which we don't expect to do.

For reference our Q2 NAV includes cumulative swap related unrealized losses of $0.11 per share that will unwind overtime as we approach the maturity date on each swap instrument.

One of the notable aspects about our floating rate liability structure is the downside protection it provides during recessionary environments when the central bank lowers rates to stimulate GDP growth.

When this occurs the cost of our liabilities will decrease in line with the drop in LIBOR while our asset yields will only decrease to the extent LIBOR reaches the average LIBOR floor across our debt investments.

Said another way, our floating rate liability structure in combination with the LIBOR flows the restructure into our assets provides earnings support in the form of net interest margin expansion during challenging economic environments.

Moving to the income statement on slide 10, total investment income for the first quarter was 66.4 million up 8.6 million from the previous quarter.

Breaking down the components of income, interest and dividends income was 55.5 million up 8.7 million from the previous quarter given the predominantly quarter end timing of new Q1 fundings and a higher effective LIBOR on our investment portfolio.

Other fees which consists of prepayment fees and accelerated amortization of upfront fees from unscheduled paydowns was 7.6 million for the quarter compared to 5.1 million in the prior quarter as a result of higher accelerated amortization of upfront fees, the majority of which was related to a repayment of iHeart.

Other income was 3.3 million for the quarter, a decrease of 2.6 million compared to the prior quarter. Note that our fee income this quarter reflects reserves totaling $0.06 per share or $0.05 per share on a post incentive fee basis related to two investments that Josh referenced in his opening remarks.

Again we expect these reserves will be recognized into income in our Q3 results as we reach resolution on these two investments. Net expenses for the quarter were 29.2 million up from 25.7 million in the prior quarter primarily as a result of higher interest expense and incentive fees.

Interest expense was higher in Q2 due to an increase in the effective LIBOR rate on our outstanding debt and an increase in the amount of average debt outstanding. While LIBOR was relatively flat during Q2, the lag in timing of LIBOR resets on our debt tranches meant that we experienced the impact of LIBOR's rise during Q1 more fully this quarter.

Our weighted average interest rate on average debt outstanding increased by approximately 40 basis points quarter-over-quarter.

On a year-to-date basis our funding cost beta is approximately 1 as our weighted average interest rate on average debt outstanding increased by approximately 65 basis points which corresponds to the year-to-date increase in LIBOR.

At quarter end we have significant liquidity with 501 million of undrawn revolver capacity subject to regulatory constraints and remain match funded from both an interest rate and duration perspective. Before passing it back to Josh I wanted to provide an update on our ROE metrics.

Year-to-date we have generated strong annualized ROEs based on both net investment income and net income of 13.3%. We believe this reflects our strong originations platform, our ability to embed economics into our portfolio, as well as our continued focus on optimizing our capital structure through the lowest funding costs we can obtain.

Given our strong year-to-date ROEs and our outlook for the remainder of 2018, we are updating the upper end of our full year 2018 NII guidance from a $1.85 per share to $2 per share. With that I'd like to turn it back to Josh for concluding remarks..

Great, thank you Ian. We're pleased that our financial results this quarter continued to result in incremental distributions to our shareholders which resulted in a book dividend yield of 11.1% over the LTM period.

Before closing I would like to provide an update on our plan with regards to the lower asset coverage requirements permitted under the Small Business Credit Availability Act which was passed into law earlier this year.

As discussed on our last call our general viewpoint is that the regulatory release is in itself a positive for shareholders and the creditors in this sector as it increases the buffer for breaching asset coverage requirements which will constrain the sector from further borrowings, paying shareholder distributions and interest on debt.

Again we believe the potential application for leverage changes may provide a great opportunity for a select few and in fact could create meaningful and [indiscernible] for most of the sectors shareholders given the median returns on equity that been generated that have been below the sectors cost of equity.

Assessing our financial policy in light of the regulatory change we incorporated feedback from our stakeholders including our shareholders, bondholders, lending partners, and rating agencies, and over related [ph] with our philosophies on capital allocation, risk management, and protection of capital.

Ultimately we came to the conclusion that obtaining regulatory relief with a moderate change in our financial policy and a continuation of a rigorous risk management framework would be in the best long-term interests of our stakeholders.

Yesterday our Board approved reduction of our minimum asset coverage ratio from 200% to 150% and unanimously recommended that TSLX shareholders approve this proposal at special meeting of the shareholders which would allow the lower asset coverage requirement to apply earlier than August 1, 2019.

We anticipate holding the special meeting at the earliest practical date. Our financial policy upon the effectiveness of the lower asset coverage requirement would be to increase our target debt to equity range to 0.90 to 1.25 while making no changes to our dividend framework our outstanding [ph] approach.

At this new target leverage range we believe that we will be able to maintain our investment grade ratings which continue to be the highest priority for the business. Our investment strategy will also remain unchanged. We will continue to focus on [indiscernible] originated first lien senior secured investment with attractive risk adjusted returns.

Our current thinking with incremental leverage capacity is to grow at this organically over time when the market opportunity permits and further enhances the diversification profile of our portfolio.

Periods where our average debt to equity ratio exceeds 1.0 we would look to implement a base management fee waiver of 50 basis points on the proportion of assets finances of greater than one-time leverage.

Our decision to pursue a lower asset coverage requirement is based on the careful assessment of the trade-off between the incremental risk that financial leverage brings and the reward of adding incremental earnings power to our business.

Our analysis show that by increasing our leverage ratio from 0.75X to 1.25X and assuming our current yield on assets, cost of funds, operating expenses, and fees we would expect to drive an incremental return on equity of approximately 150 to 250 basis point.

When we add credit losses considerations to our model under the same assumptions credit losses on the assets would have to exceed approximately 4% per year before increasing financial leverages no longer accretive to return on equity.

Based on our expectations for the interest rate environment; financial leverage, net asset level yields, and cost of funds we would expect to increase the top end of our target ROE range from 10.5% to 11.5% to 13% to 14%. We would note that this could take some time to achieve given our selective and disciplined approach to growth.

While I don't intend to have a deep discussion about valuations across the sector on this call, we encourage those interested in this space to move beyond using book value as an anchor.

Given the expected divergence in business models and financial leverage to the sector we believe the resulting range of return on equity across this sector will be magnified without a commensurate change to book values. As we have said before leverage magnifies both returns and losses.

With the ability to utilize greater leverage comes a responsibility for ensuring we have sound risk management processes in place to navigate non-investment risk which is liquidity risk, funding, market, economic loss, and regulatory risk among others.

To that end we have established a risk management committee to assist our Board and to oversee the company's overall risk tolerance and policies. We have posted our risk management committee charter to the investor resources section of our website. I encourage those with questions to reach out to myself or investor relations team.

As we're a year away from being in the longest economic expansion in U.S. history, our expectation is that there will be some market headwinds ahead of us given rising rates, a stronger dollar, and the possibility of trade wars.

We believe our focus on derisking our portfolio, opportunistic approach to LIBOR remanagement, and risk management practices will gear our business to perform in a downturn maintain and maintain our ability to generate consistent shareholder returns across our market cycles.

Our hope is that the shareholders recognize our track record is doing the right thing for our stakeholders. As evidenced by our continued access to the capital markets and analyze return on equity on net income since our IPO of approximately 11.4% versus our peers in this sector averaging around approximately 5%.

We remain humbled by our achievements to date and by the ongoing support of our shareholders. With that I would like to thank you for your continued interest and for your time today. Operator, please open up the line for questions..

[Operator Instructions]. Our first question comes from Rich Shane of J.P. Morgan. Your line is open..

Okay, guys, thanks for taking my question this morning. Look, one of the things that you say Josh is the first widening of spreads since fourth quarter of 2015, presumably you didn't wake up one morning and say hey, we want better economics on the loans that we're making and the market just followed.

I am curious what the structural change that you saw was that you think is driving this, it is certainly a positive factor but I'm wondering what's actually contributing to it?.

So, good morning Rick. I think it is early your time so thanks for your question. I think -- I guess two things one is that you had a small amount of spread widening in last quarter and then quite frankly some of that you had a little bit of corresponding spread tightening this quarter.

I think the volatility in credit markets or generally markets have -- are associated with a number of things including kind of investors lack of confidence around the political environment, around trade wars, possibility of trade wars, and kind of where we are on the economic cycle.

So, I would say generally as it relates to the private credit markets, although things remain competitive it doesn't feel like there's been a step function that we felt in last year as it relates to tightening spreads and the competitive markets.

And so things are still so pretty stable as it relates to the competitiveness of our markets which I think will be ultimately good for our shareholders in this space and shareholders for TSLX. That could change quickly but there was a lot of capital formation in this space in 2017 and 2016.

I think that capital formation is slowed and I think discipline has returned a little bit. I don't know Bo or Mike if you have anything there..

No, I think that's spot on. It remains a competitive environment particularly in sponsor related transactions but we haven't seen the step function that we saw last year with spread tightening and term tightening. So it's a stable environment which ultimately is a decent environment to operate in..

Got it, okay, thank you guys..

Our next question comes from Leslie Vandegrift of Raymond James. Your line is open..

Hi, good morning. congratulations on the quarter.

Just a quick question on iHeart, what was the all in IRR now you have the reserve for the quarter but just without that what was the IRR at the end of second quarter from that investment?.

Hey Leslie, we probably at this point not want to talk about that publicly.

It was in our expected range given that there is litigation with the -- pending with the unsecured credit committee which we think is meritless and quite frankly there was a inner creditor in place where we think we can -- even if we lose that litigation that we will ultimately recover from the junior creditors.

But, we will rather not talk about them but most definitely in the range of our expectations..

Okay and then on the quarter, three of the new investments seem to be software or business services technology based, is there something particular about that sector right now that's really standing out to you guys seeing what deal flows from there or just better deals from there?.

Yeah, so I guess to date the largest investment -- space was actually not a business services it was Ferrellgas which is the second largest propane distributor in the United States which is both retail and commercial. But generally we have a theme in business services.

We understand those businesses well, they have high return on invested capital, high free cash flow margins, and scale. Our network of sponsors kind of rely on us to provide certain execution in that space.

So we have -- our sponsor kind of -- when we're involved in those sponsors tend to be very narrow as it relates to business services software, healthcare, IT, fintech, and given our kind of deep sector knowledge in this space and we think those businesses have secular tailwinds and good fundamental business plans.

They have strong free cash flow margins and high return on invested capital. [Technical Difficulty]..

The only other thing I would add is historically as we've seen in the last cycles they've performed actually well given the very sticky, highly recurring revenues that they have..

Okay, thank you and on the leverage, now you mention in the release last night that you expect to be able to maintain your investment grade ratings and obviously we've heard the feedback from other BDCs and we've seen the S&P's comments in the past on their thoughts on the subject, I am just curious if you have received any different feedback from them, if there is any specific commentary that like to be able to keep that?.

Yeah, so I think S&P actually published last night and so S&P removed the negative watch and reaffirmed a Triple B minus. So I would suspect that Crole [ph] would do the same thing at their rating which is a Triple B plus and the feds would do the same thing which would be a Triple B minus.

My guess is that might move from positive outlook for stable given the change in the financial leverage but there is no you know real core change in our investment grade ratings across the providers and I think S&P was out last night with reaffirming that. Ian do you have anything to add..

No, I think it's hard for us to comment on their approach with other BDC's but we had spent some time with them and outlined our strategy as it relates to applying lower asset coverage. And I think the commentary that they provided last night was helpful. I can forward it to you Leslie if that is helpful..

Perfect, I appreciate that.

And then just the last question on that, your debt structures whether your credit facility or any other outstanding bonds and notes, do any those have to be amended with the increase of a one-time?.

Yeah, so the bonds do not, the bank debt revolver will. It is hard coated in a 200% asset coverage stats. We've had significant conversations with the agent banks. We don't think that will be an issue given the nature of our portfolio and track record and so I would suspect that we'll have more visibility of that in the coming months.

And be hopefully completed with that prior to around the shareholder vote. But I don't expect any material changes as it relates to the credit facility that would materially impact how we operate or the cost of our financing. Ian do you have anything to add on that..

No, you covered that..

Alright, and then just last quick modeling question, what was the spillover income at the end of the quarter?.

It's a $1.06 per share as I will estimate at June 30..

Perfect, thank you all for taking my question this morning..

Our next question comes from Ryan Lynch of KBW. Your line is open..

Good morning and thank you for taking my questions.

I first had a couple on the leverage; one, can you talk about your leverage level maybe in the near-term, you guys are kind of bumping up against your kind of the upper end of your range, obviously that's going to increase August 1st of next year, potentially sooner if you guys do a shareholder vote, but are you guys comfortable going above that 0.85 leverage range in the near-term?.

Yeah, I think and I will give you my thoughts on, the answer is no, we were comfortable this quarter as it relates to iHeart given that we had very good clarity into the prepayment.

So the answer is no, I think at quarter-end our leverage was 0.82X and obviously as things move around our portfolio the hope is that we will get the regulatory relief which would provide headroom and relatively in a shareholder vote.

If we are given opportunities for our shareholders to invest in high risk adjusted return on assets, if we are above that 0.85X prior to that shareholder vote I would suspect we would do like we always do which was raise just in time equity that is accretive to shareholders in a book value basis and ROE basis.

Be mindful that quite frankly our objective is to add financial leverage, responsible financial leverage to the book over time to drive ROEs and the question is kind of does that timing line up given the opportunity set. But I think there are no current plans to raise equity given that we're in kind of the middle of our stated range.

But given there was no certainty we will get a shareholder vote and August 1, 2019 is a long way off, exactly a year I think is that we would -- we obviously don't want to create ex-essential risk for shareholders by -- given that we mark-to-market our book on a fair value basis including credit spreads that we erode our buffer to the current regulatory leverage on it.

Ian anything to add there..

I would just add Brian that given the size of the iHeart position, its impact on our leverage ratio was a little over ten times, 0.11 was the impact on leverage and so managing that through Q2 was important. We knew it was coming off with a timeframe in June.

So as a result our average leverage appears higher for the quarter but the exit towards the end of the quarter brought us back into our range..

Okay, and that is helpful.

And then as far as funding for the additional leverage, whenever, that want to bring that gets approved, do you guys see any change in sort of the funding mix you guys have right now, about half of your leverage currently funded with credit facility data about half unsecured bonds as you guys get to buy, do you guys pass the increased leverage and start adding on more balance sheet leverage, do you see any shift towards more unsecured or are you just comfortable with the kind of current mix that you guys have today?.

I think it's current mix over the long-term. I think given the nature of our portfolio we will have the flexibility and be opportunistic in our funding mix. That's the great thing about us running the portfolio we are running with high attachments points in our issuers capital structure and low detachment points.

I think the average debt to equity is like 4.4 or 4.5 in our portfolio. And given the senior nature of our portfolio I don't think we're going to be constrained on our secure revolver so we'll be able to continue and we have a lot of capacity.

So we will continue -- we'll be able to continue -- will continue to be opportunistic about when we access that capital markets if it is straight unsecured or the convert market where we think it's good for shareholders. So I think that is one of the positive things.

If you are running a junior portfolio and trying to out leverage my guess is the banks would struggle to provide that capital and force you to access it through higher cost capital and take away your ability to be opportunistic. So I think that's one of the positives of our strategy.

Ian?.

I will just add the normal cadence of the business from June 30th as we experience net growth we will see the funding mix naturally shift a little bit towards the secured revolver. But as we get payoffs those payoffs go immediately to pay down in the secured financing.

So there is a little bit of slack spread I think where we ended June 30 was a pretty good indication..

That makes sense and then question on just investment hold sizes, you guys obviously did Ferrellgas this quarter, that is about 4.2% of your portfolio, about $80 million investment. The total size of that investment depends I guess on how much it is strong and I guess it could be up to 575 million.

So you guys clearly syndicated all for putting in other funds but did not hold as much as you could. iHeart for example was about 6.2% of your portfolio, so that was a larger investment you guys held-on on your balance sheet versus Ferrellgas.

I'm just curious how is a decision made to hold the 4.2% of your portfolio in Ferrellgas when you guys held more in iHeart for that company specifically and then maybe even broadly how do you just kind of balance the tension of wanting to put as much as you can of really good investments on your balance sheet.

But then also being mindful of sort of those concentration risk?.

Yeah, so -- by the way this is a lengthy discussion in our board yesterday. So look iHeart, the interesting thing about iHeart for us was iHeart was a -- there was a strong secondary source of repayment. So we felt on iHeart that there was little possibility that iHeart which [indiscernible] but actually liquidates.

But in the event it does we actually are proud it was very short duration accounts receivable from the high quality issuers. So the probability of loss was zero in our minds in iHeart. And so that seemed to be a -- where we can have an outside physician.

As -- on Ferrell, Ferrell is publicly traded, our exposure we do hold a little of a second half revolver in Ferrell so what you see is just a funded term loans so our commitment to Ferrell in total is 112 million which is basically consistent with iHeart. I don't think you ever see that fund but it is consistent.

We are about -- if you look at Ferrell's capital structure and you look at the market value with enterprise of the company, we are about 20% loan to value or something like that where the market value of the company I think is 9.5 to 10 times EBITDA and right now we are at 1.7 times EBITDA. But it's a low working capital kind of.

So it is -- they're pretty comparable, actually position size is when you include the unfunded amount. I think that was -- we both think those are really high quality investments. We're cognizant of concentration risk quite frankly have we increased leverage we're going to add diversity to our portfolio.

And those were quite frankly the kind of the top end of the range as it relates to what we feel comfortable today, as it relates to the net asset value of our business..

Okay, that makes sense. That's all my questions. Thank you for your time and great quarter..

Thanks Ryan, we appreciate your efforts..

Our next question comes from Finn Shay [ph] of Wells Fargo Securities. Your line is open..

Hi guys, good morning, and thanks for taking my question.

Just to kind of be clear and continuing to Ryan's question, the increased diversification you're wanting that will come with leverage, you will see similar hold sizes continue to run course and diversification naturally come through, is that right?.

I don't think so, I don't think you can see similar whole sizes as it relates to net asset value and have diversification.

And so I think what you'll see is that if you hold net asset value constant you will -- which we are outside -- which we are seeing as the most likely case because we're going to add -- you can't look at -- I don't think you can look at -- lets start from the basic switch, I don't think you can look at concentration on a portfolio basis, you have to look at it as it relates to your net asset value or your equity capital, right.

You're at risk capital and so if we are holding net asset value constant because we are adding financial leverage of the business I think what you'll find is that the average hold position as it relates to our net asset value on average will go down. And by the way before you hop into your next question Finn welcome to the Rodeo.

So to take congrats and to your old colleague Jonathan Bach wanted to take a quick second to thank him for his efforts. We don't always agree but he was most definitely a thought leader.

We greet more and as passion pushed the sector to examine itself and focus on intellectual and physical capital and the benefit of our collective master which is our shareholder.

So hope we will continue in that footstep and it reminds me of a little bit of a Teddy Roosevelt quote which is the man in the arena and no offense to every analyst in our call. No, they have their own arena. But Jonathan if you hear this welcome to the arena versus being a critic. And we wish you the best of luck..

Well, I will make sure he hears that and try to continue with my questions here. Small on Rex, I don’t think we have got many on that one today, are your loans rolling up into the new first lien, into the economics change at all.

I think you said that it's not clearly going to be repaid immediately perhaps by year-end or so but any outlook on the dip that was just approved?.

Yeah, so just to be clear, so the existing first lien loan which was about 261 million collectively and the associated prepayment penalty which was about 45 million I think got rolled up and to a debtor in possession financing with a new $100 million commitment to finance the cadence.

There was -- the economics really then change on a collective of the loans. The prepayment penalty was earned this quarter although for the kind of -- the restructuring support agreement, the company was put up in an auction where the dip lenders had backstopped to a credit bid. That auction or the qualified bids were due last week.

We did not although our prepayment penalties were earned, we put a reserve against a portion of that prepayment only given that we didn't have clarity of the bids until last week.

We would expect that that we will be repaid in full and Robert has given our understanding of the process where we repaid in full with our yield maintenance and taking out of Rex within this year..

Thank you, that's certainly plenty of color.

I'll do one more just high level question as to the pipeline of these, a lot of your [indiscernible] larger let's say non-pass or classified deals, how do you feel about the backlog of the iHeart and the Ferrellgas's in light of financial reform or just the regulatory backdrop in general and its impact on say what banks are willing to hold and work through?.

Yes, so I don't think -- we haven't heard -- look the leverage lending guidelines on new issue credit might change a little bit but not significantly.

I don't think the shared national credit to some and criticized assets and special mention assets is significantly changing, we like generally whatever niches have been provide on companies that have told leverage issues but have got fundamental businesses providing credit on top of the capital structure in the situations and we like doing that.

It's very opportunistic in nature. I don't think that opportunity set is changing given the regulatory environment. But those are very opportunistic in nature and we do own Northern Oil & Gas is probably it goes into that example which is quite frankly delevered and performed very, very well. And so we tend to do this often.

But I don't think there is a massive change in the regulatory environment as it relates to shared national credit..

Awesome, thanks so much..

Our next question comes from Terry Ma of Barclays. Your line is open..

Hi, good morning.

You kind of talked about incremental leverages still being accretive to ROEs up to 4% credit losses, can you maybe just give us a sense of what kind of credit environment we would need to see for your portfolio to see 4% losses?.

Well, I would hope we don't see 4% losses. I think you clearly saw that environment in the global financial crisis and I'm probably about the most negative human being that one of them that walks the earth and the -- I don’t think you have the same recipe for systemic risk given how the deleveraged banks are pre-imposed crisis.

And so obviously all that leverage moved from banks into quite frankly to our grandchildren and children and to national debt. And so I don't think you have that same recipe. You surely saw that environment and the global financial crisis. I think illustratively and quite frankly you've seen some of that obviously in the sector outside.

So for us we would hope that I think the point was to illustrate that given that we've been running kind of in a net capital gains position. I think the point was is that we would have to see a massive step change in our credit performance where the additional leverage is no longer accretive to the earnings power of the business.

And so I think we sit around, we published a chart last night that kind of lays out the mat for people but obviously leverage magnifies returns and magnifies losses. It doesn't start magnifying losses until about 4% annual credit losses. For us even our asset level yields and cost of financing and fee structure..

Right, got it, that is helpful.

And then just on a policy perspective, did the extra pushing from expanded leverage change the way you think about the need to issue equity now?.

That's a great question. The answer is probably yes. And that as you rightfully point out is, that the cushion massively changes.

There we haven't thought through quite frankly given the cadence but I think the only opportunity again would be the same lens would be -- surely the need to raise equity below net asset value to protect against the asset coverage ratio is diminished.

The need to raise equity below net asset value where you think you can do something massively accretive for shareholders given the opportunities that may or may not have and we surely have to bounce that against our financial policy in keeping our investment grade rating to the cycle.

And so quite frankly that's tomorrow's business for the board given the vote and the cadence of the choices we have made..

Got it, okay, thank you..

Our next question comes from Chris York of JMP Securities. Your line is open..

Good morning guys, thanks for taking my questions.

So given the increased ROE outlook at 13% to 14% provided under SBC8A and then your updated target leverage, should our master shareholders expect any tweaks to your supplemental dividend policy as you expand leverage?.

Yeah, it is a great question. So first of all I think it's going to take a long time, relatively long time to get to the new -- given our disciplined approach to adding assets to get to the new financial target, till it gets to new financial target leverage range. So that's one thing.

But you rightfully point out, I don't think the concept materially changes which is we will set our dividend policy, our fixed dividend policy in where we think we can earn it in a three standard deviation event and we will pay half of the access over time. So, I don't think that changes.

But as we lag in the leverage will we increase as small amounts of fixed different rate, given our policy, answer is possibly. But we will have to feel comfortable that we can kind of earn that in the three standard deviations because we treated our dividends as a liability.

So there are no changes in the near-term given that it will take a while to leg into the new target financial leverage to increase our -- the fixed rate portion of our dividend policy. But the core contract will remain the same. That being said I think it's working pretty well for shareholders.

If you look back and you look at book value 12 months ago, did that dividends and both these supplemental plus the fixed dividend has been dividend yield of book value above 11% and we have actually grown net asset value over that period as well.

So I think it's working pretty well although it surely didn't feel like that in the first half of the year given absence of stock. But I think fundamentally it's working pretty well.

So I don't think there's any core change in the processes, there might be tweaks around that stuff as we grow into our financial leverage, minor tweaks around the fixed dividend rates..

Very helpful. Thank you.

Let's see, staying on that similar line on the expanding leverage, so do you expect any challenge in rounding up investors and getting a quorum at the special meeting to vote on the lower active coverage?.

I don't expect -- I mean look we -- I don't expect and can you answer this because in Lucy I don't expect any challenges given that we've been able to lineup quorums for specially in the past. And we've been able to -- we've never had to have a issue with quorum as REAL estate Annual Meeting.

So, the good news is that we have a large institutional shareholder base that we would like to think that we have good relationships with.

So, I don’t think there will be any issues related to quorum obviously I think we as management and the slow weighted shareholders account towards that form and we own about 4.5% of stock and so I don't think there's any -- there will be an issue that I see in Lucy..

Nothing more. [Question Inaudible] At quarter end your total assets of course 2 billion and you've shown an ability to originate very well above your holds. So -- and then presumably you considered the reduction in asset coverage with the long term growth potential at BDC.

So maybe Josh could you share any thoughts on the ideal asset size for the BDC or you still feel you could maintain your competitive BDC advantages like embedded economics in the portfolio of construction? YEAH I think we've always said somewhere between $2 billion and $3 billion.

Or $2 billion to $3.5 billion depending on the opportunities that -- the challenge was managing BDX and you got to be long only and fully invested and so the -- The you know there will be points in time or the opportunities that it has begged you will be able to have functions growing that.

But in a competitive environment that we are in today and given the nature that it's our shareholders permanent capital, I think that it is somewhere between $2.5 billion to $3 billion. And you might see step functions to grow that over time. And then you will, I mean if you can't invest in the style that we want we may have to return it.

But I think that's how we think about it and that's how we thought about it for since we started the business..

Okay great, Bo you talked a little bit about the documentation in the prepared remarks and investors commonly hear about covenant life being the undoing for leverage loans. But structural deterioration can surface in multiple forms like those cash flow suites and certain add backs.

So, maybe Bo or Josh my question to you is, is there one weakening structural protection that gives you more concern today than in the past that lead to lower recovery on the amount of phones going forward?.

No, as we have stated before we haven't seen a step function over the last few quarters in documentation standards that we saw at the beginning of last year. That being said there's definitely a loosening of standards in the trend volume over the last three to five years and something to watch out for.

We continue to focus on thematic originations where we're competing on things other than just price and structure, where we're thought as thought leaders and our ability to execute at a premium. So we continue to focus on the structural protections that we believe preserve capital.

I think if you follow the broader market especially sponsor finance there has been deterioration over the long run though we haven't seen a step function off late..

Perfect, that's it for me. Thanks guys..

Our next question comes from Christopher Testa of National Securities. Your line is open..

Hi, good morning. Thanks for taking my questions.

Josh just on the 4% loss rate that you cited that you would need to basically have as a breakpoint before the excess leverage would not make sense, does that type of scenario assume that your spread -- that spreads remain flat or you are also assuming a more favorable reinvestment environment and concomitant would be the increased loss rates?.

Chris, you are exactly right. As a conservative view which basically mean flat, if the market is experiencing cold, 8% default rate and 4% losses. Your reinvestment levels are a lot higher and therefore it is at breakpoint.

The breakpoint is different and so that was a conservative view which is current spreads environment, it is something idiosyncratic with our book but your bigger point is it is exactly right which is an environment where the market is experiencing 8% of fall rates, 4% loss rates, credit spreads are much wider and your reinvestment spreads much wider.

And so you have net interest margin expansion that changes that breakpoint. I assume that's your point..

Yeah, that is exactly it.

So, realistically you guys are holding the model conservatively but if we assume that the defaults were up from a broader market trend of defaults it would actually -- the breakpoint would likely be higher because you'd be getting better yields on your investments?.

Right, it assumes that we do something stupid, I mean quite frankly..

Yeah, that makes sense. [Multiple Speaker] Idiosyncratic of our stupidiness..

Got it, okay. And so I know you know there was, you guys mentioned at the beginning of the call. We have seen this kind of slight back in and yield on the broadly syndicated market that have kind of come back in and then come back out. There's been a little bit of better terms and things like that going on.

Josh do you see this as something that's kind of foreshadowing something.

Do you expect this to kind of pick up some momentum and snowball or do you think that they're just simply too much money sloshing around for us to have any sustained kind of lender friendly environment going forward the next couple of quarters?.

Unfortunately I think -- our base is that the competitive environment has no step function change for the worse. I don't think we see a step function change for the better, I think there is a decent amount of capital formation.

UNFORTUNATELY the private credit market always doesn’t give relative value and so you have the combination of a decent amount of capital formation and plus the fundamental U.S. economy is actually doing well and it's going to -- it feels like it is going to continue to do well until there's an event which is rising rates.

And rising rates you'll see that as -- I think you see inflation, you see wage inflation and so I think you were kind of stuck in the mud as it relates to volatility for the moment. Which is -- you might have even small blips but nothing to really sustain given the fundamentals of the U.S. economy or you deep in shape.

And there is a decent amount of capital formation..

Got it and just sticking with kind of a broad theme, you had mentioned obviously one of the risks the economy being the potential for a trade war and protectionism and I'm just curious what discussions you've had if any with your portfolio companies and whether they're expressing similar concerns and whether they've kind of given you some consensus of what you think the likelihood is that there is some type of full fledged trade wars that impact some of the portfolio companies?.

The answer is not in our portfolio. Quite frankly you surely have seen it in a broader kind of and broader credit portfolio. You are seeing some earnings, mixed earnings a little bit and you hear from CEOs but quite frankly in the software kind of business services you don't have kind of those same issues.

As -- and so they're not as vulnerable to the trade war. So the book is pretty defensive and that nature where we don't have our suppliers, we don't have metal, we don't have aluminum, we don't have things that are -- we don't have hardware technology. We don’t have things that are kind of right in the eye of the tornado there..

Got it, okay, that's helpful. And I'm just curious, I know you generally don't get asked about this much, you have four companies in the portfolio, roughly $200 million total exposure just to education, that's been something that a lot of your peers have kind of struggled with credit quality.

Just curious what your thoughts are on that part of the portfolio and if there is an opportunity there that you guys are able to underwrite right better than your peers like you do in a few other sectors?.

Yeah, so by the way I'm scared to death of core profit education. And so this is typically IT or software or business services into the education market. And Bo can go into that investment thesis.

But this is for profit education, it scared me for the last 10 years for a variety of reasons including the funding risk, including quite frankly the value add probably to society.

And so Bo you should talk about our education thesis which is mostly around know schools have been late adopters, there's high return on invested capital on the purchase of software for schools, sticky issue go into it but they are not for profit education..

This is a sub seam within the business service sector that we've been pursuing over the last couple of years and our thesis was which is proving out that the technology adoption particularly around how curriculum is delivered to students and how that's measured and how human capital is measured within K-through twelve schools.

It is a very late adopter, ten plus years behind the technology curve and a lot of other industries. It also has a very sticky deeply embedded customer base that you see very little volatility through the cycle, so it's not correlated.

So this has been a particular area of focus for us as the return of capital and unit economics in these businesses are very strong and that earnings potential and earnings power of the business is very strong. So, that's what we have been pursuing..

But for the record I don’t think we can good -- I don’t think we can do full education better. Yeah, it's a tough space..

No, I absolutely know and that's kind of been demonstrated by the loss rates for people who want into that. Appreciate the color and you guys taking my questions. And congrats on a nice quarter..

Great, so I think that was the last question. Look we really people's time and effort. I know that we're going through a little bit of the financial policy change which we think is good for all stakeholders.

It is you know a real change to our business model and so please feel free to reach out to the team to discuss and I will be happy to walk you through that, our thoughts and that goes for both. That goes for all of our stakeholders including bondholders, etc.

I wish everybody a great last part of the summer and happy Labor Day and hope that you get time to enjoy with their family and we thank people again for their efforts.

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