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Subject: ACAS: American Capital Strategues CC Transcript Date: 2/14/2008 11:32 AM
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http://seekingalpha.com/article/64527-american-capital-strategies-ltd-q4-2007-earnings-call-transcript

Malon Wilkus - Chairman, Chief Executive Officer and President

Amanda, thank you so much. And thanks everyone for joining us. Here with me today is Ira Wagner, our Chief Operating Officer; John Erickson, our CFO; and Rich Konzmann, who heads up our Financial Reporting.

This has been a great time to be levered less than one-to-one debt-to-equity. And we said that many times before, but it is in these times when you recognize how important that is. So, when other institutions are fighting for their survival, when they have a few, or significant write-off, that's simply not the case for American Capital and we levered... I think we levered up 0.75 to 1, and it's just a very comfortable place to be. It allows us to take advantage of tremendous opportunities that exist in a market like today, and prepare ourselves well if we're going through recession this year, and take advantage of the opportunities that present themselves through a recession. And I can assure you the opportunities are tremendous in this kind of environment just as they were, if you recall, back in 2001and 2002 when we went through a similar kind of environment.

So let's move on to slide 5, dividend highlights. And we have now declared $27.17 in dividends since we went public. In '07, we realized earnings per basic share covered our 2007 dividend by a 125%, just simply outstanding coverage of our dividend. We had an $3.72 in total dividends paid in '07, a 12% increase in '06, and that was paid a 111 million from our '06 ordinary taxable income that we rolled over into '07 and pay the dividend. And it was paid by 544 million in 2007 ordinary taxable income. And as you can see later that was not all of our ordinary taxable income in '07. We rolled over quite a bit into '08. And none of the dividend in '07 use up any of our net taxable long-term gains, which we haven't rolled over into '08 to cover the '08 dividends, and we'll talk about that in a minute.

So if you go to slide 6, you'll see that we are forecasting a 30 % increase in our '08 dividend. We have already declared $1.01 dividend for the first quarter, and that's a 13% growth over our Q1 '07 dividend. It's $0.01 increase over Q4 '07 and it is expected to be paid from 2007 excess ordinary taxable income. So, just to make clear here that the all... the first quarter of '07 dividend is going to be paid from last year's excess ordinary taxable income.

We are forecasting $4.19 for the whole year-end dividends that would a 13% increase over '07. And we are anticipating that the second quarter '08 dividend will include... will be paid in part by the '07 net taxable long-term capital gains. So you won't see... so for people, who are getting their forms, you will see... you won't see until the second quarter the use of the '07 long-term capital gains to cover the dividend.

Our 2008 quarterly dividend per share forecast is, as we've already declared 101 for the first quarter, 103 for the second, 105 for the third, and $1.10 for the fourth quarter; those will be 13%... 13%, 14% and 10% increase over their prior quarters of '07 dividends.

And if you turn to slide 7, you'll see what I believe is perhaps one of the best records of covering of the dividend with ordinary taxable income of any firm in our industry, 100% over the last ten years. So, 100% of our dividends over the last ten years was covered by ordinary taxable income. And from the samplings that we have done, I think for the top five or six, BDCs out there, we found none that didn't... haven't had to use capital gains to cover the dividend in part. So, whether... I think we are... I think quite possibly, we are the only firm out there that have covered their dividend 100% by ordinary taxable income, certainly the only one who has done it for ten years.

If you move to slide 8, in fact, to give you more statistics on that. Over the last ten years, if you go to the right side of that slide, our $25.95 in dividends, 96% of that was covered by ordinary... by, I am sorry, by net operating income. 100% by ordinary taxable income, but as you know, our ordinary taxable income over the last ten years has exceeded our net operating income. But nonetheless, our net operating income covered 96% of all the dividends we've ever paid since we went public ten years ago. And when you add to it then our net gains, we have exceeded the dividends by a 107%. And then over five years it was 96% covered by NOI and 113% by realized earnings, over the last three year it was 96%, again, by coverage by NOI and 124% by realized earnings and the last year, it was still an extremely outstanding 92% coverage by NOI and what was particularly outstanding is that 125% coverage by our realized earnings. And again, I don't... I just don't think anyone tracks well with that kind of performance.

Please go to slide 9... and by the way going back to slide 8, we've done that while having today about 25% of our assets in equity investments of portfolio companies. That's not including our equity stake in European Capital where the portfolio very much is we have here and we get great income off of it. So, 25% of our assets is in equity stakes and yet our net operating income has tremendous performance of covering the dividend. And actually our 25% in equity compares quite closely with several other of the larger BDCs and it's been, and recently bring it up as it noted that somehow is a, presents a challenge for us, but in retrospect, I think, you can see that it's only been very good for our shareholders.

If you look at slide 9 now, you can see... and... I think we all are aware that not only might we be in a recession today, but we most certainly could very well be in recession this year. And, I think it's worth reviewing how American Capital performs through the last recession and you can see here that on slide 9 that we raised our dividend every quarter through the last recession, and actually had a quite substantial dividend growth rate during the last recession. And we did that as LIBOR was coming down, was very flat as just as it's doing right now.

And if you move to the next slide, you can see that through the last recession, when LIBOR came down so much, our interest coverage ratio actually improved. I think that would be counterintuitive to a lot of people, but... and you can note here that our interest coverage ratio went into the last recession, the quarter before the last recession began at 2.1 interest coverage ratio and I might point out that we are currently at 2.0, so virtually identical. And then, it actually rose through the last recession quarter-by-quarter. In part that was due to the fact that LIBOR came down and so interest expense, particularly, senior interest expense for portfolio companies came down during that time period. Also, we were able to recycle our capital into much wider spread investment. Not because we were investing in more troubled companies, but because we were investing in some of the very best companies, and it was only the very best companies that could access capital during the last recession, and I anticipate that would be the case if we run into a recession in this year or next. So, our interest coverage performs very well.

If you will move on to 2007, and slide... I am sorry, slide 12 in the financial highlights for 2007, they were excellent, we had $3.42 in NOI which was a 9% increase over 06, 11% return on equity. We had 465 in realized earnings per basic share, 5% increase over 06, a 15% return on equity. And that, as we mentioned earlier, was 125% coverage of the $3.72 in dividend that we paid in 07. And that realized earnings was the net operating income plus the 214 of net realized gains that we had in 07.

Our earnings came in at $4.03, a 12% return on equity. That... there you added another $106 million of net realized gains and net depreciation; we had $32.88 of net asset value and $3.46 increase in our net asset value per share. So, it's 12% growth over 2006 in our net asset value which is excellent.

Going to slide 13, you can see that growth in our net asset value marching up very nicely over the last five years... over the last six years. And just to point out that we are trading, I don't know what we are trading at the moment. But we are trading at about one times outlook value. So we think this is just an excellent... American Capital offers an excellent value opportunity for investors today.

If you go to slide 14 for the fourth quarter we have had $0.91 NOI per basic share, which is outstanding 17% increase in Q4 and it... versus our guidance of $0.79 to $0.84. it's 11% return on equity, and our NOI increased nicely, in part, because we're already experiencing this increasing, widening of spread. So, we can invest at higher interest rates plus our cost of capital is dropping a little bit because LIBOR is dropping and the net result is spreads increase and we get an improvement in our net operating income. Just as we've explained happens through a recessionary environment.

Keep in mind, American Capital is this very basic growth in income firm. In good times we get a great appreciation on this modest amount of equity stakes that we have in portfolio companies. And... but yet we're subject to some spread compression and pressure on our NOI. But the gains and appreciation overwhelms that compression. And then in bad times we might see some depreciation on our assets, but we will get wonderful increases in spread income. And our net operating income goes up, and that's already you're starting to see that already in the fourth quarter of 07.

Our realized earnings was a $1.14, a 2% increase over the year before, 14% annualized return on equity. And that covered our fourth quarter dividend by 114%. So the $1 dividend that we paid in Q4 covered 114% by realized earning. And then we had a net loss of a $1.27 or 15... negative 15% return on equity, resulting from the $417 million of net depreciation and gain that we booked in the fourth quarter and let's talk about those.

If your turn to slide 15. You can see on slide 15 we had... if you look at the top of the chart, the private finance portfolio, which is our investing in change of control transactions and direct investment. It's our buyout business and our sponsored finance business. You can see that we've had $41 million in the fourth quarter, $220 million for the whole year of gains, net capital gains for our private finance portfolio.

If you look down to the next section you can see the private finance portfolio also appreciated $60 million in the fourth quarter, a 117 for the year. So, our private finance portfolio is just doing wonderfully well. Then if you continue at the bottom section, there you can see that there was reversals of appreciation associated with the gains from the private finance portfolio, representing $59 million of our depreciation for the quarter and $167 million for the year.

Below that line, you can see that European Capital depreciated $225 million for the quarter to $280 million for the year. And that's simply the stock price of European Capital plus a modest control premium for European Capital, both of which dropped in this last quarter. And as a result, the European Capital valuation dropped. But keep in mind, European Capital continues to pay us wonderful dividends and we are and our management feed [ph] of European Capital irrespective of this kind of depreciation. And we ultimately expect that European Capital will be performing extremely well as it has been in the quarters that we've reported since our IPO.

The next line item is foreign currency translation, that relates, to the most part, with European Capital; and you can see a $37 million of depreciation there and $98 million for the year. Then American Capital, LLC, which is our asset management portfolio company, we own 100% of it, and it is through that portfolio company that manages our various funds in the management. And American Capital, LLC had $87 million of depreciation. And if you recall, we have to deconsolidate it in the second quarter of last year; we were required to do so. And in doing so we valued it based on comparable alternative asset management companies. So, as you all know they depreciated in this last quarter as much as we'd hope to for American Capital valuation to rise to them, instead the ops had currently came down closer to us and as a result, we booked this depreciation for American Capital, LLC.

But again... once again, the income off of American Capital, LLC, the management income, has nothing to do with that depreciation and so we're still booking the same income off of it. And if alternative asset management companies re-appreciate and as we roll out more funds under management, American Capital, LLC we expect to get more and more valuable.

Below that is our commercial CLOs and our commercial mortgage-backed securities investments. And you can see we had $132 million depreciation for the quarter, $203 million for the year. Those... the depreciation associated there was associated to declines in pricing, which... actually we have a slide on, later in this presentation, for the commercial... for our CMBS assets, so you can see very clearly the changes in pricing which causes us to have to revalue, in this case, depreciate the existing investments that we have there. Of course, if the pricing were to change in the opposite direction next quarter, and if performance continues according to plan, then we would re-appreciate these assets. And, of course, these assets were required to value them on a trading basis, but they don't trade and as a result, they really... the valuation is tied to pricing and we intend to hold these assets to maturity, if they perform according to plan in terms of the loss rates on the underlying collateral, then over time, we will get back this depreciation in the form of future appreciation and gains.

Below that is our interest rate derivatives, which we're required to have for our term securitization that locks... helps us to lock in our interest rate spread on our existing assets. And, they depreciated $55 million for the quarter and $80 million for the year.

So, we've kind of explained all this on Slide 16. I've just gone through that. We can answer more questions on it when we come to the question period if you like.

Let's turn to Slide 18. We had a tremendous amount of liquidity in 2007. We expect that to continue to great extent in 2008. $4.5 billion of realization, $3.2 billion coming from principal payments and loan sales, $1.6 billion of that is our senior loans syndications. We had $402 million that we received in selling assets to the... our commercial mortgage-backed security assets to the Commercial Real Estate (CEO) that we manage, and, $976 million when we... proceeds received from the exit of the portfolios companies of equity investments, and it includes $488 million from the sale of equity assets to American Capital Equity too, which is part of our asset management strategy. And then we had $41 million of net portfolio realized gains.

So, if you go to slide 19, this is a new chart you haven't seen before, but it does show you the degree of liquidity that we have in our portfolio. And you can see that $4.5 billion that I just described to you in the last slide, overall in the right bar of this chart. And then the line actually is showing that amount of liquidity divided by the four quarters earlier assets under management. And so it's a liquidity chart. And you can see that we have 56% of the asset that we started '07 with, we got back in liquidity. We turned around and reinvested in new portfolio companies. About half of that, I think, 30-some percent was invested in the second half of the year since the credit crunch.

So, tremendous liquidity off of our asset and part of the reason for that, as noted in the subtitle here, is that we control 56% of our assets. So unlike a finance company which has to kind of sit and wait for somebody else to decide to pay them, we can actually decide to put a company up for sale. And in fact we have controlling interest on a very substantial portion of our assets.

And you go to slide 20, and you can see that we also had tremendous liquidity from capital raises that we raised $5.3 billion of capital in '07; seven different ways. I think we do have the broadest potentials and opportunities of raising capital of about any private equity or firm and or mezzanine fund that I know of and of any BDC that I know of. And that gives us just tremendous flexibility in how we manage ourselves. How we work through credit crunches like we are in right now.

You look on slide 21, that we just continued with the prior slide of showing you some additional ways in which we raise capital in 07.

Then slide 22 specifically describes how we sold the $585 million worth of equity stakes in our portfolio to American Capital Equity too. And I have been on... I did about three weeks of traveling around meeting with institutions in the last several months, and one of the things that everyone had questions about is the quality of our assets.

And, of course, because of concerns about a possible recession, and one thing we can point out is that we had six of some of the finest investors in private equity spending five months scouring through our portfolio, looking at our riskiest investment, in fact all of them, and end up buying all 80 of them, representing a 17% strip of everyone of them. They bought it at the fair value at the end of the second quarter. And they turned around and invited us to manage those assets on their behalf on a two... with a 2% management fee and 30% carried interest. So, if you are worried, at all, about our assets, you would be most worried about our equity assets. And I think you should just feel a lot of comfort that we just sold $585 million of those assets. And just to remind you, a year earlier we sold another $1.1 billion on those assets.

Slide 23 points out that we've always... not only that we have one the lowest levered financial statements in the world of public financial institutions. But we have one of the most conservative managed balance sheets just with respect to managing our borrowing. And you can see in '08 we have very little amount of debit that comes due, in 09 it is a modest amount as well, and so forth. It's not until 2012 that we have any real material amount of debt that comes due for American Capital.

24, we just want to reiterate that we're charged by our Board of Directors to buyback $0.5 billion worth of stock below... if it indeed trades at opportunistic prices below our net asset value. And we just described the terms under which will do that.

And we'd point out the bottom here that we had a very brief two-day window between the time we made our announcement and we had to give, as a BDC we have to give our shareholders, actually, a letter to the effect and then we have to wait till they digested it. So, we had only two days between that letter being digested and entering back into a trading blackout. And during the period we did buy $6 million worth of American Capital stock. And I apologize for the fire engine below, but we are in ice storm in the area and lot of accidents down the road here in Bathesda. I generally would like that fire line to come to highlight a certain point, but little better timing than I have, I guess.

We are not going to go through the new investments, the $7.9 billion that we made in 07 over the $1.9 billion that we made in the fourth quarter. The only point I will highlight there is we... those new investments, almost none of it went into stressed companies, $29 million for the whole year in nine distressed portfolio companies, $4 million for the fourth quarter into five distressed portfolio companies. Very proud about that, that just is great indication of the quality of the portfolio and how it's performing in the...

You can see on slide 28 that our pricing is, indeed, widening as we discussed kind of a lot over the last ten years that, in troubled times spreads widened, and that's great for American Capital. And you can see that happening with senior debt widening about 600 or 60 basis points. But that's in the context of LIBOR also widening out by about 80 basis point. So, you add the two together we got about another 1.5 spread there, and sub-debt widened out 1%, and now, by the way, I am comparing the yellow bars is the 12 months ending the end of the second quarter, and the green bar is the second half of 2007. And just to remind you, we invested in that period, I don't know, about $3.5 billion, about 35% of our portfolio got reinvested in that period of time. So we can move very quickly to adjust to a widening spread environment and on the sub-debt not only was there 1% increase in our pricing, but you see about a 70 basis points increase in LIBOR during that period or spread increasing for LIBOR.

Moving on to slide 29, we not only do we have control over about half of our assets, but we are in a position to fund the senior debt of transactions and so when we make investments we can do our one-stop buy on transactions. But when we sell a company, if necessary, the seller is interested in our financing and we would often love to finance the senior debt and sub-debt in selling the company. We can turnaround and syndicate it and we had a record breaking levels of syndications in 07, record breaking levels in the second half of 07.

So all those stories that you read about in the papers where the buyout business is dead, because you can't syndicate senior, remember they are referencing $1 billion plus deals. We don't do $1 billion plus deals. we are in a middle market and the middle market still is very thriving, very active and where we can continue to be one of the most active buyers and sellers in the middle market, in part because of all the capabilities that we have, our one-stop buyout capability and our syndications capability. So we have a great syndications team in New York a, 10% team, and they have made all this happen.

And by the way the reason that we can syndicate and another firms can't, is because we have the scan gain. So when we go and do a one-stop buyout and we syndicate the senior, the buyers of that know that we have the sub-debt and equity underneath us, we have to fight like crazy on their behalf otherwise our sub-debt and equity is worthless. And so we make the perfect firm to be selling senior paper.

Slide 30, just points out that we have now exceeded $10 billion with revolving investments we have made since our IPO, that's 44% of our total. And our valuations, gosh, there has been a lot of criticism of our valuations over the last three and six months. But, golly, they still... our exits, this $10 billion of exits still come within 1% of the prior quarter's valuation. I am not sure there is any other firm that could give that statistic.

The nice part about this statistic is that on our exits, overall on all of our assets we had a 16% return and remember three quarters of our assets are sub-debt and senior debt investments, in fact a third of our assets are senior debt. And if you just look at our equity-only exits we had 30% IRR.

Let's get now to our funds under management, and you can see on the chart 32, we have five funds under management and we have a whole bunch of it that we are working on that are in development, a variety of business lines that we hope some day to create fund, to manage and we are working on it hard. We have about 20 people in department that makes all of this happen.

Slide 33, shows that we have increased our assets 51% in '07, but our externally managed funds we increased to 98% in '07, and you can see two years ago we had no funds under management... extremely managed funds.

Now let's go to our 2008 forecast. We are forecasting that even through recession, we will be paying out $4.19 in dividends for the year and almost half is forecast to be paid from 2007 taxable income. We are also trying to make it as clear as a bell that our... we forecast our realized earnings in '08 will exceed our dividend, and we are giving guidance that in the first quarter we're... we expected $0.73 to $0.78 in net operating income on a diluted basis. And we are also trying to be, clear as a bell as well, that 2008 net taxable long-term capital gains will exceed our 2007 net taxable long-term capital gains. And that '08 net taxable long-term capital gains, all of will, will be... is being forecast to be rolled over into 2009 to pay the 2009 dividends.

We're also forecasting that '08 ordinary taxable income will exceed '07, and that $500 million... that we're forecasting $500 million of ordinary taxable income to be rolled over into '09 and that comparing to the $361 million rollover from '07 to '08. Is that $500 million with capital gains, as well? Yes. That, we're going to have to fix that slide, because it's not correct, the $500 million is both ordinary taxable income and long-term capital gains that we're forecasting to rollover into '09. And actually, we expect it to exceed the $500 million.

Slide 36 is even though our portfolio is performing well, we are assuming a recession occurs in '08. Now, we're not seeing that recession in our portfolio today. The latest statistics that we have is that EBITDA... revenues are up in the aggregate on our portfolio leased companies that are reported to us through December, up about 3% and EBITDA is up in December, I think, about 2.3% or so. So, we're not seeing a recession, but nonetheless, we're assuming it's going to happen. And therefore, we're prepared to operate in a steady state mode, and that means we're prepared to operate without raising capital at American Capital in '08.

Now, we do expect to generate significant internal liquidity that will be available for new investments and we think that amount of liquidity will exceed the capital base of virtually all of the competitors that we compete with. So, with a portfolio of the size of ours and with as much liquidity and control that we have, we expect lots of liquidity to invest in new companies, wider spreads and with less competition.

We're also forecasting that our asset under management will increase from $7 billion to $14 billion, but again our assets on our balance sheet remaining at around $12 billion. Now, of course, that can change if we start trading nicely and evenly and significantly above book value.

If you go to slide 37, we also want to point out that there is considerable upside to all this. In that, if we are able to raise more balance sheet equity or raise more funds under management.

So, we want to talk about our credit quality quickly here. First off all, you can see in the fourth quarter, we looked at 921 investment opportunities, and that compares favorably to the fourth quarter of '06; it's a little down. And it's significantly down from the highs of Q1 and Q2 of '07, and it will probably be some time before we see highs of that sort again. But still... there is still very substantial volumes out there.

We closed only about 2% for the quarter; and on a trailing 12 months basis, 1.7%. As I mentioned to many folks in the past, historically that's been probably a little above 2%. So, we are turning down more of what we see. And you can particularly see this in slide 40 where, of our 22 top competitors that did 244 investments last year, we only saw 21% of them, which is... tells you how fragmented this industry is. And we passed on 92% of those.

So, by the way, since we are one-stop buyout firm, we could have bought and did 52 additional transactions. We have the check book, we could have written it, we could have done those transactions in '07, if we wanted to, but we did pass on them. Not to say these were bad transactions. It's true, we did not submit... even a little ball bid on them, but there could be very good reasons why these are the firms. These are outstanding firms. These are the 22 firms, and there could be very good reasons why they did those 52 investments.

But we didn't feel that they were right for us. We did bid on four of them, 8% of the total, and of course, by definition, we lost those bids. And because we were maintaining our discipline. So this chart better point out that we continued to maintain discipline in this marketplace. We're not going to discuss slide 41, but skipping to slide 43, where we show our past due in non-accrual loans. And in the fourth quarter on a face-value basis they rose to 7.9% from 5.5%. Not to dissimilar for... to the second quarter or first quarter, it looks like of '06, and I point out that this statistics of face-value is not a statistic that you should pay, in my view, a lot of attention to, because keep in mind we've depreciated a lot of these past... a lot of the non-accrual loans.

And then, of course, a lot of the past due we ultimately collect. But we've depreciated quite a large portion, you can actually see how much on the prior slide, the $132 million of non-accruing... I'm sorry the $338 million of non-accruing loans in the fourth quarter has been depreciated down to $122 million. And so that's already gone through our books. You've already recognized it. If you pay attention to NAV, that's already in there. If you are looking at our earnings, it's already there. And so the real statistics when you take... when you think of those other things is our 2.1% statistic and you can see that's been running at a very low level and 2.1 continued to be a very low level of past due in non-accruing loans at fair value to our total loans at fair value.

Turning to slide 45, everything I have discussed this morning is all due to the performance of our assets. And we have 700, I think, of some of the finest investors in the middle market, private equity and mezzanine in the world. And the reason I can say that, the reason I can say they are some of the best in the world is because the statistics is telling us exactly that. If you look over the right side, over ten years our total assets produced to 60% IRR on a pre-levered basis. Our equity-only investments produced a 28% IRR. Over the last five years the numbers are 20% and 32%.

These would put us in the top 15 percentile of private equity. But the consistency of performance, I think, probably puts us in the top 5 percentile. And you can see that we only had one year where our equity had a negative return and in that year our total assets still produced a 9% IRR. So, we are very pleased. We added a table at the bottom of this chart to show you how much assets at fair value remains in each of these static pools, and you can see for the first five years of our investing, we have very little left of those investments. And so those pools have performed, and we are very proud of them.

And let's move on to slide 46, the reason it is with that performance, is the reason why we have performed so well relative to the S&P 500, which you can see there in blue, and in gold is the American Capital total return versus the S&P 500. And through December 31st, we've produced over ten years, an 18% return versus the S&P's 7%. And I'd like to point out that we traded below book back in 1998, and the next year we delivered a 44% total return. And then we traded below book, again, in 2002 and the next year we delivered a 53% return. And then in 07 we traded below book for the third time in our history, and already we are 11% above the S&P for total return.

So, if you go to slide 47 you could see that this quite a unique time in our history where we are trading at such a low price to book. You can see the history of that and we think it's a great investment opportunity. And so slide 48, just to point out, that with 11% dividend yield and 13% growth rate, which we have... remember that, that's the growth rate to the dividend. And we've already told you that we have almost two quarters of that dividend already banked with taxable income that we have rolled over from 07 into '08. And so if we trade at the same 11% yield as we are today. If we trade at that level toward [ph] the end of the year we will have provided you a 24% return.

If we trade down to our average 8.5% dividend yield, over the last ten years, we'll deliver about a 55% return on next two years.

So we want to just summarize real quickly here and open it to questions. We forecasting 419 in our dividends, 13% growth rate and that's assuming that we will be in a steady state mode. We are forecasting $500 million rollover of our 2008 taxable income into 09, capital market conditions we think are outstanding because there is fewer competitors, this credit conscious just going to give us wider spread to invest in. That would... should allows to increase our NOI in dividends. Commercial credit remains... in spite of all that commercial credit remains simply outstanding with very low default rates and this is a great time to have a season portfolio over which we have significant control and where we can generate lots of liquidity. And so it's a great time to be levered less than 101 and we are going to continue to rationalize this industry of investing sub debt in equity into another market.

And with that let me open up to questions and I hope Ira and John will help me here.
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