Saratoga Investment Corp.
Q3 2009 Earnings Call Transcript

Published: 15 Jan 2009

[Operator:]

Welcome to the GSC Investment Corp. third quarter fiscal 2009 results conference call. Today’s call is being recorded. At this time for opening remarks and introductions I’d like to turn the call over to Mr. Rick Allorto, Chief Financial Officer.

[Richard T. Allorto:]

I would like to welcome everyone to GSC Investment Corp.’s third quarter 2009 earnings call. Before we begin I need to remind everyone that this conference call contains statements that to the extent they are not recitations of historical fact constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual outcome and results could differ materially from those forecast due to the impact of many factors. We do not undertake to update our forward-looking statements unless required by law. A reply of this conference call will be available from 1PM today through Wednesday, January 28th. Please refer to our earnings press release for details. The third quarter 2009 shareholder presentation is also available in the investor relation’s section of our website www.GSCInvestmentCorp.com. I would like to introduce our Chief Executive Officer Seth Katzenstein who will be making a few introductory remarks.

[Seth M. Katzenstein:]

The financial markets experienced significant volatility throughout our third quarter ended November 30th. As a result of this continued volatility, we have maintained our policy of investing high ended capital structure of our portfolio companies. What we believe is an appropriate strategy for current market conditions and we have increased our focus on capital preservation, cash generation and debt reduction. Pursuant to our high attachment point investment strategy, we have invested more than 70% of our portfolio in senior secured obligation and have invested 18% of our portfolio in the equity tranche of a collateralized loan obligation fund commonly referred to as a CLO which is collateralized by more than 90% senior secured first lien term loans. Our high attachment point strategy continues to set us apart from other business development companies. To preserve capital, generate cash and reduce debt we made two important strategic decisions during and after the quarter. First, we modified our dividend policy so that starting with the fourth quarter of the 2009 fiscal year, which ends February 28, 2009, our board will consider the payment of a quarterly dividend after reviewing the quarter’s financial results. We believe that delaying consideration of a dividend until the financial results of the quarter are fully known will help us to better manage our working capital. Second, effective January 14th we voluntarily terminated our credit facilities revolving period and commenced a two year amortization period. During the amortization period, all principal proceeds from our portfolio other than our CLO investment will be used to repay outstanding debt. Because of the pressure on our borrowing base which Rick will discuss later, our ability to borrow additional amounts under the facility had effectively been eliminated over the past several quarters. By entering in to the amortization period we expect to realize improvements in our borrowing base cushion that will allow us to better manage our capital and avoid untimely asset divestitures. Now, for some highlights of the quarter; our net investment income was $0.47 per share for the quarter versus $0.42 per share for the second quarter. We declared and paid a dividend for the third quarter of $0.25 per share, a decrease of $0.14 per share over our second quarter dividend of $0.39 per share. Our net asset value per share was $10.14 as of November 30th compared to $11.05 at August 31st. I’ll return later with a review of our portfolio but I would now like to turn the call over to Rick to review our third quarter financial results in more detail.

[Richard T. Allorto:]

In my review of our financial performance I will compare our performance to the second quarter instead of the prior year third quarter because seasonal effects are minimal in our business, we continue to feel that our sequential quarterly performance provides a more meaningful comparison. Please refer to our 10Q for additional information regarding our year-over-year performance. GSC Investment Corp.’s net loss for the third quarter ended November 30th was $7.6 million or $0.91 per share. Our net investment income is $3.9 million or $0.47 per share and our net loss on investments was $11.4 million or $1.38 per share. For the nine months ended November 30th, our net loss was $7.3 million or $0.88 per share and our net investment income was $10.5 million or $1.27 a share and our net loss on investments was $17.8 million or $2.15 per share. For the third quarter ended November 30th our total investment income was $6.4 million, an increase of over $500,000 versus the fiscal second quarter. Our investment income was comprised of $5.7 million of interest income, $518,000 of management fee income associated with the CLO investment and $121,000 of miscellaneous bank interest and fees. The increase versus prior quarter is mainly attributable to the increased income earned on our CLO equity investment as a result of the CLO being fully invested. For the third quarter ended November 30th our total operating expenses before manager waiver and reimbursement were $2.7 million, a slight increase from the second quarter and consisted of $694,000 in interest and credit facility expenses, $654,000 of base management fees, $542,000 of incentive management fees, $272,000 in professional fees, $241,000 in administrator expenses and $311,000 in general and administrative and other expenses. We recorded $241,000 in manager expense waiver and reimbursement for the quarter ended November 30th resulting in total operating expenses after manager waiver and reimbursement of just under $2.5 million, an increase of about $100,000 compared to the second quarter. The largest write downs in the quarter were from our investment in Jason Incorporated, McMillan Companies and Penton Media. Changes in the fair value of our portfolio investments are considered on a company specific basis. The two macroeconomic factors that we believe have had a significant impact on our portfolio valuations are the increase in the interest yields as a result of the systemic repricing of risk and the profusion of force liquidations as fixed income investors are forced to raise capital. Additional details on the unrealized losses in our portfolio are available in our shareholder presentation which can be found on our website. As a result of a timing mismatch between the interest rate reset period on the CLO assets versus liabilities, the value of our CLO declined from $25.7 million at August 31st to $25 million at November 30th. During the third quarter we made two investments in an aggregate amount of $3 million in new portfolio companies and no additional investments in additional portfolio companies. For the quarter the company had $10 million in aggregate amount of exits and repayments resulting in net repayments of $7 million. As of November 30th, we had borrowed $66.3 million under our credit facility. As Seth mentioned, effective January 14th, our revolving credit facility entered a two year amortization period during which all principal proceeds from our portfolio excluding our CLO investment will be used to repay outstanding borrowings under the facility. As we mentioned in prior calls, our borrowing limit under the revolving credit facility is based upon a dynamic borrowing base calculation that includes such factors as market values, rating and recovery rates and portfolio diversification. As the market value of our assets declined and certain of our investments were downgraded, our borrowing capacity was reduced over the last several quarters to the point where our ability to borrow additional funds was effectively eliminated. By entering in to the amortization period we’re able to achieve a small improvement in our borrowing base calculation which allows us to withstand additional downgrades or price declines without triggering repayment obligations. We expect to experience further improvement in our borrowing base calculation as the facility delevers during the amortization period. As of November 30th, our total collateral balance of $118.1 million versus $66.3 million of borrowings yielded a borrowing base cushion of $1.8 million. The market values used to calculate the borrowing base were as of our August 31st quarterly report. Our January borrowing base calculation will use the November 30th market values and we estimate that the total collateral balance and borrowing base cushion will decrease. However, we do not currently anticipate a borrowing base efficiency. During the fourth quarter of fiscal of 2009 we expect to pay down $8.25 million of outstanding borrowings. That concludes my financial review. I will now turn the call back over to Seth.

[Seth M. Katzenstein:]

Before we open for questions I would like to review the composition and performance of our investment portfolio. At November 30th, 14% of our corporate debt investment portfolio was invested in first lien term loans, 37% was in second lien term loans and 20% was in senior secured notes which means more than 70% of our corporate debt investment portfolio was invested in senior secured obligations. To reiterate, we believe that investing at a high attachment point in the capital structure of our portfolio companies increases the probability of meaningful recoveries from troubled investments and is the proper strategy in these volatile times. Our corporate debt portfolio is also diversified with investments among a variety of industries and issuers. As of November 30th, we had 42 corporate debt investments in 22 industries and our average portfolio company investment was $3.2 million. During the quarter two investments EuroFresh and Atlantis Plastics were removed from our internal watch list and five investments were added to our watch list increasing the total number of investments to nine. We realized a 41% recovery on EuroFresh and to date we have realized a 52% recovery on Atlantis Plastics. Other than a nominal residual interest in Atlantis Plastics, all of our portfolios were performing as of November 30th. However, subsequent to the end of the third quarter, Lyondell Chemical Company became a non-performing investments as a result of filing for Chapter 11 Bankruptcy protection on January 6th. This is a $900,000 position and should not have a material impact on the company. Our single largest investment is the equity tranche of our internally managed CLO. This fund is invested in 125 issuers across 31 industries which helps protect the CLO from performance problems associated with any individual company or industry. More than 90% of the collateral is invested in first lien senior secured term loans with the balance of its portfolio invested in the combination of second lien term loans, high yield bonds and Mezzanine CLO securities. The CLO’s portfolio continues to perform well with only five watch lists investments out of 125 individual investments. As a reminder, the CLO has no mortgage related investments. In closing, I would like to thank all of our shareholders for their support during these difficult times. I look forward to working with each of you. I would now like to turn the call over to the operator to start the question and answer session.

[Operator:]

(Operator Instructions) Our first question comes from Jasper Birch – Fox-Pitt Kelton.

[Jasper Birch:]

Just to clarify, if you were to break the borrowing base, that would count as an event of default and it would force early repayment, is that correct?

[Richard T. Allorto:]

That’s correct. To the extent we fail our borrowing base calculation there is a small cure period. To the extent we remain deficient outside of that cure period it does trigger an event of default which would accelerate repayment.

[Jasper Birch:]

You have your November 30th numbers based on that can you give us any guidance on what you think your new borrowing base is going to be?

[Richard T. Allorto:]

Based upon our estimates, we do believe that at the present time when we report our January monthly report we will be in compliance.

[Jasper Birch:]

On Slide 11 you have year-over-year change in EBITDA, is that based on gross EBITDA of the portfolio or is that average EBITDA ?

[Seth M. Katzenstein:]

That’s average portfolio EBITDA , weighted average. I just wanted to add one thing on the credit facility, we’re also continuing to have discussion with our lender and although we can’t comment on the specific nature of the negotiation, we are seeking to create more margin relief with respect to our borrowing base and control over the portfolio deleveraging process.

[Jasper Birch:]

Back of the envelope calculation also, with your scheduled maturities, at the end of the two years it looks like you’re still going to have about $34 million outstanding. Are you going to make up that deficit mostly through sales of investments?

[Seth M. Katzenstein:]

First of all, that’s just looking at scheduled amortization. We do have an expectation although the expectations are low today of prepayments which could occur over the next two years. And, yes we would have to if we don’t replace our lenders supplement that with divestitures and of course refinancing remains an option as well.

[Operator:]

Our next question comes from Greg Mason – Stifel Nicolaus & Company, Inc.

[Greg Mason:]

One quick touch on the credit facility, you said you voluntarily ended the credit agreement. Does that mean Deutsch had offered a waiver of the net worth covenant? I believe that was $88 million and you finished the quarter at $84 million book equity?

[Seth M. Katzenstein:]

Correct. The tangible net worth test was set at $88 million and we’re obviously at $84.1 million at this time. In anticipation of failing that requirement we did voluntarily request to terminate the revolving period ahead of schedule. We’re continuing to have a dialog with Deutsch Banc, that decision was made in conjunction with Deutsch Banc as part of our overall negotiations with them.

[Greg Mason:]

Then could you talk about in your CLO the five watch list companies that account for 4% of the portfolio. If those were to go on non-accrual, how would that impact your cash flow from your equity position in the CLO?

[Seth M. Katzenstein:]

Actually, of the five watch list investments, one of them is on non-accrual today. It’s actually the same non-performing investment that we have in our base portfolio, Lyondell Chemical Company. To the extent we don’t receive interest proceeds in a timely manner or don’t receive them at all from our companies, they impact the cash flow of the CLO but I’ll let Rick talk about the accounting and tax impact or GAAP impact.

[Richard T. Allorto:]

The impact on those five names will be pretty limited. From a GAAP perspective we accrue based upon the effective yield that we anticipate to earn over the life of the deal, the life of the CLO. So, a small amount of assets going on non-accrual will impact the future cash flows of the CLO but the net impact to us will be pretty limited.

[Greg Mason:]

So to make sure I’m understanding this right, you’re accruing effective yield so within your numbers is already some assumed level of non-accruals?

[Richard T. Allorto:]

That’s correct, yes.

[Greg Mason:]

Could you talk about in your income statement, as I look at your assets from a cost basis they fell last quarter from $180 million to $166 million this quarter but interest from your non-control investments actually went up slightly from $4.2 million last quarter to $4.3 million this quarter. I’m just thinking if assets were declining and you said that your weighted average yield remained unchanged at $11.8 how did investment income from non-control go up during the quarter? Was it timing issues or a one-time event?

[Richard T. Allorto:]

I believe factors primarily, Atlantis and EuroFresh were liquidated so that obviously reduced the cost. EuroFresh was on non-accrual effective its bankruptcy filing I believe in early August. EuroFresh I believe was liquidated also in early August. When Atlantis settled there was some, probably about $80,000 of default interest that previously was not accrued that was received so that certainly is a function of that. Other than that I can’t think of anything else.

[Greg Mason:]

Was there any other one-time items in there? We’re just looking to try and get kind of a good run rate of interest off the portfolio. Is that the only one-time item?

[Richard T. Allorto:]

That’s correct.

[Greg Mason:]

Can you talk about just kind of your thoughts on how do you view the dividend going forward and your ability to take some of these realized losses on these debt positions and offset some of your taxable income for the dividend? What are you thinking about the dividend going forward?

[Seth M. Katzenstein:]

Let me answer the second part of that first and then I’ll let Rick talk about the tax impact or the tax requirements. We switched to a policy of paying our dividend in arrears because we think that’s the appropriate thing to do and will help to manage our working capital better and that’s in keeping with our attention to build cash and preserve capital and create flexibility. The ultimate payment of dividends was a determination that’s going to be made by our board and I can’t give forward guidance on our next dividend. Now, obviously dividends in part are driven by tax and you had a tax oriented question so I’ll let Rick address that.

[Richard T. Allorto:]

Sure. To the extent we have realized capital losses and we do unfortunately we’re not able to offset those losses against ordinary income. So, to the extent we continue to generate ordinary income, which we are, we will have a requirement under the tax rules to distribute that ordinary income. The capital losses to the extent not utilized currently can be carried forward to offset future gains.

[Greg Mason:]

Then one last question and I’ll hope back in to the queue. You said you expected to pay down about $8.3 million outstanding of borrowings in the fourth quarter. Are these primarily from investment sales or principal repayments or cash retention from moving the dividend in to arrears? Where are you generating that $8.3 million?

[Richard T. Allorto:]

We generated that probably over the last three to four months. The majority of it is cash that we’ve just had available and then the proceeds from Atlantis and EuroFresh.

[Operator:]

Our next question comes from [John Ellis] – Private Investor.

[[John Ellis]:]

Can you clarify to me, during the pay down of the credit facility are you subject to covenant requirements?

[Richard T. Allorto:]

Yes, we continue to be subject to covenant requirements. The main covenant requirement being our borrowing base calculation that the collateral value as calculated within the borrowing base continues to exceed the remaining debt outstanding.

[[John Ellis]:]

So what happens then when you’re in a violation the next period when this is set?

[Richard T. Allorto:]

To the extent we have a borrowing base deficiency we have a small cure period. If uncured, the remaining debt can be called by our lender and be due immediately.

[[John Ellis]:]

So you’re in the same situation you were but you’re just decreasing your risk here?

[Richard T. Allorto:]

That’s correct.

[[John Ellis]:]

Is this a plan liquidation then? Are we to look at that as shareholders?

[Seth M. Katzenstein:]

We do not have a plan liquidation. We are actively managing the portfolio. As one of the other callers pointed out, the weighted average life of our portfolio is greater than the two year amortization period so we have to continue to manage the portfolio the best we can and in this environment we’re in a recession, there’s a lot of work to be done to manage the portfolio.

[[John Ellis]:]

What are you long term plans for it? Are you considering for instance abandoning the BDC structure?

[Seth M. Katzenstein:]

Our plans are to continue to manage the company the way we always have which is to focus on our portfolio companies and stay high up in the capital structure. As I mentioned earlier, we’re continuing our discussions with our lender on reaching an amendment to provide us with additional flexibility, additional margin relief and additional flexibility to manage the delevering process of our portfolio and we’re also going to continue to pursue other strategic alternatives including but not limited to the refinancing of our credit facility.

[[John Ellis]:]

Okay, so what I’m hearing is that you’re going to shrink, you’re going to tough this out and when things improve you’re going to get back in your normal [inaudible].

[Seth M. Katzenstein:]

I guess to put it in my own words, in the near term we’re not expecting to grow the portfolio. Our focus is on generating and conserving cash which we’ll use to repay borrowings under our credit facility.

[Operator:]

Our next question comes from [Bob Martin – Private Investor].

[[Bob Martin:]

There are a lot of BDCs that pay out more than NII per share while you’re paying out less. What are the legal and financial impediments for you paying out a higher percentage of your net investment income per share?

[Richard T. Allorto:]

Primarily driven by the tax rules, in order to avoid corporate tax we’re required to pay out a minimum of 90%. The 10% not distributed is subject to tax. In order to avoid all tax we have to pay out 100% of our net income. To the extent we fail the 90% all of our net income is subject to corporate tax.

[Seth M. Katzenstein:]

Rick, where do we currently stand in distributing our taxable income? We currently stand at a point where we believe with additional future dividends that we will continue to comply with the tax distribution rules?

[[Bob Martin:]

Are you saying that I as an investor should expect a 90% pay out of NII per share as a dividend?

[Richard T. Allorto:]

We can’t give any future guidance on our dividends but we are clearly focused on this distribution requirement and we’ll continue to evaluate the two alternatives

[Seth M. Katzenstein:]

I just want to add, we’re a business development company. We’re required to comply with all the tax rules and our board is continuously evaluating – this is a board level decision that we have to make on a quarter-by-quarter basis but we fully intend to comply with all of our requirements.

[[Bob Martin:]

Did you say that you had zero non-accrual loans at the end of your quarter?

[Seth M. Katzenstein:]

At the end of the quarter, on November 30th, that’s correct. Other than a nominal residual interest in Atlantis Plastics which has largely completed its bankruptcy process and there’s a small, [$0.05] value left. But, subsequent to the end of the quarter Lyondell Chemical Company did file for bankruptcy protection and that is now non-performing. It’s a small position at $900,000.

[[Bob Martin:]

Can I take from the zero non-accruals at the end of the quarter that there are no loans in violation of their loan covenants at the end of the quarter?

[Seth M. Katzenstein:]

No. Those are two separate things. Whether or not a company is current on its interest and principal is different is than whether a company is in compliance with all its financial covenants. Any time, particularly in this environment we have one or more companies that are not in compliance with all of their financial covenants and the range of those varies. We have investments in 35 different companies and we’re having discussions with them as appropriate to work out solutions to address the covenant deficiencies.

[[Bob Martin:]

Can you give the loans in non-compliance as a percent of your portfolio?

[Seth M. Katzenstein:]

I don’t have that information handy at this time. I can certainly speak to you off line if you want that information.

[[Bob Martin:]

Can I assume that since you have zero non-accrual loans that there are no loans 90 days or more past due?

[Seth M. Katzenstein:]

That is correct. We have no delinquencies other than Lyondell which filed for Chapter 11 bankruptcy protection at this time.

[[Bob Martin:]

Do you consider loans 30 days past due a delinquency?

[Seth M. Katzenstein:]

For reporting purposes to our investors any loan that doesn’t pay its principal and interest on time for other than a technical non-credit related reason as delinquent even if that’s one day.

[[Bob Martin:]

Thanks for doing a good job of reporting the EBITDA trends in your portfolio companies but since you report ahead of most other BDCs and reporting with a different closing month and since in this environment comparative numbers are time sensitive, what outside or independently gathered metrics do you compare your EBITDA trends to?

[Seth M. Katzenstein:]

Well, as a portfolio manager, as a parent manager GSC Investment Corp. we have investments in over 300 companies so not just the 35 in this company in this portfolio but we have over 300 outside of it. We look at those trends in comparison to all of our portfolio companies across all of our funds because it helps give us some additional perspective of what’s going on in the economy and what the underlying trends are.

[[Bob Martin:]

62% of your portfolio being below having decreasing EBITDA that would concern me so how does that compare to outside GNV portfolios?

[Seth M. Katzenstein:]

That trend as a percentage is negative compared to some of our other portfolios. What we get comfortable with and what we look at is the credit profile of the companies we’ve invested in and if you look on the presentation I think on the next page that you’re looking at we have the leverage profile by asset class. We are see some deterioration there as well as you might expect when you’ve been in a recession for a year but we do feel good about our position and the capital structures of the individual credits. We don’t have, other than Lyondell which was a surprise situation for the marketplace, any non-performing companies or any meaningful non-performing companies so we feel good about that and we look at the individual performance of the companies, position in the capital structure and then when there are problems and issues we will negotiate with the companies and their financial sponsors. Most of our companies have financial sponsors and those are investors that have a vested interest in the survival of those companies and usually but, not always, have the ability to put additional capital in and we’ll seek to reach arrangements, usually reaching compromises with them that allow them that allow them to continue their involvement in ownership of the company and hopefully allows the company to stay current. But, they’re very dynamic situations and each one needs to be dealt with individually.

[Operator:]

Our next question comes from [Skip Crowinger] – Private Investor.

[[Skip Crowinger]:]

My understand is that the market value of your portfolio at this point is $136.2 million and I’ve lost track of what the face or redemption value, I’m not quite sure what the right word to use here is, but if everybody repaid their loans, how much principal would you get back? I know that includes the CLO so maybe it’s a more complicated question.

[Richard T. Allorto:]

Excluding out to the non-control which is $111 million of that $136, the amortized cost basis is approximately $137 million. So basically, that additional $26 million.

[[Skip Crowinger]:]

So that’s effectively what you’ve written it down to. You’ve written it down to market by $26 million?

[Richard T. Allorto:]

Correct.

[Seth M. Katzenstein:]

The only thing I’ll add to that though Skip is that our cost basis because we didn’t purchase each investment at par is below the stated par of each of our portfolio companies.

[[Skip Crowinger]:]

And the CLO, could you characterize that?

[Richard T. Allorto:]

The CLO we’ve written that down approximately $5 million.

[[Skip Crowinger]:]

And I presume you bought some of those from the discount from par?

[Seth M. Katzenstein:]

The underlying loans within the CLO were purchased at a discount to par but Rick’s referring to the equity tranche of the CLO where we invested $30 million and it’s currently marked at $25 million. That is valued on a mark-to-model basis using the cash flows of the CLO and it does not have any direct correlation to the purchase price of the underlying collateral owned by the CLO, does that make sense?

[Operator:]

Our next question comes from Jasper Birch – Fox-Pitt Kelton.

[Jasper Birch:]

Kind of on a different subject, we’ve been hearing some chatter about lobbying efforts in Washington with some of the BDCs and probably the most pertinent to you guys would be if there was a change in the accounting policies for BDCs that was some way helpful to book value. My question is, if something like that did get done where there is a change in the regulators guidelines that they give you and it did help your book value, is your borrowing base and credit facility base is that tied to specific accounting guidelines? Or, if there was a change in how the regulators approached it, could that possibly cure your borrowing base concern?

[Richard T. Allorto:]

The values used in our borrowing base calculation are the values used in our books and records in our financials.

[Jasper Birch:]

So essentially, yes it could?

[Seth M. Katzenstein:]

So if the rules for GAAP change that would flow through to our borrowing base.

[Operator:]

Our next question comes from Greg Mason – Stifel Nicolaus & Company, Inc.

[Greg Mason:]

If we could talk a little bit in particular about two of your largest companies, Jason, you had a big write down in the quarter. Can you talk a little bit more about what is going on at Jason and why the write down?

[Seth M. Katzenstein:]

Jason’s performance has declined quarter-over-quarter. It’s a diversified industrial conglomerate company and its end markets are weaker but really the valuation – we value things and a big part of our valuation is on yields and relative yields in the market and that’s a big factor on our valuations. The fact that the prices of assets have declined in general in the market and yields have increased have probably the most meaningful impact on the value of Jason as opposed to its underlying performance. It’s still in compliance with all of its financial covenants, we don’t own the loan in this company and the subordinated notes, they’re current on all their obligations so we still feel good about that investment even though they are in a bit of a decline. But, the value was mostly impacted by the change in yields in the market place.

[Greg Mason:]

Can you talk about McMillan, you’ve had that on your watch list for quite a while now, actually just since last quarter but how that has been performing this quarter? And, is it primarily driven by marks or is it more of a credit issue with the housing market?

[Seth M. Katzenstein:]

Let me start with McMillan on the valuation side, that is yield driven. McMillan is a closely held private company. We’re one of two lenders to the company, at least in the notes and so we look at the market for home builders and home builders are continuing to underperform and the yield in their securities have increased so that’s going to impact our market on McMillan. From the performance of the company, as you might expect, a California based home builder particularly one in the San Diego region is not performing well in this market. We are continuing to negotiate with them on a restructuring led by us and our partner in the investment and that situation is ongoing. The company does have cash on their balance sheet to continue to operate their business and they are taking all of the appropriate steps to reduce any burn on their cash as they try to weather the cycle. But, nothing has changed there, at least not for the positive and its more of the same on the negative side where they’re trying to reduce expenses and monitor their business. They are continuing to sell home but that’s not a meaningful part of their business at this point. It’s really managing the cost structure and reducing the cash burn.

[Greg Mason:]

One last credit specific issues, Lyondell, last quarter that was held at par and now January 6th it’s in bankruptcy and you’ve written it down to $0.60 on the dollar. What changed so dramatically from the end of August?

[Seth M. Katzenstein:]

We don’t have the last quarter marks with us. That was a liquid investment so that should have been marked at market last quarter which was not par. I don’t know the level off hand but it wouldn’t have been marked at par. It might have been marked close to our cost basis but not par.

[Greg Mason:]

Yes, excuse me.

[Seth M. Katzenstein:]

Okay, that’s a big distinction. At the end of the quarter, November 30th, Lyondell the price of it had deteriorated mainly in line or in sympathy with the rest of the market. Other large liquid issuers had significant pressure on them and the prices of those had declined as well. I don’t think at November 30th there was any major distinction. Subsequent to the quarter and really in December and early January, the situation at Lyondell deteriorated rapidly. They are the third largest chemical company in the world really focused on plastic, resin and various related byproducts, without getting in to the technical details and with the decline in oil, they had a liquidity problem because the have an [ABO] that was supported by the price of their inventory and then the prices of their byproducts or which they could sell them for had declined as well so they had a margin issue. Then there was a confluence of events because they had a hurricane at their Houston facility which also adversely affected their liquidity and performance and that ultimately ended up with them filing bankruptcy in a very rapid fashion. I think most people who follow the Wall Street Journal probably read something about this and the company is now in bankruptcy. They plan to be in for one to two years if they sell assets and delever and obviously wait for a turnaround in the cycle.

[Greg Mason:]

Could you talk one last thing about the purchases and sales this quarter? You sold First Data and Texas Competitive Electric Company but bought both of them back at nearly the same amount but you say you’ve fully executed the position and they are brand new portfolio investments so can you talk about those exits and purchases?

[Seth M. Katzenstein:]

Just to clarify, we didn’t previously own those two names, TXU and First Data. We had purchased them during the quarter and then sold them shortly after. The reason for that was really to deal with a technical borrowing base issue. We did like those investments and we wanted to own them but we had a technical borrowing base issue so the diversity helped us. We purchased those investments, they happen to trade up immediately after that so we had the opportunity to exit them and we choose to do so at a slightly gain in fact. But, really those were small positions that we quickly exited at a profit.

[Greg Mason:]

One last one, did the asset liability mismatch that you talked about in your CLO, did that impact the income statement at all?

[Richard T. Allorto:]

It had a very limited impact. Last quarter we reported an effective yield on the CLO investment of 20.2%. Our effective yield is now 19.2% so it did decrease the current accrual on the CLO investment.

[Greg Mason:]

Do you believe it’s going to be 19.2% going forward or will it increase a little from here?

[Richard T. Allorto:]

That yield will continuously change every quarter as we run updated models and those models due have current interest rate curves and so forth within their assumptions. So, I expect that effective rate will continue to fluctuate by one or two percentage points.

[Operator:]

At this time we have no further questions in the queue. I’d like to turn the call back over to Mr. Seth Katzenstein for any additional or closing remarks.

[Seth M. Katzenstein:]

I’d just like to thank everyone for joining us today and we look forward to reporting our fourth quarter and year end results in May.

[Operator:]

This concludes today’s conference. We thank you for your participation. You may now disconnect.