U.S. Markets closed
  • S&P 500

    3,699.12
    +32.40 (+0.88%)
     
  • Dow 30

    30,218.26
    +248.74 (+0.83%)
     
  • Nasdaq

    12,464.23
    +87.05 (+0.70%)
     
  • Russell 2000

    1,892.45
    +43.75 (+2.37%)
     
  • Crude Oil

    46.09
    +0.45 (+0.99%)
     
  • Gold

    1,837.70
    +0.90 (+0.05%)
     
  • Silver

    24.32
    +0.18 (+0.76%)
     
  • EUR/USD

    1.2127
    -0.0022 (-0.1819%)
     
  • 10-Yr Bond

    0.9690
    +0.0490 (+5.33%)
     
  • Vix

    20.79
    -0.49 (-2.30%)
     
  • GBP/USD

    1.3438
    -0.0015 (-0.1088%)
     
  • USD/JPY

    104.1400
    +0.2800 (+0.2696%)
     
  • BTC-USD

    19,104.36
    +56.07 (+0.29%)
     
  • CMC Crypto 200

    365.19
    -14.05 (-3.71%)
     
  • FTSE 100

    6,550.23
    +59.96 (+0.92%)
     
  • Nikkei 225

    26,751.24
    -58.13 (-0.22%)
     

Edited Transcript of BANX.OQ earnings conference call or presentation 12-Nov-20 10:00pm GMT

·32 min read

Q3 2020 StoneCastle Financial Corp Earnings Call New York Nov 13, 2020 (Thomson StreetEvents) -- Edited Transcript of StoneCastle Financial Corp earnings conference call or presentation Thursday, November 12, 2020 at 10:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Patrick Joseph Farrell StoneCastle Financial Corp. - CFO * Rachel Nachas Schatten StoneCastle Partners, LLC - General Counsel and Chief Compliance Officer * Sanjai Suryaji Bhonsle StoneCastle Financial Corp. - CEO & Chairman ================================================================================ Conference Call Participants ================================================================================ * Bryce Wells Rowe National Securities Corporation, Research Division - MD of Equity Research * Christopher Thomas O'Connell Keefe, Bruyette, & Woods, Inc., Research Division - Assistant Analyst * Devin Patrick Ryan JMP Securities LLC, Research Division - MD and Equity Research Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Welcome to the StoneCastle Financial Corp. Q3 2020 Investor Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. Now I would like to turn the call over to Rachel Schatten, General Counsel of StoneCastle Financial. Please go ahead. -------------------------------------------------------------------------------- Rachel Nachas Schatten, StoneCastle Partners, LLC - General Counsel and Chief Compliance Officer [2] -------------------------------------------------------------------------------- Good afternoon. Before we begin this conference call, I'd like to remind everyone that certain statements made during the call may be considered forward-looking statements based on current management expectations that involve substantial risks and uncertainties. Actual results may differ materially from the results stated in or implied by these forward-looking statements. This would depend on numerous factors, such as changes in securities or financial markets or general economic conditions; the volume of sales and purchases of shares of common stock; the continuation of investment advisory, administrative and service contracts and other risks discussed from time to time in the company's filings with the SEC, including annual and semiannual reports of the company. StoneCastle Financial has based the forward-looking statements included in the presentation on information available to us as of September 30, 2020. The company undertakes no duty to update any forward-looking statements made herein. All forward-looking statements speak only as of today, November 12, 2020. Now I will turn the call over to Sanjai Bhonsle. -------------------------------------------------------------------------------- Sanjai Suryaji Bhonsle, StoneCastle Financial Corp. - CEO & Chairman [3] -------------------------------------------------------------------------------- Thank you, Rachel. Good afternoon, and welcome to StoneCastle Financial's third quarter investor call for 2020. Here with me today is Pat Farrell, our CFO; and Julie Muraco, Investor Relations. During today's presentation, I will briefly comment on the banking industry and credit markets before commenting on the company. Then I will provide StoneCastle Financial's quarterly results and portfolio review. And Pat will provide you with greater detail on our financial results before we open the call for questions. During the past few weeks, we saw several banks reporting better-than-expected earnings for the third quarter and many banks are signaling that they are well positioned to withstand a prolonged economic recovery. Furthermore, banks are well capitalized, and for the most part, have adequate reserves in anticipation of an increase in corporate defaults. The government stimulus issued in Q2 helped many businesses weather the third quarter, and we believe that any additional stimulus going into 2021 will have the potential impact of keeping corporate default rates lower than expected. Going into Q4 and first half of 2021, our outlook for the banking industry remains cautiously optimistic. As of this call and with some exceptions, StoneCastle's underlying banks have reported third quarter results. Banks in our portfolio reported median net income, up 8.4% versus the second quarter. In addition, our portfolio banks reported average Tier 1 capital ratios of 12.4%, flat from Q2. Finally, StoneCastle's underlying banks reported change in median reserves, up 5 basis points to 1.27% and loan book growth was up 7.8%. I want to take a moment to mention some interesting statistics on community banks regarding the PPP stimulus program. The Independent Community Bankers Association reported that community banks exponentially serve their local and rural communities by providing PPP loans to 98% of the economically distressed or low-income counties and to approximately 97% of the rural counties receiving such loans. Overall, community banks were the dominant PPP lenders serving approximately 58% of our PPP participants and 48% of all U.S. small businesses. The community banks also supported underrepresented small businesses with PPP loans, including approximately 74% to minority-owned, 72% to women-owned and 64% to veteran-owned businesses. These statistics show the important role of the community banks within their communities, and the positive impact that community banks have on economic development, financial inclusion and job creation in the U.S. Now let me comment on the credit markets for banks. During the third quarter, we saw credit spreads tighten for banking-related strategies by approximately 50 to 100 basis points. This was due to the residual of the Fed actions in Q2. But also due to a guarded optimism throughout the third quarter and the competitive environment for attractive banking-related assets. In Q3, we saw the primary markets continue to be more active in both alternative capital securities and community banking. In alternative capital securities, the pipeline of primary issuance in the fourth quarter and into the first half of 2021 is expected to remain active with anticipated new issuance of $3.5 billion to $4 billion. We are also seeing the issuer base continue to expand. In addition, we continue to see attractive yields for alternative capital securities to the secondary markets, although not as advantageous as Q2. Community banking originations in the primary market was robust in the third quarter. The number of community bank issuances in Q3 were up approximately 50% from the prior quarter. Bank capital raise was $3.1 billion in Q3, down slightly from $3.7 billion in Q2. Banks were generally able to issue sub debt in the 4% to 6% range. We believe the current rate environment is allowing banks to issue sub debt at a historically low rates. The banks are issuing sub debt to increase their return on capital, and therefore, will remain in a stronger position as the U.S. faces a prolonged economic recovery into 2021. Now to StoneCastle Financial's results for the quarter. We are pleased to report that net investment income for the third quarter was approximately $2.8 million or $0.42 per share, an increase of $0.01 per share from the prior quarter. At the third quarter end, the value of the invested portfolio was $147 million versus $165.8 million at the end of the second quarter of 2020. A decrease of 11%, primarily due to the sale of the community funding CLO which we purchased in 2015. I will have more comments on this sale in a few minutes. The net asset value at the end of the third quarter was $20.89 per share, up $0.62 from the prior quarter. Now let me turn to the portfolio review. During the third quarter, the company invested a total of $23.7 million, including $18.7 million in 2 alternative capital transactions, and $5 million in 1 subordinated note for a community bank. The 3 new investments contributed a weighted average effective yield to maturity of 7.83% as all the securities were purchased in the primary market at par. The yield of these new assets remain accretive to our earnings. Since the StoneCastle-Aramark transition over the last 3 quarters of reporting, the company has made approximately $60 million of investments or 2.8x the total dollar amount of investments made during the entire year of 2019. During the third quarter of 2020, the company received proceeds of $45.9 million from the sale of 2 investments and received partial paydowns of $3.9 million from five investments. During the quarter, the company sold the position in community funding CLO for $42.5 million. While this has been an attractive investment for StoneCastle Financial's portfolio over the past 5 years, the asset was about to reset with a step-up in the rate resulting in a net contribution of lower earnings. In addition, we made the opportunistic decision to sell the entire position as a preemptive move to reduce the potential credit risk for the underlying assets, and to enhance the risk profile for the entire portfolio. Although we did not spend all the proceeds during Q3, we have been actively making investments in Q4, which I'll address momentarily. The $3.9 million in paydowns included a partial paydown of 2 regulatory capital trades, [NASA and Centerra], both of which were purchased at discounts during the market dislocation of Q2. This was an anticipated outcome, and these assets were able to contribute risk-adjusted returns of 13.5% and 12.1%, respectively. Subsequent to the end of the quarter, the company made investments of approximately $13.7 million with a weighted average coupon rate of 8.4%. One of the investments, an alternative capital security, has an expected yield to maturity of 9.85% and yield to call of 10.7%. In addition, we purchased community bank preferred stock with a coupon of 9%. With Q3 and Q4 investments made to date making up approximately 75% of the sales and proceeds from Q3, we believe the total portfolio investments, which currently show a net decline, will be made up with continued portfolio activity throughout the balance of the year. We expect the origination pipeline to continue to be strong in Q4, and we will provide more details of the fourth quarter transactions on our next call. For all our banking-related investments, the portfolio is managed for income generation and capital preservation. We also look at investment capacity to offer total return to the portfolio on a risk-adjusted basis. At quarter end, the estimated annualized effective yield generated by the invested portfolio, excluding cash and cash equivalents, was approximately 9.18%. The alternative capital securities represented approximately 38% of the total investments and community bank-related investments represented approximately 46% of the portfolio. A full schedule of investments can be found on our website. Before I turn the call over to Pat, I want to touch upon the relative value of StoneCastle Financial's stock. At the quarter end, StoneCastle Financial stock traded at a 7% discount to NAV with a 7.8% dividend yield. This is in comparison to other vehicles as the financial sector's [fire] fund which had a dividend yield of approximately 2.24% or the Invesco KBW Bank Index that traded at an approximate 3.12% dividend yield during the same period. We believe StoneCastle Financial is also an attractive value relative to the Bloomberg Barclays U.S. aggregate bond index, which traded at an approximate 2.01% distribution yield at quarter end. I would like to point out that as of September 30, StoneCastle Financial traded 537 basis points wide to the average dividend yield of the income-oriented vehicle peer group just mentioned. Now I want to turn the call over to Pat to discuss the financial results and provide details on the underlying net asset value of the company. -------------------------------------------------------------------------------- Patrick Joseph Farrell, StoneCastle Financial Corp. - CFO [4] -------------------------------------------------------------------------------- Thank you, Sanjai. As I do each quarter, I will present the financial results by going through the components of the company's quarterly results in detail. The net asset value at September 30 was $20.89, up $0.62 or 5% from the prior quarter, including reinvestment of dividends. Before I review the components of NAV, I want to note that in mid-October, the company reported the estimated month end September NAV to be $20.93, which was $0.04 higher than our quarter end NAV of $20.89. This difference was due to a minor adjustment related to preparing the consolidated financials. As you know, we are publishing monthly estimated NAVs to provide clarity and transparency for our shareholders. Therefore, the NAV as of September 30 and quarter end is $20.89. Now on to the breakdown of the NAV components. The NAV is comprised of 4 components: net investment income; realized capital gains and losses; the change in value of the portfolio's investments; and lastly, distributions paid during the period. Let's review these components. Gross income for the quarter was $4.3 million or $0.65 per share. Net operating expenses for the quarter were $1.5 million or $0.23 per share, resulting in net investment income for the quarter of $2.8 million or $0.42 per share. This compares to $0.41 reported in the prior quarter, up $0.01 per share. Realized capital gains and losses in the quarter is the second component affecting the change in NAV. The net realized capital losses from investments were approximately $2.7 million or $0.42 per share. Realized losses due to foreign currency transactions were approximately $530,000 or $0.08 per share. The third component, changes in unrealized appreciation or depreciation of the portfolio, relates to how the value of the entire investment portfolio has changed from the previous quarter end to the current quarter end. For the third quarter, the total quarterly change in unrealized appreciation on investments and foreign currency transactions was $6.7 million or up $1.02 per share, and unrealized appreciation on written option of $332,500 or $0.06 per share. I want to point out, gains and losses from foreign currency hedging activities do not impact our net income. The fourth component affecting the change in net asset value is distributions. The cash distribution for the quarter was $0.38 per share, paid on September 30 to shareholders of record on September 25. In summary, we began the quarter with a net asset value of $20.27 per share. During the quarter, we generated net income of $2.8 million; net realized capital losses of approximately $3.3 million; and the unrealized value of the portfolio increased by $6.7 million. The sum of these components, offset by a distribution of $0.38 per share resulted in a net asset value of $20.89 per share at September 30, which was up $0.62 from the prior quarter. Turning to the valuations for our portfolio holdings. It is worth noting that the vast majority of the portfolio continues to be independently marked from broker-dealer quotes. For the quarter, approximately 81% of the portfolio prices or marks reflect a minimum of 2 quotations or actual closing exchange prices. These quotations represent an independent third-party assessment of the current value of the portfolio. This should provide a greater degree of confidence in the company's underlying value versus other publicly traded closed-end funds and BDCs that self-mark their portfolios. At quarter end, the company had total assets of $149.9 million, consisting of total investments of $147 million and cash interest and dividends receivable and prepaid assets totaling $2.9 million. As Sanjai mentioned, we expect the asset base to grow based on the Q4 investment pipeline. Our dividend yield at the end of the quarter was approximately 7.8%. Now let me update you on the balance of our credit facility. On September 30, the company had $10 million drawn from the facility or 7% of total assets, leaving $52 million available to draw. Based on the regulated investment company rules, we may only borrow up to 33.3% of our total assets. Now I want to turn the call back over to Sanjai for closing remarks. -------------------------------------------------------------------------------- Sanjai Suryaji Bhonsle, StoneCastle Financial Corp. - CEO & Chairman [5] -------------------------------------------------------------------------------- Thank you, Pat. Now operator, I would like to open up the call for questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Your first question comes from the line of Chris O'Connell with KBW. -------------------------------------------------------------------------------- Christopher Thomas O'Connell, Keefe, Bruyette, & Woods, Inc., Research Division - Assistant Analyst [2] -------------------------------------------------------------------------------- So I guess I just wanted to start out with the CLO sale. I know that you guys have maybe seen that as an opportunity to refinance. And maybe if you could just walk through as well the aspect of -- I thought that you had said in the prepared comments that the rates were going to go up. In that, that was part of the decision for exiting that investment. I mean, I guess by rates, wouldn't that be a higher yield for you receiving? -------------------------------------------------------------------------------- Sanjai Suryaji Bhonsle, StoneCastle Financial Corp. - CEO & Chairman [3] -------------------------------------------------------------------------------- Chris, it's Sanjai. I'll take the first part here. Pat, just feel free to add something later if I've forgotten. So just as a way of background, that $45 million position was as an equity position in CLO 2015. And in the way it was structured, it had notes ahead of it, essentially about $200 million. That had a cost of capital somewhere in the 500s. The way it was structured initially was that 5 years post its issuance, those liabilities that are ahead of that $45 million equity tranche were going to step up by about 70 basis points. So -- but the underlying assets there, the earning assets were community banks. And so if you think about it, what you're earning on those community banks now is going to be net earnings on those community banks and will be less than what you're making before because the liability costs in the CLO is going to go up by 70 basis points. And so that was going to lead to lower earnings. That was one. Number two is, and if you think about it, for a fund this size with a fairly concentrated position, being $45 million. And we took this as an opportunity to diversify our holdings. And then number three is if did need to get refinanced, the CLO liabilities had to get to be financed. And we also didn't want to take a capital markets risk, especially what we saw how spreads kind of blew out on liabilities back in mid of March, April, May. And so that coupled with also the banks, generally speaking, that were held of assets in the CLO were about half the size of the rest of our portfolio. We also took this opportunity to improve the overall risk profile. So that was kind of a few reasons as to why we decided to exit this position at a gain from essentially what it was marked at. And so -- and hopefully, that helps. -------------------------------------------------------------------------------- Patrick Joseph Farrell, StoneCastle Financial Corp. - CFO [4] -------------------------------------------------------------------------------- I can just add in that with regard to that, we did see a nice markup from where it was marked at June 30. So we picked up an extra almost $470,000 in value from where it was marked in June versus the sale price. So other than that, Sanjai kind of nailed it there. -------------------------------------------------------------------------------- Christopher Thomas O'Connell, Keefe, Bruyette, & Woods, Inc., Research Division - Assistant Analyst [5] -------------------------------------------------------------------------------- Great. That's helpful. And then looking at the alternative capital investment demand and yields going forward. It seems like the yields have come down a bit. I mean, I know it was -- generally, you were saying the market was that plus is 900 to 1,000 basis points prior above LIBOR. I guess where are you seeing those new yields or those base spreads coming on up? -------------------------------------------------------------------------------- Sanjai Suryaji Bhonsle, StoneCastle Financial Corp. - CEO & Chairman [6] -------------------------------------------------------------------------------- Sure. So the yields that you're seeing on our new alternative capital security investments is kind of reflective of the risk profile that we are willing to take this year, especially after again, what happened with COVID, et cetera. And so the reason you're seeing lower yields than something that we had initially discussed is because it reflects -- those structures reflect a much more conservative portfolio, that's -- the underlying assets are backing those securities, and also the structure. So from that perspective, these are more conservative investments. That again, is a sign -- a reflection of the kind of the risk that we're seeing out there. So we're just being very prudent in kind of what we're buying. -------------------------------------------------------------------------------- Christopher Thomas O'Connell, Keefe, Bruyette, & Woods, Inc., Research Division - Assistant Analyst [7] -------------------------------------------------------------------------------- Got it. So in terms of the pool, then, I guess, of alternative investments that you are looking at to put on balance sheet versus the overall market, I guess, where are you seeing those spreads right now? -------------------------------------------------------------------------------- Sanjai Suryaji Bhonsle, StoneCastle Financial Corp. - CEO & Chairman [8] -------------------------------------------------------------------------------- Sure. So the spreads that we're seeing today are kind of ranging between the L plus 9s and L plus 10s to the high single-digit type of yields that we are showing to you for the investments in 3Q. And just based on our analysis of the underlying investments, it just so happens that so far we have kind of more gravitated from a risk-adjusted basis towards the high single digits, but we are seeing yields that are ranging in the low double digits to the high single digits. One thing I'd bring the attention to you is that from a yield to call basis, these -- some of these investments are yielding in the double digits versus when you're kind of looking at it from a yield to maturity basis. -------------------------------------------------------------------------------- Christopher Thomas O'Connell, Keefe, Bruyette, & Woods, Inc., Research Division - Assistant Analyst [9] -------------------------------------------------------------------------------- Got it. So I mean, is it fair to say that over the next 2 to 3 quarters of the investment yield, pending any changes in the overall macro rate environment, it's going to remain kind of in this high to low 9s range compared to what was kind of high 9s to low 10s previously? -------------------------------------------------------------------------------- Sanjai Suryaji Bhonsle, StoneCastle Financial Corp. - CEO & Chairman [10] -------------------------------------------------------------------------------- Yes. I mean, based on what our pipeline is today, and assuming all things constant, we expect the yield to be in the 9-ish type of range going forward, again, with all things constant. -------------------------------------------------------------------------------- Christopher Thomas O'Connell, Keefe, Bruyette, & Woods, Inc., Research Division - Assistant Analyst [11] -------------------------------------------------------------------------------- Great. Helpful. And then on the expense side, I noticed that there's like a few upticks in overall kind of other expenses, more notably, I guess, in professional fees in a few other minor line items. Are those expected to kind of revert back to what had been kind of the low 400s range going forward? -------------------------------------------------------------------------------- Patrick Joseph Farrell, StoneCastle Financial Corp. - CFO [12] -------------------------------------------------------------------------------- Yes, yes. We had a few adjustments we needed to make for on professional fees and valuation fees, et cetera. But yes, I think -- and the combination of that, along with kind of true enough and making sure that going into Q4 we're accrued appropriately. So I think you are going to see those come down a bit in the fourth quarter to some more what you've seen in previous quarters. -------------------------------------------------------------------------------- Christopher Thomas O'Connell, Keefe, Bruyette, & Woods, Inc., Research Division - Assistant Analyst [13] -------------------------------------------------------------------------------- Great. That's helpful. And then I appreciate all your comments around credit quality and the overall bank market or community bank market right now and some of that reserve info surrounding the banks that are underlying your portfolio. Is there any pockets of risk that you're ultra focused on coming out of the 3Q updates? Or where deferrals kind of, to the extent they're disclosed by the banks, are remaining higher than you would like to see? -------------------------------------------------------------------------------- Sanjai Suryaji Bhonsle, StoneCastle Financial Corp. - CEO & Chairman [14] -------------------------------------------------------------------------------- Yes. So as it relates to deferrals, let me take that last part of the question first, is in discussion with our banks, and also kind of what we are seeing out there is there -- they've come down meaningfully. And then as you might recall, at the peak, some of these banks have seen like 20-plus type percent deferral rate. And now you're kind of looking at the low single digits. And so from that perspective, that's improved materially for the banks. And just looking at our portfolio of banks, net income was up versus 1Q and 2Q. And it's almost going to reach the levels of kind of what we saw in the fourth quarter of last year. From a risk basis, actually, kind of what I -- and we see is more of a loan growth a possible issue. And in a lot of businesses out there are being very prudent from what we are seeing in talking to our management teams, where they're not overloading themselves with debt. I can give you an example of this bank that we spoke recently with in our portfolio had a $10 million revolver line. And pre COVID, this company was asking for like a $12 million line because they were going to utilize it. And today, that revolver line's almost at the unused capacity because the company is doing a better job of managing working capital, et cetera. And so -- but having said that, that, obviously -- or that coupled with NIM, they are a little worried about their income going forward. But overall, we have seen a growth in the loan book, at least as it pertains to our portfolio of banks that we own. And so that's kind of how I see more of a risk to the company's P&L. Our bank's P&L being NIM, contraction NIM and not a meaningful growth in the loan book. -------------------------------------------------------------------------------- Operator [15] -------------------------------------------------------------------------------- The next question comes from the line of Bryce Rowe with National Securities. -------------------------------------------------------------------------------- Bryce Wells Rowe, National Securities Corporation, Research Division - MD of Equity Research [16] -------------------------------------------------------------------------------- Sanjai, I wanted to ask about the unrealized depreciation on some of the alternative securities. And obviously, good to see. But curious, what's driving that? Is that a rate thing? Is it a credit? Is that purely just credit spreads coming in? Was there something specific to this -- to some of the specific securities that would drive some of the appreciation? -------------------------------------------------------------------------------- Sanjai Suryaji Bhonsle, StoneCastle Financial Corp. - CEO & Chairman [17] -------------------------------------------------------------------------------- Sure. Pat, do you want to take that first part or do you want me to... -------------------------------------------------------------------------------- Patrick Joseph Farrell, StoneCastle Financial Corp. - CFO [18] -------------------------------------------------------------------------------- Yes. Yes. I'll take a little bit of that. I'd say on the -- just on the kind of the mathematical side. We did buy a number of these in Q2 at very good, very attractive pricing. So I can -- that I can speak to right away. And interestingly enough, we mentioned that there were a couple of paydowns this quarter and one of them being with [NASA and Sonata]. Both of those, we have purchased one of them at [87 and change and 93], and they both had -- we had paydowns on those at par. So definitely got some great deals there. So I'd say on the one side, on the math side, certainly, we've got some really great deals. And most of the others we also bought at discounts, some at very nice discounts in the 80s. So I'd say number one, was just opportunistic purchasing. And then I'll throw it back to Sanjai to give some thoughts on where the pricing is going today. -------------------------------------------------------------------------------- Sanjai Suryaji Bhonsle, StoneCastle Financial Corp. - CEO & Chairman [19] -------------------------------------------------------------------------------- Sure. So Bryce, just to add a little bit more color to what Pat said. Back in doing the dislocation back in March, April has as repo lines came due for some people for some managers out there. To get on side with those repo lines, they had to delever. And what you do at that point is you take your best asset that's got the highest mark and you sell it. And that's exactly what happened. And just like some community banking securities that were -- then we kind of bought at a pretty attractive price. We kind of saw the same thing in alternative capital securities. And we were all over those in terms of looking at TAM analysis and then deciding to buy them. And so that's kind of what you -- that's kind of how that opportunity came about. And obviously, with the market normalizing a little bit more, you've kind of seen appreciation there. And in certain instances actually you have realized a gain because those securities got partially repaid. In terms of what we're seeing in the new issue market, kind of the same. And -- but again, I want to make a distinction that we are seeing LIBOR plus 9, LIBOR plus 10 type of transactions. And yes, we have bought some high single-digit type of transactions. But again, based on our analysis, based on our outlook, we are investing in more of the conservatively structured alternative capital securities. And that actually worked really well for the fund, and they are very accretive. -------------------------------------------------------------------------------- Bryce Wells Rowe, National Securities Corporation, Research Division - MD of Equity Research [20] -------------------------------------------------------------------------------- That's helpful, Sanjai. And just maybe for the benefit of me and others that aren't as familiar with the alternative capital securities, what makes one more conservatively structured than one that's not? -------------------------------------------------------------------------------- Sanjai Suryaji Bhonsle, StoneCastle Financial Corp. - CEO & Chairman [21] -------------------------------------------------------------------------------- Sure. So we can start with just the asset base, looking like we usually tell you that the underlying assets, generally speaking, are investment-grade. And so what we move from, for example, is, let's just say, a portfolio of assets that initially was coming in at like a BBB- average rating, we'll move up in rating category to make it more like a BBB, BBB+ type of security. So obviously, moving up in the rating category, which is a proxy for risk, the securities generally carry a little bit of a lower return, right? -------------------------------------------------------------------------------- Bryce Wells Rowe, National Securities Corporation, Research Division - MD of Equity Research [22] -------------------------------------------------------------------------------- Yes. -------------------------------------------------------------------------------- Sanjai Suryaji Bhonsle, StoneCastle Financial Corp. - CEO & Chairman [23] -------------------------------------------------------------------------------- And so that's one of the primary ways of how we go about getting a more conservative security. -------------------------------------------------------------------------------- Bryce Wells Rowe, National Securities Corporation, Research Division - MD of Equity Research [24] -------------------------------------------------------------------------------- Okay. That's good commentary. And then I appreciate your comments about the current fourth quarter pipeline across the alternative capital securities universe being in the -- I think I heard this correctly, $3.5 billion to $4 billion for new issuances. And you made the commentary or the comment about the issuer base expanding. So I was wondering what the pipeline might have looked like, I don't know, a year ago, just for comparative purposes. And then when you talk about issuers, the number of issuers expanding, what's driving that? Is that just familiarity with the structure and the capital treatment? I mean, just wondering what you think there. -------------------------------------------------------------------------------- Sanjai Suryaji Bhonsle, StoneCastle Financial Corp. - CEO & Chairman [25] -------------------------------------------------------------------------------- Sure. So before I can answer the fourth quarter purchases that we did year-to-date, it's a mix between alternative capital securities and community banks, right? But focusing more on the alternative capital side of it, the $3.5 billion to $4 billion. Worth noting there, that's kind of what you're seeing the issuance to be in the fourth quarter of this year. Obviously, just like anything else, our product selection process, we participate in some, and we don't participate in some. In terms of the issuer base growing, it's a reflection of particular bank's balance sheet and kind of what they did during 2019 in terms of adding on risk to their balance sheet, coupled with where the equity markets are for issuing additional Tier 1 capital. Like we have said before in my previous comments, the most efficient way to address a bank's balance sheet, one of the most efficient ways to do that is to issue more alternative capital securities. So there are some newcomers that have come to us -- to the market during this quarter, and we have participated in some of their deals, is -- they are -- given market conditions, they're kind of finding the most efficient way to rightsize their risk profile is to issue additional alternative capital securities. -------------------------------------------------------------------------------- Bryce Wells Rowe, National Securities Corporation, Research Division - MD of Equity Research [26] -------------------------------------------------------------------------------- Okay. That's helpful. And maybe one more question for me. Just considering the repayment -- or the sale of the larger asset here, this core, the CLO. I'm wondering how you think about kind of repayment risk within the portfolio now relative to the -- to your -- to the individual securities within your portfolio. -------------------------------------------------------------------------------- Sanjai Suryaji Bhonsle, StoneCastle Financial Corp. - CEO & Chairman [27] -------------------------------------------------------------------------------- Sure. So in terms of repayment risk, we're not seeing anything -- we didn't see anything out of the ordinary during 3Q or in 4Q to believe that there's an acceleration in repayment. And so this is something that's fairly average, I would say. And just kind of give you a little bit more background. I think we ended Q1 with $133 million of invested assets. It was up to about $165 million in Q2 and then Q3 was $147 million, and that was really more related to that sale of that CLO position. And we -- for the balance of Q4, we are looking at a decent amount of deals. And we -- all things constant, we do expect to see a net growth from here. And so from an income perspective, et cetera, more additive than Q3. Again, all things constant. -------------------------------------------------------------------------------- Bryce Wells Rowe, National Securities Corporation, Research Division - MD of Equity Research [28] -------------------------------------------------------------------------------- Got it. All right. Well, thank you for answering all the questions, and good to see the continued progress in terms of the originations. -------------------------------------------------------------------------------- Sanjai Suryaji Bhonsle, StoneCastle Financial Corp. - CEO & Chairman [29] -------------------------------------------------------------------------------- Yes. Well, thank you very much, and thank you for your support. -------------------------------------------------------------------------------- Operator [30] -------------------------------------------------------------------------------- Your next question comes from the line of Devin Ryan with JMP Securities. -------------------------------------------------------------------------------- Devin Patrick Ryan, JMP Securities LLC, Research Division - MD and Equity Research Analyst [31] -------------------------------------------------------------------------------- Most questions have been asked, but I just want to spend a moment on credit. I think when you found it, you could talk about this a bit. But if we think about an area where there is a second shutdown and if that creates more stress in the system, how are you thinking about the portfolio in that scenario just bridging the gap between now and the vaccine? And could that also create opportunities from a pricing perspective and some of the things you're looking at, just given that it is kind of topical at the moment here? -------------------------------------------------------------------------------- Sanjai Suryaji Bhonsle, StoneCastle Financial Corp. - CEO & Chairman [32] -------------------------------------------------------------------------------- Sure. So the last part of your question, the short answer to that is yes, but I'll add a little more color to that. From a credit perspective, I think we all are pleasantly surprised how well actually, relatively speaking, the credit space has done as it relates to defaults. I think back in March and April, a lot of estimates were fairly high. And I think generally speaking, we're going to be under like 10%. And if you're to look at, say, the high-yield market combined with the leveraged loan market, right? And so from that perspective, the stimulus came in to benefit everybody, a main street primarily. So from that perspective, we -- again, we see, going forward, we are cautiously optimistic about the default rates going forward. Then again, if we were to see a prolonged recovery or added shutdowns because of COVID, what we expect there, again is we expect another stimulus build to come through. And we've seen that story play out before, where I think they will support the consumer and the small businesses. So -- and again, talking to all our banks, kind of that's kind of where they're headed. And a lot of the banks have made have increased reserves for -- all pointing to 2021. And so again, they're cautiously optimistic about it. We -- and so are we. I hope I answered your question. -------------------------------------------------------------------------------- Devin Patrick Ryan, JMP Securities LLC, Research Division - MD and Equity Research Analyst [33] -------------------------------------------------------------------------------- Yes, that's terrific. And then maybe just a follow-up because this is coming up in a lot of my client conversations. Just the numerous scenarios of the election outcome and how that could impact financials. And I think to the extent it is a Biden administration and a red senate or close to that, the progressive agenda doesn't feel very likely. It's probably not going to have a lot of legislative change. But one area that could see some changes on the regulatory front just given that, that may be easier to push through in a Democratic administration. I'm curious if there's anything (inaudible) focused on at the moment that you feel like could be an issue or maybe even create opportunities? Or is it just too early say at this moment? -------------------------------------------------------------------------------- Sanjai Suryaji Bhonsle, StoneCastle Financial Corp. - CEO & Chairman [34] -------------------------------------------------------------------------------- Yes. I would say it's a little too early, but it seems like it's pointing towards, say, split Congress, which obviously would dampen some kind of other things as it relates to the progressive agenda, right? But also, having said that, I think from what we are hearing, our discussions are monitoring the markets, et cetera. The focus probably initially is going to be more on the economy. And then in the next, maybe taxes then, say, bank regulations at this point. -------------------------------------------------------------------------------- Devin Patrick Ryan, JMP Securities LLC, Research Division - MD and Equity Research Analyst [35] -------------------------------------------------------------------------------- Okay. Terrific to be determined. Congrats on a good quarter. -------------------------------------------------------------------------------- Operator [36] -------------------------------------------------------------------------------- Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back to Mr. Sanjai Bhonsle for closing remarks. -------------------------------------------------------------------------------- Sanjai Suryaji Bhonsle, StoneCastle Financial Corp. - CEO & Chairman [37] -------------------------------------------------------------------------------- Thank you, operator. Thank you all for listening. And we obviously appreciate all your interest in StoneCastle. I look forward to speaking with you all during next quarter's conference call. And in event, we do not touch base prior to year-end, I just want to wish everyone a healthy and happy holiday season. Thank you, and good night. -------------------------------------------------------------------------------- Patrick Joseph Farrell, StoneCastle Financial Corp. - CFO [38] -------------------------------------------------------------------------------- Goodnight. -------------------------------------------------------------------------------- Operator [39] -------------------------------------------------------------------------------- This concludes today's conference. You may now disconnect. Thank you for your participation.