Good day everyone and welcome to the Kohlberg Capital Corporation second quarter 2008 earnings conference call. Today’s call is being recorded. Currently all lines are in a listen-only mode and after management’s presentation a question and answer session will be conducted. Instructions on how to ask a question will be given at that time. At this time for opening remarks and introductions I would like to turn the call over to Ms. Jodi Bernstein. [Jodi Bernstein]: Good morning everyone. This is [Jodi Bernstein] of Lippert Heilshorn & Associates. Thank you for joining us today to discuss Kohlberg Capital’s second quarter 2008 results. Joining me on the call are Chris Lacovara, Chairman, Dayl Pearson, President and Chief Executive Officer, and Michael Wirth, Chief Financial Officer. The company issued its second quarter earnings release yesterday after the market closed. A copy is available in the Investor Relations section of the company’s website at www.kohlbergcapital.com. Before turning the call over to management I would like to remind everyone that certain statements made during this conference call which are not historical may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although Kohlberg Capital believes the expectations reflected in any forward-looking statements are based on reasonable assumptions, it can give no assurance that its expectations will be obtained. Factors and risks such as those described in the Risk Factors section of the company’s 10K and sections of Form 10Q and other SEC documents filed during the course of the year could cause actual results to differ materially from expectations. With that I would now like to turn the call over to Chris.

Good morning everyone. Thank you all for joining us for a review of our second quarter results. I will open the call with some general comments about what we’re seeing in the market place, our strategy and recent key developments. Then I’ll turn the call over to Dayl Pearson, our Chief Executive Officer, who will discuss our quarterly performance in more detail and also discuss our pipeline and our investment portfolio. After that our CFO Mike Wirth will provide a recap of our second quarter financial results and performance. Net investment income per common share was $0.38 for the second quarter versus $0.40 per share for the first quarter, in both cases as adjusted for the issuance of 3.1 million shares in our May rights offering. We declared and paid a dividend for the second quarter of $0.41 per share equal to our first quarter dividend, and our first half dividends were completely covered by first half net investment income of $0.86 per share. For the second quarter we are reporting net asset value per share of $13.14 compared to $13.29 as of March 31, and again both numbers are adjusted for the company’s issuance of 3.1 million shares in the recent rights offering. Overall our investment portfolio and asset management business continue to perform well despite growing economic weakness and ongoing credit market dislocations. We deployed the new capital raised in the rights offering over the past two months investing in $27 million of middle market loans at very attractive interest rate spreads. We believe that increasing our equity base and investment portfolio in this difficult environment distinguishes Kohlberg Capital from other players in the BDC space. The credit markets continue to be very volatile. This is particularly true for larger cap names given the significant reduction in liquidity…

Good morning everyone. I’ll start with some brief highlights of the quarter and then review our portfolio of middle market loans and equities. As Chris mentioned, net asset value on a dollar basis was $279 million at the end of the quarter up from $252.9 million at March 31 an increase of just over 10%. That is related to our rights offering which we completed in May and the full investment of the equity proceeds of that offering during the remainder of the quarter. Taking into accounts the rights offering of 3.1 million shares NAV per share was $13.14 compared to $13.29 at the end of the first quarter. I want to comment briefly about how that relates to our current stock price which closed yesterday at $8.96 per share. Our current NAV would have to flow by $89 million for our stock price to be equal to our NAV of $190 million and the cost space of our investment portfolio excluding KDA would have to fall by $120 million. As you know NAV we’ve taken some unrealized losses on that portfolio despite the fact they continue to prepay at par. What that implies is we would have to write off more than 30% of our investment portfolio for our NAV to fall to our stock price. Working backwards to come up with what that means for a market default rate given the recovery rate on the type of securities we invest in, that would be a market default rate of close to 70% in order for us to have our NAV equal our stock price. Obviously that’s a historical event that’s never happened. Generally at the bottom of the credit cycles the default rate peaks at 10% to 12% in the worst years. And it compares to our current…

Good morning everyone. Picking up with our income statement, we reported total investment income of $12.3 million compared to $8.6 million in the year ago period. Net investment income for the second quarter was $7.7 million or $0.38 per share compared to $5.3 million or $0.29 per share in the second quarter of last year. This increase primarily reflects the growth in our investment portfolio to $506.4 million from $366 million a year ago and increased dividends on our CLO equity investments. Interest income was $7.5 million driven primarily by interest earned on our debt securities. Net investment income for the six month period was $16.4 million or $0.86 per share and we paid dividends equal to $0.82 per share. For the second quarter we declared a $0.41 dividend which was payable on July 28, 2008 to holders of record as of July 9, 2008. Nearly all of the dividend was covered by investment income and the balance was contributed by undistributed earnings from the first quarter. It is important to note that even with the slight dilution from our completed rights offering during the quarter, net investment income for the six months ended June 30, 2008 was more than sufficient to pay our dividends for the period without relying on capital gains to support the dividend while returning capital. At June 30, 2008 KDA had $3 million accumulative undistributed net income. Net unrealized loss on investments for the quarter was $466,000 or $0.02 per share reflecting approximately $1.3 million in decreased fair value of the company’s middle market corporate loan and equity securities and CLO fund securities offset in part by $824,000 of the increase in fair value for the company’s investment in Katonah Debt Advisors. After total expenses of $4.6 million we generated $7.3 million net increase of…

(Operator Instructions) Our first question comes from John Hecht - JMP Securities.

You guys gave some information related to the gross investments and repayments during the quarter, but I wonder if you could summarize them. It sounded like you had around $27 million of gross investments and if you could classify those and then maybe also classify and give us the number for repayments during the quarter again as well.

During the second quarter the repayments were approximately $9 million and I did mention also the July number which was $4.8 million. And that’s made up of various different issuers. But again all those were at par or in some cases above par if we had call protection. In terms of the eight investments that we made, several of those were things we were able to buy at discounts in performing credits due to the fact that there was either a seller that needed to sell or just overall market conditions. Three of those were really originated transactions. The makeup was again a little bit more heavily weighted towards the junior securities. It was probably about 50% junior securities versus 50% first lien loans and it’s a little bit difficult to figure out the weighted average spread because some of these were bought at discounts, but our bogey has really been to try to get to in excess of 12% yield on all new transactions.

Your CLOs continue to move upward so it appears that you’re recycling capital nicely in those vehicles. I’m wondering if you can give us a similar type of discussion with respect to the extent you can determine how much free payments you’re getting their and what the incremental yields are as you recycle that capital.

It’s a complicated statistic because what we really see at the KCAP balance sheet is essentially the yield on our investments in the junior securities of the fund, and as I mentioned that’s been moving up. It’s currently at an annualized rate for what we call the seasoned CLOs, these are ones that have generally been outstanding for more than a year so they’ve reached their full dividend distribution ate, of about 34%. Now part of the move up in that is a result of the fact that we have written down the value of our CLO investments in previous quarters because of reductions in the underlying trading value of some of the loans; again, not because of performance problems. To come back to your question, I think it is fair to say that as cash comes into the underlying funds you’re basically replacing loans that would have been written at maybe 225 basis points over LIBOR for senior secured at currently rates that are probably approaching 3% or 300 basis points over LIBOR, and in those funds with their leverage and their fixed funding costs which in some funds is as little as 50 basis points over LIBOR, the increase in that recycled rate is very powerful for us in future quarters.

And also those loans are being bought at discounts [inaudible] and that discount obviously also accrues to the benefit of the junior securities.

Exactly. So to sum up, you really have three things that are working in our favor with regard to our CLO investments. One is that despite the fact that we’ve written down those values and that’s reflected in our NAV, the funds are continuing to pay at or even above the cash rates of prior quarters so the yield on our carrying value is moving up; and then you have the impact of much higher reinvestment rates in the underlying funds that improve their economics; and then as Dayl said because that reinvestment in many cases is at a discount to par, the gain as those loans repay at par comes directly to the equity in which we’ve invested. And that you’ll see in future quarters.

And keep in mind that 34% yield is based upon our cost basis in those securities, not on the written down values that we carry them on our balance sheet. It’s not going up because we’re writing them down. It’s because we’re calculating that based upon our cost side.

That 34%, if we were to equate it to fair value would be in the 50% range.

Mike this is probably a question for you. Last quarter you recognized some income from your asset management or KDA and this quarter you didn’t. Is this something that was just sort of a timing issue or how should we see that going forward?

The KDA of distributed income obviously doesn’t hit the P&L unless we actually dividend it out. We didn’t make a dividend distribution from KDA this quarter. Frankly we didn’t really think that we really needed to because we did earn the dividend through the first six months. So it’s something that we decide to make a dividend through KDA, one we look at where we think we’re going to end up the quarter with, just our normal net investment income but we also have other considerations as far as “Do we need to have cash balances at KDA for any particular reason?” We are accruing bonuses which get paid in January of each subsequent year so we want to keep a cash balance to pay for those types of accruals and that type of thing. There are a lot of metrics that we look at but in the second quarter, bottom line was we just didn’t feel that we needed to make any kind of distribution at this point from KDA up to the parent.

Our next question comes from [David Vail - Vail Partners]. [David Vail - Vail Partners]: I saw that recently you had issued some restricted stock in Kohlberg to members I think in lieu of some options issuance that had been previously recorded. So far that was correct, right?

Yes, that’s correct. [David Vail - Vail Partners]: It seems like you’ve been saying that Kohlberg has been hitting all-time lows lately in stock price and it seems like an attractive value at this point. I agree with you what you’ve been saying and yet I don’t really see any insider buying on your part. The only insider I saw that really bought was Gary Cademartori if I’m pronouncing that correctly bought 276 shares in May. Otherwise it’s just been constituents of restricted stock. If it’s such a great buy right now, why aren’t you guys eating your own cooking? Why aren’t you buying more shares? You want us shareholders to support you and believe in the company, why aren’t you buying shares of the company at this point?

First of all, let me sure we’re clear on one point. The issuance of the restricted stock in exchange for the retirement of the stock options was something that was planned previously. In fact the option plan that we put in place at our IPO was really a placeholder for the type of restricted stock program that most BDCs have for management so management can get the benefit of the dividend, but we couldn’t put the restricted stock plan in place at the IPO because it required an SEC approval that we just got this spring. So this was not a result of the current trading price. It was a plan that had been in the works for some time. Second, I want to correct a misperception. There perhaps has not been a lot of buying in the open market recently but management and the Board did participate substantially in the rights offering. I can tell you that I personally bought another 50,000 shares and I think cumulatively the Board and management probably bought several hundred thousand shares in the rights offering. So the reason you don’t see a lot of buying in the open market is quite frankly that we have a very restrictive window in terms of when management and the Board can buy around disclosure periods. But there was a considerable amount of subscription buy management and the directors in the rights offering.

Since the rights offering, the open window for insiders to buy KCAP stock has been closed and will not open until sometime next week. And then even then it’s a short window. [David Vail - Vail Partners]: So you’re saying basically that at these kinds of prices if you had the window to buy, you would be buying the shares.

I can only speak for myself and the answer is yes. [David Vail - Vail Partners]: That’s good to know. Another issue is, a lot of other BDCs have passed this resolution to issue stock below NAV and as soon as they passed it, one of them in particular like I was looking at Patriot Capital, their stock got hammered. I mean, whether you think it’s a good idea or not it just seems like the market seems to like this issuance of shares below NAV. And I wondered what your thought process is on whether you will issue shares below NAV and at what point? I know like [inaudible] their Board of Directors passed a resolution where they won’t issue shares below NAV if the stock’s trading more than 5% below NAV. That gives shareholders some assurance that you’re not going to have a really diluted offering. I wondered if you could give any assurance that you won’t issue shares that are really priced below NAV like maybe where they’re trading right now?

Let me reiterate the comments I made before about the thought process because that’s a very good question. A BDC has to balance the dilution to NAV from issuance below NAV with the potential accretion to the dividend of deploying capital at what are historically very high investment rates. Interest rate spreads are very high for middle market loans and you don’t want to miss that opportunity to the extent it can expand the overall yield on our assets and grow our dividend in future quarters. So you really have to balance the NAV dilution of the issuance below NAV with the attractive investment opportunities that we’re seeing in the market today. And that is our Board’s thought process. And I can assure you that the Board is not going to just issue stock at any rate. We have very stringent guidelines. Dayl pointed to the 12% target reinvestment rate that has to drive those decisions if we’re selling below NAV. Maybe the other assurance I can give you is that corporate capital has what for BDCs is a very high level of insider ownership. You sort of looked at the down side that there hasn’t been a lot of open market buying but as I said, there was considerable subscription to the rights offering and the management and Board own I think more than 15%. And this is again an internally managed BDC so there is no value to an external entity that gets a fee on the market cap by issuing stock to increase the market cap. It’s quite the opposite. The insiders take the same dilution as everybody else with that issuance and the insiders are substantially represented on the Board of Directors. So I think you do have a natural check against issuing at any old price beyond as I said the dynamic of looking at the reinvestment rate and the accretion to the dividend. [David Vail - Vail Partners]: What were the expenses excluding the interest for the BDC this quarter as a percentage of assets?

The expense ratio excluding interest was 3.4% for the six months ended June 30. [David Vail - Vail Partners]: Is that picking up a little? I noticed from the previous quarter it was like 2.something. Is there a reason for that?

We had some higher professional fees in the first quarter; not so much in the second quarter. Typically it’s going to annualize and stabilize somewhere hopefully south of 3%. We try to keep it somewhere around 2% if possible but again we did have some higher fees related to legal costs as well as valuation costs since we do outsource some valuation work to third parties to get comfort on our valuation. And we’ve been sending more and more assets to third parties for external review.

We do expect that to continue to decrease as we increase our investment portfolio. Obviously it’s been more challenging because of the capital markets environment to grow that portfolio but there is a large fixed component to that so that ratio should drop as we grow. [David Vail - Vail Partners]: How liquid is the portfolio at this point? If you needed to sell off some of those first lien securities to raise cash to invest in maybe higher yielding assets, could you do that and would you do something like that?

We can and we have in particular circumstances. We don’t really feel like selling good yielding assets which we believe are par securities that continue to pay off at par at substantial discounts but we have a substantial amount of liquidity in our portfolio. [David Vail - Vail Partners]: One other question I want to ask is, I saw on a note that a Mr. Kohlberg is leaving the Board. I wondered if you could just maybe go into a little detail about the reason for that and what that means to Kohlberg?

Jim has actually decreased his time commitment to the other Kohlberg & Company buy-out activities as he’s focused on some other business projects. So it was really part of an overall program where he’s focusing his attentions on some other activities. Jim also recently joined the Board of the New York Times Company which is taking up a lot of his time so he felt he just really couldn’t devote enough time to KCAP. It also made room for Dayl Pearson, our CEO, to join the Board which again is something that had been planned for some time. [David Vail - Vail Partners]: And will he be holding on to his shares or is he going to be selling them off now that he’s leaving?

I really can’t comment on Jim’s personal plans. I can tell you that he views the current stock price the same way the rest of us do as not a price that we should be sellers at. I don’t think he has any immediate plans to sell any of his shares.

Our next question comes from Troy Ward - Stifel Nicolaus & Company, Inc. Troy Ward - Stifel Nicolaus & Company, Inc.: I apologize in advance here. We hopped on late so if this has already been addressed. Can you give us some color on EBITDA trends at the portfolio companies? What are you seeing as far as the underlying fundamentals in your portfolio?

Again it’s a very diverse portfolio as you know and so it’s hard to comment globally. I would say the vast majority of our portfolio continues to see EBITDA trend positively. We are seeing some weakness across the portfolio; not significant necessarily down moves but flattening out of EBITDA. Again as we commented our hard watch list remains very small and is not growing and may actually be declining in the coming quarter. Troy Ward - Stifel Nicolaus & Company, Inc.: We’ve heard that EBITDA trends in several other portfolios maybe are not reacting quite as favorably. How do you account for your portfolio doing maybe a little bit better? Is it less cyclicality or [inaudible]? Is there any way you can put some color on that?

I think we have stayed away from the heavy cyclical businesses at the top of cycle though we do have some of those but the vast majority of our portfolio if you look at our largest industry concentrations has been health care, education, things that really not are sensitive to the economy. And again it’s a function of the fact that we’ve been turning down 95% of what we’ve seen.

To elaborate on that I think two others points. One as Dayl said we stayed away from some sectors that have actually been a large segment of leveraged loan issuance like retail, like restaurants, and I think people who bought those names because they were a large part of the issuance obviously with what’s going on in the consumer economy those names are seeing substantial declines. And we just don’t have a lot of that. On the flip side, and I think this surprises a lot of people as to why some companies are actually seeing growth, the manufacturing sector is actually doing very well and a lot of that is export growth. So we have a number of manufacturing companies particularly those that have global exposure that actually are seeing substantial increases year-over-year driven by export growth, growth in foreign markets in which they have existing operations. So it really is very portfolio specific and our strong performance is a clear result of the choices we’ve made over the last 18 months as we assembled the portfolio.

And just a comment on our largest single exposure as an example of that, it’s an industrial business which its EBITDA is up substantially year-over-year due to very strong economy both here and overseas for their products. The weakness I think as Chris mentioned is mostly tied with anything that’s related in some extent of either housing or the consumer. And while we do have some exposures to those, we’ve kept those very low. And I think that’s when you get outside of the sectors we’re not seeing a tremendous amount of weakness. Troy Ward - Stifel Nicolaus & Company, Inc.: Moving from the current portfolio into the current opportunities, what are you seeing with regard to new investments? We’ve had a bit of conflicting information I think so far in the earning season from management teams with regard to current leverage and pricing points that may be available, new opportunities that are available.

Let’s start with pricing first because that’s the easy answer. Pricing has moved up dramatically over the last 12 months. I think it’s sort of stabilized. It really can’t go up much higher just because there’s only so much pricing you can put on these leveraged companies. But I think it’s stabilized. I think the mezzanine pricing has started to move up in line with the first lien pricing which moved up a bit earlier. In terms of overall leverage in credit, one of the reasons we still are declining 95% of what we see is the fact that in a lot of cases there are still very leveraged transactions getting done which we’re not comfortable with. But we are seeing some very good transactions at very nice pricing and at very reasonable leverage. Troy Ward - Stifel Nicolaus & Company, Inc.: What about the competitive landscape? When you see a good deal is it still very competitive?

It’s very competitive on the junior capital side; less so on the senior. And where we do get some value for the buck is our ability to take some senior in order to drive our ability therefore to be involved in the junior side.

Our next question comes from [David Niazoki - Confluence Asset Management]. [David Niazoki - Confluence Asset Management]: I was curious about some of the add-on positions that you’re making even with regard to the capital that’s being redeployed in the funds. The prices that you’re able to execute them at you alluded to discounts to par that are attractive. I was just wondering, how do those prices compare to where you’ve been marking your book? Have you been surprised where they’ve come in or have they been higher or lower or about where your marks have been?

It all depends. I think in the stuff that is more broadly syndicated. We’ve been able to actually buy stuff in and around the marks have been in the bigger transactions. In the smaller middle market transactions which may not even have any third party marks of if they do have third party marks they’re not based upon trade, that’s really based upon our ability to source those transactions from people who are exiting the business and under a significant amount of pressure due to redemptions to sell. And in those cases we’re able to, because that’s a “distressed seller” and not a distressed loan but a distressed seller of the loan; if they have to sell we’re able to drive a much better discount from where the mark might be. [David Niazoki - Confluence Asset Management]: In those kinds of situations, presumably if you’re marking those kinds of investments as multiples of EBITDA or -

We mark them in the same way we mark everything which is consistent with our valuation policy. [David Niazoki - Confluence Asset Management]: Does it create a situation though when you’re taking advantage of a distressed seller where the rest of your portfolio that may have similar kinds of credits or investments where the terms and the maturity and the industry are the same that your compelled to have to bring your valuation down?

No. Again we look at that as a one-off transaction from a distressed seller and we look at the fundamentals of the business just like we would in any other company, and where the risk return is from our perspective and what a proper risk return is for an asset like that.

Essentially, to come back to your original question, what the buying is is at buying at levels that are essentially reflected in our current NAV. We’ve had three quarters where we’ve taken reductions because of the trading values of loans coming down due to illiquidity in the market. So that’s already reflected in the NAV. Now with the additional capital we’ve raised and with some redemptions coming in, we’re able to buy at those same levels. So it is the good news of the reduction in trading values that we’ve had to reflect in our NAV over the past few quarters. [David Niazoki - Confluence Asset Management]: That’s actually what I wanted to hear. It sounds like if you look at the glass half full, your ability to buy loans at the current level is also mirrored in the ability for public shareholders to buy the stock at your current price.

Exactly.

That’s correct. And one of our strategies has been over the course of the year to build in some potential capital gains by buying things at substantial discounts so that when they do pay off at par, and obviously we’re buying things which we think are going to pay off at par, there’s a potential for capital gains down the road.

And with that, we have no further questions on our roster. Therefore, Mr. Lacovara I will turn the conference over to you for any closing remarks.

I think we’ve covered everything we wanted to cover. Again we thank you all for your participation and we look forward to talking with you in future quarters.

And again Ladies and Gentlemen, this does conclude the Kohlberg Capital Corporation second quarter 2008 earnings conference call. We do appreciate your participation. And you may disconnect at this time.