PennantPark Investment Corporation (PNNT) Q4 2019 Earnings Report, Transcript and Summary

Good morning and welcome to the PennantPark Investment Corporation's Fourth Fiscal Quarter 2019 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 2019 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 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 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'm going to provide an update on the business starting with financial highlights, followed by a discussion of the overall market, the portfolio, investment activity, the financials and then open it up for Q&A. For the quarter ended September 30, 2019 we invested $39 million in primarily first lien secured debt at an average yield of 8.4%. Core net investment income was $0.17 per share. As we have discussed, we are generally moving into first lien secured positions higher in the capital structure and into a more diversified portfolio. As of September 30, first lien exposure was 57% of the portfolio up from 47% a year ago. Along with a lower risk profile portfolio we intend to prudently target higher leverage. Over time we are targeting a regulatory debt-to-equity ratio of 1.1 to 1.5 times. We will not reach this target overnight, we will continue to carefully invest and it may take several quarters to reach the new target. A careful and prudent increase in leverage against primarily first lien assets should lead to higher earnings. Our investment activity during the past quarter was temporarily lighter than normal because our credit facility had not yet been updated for the new BDC leverage guidelines. As such, our focus on the quarter was primarily on the right hand side of the balance sheet. We are pleased that in early September we amended the credit facility enabling us to use the incremental flexibility provided by the new guidelines. Additionally, at the end of September and in early October we completed an $86 million offering of 5.5% unsecured notes. In early October, we also received the green light for our SBIC number three. We are extremely gratified that our long-term track record and excellent relationship with the SBA will result in attractively priced long-term financing for the company. We are also actively assessing a new senior loan joint-venture similar to the successful joint-venture of PFLT which can also increase earnings over time. Since our credit facility amendment in early September, origination levels have normalized and since September 30, we have originated approximately $70 million of new investments. The combination of the amended credit facility, unsecured bonds, SBIC III, and a potential joint venture should provide a solid pathway for earnings growth at the company. As of September 30, taxable spillover of $0.34 per share, which provides significant dividend cushion. Our primary business of financing middle market sponsors has remained robust. We manage relationships with foreign and private equity sponsors across the country from our offices in New York, Los Angeles, Chicago and Houston and we've business with almost 185 different sponsors. Due to wide funnel of deal flow that we receive relative to the size of our vehicles, we will continue to be extremely selective with our investments. You will recall that in 2007, just as today, PNNT was focused on financing middle-market financial sponsors. Our performance through the global financial crisis and recession was solid. Prior to the onset of the global financial crisis in September 2008, we initiated investments, which ultimately aggregated $480 million. The investments performed well. Average EBITDA of the underlying portfolio companies fell about 7% at the bottom of the recession. According to Bloomberg's North American High Yield Index, the average high-yield company EBITDA was down about 40% during that timeframe. As a result, we had few defaults and attractive recoveries on that portfolio. The IRR of those underlying investments was 8%, even though they were done prior to the financial crisis and recession. We are proud of this downside case track record. We've had only 13 companies going nonaccrual out of 232 investments since inception over 12 years ago. Further, we are pleased that even when we've had those nonaccruals, we've been able to preserve capital for shareholders. As of September 30, 2019, we had no nonaccruals. Since inception, PNNT has invested about $5.5 billion of assets at an average yield of 12.1%. This compares to an annualized loss ratio, including both realized and unrealized losses of approximately 30 basis points annually. This strong track record includes both our energy investments as well as our primarily subordinated debt investments made prior to the financial crisis. At this point in time, our underlying portfolio indicates a strong U.S. economy and no signs of a recession. We remain focused on long-term value in making investments that will perform well over an extended period of time and can withstand different business cycles. We are a 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 are a trusted financing partner for our clients. In general, our overall portfolio is performing well. We have a cash interest coverage ratio of 2.6 times and a debt-to-EBITDA ratio of 4.8 times at cost on our cash flow loans. With regard to our energy exposure, as of September 30, there has generally been no material change. On a mark-to-market basis, positive movements in the value of PT Network and MidOcean JF were offset by valuation declines in Hollander and ETX. Hollander was written off during the quarter. As discussed last quarter, Hollander filed Chapter 11 in May. Our preferred strategy was a lender funded reorganization whereby the lenders would take majority control. Unfortunately, we could not get the majority of lenders to support a lender funded transaction and the company was sold to a third party. Overall asset appreciation generated $0.4 per share of NAV gains. In terms of new investments, we've known these particular companies for a while, have studied the industries or have a strong relationship with the sponsor. We've purchased first lien revolver [indiscernible] common equity [indiscernible] Technologies. The company is a government services contractor focusing on the modernization of technology for the U.S. defense and intelligence communities. ClearSky is the sponsor. We purchased $15 million of the first lien term loan of Quantum Spatial. Quantum Spatial is a provider of geospatial solutions and the company gathers detailed mapping datasets, provides analyses, and generates insights for its customers. Arlington Capital is the sponsor. We purchased first lien revolver and equity of Schlesinger Global. The company is a global market research platform that offers agencies and brands both qualitative and quantitative data collection services. Gauge Capital is the sponsor. Turning to the outlook, we believe that the remainder of 2019 will 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, 2019 core net investment income totaled $0.17 per share. We also had a one-time $0.03 per share expense net of incentives, due to the renewal of our credit facility. Looking at some of the expense categories, management fees totaled $4.5 million; general and administrative expenses totaled $1.2 million; and interest expense totaled $7.8 million excluding a one-time $4.4 million charge. Our investments gained $0.04 per share on a mark-to-market basis. Our dividend exceeded our GAAP net investment income by $0.04 per share and our liability loss $0.06 per share on a mark-to-market basis, primarily due to the mark-to-market of our amended credit facilities. Consequently, NAV went from $8.74 per share to $8.68 per share. During the quarter, we have also issued $75 million of unsecured bonds trading on Nasdaq under the ticker PNNTG [ph]. We are not marking to market these bonds as their Chief of Staff [ph] has indicated they prefer disposition for the regulatory [indiscernible]. We are amortizing one-time costs of $2.7 million over four and a half years. Subsequent to quarter end the greenshoe option was exercised for another $11.3 million bringing the total bond amount to $86.3 million. Our regulatory leverage has increased to 0.9 times from 0.5 times a year ago. 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 evaluation firms, secured in exchanges or in a broker-dealer close when active markets are available under ASC 820 and 825. In cases where the broker-dealer quotes are inactive, we use independent evaluation firms to value the investments. Our overall debt portfolio has a weighted average yield of 9.8%. On September 30, our portfolio consisted of 67 companies across 27 different industries. The portfolio was invested 57% in first lien senior secured debt, 22% in second lien secured debt; 5% in subordinated debt; and 16% in preferred and common equity. 87% of the portfolio had a floating rate. Now, let me 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 would like to open up the call to questions.

Thank you. [Operator Instructions] We will now take a question from Robert Dodd with Raymond James.

Hi guys. Just I know that you made out a number of steps Art, between the SBIC, the JV, et cetera, et cetera that can grow earnings. And I mean if I look at the asset basically NAV, I mean if you just produce a very sustainable ROE you can get to over the dividend. The question is, timing. So can you give us any color on how fast you expect various things to ramp up? I mean you did say for the outlook you expect the remainder of 2019 to be active, the SBIC obviously isn’t available yet, the JV isn’t launched yet, so I'm considering that will all be on balance sheet, but can you give us any kind of ballpark estimates of how you think the timing of various initiatives are going to play out to the point of growing that, those earnings to overcome the dividend?

Yes, it's a great question. So first on the new originations side, as we've indicated with a subsequent event note, things are normalizing. We had to take a little pause in the last quarter as we were redoing the credit facility there to deal with greater than 1:1 leverage. So originations for this quarter are kind of back to kind of normal range and we do have plenty of liquidity to deal with kind of a normalized origination flow. To the SBIC, we just got the green license, the go forth, the green light a couple of weeks ago. We have an internal debate here at PennantPark. We think it is probably three to six months away from starting to start ramping SBIC III. So probably kind of mid 2020 we can, if you wanted to try to model kind of mid 2020 is when we think we can start ramping that. With regard to the joint venture, we're just going to be going out in the next couple of weeks with a formal process to assess different partners. Again probably it doesn’t start ramping until kind of mid 2020. So between now and then I think we are using internal capital that we've already raised through the credit facility, through the bonds and then we start to see those two things kind of moving through the limelight kind of mid to late 2020.

Got it, I appreciate the call. Oh just sticking with that JV for a second, I mean when are you reviewing Canada, what's your most JVs out there I think, there is a partner who is fairly passive. They involve but they will be passive in terms of originating elements of tailwind to the JV. Would that be the reason more to expect that or are you trying to see seek out upon that can both provide capital and then, but also bring originations to the table within that JV structure?

Yes, so, look the JV we have right now with Kemper has been working fantastically. They are real terrific and they add a lot of value in terms of advice and structure and the way to think about things. So and they are terrific value add partner in PFLT. I think with regard to the new opportunity, I mean all options are on the table. We as fiduciaries need to look at all the different flavors and if there are partners who can add origination into the mix, that's sometime we need to evaluate and should evaluate on behalf of our investors.

Great, I appreciate it, thank you.

We will now take our next question from Ryan Lynch with KBW.

Hey, good morning. Thanks for taking my question. One thing I did want to focus on is your nice equity portfolio, it is obviously, fairly large today about $193 million. If I look at the top five investments, they represent about $130 million of that $190 million. I'm very familiar with the Ram Energy and the ETX. Both of those are energy investments and obviously have their own challenges or potentially exited. Look, could you maybe talk about the other three in your top five, so MidOcean, PT Network and Wheel Pro, can you maybe just give us a very high level overview of what those businesses do? And what is the potential outlook for potentially exiting those investments? They've all been written up pretty, pretty meaningfully. So just how are you guys thinking about of those?

Yes, no it's a great question, happy to run through it. Wheel Pro is the only one that came through equity co-invest and they are the Automotive Wheel business aftermarket driven and performing well, the company has grown substantially since we've invested in it. It's owned by a sponsor called Clearlake based in Los Angeles, obviously the company's doing well. And when you have an equity markup like that and sponsored company, it's really, it's a question of when and how much, hopefully this company continues to perform well. So that's kind of that snapshot on that transaction. Company’s EBITDA is, I think north of $130 million when we got involved with it was $50 million, $60 million. So it has been a nice ride. PT Network and JNF are both equity that we got through restructurings. Both because of the markups you're seeing had been performing pretty well, JNF had some issues after the restructuring and it distributes gas pumps and products and services to gas stations. The company seems to have turned around, the results have gotten much better, they have done some add-on acquisitions that are accretive to earnings. We have I think about a third of the company's equity. MidOcean is the sponsor and the control shareholder owns the majority of the equity. And the company's been on a roll recently. So that's why you've seen a significant mark-up. There were some significant mark downs in its prior life, but it seems to have, seems to have found its footing and on the way up. PT Network is physical therapy company based in the Mid-Atlantic. We recently took control from the sponsor. There was a bunch of missteps from the sponsor. We put some additional capital in. The company’s performance is better than expected. It's in an industry where there's some very attractive multiples. The company has been sold for some very attractive sale prices and multiples of EBITDA. So you've seen a mark-up there as a result of both company's performance as well as where the comparable company's trade. Does that answer your question at this point?

Yes, that's very good. Good detail, helpful background on all those different businesses. I wanted to switch over to a question on the JV. Obviously, you guys are in the very early stages of that. So I'm just trying to think about, how do you guys think about, kind of holistically look through leverage across your - across the PNNT, because obviously, putting the JV on that structure with you guys will make an equity investment into that entity and then it has this risk of [ph] balance sheet leverage. So to the extent that that growth becomes a meaningful portion of the portfolio, how do you think about that off balance sheet leverage as a portion of the JV, as a portion of your guys leverage target?

It's a great question. Something we think about, and it really is driven by what are the underlying assets. At least at this point, we are visiting it, it looked very similar to the JV we have in PFLT where it’s primarily first-lien lower risk, lower yield, senior secured assets that can be leveraged reasonably and safely one and a half to two times debt-to-equity. So that's kind of how we think about it, as you know because we've actually done this and we're now in the market as a firm, middle market CLOs you can easily get three or four times leverage three or four times debt-to-equity. So as we think about what's the blended overall asset mix of PNNT pro forma, at this point, any new assets by and large are going to be at lower risk, low return more leverageable first-lien and even with the joint venture, we think still reasonably leveraged and safely leveraged. We still have a second-lien in mezz portfolio. As you mentioned, we have an equity co-invest in equity portfolio. We were monitoring those, we’re not doing much in terms of new second lien or mezz. That said, we've said to the team, if there's really compelling second-lien or mezz out there, we want to see it. It's got to be super compelling right now, given where we are in the cycle in the economy. But we still could do a little bit more than that. But I think by and large, the mission for this particular company at this point is work down the second-lien and mezz, the equity co-invest and kind of ramp-up on the first-lien side and put appropriate leverage against that, or that's leverage from our credit facility, leverage from an SBIC or leverage from a potential joint venture.

Okay, that's helpful. Those are all my questions. I appreciate the time today.

Thank you.

Our next question comes from Rick Shane with JPMorgan.

Hey, guys, two quick questions. First, obviously you are building the cash position at the end of the quarter. I'm assuming that that has to do with the timing of the debt issuance, but I just want to make sure that there's not additional liquidity requirements that we should consider associated with any of the new facilities?

Oh no, that was just the bond that we did. You're right.

Okay. Great and then second question related to Hollander, second company we've seen this quarter in the bedding space that ran into some challenges. And the feedback we've had is, it's a lot of it’s related to sort of disruption in that industry, which leads to a really interesting question, which is, are there other industries that you're looking at this point where you fear that type of disruption, that sort of leads to those outcomes? Are there things in the portfolio we should think about? Are there areas that you're avoiding based upon that?

It's a great question, something that we think about all the time in our investment committee, and that's one of the most treacherous things about investing for any investor in this environment is, if you're investing into traditional business, is there disruption coming and if so when, right. So bedding is an area, retail, certainly an area. And you could take the theme to any number of different industries, obviously the hotel industry and a number of different industries, the taxi industry, there's been disruptive forces now. We've spent a lot of time for instance, talking about driverless cars. At one point that looked like it was coming sooner and may have accomplished back what does that mean for the trucking industry, what that mean for this industry, that industry. So it's something we all of us, now we're kind of part, but all of us as investors need to be assessing? It was maybe a small part of why Hollander had issues, but still a piece of the pie of why Hollander had issues and it's something on every deal that we have in a traditional industry, we need to, we need to be thinking about. That said, on the other hand, we can take advantage of that. There is a company in our portfolio called Walker Edison, and it's one of the - you see it, it's an equity co-invest mark-up. This company sells furniture on the Internet, right? So through Wayfair, through Amazon, someone my age would never buy furniture on the Internet. But there's quite a few people today buying furniture on the Internet and Walker Edison has been crushing it and has had significant EBITDA increases and you're seeing in our mark-to-market up, it is participating in that trend. So there's certainly a downside that you have to be aware of, and potentially there's upside that you can participate in as well. So that's just one in one example of change. Here's another company in the portfolio where you see an equity mark-up called Dominion Services. They are in the voting machine business, they are in the voting machine business. So just think about that and what's going on with voting machines today and kind of the elections and all the issues around voting machines. This company has been a beneficiary because they make not only, they make voting machines that do both paper and kind of the ATM machine type voting machines. So there's both an ATM feature to the voting sheets and there's a paper record. So this company has been a beneficiary of that change. And you can see that in the equity mark-up in the portfolio. So it's a fascinating question we could talk all day about, I'm happy to talk all day with you Rick offline if you'd like, but there's pluses and minuses to all of this.

Well, two comments there one, I hope you have better things to do than talk to me all day. And second, and I will make a bad debt point here. It really does highlight how challenging things are when you think about the mattress business and it is here is my part of my sleepy business and running to that. Even in that sector just sort of underscores the challenges that are out there. Thank you.

Thank you.

Our next question comes from Mickey Schleien with Ladenburg.

Yes, good morning, Art and Aviv. I wanted to step back and ask a high level question. So historically PNNT was known as a BDC focused on the meat of the middle market, sort of EBITDA $25 million to $30 million, and obviously more secondly, mezzanine. As the balance sheet has changed and as your capital structure has changed, what sort of EBITDA levels are you targeting now and how is that affecting the sourcing of the deal flow that you're looking at?

Yes, it's a good question, Mickey. We're still kind of focused on the 15 to 50 EBITDA range. So the mean median is still in the $25 million to $30 million zone. And we can ask our folks to go find good deals, whether that be senior or second lien or mezz because the threshold and the bar is substantially higher now, on secondly lien and mezz, but we're still open for business and by the way, we think that's a really good place to be because it's below the threshold of the broadly syndicated market, where the deals are mostly covenant light where the leverage is high and when there's very substantial EBITDA adjustments. In our 15 to 50 zone, we're still getting covenants, the EBITDA adjustments are the adjustments that we buy off on and that we diligence. We still have several months to do our due diligence. We are not to rush to make a decision. Our average debt-to-EBITDA on senior debt is kind of in the mid fours. So, we think that's a good place to be and then also with the - this move to these very, very large direct lenders, they have really moved to competing against the broadly syndicated loan space. And that's just fine because they're kind of leaving us alone in this kind of true middle market space of 15 to 50 the EBITDA where we can still get covenants and where we can still due diligence, whatever adjustments there are.

Okay, I understand and to the extent you're building up the JVs, are they buying similar credits just to, higher quality companies, or are those companies somewhat larger, perhaps more club deals in there, that reduces their risk and allows the higher leverages, how do you view that bucket versus the rest?

Well, it's very similar risk reward. And just to take a step back, I don't know if this is implied in your question, just because the company does $25 million of EBITDA versus one that does 70 certainly, there's pluses and minuses. We would rather do full due diligence really understand what we're buying, get some covenant protection, really diligence, the adjustments, and lock down a very safe deal for our investors versus competing with a broadly syndicated market where decisions have to be made very quickly, or you don't have months to do due diligence, where you're competing with covenant light. So if there's a covenant, it's going to be set very, very wide. The EBITDA adjustments are larger and less diligent. So all day long, we'd rather finance a well diligence to well-structured $25 million EBITDA loan and something that's covenant light or covenant wide with higher leverage, with less chance for diligence in a bigger company. So that's kind of where our mean potatoes is. That's what we're focused and that's what's populating our vehicles.

I understand. One last question, to the extent you're focused on first lien, there's no break definition. There's no universal definition of first lien. What I'm getting at is, to what extent is this first lien include unit tranche deals, which are obviously very popular in today's market and how actively do you sell the first out pieces?

So, I'll take the second one first, which is we don't sell the first out pieces, we like being at the top. The first part of your question is really the challenge of making and I'm kind of smiling because, as far as I can tell, everyone has a different definition about unit tranches, what is your definition? Everyone's got their own definition of the loan to value of excess capital beneath it, or whatever it is. I think those are - just to cut through what we are doing, our risk is generally firstly in top of the capital structure known above us, and we're originating in the mid fours today and generating about an 8% return. That's what we're doing. You can call that stretching and you can call that classic first lien, you can call it whatever you want. The definition of unit tranche is not clear and it flops around and what was defined4 as unit tranche in 2010 is certainly different than what's defined as unit tranche in 2019. So, we're just going to tell everybody what we're doing. It's mid-force debt-to-EBITDA 80-ish percent yields, average EBITDA company $25 million to $30 million that's what we're doing.

And just a follow up, and if a bank has extended the revolver ahead of the year, which I know in some cases you do yourself, but if it's a third party, do you still classify your investment as a first lien or not?

It is a good question, just depends on the size of that sometimes you get little ABLs. So if the ABLs are half a multiple or beneath. We'll still classify what's beneath that half a multiple as first lien. You know, where it gets murkier, which we don't do, is if it's 1.5 times or two times, and then you are tuning to that, we don't think you should be classifying that as first lien. That's junior debt.

Yes, I agree. The issue is that even that's not consistent across the space. That's why I'm asking this question. But that's it from me this morning. I appreciate your time. Thank you.

Thanks Mickey.

Our next question comes from Casey Alexander with Compass Point.

Yes. Hi, good morning. A lot of my questions have been answered, but this is a little bit of an extension on the direction that Ryan was going, which is, you have a lot of equity in the portfolio and 15%, 16% close to 20% of your portfolio is controlled positions. So you have a lot of positions where you have some say in it that are not income producing. So it would seem to me that being a little more aggressive of getting those things out of the portfolio and turning those into interest generating positions would be paramount because those are 100% accretive to NII and your dividend coverage. So how do you think about being more aggressive? And in relation to the marks on those positions, probably investors don't care what your cost was on them originally, they're more interested in improved dividend coverage, which would make them feel more comfortable about investing in the vehicle.

Amen. You know, I agree with you, Casey. I'd love to get equity down and which can then be invested in income. So some of the things we you know, some of the deals we don't control, like we don't control JNF, we don't control Wheel Pro. We do control some energy names. Now last I checked there's been a dearth of M&A in energy. So there we are trying to optimize those companies so that when M&A comes back in energy, we're in a position to exit well, but there's been really no M&A in energy. Once there starts to be M&A in energy, we're all ears, you know, and if you have suggestions Casey or anyone who got suggestions, we are all ears. Right now we'd like to deal with the energy names. But with regard to the other names where there's a good gain, and we think it's fair value, we of course will look to monetize. PT is a new one, you know, we're kind of in the first six months of that, we still think there's some nice runway there. That sector has been attractive. The multiples are very attractive on exit. We still need to consolidate those operations and get it primed in the best way for an event. And that may take a year or two, but that's - that's right in our wheelhouse. And it's something that we can control ultimately. So, I'm happy to go through specific names if you want. If you want some more color on any of the specific names. I think I covered energy. I think I covered JNF and Wheel Pro, but if any other specific names Casey you want to ask about and I'm totally up into doing it.

Well, thank you for taking the question.

Thank you.

[Operator Instructions] We will now move to David Miyazaki with Confluence Investment Management.

Hi, good morning. I have just a couple of questions. You know, kind of touching a little bit on what Mickey was asking about, if you start shifting your focus more to a senior secured sort of profile, whatever definition that may be, and you think about your energy, one of the observations from outside looking in, is that the energy problems came more from the commodity price as opposed to where you are in the capital structure. So if you think past your existing positions, do you think that energy and M&A and a senior secured position is something that will come back into the portfolio in the future?

It's a great question. And you and I've had this debate before and I think to call you back to me, you pay the tuition, why not monetize that tuition by doing more energy ones. Right? That was a question at one point you asked me David, and it's a good question. I think at least today, and we can have more - I'm happy to talk to you whenever you like, more discussion about it. For portfolios that today are owned mostly by retail shareholders, which is what BDCs are, I think we're going to avoid energy at this point in time just because we want to deliver stable cash flows, you want to stay away from commodity risk. And granted, there might be some high popping deals. You know, I read an article Sam Zeller [ph] is coming back into energy space because he thinks it's reminiscent of real estate at the bottom and maybe he's right, and we certainly hope he's right. But at least for the time being, and certainly while we have the energy exposure, we have in PNNT I think the idea for PNNT is to optimize what we have positioned as best we can for an action if and when M&A comes back. We can control a lot of things with this company. We've been controlling it as we can the right hand side of the balance sheet which you've seen the moves that we've made. On the left hand side of the balance sheet the moves off the capital structure to safer low risk securities. Unfortunately, we cannot control where the price of WTIS is West Texas Intermediate. So that's one thing we can't control. You might have seen we did mark down all three of our energy names last quarter, they've been marked down appropriately. So despite that, we still had NAV growth on the underlying assets. So it's just kind of - we just got to play it through optimize the hand we have with those names and Casey's right, and you're right. All the time, we've got to kind of get this equity percentage down, but it's a question of how and how do we best optimize the outcome for investors.

Right, thanks and I'm in agreement with that overall piece. It does seem to bring some real volatility into the credit risk in the portfolio that can be disturbing to people who are looking for consistent income or predictable income. But moving along a little bit to your comment that you're open to suggestions, one of the things that I know coming up with a fair value for any investment is an art as much as a science. And whether or not you could actually sell the position at that mark is always an open question as well. But it seems to me that if you could sell your equity or your workout positions at anything that was higher than 70% of your mark, and then use the proceeds to buy back stock, then mathematically you wind up doing something that's accretive and you get something off of the balance sheet that is an income producing. What are your thoughts on that construct?

It's an excellent point and that's what we try to do. We're always assessing exit prices, the pluses and the minuses. What that means to our capital structure, debt and equity and something we continually do with our board and we're just starting to get some ups in some of our equity portfolio. We talked about JNF, we talked about PT Network, which is a relatively new position. So we're just starting to see this kind of green shoots concept and some of these equity names. So it's always a question of I'll keep using the analogy, how high do you let that grass grow before you harvest it right? So again, it's a hard - I wish there were a black box or an algorithm I could put it into which would say, here's magically when you should sell these assets, here's magically what the capital structure should be to an equity. Some of these green shoots are starting to come out of the ground and we think they can really grow and some of them I think we think so. The right thing for any of you might be to learn grow a little bit, but that's something we constantly are assessing and talking about.

Yes, I do think that that's kind of what your job is to figure out when do you, to move on, and maybe not get all of the grass growth, but at same time there's a drag. And when you have things that haven't worked out in the past that are still in your portfolio, it kind of lays down the outlook in the future. I wanted to move on to kind of the last concept here that whenever you talk to a BDC manager and asked them where the middle mark – when middle market is the best place to be lending, if the answer always is wherever it is, they happen to be landing. So if you look at the big guys, they talk about being able to write a check and a big check $100 million to $200 million plus, certainly in closing bigger companies, better balance sheets that are credit risk. And then at the other end of the spectrum, the small guys you're looking at companies where the pricing is more stable, the terms are more stable. And so, when I want to think about where you guys are in the sort of this $15 million to $50 million EBITDA win, to some extent you are constrained because your stock has not been above net asset value for so long. So now with the change in leverage, you are able to increase the size of your portfolio. But if you really had the ability to grow the company bigger with a larger equity base, do you think that being a $15 million to $50 million is the optimal EBITDA target or would you think that over time, as you move past the problem loans and theoretically get back above the net asset value, would you want to be doing more in the $50 million to $100 million neighborhood?

Good question. So number one, you're absolutely right. Everyone hawks their book, of course, everyone hawks their book. In terms of the statistics, I mean S&P LCD have statistics on defaults and recoveries of broadly syndicated loans to bigger companies versus middle market loans. It's out there, it's accessible. It is clear that over time, middle market loans provide fewer defaults and higher recoveries than the broadly syndicated loans, which are now being done in some cases by the larger direct lenders. So that those numbers are out there, we can send them to you if you'd like. They are over many years, they are recycled, they are recession and financial crisis. It is not PennantPark versus some other firm. That's data that is verifiable, defaults and recoveries are broadly syndicated versus middle market and you now see many of our bigger brethren taking share out of the broadly syndicated. So you can ask them that question. That's verifiable data in terms of defaults and recoveries. In terms of our constraints in our business and you may have seen, we are growing the non-BDC side of our business, we have several private vehicles, managed accounts that do and participate in many of the deals that are being done by our BDCs under our SEC exempt of relief. So we allocate capital across our platform to the BDCs as well as the private vehicles under that exempt of relief and that has helped us grow bite size because when you think about it, if our average company is 25 of EBITDA and it’s leveraged 4.5 times, if you are talking like what is $110 million, $120 million ticket, If we wanted to do the whole thing, if we could do the whole thing, and that's kind of what we're aiming for because our borrower clients, our sponsor clients are saying to us, hey PennantPark, we'd like you to be bigger. We'd like you to be a bigger piece of this deal. We'd like you to do the whole deal. So we're getting that. We've made substantial progress with our private vehicles, with our managed accounts and now with the BDCs with their ability to grow through incremental leverage. We're getting there and we're on the precipice and we’re taking more and more share of those deals because those sponsored borrower clients want us to be taking bigger bites. We have no current intention of competing with the broadly syndicated market with companies with EBITDA of $50 million, $60 million, $70 million as we said, you're competing with a market that is at a very aggressive level in terms of the leverage, either no covenants or very muted covenants, and very high EBITDA adjustments. So for those people who want to do that, God bless and if they want to be taking share because the company would have been rated to B3B minus or CCC, they can have that share all day long if they want. They've got lots of capital to deploy, they can deploy quickly. They can talk to books about the size of the companies, but it's a bubbly time to be competing against that market. Again, we like where we are, where we can control the diligence, we can control the covenants. We can control what EBITDA adjustments we take or we don’t take. We've had an excellent track record over many, many years. We've shared with you, it's about a 9 basis point annualized loss on our senior business over many years. I think that all day long, it's a nice place to be, we've had a very good track record, and we're happy to populate our vehicles with that.

Right, I thank you for that insight. So the last thing I'd want to touch on is, the EBITDA add back and the erosion of the covenants, it seemingly started to really pop-up and create a frequency call it 18 or 24 months ago in that range somewhere. So when you think about, which is the bigger hazard, I'm not really sure which one it is, is it the EBITDA or the lack of covenants or the weak covenants. But having now had several quarters and one of these concepts were first brought in, if you look at the overall market, particularly the upper middle market. When you think about the EBITDA add backs that were put in place a couple of years ago, when you look at the credits today and not the ones that you've done, but the ones that you've just seen and didn't participate in. How bad are the EBITDA misses versus the actual EBITDA that’s happening today versus what was projected versus the add backs a couple of years ago? I mean do you have any sense for how bad those add backs have been?

Great question. We don't have any data on that. I can go through each and I can go through each of our articles with you and at any point tell you what the mistakes that were made. I just can't tell you about the EBITDA adjustments and whatever they've been realized. Look, we've had a reasonably good economy. We've had a reasonably good economy and that's covered for a lot of the issues and the saying goes, when the tide goes out, we see who's swimming naked. So the tide is not going out. So things seem to work, which is why you see record high leverage multiples, record high adjustments. And by the way record high enterprise value multiple such as sponsors are paying. So there is this whole big logic of – well the company's worth 15 times, so can easily be leveraged seven times, and I've got great loan-to-value and that may work these may be fantastic companies that will continue to do well and that may be just fine and that sometimes is by the way in adjusted seven times. So, there is a whole logic that people are buying off on. We'll see. When the tide goes out, we will see what happens, based on our experience from the financial crisis, and the recession last time around when you did see very high leverage numbers, a lot of them - a lot of it worked, but some of it didn't work and when it didn't work, he was very, very harsh. The severity level was very harsh because the sponsors – when the sponsor is paying 15 times and leveraging seven times, if there's a little bump, the sponsor is more likely to fix it, but if there's a big, big bump, they're still out of the money, the lender is left holding the bag. So, you know, our experiences looking back from a decade ago is a lot of those companies did just fine. But when there was a bump, it was a very severe outcome for the lenders.

Okay, thank you. So basically, you're saying that if the underwriting is poor, either because of the EBITDA add back or because of the lack of covenants. We haven’t really seen the consequences because the economy in general has been pretty good.

Yes.

I thank you for your comments and the methods and everything this morning.

Thanks.

And it appears there are no further telephone questions at this time. I would like to turn the conference back over to Mr. Penn for any additional or closing remarks.

We are certainly grateful here as we head into Thanksgiving for the relationships we have with our investors and our research analysts. Thank you for another year, as we head into Thanksgiving holidays we wish everybody great Thanksgiving and happy holidays. And next time we'll be talking to you will be in early February. Thank you very much.

And once again, that does conclude today conference. We thank you all for your participation. You may now disconnect.