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TPG Specialty Lending Inc (TSLX) Q3 2019 Earnings Call Transcript

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TPG Specialty Lending Inc (NYSE: TSLX)
Q3 2019 Earnings Call
Nov 6, 2019, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning and welcome to TPG Specialty Lending Inc.'s September 30 2019 Quarterly Earnings Conference Call. Before we begin today's call I would like to remind our listeners that remarks made during the call may contain forward-looking statements. Statements other than statements of historical facts made during this call may constitute forward-looking statements and are not guarantees of future performance or results and involve a number of risks and uncertainties. Actual results may differ materially from those in the forward-looking statements as a result of a number of factors including those described from time to time in TPG Specialty Lending Inc.'s filings with the Securities and Exchange Commission. The company assumes no obligation to update any such forward-looking statements. Yesterday after the market closed the company issued its earnings press release for the second quarter ended September 30 2019 and posted a presentation to the Investor Resources section of its website www.tpgspecialtylending.com. The presentation should be reviewed in conjunction with the company's Form 10-Q filed yesterday with the SEC. TPG Specialty Lending Inc.'s earnings release is also available on the company's website under the Investor Resources Section. Unless noted otherwise all performance figures mentioned in today's prepared remarks are as of and for the third quarter ended September 30 2019. As a reminder this call is being recorded for replay purposes. I will now turn the call over to Joshua Easterly Chief Executive Officer of TPG Specialty Lending Inc.

Joshua Easterly -- Director, Chairman of the Board and Risk Management Committee, Chief Executive Officer, Co-Chief Inv

Thank you. Good morning everyone and welcome to our third quarter earnings conference call. Joining me today is my partner and our president Bo Stanley and our CFO Ian Simmonds. I will start this morning with an overview of our quarterly results and then hand it off to Bo to discuss origination and portfolio metrics. Ian will review our financial results in more detail and I will wrap up with some concluding remarks before opening up the call to Q&A. After make close yesterday we reported strong third quarter results with net investment income and net income per share of $0.55 and $0.46 respectively. This corresponds to an annualized return on return on equity based on net investment income of 13.3% and net income of 11%. Our net investment income this quarter was supported by strong prepayment activity and the difference between this quarter's net investment income and net income was primarily driven by reversal of unrealized gains from investment realizations. As discussed on our last call our prior quarter's net income of $0.72 per share included a contribution from unrealized gains from investments where we had visibility on earning contractual prepayment fees. As some of these investments were realized this quarter we recognized fees through net investment income and unwound previous unrealized gains. Reported net asset value for the quarter reached another high of $16.72 per share representing an $0.08 per share increase from prior quarter's net asset value after including the impact of the Q2 supplemental dividend. Yesterday our board declared a Q3 supplemental dividend of $0.08 per share to shareholders of record as of November 29th payable on December 31st. Our board also announced a fourth quarter base dividend of $0.39 per share to shareholders of record as of December 13th payable on January 15th. Year to date we've declared $1.30 per share in total dividends to our shareholders their earnings in 2019 which represents an 11% increase over our base dividend level. During this time we've also increased net assed value per share by 3.2%. We continue to evaluate our dividend policy to ensure satisfaction with the RIC requirements while preserving the stability of our net asset value. As we look ahead we've been proactively strengthening our balance sheet by staggering the maturities of our debt obligations expanding the diversity of our financing sources and increasing our available liquidity. Over the course of this year we've extended the maturity and increased the commitments under our revolving credit facility and post quarter end we issued $300 million of 5-year unsecured notes which Ian will discuss in more detail. Let me now transition to a quick observation on credit risk spread and its impact on the valuation of our portfolio. During the third quarter uncertainty over U.S. trade policy and global growth led to abbreviated periods of market volatility. Quarter-over-quarter LCD first lien and second lien spreads each widened by 20 and 90 basis points respectively. A closer look however showed that credit spread movement was bifurcated on various underlying vectors including cyclical versus non-cyclical industries. LCD spreads for non-cyclical industries on average tightened during the quarter while the opposite was true for cyclical industries. Given the low cyclical exposure in our portfolio we stood at 3.2% on a fair-value basis at quarter end excluding energy and 8% including energy. The impact of credit spreads movement on the valuation of our portfolio this quarter was relatively muted once we took into account industry-specific comps for each of our investments. Before passing it over to Bo I would like to comment on a recent development for one of our portfolio companies Ferrellgas. This October the company disclosed in its 10-K filing that it is currently in a disagreement with us as the agent on a senior secured credit facility regarding various technical defaults including the going-concern qualification in the company's most recent audited financial statements report. We continue to work closely with the management on finding a solution. With that I'll turn the call over to Bo to walk you through our portfolio activity.

Robert J. Stanley -- President

Thanks Josh. Following last quarter's record originations activity we again posted strong quarterly results with $660 million of gross originations $356 million of commitments and $309 million of fundings. Q3 fundings were distributed across seven new investments and upsizes to four existing portfolio companies. We continue to take a disciplined and deliberate approach to building a defensive portfolio with a differentiated return profile. We do this by staying at the top of the capital structure limiting our cyclical exposure and focusing on themes and opportunities where our platform's scale and sector knowledge provide the competitive advantage. Our new investments this quarter were either asset-based loan solutions or select sponsor financings where our expertise allowed us to add value and create appropriate risk-adjusted returns for our portfolio. Moving to the repayment side there were $310 million of paydowns across eight full and one partial realizations. These were driven by a combination of opportunistic refinancings and portfolio company-specific events. An example of the former is Jive Software a portfolio company that provides enterprise workflow collaboration solutions. We made our original investments in Q2 of 2017 to support a sponsor take-private of the business and since then the company's performance exceeded our underwriting expectations. During the quarter Jive refinanced our loan with a new bank financing at significantly tighter spread. Upon the repayment we received the call protection and other contractual economics that resulted in a gross unlevered IRR of approximately 22% of our capital invested. An example of idiosyncratic repayment activity this quarter was Barneys. This April we funded a $35 million par-valued asset-based loan to our luxury department store chain to provide additional liquidity for ongoing operations. On August 5th the company filed voluntary petition of relief under Chapter 11 of the Bankruptcy Code. Later that month upon the funding of a new money DIP facility we were fully repaid on our $35 million par-value loan along with call protection and other contractual economics resulting in a gross unlevered IRR of approximately 31% on our investment. We continue to be fairly active in the retail ABL this year against the backdrop of a particularly challenging year for brick-and-mortar retailers. During the quarter we funded a $72 million par-value asset-based loan to Nieman Marcus to support the company's strategic initiatives. And post quarter-end as publicly disclosed we and our affiliated funds provided a $75 million asset-based DIP loan to Forever 21 to support the company's bankruptcy restructuring efforts. We believe both of these investments offer strong risk-adjusted returns given the downside protection of our borrowing-base [levered] loans including in both cases robust asset coverage from liquid working capital collateral. Now let me transition to the portfolio composition and yields. Ninety-seven percent of our portfolio at quarter-end was first lien on a fair-value basis consistent with the previous three quarters and our top three industry exposures were business services at 18% of the portfolio at fair value followed by retail and consumer products and financial services each at approximately 14% of the portfolio at fair value. We'd like to note that our retail exposure is predominantly in the form of asset-based loans secured by liquid working capital collateral and the vast majority of our financial services portfolio companies are B2B integrated software repayment businesses with limited financial leverage and underlying bank regulatory risk. The credit quality of our portfolio remains robust with an average performance rating on a scale of 1 to 5 with 1 being the highest of 1.13 versus 1.18 in the prior quarter. This quarter the weighted average total yield on our debt and income producing securities at amortized cost was 10.8% a decrease of 54 basis points from the prior quarter. Breaking this down 24 basis points was due to the decrease in LIBOR on our floating rate portfolio and 30 basis points was due to the impact of new versus exiting investments. This was an atypical quarter where a number of stronger yielding investments with a weighted average total yield of 12.7% were repaid. The weighted average total yield on new investments was lower at 10.4% and this was impacted by both the yield and the size of our Neiman ABL investment. At a yield and amortized cost of approximately 9% the yield on this loan is on the low end of our typical underwriting range. However we really like the risk reward this investment offers given our strong downside protection as discussed earlier. Excluding the Neiman ABL the weighted average total yield on new investments this quarter would have been 11%. With that I'd like to turn it over to Ian.

Ian Simmonds -- Chief Financial Officer

Thank you Bo. I'll begin with an overview of our balance sheet. Given our net funding activity this quarter total investments remained relatively flat at $2.05 billion. Total debt outstanding was $918 million and net assets were $1.11 billion or $16.72 per share which is prior to the $0.08 per share Q3 supplemental dividend that was declared yesterday. Our average debt-to-equity ratio was 0.86x compared to 0.85x in the prior quarter and our ending debt-to-equity ratio was 0.83x. Since we increased our target leverage range to 0.9x to 1.25x a little over 12 months ago upon the effectiveness of the lower minimum asset coverage requirement our average quarterly leverage has to date not reached the low end of our targeted range. This is a function of repayment activity in our portfolio as well as our prudent approach to growth especially in today's market. We've instead been focused on expanding the flexibility of our balance sheet to best position the business for the period ahead. As Josh mentioned post quarter-end we issued $300 million of 3.875% 5-year unsecured notes. While the net proceeds were immediately used to repay outstanding amounts under our revolver the additional capital will also be used to effectively replace the $115 million of 4.5% convertible notes that mature in December as well as to provide incremental liquidity under our revolver. We've been patient about issuing an index-eligible sized notes offering given our focus on cost of debt and its impact on ROEs. We executed this transaction to expand our balance sheet liquidity at a swap-adjusted pricing that resulted in minimal impact to pro forma ROEs. Further given our commitment to maintaining our investment-grade credit ratings we believe this transaction provides a meaningful enhancement to the funding diversity profile of our business. With staggered long-term maturities through late 2024 and over $940 million of availability under our revolver pro forma for the new notes and the paydown of our maturing 2019 converts we believe we are very well positioned on the capital side. Pro forma for the repayment of the 2019 unsecured notes in December our funding mix is comprised of approximately 35% secured and 65% unsecured debt. Consistent with our risk management practice of matching our liabilities with the floating-rate nature of our assets we entered into a fixed-to-floating interest rate swap with the same initial amount that resulted in an effective pricing on our new notes of LIBOR plus 225 basis points which is inside the swap-adjusted spread of 286 basis points on the 2019 converts that we will repay in December. As we have expressed previously when we make balance sheet decisions we are conscious of their impacts on all our stakeholders and believe our actions through the course of 2019 have reinforced this approach. Turning to our presentation materials slide eight is the NAV bridge for the quarter. Walking through the various components we added $0.55 per share from net investment income against the base dividend of $0.39 per share. There was a $0.21 per share reduction to NAV as we reversed net unrealized gains on the balance sheet from investment realizations. Note that approximately $0.06 of this reversal was related to our equity investments in AvidXchange and Northern Oil. As we exited these two positions we reversed the unrealized gains from the prior quarter and recognized the realized gain on sale in this quarter's net income. Back to our NAV bridge as Josh mentioned the impact of credit spread widening on the valuation of our portfolio this quarter was limited and there was a positive $0.02 per share impact from net unrealized mark-to-market gains on the interest rate swaps on our fixed-rate securities due to movements in the forward LIBOR curve during the quarter. Other changes in net realized and unrealized gains the majority of which were related to the gain on sale of our equity positions had a positive $0.12 per share impact to this quarter's NAV. Moving to the income statement on slide nine total investment income was $70.1 million up from $62.4 million in the prior quarter. This was primarily due to the $6.3 million increase in other fees which consists of prepayment fees and accelerated amortization of up-front fees from unscheduled paydowns. Interest and dividend income was $56.1 million up $0.6 million from the prior quarter and other income was $2.7 million up $0.8 million from the prior quarter. Net expenses increased slightly from $30.3 million to $31.8 million quarter over quarter primarily due to higher incentive fees from an increase in earnings. Interest expense this quarter was slightly lower compared to Q2 almost entirely due to a lower effective LIBOR on our debt. As you may remember there's an approximate 1-quarter timing lag on the LIBOR reset date on our interest rate swaps. Therefore the approximately 20 basis points decline on our weighted average cost of debt outstanding this quarter was related to the decline in LIBOR last quarter. As such the downward movement in LIBOR during Q3 will be beneficial to our cost of debt for Q4. Josh referenced our RIC-related distribution requirements earlier. At September 30 our estimated spillover income was approximately $1.60 per share. We will continue to evaluate the best way to comply with this requirement in conjunction with our distribution policy. Let me conclude with an update on our ROEs. At the beginning of the year we communicated an annualized ROE target of 11% to 11.5% based on our expectations for net asset-level yields cost of funds and financial leverage. Year to date we've generated an annualized ROE on net investment income and net income of 11.8% and 14.6% respectively. Given the earnings power of our portfolio and our outlook for portfolio activity for Q4 we would expect to end full-year 2019 at the upper end of our previously shared NII per-share guidance of $1.77 to $1.85. With that I'd like to turn it back to Josh for concluding remarks.

Joshua Easterly -- Director, Chairman of the Board and Risk Management Committee, Chief Executive Officer, Co-Chief Inv

Thank you Ian. In closing this was another productive quarter where despite ongoing competitive headwinds we were able to underwrite robust risk-adjusted asset-level returns and generate strong consistent ROE for our shareholders. We continue to work diligently on finding opportunities where we can differentiate our capital and build our track record of portfolio outperformance which today stands out in average gross unlevered IRR of approximately 19% weighted by capital invested across 104 fully realized investments. With our portfolio in good shape and with ample liquidity on our balance sheet we believe we are well positioned to continue delivering strong returns to our shareholders.

With that I'd like to thank you for your continued interest and for your time today. Operator please open up the line for questions.

Questions and Answers:

Operator

[Operator Instructions]Our first question comes from the line of Rick Shane from JPMorgan. Your line is now open.

Rick Shane -- JP Morgan -- Analyst

Look I know that some of the specifics about what you can say about Ferrellgas is going to be limited but love to explore this a little bit. Obviously the end of the third quarter carried at a gain an unrealized gain and presumably that factored in things that you were anticipating. I'm curious if you can just talk through structurally how you guys have looked at some of these situations in the past and help us understand what the opportunity and risks are related to the resolution here.

Joshua Easterly -- Director, Chairman of the Board and Risk Management Committee, Chief Executive Officer, Co-Chief Inv

First of all I think core to our franchise as a support company is in management teams even those that find themselves in a transition. We've tried and will continue to try to work with the company and the management team and their advisors on the solution. We would refer people to the litigation in Kansas for more details including the countersuit filed by the company's employee -- a company's employee's trustee Great Bank on October 24th for details of the Ferrellgas story. We believe what's really unfortunate here is that there's been approximately $2.3 billion of equity value eroded since the company's peak market cap in September of 2014 representing approximately $600 million of employee plan assets related to the ESOP. This is detailed in that Great Bank countersuit. Obviously it's a live situation which is fluid. As it related to the mark the mark is actually below the implied call protection that would be contractually owed to us upon a refi if the company chooses to refi us. The company's capital structure is pretty public. We sit -- we feel pretty well positioned in the capital structure approximately 2.5x levered. The company does -- I think reported $230 million of EBITDA and the market value of the company's securities which is mostly unsecured debt outside of us is approximately $2 billion. There's not much equity value by market cap. I think it's $50 million to $60 million so we're very well positioned in the capital structure. Obviously the arc of the Farrell story again is unfortunate specifically as it relates to previous owners and the erosion of the equity value in plan assets although we feel pretty good about where we sit in the capital structure. And again I think the loan is marked below the implied call protection on our security. Is that helpful/?

Rick Shane -- JP Morgan -- Analyst

It is helpful and obviously given the litigation I know that you have to be thoughtful about your comments. I appreciate that context. Thank you Josh.

Joshua Easterly -- Director, Chairman of the Board and Risk Management Committee, Chief Executive Officer, Co-Chief Inv

Just a quick -- there is no current litigation between us and the company. The litigation is really between -- at this point it's between the ESOP trustee who is the fiduciary for approximately 24% of the company's stock which is owned by employees and the company over who controls the company. Again you can find that in I think the Federal Court in Kansas. But we're not a party to any litigation directly with the company today and again we continue to work and to try to find a solution. And again our whole business model is supporting companies and management teams even those that are in transition.

Rick Shane -- JP Morgan -- Analyst

I appreciate that context. Thank you, Jonathan.

Operator

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

Chris York -- JMP Securities -- Analyst

So Rick addressed the elephant in the room so I'm going to focus on the opportunity set for a moment. Josh lending to middle market software companies was a source of portfolio growth in the third quarter and it seems like it has been over the last couple of years. So could you be positioned for further growth with the close of the capital solutions fund with more firepower across the platform? And the question I guess for the BDC is in these cases where you're lending to software companies by leading tech sponsors for buyouts are you extending credit as a function of recurring revenue as opposed to free cash flow?

Joshua Easterly -- Director, Chairman of the Board and Risk Management Committee, Chief Executive Officer, Co-Chief Inv

Yes good question. I think the portfolio growth this quarter a decent amount of it I think was actually in our retail ABL theme.

Robert J. Stanley -- President

That's right.

Joshua Easterly -- Director, Chairman of the Board and Risk Management Committee, Chief Executive Officer, Co-Chief Inv

So and if you look at our activity in Q4 at least the known activity again it's in the retail asset-based theme with Forever 21. So we're most definitely active in the business services as a software and quite frankly we're actually more active in the payments ecosystem for example than just traditional software. As it relates to our underwriting thesis it's a combination of both free cash flow recurring revenue with high gross margins and the ability for these companies to effectively right-size their ability to generate cash flow given that they control sales and marketing. We're really focused on companies that generate really high returns on $1 of sales marketing spend. And what that really means is that they're very efficient with their capital spend they generate 3x to 5x lifetime value of a customer per $1 spent IRR is between 25% and 50% and where they have high gross margins of 80% to 90% and low churns the lifetime customers that typically are seven to 10 years. But it's a very granular process. Each credit's a little different but it's a combination of what we consider the back book what's the value of the recurring revenue in a runoff case given that there's high switching costs steady state free cash flow profile and so it's a combination of those two. Bo anything to add there?

Robert J. Stanley -- President

No I think that was well said.

Joshua Easterly -- Director, Chairman of the Board and Risk Management Committee, Chief Executive Officer, Co-Chief Inv

But typically we're 25% to 40% loan-to-value and again we tend to be very highly selective with high-quality businesses entrenched customer base and good return on invested capital.

Robert J. Stanley -- President

Yes the only thing I'd add is we're also very thematic in our approach there as well. As Josh mentioned it's just not to software companies. We try to pick areas where we think you know the return on invested capital continued because of secular tailwinds. One area is B2B payments where we've spent a lot of time. We're also looking at the transition from legacy on-prem software providers on some of the vertical applications to more SaaS-based solutions like axiomatic so we're very thematic in our approach in how we approach the software names.

Chris York -- JMP Securities -- Analyst

Got it very helpful and investors know happen. Go ahead Josh.

Joshua Easterly -- Director, Chairman of the Board and Risk Management Committee, Chief Executive Officer, Co-Chief Inv

Hey Chris sorry but you asked a compounded question but I forgot the first piece of that question which is we've raised a capital solutions fund focused on basically structured equity and growth debt financings and the combination of those two together. That is different than what typically TSLX has done but what it does do is allows -- adds sourcing firepower given that there are people in that fund or around that fund who are focused in the same ecosystem and so there should be accretive opportunities given that we've basically increased our sourcing footprint although it's a slightly different investment profile much more down the capital structure than the typical TSLX investment. On occasion it could be down the capital structure given that it's structured equity focused.

Chris York -- JMP Securities -- Analyst

Got it. All that insight to a compound question is very helpful. Staying on the topic of themes maybe Bo investors know you guys have been quite active with your ABL strategy for many years. And then obviously axing parties Barneys here at 30% IRR is pretty attractive. You've been historically active in retail as a sector for the investment theme but I'm curious if you think your opportunity set could expand to include the extension of ABLs to older tech business models that could be disrupted by newer tech business either an enterprise software or cloud and leverage your tech expertise across BDC.

Joshua Easterly -- Director, Chairman of the Board and Risk Management Committee, Chief Executive Officer, Co-Chief Inv

Hey Chris you did break up when you said we've been historically active in and then it broke up. Historically active in what was the premise of the question? We heard the last part but what was the premise?

Chris York -- JMP Securities -- Analyst

The premise was you've been historically active in your ABL strategy with retail and curious if you're expanding that into potentially older tech business models in the extension of the ABL.

Joshua Easterly -- Director, Chairman of the Board and Risk Management Committee, Chief Executive Officer, Co-Chief Inv

Yes Bo should answer. Look I think the -- quite frankly we're concerned deeply about the old I would call it software 2.0 license maintenance models where there's a ton of free cash flow but really they depend on new license sales which is being displaced by either on-premise solutions or SaaS solutions and so we have -- you know there's not many legacy software investments in our book. Quite frankly we spent the last 20 years making legacy software investments Allen Systems etc. But I think that -- you know what we have and what we're worried about is churn picking up that given the disruption of either on-premise or SaaS. Bo do you have a different view?

Robert J. Stanley -- President

No I have the same view and that's -- what I had mentioned on the previous question is you know one of our themes is finding opportunities where we see displacement of legacy on-prem providers. You asked the question about you know would be play those on an asset-based basis. Generally these companies are software companies that have very little in the way of working capital assets or assets that you could value in a liquid scenario. You know there are some ways to play them on a legacy harvest mode but we're very weary of that play right now given the rate that you're seeing deterioration in the retention rates. So you know we're really focused more on software 3.0 which is the displacement of this and the movement to the cloud particularly in the SME market.

Chris York -- JMP Securities -- Analyst

Great I again appreciate the insight there. And then maybe for Ian here getting him into the fold questions on risk management. Obviously Josh you could answer this one too. The question is just because a BDC peer had initially sought the matched duration of assets and liabilities by swapping their term debt but recently deviated as a result of the cost of swaps in the market. So the question to you is how should we consider your elasticity to the cost of swaps or whether the cost of swaps can make you reconsider your risk management strategy on an ad hoc basis?

Joshua Easterly -- Director, Chairman of the Board and Risk Management Committee, Chief Executive Officer, Co-Chief Inv

I think what you're referring to is given that the LIBOR curve was inverted that the swap cost was higher than the fixed cost at time plus -- at T plus 0 T plus 1. Chris is that what you were referring to?

Chris York -- JMP Securities -- Analyst

Correct yes.

Joshua Easterly -- Director, Chairman of the Board and Risk Management Committee, Chief Executive Officer, Co-Chief Inv

So that being said the swap cost is effectively the net present value of the curve at that point. The implicit bet that that manager is making is a bet on the curve that the curve will be wrong and it won't be inverted or inverted as much. Again we have no ability to determine interest rates. You know we own floating-rate assets. We have floating-rate liabilities. In the case where you have an inverted LIBOR curve what it's telling you is that your assets if you have floating-rate assets they're going to be throwing off less income in the future right so T plus a year or T plus two years and if you didn't swap you would effectively have net interest margin compression at T plus 1 or T plus 2 right? And so like that again we try to stay away from the implicit bets you make -- that people are making on the curve or on the shape of the curve and effectively trying to lock in a net interest margin on our portfolio. And so that's how we think about it. But if the curve stayed exactly the same and they own a floating-rate portfolio a year from now or two years from now what's going to happen is their interest income in that portfolio is going to go down and their interest expense is going to stay exactly the same and they're going to have net interest margin compression which is the thing we're trying to avoid. Ian anything to add there?

Ian Simmonds -- Chief Financial Officer

No I think the approach we took this time Chris is just staying true to the philosophy that we put in place before so no deviation from that same approach.

Joshua Easterly -- Director, Chairman of the Board and Risk Management Committee, Chief Executive Officer, Co-Chief Inv

Yes I would say when we did the swap that wasn't the case for us. It was basically flat to the cost of the bond deal. But we're not -- again we're not making bets on the shape of the curve; we're really focused on just locking in a net interest margin.

Chris York -- JMP Securities -- Analyst

Got it thank you for the clarity on that and just contrasting the differences in approach there I think is important. So that's it for me. Congrats on the productive quarter.

Operator

Our next question comes from Mickey Schleien from Ladenburg. Your line is now open.

Mickey Schleien -- Ladenburg -- Analyst

Good morning, guys, and thanks for taking my questions. Josh I think in your prepared remarks you talked about a bifurcation in the markets and you know I do agree with that. We are seeing bifurcation in leveraged loans with some more weakness in retail and energy and then some other deals which may have been too acquisitive or maybe too optimistic on their synergies. Taking that into account and your platform's broad expertise in general and in some of these segments specifically how would you characterize the risk-adjusted returns available to you in some of those more liquid but distressed names versus the more day-to-day deals?

Joshua Easterly -- Director, Chairman of the Board and Risk Management Committee, Chief Executive Officer, Co-Chief Inv

First of all you're exactly right. I think the loans the broadly syndicated loan market is getting a much larger tail i.e. the percent trading below 95 or 90 is much higher than it has been historically. Our view is that there are good reasons why those loans are trading where those loans are trading and I don't think we've found value in those loans today. We obviously have a broadly syndicated loan book outside of the BDC and we're very much in tune with what's happening in the broadly syndicated loan market. I would say generally that it's not a technical dislocation. It is really that tail is being caused by fundamental issues either in those business models or with those names on an idiosyncratic basis. So if it's parts of the healthcare ecosystem if it's parts of energy or retail that are non-asset-based lending opportunities there's most definitely a reason why that exists. It doesn't feel like a December/January 2018/2019 or a December '15 March of '16 where there is broad-based dislocation. It feels like that dislocation exists for a reason and it doesn't seem like there's a lot of excess return in those tails at the moment.

Mickey Schleien -- Ladenburg -- Analyst

That's interesting Josh. And sort of a spillover of all of that is into the CLO market which effectively looks like it's shut down at least in the primary market. And that looks like it may be presenting some interesting opportunities in CLO equity to the extent there's any liquidity. Is that a bucket that's more interesting to you today than perhaps a few months ago?

Joshua Easterly -- Director, Chairman of the Board and Risk Management Committee, Chief Executive Officer, Co-Chief Inv

Yes I mean we've had a as you know -- by the way Mickey these are really good insightful broad market questions so I got to give it to you. You're in tune. You've done your work which has obviously historically been the case with you. So as you know CLO equity we have not purchased any CLO equity in the BDC for a variety of reasons most definitely due to the ball now of NAV. Where we have stepped in a little bit is in the mezzanine. I think back in 2016 we bought two mezzanine bonds and those quickly rallied and we exited. So I can't imagine that we'll come to the conclusion that the CLO equity opportunity is right for the BDC. There might be a small basked on the structured credit side on mezzanine bonds or other bonds. I would tell you that unlike 2015 and 2016 where the dislocation was -- felt technical and it was broad based which created the opportunity CLO equity today I think has really gained. It's focusing on those tails. The deeper down in the capital structure you are in the structured credit land so mezzanine and equity you're way more levered to those tails given the implicit leverage in the CLO structure. And so if you're negative on the loans that have -- negative broadly on the loans that have tail you would have to be very careful as it relates to the levered piece of a CLO structure that is most exposed to that tail. Now there's offsetting factors such as the ability to reinvest the ability to trade that might offset some of that tail risk. That being said the other thing that's happening in the CLO market is the risk of downgrades and the breach of OT test that will take some of the optionality. And so you know the big elephant in the room in the CLO market is -- there's two which is the tails in the portfolio and the second piece is you know how much downgrade risk from B3s B minuses to CCCs that really will truncate the optionality for the equity.

Mickey Schleien -- Ladenburg -- Analyst

I understand and that's really helpful Josh. I appreciate your time. Those are all of my questions today.

Operator

[Operator Instructions]Our next call comes from Robert Dodd from Raymond James. Your line is now open.

Robert Dodd -- Raymond james -- Analyst

Hi, everyone. I appreciate the color at the beginning of the call from Bo with the prepays that came this quarter obviously generated some fee income and as a result the higher IRRs which also you reversed out in unrealized depreciation because you had put it in. Can you give any color on at what point of certainty or probability of an early prepay do you start to factor that call protection into the unrealized or the fair value mark on the books?

Joshua Easterly -- Director, Chairman of the Board and Risk Management Committee, Chief Executive Officer, Co-Chief Inv

Yes so look the way we value our book is we really look at change of credit spread since inception. And so if credit spreads on that comp credit or in the industry have tightened the loan will go up typically capped by either time value i.e. that you don't -- in loans you don't hold a -- you write the issuer a co-option and so you can't hold it over market loan forever because they can call you at a price. And so it's typically capped at the time value or the call price the combination of the two. If loan spreads widen you obviously are marking down the loan based on your underlying duration assumption of that loan. And then you make idiosyncratic adjustments as it relates to company performance where would it reprice today. And what we're really trying to do is figure out what the fair value of that loan is and where would a arm's-length party transact. As it relates to how we start factoring call prices that's part of the idiosyncratic adjustments which is do we think the company is going to be sold? What's the probability the company is going to be sold? So what's the probability of us receiving that call price and what's the expected value? And then you incorporate that into the loan. Sometimes it's 100 sometimes it's 25 and then you make adjustments quarter by quarter as it rolls through. And so that is how the valuation works but again the overarching kind of context is where would a third party at a arm's length buy that loan or where would it be priced in the environment we're in living today? And there's a whole bunch of tools you use. The biggest tool is change in credit spreads since inception and then you overlay it with the idiosyncratic.

Robert Dodd -- Raymond james -- Analyst

Got it. I appreciate that color. And then just one more if I can. On the Nieman ABL in the quarter as you said the yield 9% but you don't really underwrite an ABL to a yield. That's a quasi yield . So I mean what you -- as we saw with Barneys so that 31% IRR right? So what would you say where would the Neiman ABL stack in terms of plausibly expected return versus your portfolio yield today?

Joshua Easterly -- Director, Chairman of the Board and Risk Management Committee, Chief Executive Officer, Co-Chief Inv

Yes look so first of all I think that one of the ways we look at it is you know yield to kind of what we would expect it as expected life not yield to worth and that's a function of things that are happening with the company. With some of our ABL investments quite frankly when the companies are facing challenges those investments tend to yield better than the yield to worth because they have a shorter life. And so you are correct; we didn't underwrite it to a 9% yield. We expect that the average life will be shorter. That being said you got to look at the quality of your collateral and the quality of your business -- of a business. We think Nieman's is a good business. It obviously has balance sheet issues and we quite frankly have a ton of experience with the underlying collateral most recently with Barneys for example and feel great about that there's very very little probability of loss given that we have a borrowing-based deal that is well inside the loan-to-value on the liquid collateral the inventory. The other thing that worked nicely about Neiman is that there's a whole bunch of suppressed availability i.e. that the basket for the FILO was much smaller than the -- there was a limited basked for the FILO I think of $100 million which was much smaller than a typical advance rate would support given the collateral base.

Robert Dodd -- Raymond james -- Analyst

Okay I appreciate -- oh carry on.

Joshua Easterly -- Director, Chairman of the Board and Risk Management Committee, Chief Executive Officer, Co-Chief Inv

It's a much less full kind of FILO or asset-based loan than a typical REIT -- asset-based loan given the baskets that the company had available to them.

Operator

And your next question comes from Finn O'Shea from Wells Fargo. Your line is now open.

Finn O'Shea -- Wells Fargo -- Analyst

Hi, guys. Good morning. Thanks for having me on. Just to continue on Neiman a touch this is one just looking at it it's very well known of course. This is a large ABL loan and of course many private credit competitors are building out in this space. So can you talk a little on the competition here? Was this shopped around or were you brought in you know with or behind a bank? And then just a small add-on to the question. There's a seemingly very small piece of the syndicated first lien that you took on. Is this a new -- did you buy that secondary or did this come with sort of your investment as a second part to the question?

Joshua Easterly -- Director, Chairman of the Board and Risk Management Committee, Chief Executive Officer, Co-Chief Inv

Yes so good question Finn and good morning to you. So on Nieman look we have a great relationship with our friends at areas have done numerous asset-based deals including Ninety-Nine Cents and so we have a great relationship. And in addition to that we were involved on one of out other funds our private funds in helping Nieman through the latest restructuring given we were a large holder of the term loan. So given that we know the company been involved with the company you know were constructive with the company in their latest efforts to restructure the balance sheet and we have a ton of experience with the sponsor and you know I think that gave us the opportunity. And so that's the context of the transaction. Again what I would say is look the portfolio yields bounce around quarter to quarter. I think if you look at Forever 21 quite frankly which is another retail asset-based loan it has a much higher yield to amortized cost. If you know -- much much higher. If you look at portfolio -- if you pro forma Q3 for Forever 21 I think yield to amortized cost of our portfolio is about 11% to 11.1%. And so the Neiman's choice was although it was lower yield it probably ultimately will have a little bit of a higher return because it will go to life. There was a whole bunch of suppressed availability which had made it a very good loan. We knew the company and we have a great relationship with the sponsor and have a history of supporting Neiman's. As it relates to your second question which is why do we own a I think it's like $700000 Neiman first lien it is under the 40 Act given that we own a different part of that capital structure -- by the way all first lien -- in Neiman's it helped solve some of the restructuring exemption if ever Neiman's is in active workout. And so it was a small investment to deal with some of the 40 Act consideration and give us regulatory flexibility under the 40 Act.

Finn O'Shea -- Wells Fargo -- Analyst

Interesting and a follow-on if I may. I think in your dialogue with Mickey you outlined a view that a lot of the secondary B2 B3 loans are down where they are in the 70s for example for a reason. Can you -- where are you in the camp of today with a little chop in the market a lot more sponsor looking at a private solution for more complicated deals or your even less complicated deals? Where are you on the spectrum of is there much better opportunity now in a traditional sponsor large cap deal?

Joshua Easterly -- Director, Chairman of the Board and Risk Management Committee, Chief Executive Officer, Co-Chief Inv

Look I think generally volatility in broadly syndicated markets leads to opportunity for the private credit market so I think that's generally the theme. What I would caution you is first that volatility needs to be -- you know it can't be one day two days a week a month. It's got to be probably 60 to 90 days where people are willing to pay for certainty. The second thing is given that there's been a lot of private credit raised our view is that if you're going to take on illiquidity risk you've got to earn a little bit of a excess premium and I'm not sure everybody shares that view. That being said I think generally we're starting to see some larger transactions. I think we looked at a $900 million deal that was going to be clubbed up through private credit guys in the last you know couple weeks and so you know I think year starting to see some of that. But again I would caution people that given where BDC sits on -- and fee structures that they've got to remember that they're non-CLO where they charge 50 basis points so they better be creating value to earn their fees and that it takes a little bit longer sustained periods of volatility. But I hope that answers your question.

Finn O'Shea -- Wells Fargo -- Analyst

Yes it does. Thank you for taking my questions.

Operator

Thank you and that concludes our question-and-answer session for today. I'd like to turn the conference back over to Josh Easterly for closing remarks.

Joshua Easterly -- Director, Chairman of the Board and Risk Management Committee, Chief Executive Officer, Co-Chief Inv

Great well thank you very much. I appreciate people's spending time with us this morning. I hope people have a wonderful Thanksgiving and a winter holiday season and we'll talk to you in Q1 if not before. And feel free to reach out to the team Ian Lucy Bo or myself with any specific questions.

Operator

[Operator Closing Remarks]

Duration: 54 minutes

Call participants:

Joshua Easterly -- Director, Chairman of the Board and Risk Management Committee, Chief Executive Officer, Co-Chief Inv

Robert J. Stanley -- President

Ian Simmonds -- Chief Financial Officer

Rick Shane -- JP Morgan -- Analyst

Chris York -- JMP Securities -- Analyst

Mickey Schleien -- Ladenburg -- Analyst

Robert Dodd -- Raymond james -- Analyst

Finn O'Shea -- Wells Fargo -- Analyst

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