PennantPark Investment Corporation (PNNT) Q4 2016 Earnings Report, Transcript and Summary

Please standby. Good day and welcome to the PennantPark Investment Corporation’s Fourth Fiscal Quarter 2016 Earnings Conference Call. Today’s conference is being recorded. And 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 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 2016 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 the 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 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 provide an update on the business starting with financial highlights, a discussion of our dividends and energy portfolio, followed by a discussion of the overall market, the overall portfolio, investment activity, the financials, and then open it up for Q&A. For the quarter ended September 30, 2016, we invested $23 million at an average yield of 12.6%. New investment activity can move from one quarter to the next. Since quarter end, we’ve invested $52 million and believe that the remainder of the quarter will be active. Net investment income was $0.21 per share, which included $0.02 per share of a fee waiver. NAV increased 1.2% from $8.94 per share to $9.05 per share. With regard to our dividend, our Board and management regularly evaluate the earnings power of the company relative to the dividend. Given the continued weakness in energy and overall yield compression in the market, we’ve concluded in consultation with our Board that it is prudent to pay our $0.28 per share dividend for the December 2016 quarter and then reduce the dividend to $0.18 per share for the March 2017 quarter. We’re all personally disappointed regarding this reduction, which is our first dividend reduction in our nearly 10-year history, in spite of the fact that we went public prior to the great recession. This is undertaken with a great consideration and we believe it is the right decision at this time. This should allow us to return to the environment, where we expect to continually earn or exceed our dividend through net investment income with gains contributing to long-term NAV growth. During the past year, we’ve had the opportunity to restructure most of our challenged energy names. Generally, post restructuring, these companies are now positioned to weathera period a prolonged lower energy prices. We believe it will take us more time for us to maximize the recovery on the energy portfolio. Additionally, with that said, yields coming down over the last several years, we’re looking to create an attractive risk adjusted returns in our portfolio. We intend to focus on lower risk, primarily secured investments, thereby reducing the volatility of our earnings stream. For the quarter ended September 30, we waived base and incentive fees, which equaled the percentage of the cost value of our energy portfolio, 16% as of December 31, 2015. This waiver amounted to $1.5 million, representing $0.02 per share. In consultation with the Board, the 16% waiver of base and incentive fees will be extended and continued through December 31, 2017, as the energy investments need more time to maximize recoveries. We believe that this waiver demonstrates a strong commitment to our shareholders and our focus on our energy portfolio. Given the continued headwinds and volatility, we continue to focus on our energy portfolio, which includes those companies in our schedule of investments listed as oil and gas and energy and utilities. Our focus is on companies that have strong management teams, attractive asset portfolios, and the ability and time to endure the current market conditions. We intend to work with our portfolio companies to ensure that they have the resources, personnel, capital, and runway to maximize our long-term recovery to weather this tumultuous period. While energy prices have somewhat stabilized over the last quarter or two, they continue to be low on an absolute basis. As of September 30, 2016, our energy portfolio had a cost of $181 million and was marked at $125 million. This represents 14% of the cost and a 11% of the market value of our overall portfolio, respectively. As we have mentioned previously, independent third-party valuation firms value all of our non-actively quoted investments. Many have asked us, what happens to NAV and NII, if our energy investments are completely written off? While we do not think our energy investments are worthless and believe that they’re fairly valued. As of September 30, NAV would have been $7.29 per share, or about 20% lower if all the energy investments were written off. If all the energy investments were put on non-accrual, NII would decrease by about $0.03 per share per quarter. As shareholders and managers, we’re disappointed with the performance of our energy portfolio and intend to work diligently to recover our capital on our energy investments and to grow our NII back to historical levels. We do not believe that the short-run option of selling these assets at fire sale prices is prudent, or will maximize returns for our shareholders. That said, we monitor each situation and investment on a case by case basis. In this challenging environment for oil prices, we intend on taking an approach that will maximize value in the long run. We believe that the recovery in this sector will be gradual and take time. We remain committed to NAV preservation and maximizing recoveries. In general, there have been no recent material developments in our larger energy names RAM Energy and ETX Energy, formerly known as New Gulf Resources. Bennu Oil & Gas remains on non-accrual, the company has entered a forbearance agreement with its lenders while Bennu continues to work with its lenders on a possible restructuring and needs all lenders to agree on a consensual plan or faces a valuable lease expiration and the liquidation or sale of its assets. As mentioned last quarter, American Gilsonite, a natural resource company went on non-accrual. On October 24, the prepackaged bankruptcy plan was filed. PennantPark is a member of the ad hoc committee of note holders, and under the plan will have a Board seat. As a result of the plan, PNNT is providing $4.1 million of a dip loan, a LIBOR plus 900, with a 1% floor issued in 96. Upon emergence of the bankruptcy, the dip loan will convert into a 15% exit facility. Additionally, PNNT’s $25.4 million face amount of debt will convert into $9.4 million, or 17% debt and $5.5 million of common equity, which implies a recovery of 59% at plan value. Given the bankruptcy process, we cannot comment further at this time. In addition to the fee waiver, several other factors are helping to offset the energy issues. Last December, SBIC legislation was passed, which raised the amount of available borrowings to $350 million which will enable us to continue to use the program and create value for shareholders. We’re finding attractive investments for SBICs and believe that our SBIC licenses will enable us to prepare [ph] ourselves of that capital. This past quarter, our latest tranche of long-term SBIC financing was locked in at an historically low rate of 2.4%. We look forward to fully utilizing the upside of $150 million of borrowing capacity in SBIC II, and utilizing an additional $50 million of borrowing capacity in potential SBIC III. This past quarter, our portfolio company, J.A. Cosmetics health beauty completed an IPO. As a result, our initial equity call investment of $2.5 million was worth 10 times the cost, or about $25 million as of September 30. This unrealized gain helped drive our overall NAV higher. Over time, we intend to exit this stock and reinvest the proceeds in the debt instruments. Similarly, we have other equity call investments that we’re hoping to exit in the coming quarters, which can be reinvested into debt instruments. As of September 30, our spillover income was $0.41 per share, providing additional financial cushion to support our dividends into the future. With regard to the market, the economic signals have been moderately positive. With regard to the more liquid capital markets, and in particularly the leveraged loan in high yield markets. During the quarter ended September 30, those markets experienced trends, as high yield and leveraged loan funds experienced inflows due to a continuing benign interest rate environment and stability in the energy market. We remain focused on long-term value and making investments that will perform well over a long period of time and can withstand different business cycles. Our focus continues to be on companies with structures that are more defensive, have a low leverage, strong covenants and high returns. We continue to be highly selective in this environment. As such, we like to have a prudent amount of liquidity in order to capitalize upon opportunities should this location arise. As credit investors, one of our primary goals is preservation of capital. But we preserve capital usually the upside takes care of itself. As a business, one of our primary goals is building long-term trust and focuses on building long-term trust with our portfolio companies, management teams, financial sponsors, intermediaries, our credit providers and of course, our shareholders. We are the first to 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’ve become a trusted financing partner for our clients. Since inception PennantPark entities have financed companies backed by over 160 different financial sponsors. Our portfolio is constructed to withstand market and economic volatility. In general, our non-energy portfolio is performing well, despite a mixed domestic and global economy. We have cash interest coverage ratio of 2.4 times and debt to EBITDA ratio of 5 times at cost on our cash flow loans. We’re pleased that we have diversified funding sources with several features that reduce overall risk to the company. First, we have $321 million of long-term unsecured bonds and have only utilized less than 10% of our long-term $545 million credit facility. Second, as we discussed, we’re utilizing the expanded capacity under the new SBIC legislation. SBIC financing creates financial cushion. Now we have exempt relief from the SEC to exclude SBIC debt in our our BDC asset coverage test and SBIC accounting is cost accounting, now mark-to-market accounting. Third, to better align the measurement of asset and liability values for both GAAP and the BDC asset coverage test, we marked both our assets and our liabilities to market. As a result of all these features, we provided substantial safety to our shareholders, bondholders, and lenders in the event of market volatility. On the asset side of our balance sheet, as indicated, we are prioritizing secured assets, investment secured by either first or second lien, or 70% of the portfolio. Due to all these factors, we remain comfortable with our targeted regulatory debt to equity ratio of 0.6 times to 0.8 times. Across PennantPark entities, we’ve had only 14 companies going non-accrual and more than 400 investments since inception nearly 10 years ago, despite the recession during that timeframe. Further, we are proud that even when we’ve had those non-accruals, we’ve been able to preserve capital for our shareholders. Through hard work patients and judicious additional investments in capital and personnel in those companies, we’ve been able to find ways to add value. We constantly monitor our deals and reunderwrite them in the face of new information, situations where the best long-term value for shareholders is created by taking control of the companies and providing capital expertise we do. Based on values as of September 30, today we recovered about 80% of the capital invested in those 14 companies that have been non-accrual since inception of the firm. It might be helpful to highlight our long-term track record over nearly 10 years, including the recession. Since inception, PNNT has made nearly 180 investments, totaling about $4 billion, with an average yield of 13%. Including both realized and unrealized losses, PNNT lost only about 50 basis points annually. Turning to the outlook, we believe that the remainder of 2016 will continue to be active due to growth in 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 us through the financial results.

Thank you, Art. For the quarter ended September 30, 2016, the recurring net investment income totaled $0.17 per share. In addition, we had $0.02 per share of other income and $0.02 per share from the fee waiver. As a result, net investment income for the quarter was $0.21 per share. Looking at some of the expense categories, management fees after waiver totaled $7.9 million. General and administrative expenses totaled $1.8 million, and interest expense totaled $7 million. During the quarter ended September 30, unrealized gain from investment was $23 million, or $0.32 per share, primarily due to the IPO of of J.A. Cosmetics health. We also had unrealized loss from our various debt instruments of $12 million, or $0.16 per share. We had about $2 million, or $0.02 per share of realized gains. Excess dividend over net income was $5 million, or $0.07 per share. Consequently, entity per share went up $0.11 from $8.94 to $9.05 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 exchanges, or independent broker dealer quote when active markets are available under ASC 820 and 825. In case of where broker dealer quotes are inactive, we use independent valuation firms to value the investment. Our overall debt portfolio has a weighted average yield of 11.9%. On September 30, our portfolio consisted of 56 companies across 27 different industries. The portfolio was invested in 35% in senior secured debt, 37% in second lien secured debt, 15% in subordinated debt, and 13% in preferred and common equity. 79% of the portfolio had a floating rate, including 72% with a floor and average LIBOR floor was 1.2%. Now, let me call – turn the call back to Art.

Thanks, Aviv. To conclude, we want to reiterate our mission. Our goal is to generate attractive risk adjusted returns through income, 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.

Thank you very much. [Operator Instructions] We’ll take our first question from Doug Mewhirter from SunTrust. Please go ahead.

Good morning. This is actually Matya Rothenberg on for Doug. Thank you for taking my question. You mentioned that originations have picked up since the end of this quarter. Are you able to characterize exits and repayments as well, and have you seen any early impact from the election?

Thank you for the question. We have been active on the origination side this quarter. It looks like it’s going to be an active quarter end, and we’ve had as usual some repayments. Again, I can’t give you any firm guidance at this point as to where we’re going to end up. In terms of the election, I don’t know, if the election is -- maybe the election has had some impact, but the high yield bond market has traded off as government bond yields have risen. So the bond market in general, the high yield bond market has traded off. So that might present an opportunity for us in some other BDCs. By the same token, the floating rate market, which is about 80% of our assets continues to be strong. So while we’re pleased that the vast majority of our liabilities are fixed at a fixed rate. And on the asset side, we have some nice upside in yield in terms of our floating rate portfolio.

Okay. Thank you. And then it looks like your other income line came down a little bit this quarter. Is there something going on there and how should we think about it going forward?

Other income primarily comes from prepayment penalties one-time amendment or fees that we get on the underlying portfolio, and that ebbs and flows with the call premiums we get when our deals get refinanced. So it’s been $0.02, $0.03, $0.04 a quarter, sometimes it’s been higher than that when we’ve had big call premiums. It’s probably average $0.02, $0.03 a quarter, but it’s something we characterize as other income, because it’s not necessarily recurring.

Great. I understand. Okay, thank you. That’s all I have for now.

Thank you.

Now, we’ll take our next question from Rick Shane of JPMorgan. Please go ahead.

Hey, guys, thanks for taking my questions this morning. I’d like to focus a little bit on the thought process around the dividend level for 2017. So I understand the rationale for cut, but like to talk about the level. You have $0.41 of spillover income. You had roughly $0.21 of sort of recurring income this quarter. Art, you talked about if you were to put all of the energy investments on non-accrual, that would cut $0.03. So I think that $0.18 represents an almost worst case run rate and that’s without considering the spillover and without considering the reinvestment of some of the gains that you’ve had. I’m curious why it’s so low? And is there something you need to think about going forward as you transition the portfolio?

That’s a great question. Of course, we – as I said, we spent a lot of time debating this. It’s been 10 years and it’s our first dividend cut. And we don’t ever want to do it again. We don’t ever want to go through this again. We’re going to do everything humanly possible. There are $0.21, this consist of $0.17 kind of recurring on the portfolio, $0.02 of other income, and $0.02 of the fee waiver. We do believe with this new level, we can meet or exceed on an NII basis going forward to $0.18 easily, we hope we can, and we hope over time, we can get back into the mid-20s. To get back into the mid-20s, we’re going to need to invest a little bit more. And I said, we’re active. We’re going to need to use the cash on the balance sheet, really need to use the SBIC licenses. And we’re also going to need to rotate those equity co-invests like [Technical Difficulty] which aren’t earning income. But over time, we’ll rotate out of those and invest those proceeds into cash bank debt instrument. So our goal, Rick, is to get back into the mid-20s. But that said, we wanted a dividend level that we and no one else would be concerned about going forward that we could easily meet or exceed going forward, so the people could view it as a real base at sustainable and then we could provide upside in terms of NII and hopefully NAV growth over time. And at some point, energy is going to rebound and that will be a powerful tailwind to our NAV growth.

Okay, great. Thank you, Art.

Thank you.

[Operator Instructions] We’ll take our next question from Kyle Joseph from Jefferies. Please go ahead.

Good morning, guys. Thanks for taking my questions. I just wanted to get a sense for sort of the terms on the new deals you’ve done quarter-to-date in terms of yields, leverage as well as seniority?

Yes, it’s been a mix of both stretch – senior stretch senior and second lien, I’d say over time and you’ve heard in our remarks, we don’t feel like we want to be reaching for yield. We want to have a consistent cash flowing portfolio. We want to reduce volatility in the portfolio. So we have been historically kind of generating yields of 12%-plus. Given the yield compression in the market, we think gradually our average yield will work down into the 11s somewhere into the 11s on a yield to maturity basis. Again, we amortized OID over the life of the deal. We don’t characterize our upfront fees into income. So over time, we’re going to – in order to reduce risk to portfolio, we’ll work our yields, it will end up working their way down. And again, it’s going to be a mix of senior and second lien – first lien and second lien deals.

Great, thanks. And then just looking for a little more color on the competitive environment. So is the competitive environment, is it mostly other BDCs and what are non-BDCs that you’re seeing in deal flow?

Look, the biggest competitor over the last few years has been the liquid markets, the broadly syndicated market and the high yield market. And when those liquid markets are aggressive, they will dip down into smaller companies, which impacts us, other BDCs, and the overall direct lending universe. The nice thing about what’s going on right now is with the high yield market backing up due to treasury backups. There’s a little bit more, I mean, there’s a little less firmness in the broadly syndicated market, which is helping our origination and helping our yields this quarter.

Okay. And then just one last one for me. I haven’t had time to spin through the K. But can you give us a reminder of what happens to Pennant in a rising rate environment, given what rates have been post election?

Again, liabilities were mostly fixed. We’ve only drawn at this point. We have plenty of liquidity. That’s – we’re in a very good a liquid position. On liability side, we’re mostly fixed rate with our two types of bonds as well as our SBIC financing and we’ve drawn about 10% as quarter end about 10% of our revolver, which is our only liability that floats. And then on the asset side, we’re about 80% floating. And since LIBOR is at about 90 basis points right now and our LIBOR floors were about 100 on the verge of piercing through and getting some nice upside if LIBOR continues to go up.

Great. Thanks for answering my question.

Thank you.

And we’ll take our next question from Christopher Nolan of FBR and Company. Please go ahead.

Hey, Art, given that the focus on derisking the portfolio going forward, should we look for higher balance sheet leverage ratios than in the past?

Hey, look, we are in a really fortunate liquid position right now. Again, we’re targeting 0.6 times to 0.8 times regulatory leverage. So we’re at the low end of that right now. So, look, we hope to be using our SBIC facilities. We hope to be using our regular facilities, as we find hopefully attractive risk adjusted returns.

And as a follow-up answering your earlier question you indicated where the loan yields could dip down to the 11% area. Is that mostly due to focusing on lower risk investments, or is that mostly due to just the changing market environment?

There has been yield compression over the last few years. We don’t want to feel like we have to reach or stretch for yield. We want to most importantly find very good risk adjusted returns. So a combination of where the market is, the combination of where we want to be in the capital structure kind of more secured leads us to set the expectations in the 11s.

And finally, just sort of a strategic question, given the election and the prospect of changing regulatory environments and so forth like that, what are your thoughts right now in terms of how does this affect your strategy, your thinking of the market, if anything you could share enough would be helpful?

It’s a good question. It’s too early to tell, we’re kind of in the early days. We’ll see what the legislative calendar brings in terms of both our underlying portfolio companies in healthcare, for instance, as well as other industries, as well as what it might mean for the BDC industry in terms of legislation or other rules that are guided by the SEC. So we’re waiting and seeing. We really can’t make decisions at this point, because there’s not enough information to make a decision on.

Great. Thanks for taking my questions.

Thank you.

We’ll take our next question from Jonathan Bock of Wells Fargo Securities. Please go ahead.

Good morning, gentlemen. Joe filling in for Jonathan Bock. The first question, the stock is trading at quite a significant discount to net asset value. And we see that the stock repurchase agreement expired earlier, or excuse me, the stock repurchase program expired earlier this year. So with this significant discount and the significant dry powder leverage came down quite a bit this quarter, why not enact a large scale stock repurchase program to complement lower risk new investment activity?

It’s a good question, and the Board and the management are always assessing. We did a significant repurchase program a few quarters ago. The only thing, we do focus again on our credit ratings. We worked very hard to get investment grade rating. We have been fully leveraged, at least, historically. We will continue to assess a stock buyback program. You will be seeing management making purchases in the market in the coming days. So that’s all, I can say at this point on that point.

Okay, yes, that certainly makes sense. Obviously, the ratings are a consideration here. So we didn’t see any SBIC growth in the quarter. But you do have about one $107 million of capacity up to the $300 million limit for two licenses. So we know that only certain deals fit within the SBA requirements. So how quickly do you expect to draw down additional debentures here? Is that something that you would target, or you more or so look at your origination pipeline and fill this bucket when certain deals that fit those requirements come along?

Look, we’re investors first and we want to find good risk adjusted returns and we’re going to whatever buckets they go into the SBIC buckets are somewhat arcane. Obviously, if something fits that first port of call we put it in the SBIC. We were fortunate. We locked in about $25 million of the SBIC financing at the two handle long-term rates this past quarter. We did get some repayments in the SBIC, as well. So our people know that, we want to find great risk adjusted returns and when we can find something that fits the SBIC, that’s terrific. But we don’t want to change our – with the way that we invest or originate due to that.

We certainly appreciate that and we know the market appreciates that conservative perspective. And just one final question, in relation to repayments in the quarter, so our sales repayments. So it looks like the one of the largest repayments was the $40 million second lien investment in language line. It looks like this was a sale. I don’t believe this was repaid. So if you could just provide some color, I know, the second lien traded up recently? Did this just look like a good exit opportunity, or did kind of the thesis change around the credit profile of this investment?

The company got sold to a large French communications company. So that the deal was repaid with that M&A exit.

Okay, my mistake, that that was a repayment. That’s it for me. Thank you very much for taking my questions.

Thanks, Joe.

[Operator Instructions] We’ll take our next question from Mickey Schleien of Ladenburg. Please go ahead.

Yes. Good morning, Art. Actually I just wanted to follow-up on the first question. I do understand that you can’t forecast exactly what repayments will be by the end of the calendar quarter. But you should be able to give us a sense of what they’ve been so far this quarter, correct? Can you give us some color on that?

I can tell you that as of today, we’ve originated more than we’ve gotten paid back. How about that?

Okay.

And I would hope that that would continue. I would hope that that would continue through quarter. And now let’s also – I always want to give you the other side of the story. But when somebody – when a company pays you back, that’s a nice thing too. I mean, sometimes as we know the companies do not pay you back. So when companies pay you back and they take you out sometimes just call premiums that that’s okay. We should be thankful for companies paying us back. We do hope that – and we would estimate that we’d have growth in our assets this quarter. We do have a very robust pipeline, but sometimes companies just pay you back and that is what it is.

And that’s a good segue into actually the activity for the quarter that you just finished, so it was a relatively low level of investments and a high level of repayments. You mentioned one large exit due to a company being sold. But was that generally a lack of deal flow in the PE community combined with spread compression, or you’re unease with the terms in the market, or how would you characterize the dynamics of your investing activity in the fourth fiscal quarter?

Yes, look, you touched on a lot of the issues. I think if you rewind the tape, you remember that Brexit event. And then the market went on a tear for a while. And to my point about here competition really is that broadly syndicated in liquid markets went on a tear and started taking out and started refinancing some of our portfolio, including some M&A trades like language line. So the benefit of that was a company like health cosmetics, health beauty you did a very nice IPO and our equity co-invests and the rest of our equity co-invests portfolio has been generally doing very well. So there’s gives and there’s takes. And again, we’ve been cautious and conservative around what we want to put in our portfolio and we’re trying to really reduce the volatility of the earnings stream. So you touched on lot of the issues. There’s little bit all of the above. We’re seeing a much more robust environment here in this quarter. I would call this quarter kind of a more normal quote unquote quarter for us in terms of originations.

And in terms of those originations, I’m assuming a good portion of your cash is in the SBIC, is that correct?

Yes. We have some cash outside the SIBIC, but most of the cash we have on our balance sheet is inside the SBIC.

Okay. So you have that to put to work and remind me, I don’t have the K in front of me, but you haven’t fully equitized the SBIC subsidiaries so far, is that right?

We’re getting close to equitizing the second SBIC. We got fully equitized SBIC one we’re getting close to being pretty fully equitized in the SBIC II.

So no problem getting to the $300 million in terms of equity capital in the SBICs?

No, it won’t be a problem and it won’t be a problem for us to draw on the $300 million.

Okay terrific. Those are all my questions. Thank you.

Thank you.

We’ll take our next question from David Miyazaki from Confluence Investment Management. Please go ahead.

Hi, good morning. Art, I guess, we’re sort of in a rather unfortunate chapter in what’s been a pretty good book over time with your dividend cut that, I did want to revisit the topic that Joe had brought up earlier regarding share repurchases. We appreciate that you bought back fair amount of stock in the past, and I think, your fee waiver gives you some credibility that, you’re not willing – you’re willing to take on less income as a manager by weighing fees. And so I think you’ve been able to dismiss some of the skepticism that investors may have for managers who don’t buy in stock by doing that. But when we look at the current price of the new dividend, you’d be buying in stock that would have a yielded around 140%. And it would be – so it would be so accretive to the net asset value that it’s kind of hard to not to see why you wouldn’t do that right now and institute a pretty significant share repurchase. I know you…

No, you make a great point. And certainly, as I said personally, you’ll be seeing some purchases. We’re on watch with the agencies. So, this is a debate that you always have and had investment grade ratings. We think important for the company long run. We of course, will evaluate and always evaluate a stock buyback along with all the other elements. And of course, on the alignment issue, if our income is less in addition to the 16% fee waiver, our incentive fee will be less in addition to the 16% fee waiver. So, we as management believe, we’re appropriately aligning ourselves, and again, we’re all disappointed.

Yes.

We’ve been very proud of our 10-year track record of never cutting a dividend and this was something that we thought about a lot and agonized about a lot. And so, look, we’re lining ourselves. We of course, will take this feedback into account. We’ll talk to our Board about a buyback going forward as we always do as well with dividend level as well as management alignment. And we’ll work hard to be completely aligned with our shareholders, and of course, with big shareholders ourselves.

Well, and I appreciate that. And I know that you’ve worked long and hard in getting an investment grade rating. But is the cost of capital advantage for having an investment grade rating, so important that is outweighs the basic math of buying back shares right now, because…

Yes, look, I mean, David you and I have been having some form of this discussion now going on a decade. The issue becomes and we all lived in and thankfully lived through the 2008, 2009 time period. At the time you need capital and investment grade rating has infinite value, or can have an infinite value. And it’s hard on a day to day basis in a relatively benign environment like we have today to put a value on that right. It’s hard for us. Everything looks fine. The economy generally looks fine. The credit markets generally looks fine, to say, kind of trade that off. But there was a time and you lived through with us and others when capital access had infinite value or almost infinite value. And it’s really – it’s hard for all of us to sit here and discount that value today. So that’s what we take into account when we talk about stock buybacks and our investment grade rating, and what’s the dividend level? And how much leverage do we put on the balance sheet? How much secured debt versus how much unsecured debt? These are the – unfortunately, it’s not a black and white answer. There’s some shade of gray in all of this. And unfortunately, there’s not a black box that you can just put all the inputs in and out says, you should here’s how much leverage you should have. Here’s how much unsecured you should have. Here’s how much where your stock buyback should be. And believe me we get the math of buying back stock. And we will always assess that as an option. Just please understand that taking a long-term historical perspective as as management – as a management and as an investor, and you’re an investor who has been in the industry a long time. When that capital is needed at that tough time, it has really, really, really high value. So that’s the kind of thing we’re trying to grapple with when we try to make these decisions.

Okay, great. That’s a helpful commentary. Shifting gears on you, if I may, as you talked about moving to a more secured position in your underwriting. Would you expect that this would change the amount of deals that you’d be looking at with regard to what could fit into SBIC and what is the fact at all? How you might be underwriting in tandem with your sister company PennantPark floating?

So on the SBIC, again, we have our investment parameters. If it fits the SBIC, of course, that that’s the first port of call. But if it’s a good deal, we want to be doing it. We do have a liquidity to be doing good deals if we think they’re really compelling. And we think that in this environment, which has seen yield compression, and if we want to have a mostly secured portfolio, we have about 70%-plus secured. In general, our average yields are going to come down into the 11s. And then in terms of PFLT, PFLT long with every other BDC has the same issue, which is yield compression. PFLT has a different risk adjusted return threshold. So PFLT has been originating in the 8% zone. PNNT historically has been in the 12% zone. We’ll talk about peonage PFLT tomorrow, but yields compression has been everywhere in order to get good risk adjusted returns. PFLT like PNNT and like others in the industry may have to take a little less yield.

Okay, great. Thank you for your answers.

And there appear to be no more questions at this time. So I’d like to turn back to Art Penn for any additional or closing remarks.

Thanks, everybody. I want to appreciate everyone’s time and attendance today on the call. We appreciate your support and we’ll be talking to you in early February in our next earnings conference call. Thank you very much.

And this does conclude today’s presentation. Thank you for your participation. You may disconnect.