Saratoga Investment Corp.
Q4 2009 Earnings Call Transcript

Published: 29 May 2009

[Operator:]

Welcome to the GSC Investment Corporation’s fourth quarter and fiscal year 2009 results conference call. Today’s call is being recorded. At this time I would like to turn the call over to Chief Financial Officer, Mr. Rick Allorto.

[Richard Allorto:]

Thank you. I would like to welcome everyone to GSC Investment Corporations fourth quarter and fiscal year 2009 earnings conference 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 replay of this conference call will be available from 1 p.m. today through June 11th. Please refer to our earnings press release for details. The year-end 2009 shareholder presentation is also available in the investor relation’s section of our website www.GSCInvestmentCorp.com. I would now like to introduce our Chief Executive Officer, Seth Katzenstein, who will be making a few introductory remarks.

[Seth Katzenstein:]

Thank you Rick. Welcome to all of our shareholders. During fiscal 2009 we have had to contend with unprecedented levels of credit market volatility and a financial environment that has been truly extraordinary for our industry. To fortify ourselves during this period we took a number of important steps to preserve capital, generate cash and reduce debt. Over the last year the decline in the fair value of our collateral effectively eliminated our borrowing capacity under our revolving credit facility. Consequently in March of this year we amended our credit facility to address these issues and their effect on our portfolio. This amendment decreased the minimum required collateralization and increased the portion of our portfolio that can be invested in CCC rated investments thereby increasing our borrowing base. By amending the credit facility we increased our financing costs but more importantly we have strengthened our ability to manage defaults and withstand rating agency downgrades. Because the current market dislocation continues to raise concerns, we have maintained an active dialogue with our lender in order to address potential problems. While we declared and paid dividends totaling $1.03 per share in fiscal 2009 we have elected not to pay a dividend for the fourth quarter. As a regulated investment company we are required to distribute substantially all of our net taxable income to shareholders through the payment of dividends. However, in the face of working capital and credit facility constraints and the continuing extraordinary market dislocation, we feel that the best course of action at this time is to conserve cash. For fiscal 2009 we have $6.3 million of undistributed taxable income so in order to comply with the [Req] requirements, we must declare dividends equal to $6.3 million or $0.76 per share by November 15, 2009 and pay them by February 28, 2010. Under the current IRS rules we are permitted to declare stock dividends equal to 90% or $5.7 million, $0.68 per share in order to satisfy the distribution requirements. I will return later with a review of our portfolio. I would now like to turn the call back over to Rick to review our fourth quarter and year-end financial results in more detail.

[Richard Allorto:]

Thank you Seth. GSC Investment Corp’s net loss for the fourth quarter ended February 28, 2009 was $14 million or $1.69 per share. Our net investment income was $3.3 million or $0.40 per share and our net loss on investment was $17.3 million or $2.09 per share. The $17.3 million net loss on investments included $17.5 million a net unrealized depreciation on investments. For fiscal year 2009 our net loss was $21.3 million or $2.57 per share. Our net investment income was $13.8 million or $1.67 per share and our net loss on investments was $35.1 million or $4.24 per share. The $35.1 million net loss on investments included $28 million in net unrealized depreciation on investments. As we have discussed in the past we have adopted a rigorous valuation methodology to determine the fair value of our investment portfolio. This methodology focuses on two market factors that we believe have had a significant impact on our overall portfolio valuation. First, the market wide increase in interest yield as a result of risk repricing and second the profusion of forced liquidations as loan buyers are forced to raise capital. In many cases we found that an enterprise valuation analysis showed that our loan would be repaid at par in the event of a sale or financial restructuring. After taking into account market yield analysis and indicative pricing, however, we determined that par was not the appropriate fair value as of the applicable reporting date. We hope over time the fair value will reflect what we believe to be the intrinsic or realizable value of these investments. Additional details on the unrealized losses in our portfolio are available in our shareholder presentation which can be found on our website. Our total investment income for fiscal 2009 was $23.4 million, an increase of approximately $2 million versus fiscal year 2008. Our investment income was comprised of $21 million of interest income, $2 million of management fee income associated with the CLO investment and $371,000 of miscellaneous bank interest and fees. The increase is predominately attributable to the management fee earned from the CLO during the fiscal year ended February 28, 2009 and the company being operational for only 11 months during the fiscal year ended February 29, 2008. For fiscal year 2009 our total operating expenses before expense waiver and reimbursement were $10.4 million, a significant decrease from 2008 and consisted of $2.6 million of interest and credit facility expenses, $2.7 million of base management fees, $1.8 million of incentive management fees, $1.2 million in professional fees, $961,000 in administrative expenses and $1.3 million in general, administrative and other expenses. The decrease versus the prior year is mainly attributable to decreased borrowing costs and associated expenses under our credit facility. We recorded $1 million in expense waiver and reimbursement for the year ended February 28, 2009 resulting in total operating expenses after expense waiver reimbursement of just over $9.4 million, a decrease of approximately $1.1 million compared to 2008. For the fiscal year ended February 28, 2009 we had $7.2 million of net realized losses versus $3.9 million net realized gains for fiscal year ended February 29, 2008. The most significant realized losses for the year were mentioned in our third quarter conference call. Atlantis Plastics Films and [Eurofresh]. Greater details on the realized gains and losses in our portfolio for fiscal year’s 2008 and 2009 are available in our 10K. During fiscal year 2009 we wrote down our investments in the following

[Seth Katzenstein:]

Thanks Rick. Before we open for questions I would like to review the composition and performance of our investment portfolio. Our high attachment point investment strategy remains conservative and continues to set us apart from other business development companies. At February 28, 2009 17.8% of our corporate debt investment portfolio was invested in first lien term loans. 42.6% was invested in second lien term loans and 26.8% was invested in senior secured notes which means that more than 87% of our corporate debt portfolio was invested in senior secured obligations. We believe that investing at a high attachment point of the capital structure of our portfolio companies increases the probability of meaningful recovery in 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 February 28, we had 42 corporate debt investments in 22 industries and our average portfolio company investment was $2.8 million. During the fiscal year ended February 28, 2009 we made 17 investments in an aggregate principal amount of $23.1 million in new portfolio companies and $5.2 million in investments in existing portfolio companies. Also during this fiscal year we had $49.2 million in aggregate amounts of exit and repayments resulting in repayment of $20.9 million for the year. During the fourth quarter Lyondell Chemical Company became nonperforming as a result of filing for Chapter 11 Bankruptcy protection on January 6. This is a $400,000 position and should not have a material impact on the company. Since we ended the quarter three portfolio companies have experienced adverse credit events. On April 16, Abitibi Bowater and certain of its subsidiaries which includes Abitibi Consolidated Companies Canada filed for Chapter 11 Bankruptcy protection in the United States and sought creditor protection under the Company’s Creditors Arrangement Act in Canada. Abitibi is a leading producer of newsprint and commercial printing papers. At February 28 our investment in the first lien term loan with Abitibi had a fair value of $2.1 million. While there can be no guarantee, based on our knowledge and analysis of the credit we expect that Abitibi will emerge from bankruptcy protection within 12 months following the completion of asset sales later this year. The first lien term loan will be reinstated without any impairment or reduction in principle value. On May 1, Jason Inc. senior lenders prevented the company from paying its quarterly coupon payment on its senior subordinated notes. Jason is a leading diversified industrial manufacturing company comprised of four operating units serving a variety of end markets. At February 28, our investment in the senior subordinated notes at Jason had a fair value of $9.9 million. Jason is cash flow neutral from operations and does not have any near-term liquidity issues. We are cautiously optimistic that later this year the company will successfully restructure its credit facility and resume making its regularly scheduled quarterly senior subordinated note coupon payments. On May 7, the senior lenders to Stronghaven, in cooperation with the company, accelerated the maturity of the company’s credit facility causing the loan to become immediately due and payable. Stronghaven is one of the largest, non-integrated manufacturers of corrugated containers in the United States. At February 28 our investment in the second lien term loan of Stronghaven had a fair value of $2.4 million. The company is conservatively leveraged with a debt to EBITDA ratio through our investment of three times and based on our analysis and knowledge of the credit it is our expectation that its credit facility will be refinanced within the next few months. In addition, the number of portfolio companies on our watch list increased this quarter from 9 to 18. This is a function of the three situations that I just described and the fact that two quarter’s ago we modified the criteria for watch list investments to provide an earlier warning to potentially problematic assets. Our single largest investment is the equity trench of our internally managed CLO. This fund is invested in 124 issuers across 37 industries which helps protect the CLO from performance problems associated with any individual company or industry. 90% of its collateral is invested in first lien senior secured term loans. As of April 22, 2009 the latest equity distribution date of the fund, the CLO generated a 19.7% cash on cash annual return. We are conscious of the extraordinary challenges the recession poses for our portfolio companies and our company. Accordingly, in addition to following a conservative strategy of conserving cash, preserving capital and debt reduction we are constantly evaluating strategic alternatives such as debt refinancing and merger and acquisition opportunities all with an eye towards maximizing shareholder value during a time of intense and protracted market dislocation. To that end we have engaged Stifel Nicolaus and Co. to assist us with identifying and exploring these strategic alternatives. In closing, I would like to thank all of our shareholders for their continued support during these difficult times. Please rest assured that we continue to focus on preserving and maximizing value for all of us. I would now like to turn the call over to the operator to start the question-and-answer session.

[Operator:]

(Operator Instructions) The first question comes from the line of Greg Mason – Stifel Nicolaus & Company, Inc.

[Greg Mason:]

First I would like to touch on the credit facility. In your 10K there are several subsequent events in your liquidity section about some additional problems loans that can reduce your borrowing base to about $48.3 million versus I believe you say at April 30th your debt outstanding was $57.8 million. So a few questions. What is causing the big $7.8 million decline in the borrowing base that you say expected June of this year? How can you keep from violating that borrowing base test if both of those events happen and it declines to $48 million?

[Richard Allorto:]

The $7.8 million is associated with one of the respective assets and the borrowing base is a dynamic function in how it is calculated. If both of those two credit events that are in the K do happen, when you factor in the cash on hand or the pro forma cash, we will still be compliant with the borrowing base.

[Greg Mason:]

If something else happens and you don’t have the cash, what is the cure period for the borrowing base default and how is that calculated? Is it calculated based on the last SEC filing value of the assets?

[Richard Allorto:]

We calculate our borrowing base at every month end and depending on respective compliance at that month-end we have a 30 day cure period. With regard to kind of SEC reporting, to kind of somewhat clarify what is in the K for the majority of our assets the collateral value is based upon the fair values we have in our financial statements which are updated quarterly. That limits the fluctuation of market values in the borrowing base calculation on a quarterly basis.

[Greg Mason:]

So the potential benefit from an increase in the S&P index that you mentioned in the press release would actually not positively impact the borrowing base until next time you file an SEC filing?

[Richard Allorto:]

That is correct.

[Greg Mason:]

On the new credit facility amendment the text in that amendment sounds like when you have to make your dividend payment that it has to be 90% in stock. Are we reading that Deutsche is saying you have to do a max dividend of stock?

[Seth Katzenstein:]

I just wanted to add one thing to the last question. The appreciation and the liquid assets or really in any assets won’t necessarily impact the borrowing base until the end of the next quarter when we report unless we monetize an asset or receive pay down’s or refinancing for those assets. So realizations, not to state the obvious, would benefit us. There are several things in the portfolio albeit small where we do expect some moderate realizations over the next months.

[Richard Allorto:]

To answer your respective question that is not entirely true. Within the SPV, interest proceeds are also being aggregated into a reserve account and there we are only allowed to up stream out of that interest reserve account 10% of our net taxable income. That does not prohibit the corporate entity itself with regard to dividend declarations and determinations.

[Greg Mason:]

So investments, i.e. the CLO that is not plush with the facility, that cash is available for you to support the dividend?

[Richard Allorto:]

That is correct.

[Seth Katzenstein:]

As is the cash that is unencumbered at the holding company level which Rick can break that down for you.

[Richard Allorto:]

At year end I believe it was a little over $6 million.

[Greg Mason:]

IN the K you talk about GSC Group, your parent, actually experienced a payment default on their facility and it sounds like there may be a cross-default provision for you. Can you explain what that impact is to you that the parent is in default?

[Seth Katzenstein:]

Well let me take a step back. GSC Group, our investment advisor and external manager, is engaged in discussions with its senior lenders regarding a restructuring of its balance sheet. The proposed restructuring involves debt that is an obligation of GSC Group and not GSC Investment Corp. These events have not affected GSC Investment Corp’s business or financial condition. Our board of Directors will continue to monitor the events at GSC Group to ensure that it has the capacity to fulfill its obligations. While we are not directly affected by our investment advisor’s default, and material adverse change in the business condition, operations or performance of our investment advisor could constitute an event of default under our revolving credit facility.

[Greg Mason:]

So what would draw the line that would be an event of default? Is it really kind of up to Deutsche that says that is a material change and we are declaring that an event of default or is there a hard, fast line you can characterize what is a material change?

[Seth Katzenstein:]

These are things that are a matter of interpretation and depend on the events and facts as they unfold. This is something that our board is monitoring and will continue to monitor and at this time that threshold has not been achieved causing a potential default.

[Greg Mason:]

I want to turn to the CLO. It looks like the CLO in your presentation the yield declined from 19.2% to 12.2% last quarter versus this quarter and then you talked about the cash on cash was 19.7. Is there a difference between the accrued return and what you are experiencing on the cash return?

[Richard Allorto:]

Those first two percentages you quoted is the effective interest rate over the life of the deal. Last quarter it was a little over 19% and now it has gone down to a little over 12% the primary reason is a result of a change in our future cash flow model assumptions. The 19.7 cash on cash is the actual cash received. On a trailing basis it is the 19.7. On a forward-looking basis we would expect to be accruing as well as receiving on a cash basis the 12.15%.

[Greg Mason:]

What changes did you make in your cash flow assumptions that drop it from 19 to 12?

[Richard Allorto:]

The biggest change was the model default rate assumption. We significantly increased that particular assumption.

[Seth Katzenstein:]

We increased that assumption based on our view of the expectations of the market. We think we have demonstrated an ability to out perform the market but default rates for the market itself are expected to increase dramatically and have increased dramatically. We were able to out perform the market by a couple hundred basis points that is meaningful and ultimately will allow us to perform better than the cash flow projections that Rick just provided.

[Greg Mason:]

Can you talk about what are the most restrictive tests on the CLO that could trigger a cash trapping mechanism in that CLO and stop the cash flow to you? Like an OC test or a CCC bucket? What is the most restrictive limit there?

[Seth Katzenstein:]

The tests that govern whether or not the CLO makes cash flow distributions are the over-collateralization tests, also interest coverage tests but those aren’t necessarily relevant to this discussion. The over-collateralization tests, the most junior test is something called a re-investment test. If we fail that a portion of the excess spread proceeds from the waterfall would be used to buy additional collateral inside the CLO. The next most restrictive test is the junior OC test. To the extent we are failing that a portion of the proceeds, possibly all of the proceeds depending on the magnitude of which limit is failing that test, will be used to actually retire the most senior debt in the structure as opposed to purchasing additional collateral. So those are the tests. The actual compliance with those tests is based on something called your over-collateralization or your collateralization level which is a function of the principle balance of the debt as a function of a certain amount of debt ahead of it outstanding. Sort of a bit of a complicated calculation.

[Greg Mason:]

Can you tell us where you stand today on your OC ratio relative to the hurdles?

[Seth Katzenstein:]

The over-collateralization ratios are essentially tested on each payment date and we report them on a monthly basis. Our most recent payment date was at the end of April on April 22 and at that time we were in full compliance with all of our coverage ratios. We won’t have to test that again until the end of July.

[Greg Mason:]

Can you give us an idea of how much cushion there was there relative to your hurdles?

[Seth Katzenstein:]

At the end of April we had a 25 basis point cushion on our reinvestment test and we had 105 basis point cushion on our junior OC test. Since then, taking a step back there is variety of options and tools available to us to build additional collateralization over the next couple of months in order to hopefully withstand any diversion of interest proceeds. So we can reinvest cash at a discount to par. We can sell certain assets where we might not be receiving full par credit for it. There can be no assurance that distributions will continue at the same rate that they have occurred in the past.

[Operator:]

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

[Jasper Birch:]

Could you give us a little more color on retaining Stifel and what sort of things you are looking at particularly in terms of debt refinancing and longer-term debt and also M&A activity. Are you seeing anything in the market or any indication that type of market is opening up?

[Seth Katzenstein:]

Let me take the first part of that. We engaged Stifel Nicolaus to assist us with identifying and evaluating our strategic alternatives including remaining independent. We are not committed to pursue any particular type of transaction and our retention with Stifel Nicolaus should not be construed as indicating a preference for a sale over any other alternative. As I stated on the call we are committed to maximizing shareholder value and the retention of Stifel Nicolaus is one part of exploring all of our available alternatives. That is how we kind of view it. This is part of maximizing shareholder value.

[Jasper Birch:]

So in terms of investors sort of looking at your company and your model going forward. It is basically we should look at it as amortizing down the facility? What is sort of the next step or what do you see in the future as you get your leverage under control or as you get your financing under control?

[Seth Katzenstein:]

Well we think we have our financing under control. Our next reporting date for our borrowing base is at the end of this month based on today’s closing levels. As of yesterday we were in full compliance. We certainly have a significant amount of cash to deal with some known problems. We are currently working out a variety of things, three of which I talked about on the call, and all of which we feel very confident about that they are to be reinstated or refinanced over the next few months. We think that is under control. That being said, we will certainly look at all of the options available to us and if there is an opportunity to refinance the credit facility in a way that makes sense we will pursue that. We are continuing to have an active dialogue with our lender. They have been constructive and helpful and we appreciate that.

[Jasper Birch:]

Changing gears, you mentioned on the call the possible realization. Is there any more color you can give on that and then also a related topic, can you give us some color on scheduled maturities that are coming up? How you look at your ability to exit those positions? Do you think you will have any issues with things that might not be able to get refinanced attractively and you try to work through that? Or are you pretty much all set?

[Seth Katzenstein:]

Let me take the first question first. We have a handful of positions including Stronghaven which is actually in default but performing. It is current on its interest but the bank group has elected to accelerate the loan in order to maximize the proceeds available for a refinancing. That is one that over the next couple of months is likely to be refinanced. We have other situations that are currently going through workout where we can receive partial refinancing or partial pay down’s I should say. Although these are all in the discussion stage and nothing is done until the agreements are signed it would be premature for me to single any one of those out. There is a handful of those that are small that are under consideration. As far as some of our other positions if you look at the maturity of our portfolio and you look at the schedule of investments where you see the maturity date, we have very little scheduled maturities for the next 24 months. Certainly the next 12 months. So we are not really expecting too many events. We do have a handful of situations which are due to mature soon and we are working with those companies and their sponsors to come up with solutions. In the current environment what you are seeing a lot of lenders do, particularly in the larger markets, is extend the maturities of facilities with partial refinancing and consent solicitations to trim out their facilities. Those are the types of things we will probably see from our portfolio companies which may or may not include going through bankruptcy which we think is a perfectly healthy process as long as it is done in a controlled fashion.

[Operator:]

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

[Greg Mason:]

You said in your press release that your liquid loans are mirroring the up turn in the S&P index since February. How would you classify how much of your portfolio is liquid and should you directly benefit from that going forward?

[Richard Allorto:]

Actually our respective liquid names are actually doing better than the S&P index. We do disclose that in the 10K. Our liquid basket is approximately 6% of the portfolio.

[Seth Katzenstein:]

It is important to keep in mind and Rick talked about this earlier that the indices and the market is part of our valuation process for all of our portfolio and is a factor that will have an impact on our valuation of even our illiquid names. Although they are based on a variety of factors and there could be other factors working in the opposite direction.

[Greg Mason:]

To continue on that, it looks like in your presentation at the end of last quarter at the end of November the S&P index was in the mid 60’s. At the end of February it looks like it was above 70. So it looks like there was some upward movement in the index from quarter-to-quarter end. How should we think about the write down’s this quarter? Were most of them essentially credit related offset by a tick up? Or was there some other factor that was a market issue that caused the decline?

[Richard Allorto:]

With our methodology and valuation bifurcating out credit is extremely difficult. We look at a variety of different analysis in determining our fair value. Market yield analysis both a security rating and industry indices. We look at enterprise valuation calculations. Obviously we do take into account any specific credit related issues associated with any of our portfolio companies. So it is really difficult to quantify specifically what is credit related. Was a portion of our write down, and we had a very large write down in the quarter, was a portion of it credit related? Yes. Absolutely it was.

[Greg Mason:]

To follow-up on the last question about a company maturing, it actually looks like Terphane has a maturity date actually in a couple of weeks which has about a $10 million cost basis, fair value at $8 million. How do you look at getting that capital back as it approaches this maturity date here in a couple of weeks?

[Seth Katzenstein:]

I do not expect those senior secured notes to be repaid on June 15th when they mature. We are having active discussions with the financial sponsor and the company regarding the appropriate restructuring of those notes. When that occurs we will provide some more clarity on that. Again, that is a situation much like Jason where the leverage through our trench is reasonable and we don’t expect our notes to be impaired or to take an impairment write down. Ultimately we are going to have to have some type of restructuring which could be very simple or could be complicated and we will have clarity on that in the next few business days.

[Greg Mason:]

If you wanted to sell assets and pay down and get out from under Deutsche and your credit facility how many loans do you think you could sell in a reasonable time frame close to your current marks? Obviously the liquidity investments that you talked about, 6% of your portfolio should fit in that bucket. Any other type of loans that you feel you could exit if you needed to at a reasonable valuation to your current marks?

[Seth Katzenstein:]

The 6% of the portfolio that Rick mentioned we certainly think we could exit those very quickly and we think we could do it at levels higher than where they were marked at the end of the quarter. The next tier of assets is really going to depend. You have to keep in mind this is a portfolio of relatively illiquid middle market investments and we get paid well for having made those investments but we gave up liquidity for that. Our lender understands that and we will work with them to the extent there are issues within our credit facility. Even selling 6% of our assets and using that to pay down our lender. That is meaningful. That is something I think would be valuable to them.

[Greg Mason:]

What is the weighted average EBITDA of the portfolio companies?

[Seth Katzenstein:]

Median EBITDA is approximately $40 million for our portfolio.

[Unidentified Analyst:]

I have a quick follow-up on my list here. Can you remind us when your tax year end is? Was that February as well?

[Richard Allorto:]

Yes. Our tax year end is the same as our reporting so February 28.

[Unidentified Analyst:]

You spoke earlier in the call about your distribution requirements and what the date it had to be distributed by, declared by and distributed by. Can you repeat that? Also do you have carry over from the year-end just ended?

[Richard Allorto:]

The carryover from the fiscal year 2009 just ended is $6.3 million of undistributed net taxable income. We have to declare dividends equal to that amount by November 15 of this year and pay them by February 28, 2010.

[Unidentified Analyst:]

A follow-up on the CLO, a little bit confusing still on that disclosure that was 12.15% effective yield, some changes to your modeling, has anything changed with regard to your receiving the management fee or the expectation of the management fee on the CLO?

[Seth Katzenstein:]

No there have been no changes as of this time. The thing you need to understand is when Rick talks about the CLO from an effective yield basis that takes into account effectively projections and default and recovery assumptions in the portfolio. When I talked about it on a cash on cash basis I am talking about truly a cash flow basis, not an accounting basis. There is a distinction between the two. To the extent we out perform our assumptions, and I think we will or I think we have the ability to, you will see an up tick over time in the effective yield as Rick reports to you on our quarterly calls.

[Unidentified Analyst:]

Isn’t there some level of default that would cause you to quit incurring a management fee in the CLO?

[Seth Katzenstein:]

Yes. There certainly is. There is a priority of payments from the cash flow and at higher levels of default than we have experienced the management fees could be diverted but the first thing that would be diverted is the excess spread. Then after that the management fee is possibly diverted. We have a number of options available to us such as reinvesting cash at a discount and selling assets where we are not currently receiving full par for.

[Unidentified Analyst:]

On the Deutsche facility obviously it has step ups in interest rates currently and another 100 bips next year. Is there a step up in interest rate if it would go into default?

[Seth Katzenstein:]

Before we answer that question I want to add one more thing on the CLO. To the extent management fees are diverted, or not paid in a given period, they continue to accrue and we are allowed to receive those in subsequent periods when the CLO is back in compliance. So unlike equity distributions where if you don’t receive them?

[Unidentified Analyst:]

They go to pay down debt.

[Seth Katzenstein:]

They go to pay down debt. Even after the distributions aren’t necessarily lost. To the extent equity distributions are diverted to repurchase collateral you will receive those on the back end of the transaction when the deal is liquidated. Effectively it is really a timing issue on diversions.

[Unidentified Analyst:]

If you fail the junior OC test then that is used to pay down senior debt?

[Seth Katzenstein:]

That is used to pay down senior debt. Really that still creates equity value. It just comes out all the way at the end of the deal when you liquidate the deal. You are much better off if the proceeds are diverted and used to pay collateral to acquire additional collateral because you keep your leverage and your earnings in your arbitrage. Even if the proceeds are diverted to pay down debt you are still creating equity value. You just won’t receive it for several years.

[Unidentified Analyst:]

The final question was on the default interest rate for Deutsche.

[Richard Allorto:]

We do have a default interest rate. Going off of memory I believe it is an additional 200 basis points off of the applicable rate. If it happens currently the 4 goes to 6 or if it happens after we bump up to 5 it goes to 7.

[Operator:]

With no other questions in our queue. I would like to turn the conference back to Mr. Katzenstein for any additional or closing comments.

[Seth Katzenstein:]

I would like to thank everyone for joining us today and we look forward to reporting our fiscal first quarter 2010 results.

[Operator:]

This does conclude your conference call. We thank you for your participation. You may now disconnect.