Sixth Street Specialty Lending, Inc.
Q2 2015 Earnings Call Transcript

Published: 5 Aug 2015

[Operator:]

Good morning and welcome to TPG Specialty Lending, Inc.'s June 30, 2015 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 as 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 quarterly earnings press release for the second quarter ended June 30, 2015, and posted a supplemental earnings slide presentation to the Investor Relations section of the website, www.tpgspecialtylending.com. The earnings 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. As a reminder, this call is being recorded for replay purposes. I will now turn the call over to Joshua Easterly, Co-Chief Executive Officer and Chairman of the Board of TPG Specialty Lending.

[Joshua Easterly:]

Thank you, Ashley. Good morning everyone and thank you for joining us today. I'll begin today with a brief overview of our quarterly highlights and then will turn the call over to my Partner, Mike Fishman, to discuss our originations and portfolio metrics for the second quarter of 2015. Alan Kirshenbaum, our CFO, will then discuss our quarterly financial results in more detail. I will conclude with final remarks and our outlook for market conditions before opening the call to Q&A. I am pleased to report solid financial results for the second quarter. Net investment income per share was $0.46 for the second quarter of 2015, as compared to $0.39 per share for the first quarter of 2015. This $0.07 per share quarter-over-quarter positive variance was driven by fees on investment paydowns and prepayment premiums earned during the quarter. Net asset value per share as of June 30 was $15.84, as compared to $15.60 as of March 31. Alan will walk through this in greater detail, but at a high level these variances were largely driven by higher net investment income and net realized and unrealized gains on investments. Net realized and unrealized gains per share for the second quarter of 2015 increased to $0.17, up from $0.06 in the previous quarter, reflecting idiosyncratic, positive valuation adjustments in the portfolio and to a lesser extent, a tightening in spreads. As announced on last quarter's call, our Board of Directors declared a second quarter 2015 dividend of $0.39 per share payable to shareholders of record as of June 30th, which was paid on July 31st. Our Board has also declared a third quarter dividend of $0.39 per share, payable to shareholders of record as of September 30th on or about October 30th. Our Board has established a dividend policy reflective of the high-quality earnings power of our business over the intermediate term at a level that we believe can be consistently earned and which maximizes cash dividends to our shareholders. During the second quarter of 2015, we over-earned our dividend on a net investment income per share basis by $0.07 and over-earned our dividend on a net income per share basis by $0.24. From a portfolio management perspective, the second quarter was very active for us. As was publicly reported, on July 15th, Milagro Exploration, and its subsidiaries, filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code. As we have previously discussed on quarterly calls, we underwrote our investment in Milagro assuming some degree of process risk, but believed that our first-lien investment was protected by a substantial hedged collateral value. We believe this thesis will be proven out. Our senior secured investment in Milagro benefits from a first-lien priority interest, ranking ahead of $250 million of bonds. As detailed in the Company's bankruptcy filing, the pre-arranged bankruptcy plan includes a sale of substantially all of its oil and gas assets to a strategic buyer in exchange for $120 million in cash and approximately $97 million of equity value in the acquirer, for total consideration of $217 million. The combined proceeds are expected to be well in excess of the Company's entire first-lien obligations totaling $102 million, which include 100% of principal value, accrued interest, and a $14 million yield maintenance premium. The key Milagro stakeholders have agreed to the pre-arranged bankruptcy plan via an executed contribution agreement and restructuring support agreement and we expect the bankruptcy process to be finalized during the third or fourth quarter of 2015. On July 19, A&P, which operates approximately 300 food retail stores primarily in the Northeast, filed voluntary petition for relief under Chapter 11 of the Bankruptcy Code. As of the filing date, the Company has signed agreements to sell 120 of its 300 stores to strategic buyers. The aggregate bid value for these stores alone, less revolver outstandings related to working capital assets, provides for approximately $390 million of collateral value for the benefit of approximately $263 million of first-lien term loan obligations, of which TSLX holds approximately $22 million of principal value. Consistent with our initial investment thesis, the company's significant leasehold real estate value is expected to provide for substantial downside protection and liquidity, resulting in early repayment of our term loan with a prepayment premium likely in Q3 2015. Finally, our first-lien investment in IRG was rated “5” as of June 30th, based on our internal investment performance ratings, representing the loan's non-accrual status. The fair value as of June 30th reflects agreed upon terms as stipulated in a subsequently executed restructuring support agreement with the Company and its guarantor, resulting in a $20 million performing credit investment, a $5 million equity investment, and a settlement with the guarantor that we expect to result in an additional $10 million performing credit investment. We believe that the $30 million of combined performing credit investments are well-collateralized. Although we are disappointed to have a loan on non-accrual this quarter, our control of this bilateral credit agreement and the collateral value, including real estate, underlying our investment provided downside coverage and is expected to result in a swift resolution to this non-accrual. With that, I'd like to turn the call over to Mike Fishman who will walk you through our quarterly originations and portfolio metrics in more detail.

[Mike Fishman:]

Thanks, Josh. Gross originations and new commitments made during the second quarter totaled approximately $112 million across five new portfolio companies and three upsizings of existing portfolio companies, a lower level than we've experienced in recent quarters. Of the $112 million of new investment commitments made during the quarter, approximately $84 million was funded. As we previously discussed, our direct originations efforts, coupled with our high degree of investment selectivity, results in investment activities that tend to be idiosyncratic during any given quarter. It is therefore instructive to focus on our originations and investment pace over a longer term period. Over the last four quarters, we have generated average quarterly originations of approximately $240 million and average quarterly fundings of approximately $160 million, or approximately $640 million on a full year basis. Our investment focus is to concentrate our resources on selecting the 3-5 most attractive risk-adjusted return investments per quarter, which we expect to represent approximately $150-$200 million of gross originations on an average quarterly basis. Of the more than 4,100 opportunities we've screened since inception, we've closed less than 2% of these investments. During the second quarter, we exited commitments totaling $22 million due to a full investment paydown, two partial investment paydowns and the partial sale of a Level 2 investment. Approximately 94% of our debt investments have the benefit of call protection, which serves to mitigate reinvestment risk and results in additional economics when loans are repaid. Our net funded activity for the second quarter was approximately $63 million, as compared to our average quarterly net funded activity of approximately $74 million based upon the past four quarters, or approximately $300 million of net funded activity on a full year basis, a level of growth that we continue to feel is prudent in the current market environment. Since inception through June 30th, we have generated a gross unlevered IRR of 16.4% on fully exited investments totaling over $900 million of cash invested. We continue to believe that our ability to provide flexible, fully-underwritten financing solutions and to hold significant positions is a key competitive advantage benefitting both our borrowers and our shareholders. Through our direct originations efforts, approximately 90% of our current portfolio was sourced through non-intermediated channels. This enables us to control the documentation and investment structuring process and to maintain effective voting control in approximately 81% of our debt investments. In the case of IRG, although this credit event was not consistent with our underwritten base case, our control position enabled us to swiftly take actions to protect and maximize shareholder value. As of June 30th, our portfolio totaled $1.40 billion at fair value compared to $1.33 billion at March 31st and $1.26 billion at December 31, 2014. At quarter-end, 90% of investments by fair value were first-lien and 98% of investments by fair value were secured. At this point in the cycle, we are primarily focused on investing at the top of the capital structure and, in keeping with our focus over the past year, our second-lien exposure remained at 8%. The portfolio is broadly distributed across 40 portfolio companies and 19 industries. Our average investment size is approximately $35 million and our largest position accounts for 4.9% of the portfolio at fair value. At this later point in the economic cycle, we are focused on industries with low exposure to cyclicality and the ability to perform throughout credit cycles. Our largest industry exposure by fair value at quarter-end were to Healthcare and Pharmaceuticals, primarily healthcare information technology with no direct reimbursement risk, which accounted for 15.7% of the portfolio at fair value, and Business Services, which accounted for 11.7% of the portfolio at fair value. After giving effect to the expected Milagro realization, at June 30th our Oil and Gas exposure represents less than 3.7% of the portfolio at fair value. The weighted average total yield on our debt and other income producing securities at amortized cost at June 30th was 10.4% versus 10.3% at March 31, 2015 and 10.5% at June 30, 2014. The weighted average interest rate at par of new investment commitments made during the second quarter was 7.9% as compared to 10.2% for the first quarter of 2015 and 10.6% for the second quarter of 2014. While this figure will vary quarter-to-quarter as originations in any single quarter are idiosyncratic, this quarter's variance is primarily driven by our largely unfunded commitment to the Sears non-extended, asset-based revolver, which we purchased at a significant discount to par and whose near-term maturity provides a further yield enhancement. The effective return on our investment in Sears is more accurately reflected in another important metric- the weighted average yield at amortized cost on new investments in new portfolio companies made during the second quarter, which was 9.9%. Our investment focus is to mitigate both credit and non-credit risk. We seek to mitigate credit risk by investing in companies that are scaled and relevant to their supply chain. As of June 30, our core portfolio companies had weighted average annual revenues of $135 million and weighted average annual EBITDA of $31 million. Our target borrower profile has inherent downside protection features that may include a high degree of contractual recurring revenues and/or hard asset value, depending on the borrower's industry and our investment thesis. Whenever possible, we seek to avoid credit risks that are asymmetrical to the downside. Non-credit risks that we seek to mitigate include interest rate, foreign currency and reinvestment risk, the latter of which is mitigated by call protection. We mitigate interest rate and foreign currency risk by match funding our assets and liabilities. Approximately 96% of our income producing securities are floating rate, typically subject to interest rate floors, and 100% of our liabilities are floating rate. And when we fund investments in currencies other than US dollars, we borrow on our revolver in local currency, as this provides a natural hedge of our principal value against foreign currency fluctuations. At June 30th, 97.5% of our investments were meeting all covenant and payment requirements. As previously noted, as of June 30th, we had one investment- IRG- on non-accrual status. Subsequent to quarter-end, we've executed a restructuring support agreement with the company and reached a settlement with the guarantor, which are expected to result in a performing credit investment for TSLX. With that, I'd like to turn it over to Alan to discuss our quarterly results in more detail.

[Alan Kirshenbaum:]

Thank you, Mike. Good morning everyone. We ended the second quarter of 2015 with total portfolio investments of $1.4 billion, outstanding debt of $557 million, and net assets of $855 million. Our net investment income for the second quarter was $0.46 per share. Our average debt-to-equity ratio for the three months ended June 30th was 0.63x as compared to 0.50x for the previous quarter. At quarter-end June 30th, our debt-to-equity ratio was 0.64x, as compared to 0.59x at March 31st, both pro forma for unsettled trades. We have made considerable progress towards our target debt-to- equity ratio, which is 0.65x to 0.75x. As many of us are aware, there has been recent regulatory focus on how companies in our industry treat unfunded commitments. As we have discussed in the past, we have always carefully considered our unfunded commitments, as well as our forward pipeline, for the purpose of planning our ongoing financial leverage. As a further point, we maintain sufficient borrowing capacity within the 200% asset coverage limitation to cover any outstanding unfunded commitments we are required to fund plus our forward pipeline. As it relates to the right side of our balance sheet, we continue to evaluate additional ways to diversify our funding sources. We have significant liquidity at June 30th with over $450 million of undrawn commitments and we believe we remain match funded from an interest rate and duration perspective, and have little to no funding risk in our business. As you can see on slide 8 of our earnings presentation, during the three months ended June 30th, we had a number of factors impacting our net asset value per share. In May, our DRIP issuance had a small positive impact on NAV as shares issued under this program were at a price above our net asset value per share. We added $0.46 per share to net asset value from net investment income. Our dividend was $0.39 per share, reducing net asset value, and we had $0.01 per share positive impact from the reversal of unrealized gains and losses from two investments-one we sold and the other was paid down in full. There were two other factors impacting net asset value in the second quarter-$0.01 per share can be attributed to unrealized gains resulting from some tightening in credit spreads experienced during the second quarter and $0.15 per share can be attributed to other unrealized and realized gains and losses during the quarter, this being primarily related to unrealized gains driven by positive valuation adjustments in the portfolio from idiosyncratic events. Moving on to the income statement on the next slide, Total Investment Income for the quarter ended June 30 was $45.4 million. This is up $7.6 million from the previous quarter, or just over 20%. This increase was driven primarily by both an increase in Interest from Investments and an increase in prepayment fees earned during the second quarter. Also, our PIK income remains low at less than 3% of total investment income year-to-date. On the next slide, slide 10, you will find a more detailed breakout of our revenues. Our Interest from Investments - Interest Income was $35 million for the second quarter ended June 30th. This is up $2.6 million from the previous quarter, or approximately 8%. As you can see, we continue to generate strong, consistent revenues on the top line

[Joshua Easterly:]

Thanks Alan. The second quarter of 2015 saw a tightening of risk premiums across asset classes, including LCD second lien spreads, which tightened by 34 basis points, while conversely LCD first-lien spreads widened slightly by 8 basis points. The net impact of the spread movement was a small appreciation in the fair value of our investment portfolio prior to accounting for other idiosyncratic events that drove positive valuation adjustments in the portfolio this quarter. Our investment strategy, which is predicated on mitigating credit and non-credit risks, seek to avoid situations where asymmetric downside risks exist. However, despite our high degree of investment selectivity, the risk of principal or interest loss, as well as bankruptcy “process” risk, is an inherent aspect of our business. Though we remain committed to late-cycle sector and capital structure perspectives, from time to time, typically during later-cycle investing periods, certain of our portfolio investments will underperform expectations, or, as in the case of Milagro and A&P, our underwritten base case involving “process” risk will play out. In either of these scenarios, it is our belief that our expertise in managing credit and “process” risk, as well as our focus on senior secured investments at the top of the capital structure with substantial enterprise value and/or hard asset value protection, and our control positions, provide for opportunities for value creation and creating shareholder value, in addition to downside protection, as exemplified by the expected IRG restructuring. Although the IRG credit event was not consistent with our underwritten base case, our structural protections allowed us to swiftly take action to protect shareholder value by restructuring our investment into what we expect will be a performing credit. We believe that our proficiency in selecting and structuring downside protected investments, and our ability to navigate complexity in the portfolio, are the drivers of our high quality of risk-adjusted returns. Our long-term focus is the driving principle behind our dividend policy, capital raising philosophy and capital allocation decisions, and the alignment of interest we foster with our investors. This long-term perspective is the motivation behind our practice of match-funding our assets and liabilities, as well as our stock repurchase programs. It is our belief that in managing our Company with a long-term perspective, we are acting in the best interest of all of our stakeholders. To that end, yesterday, our Board of Directors authorized the Company to enter into a new stock repurchase program on substantially the same terms as the prior stock repurchase plan that expired on June 30, 2015. The new plan will remain in effect through the earlier of February 29, 2016, which happens to be a leap year, or such time as the $50 million plan has been fully utilized subject to certain conditions. As previously stated, we believe that return on equity, coupled with the quality, risk profile, and control features of our portfolio, is the appropriate measure of our ability to generate high quality, risk-adjusted returns over the long term. For the three months ended June 30th, we generated an ROE based on net investment income of 11.9%, and for the six months ended June 30th, we generated an ROE based on net investment income of 10.9%. Based on our current asset level yields, and as we continue to leg into our target leverage ratio, supported by our pipeline of new investment opportunities, our target return on equity is 10.5% to 11.5% over the intermediate term. This corresponds to $1.63 per share to 1.79 per share on net investment income based on our 12/31/14 book value, which compares to our annualized dividend of $1.56 per share. A few points in closing related to senior management changes announced last Friday. Alan Kirshenbaum will be stepping down as our CFO in October to pursue a new career opportunity. He will play an advisory role in our third quarter close to facilitate a seamless transition. Mike and I not only value Alan as a trusted partner in our business, but also as a friend. His consistency and leadership will be greatly missed. Alan's enduring legacy to TSLX is the talented team of dedicated finance and accounting professionals that he has led during his time as CFO. Upon Alan's departure in October, Bob Ollwerther, our Chief Operating Officer, will assume the role of interim CFO as we search for a permanent CFO amongst both internal and external candidates. Bob is a seasoned executive and valued member of the TSLX team. We look forward to introducing him to you on next quarter's call. On behalf of myself, Mike, Alan, and Bob, thank you for your continued interest in TSLX and for your time today. Ashley, please open up the line for questions.

[Operator:]

[Operator Instructions]. Our first question comes from Rick Shane of JPMorgan. Your line is open. Rick Shane Thanks guys and good morning. Just want to talk a little bit about growth at this point. Josh, in your words, you've legged into your leverage targets or you’re legging into your leverage targets. I would describe that this is the first quarter where we need to sort of start thinking about what the next steps are in terms of growth. Is your expectation -- and again, I know you have strong views on the overall market, is your expectation that the next couple quarters will be about recycling capital or do you expect that you will continue to grow and potentially test that premium to book multiple that you guys enjoy at the moment? Joshua Easterly Sure. Well, we appreciate the question. I think when you take a step back or at least what's publicly announced or in the marketplace, we have approximately $120 million of credits, including Milagro, A&P, GHX and Metalico, that -- there will be proceeds in the next couple quarters. So -- and then, I think, obviously, who knows what happens with our existing portfolio. But I don't expect in the near-term, even though that we were legging in to- that- our total leverage ratio and that we are we'll -- if you kind of think about our investment pace- that will need to raise capital, we do have some near-term dollars coming back in the system that we'll be able to recycle. And as you know and I think we've talked about, I would say the investment environment generally, when you think about as a scale from 1 to 10, 1 being the worse environment and 10 being the best environment, it's probably a 5-6. And so we're not looking to kind of grow the book and franchise and dilute ROE given kind of the investment environment we sit in today.

[Operator:]

Our next question comes from Douglas Mewirther of SunTrust. Your line is open. Douglas Mewirther Hi. Good morning. Could you talk a little bit more about the restructuring of IRG to the extent that you can? So it sounds like, because you went through it fairly quickly, so it sounds like you took the existing loan, you equitized part of the loan and you issued a new loan. Is the new loan at a different yield and did you extend the maturity on that new loan, and is it the same place in the capital structure? Joshua Easterly Sure. So, a couple things happened, just to walk you through in more detail. First of all, if you look at the Schedule of Investments, and these are rough numbers, as of the prior quarter, there was probably $43 million at par value outstanding. We -- the company paid us down $3 million, lowering the kind of, our outstanding to the low $40s- and then we entered into a restructuring support agreement post quarter-end that was in -- kind of in process right at the quarter-end. A couple things happened. One was, we equitized our position where we’ll reinstate a $20 million loan approximately at the same yield. And then we had a guarantor on the transaction and that we settled with the guarantor, which will also be a new separate $10 million loan that will not be on the company's balance sheet. And so effectively, the company's balance sheet has delevered by about $20 million. But we only took -- we didn't take that full pain given the guarantor support and that we have a $10 million performing loan from the guarantor that's well-collateralized. So when you take a step back and you think about -- there's been -- the NAV impact is already embedded in the Q -- in this quarter's earnings. So the NAV impact should be behind us, given our view of the business. The earnings impact of the business when you think about on an annualized basis, based on outstanding shares as of 6/30/15, you had about $0.10 or $0.0975 of contribution pre-restructuring from IRG. So about $0.02 -- about a little more than $0.02 a quarter. Post-restructuring, we expect to have a $30 million performing credit, instead of a $44 million performing credit, at approximately the same yield, and so this would equate to about $0.06 per year and -- about $0.06 per year. So we've lost basically only $0.03 of earnings power. Alan, do you have anything to add? Alan Kirshenbaum Yeah, just to be clear on that. So the $0.06 per year is incremental to 2Q because there was no revenue attributed to IRG in 2Q.

[Rick Shane:]

Okay, because that was on a non-accrual status in 2Q?

[Joshua Easterly:]

Right, exactly. And it’s expected to go back on accrual this quarter, or in the third quarter. Douglas Mewirther And also, so it looks like you recognized the make-whole premium on Milagro this quarter. You mentioned that there is a make-whole yield maintenance premium on A&P. Do you know -- or could you disclose- what the dollar value of that is and also the certainty in terms of it going in your favor in terms of the bankruptcy settlement? Joshua Easterly Yeah, I don't know if the A&P quite frankly is in the public domain, in the filing. So -- but it is surely reflected in our mark on the A&P asset. So there are -- that is a -- with high degree of certainty as it relates to a) the collectability of the A&P [prepayment premium] and b) that, there will be no issues with that, is reflected in the mark. Douglas Mewirther Just last question. It's more of a big picture question. Oil has really gone in the tank, in terms of oil prices. I know you're kind of shying away from cyclical risk, but I also do know that you like to do a lot of quirky unique investments. I mean, does that actually make oil and gas more attractive to you because oil is so low that it sort of maybe shakes loose companies that people are just running away from just because of fear,or you're just kind of staying away from that area for now?

[Joshua Easterly:]

So look – to take a step, I mean, I’ll take the quirky as a compliment.

[Douglas Mewirther:]

Yes, I intended that as a compliment. Joshua Easterly I'm not sure if that was meant as a compliment. I’ve been called quirky before, and I'm pretty sure that hasn't been meant as compliment. But as it relates to energy, the way we think about energy is, we recognize what we manage and what our shareholders expect, which is we -- they expect that we have a portfolio of cash yielding credit investments that have downside protection. So I think there's probably asymmetrical kind of return given where oil prices are, but it probably feels more appropriate for kind of a distressed-for-control kind of strategy, which is -- it doesn't really fit into the BDC yield, kind of avoiding non-accruals. So I think that we will continue to be opportunistic in energy only if we can find investments that are not capital appreciation oriented but cash yielding in a distressed scenario. So companies -- that scenario might be upstream companies that have -- like Milagro-who have over-levered balance sheet that quite frankly where we invest in them they can continue even in this commodity price environment, continue to service our debt, but they might need to go through a restructuring. But it won't be where we find value where we can find something or creating something at $0.80 that has a risk of kind of distressed-for-control or us owning a large portion of reorganized equity that's not cash paying nature. Did I answer your question?

[Operator:]

Our next question comes from Chris York of JMP Securities. Your line is open. Chris York Good morning guys, and thanks for taking my question. Forgive me, if I missed it or overlooked it, but could you talk a little bit about investment activity post quarter-end? What were originations, exits and yields potentially? Joshua Easterly Hey Chris, we are not in the habit -- or we don't disclose-- information post quarter-end. So you didn't overlook it, my guess is and my hope is you've never seen it because we don't disclose investment activity intra-quarter. Chris York And then maybe, could you talk a little bit about --? Joshua Easterly But, Mike is happy to talk about what he sees in our pipeline. Mike Fishman Yeah, I mean, what I have said in the past and it continues to be the case, the pipeline is very active. We are seeing a number of interesting opportunities in the market. I think one of the reasons we don't get too detailed is because as I have said in my comments, we are pretty selective and look toward finding the right 3, 4, 5 investment opportunities per quarter. And depending on timing of close, that becomes kind of potentially lumpy from quarter-to-quarter. So we always ask people to look back 2, 3, 4 quarters when evaluating our originations activity. But that being said, we are seeing a number of interesting opportunities in the market and the pipeline does continue to be active. Joshua Easterly Just a little more color. And I think there's only been two quarters out of-since July of 2011, when we started investing-where we've had negative portfolio growth. So -- I think one quarter was back in maybe Q1 of 2014 and other one was Q1 of 2013, but generally, we have pretty measured net portfolio growth quarter-over-quarter, although we remain selective. Chris York Got it, that color is helpful. And then maybe taking a step back and thinking bigger picture. So I know it was reported that TPG was bidding for ANZ's US car and equipment portfolio. So I kind of just wanted to talk a little bit about investment strategy and maybe portfolio management at TSLX. So what would be your view of the likelihood of the BDC to potentially sprinkle in something like specialty leasing assets on the balance sheet given any potential expansion at TPG SSP? Joshua Easterly Just to be very clear. Just so I think you -- I just wanted to clear the comment up. TSLX was not bidding on that portfolio of leasing assets. So, I'm not saying you suggested that, but the broader private equity platform might have -- or been involved--that surely wasn't the TSLX business. Generally, our view is, we're not a growth for growth’s sake kind of guy given that we're really focused on generating ROEs on a per share basis and returns on a per share basis. So you won't see us in kind of in the asset aggregation mode or adding strategies or verticals unless we think it generates incremental accretive units of return for our investors. We have generally shied away from -- leasing assets given that we don't have -- we think we have a pretty deep understanding of corporate credit, less deep understanding of leasing assets such as aircraft leasing, car leasing etc. And so I would not expect to see us expand in verticals unless we have a very deep knowledge and conviction of being able to manage that risk/return and be able to create incremental returns for our shareholders. That's a step back. Chris York Great, thanks, that’s very helpful. Yep, so pretty much just keeping it in the fairway and staying narrow there, so that's great. And then maybe just talking lastly about maybe staying kind of narrow on the fairway with your core unitranche product and maybe the demand from private equity sponsors for that as we've anecdotally heard that that is incrementally being more receptive in the marketplace. So maybe just kind of touch upon what you're seeing? Joshua Easterly Look, I think we're seeing pockets of opportunity. Although the market feels pretty competitive, actually, spreads have widened year-over-year, which people probably haven't actually thought about. So I think you're seeing generally less activity given that in a widening spread environment, borrowers are not apt to refinance given that- why move their cost of capital to higher – when they own an under-market liability or under-market cost of capital / piece of liability in their capital structure. So I think generally, we're seeing pockets of demand. I think that's in unitranche product, that's in, we're seeing -- we have got involved in kind of asset-based lending- true, hard core asset-based lending for the retail sector given changes in what's happening ,changes in retail, but that's consistent with our value oriented investment kind of philosophy. Mike, I don't know if you have anything to add? Mike Fishman I think, also -- and you probably heard this from others, I think as it relates to sponsor activity, there's probably less flow on new money M&A transactions because I think part of that activity has migrated towards strategics versus the sponsor community. And -- but there is activity certainly with strategics doing synergistic add-on acquisitions, we're seeing a fair amount of that. So but quite frankly, we're not exclusively focused on sponsor-related activity anyway. So again, we are seeing activity through sponsors and activity through other intermediate and non-intermediate channels.

[Operator:]

Our next question comes from Jonathan Bock of Wells Fargo Securities. Your line is open. Jonathan Bock And no Josh I would not outline you as although Quirky can be a very good thing. Under the definition of quirky, Josh, would be Alan Kirshenbaum. I'm just kidding. We all love Alan. So very quickly, starting with a view on dividend policy because it's, given the strong returns, given the increased cushion, perhaps reminding us how you feel some of the best ways to generate additional shareholder return through either special dividend or retaining that capital and paying excise tax going forward as I believe you have roughly and Alan will correct me if I'm wrong $0.70 of spillover I guess today and growing? Joshua Easterly So look Jonathan, I -- to take a step back, I find this question a little “quirky” in the sense that-- or misplaced in that the – although, if we don't increase our dividend, it's not like that leaves the ecosystem, right? So those returns stay and build NAV. So I think there is a little misplace that, oh my God, if they're over-earning their dividend and are not increasing their dividend, somehow, that's a loss to shareholders. It's surely not a loss to shareholders in that it’s a closed system and it increases NAV. So that being said, what we really want to is not get over our skis as it relates to our dividend policy, because I think volatility in dividends is what creates kind of, at least in the intermediate term, shareholder destruction. So our goal, like we've always said, is to have a dividend, where we have three standards of deviation that we will be able to earn that dividend and return that cash to shareholders in the intermediate term. As it relates to special dividends versus retaining that capital, I don't think special dividends are that accretive to long-term shareholders of the business, right. They are not predictable. You happen to participate, if you happen to be a shareholder at one moment of time versus not. I’d rather create an environment where we have long-term shareholders for the business and not kind of a stock where people are guessing if we're going to have a special dividend, which drives the price, versus a stock that that price is driven by our ability to generate high risk-adjusted returns over the cycle. So I don't think generally, we're a big believer in the special dividend as a policy mechanism. If we were in an environment where we can't reinvest our proceeds and leverage -- where we can't reinvest our proceeds and leverage is failing, what I think you'll see us do is increase our stock buyback program and reduce the capital base of the company versus a special one-time dividend. In an environment where we are marginally growing the book, retaining that capital, which again is staying in the ecosystem, retaining that capital, paying the 4% excise tax is cheaper and more efficient than raising capital, which obviously, you have to pay underwriting fees and price at a discount to the market. Jonathan Bock And there is no argument again, so I appreciate that. Perhaps just trying to understand a bit of the fee income dynamic next quarter. I would say that if we're looking at discount to par, particularly on the A&P investment that's about 3 point fee and if we look at Global Health Ex, that would also be a 3 point fee as well, does that kind of fit with your numbers? Joshua Easterly I think, those are directionally right. I think, when you think about Global Health -- GHX announced a refinance after quarter-end. I have no idea if that refinance will be completed, time will tell. And so, but if the refinance happens tomorrow, that number would be directionally right. A&P, I think there's probably a little more certainty around given the auction data as it relates to those assets and the proceeds from those assets and signed APA as it relates to those assets. And that number is also directionally right. Jonathan Bock And Mr. Fishman, when we think about the Sears ABL and I understand that it's small in terms of funding, but it's unique in that it's a creative way to source return. Just to make sure I'm kind of understanding this right and for all the investors on the call, when you make a commitment, is it also possible-so you to get a fee on that overall commitment though you've only funded an X amount and let's say, I don't know if this fee is directionally correct-maybe 2 points, maybe 3 points- but that's on the entire commitment. And yet you’ve only funded $3 of $15 and I don't know if they'll draw more, I’m sure it depends. But can you maybe walk through kind of the return dynamics there because it is interesting given that the maturity -- you're likely more than covered from real estate value and the maturity is coming up in the short run, so trying to understand that fee dynamic and how that accretes in income for, I don't know, what 10% to 13% return or maybe even higher? Joshua Easterly Yeah, so, Jonathan, really quickly. We are not, the Sears ABL revolver is a traditional bank revolver based on appraised values of receivables and inventory. It's very liquid, collateral, it's not -- Sears, they've been in news, they've done a whole bunch of transaction around real estate including creating liquidity and dropping their real estate assets in a REIT. But this is a traditional bank ABL revolver with a borrowing base on receivables and inventory that has reserves, etc. So, go ahead Mike. Jonathan Bock Right. But what you've outlined as far as how these commitments are bought and sold, it is basically the math that you've outlined is correct from the standpoint of they are sold on a commitment basis, we make an assessment. Certainly we’ll know -- we know what the fundings are to make a forward assessment of fundings and you could do the math on the yield based on the discount to the commitment purchased across the actual average fundings during the duration of the remaining term of that facility, and as we mentioned that's a near-term maturity. So it's typical yield math based on that. Joshua Easterly Just to illustrate it for people. First of all, we have an economic cost for the unfunded commitment, although that were long—we’re surely long liquidity. But if you think about the math, say we bought the Sears ABL at a 2 point to 4 point discount illustratively, so this is directionally illustratively and $3 of the $15 was funded, we would effectively have basically 16 points or 12 points to 16 points of discount as it relates to our funded piece where we only have a year of risk in a completely conforming asset-based loan. Jonathan Bock Okay. And also just in the weeds of one more investment. So if we look at Key Energy, just with the -- and again this is small but perhaps with the some reports of negative results the same with Quiksilver kind of the views on -- are these kind of entry into somewhat quirky situations that allow you to ex-out some nice OID while you have primary and secondary sources of repayment or -- do you kind of see these as a long-term values of the business because investors are happy to make money when there's problems and they're happy to make money when you support longstanding businesses that do well over time. Joshua Easterly So just Key -- just generally, we're not really generally big on the services business. Key has some idiosyncratic things happening in their business that allowed for an opportunity to participate in a club financing. Key, given that where commodity prices are will continue to be, my guess is volatile, as you saw in the last earnings, but the reality is they have a lot of liquidity. As that business shrinks, they have a lot of unwind of working capital that will create a lot of operating free cash that will continue to kind of ride out a cycle for a long period of time. And then we believe in the, kind of the mid-cycle earnings of Key, at least where we are in the capital structure and then Key does have some unique assets and that are kind of, I would say more homogeneous in nature away from just pure oil field services that provides secondary support. So I don't know if I answered your question. But Key, we are very comfortable with and, both in a kind of going concern and downside case, but they have a ton of liquidity and liquidity in the near term in that business will be good as that business continues to shrink and the investment that they had in working capital will continue to unwind. On Quiksilver, look sometimes we get involved in names because we think there is a refinancing opportunity and which we think we can drive shareholder value. Quiksilver has been in news, which I think they are a more fulsome refinancing, I don't want to comment on our level -- either our participation level or involvement in that. But Key, we think owns very unique assets -- I mean, Quiksilver, we think, owns very unique assets given they have -- they own brands, consumer brands that we think, they have value. And so we feel pretty good about both those investments and where we made them.

[Operator:]

Thank you. [Operator Instructions]. I'm not showing any further questions in queue, I'd like to turn the call back over to Joshua Easterly for any further remarks.

[Joshua Easterly:]

So we really appreciate everybody's participation and again Alan, thank you for being a great partner to Mike and myself and we look forward to continuing the friendship, which is very, very important to me. So the last thing I want to say is that I hope people enjoy their summer and their Labor Day and we will surely talk if not in November before then. So thank you.

[Alan Kirshenbaum:]

Thank you, Josh. Thank you, Mike. Appreciate it very much.

[Operator:]

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone have a wonderful day.