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Edited Transcript of TICC earnings conference call or presentation 27-Feb-18 3:00pm GMT

Q4 2017 TICC Capital Corp Earnings Call

Greenwich Feb 28, 2018 (Thomson StreetEvents) -- Edited Transcript of TICC Capital Corp earnings conference call or presentation Tuesday, February 27, 2018 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Bruce L. Rubin

TICC Capital Corp. - CFO, CAO, Treasurer & Corporate Secretary

* Jonathan H. Cohen

TICC Capital Corp. - CEO & Interested Director

* Saul Barak Rosenthal

TICC Capital Corp. - President & COO

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Conference Call Participants

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* Christopher Robert Testa

National Securities Corporation, Research Division - Equity Research Analyst

* Finian Patrick O'Shea

Wells Fargo Securities, LLC, Research Division - Associate Analyst

* Mickey Max Schleien

Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research & Supervisory Analyst

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Presentation

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Operator [1]

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Good morning, and welcome to the TICC Capital Corp. Fourth Quarter 2017 Earnings Release and Conference Call for February 27. (Operator Instructions) Please note today's event is being recorded. I would now like to turn the conference over to Jonathan Cohen, Chief Executive Officer. Please go ahead.

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Jonathan H. Cohen, TICC Capital Corp. - CEO & Interested Director [2]

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Good morning. Welcome, everyone, to the TICC Capital Corp. Fourth Quarter 2017 Earnings Conference Call. I'm joined today by Saul Rosenthal, our President; and Bruce Rubin, our Chief Financial Officer.

Bruce, could you open the call today with the discussion regarding forward-looking statements?

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Bruce L. Rubin, TICC Capital Corp. - CFO, CAO, Treasurer & Corporate Secretary [3]

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Sure, Jonathan. Today's call is being recorded. An audio replay of the conference call will be available for 30 days. Replay information is included in our press release that was released earlier this morning.

Please note that this call is the property of TICC Capital Corp. Any unauthorized rebroadcast of this call in any form is strictly prohibited. I'd also like to call your attention to the customary disclosure in our press release this morning regarding forward-looking information. Today's conference call includes forward-looking statements and projections, and we ask that you refer to our most recent filings at the SEC for important factors that could cause actual results to differ materially from these projections. We do not undertake to update our forward-looking statements unless required to do so by law.

To obtain copies of our latest SEC filings, please visit our website, www.ticc.com.

With that, I'll turn the call back over to Jonathan.

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Jonathan H. Cohen, TICC Capital Corp. - CEO & Interested Director [4]

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Thanks, Bruce. We are pleased to report that we generated a strong total return for shareholders during the fourth quarter and for the full year 2017. Our book value per share rose from $7.43 at the end of the September 2017 quarter to $7.55 as of December 31, equating to a total return of 4.3% for the quarter ended December 31.

Total return is the change in TICC's book value per share plus distributions paid to our common stockholders. We also note that our book value per share is now $0.05 per share higher than it was at the end of 2016, and that we've paid distributions to our shareholders during 2017 of $0.80 per share. In other words, for the year ending 2017, we produced a total return of 11.3% increase over our book value per share with distributions compared to year-end 2016.

For the quarter ended December 31, 2017, we recorded GAAP net investment income of approximately $7.6 million or approximately $0.15 per share compared with approximately $6.8 million or $0.13 per share for the third quarter. In the fourth quarter, we recorded net realized losses of approximately $1 million or $0.02 per share and net unrealized appreciation of approximately $9.8 million or $0.19 per share. In total, we had a net increase in net assets from operations of approximately $16.4 million or $0.32 per share.

Our core net investment income for the quarter ended December 31 was approximately $9 million or $0.17 per share compared to approximately $6.8 million or $0.13 per share for the prior quarter.

Please see the earnings release we issued today for a reconciliation of GAAP net investment income with core net investment income. Saul?

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Saul Barak Rosenthal, TICC Capital Corp. - President & COO [5]

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Following the company's total -- positive total returns for the fourth quarter and the -- for the full year 2017, the company's board of directors has declared a $0.20 per share distribution for the quarter ending March 31, 2018, payable to shareholders of record as of March 16, 2018.

2017 represented a period of continued strength in the markets in which we participate. From January 1, 2017 to December 31, 2017, the LSTA corporate loan index remained stable, trading at approximately 98% of par. At the same time, corporate loan default rates remained at low levels, providing investors with a generally lower risk, lower return corporate debt environment.

During 2017, tighter leveraged loan credit spreads reduced the weighted average spreads and the loan assets in our CLO investments. The current marketing environment has also resulted in tighter CLO liability spreads, presenting us with ongoing refinancing and resetting opportunities. With both CLO collateral and liability spreads at nearly the tightest levels since the 2008 credit crisis, and with 3-month LIBOR at approximately 1.7% as of the end of 2017, we believe that the CLO asset class is currently well-positioned for any widening of spreads and/or dislocation in the market.

As we executed our strategy of rotating out of more broadly syndicated corporate loans into a combination of club deals and narrowly syndicated loans through purchases in both the primary and secondary markets, we remained mindful of maintaining overall portfolio liquidity. We believe this strategy allowed us to maintain corporate debt investments which had sufficient liquidity to be sold, if necessary, in order to take advantage of market opportunities. We note that we continue to have no investments on nonaccrual as of December 31.

During 2017 we took steps to increase shareholder value in multiple ways. We significantly reduced our overall debt, rotated into higher yielding corporate loan assets and rotated our CLO portfolio with a view towards maximizing our expected near- and longer-term total returns.

Additionally, on February 5, 2018, the board of directors authorized a stock repurchase program of up to $25 million. We have and continue to focus on portfolio management strategies designed to maximize our total return, as opposed to generating a certain level of income over a particular time frame. Following strong investment performance in 2016 and 2017, we continue to see opportunities available to us and as a permanent capital vehicle, we have historically been able to take a longer-term view towards our investments. We believe this perspective has served us well. Additional information about TICC's fourth quarter performance has been posted to our website at www.ticc.com.

And with that, operator, we will now begin taking questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question today comes from Mickey Schleien with Ladenburg.

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Mickey Max Schleien, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research & Supervisory Analyst [2]

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Jonathan, I want to start by asking about CLO issuance. It's dropped about half -- by half from the levels we saw in October and November. I'd like to understand what you think is driving that trend?

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Jonathan H. Cohen, TICC Capital Corp. - CEO & Interested Director [3]

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The issue for us, Mickey, isn't so much the new issue calendar. We've been very, very active in the secondary market. We've been very active in the reset and refinancing markets. This is across our platform. So the new issue calendar tends to wax and wane, primarily as a function of the arbitrage that's available to the equity, based upon the delta between the cost of capital and the prospective use of proceeds. I think some of the air in the market has probably been pulled out by the reset and refi markets. Those have attracted new capital, and they've probably taken some of the activity away from the primary market. That said, we look at the forward calendar. And we think that, that presents opportunity for us.

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Mickey Max Schleien, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research & Supervisory Analyst [4]

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Okay, I appreciate that. And I actually wanted to ask you a handful of questions about spread compression. In terms of gauging the impact, or the pace of the impact, of spread compression, if you look at the pool of loans within CLOs sort of on a global basis, how fast would you say those turn over annually?

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Jonathan H. Cohen, TICC Capital Corp. - CEO & Interested Director [5]

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You're talking about loans within U.S. CLO structures, Mickey?

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Mickey Max Schleien, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research & Supervisory Analyst [6]

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Yes, in general. I'm just -- because we have the left-hand side of the balance sheet on the CLOs themselves suffering from spread compression. And then we have the right-hand side refinancing and resetting, and there is a mismatch between the timing of those two things. And I'm trying to understand where we are and obviously, the outlook for that.

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Jonathan H. Cohen, TICC Capital Corp. - CEO & Interested Director [7]

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Sure, Mickey. We estimate somewhere between 3 and 3.5 years.

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Mickey Max Schleien, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research & Supervisory Analyst [8]

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3 and 3.5 years in terms of average maturity on the left-hand side?

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Jonathan H. Cohen, TICC Capital Corp. - CEO & Interested Director [9]

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In terms of weighted average hold, keeping in mind that maturity is one aspect, but refinancings and calls are another aspect. So loans don't always ultimately last to their final maturity dates. They are not infrequently, especially in a tightening spread environment, called early.

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Mickey Max Schleien, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research & Supervisory Analyst [10]

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And if we look at the pool of CLOs that are beyond their non-call period, how quickly -- first of all, what does that represent on an aggregate basis? And how quickly are those refinancing and resetting?

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Jonathan H. Cohen, TICC Capital Corp. - CEO & Interested Director [11]

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The answer, Mickey, is that these vehicles, these CLO structures, tend to be enormously specific. In other words, every one of the roughly 950 U.S. CLOs in existence is different, fundamentally different from every other one. And depending on the underlying collateral pools, depending upon the costs of capital, depending on their [owarf] scores and their OC ratios and the predispositions of the collateral manager and the majority equity holders, all of those things go into any kind of a determination about ultimate maturity and about the persistence of any particular vehicle, but they're really all different, and it is somewhat -- it is very difficult to try to generalize.

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Operator [12]

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Our next question comes from Jonathan Bock with Wells Fargo.

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Finian Patrick O'Shea, Wells Fargo Securities, LLC, Research Division - Associate Analyst [13]

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Finian O'Shea in for Jonathan this morning. Just first, can you kind of outline the 20% dividend level, your thoughts on sort of bridging that gap? As you declare it for the first quarter, core NOI is 17, and I think there's some language on those CLO cash distributions no longer, perhaps, representing taxable income. So maybe is that -- is the taxable income maybe higher? Or can you get this through leverage or stock buybacks? Just can you help us get comfortable around that number?

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Jonathan H. Cohen, TICC Capital Corp. - CEO & Interested Director [14]

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Sure. Fin, as you know, we don't provide guidance typically, and we're not in a position to provide forward guidance now. As you referenced though, we are one of the most lightly levered BDCs in the market at present. So we certainly have additional headroom should we want to releverage the balance sheet over time. You also referenced the stock buyback program. And we enjoyed the benefit of the repayment of the roughly $94 million of convertible notes that we had outstanding in the prior quarter, that was in the September quarter of last year. The December quarter, obviously, we had less of that cash on balance sheet not earning a return in anticipation of the repayment of those notes. So in terms of the $0.20 dividend, we're really not able to provide forward guidance. One thing that I think we've looked to historically is the state of our net asset value. And the fact that really for the last 2 years, we've had stable and growing book value per share, while maintaining a relatively high dividend payout ratio, is something that does provide us some comfort.

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Finian Patrick O'Shea, Wells Fargo Securities, LLC, Research Division - Associate Analyst [15]

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Yes. I agree that the book performance has been solid, and just kind of the matter is, that the yield at book is very high, it's over 10%. And it's something that if it's not being earned, NOI, core NOI, et cetera, it just -- is there a high level of taxable spillover at TICC?

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Jonathan H. Cohen, TICC Capital Corp. - CEO & Interested Director [16]

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So that's a great question. And as you know, the indeterminate part or the part that's very difficult to determine of our tax composition relates to our CLO equity exposure. We have a bit more than 30% of our assets currently invested in CLO equity. CLO equity produces relatively high levels of cash flow, but the determination of those cash flows and the characterization of those cash flows in terms of what represents taxable income is something we really only find out a fairly long time after we get the income in the first place. So we receive PFIC income, passive foreign investment company income, and we receive PFIC statements. We generally receive those PFIC statements in the subsequent year to the year in which those distributions are received. And those PFIC statements start coming in usually around March. But for us, and for the market generally, we may not receive the last of those PFIC statements until sometime well into the summer, August or even as late as September in some cases. So the ultimate characterization of our taxable income is something that takes a while for us to determine, by virtue of the lag associated with the receipt of these PFIC statements, and therefore, Fin, is something we're not really able to provide a lot of guidance on, on a moment-to-moment basis. That said, we are very easily able to see the true economic returns, the actual IRRs that we're generating by virtue of our investments in CLO equity, and those have and continue to be fairly strong.

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Operator [17]

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Our next question comes from Christopher Testa with National Securities Corporation.

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Christopher Robert Testa, National Securities Corporation, Research Division - Equity Research Analyst [18]

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Just touching on the taxable income issue and looking at the estimated additional -- excuse me, taxable income, that was tracking your CLO reductions to cost on the roll forward, on the investment flow, pretty closely all through 2016. And then 2017, they become completely uncorrelated. So I'm just wondering if you could kind of reconcile that.

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Jonathan H. Cohen, TICC Capital Corp. - CEO & Interested Director [19]

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Sure. Absolutely, Chris. So the issue from a taxable perspective is that we did, as you say, have a fairly tight statistical fit between our core NII and our ultimate -- ultimately determined taxable income in most of the years -- for most of years in which we've been investing in CLO equity. In 2016, calendar 2016, which I think is the period that you're referring to, there was a fairly wide deviation. And the reason for that really related ultimately to the syndicated loan market dislocation we saw in the first quarter of 2016. So what many collateral managers chose to do, as far as we're able to tell, is that they realized capital losses during, typically, early calendar 2016, and then reinvested those proceeds at lower prices or at similar prices in other assets. In so doing, they essentially created tax blockers. They created a blocker to tax liability that ultimately flowed through and manifested on the various PFIC statements. That was -- I'm not going to call it an unprecedented activity, but it was probably unusual.

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Christopher Robert Testa, National Securities Corporation, Research Division - Equity Research Analyst [20]

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Got it. But just to be clear, what I was referring to is, it really started in the first quarter of '17, I mean it tracked it pretty closely through 2016. But for example, like first quarter '17, you had a CLO equity reduction to cost of $12.1 million. But then if I look on the income statement, your estimated additional tax -- additional -- excuse me, taxable income is about $2.6 million-or-so, but that was tracking fairly closely all through 2016. So I'm just -- and for the first 3 quarters, obviously I don't have the K yet for this quarter, but the first 3 quarters, it was just very, very different than what's on the investment flow. So I'm wondering where that difference is coming from in 2017.

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Jonathan H. Cohen, TICC Capital Corp. - CEO & Interested Director [21]

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Sure, Chris. It's principally coming from called deals. So as TICC is holding a higher percentage in 2017 compared to 2016 or 2015 of deals that were relatively later in their structural life cycles, and we were -- other equity holders chose to call those deals, that's what created the dynamic that you're referencing.

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Christopher Robert Testa, National Securities Corporation, Research Division - Equity Research Analyst [22]

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Okay. That makes sense. And obviously, quite some time ago, you guys received exemptive relief to coinvest with Oxford Lane, just curious how many deals in the portfolio are coinvested with Oxford? And how you think the market is going to value this in light of the recent news that risk retention may be going away?

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Jonathan H. Cohen, TICC Capital Corp. - CEO & Interested Director [23]

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It's hard to say how the market is going to value it. Risk retention going away is a really interesting topic. And it's worthy of a longer and more structured discussion. But we do, I believe, hold some names, we do hold some names in common between TICC and the Oxford Lane, although at the moment, we are not co-investing out of TICC by virtue of TICC exceeding at present its 30% statutory nonqualified asset test basket.

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Operator [24]

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The next question is a follow-up from Mickey Schleien.

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Mickey Max Schleien, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research & Supervisory Analyst [25]

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Jonathan, a couple more questions. Could you give us a sense of what the effective yield is, you're seeing in the primary markets now versus -- and for CLO equity versus the existing portfolio?

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Jonathan H. Cohen, TICC Capital Corp. - CEO & Interested Director [26]

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Sure, Mickey. Effective yields in the market that we see in terms of new deal flow, this is across our platform, are anywhere from kind of the mid-teens to perhaps the low 20s. That's probably where the market is right now, which is not wildly disparate from where our actual IRRs have been coming in.

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Mickey Max Schleien, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research & Supervisory Analyst [27]

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All right. And lastly, can you tell us what drove the unrealized appreciation in the portfolio this quarter?

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Jonathan H. Cohen, TICC Capital Corp. - CEO & Interested Director [28]

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Just marks -- marks-to-market. We had one name in particular, which is Birch, which had a significant markup in value.

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Mickey Max Schleien, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research & Supervisory Analyst [29]

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So there were no significant changes to assumptions in terms of default rates or reinvestment rates or anything like that?

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Jonathan H. Cohen, TICC Capital Corp. - CEO & Interested Director [30]

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No, Mickey, there were not.

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Operator [31]

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The next question is a follow-up from Christopher Testa.

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Christopher Robert Testa, National Securities Corporation, Research Division - Equity Research Analyst [32]

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Jonathan, just wanted to just ask about briefly about the right-hand side of the balance sheet, whether you're evaluating potentially getting a credit facility in place. And insofar as you do that, I was just curious what the advance rates on that facility will look like on your kind of club deals versus the previous broadly syndicated strategy?

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Jonathan H. Cohen, TICC Capital Corp. - CEO & Interested Director [33]

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Sure. They'll obviously be lower. But we're looking and we have and continue to look, Chris, at a variety of different releveraging possibilities for TICC. You may have noticed that we just entered fairly recently into a repo transaction at Oxford Lane. So that's a possibility, I suppose, potentially for TICC, but we have lots of other elements that we're -- or possibilities that we're considering.

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Operator [34]

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At this time, this will conclude our question-and-answer session. I would like to now turn the conference back over to Jonathan Cohen for any closing remarks.

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Jonathan H. Cohen, TICC Capital Corp. - CEO & Interested Director [35]

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All right. I'd like to thank everyone very much for their interest in TICC Capital Corp. and for their participation in this call. We look forward to speaking to you again soon. Thanks very much.

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Operator [36]

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