Prospect Capital Corporation (PSEC) Q2 2012 Earnings Report, Transcript and Summary

Good morning, and welcome to the Prospect Capital Second Quarter Fiscal Quarter Earnings Release and Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Mr. John Barry, Chairman and CEO. Please go ahead, sir.

Thank you, Denise. Joining me on the call today are Grier Eliasek, our President and COO; and Brian Oswald, our CFO. Brian?

Thanks, John. This call is the property of Prospect Capital Corporation. Unauthorized use is prohibited. This call contains forward-looking statements within the meanings of the securities laws that are intended to be subject to Safe Harbor protection. Actual outcomes and results could differ materially from those forecast due to the impact of many factors. We do not undertake to update our forward-looking statements unless required by law. For additional disclosure, see our earnings press release and our 10-Q filed previously. Now I'll turn the call back over to John.

Thank you, Brian. For the 6 months ended December 31, our net income was $104.4 million, or $0.96 per share. For the 3 months ended December 31, our net income was $64.5 million, or $0.59 per share. For the September 2011 quarter, our net income was $39.9 million, or $0.37 per share. Our net income increased 62%, and our net income per share was up 60% from the September quarter to the December quarter. These increases are primarily due to growing interest income from additional investments, higher dividend income from our investments in energy solutions and NRG and significant realized and unrealized gains recognized in connection with Energy Solutions and NRG. These companies have delivered significant enhanced operating results in Energy has generated realizations in December and early calendar year 2012. Power net investment income or NII was $64.4 million or $0.59 per share for the 6 months ended December 31, 2011, compared to $40.1 million or $0.51 per share for the 6 months ended December 31, 2010. Our NII was $36.5 million, or $0.33 per share for the December 2011 quarter compared to $19.1 million, or $0.23 per share for the December 2010 quarter. Our net investment income was $27.9 million for the September 2011 quarter, or $0.26 per share. Increases in the December 2011 quarter were primarily due to growing interest income from additional investments and higher dividends from our investments in energy solutions and NRG. Our NII per share in the December 2011 quarter increased 27% from the September 2011 quarter, and 43% from the December 2010 quarter. We are targeting growth in NII per share as we utilize prudent leverage to finance our growth through new originations given our debt-to-equity ratio stood at less than 49% as of December 31 and stands at approximately 37% today. We estimate that our NII for the current third fiscal quarter ending March 31 will be $0.53 to $0.58 per share. Our net asset value per share in December 31, was $10.69 per share, an increase of $0.28 per share from September 30. Our portfolio continued to perform during the December 2011 quarter with increases in the value of our assets. None of our loans originated in over 4 years has gone on nonaccrual. We have generated cumulative net investment income in excess of cumulative distributions to shareholders for both the current August 2012 tax year, as well as since Prospect's initial public offering almost 8 years ago. Depending on future distributions to shareholders, spill back dividend classification and other factors, we may retain significantly all or a portion of recent realizations and reinvest them in additional income-producing investments. This week, we declared our 43rd, 44th and 45th consecutive cash distributions to shareholders. Including 22 consecutive per share monthly cash distribution increases. Thank you. I'll now turn the call over to my friend, Grier.

Thanks, John. Our origination efforts during the December quarter have focused primarily on secured lending, continuing to prioritize first lien loans, although we also continued to close selected junior debt and equity investments. In addition to targeting investment senior and corporate capital structures with our new originations, we've also increased our new investments in third-party private equity sponsor-owned companies, which tend to have more third party equity capital supporting our debt investments than in non-sponsored transactions. While still maintaining flexibility to pursue attractive non-sponsored investments. With our skilled team of more than 45 professionals, one of the largest dedicated middle market credit groups in the industry, we believe we are well-positioned to select in a disciplined manner a small number of investments out of thousands of investment opportunities sourced per annum. At December 31, our portfolio consisted of 75 long-term investments with a fair value of $1.717 billion, compared to 72 long-term investments with a fair value of $1.463 billion at June 30, 2011, and compared to 58 long-term investments with a fair value of $748.5 million at June 30, 2010. During the December quarter, we completed new and follow-on investments aggregating approximately $154.7 million. Our repayments in the December quarter, were $120.2 million, resulting in $34.5 million of investments net of repayments. In October, we made investments of $10.7 million to purchase subordinated notes of Apodis. On October 24, we made a senior secured investment of $6 million in Renaissance, a leading provider of technology-based school improvement and student assessment programs. On October 28, we made a follow-on investment of $8.2 million in the senior secured debt of Empire. On October 31, IC and ARS repaid our $20.9 million loan. Cash stood at 2.2x cash and cash multiple at a 35% realized cash internal rate of return on its combined investments. On November 4, we made a secured second lien investment of $15 million to support the acquisition of Injured Workers Pharmacy, a specialty pharmacy services company in a private equity sponsored backed transaction. On November 21, we received an equity distribution from the sale of our shares in Fairchild, common and preferred stock, realizing $1.5 million of gross proceeds and a total gain of $1 million. On December 2, we completed a reorg of Gas Solutions Holdings, renaming the company Energy Solutions Holdings and consolidating ownership of other operating companies owned by us and operating within the energy industry. As part of the reorganization, our equity interest in Change Clean Energy, Freedom Marine and Yatesville, were transferred to Energy Solutions to consolidate all of our Energy Holdings under one management team, strategically expanding Energy Solutions across energy sectors. Also in December 2, we made a secured second lien follow-on investment, of $7.5 million American Gilsonite to help support a dividend recap and we subsequently received a $1.4 million dividend. On December 22, we made a first lien loan of $31.1 million to VanDeMark, a specialty chemical manufacturer. Also on December 22, we made an investment of $17.9 million in secured and unsecured notes of CIFC. On December 28, we made a first lien follow-on investment of $4.75 million in Energy Solutions for the acquisition of a new offshore supply vessel by Vessel Holdings, a subsidiary of Freedom Marine. Also on December 20, we made a secured debt investment of $10 million to support the acquisition of Hoffmaster and we subsequently received the repayment of our previously outstanding loan. Also on December 28, we made a secured debt investment of $37.2 million to support the recap of Energy. After the financing, we received a repayment of our previously outstanding loan. We received this $6.7 million dividend, as a result of our equity holdings, and we sold a portion of our Energy common stock of $13.3 million realizing a gain of $12.1 million. On December 29, Iron Horse repaid our $11.3 million loan. Iron Horse had previously been a non-accruing loan experiencing significant stress in 2009. Due to our supervision and the turnaround efforts of a new management team that we recruited, this loan returned to accrual status and was repaid in full representing a 1.2x cash and cash multiple and 10% realized cash internal rate of return on our investment. On December 30, we provided $8 million of senior secured debt to High-tech, a provider of nondestructive testing services to detect leaks and other defects in various energy and industrial industries. On December 30, we exited our investment in Mac & Massey and received $10.2 million as repayment of our $9.3 million loan, and monetization of our equity position resulting in a realized gain of $800,000. We recognized $700,000 of accelerated purchase discount accretion ended December 2011 quarter in conjunction with the loan repayment. Since December 31, we've completed one new investment and one add-on investments aggregating approximately $35 million. Three loan investments have been repaid since December 31. On January 4, Energy Solutions sold gas gathering and processing assets of Gas Solutions for sale price of $200.5 million including a potential earn out of $28 million that will be paid based on the future performance of Gas Solutions. After expenses including structuring fees of $10 million, paid to Prospect, Energy Solutions received approximately $148.7 million in cash with an additional $10 million held in escrow. Our loans to Energy Solutions remain outstanding and are collateralized by the cash held by Energy Solutions as a result of the sale transaction. Beyond ongoing interest payments from such loans, further potential dividends to us could be recognized as dividend income, to the extent of earnings or profits available as we receive additional future cash payments from Energy Solutions. The accounting for the sale of Gas Solutions has yet to be finalized by Energy Solutions, but we'll not result in any dividend income, or realized gain recognition by us until cash payments are received from Energy Solutions. Energy Solutions currently has approximately $152 million of cash available for future debt service, distributions, operating investments or add-on acquisitions. Together with prior cash flows, that excluding both escrow and earn out, the exit price for Gas Solutions produced a 57% internal rate of return and 5.5x cash multiple for Energy Solutions on its Gas Solutions investment. January 9, Arrowhead repaid our $27 million loan. On January 12, we made a follow-on investment of $16.5 million to purchase notes in CIFC. On January 17, we provided $18.3 million of second lien financing to a financial services processing company purchased by a leading private equity sponsor. In January 31, Aircraft Fasteners repaid our $7.4 million loan. On February 2, we sold Energy to a third-party buyer. In conjunction with the sale, our $37.2 million loan was repaid. We also received a $26.9 million make-whole premium for prepayment of our loan, which will be recorded as interest income in the March 2012 quarter. Prospect also received a $3.8 million advisory fee for the transaction, which we recorded other income in the same March 2012 quarter. Not including the escrow, we received net proceeds of $26 million and we'll recognize the realized gains of $24.8 million in the March 2012 quarter. In total, we received proceeds of $94 million at closing. In addition, there is $11.1 million being held in escrow, of which 80% is due to us upon release of the escrowed amounts. Monies released from escrow will be recognized as additional gain when and if received, including all cash flows over the life of the investment, but not including escrowed amounts, Prospect's realized 59% annualized internal rate of return on the NRG investment. We are pleased with the overall credit quality of our portfolio, with many of our companies generating year-over-year and sequential growth and top line revenues and bottom-line profits. None of our loans originated in over 4 years has gone on non-accrual status. Fair market value of our loan assets in non- accruals as a percentage of total assets to approximately 2.1% on December 31, down from 3.5% on June 30. Because of the performance of several control positions in our portfolio, we selectively monetized certain such companies and may monetize other positions if we identify attractive opportunities for exit. As such exits materialize, we expect to reinvest such proceeds into new income-producing opportunities. We're pleased with the performance of our controlled portfolio companies and are actively exploring other new investment opportunities at attractive multiples of cash flow. Our advanced investment pipeline aggregates nearly $300 million of potential opportunities, currently. These investments are primarily secured investments with double-digit coupons, sometimes coupled with equity upsides or additional investments and diversified across multiple sectors. Thank you. I'll now turn the call over to Brian.

Thanks, Grier. Our modestly levered balance sheet is a source of significant strength. Our debt-to-equity ratio stood at 49% at December 31, and stands at approximately 37% today. Our equitized balance sheet also gives us potential for future earnings upside as we prudently look to utilize and grow our existing revolving credit facility as well as potentially add additional secured or unsecured term facilities, made more attractive by our investment-grade ratings at corporate, revolving credit facility, and term debt levels. In addition, our repeat issuance in the past 2 calendar years in the 5-year and greater unsecured term debt market has extended our liability duration, thereby better matching our assets and liabilities for balance sheet risk management. We also had significantly diversified our counterparty risks. We currently have 11 institutional lenders in our revolving facility, up from 5 at June 30, 2010, 2 lenders at June 30, 2009, and 1 lender at June 30, 2008. On December 21, 2010, we issued $150 million of 5-year unsecured 6.25% convertible notes due December 2015. The 2015 notes are convertible into shares of common stock at a conversion price of approximately $11.35 per share of common stock, subject to adjustments under circumstances. On February 18, 2011, we issued $172.5 million on 5.5-year unsecured 5.5% convertible notes due August 2016. The 2016 notes are convertible into shares of common stock at a conversion price of approximately $12.76 per share of common stock, subject to adjustment in certain circumstances. In 2015 and 2016 notes are general unsecured obligations of Prospect, with no financial covenants, no technical cross default provisions and no payment cross default provisions with respect to our revolving credit facility. In 2015 and 2016 notes have no restrictions related to the type and security of assets in which Prospect might invest. The issuance of these notes have enabled us to grow our investment program in calendar year 2011, and commit to loans with maturities longer than our existing revolving credit facility maturity. These 2015 and 2016 notes have an investment-grade rating from S&P of BBB. Between January 30, 2012 and February 2, 2012, we've repurchased $5 million of our 2016 notes at 97.5% of par including commissions. We may look to make additional repurchases of the 2015 or 2016 notes at our discretion if attractive opportunities become available. On June 11, 2010, we held our first closing on an extension expansion of our revolving credit facility with the syndicate of lenders, extended commitments of $210 million under the facility. The facility include an accordion feature, which if the amendment completed on January 13, 2011 allows commitments to increase up to $400 million without the need for re-approval from the existing lenders. Since the closing on June 11, we have been obtaining additional commitments to the facility and on September 1, 2011, we closed the final upsizing of the facility to reach our $400 million accordion target. As we make additional investments we generate additional availability to the extent such investments are eligible to be placed into the borrowing base. The revolving period of the facility expense through June 2012, with an additional one year amortization period, with distributions allowed after the completion of the revolving period. Interest on borrowings under the facility is one month LIBOR plus 325 basis points, subject to a minimum LIBOR of 100 basis points. The facility was recently updated to an investment grade Moody's rating of Aa3. We are currently in negotiations with our lending syndicate an additional lenders regarding an extension and upsizing of the facility to a 5-year term comprised of 3 years for the revolving period followed by 2 years for the amortization period with distributions allowed. We anticipate, but cannot guarantee a reduction in our spread on borrowings, an increase in our advanced rate, and an improvement in covenants. We currently have borrowed $119 million under our facility. Assuming sufficient assets are pledged to the facility and we are in compliance with all terms, we would have $281 million of new investment capacity based on a $400 million facility size. Any principal repayments or other monetizations of our assets will further increase our investment capacity. Any increase in our facility size or issuance of other debt, including term debt, would also increase our investment capacity. I'll turn the call back over to John.

Thank you, Brian. We can now answer any questions.

[Operator Instructions] Our first question this morning will come from Arren Cyganovich of Evercore.

Could you just tell me what's included in your $0.53 to $0.58 guidance for the quarter? You listed 3 fee items that you received, I wasn't sure if the $10 million restructuring fee from the Gas Solutions is included in that guidance?

Yes, that's included as well as the various items related to the exit of NRG.

Okay. And then the $28 million of earnout that you got from Gas Solutions, can you talk a little bit about the parameters around that in the timeframe, it's just over -- 1-year period, 2-year period, how should we think about that?

Well, there's 2 components of additional potential value. One is in escrow, which I believe is over the course of the next 12 months, right Brain?

Right.

And then the other portion is in earnout that's over a long period -- a longer period.

Okay. And the escrow, how much was that?

$10 million.

Okay. And that'll be equally distributed over the next 12 months?

Well, that's an asset sale that was done by Energy Solutions in conjunction with sales in Gas Solutions. So as cash comes back to Energy solutions from those various streams then the future of what the streams fall into what Energy Solutions does with the money, which can range from making distributions that may be recognized as dividend income to the extent that there are sufficient earnings and profits, to servicing debt that is still in place, to making additional operating investments in growth opportunities, it's about acquisitions like the purchase of a new vessel at Freedom Arena that was done late last year.

Our next question will come from Greg Mason of Stifel, Nicolaus.

One of the talks says there's a lot of moving parts regarding those. Is there additional upside in book value in the calendar first quarter versus the fair value marks as of 12/31?

Well, it's difficult to project what NAV might be in the future for 3/31. We talked about how there's some different accounting items being figured out. So, I think, it would be speculative to project what our future marks might be for 3/31. Those exits did both occur after the end of last quarter, however. And we obviously mark our book-to-market on a fair value basis. So that's not the worst thing under-promise and over-deliver in life and we try to do just that we appreciate your comments at the beginning of your question.

And as we think about the NRG, the $27 million MACO premium. Just trying to get a sense, is that already baked into the fair value mark as of 12/31 or would that be some additional income that again over and above the dividend would grow book value?

Brian, you want to take that?

That, Greg, was included in the value of NRG at 12/31. So that will not increase book value when it's recorded.

Okay, great. And can you talk about -- are there any tax benefits in combining all of these energy companies into one investment and kind of what was your thought process behind doing that?

Well, we really combine these investments from a business point of view. We had some subscale, control investments in the energy industry. That we thought and knew it would benefit from a consolidation along the lines of manager on oversight, along the lines of monitoring and supervision, cost-sharing, G&A, a number of different factors. And that really was our motivation there.

Okay, great. And then one final question. As your portfolio began to season, I think it'll be reasonable to expect some pre-payments to kind of ramp up kind of what we saw this quarter. How are you guys viewing your net portfolio growth going forward versus call it what you will, the average net portfolio growth has been $150 million over the last 18 to 24 months. How should we view kind of the net portfolio growth in the repayments impacting your origination that portfolio growth levels?

It's a fair question, Greg. I think it's awfully difficult to predict that on conveyor belt as you know, and being an expert in my training in this industry and asset class. And they do tend to go hand-in-hand as marketing activity ramps up, confidence improves, M&A picks up, financing opportunities pickup, repayments tend to pickup as well as the same time. We benefited to certain extent, in terms of net portfolio growth because some of the legacy positions are, tend to be smaller in size, for example, the repurchases part of the Patriot acquisition over 2 years ago now, was a much smaller book in general on an individual basis. We announced a couple of those recently, for example Mac & Massey and Aircraft Fasteners that were sort of smaller in size. New originations of the scale of the business has grown reflecting not just the scale of the asset base but the scale of the team with the nearly 50 people we have working here focused on this business. Then we can in effect have done larger deals on the new origination basis with more firepower. First 3 quarters on the calendar basis of 2011 had greater, kind of net portfolio growth. The fourth quarter was a little bit less, as you saw. I think that reflected some of the market reality of what happened with the slow down, with Europe impacting our side of pond in August and October, it caused deals that were, otherwise would've been 2011 calendar year deal to slide in 2012. We have a lot of activity hopping right now, in message there pipeline is nearly $300 million, which is what we call category A deals, with a higher likelihood, no guarantees but higher likelihood tend to be under some type of ladder exclusivity or higher confidence basis than just all the other stuff we're working on at any given point in time. So, we're seeing a lot more activity now and more on par with where things were over 6 months ago.

Our next question will come from Dean Choksi of UBS.

Just a follow-up to Greg's question, I mean, you said that the MACO premium for NRG was baked into the fair value at the end of 12/31. Is that included in the equities of the common stock valued that $50 million that must have been a $48 million premium on a cost basis?

It's included in the equity value, yes.

Is that typical? Why would it be included in the equity value and not in the debt, which is carried at cost?

Because at December 31, there was no requirement to pay that pre-payment penalty. And the auditors actually required that we keep it in the equity account because at 12/31, that's what they believe the value was.

Has it always been an equity count? Just looking back like in June common equity was carried at $30 million gain the cost.

Well I think, the loan value -- the loan value has always been carried out at close to par value.

Okay. And can you just -- remind me what the capital loss carry forward is?

For tax basis? It's somewhere around $20 million.

Okay. And then what happened with striker in the quarter? That was marked down from the 9/30 marks.

Striker, the markdown came primarily from the change in natural gas prices that happened during the quarter. They had a dramatic effect on the value of that company, I think natural gas prices, Grier, can correct me if I'm wrong here, came well above $3 to almost $2, making the economics of actually some of the gas plays that they had making the economics for some of them, they can't even make money getting the oil out of the ground -- or the natural gas out of the ground. So, that's what drove the decrease in value.

In the past of the Gas Solutions you did a good job of hedging natural gas prices generates big rental value. Should we, striker is unhedged against natural gas prices then?

Striker has actually carried hedges going back several years at -- including some pretty attractive pricing in the last couple of years relative to the current prices. But you hedge forward for a certain time period and after a while, prices subside so it's not as if there were 10 or 20-year our long-term hedging I think they were hedging forward every 2 years at a time. And of course, when you talk about doing anything but buying inputs, i.e., swaps or colors, there's a counter-party credit items that also comes in play that can get quite tricky with these middle-market oil and gas companies. And this is a business we have a loan to. We don't obviously control the business. So that's something that gets worked out with the team. There's an interesting economy happening there in the energy patch, where crude oil and NGL and liquids related prices are reasonably high and natural gas prices are quite depressed. And we've actually exited a couple of deals on the strength of the former and the nearest path that had a greater concentration in energy today after the sale of those 2 companies, I would say energy is, probably what Brian? Less than 10% of our portfolio in fact arguably, under 8%, may be actually it's under 8% in that industry relative to others which is an interesting place to be and we're happy to be in that place because the price environment is a good time to scoop up value as we've done in the past.

Our next question will come from Robert Dodd of Morgan Keegan.

I do have a question about structuring. Because it looks, I mean, just looking back, the aggregate realized losses since inception for the company are about $90 million of realized losses and shareholders have grown 100% of that to date. And the structuring of NRG in terms of the pre-payment penalty and instruction with Energy Solutions selling assets looks to potentially avoid realized gain events and potentially reduces the chance of the shareholders to catch up on the realized losses they had of potential increases fee incentive free management, and the fee income to prospect capital management. So could you give us a little bit of a clue why you structured them in those particular ways, rather than just plain vanilla transactions when more of the value, 100% would have accrued to shareholders instead of a potential 80% accrues to shareholders given the structure that they actually have?

Thank you, Robert. I guess I think there's a few things baked into your question there. First point of clarification on realized gains versus losses. We have actually not had substantial categories in the realized loss column in quite some time, many years, right, Brian?

2008, 2009, 2010 combined, were $107 million in realized losses.

Right. With a lot of the -- and of course, in some cases there's an unrealized piece and you don't take the final realization after thing has occurred, but those were 100% related to -- nearly 100% related to Project Finance business, which we exited making new investments on I believe almost 5 years ago. Not so coincidentally relating to the fact that we haven't had any new loans originated in almost equal time period, not going on non-accrual. So we haven't had -- our transition from a legacy project finance book to cash flow in businesses and focusing on that has served us very, very well. I don't want to give folks the wrong impression on that to start. Secondly, we've been told by many constituents shareholders, other stakeholders that net investment income should be our prioritized area of focus. And so we focus very hard on driving income to the maximum extent possible through interest, through fees, entering and exiting, whenever we do deals, and of course that reflect the fact that we're a secured lending organization and that's our primary area of focus. And if we do a deal on the controlled side, it's where we can get an attractive yield first and foremost, which means you can't pay a very high multiple for the business, which is why that's going to be a more opportunistic type of business. We have had protection on yields in various formats, hard call protection, soft call protection, soft-call protection and other types of prepayments. It is a part of our business model pick it helps to drive income for our business. It struck with the counter-parties in the ordinary course across our portfolio. And it can cause some lumpiness from time to time in terms of income and earnings. But hopefully, lumpiness that we drive towards the upside by having repayment. We don't necessarily love having a repayment because we got to go out and find a new asset to replace it but it's nice to have some time to catch up with exit income in a premium fashion to redeploy capital into a new income-producing asset.

On the NRG, can you give us some color on why it was done in 2 different events I mean obviously they're pretty close together, I mean were they related? Or was it just a timing coincidence?

No, they were not related. We did not have any, I guess, you describe the first transaction as a de-risking one. And we do not have any deals signed up with a buyer of the business until 2012.

Okay. And then just looking forward, I mean, obviously you've done a little bit, whatever I'm supposed to be calling them at this point of the cycle, unless it seems to be potentially a lot of that coming to, and looking for funding over the next couple of years I mean what do you think your outlook is and how much exposure is your kind of target mixed to those kind of structures versus self-soft deals?

Sure. Our philosophy on that business is that it's an attractive business on a risk-adjusted basis. It's a senior lending type business. But we've approached it from a value added standpoint. We've only done a very small number of transactions that aggregate in less than 5% of our overall portfolio. And we've done so on a partnering basis with third-party collateral managers putting us in good stead from a consolidation risk standpoint. And to get additional protections and rights into the picture as pertains to call rights, call protections, other matters that would not be available to someone where I would say the secondary buyer of a small position. That marketplace suffered a dislocation with little primary issuance in 2008, 2009 and most of 2010, and really started to regroup in 2011 and here in 2012. I think it will always need to be a small portion of our book in part because these assets fall into the 30% basket, which largely speaking, picks up most types of financials, international investments and public companies of the market cap greater than $250 million as the rough categories that go into that basket. But other types of deals are already fallen into that basket. We've got some Canadian investments, we've got some other services type stuff portfolio companies. So the -- that puts a natural cap on how large this will be and how large we would wanted to be. Our primary focus continues to be our direct origination focus and the value added fashion and secured lending for, as a first priority borrowings base eligible assets for our credit facility.

Our next question will come from Loren Ben of Oppenheimer.

Could you talk a little bit back in August you announced $100 million share repurchase plan. Can you just talk a little bit about that? Tell us if you've done anything with it? I know you said you've bought back $5 million in your convertible notes. Is that part of the plan, and what about going forward?

Sure. We announced the repurchase plan and then we sent out a mailing and kind of organized for the repurchase. And then I don't know if our stock didn't snap back just as we were getting ready to purchase some shares back, which on the one hand it's darn it because you want to purchase at an attractive price. On the other hand, I think there's a lot of folks happy when the stocks re-bounce. So but should that window reemerge, I believe the authorization is good for what, Brian, 6 months at a time?

Correct.

We could ask the board for authorization again and send out another mailing to shareholders. That certainly will be an area to defend value. On the convert side, we've seen our convertible bonds as attractively priced and did make out purchases and as we messaged in our release yesterday and comments this morning, we could potentially look to make additional purchases and prices we deem to be attractive.

What kind of rates of interest are you paying in those convertible notes?

We have 2 converts that are extent. We have December 15 notes that are 6.25% notes and we have August 16 notes that are 5.5% on original issue.

Loren, this is John. You might find it interesting to know, and maybe other shareholders would find it interesting to know that we identified repurchase of convertible notes as the greatest bang for the buck in terms of the shareholders dollar, buying in equity, getting the most per penny spent. And interestingly the notes trade x, and then the moment we go out there, I'm sure everyone on this call has had this happened, the moment you go out there and try to buy it at x, whoa, suddenly it's unavailable. And we're not disclosing ourselves as principal. We're working through agents. We're an undisclosed principal. So sometimes we see that our stock or these notes more particularly and more recently appeared to be floating around at very attractive prices and then when you reach to get it, it evaporates. That's why we were able to buy the amount that we were able to buy, we weren't prepared to buy anymore. So we just monitored this and they keep an eye on both markets to see when there are opportunities to put money to work, buying in our own stock.

I'm not an analyst or an accountant but it would seem to me that buying back stock, that I assume you would be retiring, that even at current rates has an 11.25% yield to would be more advantageous to not have to pay the dividends and shares repurchased than to pay 5.5% or 6.5% and buying in notes 2.5% discount?

Well first, I was impressed with your ability as an analyst and a CPA now that I know that you're not, it's even more impressive. There are a couple of other angles on this. For one thing, when you buy in the debt and if you can take out somebody sitting there, supposedly offering your debt at some very high yield, when it's really imaginary. Maybe you could remove that person, that has an effect on the cost of debt for the entire company because people will metric off of that. So one single person offering one convert at a yield of 15%, it's having an effect on an entire capital structure that we think is a quite a distortion. So that's why we get more bang for the buck buying in converts but tomorrow, like in the past week -- 2 weeks, that could change tomorrow, exactly for the reason that you mentioned. Part of it too is remember, if we, how can I put this very, very carefully? The signaling theory and everything people to, right? So, somebody needs buying in the converts they think that it's a better opportunity for the company to buy those in. Maybe we think the dividend will be coming down as a percent of the share price, anyway. But with the converts maybe that wouldn't happen. If you looked were they trade, the converts seem to trade in this little universe all by themselves with no connection to the rest of the reality of our business.

What else is new?

Right.

I just want to clarify, when John said, percent, dividend coming down as a percent of share price, he means based on the stock going up.

Right.

I was just curious about it. I mean you folks have done a number of offerings at below net asset value or below book value and it seemed as though there was an opportunity to at least purchase some of these shares back at the same below net asset value or just now, were right a little bit above the net asset value.

Right. And certainly, Loren, when we looked at buying at the converts, it affected very low yields right they're down, it may be down, may be below 6 now. That was part of the equation. We're investing in an instrument yield being in our hands, once we buy it, less than 6% of all we could buy our stock but in which in our hands, produce a much nicer yield. But what I want you to understand is that there were actually, how would I put it, who was it that said, "Give me a spot to stand on and I can..."

Archimedes.

Okay. So it's a very long weaver there vis-à-vis the converts that we did not perceive as existing vis-à-vis buying in a few shares of common.

And Loren, share purchases are definitely on the table as part of our long-term arsenal. If you want to clarify last year our offerings on a total basis were net accretive relative to book value. You're right going back a couple of years ago when we discussed the offense plus defense reasons why we did so.

Our next question will come from Jasper Burch of Macquarie.

Most of my questions have been asked, and that was really good commentary on the converts right there, definitely helpful. I guess just one small modeling question. On the MACO provision on the energy cell, where does that flow through on the income statement?

It will be -- the MACO will come through as interest income.

And showing no additional questions in the queue, I would like to turn the conference back over to Mr. Barry for any closing remarks.

I don't have any. Thank you very much, everyone.

Thank you all.

Right.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.