Operator: Good morning, my name is Sarah and I will be your conference operator today. At this time, I would like to welcome everyone to the American Capital Fourth Quarter 2010 Shareholders Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. Thank you.
Ms. Katie Wisecarver in Investor Relations, you may begin your conference.
Katie Wisecarver - IR: Thank you, Sarah. Thank you for joining American Capital's fourth quarter 2010 earnings call. Before we begin the call, I'd like to review the Safe Harbor statement. This conference call and corresponding slide presentation contains statements that to the extent they are not recitations of historical fact, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.
All such forward-looking statements are intended to be subject to the Safe Harbor protection provided by the Reform Act. Actual outcomes and results could differ materially from those forecast due to the impact of many factors beyond the control of American Capital.
All forward-looking statements included in this presentation are made only as of the date of this presentation and are subject to change without notice. Certain factors that could cause actual results to differ materially from those contained in the forward-looking statements are included in our periodic reports filed with the Securities and Exchange Commission. Copies are available on the SEC's website at www.sec.gov. We disclaim any obligation to update our forward-looking statements unless required by law.
An archive of this presentation will be available on our website and the telephone recording can be accessed through March 2 by dialing 800-642-1687. The replay passcode is 37368950.
To view the Q4 slide presentation that corresponds with this call turn to our website americancapital.com, and click on the Q4 2010 earnings presentation link in the upper right hand corner of the homepage. Select the webcast option for both slides and audio, or click on the link in the conference call section to view the streaming slide presentation during the call. If you have any trouble with the webcast during the presentation, please hit F5 to refresh.
Participating on today's call are Malon Wilkus, Chairman and Chief Executive Officer; John Erickson, President, Structured Finance and Chief Financial Officer; Sam Flax, Executive Vice President and General Counsel; Rich Konzmann, Senior Vice President, Accounting and Reporting and Tom McHale, Senior Vice President of Finance.
With that, I will turn the call over to Malon Wilkus.
Malon Wilkus - Chairman and CEO: Thank you, Katie, and thanks everyone for joining us today for the 2010 shareholders call and the fourth quarter. I think, the quarter was pretty straight forward and so we're going to only touch on a few slides before we open it up to questions. I thought I would start off with something that probably most folks aren't aware of, and that is that last week American Capital celebrated its 25th anniversary, and we're able to celebrate also a very good year of 2010 and that we produced $1 billion of earnings for the year.
So, let's start with slide three, we have $1.08 in net earnings for the fourth quarter last year. That's $381 million of net earnings, or 44% annualized return on equity. That brought our net asset value to $10.71, which is a 12% increase over last quarter's NAV, and a 29% increase over year ago NAV bringing our NAV up to $3.7 billion.
If you move to slide four, we also wanted to summarize that we paid down $258 million in the fourth quarter of our 2013 or debt that's due on 2013. I should say, we paid $258 million in total, of which $107 million of it was associated with our secured debt in 2013 bringing our debt-to-equity ratio down to 0.6 to 1, and actually this month we also paid down another $150 million of the debt that's due 2013.
On slide five, you can see that we earned $3.02 or $1 billion, which is a 34% return on equity, and since our low point back in the second quarter of 2008, we have increased our book value by $1.8 billion, we repaid $2.1 billion of debt, and we have had a 44% return on equity.
Slide six, you can see we continue to correlate with the economy. The gross domestic product was up in the fourth quarter by 3.2% and our net earnings produced $380 million in the fourth quarter.
Now skipping to slide 18, I just want to review our value proposition. We produced $1.1 billion of portfolio appreciation over the last six quarters and a 44% annualized return on equity over those six quarters. That's $3.29 per share or as I said, 44% growth rate. But that's what is in our past. What we think we have some potential with respect to growth would be $234 million of potential appreciation associated with European Capital, because it's still currently being valued at a discount to its NAV and that's not counting any growth or potential growth in European Capital's NAV.
Then both at American Capital and European Capital, we have $237 million of potential appreciation associated with bond yield discount, or saying it another way, if you take our performing debt assets and if they're repaid at cost, as we expect them to be, we would pick up $237 million of additional value, because right now, even though their performing asset share is discounted based on the current bond yield expectations.
Then perhaps most importantly, on the bottom of the slide 18, we have a potential appreciation on $1.6 billion of existing private equity assets. That $1.6 billion is at fair value when we – fair value of these assets we have to use the market rates of return that are expected and we do believe that in a economy that's recovering, we will get equity rates of return on this equity.
Now, if you think the economy is not going to recover, it's going to go in the opposite direction, and we'll get appreciation on this $1.6 billion, almost assuredly. On the other hand, if it does recover as we're expecting and I think many of the economists are expecting, then we expect an appreciation and for this kind of equity asset, you would look at something in the order of a 20% annualized depreciation on the asset.
So, if you turn to slide 20, we do have a positive view about the economy in that if the economy does indeed perform as it has been in the last number of quarters, then we expect asset valuations to continue to improve. As you all know, we've stayed very focused on our portfolio of companies and we think we have a lot of growth potential there for organic and add-on growth in terms of acquisitions, and those portfolio companies will require our financings to pursue some of this growth.
We are seeking unitranche second lien mezzanine investment opportunities. So, we have our teams in our various offices pursuing those opportunities very hard and we're pursuing one stop buyouts as well, and of course, we continue to manage (in-house) our portfolio and as we've always been a long-term patient investor and we're very pleased to getting fair values on realization in a slow M&A market.
With that, I'd like to open it up for questions.
Operator: Vernon Plack, BB&T Capital Market.
Vernon Plack - BB&T Capital Market: John, this question is for you. Looking at the $474 million in cash realizations during the quarter, I was curious how much that impacted investing operating income.
John Erickson - President, Structured Finance and CFO: I have to do some calculations because you're talking about how much came off the book in terms of yielding assets versus the rates on the debt paydowns?
Vernon Plack - BB&T Capital Market: I'm really looking at that and any associated early repayment fees that were perhaps built into that number, just trying to determine what an ordinary number is. I can certainly do that, but…
John Erickson - President, Structured Finance and CFO: There weren't very significant prepayment fees during the quarter, right? I mean, we'd have to go do a breakdown if you know this deep because some of them..,
Vernon Plack - BB&T Capital Market: I'll ask one more then jump on. John, do you know what your capital loss carried forward number was as of 12/30?
John Erickson - President, Structured Finance and CFO: As our tax year end, which was September 30, 2010, it's approximately $590 million.
Vernon Plack - BB&T Capital Market: $590 million. Okay. Great. Thanks very much.
Operator: Rick Shane, JPMorgan.
Richard Shane - JPMorgan: I have three questions. First, you mentioned related to ECAS that you have a $176 million of, sort of, write downs there of loans that are accruing that you are marking below cost. What is the cost basis on those just so we can get a sense of what the actual marks are? Let me ask my other two questions and maybe you want to circle back there?
Malon Wilkus - Chairman and CEO: We're just going to European Capital now?
John Erickson - President, Structured Finance and CFO: Yeah, I mean, we won't know what the cost base -- well it's probably in the low 90s, but let's look that up?
Richard Shane - JPMorgan: Second question is…
Malon Wilkus - Chairman and CEO: So, as European Capital…
John Erickson - President, Structured Finance and CFO: Yes, so it was just 176…
Malon Wilkus - Chairman and CEO: You know, European Capital has given information on its performance, but I am not sure we have it in front of us today.
Richard Shane - JPMorgan: Okay great. I'll circle back on that one. The next question is that given – you show non-accruals going from $746 million to $704 million, which gives us the net change. Can you give us a little bit of color, was that just simply one loan going from non-accrual to accrual, was it a sale, what were the underlying dynamics there during the quarter?
John Erickson - President, Structured Finance and CFO: Yeah, there were several loans involved. We had $59 million decreased from three loans due to improved performance, so $59 million came off the list because of three companies improved performance; $61 million was decreased because we actually took some realized loss or exited the companies and that was two companies; and then $83 million was an increase due to just weaker performance at four different companies. So there was a mix. So you had some coming off due to improved performance, some coming off as we actually realized the loss, and then some going on because the company's performance was weaker.
Richard Shane - JPMorgan: Then last question. Obviously, given the improving liquidity situation, and now you're reaching your leverage targets, and the idea that you're going to start to deploy capital. What about the idea of deploying capital into the investment you guys know the best, which is American Capital Strategies and actually buying back stock given where you are trading versus NAV?
Malon Wilkus - Chairman and CEO: We've obviously thought about that as well, and we, I think that ultimately to be an effective spread lender. We want to get to cost more debt down. Our current debt facility is not that attractive. So, we kind of weigh that against the impact of actually buying some stock back, and also against the value of the opportunities that are out there. So, there are certain circumstances where we will consider it, but we're not there right this minute.
Richard Shane - JPMorgan: Again, I realize, look that that's long-term that is contrary to the growth idea here, but at least in the short-term when you look at the investment set it's got to be pretty compelling?
Malon Wilkus - Chairman and CEO: No, we appreciate that, but as I said, ultimately we don't want to be borrowing at single B or BB rates in order to effectively be a competitive spread lender. We're going to want to borrow at AAA rate. So, we need to build the portfolio and manage our debt burden with that in mind as well. So, we're also thinking about the ability to generate a strong dividend in the future, once we start the dividend. Yeah, one other thing I'd say about the debt. In our circumstances, we can't use our capital to retire debt and produce about a 9% return on that capital, and that's a risk – virtually a riskless investment is in –and it's de-risking our balance sheet.
Richard Shane - JPMorgan: That absolutely makes sense, 9% risk-freeze is a great investment in this environment.
Malon Wilkus - Chairman and CEO: Yes, and look, I mean, as we've seen over the past year there just continues to be events outside our control that create shockwaves. I mean, you go back last year, the European debt crisis, and then more recently you look at what's going in Egypt and those sorts of things. So that always gives you some pause about whether it's the right environment to lever up. We went through a couple of very tough years being too levered, and so effectively you are saying we should lever up, and that is a difficult decision to make. We see plenty of opportunities to provide very good returns on a riskless basis, so we don't want to add risk to the balance sheet right this minute. I think going back to the question on ECAS loans, we have €909 million of loans with a fair value of €777 million.
Operator: Sanjay Sakhrani, KBW.
Steven Kwok - Keefe, Bruyette & Woods: This is actually Steven filling in for Sanjay. Just two questions I have. One was the increase in the interest and dividend income. I was wondering, could you talk a little bit about that because on a full year basis, there was shrinkage and yet the income actually went up. And second question I had was, what's your targeted debt to equity range, given that you guys already at 0.6 times, and I was just wondering, going forward, how should we think about that in conjunction with potentially investing to built out the portfolio?
Malon Wilkus - Chairman and CEO: Yeah, I will answer the second question first. We ended the year at 0.6, but we did choose to pay down another $150 million of the debt that's due 2013. We didn't have to. In fact, since the pay down that we made in the middle of last year, we haven't had to – there is nothing compelling us to pay down our debt, other than to get a very good return on it. In the fourth quarter, we had particular advantage there, because it brought our pricing down to the lowest grid on the entire remaining amount, and so that had about a 13% return on the capital. This $150 million pay down that we did in February had basically a 9% return on capital. We will continue to compare and evaluate what we can do with our liquidity. We continue to get lots of liquidity. We think that will continue, though we are not forecasting any levels of that liquidity. It will be up and down quarter-by-quarter, but if we have good investment opportunities then we'll want to deploy it there. We'd be certainly seeking investment opportunities that produce somewhere between 12% and 25% rates of return, and considering the economy and everything else, we will be looking for investments that we feel very good and very strong about. We will compare that with paying down more debt, and as John pointed out too, I suppose there is circumstances where we might also consider a stock buyback, but it's those first two areas that are going to capture most of our attention.
John Erickson - President, Structured Finance and CFO: I'll answer the question on the comment about the increase in interest and dividend income from Q4 to Q3. This difference is primarily the impact of nonaccrual changes in the third quarter and the fourth quarter. So, really in the third quarter, our interest and dividend income was negatively impacted by nonaccruals where we had, let say, in the third quarter, was about $13 million net negative impact relate to prior period income that was reserved for in Q3, and in the fourth quarter, we had about a $4 million positive impact related to non-accruals, related to a reduction in non-accruals during the quarter. So, once you factor in those two differences between Q3 and Q4 in the nonaccruals, there is really only a modest change in interest and dividend income quarter-over-quarter.
Steven Kwok - Keefe, Bruyette & Woods: Then just one other follow-up. I guess in comparing the investments that you exited, what type of yields are those generating?
John Erickson - President, Structured Finance and CFO: I think we'll have to calculate that to aggregate the yields on that.
Malon Wilkus - Chairman and CEO: Yes, we just don't have that in our fingertips. I am sorry.
John Erickson - President, Structured Finance and CFO: Pete will get back to you later today with that.
Operator: Troy Ward, Stifel, Nicolaus & Co.
Troy Ward - Stifel, Nicolaus & Co.: Could you talk just briefly about the level of repayments historically versus – and not necessarily guidance Mr. Malon, but the repayments that were coming, do you felt like, were you, because you were looking for that 0.6 debt-to-equity, were you pushing some of that repayments or was it all just coming in kind of voluntarily and so maybe we expect it could continue close to same level?
Malon Wilkus - Chairman and CEO: It's been something in the order of a year since we sold anything for any other reason other than we thought it was the right time to exit and the offers that we were getting were excellent. We really haven't -- out of the, I don't know, $2.5 billion of liquidity that we have received over the last two years, there is maybe $300 million or $400 million that was exited for any other reason than it was the right time in our view to exit the asset, and that's certainly was the case in the fourth quarter. The $474 million there, it was driven by – about 60% of it was driven by third parties who were making the decision to do change of control transaction or to just simply pay us off or recapitalize and pay us off, and about 33%, I believe, somewhere around there was in control investments where we were making the decision to exit, driven because we thought it was the right time to exit the asset. So, it wasn't in anyway driven by any desire to retire debt.
Troy Ward - Stifel, Nicolaus & Co.: Great. That's the color I was looking for. Then as you think about restarting the origination platform, thinking back several years ago, when you were very active in the origination market, we of course know how you restructured with different verticals and very focused on different industries. Can you speak to whether any of that has changed during the last couple of years as you moved headcount around and things like that? How does the origination platform restart and does it change at all?
Malon Wilkus - Chairman and CEO: It's certainly been downsized, and we have – we are no longer pursuing certain areas which I think I reviewed in some other presentations a while back. But in terms of our mezzanine – our private finance, mezzanine and buyout business, we have downsized the number of teams that pursue it and we have closed our LA office, and I suppose, you could also say, our San Francisco office. But outside of that, we have our capacity well intact, and we have quite a number of people capable of going after this business, and we think we're in very good shape to be able to get our fair share of the business and turning to slide 24, you could see we have 32 investment teams and 86 investments professionals able to pursue our private finance business. A few of those professionals are involved in other areas, but most of that is in our private finance business. Then we still have 19 person operations team. We think it's one of the largest in the industry with eight former CEOs and presidents that work full time on our portfolio. They work for us. They are our employees and they work for – they work on our portfolio companies, and we have one former COO as part of that group, and one former CFO as part of that group, and three supply chain management professionals.
Troy Ward - Stifel, Nicolaus & Co.: Just one last question, back to the dividend on slide 19, you talk about no taxable income, it's basically going to be able to be offset by losses. The first question is, are those losses that have already been incurred, or is the taxable income for 2011 losses still yet to be taken, and how should we look at the ability to do that? I think, there has been a lot of confusion over the last three or four years as that has become – seen more of an option to offset taxable income with realized losses, what level of realized losses can you offset taxable income with?
Malon Wilkus - Chairman and CEO: It depends on the characterization. Some of our realized losses, and particularly from our equity stage are capital, so it can't offset ordinary income but some of our realized losses on debt investments are ordinary, and they do offset, so one of the realizations we had this year was in Orchard brands, and that did take and offset a lot of our 2011 income, so our projection for the 2011 income takes into account that loss, and so I think, we're highly confident that we won't have taxable income for 2011 at this point.
Steven Kwok - Keefe, Bruyette & Woods: Does it have to be – does the realized loss in the particular investment have to be taken, the offset in the same year against taxable income, or can you carry-forward any realized losses in the past that count against future taxable income, I guess, is the question?
Malon Wilkus - Chairman and CEO: As a RIC, you cannot carry-forward realized losses, so it has to be in the current tax year. When you're talking about ordinary, the capital gains you can carry-forward, but it's not about eliminating the ordinary income. It has to be done on current tax year basis, so as a RIC you wouldn't want to end the year with a net operating loss situation because then you would actually lose the tax benefit of that.
Steven Kwok - Keefe, Bruyette & Woods: That's right, so you are incentivized to take the losses in the year where you have taxable income to offset it?
Malon Wilkus - Chairman and CEO: Well, you have to, I mean, in other words, you have certain rules about when to recognize these losses. You don't have a choice, and so as a RIC, what you wouldn't want to do is end the year with a NOL that you couldn't utilize.
Operator: Jasper Burch, Macquarie
Jasper Burch - Macquarie: I guess starting off with – I was wondering, if you guys could give us sort of what your outlook is on the M&A and IPO marketplace, and what your sort of pipeline line is on exits particularly on your equity investments?
Malon Wilkus - Chairman and CEO: The M&A market is definitely recovering slowly. It certainly in the fourth quarter had a boost because some folks were trying to get the transaction done before any potential changes in the tax code occurred. That probably pulled in some M&A volume from early 2011 into the fourth quarter of 2010. Nonetheless, we do think that M&A in the first quarter and in 2011 will be more robust than in 2010, but we don't expect to get our socks knocked off over it. The volumes will be better, but they won't be terrific in any way. Now keep in mind American Capital if we can show the exit slide, American Capital generated a lot of liquidity even during incredibly low levels of M&A, and we did it at generally good valuation, and by the way when we couldn't do it, exit valuations, we yanked the companies off the market, but we haven't given any guidance about whether – or in the number whether we have, and the number we may have of companies that are up for sale that we control, and then keep in mind about 65% of our liquidity over the last several years has been associated with companies we have no control over that is controlled by generally other private equity firms that are making their decisions about liquidity. So it is very hard for us to give any guidance of any kind about the kinds of liquidity that we might receive. All I can do is show you slide 10, show you that there has actually been a fairly highly consistent degree of liquidity from quarter-to-quarter, but nonetheless, it's still lumpy as you can see. I think it will be much better to think of it on an annual basis and we will still have substantial amount of liquidity we anticipate in 2011, but how much we're not giving any guidance on.
Jasper Burch - Macquarie: Then looking back at your debt capitalizations; obviously, you know, continuing to pay down some secured notes just because of the return on those. Looking at it sort of – has anything changed in terms of your desire to refinance out of those or possibly reduce some of your higher cost debt through CLO issuance and sort of your ability to and where you might expect market rates to be for various type of debt?
Malon Wilkus - Chairman and CEO: We are always evaluating it. I can assure you that we just are constantly on top of the pricing in the marketplace and whether or not a transaction would be beneficial to our shareholders and indeed lower our debt load and so forth. Taking fees into account, so far we haven't come to believe that that's the best way to go. It's not the lack of the opportunity. We probably could refinance, but certainly you don't want to do it unless it has a net positive benefit.
John Erickson - President, Structured Finance and CFO: Well, as you may recall, 530 main of the public notes or approximately 530 main have a yield maintenance provision that is intact until August of 2012, and that provision alone makes it not overly attractive to refinance, so we can actually just pay those down through realized proceeds ahead of that without having to pay that yield maintenance. But I think that refinancing would be after August of 2012, will be more likely when that yield maintenance provision is gone.
Jasper Burch - Macquarie: Then just back to possible securitizations, I know you guys have talked about it in the past, but could you just remind us, do you guys have to meet the diversification requirements to be able to pull off a CLO in the current environment and what your sort of outlook is there?
John Erickson - President, Structured Finance and CFO: Once again, because our balance sheet in encumbered both with our own BLT securitizations and then with the other secured deal, we don't have the assets available right now to do a securitization. We're really in the context of refinancing the balance sheet after August 2012. Then from that standpoint, we would just have to look at that point in time as to what our debt assets look like versus our needs. But we have that consideration in mind. We're actually looking to originate new debt assets. So, we are cognizant of the requirements that we would need in order securitize a pool of assets, and as we do origination, we do keep that in mind. Part of our goal has been to originate a pool of granular debt assets that would help us with the securitizations, but that's really going to take place over the next 18 to 24 months.
Operator: Dean Choksi, UBS.
Dean Choksi - UBS: In the past you've talked about for European Capital, the three reasons for the discount was the credit facility overhang, a discount to public comps, and then the I guess the bid that you had when you put it up for sale back (ACE) in '09, of the discount shrinking from 37% to 28%. Can you just help me understand, which was the biggest factor in driving that shrinkage of the discount rate?
John Erickson - President, Structured Finance and CFO: It's probably more detail than we want to give on any individual valuation. That's more than normally would even…
Malon Wilkus - Chairman and CEO: Honestly, I can't quite recall what was the biggest factor. So, we don't have it at our finger tips and it's probably too detailed for any portfolio company to get into.
Dean Choksi - UBS: Then kind of looking through your static pool data, for 2005, the equity interest in fair value went up from $822 million last quarter to $985 million. Were there any – can you just kind of comment like what drove that if…
John Erickson - President, Structured Finance and CFO: Yeah, 2005 static pool includes both European Capital and American Capital LLC, American Capital LLC is our asset manager, and so both European Capital and American Capital LLC were appreciating for the quarter. So, that was driving out the equity values there, and hopefully, we'll continue to see improvements in the future and the equity value there going up.
Dean Choksi - UBS: Then I guess kind of finally on the American Capital LLC, the $49 million increase in valuation, was that off an incremental equity in AUM and agency?
John Erickson - President, Structured Finance and CFO: Once again, that's a pretty detailed question for a single valuation. I think obviously that's a significant driver but – I don't have all the details in front of me, but I think that that's certainly a key driver there.
Dean Choksi - UBS: Thanks, and congrats on the 25-year anniversary.
Operator: Faye Elliott, Merrill Lynch.
Faye Elliott - Bank of America Merrill Lynch: Can you clarify your outlook for taxable earnings for 2011? Are you saying that because of carry-forward on the capital losses that there wouldn't be taxable earnings or are you saying that the NOI that you earn in the year would be offset with losses basically?
Malon Wilkus - Chairman and CEO: It's both of those. Any more capital gains we have we would expect to not have enough to absorb our capital loss carry-forward, and then also our NOI or the ordinary components of our income are being offset by losses that we've realized, so it's actually both of those.
Faye Elliott - Bank of America Merrill Lynch: Then I guess at what point are you thinking that you might run out of capital losses that you could carry-forward, and I guess the question then is really when do you expect that you might be able to restart a dividend?
Malon Wilkus - Chairman and CEO: That's difficult. We haven't projected that far. It's difficult enough just projecting the current year, so we haven't gone beyond that. Obviously the capital component depends a lot on how much do we end up appreciating the assets before we sell them, and so that's just very difficult to lookout. What I would say is we – and what we've said even going back to last year, we're focused in the near-term of restoring book value and growing the book. We are growing the book tax free, which I think all the shareholders are benefiting from, and the second phase of the recovery is really getting the dividend restarted. So, whether that's a year away, two years away, we're not as concerned about that. What we're focused on now is really restoring book value through good growth, and utilizing all of our tax attributes, and I think, all the shareholders are benefiting from us growing the book on a tax free basis.
Faye Elliott - Bank of America Merrill Lynch: Then the appreciation in the quarter, how much of that had to do with debt multiples, I guess that you – comparable multiples, and then how much of it had to do with tighter spreads, and I guess, I'm asking just so that we can project what may happen if spreads widen out again?
Malon Wilkus - Chairman and CEO: A very little of it, virtually none of it was associated with spread compression in the fourth quarter. About – I recall about 60% of it was associated with performance, EBITDA performance, improved EBITDA at the portfolio of companies, and about 40% associated with multiple expansion, but none associated with bond yield discount improvement.
Operator: Joel Halk, Wells Fargo.
Joel Halk - Wells Fargo: Can you guys remind us which areas you're no longer focused on in terms of origination?
Malon Wilkus - Chairman and CEO: Yeah, we had credit opportunities effort at one time, which we are no longer pursuing. We had an early stage technology investing that we're no longer pursuing. We had a second lien investing in – the trading – second lien trading and investing that's we are not pursuing. I'm not getting anything here. Financial services, well, and we may have – we would still consider financial service investment opportunities, but that's not something that we often see. But with respect to CMBS, we haven't been investing, though we still have a team that will continue to manage our CMBS portfolio.
John Erickson - President, Structured Finance and CFO: They are (may as well) seeking partners too to fund some opportunities.
Malon Wilkus - Chairman and CEO: Joel, is that covered?
Joel Halk - Wells Fargo: Yeah, and then, I guess, kind of the next question is, I mean, I'm sure you're not going to get too precise on the origination outlook for 2011, but you do have – you mentioned you have 32 investment teams, and I assume that a lot of the heavy lifting in terms of fixing the portfolio of companies, while it's not completely over a lot of the heavy lifting is done. So, I mean, what can we expect relative to repayments, in other words, we're going to be much balance sheet growth this year, or should we look for just churning the portfolio, in order words, redeploying the repayments or keeping the balance sheet constant?
Malon Wilkus - Chairman and CEO: We've already pointed out that we have our teams looking to originate new investment opportunities. We have at the investment community level approved several handfuls of opportunity. They have not materialized. In some cases, you kind of have to win twice on the sponsored finance business where we invest senior debt, sub-debt, and equity co-investments and another peoples' buyouts. The firms that we – the buyout firms that we team up with have to win the bid, and we have to win the bid to support the buyout firms. So, there is kind of a two step process. We've gotten to that first step on good number of occasions with buyout firms, where the private equity firms have not won the bidding. On the buyout business, we've just really have begun to pursue that, and it takes as you know, probably five months – five to six months to get from reviewing the opportunities to actually getting to closing at the earliest. So, that will be in the second half, generally. I think it's fair to say, generally, in the second half before we get to doing buyouts, and we'll have to see. The M&A volume is still extremely low relative to say 2007. We think we will get our fair share of that volume, but it all remains to be seen how big that volume that will actually be.
John Erickson - President, Structured Finance and CFO: One of the other factors really that's impacting is that, strategic buyers are well capitalized right now and taking the advantage of opportunities. So, if you look at (indiscernible) that we sold for example, I mean, that didn't go to the private equity community. It went to a strategic. And several of the transactions that Malon mentioned where we teamed up with a private equity sponsor, they loss their transaction to a strategic buyer, so that certainly has been impacting the M&A market at this point, but we are out there being active.
Joel Halk - Wells Fargo: On the $1.6 billion of private equity investments, can you guys give us a sense for what the multiple to EBITDA is? The industry kind of discloses it on a debt-to-EBITDA level, but it would be helpful to understand or appreciate maybe the upside relative to where you guys have the portfolio carried at?
John Erickson - President, Structured Finance and CFO: Our carrying mark is probably about eight times EBITDA.
Malon Wilkus - Chairman and CEO: We don't have that in front of us, so we maybe a little off, but I think it's around eight times.
Joel Halk - Wells Fargo: The last question I have is; your securitizations, where are they with respect to trapping cash, are there any releasing cash yet, and is the restricted cash in the balance sheet of $185 million, is that largely what that number is from?
John Erickson - President, Structured Finance and CFO: Yeah, it'd be largely securitizations, and with our static structures, we would expect that they're going to trap cash until they amortize it. The way they're amortizing, you would expect that they'll amortize over the next two years or so, so we're going to amortize those mostly down to the zero, and then we'll get the residual assets out of them after they're done amortizing.
Joel Halk - Wells Fargo: That's on an individual basis or are they across (indiscernible)?
John Erickson - President, Structured Finance and CFO: They are not across. They're all individual.
Joel Halk - Wells Fargo: So, you guys will be getting cash, when is the earliest you'll get cash do you think?
Malon Wilkus - Chairman and CEO: It's based on the underlying liquidity in the assets. So, I think you just have to make your own judgement based on the rate that they're paying down, but because it depends on access to liquidity, but if you kind of look at what we've amortized down this year and kind of project it out, you'll start to see that some of them will burn off in the next 12 to 24 months if you start looking securitization-by-securitization and how much has been amortized and how much is remaining.
Operator: John Hecht, JMP Securities.
John Hecht - JMP Securities: Thanks for taking my questions. I'm just trying to drill a little bit more into the contribution to the NAV increase from the private finance portfolio. If I take the $82 million of unrealized gains plus the $61 million of reversal of depreciation, you get around the $143 million. Can you guys tell us, is that predominately equity or is it senior debt or what is the composition of that increase there?
John Erickson - President, Structured Finance and CFO: We could have Pete get some more details on that and get you that after the call, but it should primarily be equity.
John Hecht - JMP Securities: Malon, you talked about, utilizing market rates or equity, private equity IRRs to discount your equity portfolio. Can you tell us what the range of that discounting is at this point and what has it been historically on a normal basis?
Malon Wilkus - Chairman and CEO: For equity in a leveraged buyout transaction, it would range – I think that in 2007 maybe it got as low as 18%, but it would range from 18% to 30% depending on the nature and the kind of risk profile of the investment. Today, it would probably be at the low end of being 20%, and still at the top end 30%. It hasn't changed very much. Historically, it hasn't moved a lot, the average moved some, but the whole range would still be quite (static). But today starting probably at around 20%. So, 20% compounded rates of returns at minimum, and 30% towards the top end, before we start to get it to venture capital arena.
John Hecht - JMP Securities: Understanding that the range has been fairly static, would we look to the average to improve assuming economy continues to improve as we all think it is?
Malon Wilkus - Chairman and CEO: Yeah. I mean, that's – no, I don't know, what you mean by that. The rate – that – you can think of it as a discount rate, that discount rate is going to be fairly consistent quarter after quarter. What will change is your forecast for the performance of the company. If the world gets ugly, your rates of return would go up, if it gets better, they might drop, but like I said even in an extremely robust M&A environment in 2007, equity and leverage buyouts were being priced at no lower really than 18% for the middle market. So for large corporate, for much larger say $1 billion corporate transactions, it might be priced down a little lower than that, but for the middle market, the lowest it would go is 18%, and today, I'd say the lowest part is around 20%.
John Hecht - JMP Securities: I guess, what I am getting at is, we just did quantify that a large portion of the private finance portfolio contribution to NAV was related to equities, and it seems like a lot of that is related to improvement in financial performance of the company or the investment level. I am wondering, is there a possibility that as the world improves, that discount rates come down a bit, which would also add to the contribution to NAV growth from equity, and I was just…
Malon Wilkus - Chairman and CEO: Yeah, that's a very good question, it's a very interesting question. Keep in mind, private equity firms have their hurdle rates on their carried interest, and unless they exceed their hurdle rates, their carried interest is going to be worthless. And the management companies of those partnerships live for the carried interest. So there they are going to be very reticent to elect to price a deal where they are going to get something below their hurdle rates. Now the hurdle rates tends to be 8% to 9% – 8%, 9% or 10%. So it could go down, but again if that margin over the hurdle rate up to something more like say 15% to 16% that really makes a lot of money for the management companies, and so they're going to be pretty reticent to let pricing go to – for returns to go I would say much lower than 18% pricing a deal going in.
John Erickson - President, Structured Finance and CFO: I think, what can happen though is their confidence level of future performance could be higher, therefore the way that gets reflected, they are still generating a 20% return, but the multiple on the current earnings could go up. So, if you look at like where the portfolio is currently value, if we arrived at roughly eight times, could that multiple expand, yes, and I think, what's driving it is, as Malon said, it's not necessarily they are changing the discount rate, but the confidence level they put on the future performance of a company goes up, therefore they still get the same return, but they can pay a higher multiple on the current earnings.
Malon Wilkus - Chairman and CEO: Yeah, and actually what I was discussing is only about 30% of the market that's financial buyers. You still have strategic buyers out there, and strategics could indeed and maybe they are so plush with cash that they could indeed and they may very well drive prices up so much that we could price our equity at discounts that were more than say 20% – or less I should say, less than 20% and that would be very interesting. I am not counting on that, and you all – I don't think are – the market should count on that, but you could come up with scenarios where it happened, if we really got the world economy going back again and there is still as much capital on the sidelines as there is today and that capital continues to grow as it would in a improving economy you may very well indeed bring those discount rates down for private equity, and if so we will get the benefit of that. We have the largest portfolio of equity investments in the (BEC) sector.
John Erickson - President, Structured Finance and CFO: Obviously, the other factor that comes to play, as Malon say, they're targeting 20% return, but when leverage levels goes up and cost of leverage goes down that 20% levered return in effect you can pay a higher price for it, so that's the other thing that could drive multiples up as if the pricing of senior debt in the middle market came down and the leverage levels went up that will impact ultimately the multiple you pay for a company.
Malon Wilkus - Chairman and CEO: We had said in the past, and I believe, it's still true though I've not – I didn't check it for the fourth quarter, but I believe, it's still true that over the last two years, we – every one of our control investment was exited at a higher multiple than our entry multiple. Now that does seem to be pretty amazing considering that we went through the worst recessions of the depression, and there was liquidity crisis, but the volume of M&A has come down so much that there wasn't good opportunities out there for people. So, when American Capital thought that it was time to sell a Company that the growth rate for that Company was coming down, and it was – so now is a better time to get liquidity in it, and we put it up for sale, we ended up getting tremendous levels of interest for our companies, and the result was that we were able to exit companies at very good values. So, even companies where we paid what seemed like high multiples, pre-recession high multiples, we've been able to exit many of them at equal to or better multiples than what was thought to be particularly high in the pre-recession period. So, if you go back to our portfolio or our static pool IRRs on slide 15, we have done very well on all but the 2007 static pool, and we still have half of that pool remaining and we're going to work very hard to turn that IRR around.
John Hecht - JMP Securities: Thanks for the color. It's very interesting.
Malon Wilkus - Chairman and CEO: Yeah, well you asked an interesting question, I'm afraid though, we'll all have to wait and see how that turns out.
Operator: This does conclude today's Q&A portion for today's call. I would now like to turn the call back over Mr. Wilkus for closing remarks.
Malon Wilkus - Chairman and CEO: Thank you, Sarah, and thanks everyone for joining us. We do look forward to having another discussion with you all at the end of this first quarter, and in the mean time, I hope you have a good time and good day. Take care now. Bye, bye.
Operator: Thank you for participating in today conference call. Investor relations may be contacted at 301-951-5917. Again that's 301-951-5917, or by email at firstname.lastname@example.org. You may disconnect your lines at this time, and have a wonderful day.