Filed by Crescent Capital BDC, Inc.
pursuant to Rule 425 under the Securities Act of 1933
and deemed filed under Rule 14a-12 of the Securities
Exchange Act of 1934
Subject Company: Alcentra Capital
Corporation
Commission File No. 814-01064
C O R P O R A T E P A R T I C I P A N T S
Eunice Han,
ADDO Investor Relations
Jason Breaux,
Chief
Executive Officer, Crescent Capital BDC
Mike Wilhelms,
Chief Financial Officer, Crescent Capital BDC
Suhail Shaikh,
Chief Executive Officer, Alcentra Capital Corporation
Ellida McMillan,
Chief Financial Officer and Chief Operating Officer, Alcentra Capital Corporation
C O N F E R E N C E C A L L P A R T I C I P A N T S
Robert Dodd,
Raymond James
Ryan Lynch,
KBW
P R E S E N T A T I O N
Operator:
Greetings and welcome to the Crescent Capital BDC to Acquire Alcentra Capital Corporation conference call. At this time all participants are in a
listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require Operator assistance during the conference, please press star, zero on your telephone keypad. As a reminder, this conference is being
recorded.
It is now my pleasure to introduce your host Eunice Han with ADDO Investor Relations. Please go ahead.
Eunice Han:
Good afternoon and thank you for joining us to
discuss Crescent Capital BDCs planned acquisition of Alcentra Capital Corporation. Speaking on the call today from Crescent Capital BDC will be Jason Breaux, Chief Executive Officer, and Mike Wilhelms, Chief Financial Officer. From Alcentra
Capital Corporation, we have Suhail Shaikh, Chief Executive Officer. We also have other members of the respective management teams available for the
question-and-answer
session.
In addition to our joint press release and the
8-K
that we filed this morning with the SEC,
weve posted a supplementary presentation on the transaction, which you can find on both companies investor websites at crescentbdc.com and alcentracapital.com, respectively, as well as on the SECs website at SEC.gov.
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The joint press release announcing the transaction includes important disclosures that apply to this call.
Please also note this call does not constitute an offer to sell or buy or the solicitation of any offer to buy or sell any securities, nor shall there
be any sale of securities in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities law of any such jurisdiction. No offering of securities shall be made except by
means of a prospectus meeting the requirements of Section 10 of the Securities Act of 1933.
Before we begin todays call, Id like
to remind you that certain comments made during the course of this conference call and webcast contain forward-looking statements. All statements, other than historical facts, including statements regarding the expected timing of the closing of the
proposed transaction; the ability of the parties to complete the proposed transaction considering the various closing conditions; the expected benefits of the proposed transaction; the competitive ability, position, growth and trading levels of the
combined company following completion of the proposed transaction, and any assumptions underlying any of the foregoing are considered forward-looking statements. Crescent Capital BDCs and Alcentra Capital Corporations actual results
could differ materially from those expressed or implied in such forward-looking statements for any reason, including those listed in the companies respective SEC filings. Crescent Capital BDC and Alcentra Capital Corporation assume no
obligation to update any such forward-looking statements post todays call. Please also note that past performance is not a guarantee of future results.
During this conference call, we will also refer to certain
non-GAAP
financial measures. As these measures may
not be comparable to similarly titled measures used by other companies, you should not consider them in isolation from or as a substitute for measures prepared in accordance with GAAP.
Ill now turn the call over to Crescent Capital BDCs CEO, Jason Breaux.
Jason Breaux:
Thank you Eunice, and thank you all for
joining us today. This is a very exciting time for both Crescent and Alcentra Capital. Just this morning, we jointly announced that Crescent BDC has entered into a Definitive Merger Agreement to purchase Alcentra Capital Corporation. This
transformational combination establishes a Top 15, externally managed, publicly traded BDC, which we estimate at close will have over $500 million in net assets and a combined portfolio in excess of $900 million.
Through this merger, Crescent BDC will significantly increase its market presence, improve economies of scale, and enhance asset diversification, while
still staying true to our core strategy of maintaining a high-quality, senior secured, first lien-focused portfolio. Alcentra Capital shareholders will also see immediate benefits from the transaction ranging from higher dividend yields to a more
diversified portfolio.
With the unanimous approval of both companies Boards of Directors, including the independent directors of each, we
anticipate that this merger will close in the fourth quarter, subject to shareholder and regulatory approvals, as well as other customary closing conditions. At that point, shares of Crescent BDC common stock are expected to begin trading on the
NASDAQ under the ticker symbol CCAP.
By way of background, I have been with Crescent Capital Group for nearly two decades in various senior
investment roles and have been CEO of our BDC since it was established in 2015. Over the past four-plus years, weve developed what we believe is a
best-in-class
privately held BDC. Now, we are committed to launching a premier publicly-traded version.
Ill begin todays call by providing a brief
introduction on Crescent Capital, our firm investment strategy
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and the transaction rationale from Crescent BDCs perspective. Ill then turn the call over to our CFO, Mike Wilhelms, to discuss the transaction details and the pro forma combined
portfolio. Suhail Shaikh, CEO of Alcentra Capital, will then discuss the strategic merits and deal rationale for Alcentra Capital shareholders. Ill return to provide a few closing remarks before opening the call to your questions. So,
lets begin.
For those Alcentra Capital shareholders listening into todays call who may be new to Crescent BDC, we welcome you to
Crescent and look forward to working together. Crescent BDC is part of the Crescent Capital Group platform, an independent, employee-owned alternative credit manager with over 170 employees, including 80 investment professionals across the U.S. and
Europe managing more than $25 billion in assets. For nearly 30 years, Crescent Capital Group has been investing in senior secured loans, high yield bonds, mezzanine debt and distressed debt securities. We are one of the oldest private credit
managers with a track record dating back to 1992.
We have differentiated ourselves by strategically growing our asset base across multiple economic
and business cycles to be more effective and relevant to our clients, including our investors as well as the private equity community whose companies we finance. Crescent Capital Group seeks to deliver attractive returns with less volatility, lower
default rates and higher recoveries than the market average. Our disciplined investment approach based on current income and principal preservation, our proprietary research platform, and our origination capabilities have resulted in many
longstanding investor and sponsor relationships. We believe that Alcentra Capital shareholders will benefit from these strong relationships due to the increased investment opportunities provided by our merger.
Crescent Capital Groups market presence and origination capabilities are apparent from our track record. In our private credit business,
weve reviewed over 10,000 transactions and provided debt financing to over 200 unique private equity sponsors, many of which are repeat clients. Our team has invested more than $18 billion in nearly 400 private credit transactions over
nearly 30 years.
Now, turning back to Crescent BDC. Our BDC has broad access to Crescent Capital Groups private credit expertise and
leverages the Crescent Capital Group platform to grow the portfolio. Crescent BDC has exemptive relief from the SEC to
co-invest
alongside Crescents private credit strategies, thus providing our BDC
access to a large variety of opportunities based on Crescents long-established private credit origination and underwriting capabilities. With the addition of Alcentra Capital, we can provide our clients and Alcentra Capitals shareholders
even further opportunities for income generation and capital appreciation.
The broader Crescent Capital Group platform has historically focused on
serving large institutional clients, with 95% of the investor base comprised of institutions. Through this transaction, public equity investors will have access to Crescent Capitals institutional-caliber private credit expertise for the very
first time. As a publicly traded entity, our current shareholders will be provided with the opportunity for liquidity, as well as increased scale and further portfolio diversification. With the larger combined portfolio, we will benefit from
economies of scale as we leverage our cost base.
Furthermore, our increased size will provide us improved access to the capital markets for growth
and financing. Importantly, we will offer what we believe is a new
best-in-class
public BDC fee structure that is further enhanced by waivers of certain management and
incentive fees for six quarters following the closing of the transaction. We also expect the transaction to become accretive to net asset value per share during this waiver period. We believe our proposed fee structure is one of the most competitive
amongst our public BDC peers with an attractive management fee coupled with an incentive fee governed by an appropriate hurdle. This fee structure, combined with the meaningful financial contribution and support from our advisor, aligns Crescent
Capitals interests with those of our current investors and soon-
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to-be
shareholders. Mike will further address this shortly.
Our advisor has demonstrated significant alignment with all shareholders by contributing $21.6 million of the transaction consideration. This has
allowed us to achieve the mutually beneficial outcome of providing Alcentra Capital shareholders with estimated consideration well in excess of the current trading price and equal to Alcentra Capitals net asset value per share as of
June 30, 2019 while providing Crescent BDC shareholders the opportunity to acquire Alcentra Capitals assets at a considerable discount to book value.
With that as background, let me now turn the call over to Mike Wilhelms, our CFO, to discuss the transaction details. Mike?
Mike Wilhelms:
Thank you, Jason. As a quick introduction, I
have been the CFO of Crescent BDC since our inception in 2015. I began my career in public accounting and have served as CFO of several companies throughout my
26-year
career. Lets now discuss the
transaction.
Under the terms of the agreement, in exchange for approximately 12.9 million shares of Alcentra Capital common stock, Alcentra
Capitals shareholders will receive consideration in the form of three components which approximate, first, $19.3 million in cash or $1.50 per share, from Crescent BDC; second, 5.2 million shares of Crescent BDC common stock; and
third, $21.6 million in cash or $1.68 per share from CBDC Advisors, our external manager, which will be rebranded Crescent Cap Advisors in the coming weeks. Any final dividend that Alcentra Capital must pay in connection with the closing of the
transaction to comply with applicable tax requirements that is in excess of Alcentra Capitals regular quarterly dividends will reduce the cash consideration to be paid by Crescent BDC on a
dollar-for-dollar
basis. The total cash and stock consideration Alcentra Capital shareholders will receive at closing is currently estimated to be approximately $141.9 million after taking into account
certain post-closing adjustments or approximately $11.02 per share, representing 1X Alcentra Capitals net asset value per share as of June 30, 2019, and 1.36X the closing price of Alcentra Capitals common stock on August 12,
2019.
As I just mentioned, we anticipate that approximately 5.2 million Crescent BDC shares will be issued in total, with Crescent BDC
shareholders owning approximately 81% and Alcentra Capital shareholders owning 19% of the combined company at close.
As Jason mentioned, we have
the benefit of a very strong platform. Our investment advisor will provide significant financial support for this transaction. This includes the aforementioned $21.6 million, or $1.68 per share, of total cash to be paid to Alcentra Capital
stockholders at close, as well as funding up to $1.4 million of Crescent BDCs transaction expenses for a total of $23 million in support of the stockholders.
Upon closing, as Jason noted, we plan to implement a compelling fee structure that includes a reduced management fee of 1.25% and an increased hurdle
rate of 7% on a 17.5% incentive fee. In addition, we will provide six quarters of base management fee waivers of 50 basis points, income incentive fee waivers, and a dividend policy designed to over-earn a quarterly dividend of $0.41 per share. We
will also implement a $20 million open-market stock repurchase program following the close of the merger.
As of June 30, 2019, Crescent
BDCs investment portfolio was $625 million across 91 investments, and Alcentra Capitals investment portfolio was $219 million across 29 investments. Crescent BDC will continue making new investments throughout the coming
months, so we anticipate having a combined investment portfolio over $900 million at close. When combining our investment portfolios as of June 30, 2019, the investment type breakdown is 73% first-lien loans, 17% second-lien loans, 1%
subordinated
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loans and 11% equity and other.
I now turn the call over to Suhail Shaikh, CEO of Alcentra
Capital.
Suhail Shaikh:
Thank you Mike, and thank you
to all of our shareholders joining us today. To provide some background on who we are, Alcentra Capital Corporation is a publicly-traded BDC that offers customized debt and equity financing solutions to middle-market companies. Alcentra Capital is
currently managed by Alcentra NY, LLC, a majority-owned indirect subsidiary of BNY Alcentra Group Holdings, one of the worlds leading
sub-investment
grade credit asset managers with an investment track
record spanning across approximately 75 separate investment vehicles and accounts totaling approximately$40 billion as of June 30, 2019.
We are very excited to have entered this mutually beneficial combination with Crescent BDC, and we believe this transaction will bring great value to
our investors. Our merger agreement with Crescent BDC represents the culmination of our strategic alternatives review process led by an independent director committee of Alcentra Capitals Board of Directors.
We publicly announced our strategic review process this past April, and after extensive diligent analysis and thoughtful deliberations with a variety of
interested parties, we believe our merger with Crescent BDC is in the best interest of our shareholders to enhance the value of our company and will accelerate our portfolio transition to a diversified portfolio of middle-market senior secured
investments. Given Crescent Capitals strong investment performance and deep platform, we are very happy that Crescent BDC was selected following our extensive review process. Our Board of Directors and I are very impressed with Crescent
BDCs investment experience and, of course, the consideration to be paid to our shareholders.
We are pleased with the expected benefits of the
proposed transaction and believe that our investors will be too. In addition to the consideration to be paid at closing, Alcentra Capital shareholders will benefit from an attractive dividend yield from the combined company generated by a scaled and
diversified combined portfolio. Our entire Management Team and Board of Directors are confident that this transaction is a
win-win
that brings incremental value to Alcentra Capital and Crescent. For our
shareholders, in particular, this transaction offers access to the larger Crescent Capital Group platform, whose extensive resources, broad market insights and ability to access capital will provide attractive opportunities going forward.
Ill now turn the call back to Jason Breaux for concluding remarks.
Jason Breaux:
Thanks, Suhail. When we first launched our
BDC in 2015, it was a natural fit for Crescent Capital who has been managing and underwriting below investment grade credit for nearly 30 years. This transaction is the next step in our growth trajectory. Ultimately, the combination of Crescent BDC
and Alcentra Capital will solidify our position as a scaled BDC with a high-quality portfolio that generates an attractive and sustainable dividend for our shareholders.
Well over two decades ago, we learned that it is not about the leverage; it is about the credit, and we have the right people and the right investment
processes in place to drive strong performance. On behalf of our Board of Directors and our entire Management Team, wed like to thank each of our clients, shareholders and employees for helping to build this business and making this
transaction possible. Wed also like to thank Alcentra Capitals Board of Directors, management and shareholders for their trust and
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confidence in Crescent Capital. That concludes our prepared remarks. Operator, please open up the call to questions.
Operator:
Thank you. We will now be conducting a
question-and-answer
session. If you would like to ask a question, please press star, one on your telephone keypad. A confirmation tone will indicate your line is in the
question queue. You may press star, two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll
for questions.
Our first question comes from Robert Dodd with Raymond James. Please go ahead.
Robert Dodd:
Hi guys and congrats on the whole process.
Ive got a bunch of questions so Ill start off with the kind of deal structure ones and then hop back in the queue for more. On the $1.50 from the BDC, from Crescent BDC to shareholders, can you tell us anything about what the tax
treatment of that $1.50 will be, and also, when you say it could be reduced by any excess of normal dividends, is that to say both Q3 and Q4 Alcentra normal dividends, because obviously the Q4 would normally be paid after the expected close of the
transaction.
Suhail Shaikh:
Robert, this is Suhail.
Thank you for your questions. Yes, the plan is weve already obviously declared the Q3 dividend last week, so thats going to get paid. And then our intent is to declare the Q4 dividend and get that paid before the end of the year instead
of post the end of the year, which is our normal practice. Both those two dividends are the regular dividends that will be paid out.
With respect
to the adjustment of the $1.50, I think Id first say that were going to direct you to our proxy statement thats going to get filed in the next few weeks, couple of weeks or so, and thats going to have a lot more detail, but I
think as we said and as Mike said in his prepared remarks, its going to be adjusted for our sort of leftover income and whatever taxes we are required to pay as a RIC in 2019.
Robert Dodd:
Right, right, so that excess is really just
referring to if you have any undistributed left at the end of the year. Okay, that makes sense. Thats normal, right?
Going back, so on that
$1.50 and the $1.68 as well, do you have any color you can give us about whether those areto shareholders, is that going to be treated as ordinary income or affect their cost basis? Do you have any color on that?
Ellida McMillan:
Hey Robert, its Aleta. How are you?
Its going to be ordinary income unless theres a return of capital, but right now its ordinary (inaudible).
Robert Dodd:
Got it. Then the last question, I promise, last question about tax. That $1.68, since its coming from the
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advisor thats an LLC, if any of the shareholdersobviously you have a lot of shareholders that are retail oriented and might hold it in a
tax-free
account or a term account, will that $1.68 if its coming from an LLC generate UBTI, do you know?
Suhail
Shaikh:
We dont. Id say those shareholders should consult their advisors on how that should be treated.
Robert Dodd:
Fair enough. Ill hop back in the queue
for my other questions about Crescent. Thank you.
Operator:
Our next question comes from Ryan Lynch with KBW. Please go ahead.
Ryan Lynch:
Hey, good afternoon. Thanks for taking my
questions. First one, Jason, you know you mentioned Crescent being about a $25 billion platform. Can you maybe just further breakdown the buckets of kind of the AUM or the strategies that compose that $25 billion of AUM at Crescent? Then,
specifically, what sort of AUM do you have that is going to be focused on the same sort of strategies that Crescent BDC as well as the combination of Crescent and Alcentra will be focused on?
Jason Breaux:
Hey Ryan, its Jason. Thanks for your
question. Just to break down Crescents AUM for you, the $25 billion of assets, its all below investment grade corporate credit. We split our business up into private credit and public tradable credit. The tradable credit is sort of
less relevant the BDC. Thats about 40% of the $25 billion or $10 billion. The remaining $15 billion is private credit. Thats managed through multiple different investment vehicles, but essentially we have direct lending
strategies that invest in senior secured companies. We also have junior debt strategies that invest in second lien and unsecured debt strategies as well and were in both the U.S. and in Europe, so the relevant sort of AUM with respect to the
BDC portfolio and the
co-investment
opportunities is across Crescents private credit business which we characterize as approximately $15 billion.
Ryan Lynch:
Okay, thats helpful. I guess what
Im trying to get a sense of is I know you have the BDC has been in inception since 2015 and this merger, the BDC is going to take over Alcentra and its going to have the same sort of strategy that the private Crescent BDC has had.
Im just trying to get a sense of is there other AUM outside of the BDC that you guys can use to
co-invest
and outside of the BDC, the strategy that you guys currently use within the BDC, do you guys have
any strategies today that you have that same strategy?
Jason Breaux:
Thanks, Ryan. Just to make it clear, Crescent BDC has
co-investment
exempted relief from the SEC to invest
across our affiliated funds. So, any opportunity that we originate and underwrite across the private credit platform at Crescent, that BDC has the opportunity to participate alongside. Thats really important to highlight I think because that
$15 billion platform sees many, many opportunities on an annual basis,
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approximately 1,500 or so per year at this point, and while the BDC itself maybe commits investment sizes of call it $5 million to $25 million or $30 million on average, when we
invest alongside the rest of our private credit strategies at Crescent, we speak for much larger amounts across the platform. The BDC might take a $10 million position in a commitment that we might make for up to several hundred million dollars
to a company.
Ryan Lynch:
Okay. Makes sense. Then a
question on the consideration paid. If you used your guys NAV as the proxy, you guys paid $11.02. If you strip out the cash from the advisor, the BDC paid, the private BDC Crescent Capital paid $9.34 for the assets at Alcentra. Alcentra, the current
market value has been significantly below that amount, if you look at kind of where its traded over the last year, so the market was clearly valuing those assets at a bigger discount than the purchase price that Crescent Capital BDC paid, so
how did you get comfortable paying the price that you paid for these assets?
Jason Breaux:
Thanks, Ryan. Jason again. I can kick that off and if Mike has anything to add, feel free. We through out diligence process got very good information on
the underlying portfolio at Alcentra. We performed extensive diligence on the 29 names within the portfolio and we essentially
re-underwrote
those names as if we were underwriting any particular individual
investment, so I would say that our purchase price, which at the BDC level represents 85% of Alcentra book net asset value is something that we got quite comfortable with through the process.
Ryan Lynch:
Okay. Then last one for me for now, it looks
like you guys put in, are going to put in a $20 million share repurchase program for a period of 12 months post closing. Can you talk? Is that going to be a programmatic buyback program or is that going to be a discretionary buyback program?
And any other plans that you guys have of minimizing the impact of when you list this vehicle which is going to have a significant amount of shareholders who have been locked up for a few years now to try to ease that potential selling pressure post
listing?
Mike Wilhelms:
Hi Ryan. This is Mike. Yes,
weve had discussions regarding that and at this point its still TBD as far as the exact structure.
Ryan Lynch:
Okay. Are there any otherI guess with the share repurchase, are there any other features that you guys have taken into consideration as post
merger this is going to be a listed vehicle with shareholders from Crescent Capital BDC being locked up for several years, that can create and weve seen it create significant amount of selling pressure once those vehicles lift. What are the
considerations are you guys are going through to ensure that the stock price trades well post listing?
Mike Wilhelms:
Again, good questions, Ryan. I mean at this point those details are expected to be in the proxy and so at this point we need to wait for that to come
out.
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Ryan Lynch:
Okay, thats all for me. Appreciate the time.
Jason
Breaux:
Thanks, Ryan.
Operator:
Our next question comes from Robert Dodd with Raymond James. Please go ahead.
Robert Dodd:
Hi guys. Im back. To
follow-up
on maybe more bluntly on one of Ryans questions, the BDC looks, Crescent BDC, its had a pretty good track record so far with NAV etc., but yes, its only been around a couple of years. Do
you have any metrics, numbers that youre willing to disclose or can disclose about the track record that Crescent Capital had in those type of assets over the last more than a decade. Ideally, you know, a track record that stretches back
through a recession. Are there any numbers you can give us on that?
Jason Breaux:
Crescent has been around since 1991. Our private strategies are sort of, call it 15 to
25-plus
years old across
multiple cycles, business cycles and economic cycles. We have track record data going back nearly 30 years and I think what youd find is that if you looked our historical default rates and loss rates across those cycles, I think we would
compare quite favorably to industry averages and index averages.
Robert Dodd:
Okay, got it. Thank you on that. When I look at obviously the BDC, what could be the success of BDC, obviously the bigger part, the Crescent BDC, it
says that the target EBITDA range is 10 to 250, which is a pretty wide range. Can you give us any more data about where you currently reside in that? I mean if I look in the portfolio, the spreads are typically pretty narrow. It looks like a very
secure portfolio which might indicate that youre at the higher end of themaybe not the 250 but not at the $10 million EBITDA range. Any color you can give us on kind of the average EBITDA in the portfolio right now? Maybe what the
debt-to-EBITDA
is on the interest coverage or any metrics like that? They may be disclosed in the Crescent Q but I havent had a chance to dig through in that detail yet.
Mike Wilhelms:
Thank you. This is Mike Wilhelms. On
average, currently our portfolio has an EBITDA of $28 million and as to your comment with the range of $10 million to $250 million, that has to do more with the fact that we are
co-investing
with different strategies within Crescent, so, for instance, our U.S. direct lending strategy is more lower middle market focus so theyre going to be looking at $10 million to $40 million EBITDA companies, whereas our junior debt
strategy or mezzanine strategy is upper middle market focused and so theyre going to looking at
$40-plus
million EBITDA companies. But on average, our portfolio as of June 30 had a $28 million
EBITDA.
Robert Dodd:
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Got it, got it. Thank you. Then one obscure one if I can, obviously (inaudible). Either Crescent BDC
has a senior loan JV and the partner in such as JV can be quite important about the ability to grow that long-term, etc. and so your partner in there is Master Land Enterprise Holdings. Ill be honest. I cant find anything out about these
people other than the fact that it may be a Hong Kong real estate developer. Any color you can give us on who that is and what their ability would be to scale that JV if and when the BDC were to get bigger?
Jason Breaux:
Yes, Robert. Thank you. Master Land is an
entity that is named but we will tell you that it is a part of a global asset manager of very significant size, so in terms of the ability to commit and grow that vehicle over time, I think thats certainly in the cards, so I just wanted
toId like to make that clear. Anything else on that?
Mike Wilhelms:
Id add from a growth standpoint, currently the commitment is 50/50 in that joint venture and certainly from an eligible or an ineligible basket we
have plenty of room there, so it is something that Crescent would be willing to take their commitment size up to say 60/40 or even greater than that if growth made sense.
Jason Breaux:
Thanks, Mike.
Operator:
This concludes the
question-and-answer
session. I will now turn the conference over to Jason Breaux for closing comments.
Jason Breaux:
Okay. Thank you everyone for dialing in and
listening to our call here. Were very excited about the merits of this transaction and combination, and look forward to speaking with you all soon.
Operator:
This concludes todays conference. Thank you
for your participation.
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