PennantPark Investment Corporation (PNNT) Q4 2015 Earnings Report, Transcript and Summary

Good morning. And welcome to the PennantPark Investment Corporation's Fourth 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 open 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 fourth 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 and PIN provided in our earnings press release as well as on our website. I'd like to also 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.

Thanks, Aviv. I am going to spend a few minutes discussing current market conditions, followed by discussion of the portfolio, investment activity, and the financial and then open it up for Q&A. As you all know, the economic signals are modernly 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 September 30, those market softened as high yield and leveraged loan fund experienced some outflows due to expectation of Fed tightening and a potential weakening economy. This has impacted the tone of the middle market and has generally resulted in a better opportunity to invest in attractive risk reward. 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 and structures that are more defensive, have low leverage, strong covenants and high returns. As credit investors one of our primary goals is preservation of capital. And we preserve capital usually the upside takes care of itself. As a business, one of our primary goal 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 first call for middle market financial sponsors, management teams and intermediaries, who want consistent credible capital. As an independent provider, free of conflicts or affiliations, we become a trusted financing partner for our clients. Since inception, PennantPark entities have financed companies backed by over a 150 different financial sponsors. We are excited to be approaching this improving investing market with substantial financial and human capital across our platform. From the standpoint of financial capital, we've significant liquidity in PNNT and our sister company PennantPark Floating Rate Capital has recently nearly doubled its financial resources due to the merger with MCG Capital. With regard to human capital, we've made investments in senior and middle level investment professionals across different geographies. The senior investment professionals in the Midwest, West Coast, Texas and London. Our geographic footprint has broadened. All of these senior professionals have worked with us in the past and come on board sharing our culture. As a result, we should be able to drive significantly enhanced deal flow as PennantPark entities get more looked and can be even more relevant to our borrower clients. We've been active and are well positioned. For the quarter ended September 30, 2015, we invested $116 million at an average yield of 12.2%; expected IRRs generally range from 13% to 18%. Net investment income was $0.27 per share. We have met our goal of steady, stable and consistent dividend stream since our IPO eight and half years ago, despite the overall economic and market turmoil throughout that time period. Our goal is to continue this steady, stable dividend stream going forward. As you know, BDCs are required to pay off their shareholders at least 90% of taxable earnings. As of September 30, our undistributed taxable income was $0.53 per share. This spillover amount grew from $0.21 per share last year due primarily to $30 million of realized gain from out portfolio during the year. This is substantial cushion that we can use to protect our dividend while we build income over the coming quarters. We have plenty of liquidity. As of September 30, we had in total about $385 million of available liquidity consisting of $260 million of available credit facility, $75 million of SBIC debt financing and our second SBIC, and $50 million of cash on hand. We are pleased that much of our debt financing is fixed rate with long maturities including our two issues of unsecured bonds at our SBIC financing. We remained appropriately levered and have excess liquidity that we can use for both defensive and offensive purposes. We continue to make significant progress on our stock buyback program. Last quarter we purchased about 1.3 million shares for about $9.9 million, bringing our total purchases so far to 2.1 million shares for approximately $18 million. We look forward to continuing the program. Our portfolio is constructed to withstand market and economic volatility. We have a cash interest coverage ratio of 2.4x and debt to EBITDA ratio of 5x at cost on our cash flow loans. We've had some attractive realizations. We sold our investment in Southern Park Holdings to management and financial sponsor generating proceeds of $28 million and an IRR of 17%. Additionally, after quarter end Foundation Building Materials was sold resulting in $80 million second lien loan getting taken out of 102 and our $2 million equity co invest getting realized at over $8 million. The blended IRR on this $82 million investment was about 20%. Over the course of 2015, we exited 10 equity co investments and had net realized gains of $30 million. As we've discussed in prior calls, several companies in our portfolio are experiencing challenges including RAM Energy, New Gulf Resources and Affinion. And all three of these cases we have either led or had a leading role in capital structure discussions. The outcome should serve to ultimately maximize our value and recovery over the long term. Affinion as you may recall is one of the largest customer engagement and loyalty solutions companies in the world. The company is comprised of four key operating segments. North American membership, loyalty, insurance and international. We are enthusiastic about the prospects of three of the four businesses. However, the membership business has been challenged due to regulatory headwinds that have impacted their large financial institution clients. The global loyalty business which is experiencing favorable trends at sticky revenue, high free cash flow conversion and attractive growth opportunities. The company completed a debt exchange offer two years ago in November 2013 which extended maturities and reduced the company's cash interest burden. Unfortunately the decline in North American Membership exceeded expectations. This month after extensive negotiations, Affinion completed an exchange offer in which the 14.5% notes converted into 25% of the company's equity and the 13.5% notes converted into 75% of the company's equity. In order to boost liquidity there is $110 million rights offering of new international notes with 25% of the common equity attached. The exchange offer and rights offering result in PNNT owning about 9% of the common equity. The company can now refocus on its operational transition from the legacy membership business to higher growth and higher value added segments such as loyalty and international. In addition, PennantPark's equity ownership should allow us to recover our investment as Affinion returns to growth and the market ascribes a higher multiple to the company's earnings. We believe its recapitalized business will be able to grow from a stable foundation and that the company's valuable segments will allow us to maximize our recovery over time. Our positions in the 14.5% and 13.5% notes will put on non accrual as of September 30. Our position in the company second lien should be enhanced by the new de-leveraged balance sheet. With regard to the energy names. We have avoided many energy sub sector geographies as well as undifferentiated service businesses with low barriers to entry. While the industry is challenged by low oil prices and a rising supply, much of our exposure is senior in the capital structure with an asset back focus. 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 through proved, developed and producing reserves. There are also significant additional assets in the form of additional acreage, reserves and midstream assets. With regard to RAM Energy. We are backing an experienced management team who has performed well for PNNT in the past. RAM is an E&P company focused on the development and production of long life, slow decline, conventional assets in the Permian, Mid -Con, Ark-La-Tex basins. The company is more than 50,000 net acres and are all held by production. In September, the last calculated 1P or proven reserve PV-10 using the NYMEX strip was greater than $55 million. The company is the operator of a vast majority of its acreage and production is approximately 1,200 Boepd. Despite the company's hedging program and completion of approximately $15 million of opportunistic asset sales at attractive prices over the last year to generate liquidity, the continued weak commodity price environment made the company's capital structure unsustainable. Since the last quarter, we have completed a consensual restructuring by converting our $20 million tranche B loan into 100% control equity position. Together with management, we decided that the best corporative course of action was to recapitalize and not pursue additional asset sales today at fire sale prices. The company will be run in partnership with management. Recall that the CEO Larry Lee is a long time industry veteran with whom we have successfully invested in the past. He has previously run a public company which was subsequently sold. We believe that this restructuring will provide RAM with a room for growth and allow it to operate successfully in this market environment. Additionally, we amended the credit agreement to include a PIK/Toggle function on the $75 million first lien senior secured tranche A to provide maximum flexibility to build value over time. Our strategy in the future may include strategic acquisition, divestures or mergers. New Gulf Resources is an ENP company that focuses on the development, production and exploitation of oil weighted assets in Woodbine Eagle Ford shale areas of East Texas. The East Texas assets are situated in the Halliday, Curden, Johnson Ranch, Centerville, and Bodias Creek Fields [ph] with significant concentration of oil and over 70,000 net acres. With the large block of contiguous acres the Johnson Ranch area is a high value, potential deep horizontal play with recent offset production of approximately 1,500 Boepd from nearby operators. Several large energy companies such as EOG and Apache have highly productive acreage in and surrounding these areas. While the company has aggressively responded to the lower price environment by selling its midstream natural gas assets for $85 million and marketing its other non-core assets, weak commodity prices have played strain on the company's liquidity. New Gulf is a private company and only discloses limited information to the public. The company has a $50 million RBL facility, $365 million of second line senior secured notes and approximately $150 million of senior subordinated notes. On October 30, New Gulf announced that it had to retain advisors to review strategic alternatives with capital structure. While we have placed New Gulf on non-accrual, we believe the company has substantial asset value. With regard to our energy exposure, we do not believe that the short run option of selling attractive assets at fire sale prices is prudent. In this challenging environment for oil prices, we intend on taking approach that will maximize value in the long run. We believe that our underwriting criteria long-term approach should support our investments through this period of low energy prices and allow us to realize attractive returns. While mindful of our desire to maintain a diversified portfolio, the current situation may also present attractive risk reward opportunities in our existing portfolio companies. Across PennantPark entities we had only 11 companies on non-accrual and 385 investments since inception eight and half years ago, despite the recession during that timeframe. Further, we are proud that even we had those 11 non-accruals we have been able to preserve capital for our shareholders. Through hard work, patience and judicious additional investments in those companies, we've been able to find ways to add value. We constantly monitor our deals and we underwrite them in the face of new information. Every investment that is not on a broker dealer quote or where the broker dealer quote is inactive is independently valued by one of three nationally recognized valuation firms in each and every quarter. In situations where the best long-term value for shareholders is created by taking control of the companies and providing capital and expertise we do. Although past returns are not necessarily indicative of future returns, a positive net realized cumulative gain since inception eight and half years ago through the financial crisis are testament to our long-term value orientation. You may recall our prior investment in UP, Universal Pegasus and Energy Services Company. Due to a significant downturn in the company's industry and performance, our debt investment was restructured; we back stopped in equity raise and took control of the company. After changing management and improving performance, we subsequently sold it to a strategic buyer and generated a double digit overall return from inception of the investment. Based on value as of September 30, today we have recovered nearly 87% of capital invested on those 11 companies that have been on non-accruals since inception of the firm. As a result of this track record of low non-accruals and high recovery rate, we are one of the BDCs operating before the recession which has preserved capital for shareholders while generating consistent, steady dividend. With regard to our dividend, our Board is continually evaluating the earning power of the company relative to dividend. Our substantial spillover cushion of $0.53 per share gives us the opportunity to protect our dividend while we build income and evaluate our portfolio and the market without rushing to make a decision on the dividend at this point. In terms of new investments, we had another quarter investing an attractive risk adjusted returns. In virtually all of these investments we have known these particularly companies for a while and studied the industry or have a strong relationship with the sponsor. Let's walk you some of the highlights. We lent additional $9 million of second lien term loan to Balboa Capital. Balboa provides equipment leases to small and medium size businesses in the U.S. The company is owned by management. Language Line is a provider of on-demands book and interpretation services. We purchased $40 million of the second lien term loan, Avery Partners is the sponsor. We lent $30 million in the first lien term loan to Sunborn International which operates the Sunborn London Hotel. The Nini Family is the owner. This investment was a result of our presence in London. U.S. Mad is a direct-to-consumer mail order medical supply distributor focused on patients with chronic conditions. We've invested about $9 million in the first lien loan, HIG is sponsor. Turning to the outlook. We believe at the remainder of 2015, we will continue to be active due to growth in M&A driven financings, due to our strong sourcing network and client relationships, we are seeing active deal flow. Let me now turn the call over to Aviv, our CFO to take us through the financial results.

Thank you, Art. For the quarter ended September 30, 2015, recurring net investment income totaled $0.21 per share. In addition, we had $0.06 per share of other income. As a result, net investment income for the quarter was $0.27 per share. Looking at some of the expense categories, management fees totaled $11.7 million, general and administrative expenses totaled about $800,000 and interest expense totaled $6.7 million. During the quarter ended September 30, unrealized loss from investment was $16 million or $0.22 per share. Unrealized loss from our debt was about $600,000 or $0.01 per share. Realized losses from investments were $1.8 million or $0.02 per share. In the accretive effect of our share buyback was $0.04 per share. Consequently, entity per share went down $0.22 from $10.04 to $9.82 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 quotation when active markets are available under ASC 820 and 825. In cases where broker-dealer quotes are inactive, we use independent valuation firms to value the investments. Our overall debt portfolio has a weighted average yield of 12.1%. On September 30, our portfolio consisted of 61 companies across 30 different industries and was invested 31% in senior secured debt, 47% in second lien secured debt, 14% in subordinated debt and 8% in preferred and common equity. 71% of the portfolio has a floating rate including 65% with the floor and the average LIBOR floor is 1.4% Now, let me turn the call back to Art.

Thanks, Aviv. To conclude, we want to reiterate our mission. Our goal is a 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 risky 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 flows 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’d like to open up the call to questions.

[Operator Instructions] And we will go first to Rick Shane of JPMorgan.

Good morning, guys. I just like to talk a little bit about two things. Obviously, you have been buying back shares about $10 million a quarter and I like to talk about leverage. The market is implicitly giving you the opportunity to buy your stock back at about 30% discount to NAV but I think more importantly when you look at it on a levered basis at about a 16% discount to the value the underlying assets that are marked to fair value. Given everything, isn't that really the best opportunity for investment for you at this point? And then you talk about liquidity and I think you guys are sort of at the right point at right now we are looking at it is about 170% assets to equity ex SBA loans which is appropriate. How much more leverage do you think you can take on given the current environment?

These are -- those are great questions, Rick. And they are all kind of important and they all relate to each other. And then of course it's all balancing act and yes we really like the buyback, that's why we did it. And when we announced the couple quarters ago our thought was and it remains that we will methodically over the four quarters buy the $35 million. See where we are at that point in time, lift our head up see what the opportunity in the deal market is, see where our leverage is and make a decision based on that. So we are excited to continue to buy back. We also are excited to have liquidity we have. Our SBIC licenses are obviously a great port of call and a first port of call because it is long-term financing. It uses cost accounting. It is attractive financing so that we clearly hope to optimize and use all of the SBIC financing that we can use and then our additional excess liquidity. We are still thinking overall leverage in the same zone that we always have. We just really like those SBIC licenses as we've always said they are great for both offensive and defensive purposes. And then we have to really manage our portfolio. What are the deals that are coming in we have to make sure that they are attractive. They should be compelling, the deals that we are doing. And then we have to manage our portfolio pro forma for some of these non-accruals - equity as a percentage of the portfolio is going to end up probably being a double digit number, a little higher than we like. So we are going to need manage that equity portion of our portfolio. And as we have been doing we had $30 million of realized gains over the last 12 months, continue to hopefully realize gains from the equity portfolio which will be additional cash to use to put into interest paying debt instruments.

Okay, great. That's very helpful. And appreciate the point on the increase in the equity positions as well. Thank you.

And next we will go to Arren Cyganovich of DA Davidson.

Thanks. I guess you just kind of touched on this little bit but your equity positions, what's your ability to I guess direct sales there, often times you are on a control position and realize gain and help get the NII coverage on a recurring basis back up a little bit higher.

Yes. So you know, look as you know, in many cases and where we have most of these gains have been in equity co-invest and LBOs, last year was very prolific year we still have some very good nice embedded numbers in our equity portfolio that were helping we rollout and will turn into cash over the next 12 months. Unfortunately, we are not the driver, many of those just happen over time as companies performed or de-leverage or ultimately get sold. Impossible for us to time it, we take -- again we take a long-term view on all of these things and over time we believe we are going to be able to -- as we have from inception be able to have enough realized gains to offset losses that maybe even positive at the end of the day. So even though we are not thrilled obviously with some of these development in non-accruals we are optimistic in the long run like we have in the past that some of these will turn into interesting exit opportunities for us, we will gain back vast majority of the money we've invested and potentially more and then turn that into cash paying debt instrument as well.

Thanks. And with respect to RAM Energy, when you make the decision to allow company to go towards to PIK/Toggle, they end up 100% PIK, how do you usually think about that decision whenever you have a couple of revenue portfolio -- [multiple speakers]

Yes. So on RAM specifically we are just getting in there as a control investor so the reason we get to PIK/Toggle because of its optionality either way depending on what we find out, how much cash flow they developed, they could sell off some assets to pay cash, there could be enough cash flow from operations to pay cash. On the other hand, we also want to maximize the opportunity to maximize value in that enterprise and to mix, sound for us to pick for a little while if that's the best way to maximize value we will certainly look at. We are excited to be partner with Larry Lee and his team, they are great management team, they have done well for us in the past, and they have a great track record. So it is going to be interesting to work with him and his team and we are excited about that opportunity. But the PIK/Toggle gives us maximum optionality as we get in there and figure out what the various tools are.

Okay. And then just lastly on the repayment of foundation building. Is there going to be any fee income associated with that or will that be treated as realized gains.

So that $80 million debt, it got taken out one or two so that's prepayment penalty which are going to other income and then $2 million of equity co-invest turned into $8 million of proceeds or $6 million realized gain.

And now we will take a question from Greg Mason of KBW.

Great, thank. Art, I just want to get just a little more clarity on the dividend. It sounds like you're not going to do anything for a while based on your spillover but I just wanted to get just a little more color on what you are thinking about the dividend near term and long term, longer term?

We have the substantial spillover. We have a lot of liquidity. We think the market is coming -- is becoming a little bit more of a buyers market which means better risk adjusted returns better yields. So there is really nothing we can make a decision on at this point. We have to see how the deal flow is, where the yields are coming in. We have to see our spillover works over time. We are looking forward to using the SBIC licenses little bit more fully. So there is really nothing we can do at this point in terms of making a decision. We don't think it is prudent to make a decision until we see how this plays out over the coming quarters.

Okay, great. And then my next question was on the SBIC, you have been at $150 million drawn here for now four years. I know some of that you were waiting to get your second license but you had that for a while and not yet drawn on it. So was that conscious effort or was that asset not fitting and do you think you will be able to more aggressively use the remaining $75 million in the coming quarters?

It's a great question. It was what we've always love the SBIC financing and it has been our goal to use it. But we've always like having it a little bit in our back pocket as well for offensive and defensive purposes given the ability to get 2 to 1 leverage given the long-term cheap financing and given the fixed rate on it. So we try to find deals to go into, we are finding I think in this more of buyers market they were coming into. We have been finding more deals to fit into the SBICs. So we are hopeful that in the coming couple quarters we will be able to fill them all up.

And now we have a question from Doug Mewhirter from Suntrust.

Hi, good morning. First just a quick clarification. Do you have exempted relief on cross investing with PSLT?

Yes. We do have SEC exempted relief.

Okay. I thought you did. I just wanted to clarify that. Also looking into the portfolio, some of your other bigger energy investments so link and venue seemed to have avoided the non-accrual or restructuring bogey, is there any I guess company specific characteristics or they are just little bit more well capitalized, how are they chipping right now? I mean obviously been marked down but I am assume that's market related.

Yes. Look, you know in the energy portion of portfolio has been marked down pretty heavily which is fair. And again reiterating that we send 100% out to external valuation firms every quarter. Look the fact is service date is change all the time with these companies and we are hopeful that they will avoid non-accrual. We think they are capitalized well. But we don't really know because we don't really know what the future will hold. But we think they have been appropriately marked and we are hopeful that they will stay non accrual.

Okay. Just last one just to clarify because there is a lot of ins and out of non-accruals what is four, you said there is four investor, what exact ones are they, are currently on non-accrual as of end of the quarter?

So the four and the four names currently on non-accrual are Affinion, New Gulf, Direct by and Great Wide which sometimes goes only in transportation 100.

And we will now go to Doug Harter of Credit Suisse.

Thanks. I was hoping if you give a little more color on what was the kind of the unusual fee income that you had during the quarter?

It's a great question. We sold Southern Park which was a control equity investment; we also were lender to that company. So the vast majority the other income was prepayment penalties from that loan.

Got it. And I mean you highlighted the $0.06, I mean is that the entirety of the prepayment income. I mean and kind of what is that average over the past year or several quarters?

So we do highlight or we do separate other income in our revenue statement or income statement. And that is what we determine as kind of one time fee events and minimum waivers prepayment penalties. So that is gone from $0.01 to $0.08 a quarter. It is usually something but there is a risk that sometime we don't have some of these fee events. Just to clarify upfront fees on deals we do not take as other income or as fees. We amortize that over the life of the loan so the two or three point upfront fee to us as OID that we amortize over the life of the loan.

And now we will go to Mickey Schleien of Ladenburg.

Good morning, Art. I noticed that pick income relative to total investment the income jump pretty substantially in the fourth quarter and I would like to ask you whether you are particularly concerned about any investments that are on pick accrual that potentially going to on pick non accrual?

Yes. So that's a great question. And the way to answer is way to no we are not. I mean the way to look at it is also where the investments are mark-to-market. If it is a PIC deal and it is $1.95, we think there is a justification obviously for not having any concern about. Obviously if it is a PIC deal and it is $1.40 totally different kettle of fish. So we feel like, we did not accrue any income for New Gulf and we do not accrue any income for Affinion in the quarter headed 9/30. So we feel we've got very clean income statement.

Okay. And talking about marks Art, same question I asked last quarter. I looked again at New Gulf and at the end of the second calendar quarter so June that eleven and three quarter second lien was mark, you marked at it 85 and it traded at 58, now it is marked at 71 and I saw trading September at 31. I think you said in your prepared remarks that perhaps you and the Board have more insight into the names and the market. Does that what's causing the disparity or do you know -- as the Board feel the market is too pessimistic on this particular name?

Well, what happen is when there is broker dealer quote, it is up to us to figure out as the broker dealer quote active and liquid right. So we've always to ask ourselves as what's the exit price to market participants in orderly market. In that particular name there was only one buyer who takes his bid down every other day so there is -- if there is a trade and I think the one trade that happened was a distress seller who was a forced seller. So you sit there and say okay that's not really an active market. You have a distress seller and buyer takes it bid down everyday, that's an interesting fact. But it is not really an active market. You send the investment to the external third party valuation firm who does take that broker dealer quote into account, we take that one trade from the distressed seller and the one buyer keep luring and bid everyday. They take that into account and then look at other market comps, what reserves are going for in the public equity markets and other debt markets. And they look at all those different elements and come up with their number. Their number in the cases of the energy deal is based on; the value of the reserve is based on the number of market comparable.

Okay. I appreciate that color. My last question is little more philosophical. Obviously you're NAV per share declined pretty substantially over the last fiscal year. I am just curious whether you thought meaning the external managers considered revising the management agreement to lower the base management fee and introduce a look back which is more in line with recent vintage BDCs?

Yes. The Board is always looking at all the arrangements and they always looking at the comps and the peers and performance. That said, we had a lot of realized gains during those 12 months and the view is that in the long run it is cash in and cash out. And historically we've had very good cash out relatively to the cash in. Sometimes there is mark-to-market negative. But in the long run it is cash in and cash out and so far our performance has been strong.

Art can you just remind when the external management does contracted PNNT come up for renewal?

Every February.

February. Okay, thanks for your time this morning.

Now we have a question from Jonathan Bock of Wells Fargo Securities.

Hey, guys. This is actually Jamie Sirockman filling in for Jonathan. Just had a quick question regarding kind of the share repurchase and your leverage. We've seen those kind of tick up recently. We've also seen some tailwinds and other income so I was just kind of curious how should we be looking or thinking about portfolio activity in the coming quarters?

Look, it's -- again it is -- thank you for the question. It is a balancing act between equity realizations, between leverage, between new deals and between the buyback. And we are balancing those all the time. We are looking at those all the time. We intend to keep within the leverage zone that we have although and as we've said it is nice to have those SBIC licenses which give you some extra defense and offensive firepower. So I think we are going to keep operating the way we are operating, looking at the market, try to find good deals, keep our leverage reasonable, execute on the buyback and over time try to convert some of these equity investments as we have the co-investments in certain cases where we have to convert debt to equity try to convert them into cash over time at reasonable levels.

And now we will go to Christopher Nolan of FBR.

Art did you mention Pennant now owns 100% of the equity of RAM?

Yes. We own 100% of the equity. We are operating the company in partnership with management. We really like the management and we view them as a partner in the deal.

And can you give us a little detail in terms of what does RAM's balance sheet look like? I mean obviously you have the debt component but is there bank in front of you? What's you're - for your debt, what's EBITDA turns on that right now?

Yes. So we are the only partner, only debt player in the capital structure. Company doesn't disclose EBITDA and frankly we are getting into the company and learning more about it with management. We have nothing else to disclose at this point.

All right. So if there is a capital -- excuse me, a liquidity squeeze or so forth we should look at Pennant to probably be stepping in to one degree or another?

Potentially although since we are the only debt and capital structure, we could allow our reserve base loan on top of us if we want to do that. One of the ways we've made good returns in the past is by lending additional money to companies that we’ve lent to that have underperformed and rest assured that any loan we -- any additional capital we put into any of these companies we think will be on attractive terms.

And now we will take a question from Bryce Rowe from Baird.

Thank you. Art just want to ask a question about RAM as well, certainly understand the conversion from debt equity on that second tranche [B] [ph] tranche, but curious what kind of triggers or realized loss versus an unrealized loss given the equity now is valued at zero?

Yes. So look it is fact every time there are some kind of restructuring the various accountants and lawyers take over and then usually there is call whether something is realized or unrealized. What we’ve traditionally done in restructuring is when it is still middle of the game which for us in RAM it certainly is. We think the middle of the game is we think there is lot more opportunity in life to this investment as with [UP] [ph] and some of the other examples that we've talked about. We usually keep it unrealized until there is an event down the road that is clear that there is an actual event.

And now we have a question from John Hecht of Jefferies.

Yes. Thanks very much. Couple of questions. First just make sure I got my notes right. For New Gulf, did you convert both tranches or just one of them?

Yes. So New Gulf it is -- the thing that we've disclosed on New Gulf is that they hired an advisor on October 30 to assess their options. There is nothing else we can say at this point. It is early days and we don't yet know where that's all going to play out.

And then I guess little bit tag on to the prior question. Do you -- for the companies where you have substantial ownership now or your non performing companies, can you give us a sense of their liquidity profile? Forgetting the asset kind of -- the asset coverage just the liquidity profile on when you might need to think about cash infusions or raising capital for these companies?

Look, we take it day by day, week by week, month by month. We think these companies once they are restructured have very flexible capital structures. Give them room to run and run for a while so the idea behind the restructuring is that it is not a band aid, that it is a long term or longer term approach.

And then did you mention the couple of post quarter take outs, do you have -- can you give us a sense for what kind of fee income you might have already earned on those, just so that we can consider that in your near-term model.

Sure. So Foundation Building Materials was taken out, it was sold. Our $80 million tranche was taken out of 102, so that two points is a one time repayment penalty, repayment fee. And the $2 million cost investment in the equity was taken out of the $8 million. So that's we've disclosed in terms of post quarter end events.

Okay, that's very helpful. Thanks. And any update on DirectBuy? It’s a name you highlight a little bit in the past?

Yes, no, look, they are changing their business model quite substantially. Again the company is capitalized to have time to do that. It is going to take some time. We are optimistic that the business model change will ultimately take. But it is a long term process.

And that concludes today's question-and-answer session. And I'd like to turn the conference back to our presenters for additional or closing comments.

So I want to thank everybody for their attention today. And their interest in the company. And we will talk to you in early February.

And with that, ladies and gentlemen, that does conclude today's call. We'd like to thank you again for your participation.