PennantPark Investment Corporation (PNNT) Q1 2015 Earnings Report, Transcript and Summary

Good morning. And welcome to the PennantPark Investment Corporation's First Fiscal Quarter 2015 Earnings Conference Call. Today's conference is being recorded. At this time, all participants have been placed in a listen-only mode. The call will be opened for a question-and-answer session following the speakers' remarks. [Operator Instructions] It is now my pleasure to turn the call over to Mr. Art Penn, Chairman and Chief Executive Officer of PennantPark Investment Corporation. Mr. Penn, you may begin your conference.

Thank you, and good morning, everyone. I'd like to welcome you to PennantPark Investment Corporation's first fiscal quarter 2015 earnings conference call. I'm joined today by Aviv Efrat, our Chief Financial Officer. Aviv, please start-off by disclosing some general conference call information and include a discussion about forward-looking statements.

Thank you, Art. I'd like to remind everyone that today's call is being recorded. Please note that this call is a property of PennantPark Investment Corporation and that any unauthorized broadcast of this call in any form is strictly prohibited. Audio replay of the call will be available by using the telephone numbers provided in our earnings press release as well as on our Web site. I'd also like to call your attention to the customary Safe Harbor disclosure in our press release regarding forward-looking information. Today's conference call may also include forward-looking statements and projections, and we ask that you refer to our most recent filings with the SEC for important factors that could cause actual results to differ materially from these projections. We do not undertake to update our forward-looking statements unless required by law. To obtain copies of our latest SEC filings, please visit our website at www.pennantpark.com or call us at 212-905-1000. At this time, I'd like to turn the call back to our Chairman and Chief Executive Officer, Art Penn.

Thank you, Aviv. I'm going to spend a few minutes discussing current market conditions, followed by a discussion of investment activity, the portfolio, the financials, the overall strategy, and then open it up for Q&A. As you all know, the economic signals are moderately positive with many economists expecting a slowly growing economy going forward. With regard to the more liquid capital markets, and in particular the leveraged loan and high-yield markets, during the quarter ended December 31st, those markets experienced volatility due to cash outflows and leveraged loan and high-yield funds. A less robust broadly syndicated loan and high-yield market helps the overall tone in the middle market. Risk reward in the middle market has generally remained attractive, as the overall supply of middle market companies unique financing exceeds the relative demand of applicable lending capacity. As debt investors and lenders a slow growth economy is fine, as long as we've underwritten capital structures prudently. A healthy current coupon with deleveraging from free cash flow overtime is a favourable outcome. After several years of spread compression, we believe 2015 could finally be a year of yield expansion. We remained focused on long-term value and making investments that will perform well over several years and can withstand different business cycles. Our focus continues to be on companies of structures that are more defensive, have low leverage, strong covenants and high returns. With plenty of dry powder, we are well-positioned to take advantage of the investment opportunities as they arise. As credit investor is one of our primary goals as preservation of capital. If we preserve capital, usually the upside takes care of itself. As a business, one of our primary goals is building long-term trust. Our focus is on building long-term trust with our portfolio companies, management teams, financial sponsors, intermediaries, our credit providers and of course, our shareholders. We are a first call in for middle market financial sponsor's management teams and intermediaries who want consistent credible capital. As an independent provider free of conflicts or affiliations, we've become a trusted financing partner for our clients. Since inception, PennantPark entities have financed companies backed by 140 different financial sponsors. We have been active and are well positioned. For the quarter ended December 31, 2014, we invested $159 million. The average yield on new debt instruments was 12.6%. Expected IRRs generally range from 13% to 18%. Net investment income was $0.26 per share. We have met our goal of a steady stable and consistent dividend stream since our IPO nearly eight years ago, despite the overall economic and market turmoil throughout that time period. We anticipate continuing the steady, stable dividend stream going forward. As you know, BDC's are required to pay out the shareholders at least 90% of taxable earnings. As of September 30, undistributed taxable income was $0.21 per share, which provides substantial cushion. With the additional equity and long-term debt capital we raised in September, we believe we will be able to cover the dividend, as we deploy our capital into an increasingly attractive market in 2015. As previously mentioned, we have plenty of liquidity. As of December 31, we had in total over $550 million of available liquidity consisting of $420 million of available credit facility, $75 million of new SBIC debt financing and our second SBIC and over $54 million of cash on hand. Given the current market back drop, we remained appropriately levered and have plenty of excess liquidity that we can use for both defensive and offensive purposes. At quarter end, our overall net leverage ratio accounting for cash on the balance sheet was approximately 69% and only about 50% excluding SBIC debt. Taking into account the recent exit of our investment in Patriot National which I'll comment on in a minute, those percentages are 60% and 41% respectively. Our overall, portfolio is constructed to withstand market and economic volatility. The cash interest coverage ratio, the amount by which EBITDA or cash flow exceeds cash interest expense, continued to be a healthy 2.5 times. This provides substantial cushion to support stable investment income. Additionally at cost, the ratio of debt-to-EBITDA on the overall portfolio was 4.8 times, another indication of prudent risk. We had some attractive realizations last quarter and generate $8.6 million of realized gains for example, Convergent refinanced our $24 million subordinated debt position and generated 14.8% IRR. We remained an equity co-investor and received a dividend as part of that financing. Our $14 million second lien debt position and $4 million equity investment in CT HealthPort was monetized of at an IRR 13.1% on the debt and 17.3% blended including the equity, as the company was sold to a new sponsor. With regard to our exposure to the energy industry, we've successfully invested in energy through 21 different companies, since our inception nearly eight years ago. Our investment thesis and structuring our tailored to the specific dynamics of each subsector and incorporate several broad underwriting principals. We focused on opportunities back by sponsors or experienced management teams, who have deep experience to be successful across the industry. Together with our own contacts industry consultants and engineers, these resources have aided us meaningfully in the past. We have avoided certain energy subsectors, geographies as well as many undifferentiated service businesses with low barriers to entry. For exploration and production, we'd like to be senior in the capital structure with an asset backed focus and strategic hedging to mitigate downside. We look to remain in low cost areas with growing production and experienced management teams with proven project capabilities. In 2014, we successfully monetized several large subordinated debt and equity positions in the oil field service and midstream sectors. Eureka Hunter, Universal Pegasus and [indiscernible] generated proceeds of approximately $170 million at a weighted average IRR of 17.8%. Our existing portfolio including the exploration and production companies fit into our theme of being senior in the capital structure backed by substantial asset coverage including proved developed and producing reserves with substantial hedges in place. There are also significant additional assets in the form of additional acreage, reserves and midstream assets. For instance, Ram Energy we are backing an experienced management team, who has performed well PennantPark Investment Corporation in the past, we are first lien position and the company has hedged most of its oil production at over $75 per barrel for the next three and half years. In New Gulf, we are investing in resources that we've previously reviewed the majority of its oil production is hedged and over $95 per barrels for 2015 and it has valuable midstream assets. We believe, that underwriting criteria and long-term approach should support our investments through this period of low energy prices and allow us to realize attractive returns. While mindful [indiscernible] to maintain a diversified portfolio, the current situation may well present attractive risk reward opportunities. Across PennantPark entities, we've had only nine companies on non-accrual out of 350 investments, since inception nearly eight years ago. Despite the recession, during that timeframe. Further, we are proud that even when we've had those nine non-accruals we have been able to preserve capital for our shareholders through hard work patience and judicious additional investments in those companies, we have been able to find ways to add value. We always monitor and re-underwrite our deals and situations where the best long-term value for shareholders is created by taking control of the companies and providing capital and expertise, we do. Our realized cumulative gain since inception, eight years ago through the financial crisis, our testament to this long-term value orientation. Based on the values as of December 31, we've recovered 94% of the capital, invested so far in those nine companies that it have been on non-accrual since inception. We had two non-accrual investments as of December 31, representing only 1.7% of the portfolio at cost. As a result of this track record of low non-accruals and a high recovery rates, one of the few BDC's it was an operation before the recession, who has preserved capital for shareholders while generating consistent steady dividend. Since quarter end, our position in Patriot National was existed at a premium, due to the company's IPO. Our $50 million debt position was taken out at a premium of $2.8 million which will result in other income of $0.04 per share for the quarter ending March, 31. Our warrants in the company were taken out at a value of $8.7 million. As a result, we received liquidity of about $60 million and a realized gain of $0.13 per share resulting in an NAV increase of $0.08 per share. In terms of new investments, we had another quarter investing in attractive risk adjusted returns and virtually all these investments we have known these particular companies for a while, have studied the industries or have a strong relationship with the sponsor. Let's walk through some of the highlights. Howard Berger is a provider of branded and private label hardware and houseware-related products in North America. We purchased $41 million of second lien term loan, the Littlejohn & Co is the sponsor. In line with our successful track record of investing and gaming projects in or near population centres, we invested $75 million in the second lien debt of Park [ph] Holdings. Park [ph] is constructing a gaming and hotel complex in Downtown, Vancouver, Canada. The company is owned by Paradigm Gaming, Dundee and Canadian Pension Funds. RotoMetrics Holdings provides rotary dies and engineering tooling. We purchased $13 million of subordinated and $1 million of equity. The company is sponsored by Sentinel Capital Partners. Turning to the outlook, we believe that the remainder of 2015 will continue to be active due to growth and M&A driven financings. Due to our strong sourcing network and client relationships, we're seeing active deal flow. Let me now turn the call over to Aviv our CFO, to take it through the financial results.

Thank you, Art. For the quarter ended December 31, 2014 recurring net investment income totalled $0.24 per share. In addition, we had $0.02 per share of other income. As our result, net investment income for the quarter $0.26 per share. Looking at some of the expense categories. Management fees totalled $11.6 million, general and administrative expenses totalled $1.5 million and interest expenses totalled $6.5 million. During the quarter ended December 31, net realized gains from investment was $8.6 million or $0.11 per share. Unrealized losses from investments was $53 million or $0.71 per share and unrealized gain from our notes was $1 million or $0.02 per share. Excess dividends over net income was about $1.5 million or $0.02 per share. Consequently, NAV per share went down $0.60 from $11 and $0.03 to $10.43 per share. As a reminder, our entire portfolio credit facility and senior notes are mark-to-market by our Board of Directors each quarter using the exit price provided by independent valuation firms, securities and exchanges or independent broker-dealer quotations, when active markets are available under ASC 820 and 825. In cases we broker-dealer quotes are inactive, we used independent valuation firms to value the investment. Our overall debt portfolio has already the average yield of 12.5%. on December 31, our portfolio consisted 66 companies across 29 different industries and was invested 32% in senior secure debt, 44% in second lien secured debt, 16% in subordinated debt and 8% in preferred and common equity. 70% of the portfolio has a floating rate including 64% with the floor and the average LIBOR floor is 1.3%. Now let me turn the call back to Art.

Thanks, Aviv. To conclude, we want to reiterate our mission. Our goal is steady, stable and consistent dividend stream coupled with long-term preservation of capital. Everything we do is aligned to that goal. We try to find less risk middle market companies that have high free cash flow conversion. We capture that free cash flow primarily in debt instruments and we pay out those contractual cash flow in the form of dividends to our shareholders. In closing, I'd like to thank our extremely talented team of professionals for their commitment and dedication. Thank you all for your time today and for your continued investment and confidence in us. That concludes our remarks, at this time I would like to open up the call to questions. Question-and-Answer Session

[Operator Instructions] we will take our first question today from Doug Mewhirter with SunTrust. Please go ahead.

Just have a three quick questions, first obviously it looks like you're kind of knocking up on the upper end of your debt ratios and the share prices is not really cooperating with issuing equity right now, given your multiple. So would it right to assume that you would use your liquidity provided by your exits to fund most of your new investments and then you wouldn't anticipate meaningfully growing the portfolio or do you actually have some room on your SBIC to maybe show some organic portfolio growth over the next couple of quarters.

Thanks, Doug. I think after Patriot National, I think we said that word about 60% gross, 40% excluding SBIC. So we think we've got some reasonable runway. We say, we're kind of 0.6 to 0.8 is our general target zone. We keep extra cushion both for defensive and offensive purposes depending on the market.

And this may sound like a silly question given the state of the market, but I mean are there any opportunities for additional energy investment or you kind of taking a wait and see approach, right now?

Well, it's a great question something we think about, certainly we feel like we're comfortable with our existing energy exposure, that said there are some really great bargains out there. So some we're thinking about, but we are being cautious and careful and very thoughtful about what we do. Certainly, if we see really compelling value and a compelling way to increase income and potentially the dividend for shareholders, we've got to assess those options.

Yes and my last question, you have that long-term 13% to 18% IRR bogie that you have with your investments. Given that your own dividend yield is actually hitting on that lower end of the spectrum. Would it be prudent to do a small amount of buy backs or maybe it would be a better investment and maybe some of your investments that are hitting on the lower end of that range?

We as management or board are always assessing our options and always trying to figure out, the right and long-term orientation for all our stakeholders. So something, we think about from time-to-time. We do take a long-term review and capital is very precious, whether it's precious to BDC, a finance company or a bank. So there is mass and then there is always the intangible positive having excess liquidity in the finance company kind of construct, but it is something that we do as a board and management team, to talk about.

Great, thanks. That's all my questions.

We will take the next question from Troy Ward with KBW. Please go ahead.

Art, can you talk a little bit about JF acquisition, the Jones & Frank that went on non-accrual this quarter, looking into kind of what they do as a business, you know less service distribution and fuel handling for, it looks like convenience stores and gas stations. Can you speak to whether or not that, it's an energy problem. It's related to the energy exposure or if it's that's kind of a one off its unrelated to the drop in oil prices.

Yes, it's actually interesting to your question. These guys distribute gas pumps to gas stations at convenience stores in gas stations etc. So it's driven by retail gas distribution, which you would imagine in the lower gas price environment would be a good place to be, this company is messed up on their computer systems and ERP implementation. We've got the mark I think about $0.87 on the $1, which indicates kind of we feel like, even in a potential restricting our recovery level will be relatively high.

Okay, great and as reading about it, it didn't feel like there was any direct oil. I just wanted to make sure, they didn't have ancillary business, that I couldn't see and then also, going on non-accrual as we look backwards at the valuation, it didn't look like it was under much stress, is it all non-accrual because in your sub-debt piece, are you being blocked by the senior in the lieu of some type of restricting.

Yes, so there is negotiation going on between the senior, the sub-debt and the equity about things as they messed up their computer and ERP system and so yes, we're not getting current cash interest on that investment as this point.

Okay, great and then on the originations, you know you had a little bit higher number than we anticipated in our model. Can you just provide just for kind of get the run rate timing on those deals, were they more front or back end loaded in the quarter?

They were mostly back end loaded in the quarter. So that maybe have impacted our rank. Remember, we did an equity offering in September, which we thought was a good timing and normally when you do an equity offering you do under earn your dividend for a while as you're investing those proceeds, so you know that's what going on here with us and most of our origination is past quarter was back end loaded.

Okay, great and then, you know kind of good segue from that equity offering, that was first equity offering you've done in quite a long time and as you said today it looks pretty well timed. Are you seeing spreads that are wider and I know you're seeing them, I guess but are the borrowers realizing that the market is different and are accepting these wider terms and how is it impacting covenants?

It's a great question, we do think it will become more, it is more of a buyer's market and it will become more sellers over the course of the year. It certainly been a seller's market for last three or four years. We're seeing it, in some cases deals are continue to fly off the shelves, in some cases they're running into a more turbulence. So it's kind of case-by-case and where borrowers reactions are as versus its human behaviour. Some borrowers reactions are more realistic, some borrowers reactions are kind of walking away and they think, they'll come back in a later day and get more attractive term. So case-by-case, makes it certainly more interesting for us as a lender to in certain cases, be able to drive yield to be able to drive covenants lot more aggressively than we have over the last three or four years.

Okay and then one last topic. Being here at the KBW/ Stifel platform, we have a lot of retail clients and we get a lot of inbound calls about the proxy solicitation process that was going on with PNNT over the last month or so and obviously, Art you said in a press release a couple weeks ago, that you have no reason to issue shares at these low levels. So can you just speak to why, you ask for permissions to sell below book value, but you have to do in a BDC, you have to get shareholder permission, why do you do that if you have no intention of issuing at these levels?

It's a great question and we get all the time, I'm happy to talk about. So thank you for bringing it up. We have in PNNT for the last six years, gone pre-approval to issue below book value and the reason we have is that, people have been with us a while and have seen our behaviour in good markets and not so good market, have come to trust and we will behave in their best interest. Our historical track record is clear during the financial crisis, we did issue shares below NAV only when it was absolutely clear, that the proceeds could be deployed in a way that would increase income and shareholder dividends. So that was in fact what happened in times of market turmoil and chaos, there are great deals to be done, if it’s absolutely clear to us as management and our Board of Directors, that by issuing at a small discount to book, there might be small dilution on NAV basis, but there might be very large accretion on an income and dividend basis because we are seeing such good deals, that's why we try to get pre-approval, we try not to bother shareholders during the year, we have, once a year we go for a vote, we ask for a vote, we've gotten it over time and I think it's because shareholders it's come to trust that we will only use it, in the sense of trying to create income and increase dividends.

Great thanks, Art.

Our next question will come from Doug Harter with Credit Suisse. Please go ahead.

I was hoping, Art you could give us little bit of outlook as far as what prepays might look like, do you expect those to slow now that spreads have backed up a little bit?

You know it's a great question, it is more of a buyers’ market so that does imply prepaids will slow up in general, that said if we have very good well performing portfolio companies even in a choppier environment they're going to get sold or refinanced. So it probably slows down a little bit, it probably slows down a little bit in line with the market moving to a buyers’ market.

Thanks, Art.

[Operator Instructions] we will go next to Chris York with JMP Securities

In light of the decline in the price of crude and the risk that is caused here, energy portfolio which is the largest sector. Have you guys made any changes in your thinking as it relates to portfolio management?

Good question, we're always on an individual basis we are underwriting each and every credit and we don't spend a ton of time, thinking about macro factors. For us it's usually credit-by-credit, deal-by-deal does this deal make sense? We are very focused of course on diversification around industry, diversification around geography. When the market gives you opportunities, whether they'd be on an industry basis or an overall market basis to get really good risk adjusted returns, where we get a little bit more aggressive, but we're pleased we have liquidity at this point, we're pleased that the market is moving in our direction, but we're going to very thoughtfully methodically deal-by-deal continue to underwrite credits.

Got it and then, can you talk a little bit about the performance at our largest credit being Ram Energy and then potentially share the terms of the credit like leverage and whether or not the borrower employs hedges.

The borrower does employ hedges and that's one of the areas of great comfort for us there, the majority of their production for the next three and half years is hedged it over $75 a barrel, we are in a first lien position, so we're feeling good. It's a management team that we've known for a long-time, we back them successfully in a prior iteration, they're on the Permian and Ark-La-Tex basins. Their predecessor company which is Larry Lee was sold to Halcon Resources in 2011 and this company acquired about 60,000 net acres from Chaparral in July, 2014. They also have producing assets in Oklahoma and it's more of a traditional play they focus on operational improvements in drilling low cost vertical wells. It will opportunistically seek to divest non-core assets and we think there's great asset value in this particular situation.

Got it and are you, how are you thinking about the maturity of that Tranche B, which is up from in, I guess maturity in this year?

It's great to have that kind of structure, where we do have a maturity which gives us a really seat at the table here in the coming handful of months. So as we said, the company's got great asset value, the company generates nice cash flow, so we're optimistic that things will work out well for Ram Energy.

Got it, that's it from me. Thanks.

Our next question today will come from Mickey Schleien with Ladenburg. Please go ahead.

Art, my first question relates to again the oil and gas investments. If you look at the spot price of oil now versus December 31, we're still down little bit more. Obviously not nearly the correction we saw in the fourth quarter, but I'm curious where if you were to post NAV today, would there be more pressure on the marks in the oil and gas investments?

We don't think, so.

Okay, in terms of leverage and target leverage. My first question is in relation to cash, do you have good amount of cash and now you have more from Patriot, how under perfect world, how low could the cash balances go in order to help fund investments?

It's a good question, a big chunk of cash we had is in SBIC I. So that's dependent on our origination of deals with 50 SBIC. There is going to be deal this upcoming quarter that does 50 SBIC. Obviously, we do not lower our standards as investors or whatever fits our investments standards, fits. If it happens with the SBIC, that's great. We love that SBIC structure and that's the first port of call, obviously when something does fit. So with that cash in SBIC, we don't realize cash on the balance sheet. Otherwise we paid down our revolver.

Okay and in terms of target leverage number that you gave, grew the range, I think you said 0.6 to 0.8 times does that include or exclude the SBIC leverage?

0.6 to 0.8 times, we tell everybody is inclusive of total leverage including the SBIC's. Now what is implied in that, is not only do we have cushions going up to one to one, but as you know, SBIC leverage can be greater than one to one, it can be two to one. So that implies a ton of cushion, which we like to have both for defensive purposes as well as for offensive purposes, whenever the market gets chaotic. Number one, you don't want to be foreseller, when the market gets chaotic and number two, you want to an opportunistic buyer. So that 0.6 to 0.8 times, it gives us kind of double cushion and this goes to kind of being how do you want to run your BDC, your finance company or your bank. If you're in this business, having excess liquidity to us is always something, you want to have.

Okay and that's sort of a good segue to my last question, which is related to the stock repurchase. I do understand, I think the market understand that capital is precious and it's a difficult decision to allocate the capital, but looking at your stock price today, with the discount to NAV we see 23% upside to NAV, plus 13% dividend yield which would imply a total return sort of mid 30s. I just don't understand what else is out there in the market that could be more attractive than buying the stocks, so why not at least nibble at the stock and it's nothing else, it will help prop up the stock and get your back to point where, issuing an equity is not a problem.

Yes, not with it. As I said earlier, Mickey it's something we're evaluating as we evaluate all options on behalf of our stakeholders. I will remind you that, we were not one of those BDC's when our stock was trading well over book value, that every six months came to the market to issue stock. We are very judicious, very thoughtful and careful. As an issuer, we are going to be judicious and thoughtful and careful as we consider those other options.

Okay, those were all my questions. Thanks for your time.

Thank you.

Our next question comes from Jonathan Bock with Wells Fargo Securities

My question pertains to the SBIC and originating deals that fit because we've seen some BDC's chose to lever those faster and we're just curious, Art what would you consider the governor here in your mind, that makes portions of your deal flow not as applicable to that type of debt and kind of going forward, how that's the first place you go, but are there ways to source assets in easier manner. I don't know if you're able to purchase those from friends or club deals etc., that could allow you to build that up faster or not kind of interested in the governor's and kind of the outlook, as to you have one investment coming in. Is it fair to assume that it should be quicker in the future or not?

Yes, it's a great question and we analyse it all the time. As it becomes more of a buyer's market and we become more involved in down the middle of the fairway buyouts etc. You would expect more to go into the SBIC's. We've been in environment in the last few years, where it's been a seller's market and on the down the middle of the fairway deals, if borrowers can get single-digit subordinated or second lien debt that we don't like as a general proposition with little or no covenants, that's hurt our ability to source for the SBIC's. So as the market, we think normalizes it becomes more of a buyer's market, we will be able to utilize and that's the deal that we're talking about, we are referring to coming in score, it's down the middle of fairway buyout, where it's kind of right to our forehand and it's going to fit in, we would expect more of the down of the middle of the fairway deals. It's just interesting two of our big verticals as you know are gaming and energy, those are two verticals that the SBIC's don't really like financing.

Yes, I appreciate that and then maybe a question as we've seen a bit of a shakeup, will say more of liquid credit relative to liquid credit because your liquid credit generally has a six month lag for your stereotypical middle market deal that doesn't get put out to bid. Art, do you see opportunities to perhaps given that you'll be a little flush with liquidity and you've already considered the stock buyback and are looking at, which we appreciate so thank you for those comments, but then also seeing opportunity perhaps deploy in the more liquid credit securities that might allow you to get in and leverage a little bit more and boost earnings, in this timeframe or would you chose to perhaps play the slower developing deals that are bit more proprietary, but in this case might actually carry the same yield as what you could find in a more liquid credit offer at 11% something to that effect.

That's a great question, if you look at our track record over the eight years. Certainly during the '08, '09, 2010 time period when you could source liquid credit and buy dollar for $0.70 or $0.80 and get a very healthy yield and move towards the top of the capital structure and we did a bunch of that and that is one of the reasons that you know, we saw very good NAV and income and dividend growth during that time period. So as we move towards more of a buyer's market, we hopefully will see nice opportunities in the secondary market for liquid credit. There will only be in situations where we think we have a unique view, where it's a company we follow for a long time, we know the sponsor, we know the management team, well we just want to be, if we do it buying on the run stuff, it's going to be stuff, where we think we have a differentiated angle and view than the market place. So we did a bunch of that in the financial downturn, you could expect some of that to extent opportunities arise in next year too.

Art, thank you so much.

Thank you.

Our next question today comes from Christopher Nolan with MLV & Co

Art, question on Ram Energy, was the write down primarily related to concerns on cash flow or was it lower asset values for Ram given, they bought Chaparral property and possibly there might been valued at lower, at lower valuation later on.

It's a great question, what does fair market value mean. To us, we still think we are at least getting $0.100 and a $1 back as you know we are obligated to fair market value, names each quarter. We either get broker-dealer quotes, where they're active or we send everything to independent valuation firms and a fair value processes one that looks at comparables, what are comparables trading at. So we think, we're going to get $0.100 plus on the $1 back, but due to fair market value, it's marked down a bit. So that's why we point out the difference between realized and unrealized, right? To us, it's always about in the long run cash in and cash out, you have a mark-to-market, while you're in an investment which is based on comparables, but we point out how our actual cash performances been over a long period of time, through the recession, through the downturn in our deals.

Great and a related question, how does the strength of the sponsor factor into your valuation calculation, if your sponsor might have heavy energy exposure and their position might be weakened overall, does that affect your fair value for these investments?

The management sponsor always important to us, we see it all the time, having a great management is key. Having great management is key. This management team at Ram is one that's done well by us in the past, we think they're excellent management and we think they know how to deal with this type of environment.

Great, thanks for the questions.

Our next question comes from Andrew Kerai with BDC Income Fund

Just have a, just looking at new goal for resources noticed you marked down the subordinate piece a bit more this quarter, you're still holding the second lien piece, a basically a par. I was hoping for me, a little bit of colour. One on how much bank debt is ahead of that second lien piece and secondly, how much equity cushion you have below the sub debt component?

So good question, the only thing ahead of the senior pieces, Reserve Base Loan or RBL which is $50 million. Some other people might characterize this piece as a first lien depending on how you, view the RBL ahead of you or not. So we characterize as second lien. Typically these companies like all companies have revolvers that are normal companies have ABL, energy companies have RBL. The sub-debt piece for us was essential a bit of an equity [indiscernible] we knew it was subordinated debt had a coupon on it. So and had a bunch of warrants on it. There is a about load of warrants on that on piece. So that's an equity [indiscernible] style piece and will be more volatile by definition overtime.

Sure. Thank you. Certainly makes sense. Then sort of here, that I heard the dialog on the Patriot again correctly. So the $2.8 million that you're getting as a fee on the take out of your debt, just $0.04 a share and then separately based on your warrant mark up as well, that's some additional some $0.08 on a NAV upright. So combined, if you take the current cum piece plus the $0.08. You're talking about $0.12 a NAV from both a third income $0.08 of realized gain, is that correct?

That's correct.

Okay, certainly and then lastly, I just had the spill over income that you mentioned that's can you just, if you would just repeat that as well. I think I heard $0.21 if I'm not mistaken.

So this is once a year, we're obligated and BDC's are obligated to disclose their undistributed taxable income. So that was September 30, it was $0.21.

Great, thank you. I just wanted to say, just wanted to reiterate, it's good to see as investor you're taking at least some of the marks on the oil and gas book, as oppose to a couple of your peers, who this morning seemed to be holding on their private energy investments at par, so certainly appreciate you taking and honest fair value look at your book.

Thank you very much.

Our next question comes from Jim Young with West Family Investments

Art, you mentioned that 2015 could be a year of yield expansion. Can you just help us better understand what conditions have changed relative to last couple of years and are you talking about maybe like 10 basis points or just like 50 basis points plus in 2015, do you think could occur.

Well, it's great question and thankfully in our world, we don't deal in 10 basis points increments. If it's about 10 basis points we're not adding much value. So look we think about things in 50, 100 basis points type increments. Drivers are cash flows in the mutual funds. Drivers are concerns about interest rates, a choppier market etc. Geopolitical risk, so it just appears to be the last few months going back into the prior quarter, more of buyers’ market where we can drive terms a bit more.

Can you just give us a sense on, the change in the terms that you're seeing, with exactly the covenants debt-to-EBITDA etc.?

Sure, I mean, when the wind blows it impacts all of these issues. So certainly most importantly for us it's credit quality is incredibly important keeping the debt-to-EBITDA rational in low and then it's about yield and it's about covenants and we've been able to drive covenants, we've been able to drive yield and we've been able to drive credit quality and in couple recent deals, the equity sponsors put in additional equity deleverage. We have seen an increased willingness to engage on covenant negotiations. We've seen an increased willingness to pay a little bit more yield. So it impacts the whole thing.

And we will take our last question from Casey Alexander with Gilford Securities

Sorry to pile on, but looking at the portfolio and this is similar to what some other people have done here. Your first lien experienced on average low-single-digit mark downs, if we X out Ram and the second lien was more 10% to 25% mark downs and the sub debt was 30% to 60%. Were these valued by the board or were they third party valued first of all? Secondly, given the volatility as you moved down the capital structure in energy, how does that colour your underwriting approach going forward?

So, with just valuation process, Casey. First, we the manager takes a swag at value then we send all of our files to external third party valuation firms. It's 100% every quarter, okay.

100% every quarter, that's great.

100% every quarter, external valuation firms, do their analysis, they do their book. They talk to our auditors and the auditors have their own valuation group, that interacts with the independent valuation firms and then those numbers go to the audit committee of the board. Okay, in eight years through the downturn the board has never moved $0.01 of what the independent valuation firm said should be the value. So basically, that's what goes into the 10-Q's and 10-K's. We are committed to external valuation, we're committed to fair valuation and that's the process. Now as I said, there is a score card, ultimate score card which is cash in and cash out overtime and then there is the score card, while you own an investment. On some of these energy names, we think we're getting all their money back, right and more, if you look at our track record over years. Even through the financial crisis, even through some defaults, we've gotten all our money back and more. So I would kind of caution people, certainly unrealized gains and unrealized losses are a mark-to-market and they were a report card along the way, but if you look at our track record underwriting credit through the cycle managing non-accruals. It's been excellent. Past results never guarantee the future performance, of course.

That's for sure and we know that.

We think, we know how to deal with deals that or markets or industry that have bumps along the way, we had an excellent track record doing it. So that would be my statement on that.

Okay, great. Thanks for taking my question.

Thank you.

Ladies and gentlemen, that does conclude our question-and-answer session. At this time, I would like to turn the call back over to Mr. Penn for any closing comments.

Thank you, everybody we appreciate your time today and your interest in us and we will talk to you next quarter.