At this time, I would like to welcome everyone to the Triangle Capital Corporation's conference call for the quarter and year ended December 31st, 2017. All participants are in a listen-only mode. A question and answer session will follow the company's formal remarks. If anyone should require assistance during the conference, please press star then zero, and an operator will assist you. Today's call is being recorded and a replay will be available approximately two hours after the conclusion of the call on the company's website at www.tcap.com under the investor relations section. The hosts for today's call are Triangle Capital Corporation's Chairman and Chief Executive Officer, Ashton Poole, and Chief Financial Officer, Steven Lilly. I will now turn the call over to Tommy Moses, Vice President and Treasurer, for the necessary safe harbors disclosures.
Thank you, Bridget. Good morning, everyone. Triangle Capital Corporation issued a press release yesterday with details of the company's fourth quarter and full year 2017 financial and operating results. A copy of the press release is available on our website. Please note that this call contains forward-looking statements that provide other than historical information, including statements regarding our goals, beliefs, strategies, future operating results, and cash flows. Although we believe these statements are reasonable, actual results could differ materially from those projected in forward-looking statements. These statements are based on various underlying assumptions and are subject to numerous uncertainties and risks, including those disclosed under the sections titled Risk Factors and Forward-Looking Statements in our annual report on Form 10-K for the fiscal year ended December 31st, 2017, as filed with the Securities and Exchange Commission. TCAP undertakes no obligation to update or revise any forward-looking statements.
At this time, I'd like to turn the call over to Ashton.
Thanks, Tommy. Good morning, everyone. Thank you for joining us on today's earnings call. Before Steven and I provide you with some color regarding our financial and operating results, let me first say that the evaluation of certain strategic alternatives that our board is considering is still ongoing. As a result, while we look forward to sharing with you the results of the process once it has concluded, for obvious reasons relating both to preserving the integrity and confidentiality of the process, we will not be making any comments nor answering any questions regarding the strategic process on this earnings call. With that introduction, let me turn to a few high-level comments regarding our fourth quarter and full year 2017 results. After which, I will provide some color on our investment portfolio.
During the fourth quarter of 2017, we generated total investment income of $31.7 million, which was comprised of $27 million of revenue associated with recurring portfolio company interest and fee income and $4.7 million of revenue associated with non-recurring fees and dividends. The majority of our non-recurring fee income during the quarter was associated with the prepayment of loans across our investment portfolio, which totaled three and a half million. Our NAV on a per share basis increased by $0.23 from $13.20 to $13.43, relating primarily to unrealized appreciation on our current portfolio of $0.11 per share and overearning our dividend by $0.08 per share. From an investment standpoint, during the fourth quarter, we originated $92.2 million of total investments, of which $74.2 million were new investments and $18 million were follow-on investments.
Consistent with our TCAP 2.0 investment strategy, our new investments were comprised of $42.5 million in unitranche investments, $29 million in second lien investments, $500,000 in mezzanine investments, and $2.2 million in equity investments. During the fourth quarter, we experienced $171.9 million in repayments and sale proceeds, resulting in a net portfolio decline of $79.7 million. For the full year 2017, we originated $483.7 million in total investments, of which $408.9 million were new investments. The weighted average interest rate associated with all our new debt investments was 9.9%. We experienced $403.7 million in repayments and sale proceeds, resulting in net portfolio growth of $80 million.
Turning to our investment portfolio, as of December 31, 2017, we had investments in 89 portfolio companies with an aggregate cost of $1.12 billion and total fair value of $1.02 billion. The weighted average yield on our outstanding debt investments was approximately 11%, compared to 11.7% as of December 31, 2016. The weighted average yield on all our outstanding investments, excluding non-accrual debt investments, was approximately 9.6%, compared to 10.2% as of December 31, 2016. During 2017, we had 21 portfolio company loans repaid at par totaling $332.5 million, and we received normal principal repayments, partial loan prepayments, and PIK interest repayments totaling $54.5 million. We received proceeds related to the sales of certain equity securities totaling $29.6 million and recognized net realized gains on such sales totaling $20.9 million.
We recognized $72.3 million of realized losses related to the restructuring, Or sale of our investments in certain portfolio companies, including CRS Reprocessing, Capital Contractors, DCWV Acquisition Corporation, Dialog Direct, and Waste Recyclers Holdings. As of December 31, 2017, the cost basis of our non-accrual assets was $120.1 million and totaled 10.7% of our investment portfolio. And the fair value of our non-accrual assets was $15.8 million and totaled 1.6% of our portfolio on a fair value basis. From a credit quality standpoint, we did not place any additional accounts on non-accrual status during the fourth quarter of 2017. During the fourth quarter, we exited our investments in Dialog Direct and DPII Holdings, and we also restructured our investment in CRS Reprocessing. Of the eight remaining non-accruals, four are currently valued at zero, and one investment, GST AutoLeather, Inc., has a nominal value based on recovery expectations.
Four of these accounts experienced meaningful depreciation during the fourth quarter from a valuation standpoint. In each case, the decline related specifically to company performance. Finally, as we take steps to reinvest the $171.9 million in portfolio company repayments and sale proceeds we experienced during the fourth quarter, we expect our first quarter 2018 NII per share will be slightly below our $0.30 per share dividend. With that, I'll turn the call over to Steven.
Thanks, Ashton. As Ashton previously mentioned, during the fourth quarter, we generated total investment income of $31.7 million. This level of investment income compares to total investment income of $29.9 million during the third quarter. The increase in our quarter-over-quarter total investment income resulted primarily from $4.7 million of non-recurring dividend and fee income during the fourth quarter as compared to non-recurring dividend and fee income during the third quarter of 2017 of $2.1 million, representing an increase of $2.6 million during the fourth. This increase was offset by a decrease in portfolio debt investments from the third quarter to the fourth quarter. During the fourth quarter, interest expense and other financing fees totaled $7.8 million as compared to $7.4 million during the third quarter. Our compensation expenses totaled $4 million during the fourth quarter as compared to $4.3 million during the third quarter of 2017.
The quarter-to-quarter decrease in compensation expenses was primarily related to a decrease in discretionary compensation expenses. G&A expenses totaled $2 million during the fourth quarter of 2017 as compared to $1 million during the third quarter of 2017. The increase primarily related to increased legal and other professional service fees, including public company expenses. From an efficiency ratio standpoint, with efficiency ratio being defined as total compensation and G&A expenses divided by total investment income, our fourth quarter efficiency ratio was 18.8% compared to 17.9% during the third quarter. Net investment income during the fourth quarter was $17.9 million or $0.38 per share as compared to $17.2 million for $0.36 per share during the third quarter.
During the fourth quarter, we recognized net realized losses totaling $34.6 million, relating primarily to $25.3 million of losses on the restructuring of our investments in CRS Reprocessing LLC, and $10.9 million of losses on the sales of our investments in Dialog Direct Inc. and DPII Holdings LLC. From a valuation perspective, we recorded net pretax unrealized appreciation on our current investment portfolio totaling $5.3 million for the quarter, largely driven by $21.5 million of write-ups in 11 strong performing equity investments, including write-ups in ND Products Inc., Rotolo Consultants Inc., HALO Branded Solutions Inc., United Biologics LLC, and Noma Corp LLC. In addition, we had debt write-ups of $5.1 million associated with the 2018 repayments of All Metals Holding LLC, Noma Corp LLC, and United Biologics LLC.
These write-ups were partially offset by $15.6 million in write-downs associated with our non-accrual debt investments and $5.7 million in write-downs associated with certain debt investments, including PCX Aerostructures LLC, Passport Food Group, Technology Crops LLC, HTC Borrower LLC, and Lakeview Health Holdings Inc. As a result of these events, our net increase in net assets resulting from operations during the fourth quarter total $23.7 million. On a per share basis, our net increase in net assets resulting from operations during the fourth quarter was $0.50 per share. Our total net assets were $641.3 million as of December 31, 2017, and our net asset value per share at December 31, 2017, was $13.43 as compared to $13.20 as of September 30, 2017, and $15.13 as of December 31, 2016.
For the full year ended December 31, 2017, total investment income was $123 million as compared to $113.7 million of total investment income for the year ended December 31, 2016. The change in investment income was primarily attributed to an increase in our overall investment portfolio and a $2.8 million increase in non-recurring fee and dividend income. These events were partially offset by a decrease in the weighted average yield on our debt investments from 2016 to 2017, and a decrease in investment income relating to non-accrual assets.
During 2017, interest expense and other debt financing fees totaled $29.3 million as compared to $26.7 million for 2016, with the increase relating to additional borrowings under our senior secured credit facility, a higher overall interest rate associated with the increase in LIBOR during the year, and an amendment to our senior secured credit facility, which extended the maturity to April 30, 2022. For the year ended December 31, 2017, compensation expenses totaled $16.1 million as compared to $23.7 million for the year ended December 31, 2016. Compensation expenses for the year ended December 31, 2016 include previously announced one-time items totaling $7 million relating to the retirement of the company's former CEO and the resignation of the company's former CIO. In addition to the impact in 2016 of the one-time charges noted above, 2017 compensation expenses were $600,000 lower.
Excuse me, 2017 compensation expenses were $600,000 lower than 2016, primarily related to lower discretionary compensation. For the year ended December 31, 2017, general administrative expenses totaled $5.4 million as compared to $4.4 million for the year ended December 31, 2016. For the year ended December 31, 2017, our efficiency ratio was 17.5%, which we believe continues to be one of the lowest efficiency ratios in the BDC industry. Our 2017 net investment income was $72.2 million, or $1.55 per share, as compared to $58.9 million, or $1.62 per share during the year ended December 31, 2016. Net investment income for 2016 included the $7 million of one-time compensation expenses that I just mentioned, which had an impact of $0.19 per share. During the year ended 2017, we recognized net investment losses totaling $51.6 million. Also, during 2017, we recorded net unrealized depreciation totaling $48.4 million.
As a result of these events, our net decrease in net assets resulting from operations during the year ended December 31, 2017, totaled $28.7 million. On a per share basis, our net decrease in net assets resulting from operations during 2017 was $0.62 per share. Finally, from a liquidity and capital resources perspective, as of December 31, 2017, our current liquidity totaled approximately $545 million, consisting of a combination of cash on hand, available bank borrowings, and SBA debentures. With that, operator, we will open the call to questions.
Ladies and gentlemen, if you have a question at this time, please press star and the number one on your touch-tone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Our first question comes from the line of Ryan Lynch with KBW. Your line is open.
Good morning. I was just curious, have you guys been seeing any pushback from potential borrowers that are looking for capital from TCAP, given just the uncertainty surrounding the company's future, given the strategic review?
Ryan, good morning. Thank you for your message. Look, we have been and continue to be active in the market. Thanks to our longstanding history as a company and the longevity of our senior coverage officers here, we have extremely good relationships in the financial sponsor community, and those relationships continue and our dialogue and our flow continues.
Okay. From the G&A side, obviously G&A bumped up this quarter, given the things that are going on in the company. As that process continues in the first quarter, should we expect G&A to stay at this $2 million-ish type level versus kind of the $1.1 million you guys experienced in Q1 through Q3 of 2017?
Ryan, it's Steven. My personal opinion would be it's probably not as high as the $2 million or the full $1 million difference, it's probably not equal to where we were last year either. We will have certain other expenses, I would imagine, that will flow through. I think in the fourth quarter, you saw more of those as we were gearing up for things, so to speak.
Okay. I believe you guys mentioned prepared remarks, $21.5 million of appreciation due to 11 stronger performing equity investments. I was just curious, of the $21.5 million of write-ups in these equity investments Was any of that driven by favorable changes due to tax reform getting in place, or are these just companies that are just having stronger underlying fundamental trends?
Ryan, in the equity write-ups this quarter, there was a significant grouping that accounted for equity changes over $1 million in terms of write-ups, and that totaled about $0.45 per share. That was about 11 companies, and seven out of those 11 companies are in active M&A processes. To answer your question, the write-ups were primarily driven more by M&A-related processes as opposed to tax changes.
Okay. That's all for me. Thank you for taking my questions.
Thanks, Ryan.
Our next question comes from the line of Chris York with JMP Securities. Your line is open.
Good morning, guys, and thanks for taking my questions. Ryan touched on three of them, so I'll switch to a couple of others. I believe your senior loan investment at Passport was originated about a year ago under the Triangle 2.0 strategy. Yet the valuation of the mark has declined over the last two quarters. Could you help me understand or describe some of the inputs driving the deterioration and what was not anticipated at underwriting?
Chris, good morning. Just to recount for everyone, Passport Foods is a manufacturer of Asian and other ethnic food products, and they sell primarily through the food service and retail club channels. This quarter, the senior debt investment is valued at 85% of cost versus 90% of cost last quarter. The primary driver of the decline in performance was the unexpected loss in Q3 of the company's key product line, and that loss resulted in lower sales and contributed to the performance decline. Since that time, they have revamped their business plan. They have a pipeline that's robust for new customers and products, that shift is going to take a little bit of time in order to rebuild the lost sales related to the key product line that was lost. We still believe in the company long term. We believe operational performance will improve.
The write-down this quarter was based on the slight delay in the expected improved performance.
Got it. Thanks, Ashton. That color's helpful. Last question from me. Over the last couple of years, you have received management and other fees from SRC. Do you expect to receive these fees going forward as a result of the SPV with CRS?
Chris, it's Steven. At this point, there's not anything that we see with the company that would change that view. Obviously, your question is very future looking, hope you will forgive us if we say we can't foretell what may happen in ultimate quarters. Right now, that's our consistent view.
Great. Thanks, Steven. Thanks, guys.
Thank you so much.
Thank you.
Our next question is from the line of Robert Dodd with Raymond James. Your line is open.
Hi, guys. First one you're probably not going to want to answer about the process. You did declare or schedule your annual general meeting for 2nd of May. Do you have any reasonable expectation that you're going to be able to give shareholders a more thorough update on the strategic review process by that date?
Robert, it's Steven. As I'm sure you know and appreciate, 40 Act companies have to declare their annual meeting within a certain number of days from year-end, that's the time we've always had our meeting. In the normal course, which is how the company, per Ashton's comments earlier, is operating, have scheduled that meeting, we'll look forward to hosting that meeting. As we said in prepared remarks, we can't make any comment on the strategic process. When there's something to announce at the conclusion of it, we will announce what we can.
Got it. I appreciate that. It was worth a shot. On the portfolio, obviously, so markdowns on the non-accruals, I don't think any great shocks there. Two that you mentioned on markdowns on the non-accrual assets of that $5.7, some of that was PCX, some of that was Technology Crops, a couple of others. Those two were already what I would lump in. They were marked below 80% of cost last quarter. Obviously, they've come down a little bit more this quarter. When you talked about the non-accruals, obviously the marks for the non-accruals were company-specific issues. The PCX, Technology Crops, they were already having issues. Have those issues deteriorated even further? Any visibility on a probability that those issues could continue to accelerate and potentially become an incremental non-accrual?
Robert, it's Ashton. Let me start with PCX quickly. Just as a quick reminder, they manufacture close-tolerance aerospace components that are used in military and civilian aircraft. This is a 2014 investment for us. It's valued at 72% this quarter versus 79% last quarter. The one thing of note here is that the company completed a debt recap in the first quarter of 2018. Fundamentals behind the company are actually much improved. The primary driver of the write-down this quarter was an adjustment of our interest rate as part of an all-encompassing recap of the company. It was a reduction in our interest rate from 10.5 down to 6, that was the primary driver of the write-down this quarter.
I think from where we sit, we feel very encouraged by the progress of the company and the backlog of the company and the overall environment for defense spending. I think, again, the key driver of the write-down was the interest rate reduction.
Got it. Go ahead, sorry.
I was just going to say on Technology Crops that you mentioned as well, as you know, that was a 2009 investment for us. Last quarter, I think was valued at 77% of cost. This quarter, 70% of cost. It's a write-down of about $800,000. Based on a restructuring at the company, we amended our sub-debt terms, and we have reduced our, I think our rate was 12 and 5% PIK, 12% cash, to just simply 12% cash. Here again, there's no real change in the operations of the company. It's similar to PCX. Given the lower economics we are receiving, that mathematically produced a write-down.
Got it. One last one, if I can. Obviously, Ashton, you addressed it in response to kind of an earlier question that your relationships with the private equity community continue. When we look at that, if any, how much of the lower level of origination in the fourth quarter could you allocate? Obviously, it's a competitive market and quarters are choppy. Is there any allocation of that that could be pointed to say as a result of, for lack of a better term, management distraction. You've had another large project with the review for everybody ongoing during that process. Has that reduced the amount of time available for management and originators to get out and make calls, press the flesh, so to speak, and originate deals?
Robert, just with respect to, I think you said a lower level of originations in Q4 2017. I would just point out, if you did say that, I guess I would respectfully disagree with that characterization. At $92 million, that's very consistent with previous quarters, in which the typical level of origination, that's very much in line with how we've originated in the past. I'd say we're very proud of the level of originations that we had in the quarter, and it's again, a reflection of our relationships. Certainly, the strategic process has taken management time, but we've been very disciplined and focused on our outreach and our origination efforts. Again, I would just say that our touch points, our flow and our level of dialogue with our financial sponsor community has never been stronger.
As you can imagine, we're being very proactive in reaching out to our sponsor network and ensuring that we stay in their flow, and we stay top of mind.
Got it. Thank you.
Yep. Thanks, Robert.
Our next question comes from the line of Jonathan Bock with Wells Fargo Securities. Your line is open.
Good morning. Joe Mazzoli filling in for Jonathan Bock. The first question is a two-part question. We see about $191 million of cash on the balance sheet as of 12/31. Is this deleveraging part of the strategic review in terms of just increasing optionality? Also, I guess we would assume that you'd use this cash to pay down the credit facility?
Joe, it's Steven. Thank you for your question. The amount of cash we have on the balance sheet at year-end is in no way related to anything particular to the board's review of strategic alternatives. It's just the timing difference that sometimes is associated when you have more repayments than investments. To the part of your question of why the senior credit facility hasn't been paid down with that cash is, I'm sure you can appreciate with your knowledge of the company, that a majority of this cash is held at our SBIC funds. Less of it is held at the, what we would call the holding company, where the credit facility legally is. The credit facility with the unused fee that, as I'm sure you're aware, the credit facility has in it, even if we were to pay down, effectively the mathematical break even.
We technically could pay it down a little more, but it wouldn't necessarily be to our benefit given the terms of it. The holding company does have a little bit more cash, but it's not considerably more. Most of the cash is held in funds. Hope that helps.
That does. That totally makes sense. Thank you. Thank you, Steven. The next question is, the stock is trading at about 0.8 times price to net asset value. Triangle Capital has historically certainly managed the balance sheet in ways that have been very accretive for shareholders by issuing above net asset value. Stock repurchases at these levels would, of course, also be highly accretive to net asset value. Now, we understand that the effective shareholder-owned management contract becomes less valuable if there were less assets, but for more traditional M&A, higher NAV per share through repurchases, that would be a higher purchase price. What are your thoughts on stock repurchases at this point? Of course, there's a number of different scenarios under the strategic review where stock repurchases could add value.
Joe, appreciate your question. While not differing with anything from a mathematical computation standpoint that you might have raised, it's a fairly simple matter from a legal standpoint. We discussed this a bit on the third quarter call, that our board is involved with, and therefore the company, with review of strategic alternatives. For the company to be in the market buying its own stock, while at the same time it is perhaps aware of material non-public information, I'm sure you can understand the conflict that that would create. That's not something that we, as a management team, nor our board would be comfortable with. Everything you allude to, frankly, is just not possible right now from our standpoint. Any of that type of activity would not occur until after the board has concluded its review of strategic alternatives.
Understand. That's helpful. Just one final question. The combined fair value of CRS increased from about $8 million to $20 million. It looks like this investment was restructured. I'm just curious, what led to the fair value improvement?
It's really two things. Number 1, during the fourth quarter, there were incremental investments made, that accounts for a portion of the change. Number 2, when CRS emerged from bankruptcy, we had a third-party valuation firm do a fresh start accounting analysis, which was helpful to our board in establishing valuation of that single asset. During the fourth quarter, CRS Reprocessing LLC was merged with SRC, another portfolio company. What you're seeing in the fourth quarter is the combination of both of those values.
That's it for me. Thank you for taking my questions.
You're welcome.
Our next question comes from the line of Christopher Testa with National Securities. Your line is open.
Hi, good morning. Thank you for taking my questions. Just curious, how much of the problem assets, meaning anything that's been written off as well as the current non-accruals, are within the SBIC?
Chris, it's Steven, I don't have that breakdown in front of me, we can follow up after the call with you if you'd like.
Okay, that's fair. Just touching on Joe's question about your leverage position a little bit. I'm just curious, obviously, with you guys below book and not able to really issue equity, how comfortable you would be in the current environment taking up total debt to equity?
Well, given the amount of cash we're sitting on right now, I don't think we're in the market to do anything from a leverage standpoint. We obviously, as you know, have, from the prepared remarks, well north of $500 million of liquidity. Liquidity's not really an issue. We've got committed debt facility, a senior credit facility. We have the third SBIC license and a good partnership with the SBA. We're really in good stead there right now.
Okay. Got it. Can you quantify how much of TCAP 1.0 at cost is remaining? Of this, how much has already been written off?
Chris, Ashton, I was just saying, we don't have that page in front of us. We, again, like your other question, we can follow up with you offline. I think a little more than 50% of the portfolio has shifted, if you will, into what we refer to as TCAP 2.0. Again, to give you the exact breakdown, we'll follow up offline.
Okay, no problem. Last one for me, just given you guys obviously have a lot of subordinated second lien on the book. With tax reform, how much of your portfolio is leveraged enough that the loss of interest deductibility will offset any decrease in rates where we could see cash taxes actually increase?
Chris, given the recent passage of the tax law and with our individual portfolio companies, that analysis has not been completed. From a total standpoint of the portfolio, we don't believe there's based on where our leverage point is, regardless of whether we're a unitranche, a second lien, or a mezzanine position, we don't perceive that to be really much of a change when you net it all out.
Okay, got it. That's all for me. Thank you for taking my questions.
Sure. Thank you.
Thanks, Chris.
Our next question comes from the line of Mark Drucker with Jefferies. Your line is open.
Good morning. Thank you. Any additional color you can share on new issued loan yields by category?
Mark, I'm sorry, your question broke up on the line there.
Oh, okay. No problem. You shared 9.9% on new debt investments, the average yield. I was wondering, can you share anything, in addition to that, in terms of yields by category?
Well, investments made during the quarter, you're just asking, what do they range between? Are you asking what type of securities we're invested in, if they're first lien or second lien, or?
Oh, no. The yield specifically. By category, what were the yields in relation to where the portfolio stands today during the quarter?
I think very consistent with the overall portfolio.
I mean, sorry, the fourth quarter is.
Yeah. Just typical, I mean, in general, Mark, to answer your question for the Q4 investments, the unitranche investments would've been made around the, call it, 7.5%-8.5% kind of debt way, if you will. The second liens would've been in the, call it, 8%-10% range for those investments. Does that help?
Yes, it does. Thank you.
Okay.
Last question from me. Any insight you can share on prepayment and repayment trends over the next couple of quarters? I know it's difficult to predict.
It's impossible to predict, unfortunately. We had elevated repayments in the fourth quarter. If you were to go back and look at the company on a quarter-to-quarter basis, you would see that it really does jump. It jumps around. The last two quarters of 2017, we were, in the third quarter, $131 million or so in repayments, and closer to about $143 million or so, including equity realizations. In the second quarter, we were at $35 million. In the first quarter, we were at between $53 million and $54 million. As you know, we announced, or we said in the prepared remarks, we were $171.9 million in the fourth quarter. It really does sort of go in waves, and you just can't really predict one way or the other, unfortunately.
Got it. Thank you.
Thank you. Well, we're showing no further questions. Bridget, thank you for the call, and we will conclude at this time.
Ladies and gentlemen, this does conclude the program. You may now disconnect. Everyone, have a wonderful day.