PennantPark Investment Corporation (PNNT) Q1 2020 Earnings Report, Transcript and Summary

Good morning and welcome to the PennantPark Investment Corporation's First Fiscal Quarter 2020 Earnings Conference. Today's call 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 first fiscal quarter 2020 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 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 discussion of the overall market, the portfolio, investment activity, the financials and then open up for Q&A. We were active in the quarter ended December 31, 2019. We invested $174 million in primarily first lien secured debt at an average yield of 8.8%. Our NAV increased from $8.68 per share to $8.79 per share. Net investment income was $0.15 per share, which was all recurring income. We had no other income in the quarter. Other income is typically $0.01 to $0.03 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 December 31, first lien exposure was 57% of the portfolio, up from 48% a year ago. Along with a lower risk portfolio, we are prudently targeting higher leverage. As of December 31, regulatory leverage was 1.06 times. Over time, we are targeting a regulatory debt equity ratio of 1.1 times to 1.5 times. We will not reach this target overnight; we will continue to carefully invest and it may take us time to reach the new target. A careful and prudent increase in leverage against primarily a first lien portfolio should lead to higher earnings. In early October, we also received a green light for our SBIC III. We’re 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 our earnings over time. Our recently amended credit facility, issuance of unsecured bonds last fall, SBIC III, and the potential joint venture should provide a solid pathway for earnings growth. Solid coverage of our dividend should come as a result of this prudent increase in leverage. Above and beyond the prudent increase in leverage, earnings should grow as we exit performing equity investments and reinvest those proceeds in loans. As of the last fiscal year, we had 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 about 400 private equity sponsors across the country from our offices in New York, Los Angeles, Chicago, and Houston and we've done business with about 190 sponsors. Over the last 12 months, about 65% of the companies we invested in were existing borrowers. These were generally cases or we had an option to continue to finance an existing borrower or could opt out. To us, this encompasses the best of both worlds, staying with solid credits with reduced competition or choosing to exit. In a market where investors are asking about differentiation among middle market direct lenders, the value of incumbency can't be overstated. With 135 borrowers in our overall platform, we are driving substantial benefits of incumbency. Our growing team, capital resources and incumbency put us in a position to be both active and selective. Today, we are only investing an approximately 4% of the opportunities we are shown. Due to wide funnel of deal flows that we receive, we will continue to be extremely selective with our investments. As you will recall, 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 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 non-accrual out of 245 investments since inception over 12 years ago. Further, we are pleased that even when we've had those non-accruals, we've been able to preserve capital for our shareholders. As of December 31, 2019, we had no non-accruals. Since inception, PNNT has invested about $5.8 billion at an average yield of about 12%. 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 cash interest coverage ratio of 2.7 times and a debt-to-EBITDA ratio of 4.7 times at cost on our cash flow loans. With regard to RAM Energy, as we have discussed, RAM is focusing on its core 13,500 contiguous gross acres, Austin Chalk project in Giddings field outside of Houston, Texas. This area has received renewed focus. RAM’s first seven wells have all ranked in the Top 20 wells in terms of an initial production with four of these in the Top 10, including the Number 1 and Number 3 wells in the Austin Chalk. RAM’s acreage is surrounded by well-known and active strategic oil and gas companies. Today, RAM has over 100 potential additional locations in this project. We decided to convert a portion of the company's outstanding debt-to-equity and today we have about $40 million of funded revolver outstanding. That, in addition to the $30 million funded portion of Macquarie loan represents less than three times leverage on RAM’s 2020 estimated EBITDA, which is consistent with comparable companies in the industry. 18% of our portfolio was preferred in common equity as of December 31. This is higher than our long-term target of 5% to 10%. A substantial portion of the growth in equity is due to the positive performance of quite a few investments. The strong performance of MidOcean JF, Wheel Pros, ITC Rumba, DecoPac, PT Network, Walker Edison, Dominion and others as a result of the markups in those equity positions over the last few quarters. About $120 million or nearly half of our equity portfolio has increased in value over the past 18 months where we can envision an exit over the next 12 months to 24 months. Our goal is to make substantial progress over the next 12 months to 24 months and exiting equity positions at attractive prices. As we reinvest those proceeds into our core cash bank debt instruments, our income should grow. To give you a sense, if we were to exit only $60 million of that $120 million, and reinvest in loans consistent with our recent yields, our NII would increase about 0.015 per share per quarter. If we were to exit all $120 million, NII would increase by $0.03 per share per quarter. On a mark-to-market basis, this past quarter, positive movements in the value of MidOcean JF and PT Network were offset by evaluation declines in ETX. Overall asset appreciation generated $0.18 per share of NAV gain. 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. Let’s walk through some of the highlights. We purchased $13.7 million of DRS Holdings, Dr. Scholl's first lien term loan with revolver and common equity. Dr. Scholl's is a leading brand in the foot care category in North America, including insoles, skin treatments and orthotics, Yellow Wood is the sponsor. We’ve purchased $2.9 million of ECM Industries first lien term long with revolver and common equity. ECM is a provider of broad range of tools and consumables for electrical and harsh environment applications under highly regarded brands. Sentinel Capital Partners is the sponsor. We purchase $5.5 million of Sargent & Greenleaf first lien term loan. Sargent & Greenleaf is a global manufacturer of high-end locks for safes, for residential ATM and government end-markets. OpenGate Capital is the sponsor. We purchased $5.2 million of first lien term loan of TeleGuam Holdings. The company is a quad play telecom operator in Guam. Huntsman Family Investments is the sponsor. Turning to the outlook, we believe that the remainder of 2020 will be active due to growth in M&A driven financings. Due to our strong sourcing network and client relationships, we are seeing active flow. Let me now turn the call over to Aviv, our CFO, to take you through the financial results.

Thank you, Art. For the quarter ended December 31, 2019, net investment income totaled $0.15 per share. Looking at some of the expense categories, management fees totaled $5.5 million; taxes general and administrative expenses totaled $1.5 million; and interest expenses totaled $8.9 million. Our investment gained $0.18 per share on our mark-to-market business. Our dividend exceeded our GAAP net investment income by $0.03 per share, and our liabilities reduced NAV $0.04 per share on our mark-to-market basis. Consequently, NAV per share went from $8.68 per share to $8.79 per share. During the quarter, we exercised [indiscernible] greenshoe of our unsecured bond trading on NASDAQ under the ticker PNNTG and issued an additional $11.3 million. The full amount of the bond is $86.3 million. 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-dealers quotes 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 9.6%. On December 31, our portfolio consisted of 78 companies across 30 different industries. That portfolio was invested in 67% first lien senior secure debt; 20% in second lien secure debt; 5% in subordinated debt, and 18% in preferred and common equity. 98% of the portfolio has 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 and capital. Everything we do is aligned to that goal. We try to find less risky middle-market companies that high free cash 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 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 for questions.

Thank you. [Operator Instructions] And we’ll first hear from Kyle Joseph of Jeffries.

Hi, good morning guys, and thanks for taking my questions. First question, just wanted to talk about sort of the pace or the cadence of deployment during the quarter. You know was it a little bit back weighted in the quarter? Just wanted to get a sense for the yield dynamics in the quarter?

Thanks, Kyle. Yes, you know, as usual, we had a large number of deals close right around year-end December 31, so a big chunk of the flow came at around the year-end or shortly thereafter. So, very active quarter in general. We’re pleased with the activity like the risk-adjusted returns we’re getting, but it was very back-end loaded.

Got it. And then, just on yields, obviously yields are subject to, you know, market movements and are subject to base rates, and lastly, we’ve been seeing portfolio allocation. Obviously you guys are only in control of one of those aspects for at least in terms of the portfolio allocation, can you give a sense as – a sense for, you know, how much progress you’ve made, you know, how much more of the portfolio there is to rotate, which would ultimately pressure assets? I know that rotating equity into yield investments have actually enhanced the yield on the portfolio. So, just give us a sense on the progress you’ve made and how much would you have left to check if you will?

You know it’s a good question and look, it’s – as the saying goes, it's a process. You know, a while ago we said, look, we’re – in this environment, we are going to be much more cautious about second lien and mezz given where the leverage ratios were and where we’re going to pivot and do more first lien and take advantage of the higher leverage available in BDC space. So, we’re in the midst of that transition today. First lien exposure is 57% of the portfolio, up 10% from – about 10%, 9% from last year, which was 48%. Almost everything we’re doing going forward is going to be first lean where we’ll be able to leverage it up a bit more. Occasionally, we’ll do a second lien in that space, but it’s going to have to be very, very compelling for us. So, we’re kind of in the middle of this transition of more first lien, higher leverage, lower yields, but made up with leverage a safer portfolio, and at the same time, working on exiting as best we can our equity investments and replacing those with cash paying debt instruments. You know, the fact that a bunch of the investments are performing very well and the valuations are rising is a good sign. It sets a nice foundation for exit, you know, over the coming quarters. Again, we don’t really control most of that, but it sets up this dynamic where over time, you know, with increased leverage, with the ability to exit these equity investments, we should see solid dividend coverage; we should see some growth well beyond that. So, that’s the game plan. You know, we knew it was not going to be flipping a switch and turning lights on, we knew it’s going to take some time. We’re in the middle that and it's very labor-intensive. We're committed to and we think in the end, it will be a much better company, much better cash flow stream in NAV for our shareholders.

Got it. That’s very helpful and thanks very much for answering my questions.

Thank you.

[Operator Instructions] We’ll next hear from Robert Dodd of Raymond James.

Hi, guys. On the equity book, obviously which went up this quarter because of [indiscernible] and other things, but can you give us any color that [you only do on] what proportion of the book, if any, is in active discussions to exit? Or, you know, is it all just – you know it’s – you know obviously it’s a process, but, you know is it all fitting out there or is any of it currently in active discussion?

It’s a good question, you know, because sometimes we are in the room when we – you know we’re in the room when it happens and sometimes we’re not in the room where it happens. So – and I know, Robert, you like [Broadway]. So, there is a portion of the book, I’m going to say, of that $120 million, you know, 10% to 20% and we’re in the room where it happens and, you know, we don't have discussions at this point. The rest of it, we’re not in the room where it happens, and you know, you would hope and think that as the companies perform well and as there enhance primarily of middle market sponsors, it’s just a matter of time, it might be six months, it might be a year, it might be 18 months or two years, but it should just be matter of time until that value is realized.

Got it. Thank you. On the JV, you said you’re actively accessing, so where – you which act would you be in so to speak, to bring Broadway into play again. I mean, you know, is that early stage? I mean any color you can give us on when something might go live on that front?

Yes, so we’re actively assessing proposals, right now, from potential parties – from potential partners, so hopeful that, you know, by the time we speak in early May, we’ll have something more concrete to talk about.

Got it. Thank you. And then, just one on RAM, which, as you say, you restructured a little bit, looks to be doing pretty well, will that – and you obviously just got another permit, I think, to drill it just a couple of days ago. Will there be more needed debt either from you guys or from [Macquarie] to fund incremental wells? You know, I mean you just got one permitted, so, you know, is that going to require more debt capital? Or is the drilling program through this year already funded from capital they have?

Yes, so we’re kind of done with 10 wells, there’s two more potential wells in this project, at this point, that would come from Macquarie, so we will see, you know, kind of one-day at a time. Again, reason we kind of did this recap is we wanted to debt-to-EBITDAs to be kind of in the zone of where the comparables were, which is about three times EBITDA. So, we would only go forward with the other two wells, if we felt we could keep it within the zone. In terms of our capital, I think, at this point, we're set. We're not planning to put any more capital in. Any idea, you know rolling back the tape over the last number of quarters. And we shared this with everybody as, we thought we have really good – we thought we had some really good acreage there in this getting field area, and the mission has been to prove it out. So, that we can position the company best – as best as possible for moving into the right long-term hands. We are not the right long-term hands for these assets. And there's three or four big strategists who are active in surrounding our acreage. So, the idea has been proved out the best position the company for potential exit in the strongest way. So, the wells have been very good. The seven wells, where we have our results are all in the top 20 in that area. So, we think we're setting ourselves up as best we can for potential exit. But it's a volatile market out there in energy, as we all know, and we can do what we can do. But in – for in terms of our capital commitment, at this point, we're finished and the additional wells would come from Macquarie, as we decided to go with those additional two wells.

Got it. Thank you. And then one more, if I can. On the – obviously, your indication of a target regulatory leverage [11% to 15%], it's pretty wide range. Obviously, you're sitting at 18% equity in the portfolio right now. What would – how – where in that range would you be willing to go, if equity for the time being remains at 20% of the portfolio? And where would it need to be, for you to be, willing to go to the 1.5%?

Yes. It's really – it's a good question. Really, for us, it depends on the underlying assets. As you know, most of what we're doing is first-lien senior secured. The debt-to-EBITDA were originated today in the senior basis 4 to 4.5 times, again, 8% to 9%. That kind of collateral, as we know, in a more dramatic world to go into a middle market CLO and be leveraged 4 to 1. We're not suggesting that, but what we are suggesting that, as we have more senior collateral getting, depending on what's financing that, whether it be SBIC, credit facility or otherwise, we would potentially take it towards the upper-end of that range, assuming what we have by and large its first-lien senior secured loans.

Okay. Got it. Thank you.

Thank you.

Next, we hear from Mickey Schleien of Ladenburg Thalmann.

Yes, good morning, Art. I want to follow-up on Robert’s question about leverage. Just to clarify, is the target you announced a regulatory target, or a total debt-to-equity target?

Yes, I’d say regulatory, which, just to be clear, excludes SBIC financing.

Okay, I understand. And can you walk us through the dynamics of winding down SBIC I and putting SBIC III into place, and what proportion of your deal flow in today's market is SBIC compliant?

Yes. So, once you get – SBIC financing is a 10-year financing. Once you get kind of just the midpoint in five years, the SBA says, “Hey, we really need to see a gain plan for getting us fully paid out by the end of the year 10. So, after five years, you don't really increase it that much. You really have to start winding it down. And we're getting towards the back-end of SBIC II. And so, we've kind of started winding it down. And we paid back a bit of the SBA debt last quarter. As part of that and as part of our relationship, we’re pleased we got a Green Light letter. Again, I just want to be clear, Green Light letter is, we’ve been very good and usually leads to getting a license. We are still in the licensing process. We think we'll get a license, but there are no guarantees. We like the financing. It's very attractive. In terms of what fits, usually, there's a lot of arching rules around what fits and what doesn't. Usually, if a company has some form of manufacturing in the United States, it fits, as a general rule of thumb. And as you look at our portfolio today, about 25% or so of the portfolio kind of fits. So, it actually fits nicely with the size of potential SBIC III and it's a nice adjunct to our tools.

And Art, this 25% of your deal flow fits. In other words, are you willing to invest in the businesses that are oriented towards manufacturing, given where we are in the economic cycle?

That's a good question. And what we say is, when we do manufacturing, it's usually like manufacturing. So, we generally avoid heavy CapEx, in a big cyclical CapEx, pulp and paper, steel, chemicals. It's usually lighter manufacturing, which, by the way, is a lot of what's going on in the economy, but it is about 25% fits. And as we kind of look at the flow over the course of time, it's a reasonable amount. In some cases, non-manufacturing companies fit. There's lots of rules about number of employees and what your net income is. So, there's lots of different rules about what fits, but as a general proposition, something that does some form of manufacturing in the United States fits.

And then my last question, Art, in the current environment, how long from a Green Light letter typically to a license? I know there's a lot of moving parts, but would that be a calendar year 2020 event, in your mind?

Yes. I mean, you – we think there's a six-month process since we got the license kind of – I think in why don’t we get the license even…

Just around October of mid-year, say, six-month is very safe assumption, but we never know, obviously we’re in the process.

And how would you capitalize SBIC III, Art?

We’ve been with new – it’s how many deals you need to provide $1 of equity and over time you get up to $2 of debt. So, we would borrow to finance the equity portion of the SBIC.

And the credit facility is the large of that. Is that correct?

Well, they don't give you live credit for. They allow for or you could do some unsecured bonds. So, we did some unsecured bonds last quarter and that could help financing as well.

Okay. That's all for me this morning. I appreciate your time. Thank you.

Thank you.

Next, we'll hear from Ryan Lynch of KBW.

Hi, good morning. Thanks for taking my questions. First one just wanted to talk about RAM a little bit from a higher-level. Art, how do you balance thinking about exiting an investment like RAM, that seems to be performing pretty well and making some pretty good progress, but as in a very out of favor industry? So, clearly, I think, RAM is an investment on your balance sheet that I think investors would like to see you guys exit, particularly because of the equity component and the sector, but you're trying to sell that into a sector that is very out of favor today. So, how do you weigh trying to get out of that, that investment that investors probably want to see you get out of luck, but also wanting not to give up significant amount of value in a sector that’s really out of favor today?

Yes. It’s a great question, somebody grapple with all the time, and I want to say all options are on the table, right? We know we're not the best long-term holder for this asset, particularly as the wells are performing extremely well and there's some active strategic threat around the geography. So, we know we're not the best long-term holder and we'd rather not sell into weakness either. So, that's the conundrum. It is an important investment for us. We do want to convert it to cash over time. So, we have to play it out. We're now very active in website on RAM. Anyone can go to like [indiscernible] shares the geography in the wells and gives you sense of the results versus the comparables and the peers and who the peers are. So, we are open minded and happy to take suggestions from people who – how we can maximize the value of that asset. So, it may just take some time. RAM’s important, but I don’t want to obsess on it, because we have a lot of other really good equity investments that are growing in value based on strong performance that we hope to exit and those are in more in favor industries than energy. So, I think in RAM, we just got played out. We have a couple more wells, potentially the drill, put up the good results. And then try to maximize value as best we can. In the long run, all options are going to be on the table.

Okay, yes. That's helpful. I had a question regarding your leverage. So, your target regulatory leverage is 1.1 to 1.5. I'm just wondering, obviously, the SBIC debentures do not count against that. That's about 20 points of additional leverage that you guys have on, if you include the SBIC to your total leverage. If you guys get another SBIC license that can even become a larger component. So, I'm just wondering, do you guys think about total leverage at all, as you guys are operating, or is your main focus just going to be on that regulatory leverage target?

We obviously think about overall leverage as well. And we think about what's the appropriate leverage against the particular asset. So, clearly, we're doing primarily first-lien senior secured loans today, which, as we said, there are ways to finance that to much more aggressive leverage than even 2 to 1. 2 to 1 is the BDC regulatory GAAP, regulatory limit. And in theory, if you have the SBICs, I guess, we could get to 2 to 1 leverage on an overall basis. Again, that would be against at that point in time mostly a senior book. We're not there yet. It's going to take some time. So, in other words, we're going to likely even get there at that point in time, but it does give us a lot of dry powder, particularly kind of senior assets to generate earnings in a safe way.

Okay. And then last one on your – obviously, you guys are in the Green Light hoping to get another SBIC license. Do you know where the all-in rates would be, if you were to take an SBIC license today and drawdown some adventures, where those current all-in costs are today, roughly?

Yes. Those are like 3.5% to 4.5%, in general indicative zone.

Okay. Those are all my questions. I appreciate the time today.

Thanks, Ryan.

Next, we'll hear from Rick Shane of JPMorgan.

Hi, guys, thanks for taking my question this morning. First on – from a government perspective, I believe you guys now have two inventory board seats. I'm curious from an ownership perspective, can you just tell us a little bit more about the capital structure? What percentage of the capital does your equity represent? What percentage of ownership do you have?

Yes. So, we own all the equity. That said, we have a program for management to participate in upside and participate in a potential exit. So, for us, management's key here, we think we have a great management team, led by Larry Lee and some really talented operators. And we think highly them, and we've wanted to – we have arrangements in place, where they will participate in upside. So – but we do 100% of the equity at this point.

Got it. Okay, great. And then, this is obviously related in a tangential way. Historically, [BVT] didn’t have higher concentrations of equity investments and traded at significant discounts to NAV. You're obviously highly aware that you're addressing that in terms of your outlook. I’m curious, giving the discount and that opportunity. How important is repurchasing shares as you move forward? You haven't been particularly active on the buyback the last several quarters, but given the discount and given that investment opportunity, you weighed against deploying capital?

It's a good question, Rick. And we – it's something we and the Board talk about regularly, which is capital allocation. We've now done two buybacks. The last one ended a couple of quarters ago. Management has been buying the stock regularly – you can pass them and we’ll continue to do so. It's something we evaluate. It's on the table all the time. Like we want to, as you said, we want to exit some of these equity investments. And that will be very good – nice thing to happen when it happens. And we'll – and then we'll evaluate all the different options in front of us, whether it be new investments, buybacks, et cetera.

Got it. I understand that signaling your locations in management buying shares and that's important in the market, certainly, looks to that. But moving the discount to NAV, the company buying shares is different not only because of the signaling impact more importantly because of the investment – potential investment return associated with that?

I agree, and that's why we've done two buybacks in the last few years and why it's always [Technical Difficulty].

Art, I lost you. Can you hear me?

Yes. As I said, that's – it makes a lot of sense, which is why we've already done two buybacks. And it's something that we continue to discuss regularly.

Terrific. I appreciate that. Thank you, guys.

Thank you.

Next, we’ll hear from Casey Alexander of Compass Point Research.

Yes. Hi, good morning. I just have one question. The reclassification of the RAM loan into equity and the additional equity that you put into RAM, was that done at the 9/30 valuation or the 12/31 valuation?

So, if you look at it, Casey, as of 9/30, the fair market value of the bundle of RAM was $120 million. We put $10 million of new money in bringing that to $134 millions. And as of 12/31, that value of $134 million, which was at 9/30 is worth about $138 million. So, there was a markup in the valuation of the overall bundle, because the wells had excellent performance. And as we discussed, we converted some of that debt to equity, during that time period.

But that – was it – was the conversion of the debt to equity also at the 9/30 valuation?

It was done at the 9/30 valuation. It was debt that we converted at that valuation, and we always marked as at 9/30.

Alright. That's the only question I have. Thank you for taking my questions.

Thank you, Casey.

Next, we'll hear from David Miyazaki of Confluence Investment Management.

Hi. Good morning.

Good morning.

So, Art, you talked a little bit about the overall shift that you're moving more towards senior secured with what you have on the balance sheet. And I'm just wondering from a broad perspective, when we talk about doing only 4% of your deal flow, what kind of trends are you seeing across the entire underwriting opportunity with regarding to revenue and EBITDA trends for your target market? Is it stable? Is it getting a little better?

Yes. No, the economy, as a general proposition, is in good shape. I mean, we're seeing solid mid single-digit revenue and EBITDA growing, as a general proposition, across the economy. There are certain areas of weakness. Auto-related has been a little weak. Manufacturing that had been related to tariffs is a little week. We hadn't really been and at least in our portfolios much from the 737 Max, that's been muted at least with our portfolio. So, okay, so far so good. We don't yet know the outcome of this virus issue. It's early. But in gentle proposition, the economy's good. And because we have a wide funnel, we can stay in our lane. And our lane has been a good one for – in that kind of, first-lien mid-4 to low-4s debt-to-EBITDA. So, we think it's a really good risk-adjusted return in the market, where people are saying, gee, it's – the cycle is long in the tooth and multiples are high, and what did we do? 8% to 9% on first-lien, 4, 4.5% debt-to-EBITDA, to us, it seems like a really solid place to put money and then you put appropriate leverage against that asset and you can get a very solid ROE, which is kind of a game plan.

Okay. That's very helpful. And along those lines, as you shift toward being more senior and more secured, I get the sense that part of that is your opinion of where the conditions are right now and where we are not in the credit cycle. But it also seems to be that it's where your advance rate is on what you underwrite and how you can change the leverage of your balance sheet. So, is it fair to say that it's probably equal parts of both that is driving the decision to underline more senior secured?

Alright. It's a really good question. I think, if we think about PNNT, we like to say, as a strategy of being across the capital structure. When first-lien – whenever we think that's best, we’ll be at the top and certain times. Secondly, the measure is really attractive. We'll go there, when that's really attractive. The biggest driver has been the elevated leverage of levels on second-lien in mezz and they’re obviously subordinated. So, in PNNT, we do second-lien in mezz. Periodically, the bar is really high now, because we want to see reasonable leverage, and it's 6.5 times leverage or whatever the market in general seems to be. In general, we're not – we don't really like going that deep in the capital structure at those elevated leverage levels. Occasionally, we see a company that just really clears the bar that we love that will do on that basis. But as a general proposition, once we get much above five times in any security, we start to get a little nose bleed. As a general proposition, sometimes we'll go a little bit above and we see a very strong growth or put deleveraging, but generally, once you get above five times, we start to become a little allergic. So, that's the primary thing. Now, fortuitously, roughly, at the same time, BDC rule has changed and BDCs can now leverage their assets more than 1 to 1. So, that puts us in a position and a lot of BDCs in a position to say, ‘Okay, you can move higher in the capital structure be safer and for more leveraging and when it all comes out in the wash, you have a very attractive ROE.’ So, that was – that has all happened roughly at the same time. And for now, we think this is appropriate for PNNT. There may be a time a year or two down the road when we say, geez, that second-lien deal is at 12% or 13% and 4.5 times or 5 times debt-to-EBITDA is really attractive. We're going to do more of those. So, that's kind of how we think about it

That's very helpful. And I know that's the way that you thought about it coming out of the credit cycle. So then, if you contrast that with the SBIC loans that you're making, it's great that you're making progress on your license and congratulations on that fund. However, if I think that it's probably fair to say that you're not going to be doing senior secured floating rate loans with the SBIC underwriting. So, can you talk a little bit about how you're working in that dynamic, where the ability to go up and down the capital structure is more limited in the SBIC and how you're going to underwrite against the backdrop of the high leverage that you're talking about on the support [maybe balance]?

Yes. It is true that the SBIC does not discriminate between first-lien and second-lien mezz, so that's true. So, there's a very good vehicle to exchange secret second-lien in mezz deals, that's totally accurate. That said, first and foremost, we have to be good investors. And if we can borrow with 3% or 4%, from the SBIC or anyone else and put senior debt into it – into the one leverage, that makes sense, just as well. So, most importantly for us is, we have to make good loans. We have to make good investments. And then we have to match with the financing. The SBIC gives us the optionality to do second-lien in mezz in that bucket and give us the same advanced rate. But it's not necessarily what we're going to be doing. It will depend on the facts and circumstances. At the time, now SBIC financing is a 10-year facility. You're ramping over five years. So, who knows what's going to happen over the course. We're hoping to get a license here in the next few months. You got five years of investment ramp from then, we'll see. Most importantly, they have to be good investors and put good risk-adjusted returns on the balance sheet.

Would you – I know that this is – five years is a long time to think about, but would you say in the current environment, that it's probably likely that you won't ramp this license, assuming you get it, as quickly as the previous ones, because the subordinated loans are carrying so much more leverage?

I mean, I think, the reality is once we get the license, if it s a solid deal first-lien or second-lien or otherwise and if it's the SBIC we're going to put it in there. It's attractive financing and it’s a long-term money. And if we end up filling up with first-lien, we end up filing up the first-lien, but still ROE accretive to our shareholders.

Okay, great. Thanks for your help. I appreciate it.

And it appears, there are no further questions at this time. I'll turn the call back over to Art for any additional or closing comments.

Yes. Thanks, everybody. I just want to appreciate – I thank everybody for being on the call today. We appreciate it and we will speak to you in early May, which is will be our next quarterly call. Thank you very much.

That does conclude today's conference. Thank you all for your participation. You may now disconnect.