PennantPark Investment Corporation (PNNT) Q2 2020 Earnings Report, Transcript and Summary

Welcome to the PennantPark Investment Corporation's Second Fiscal Quarter 2020 Earnings Conference. 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.

Good morning, everyone. I'd like to welcome you to PennantPark Investment Corporation's second 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. First, we hope that you, your families and those you work with are staying healthy and navigating through these challenging conditions. We are pleased to report that PennantPark continues to operate smoothly and effectively, and remains committed to working diligently on behalf of our investors. I'm going to spend a few minutes discussing our portfolio going into the COVID-19 crisis, how we fared in the quarter ended March 31, how the portfolio is positioned in the upcoming quarters, our capital structure and liquidity, the value proposition of our stock, the financials and then open it up for Q&A. We believe that our rigorous underwriting process and disciplined approach has successfully positioned us to manage through the challenges ahead. We have an excellent team of talented and dedicated professionals, many with decades of experience, managing through multiple economic cycles, to help ensure the best possible outcome in this type of difficult environment. Although we never predicted a global pandemic, as you may know, we've been preparing for an eventual recession for some time. Prior to the COVID-19 crisis, we proactively positioned the portfolio as defensively as possible. Over the past several years, we've generally been moving into first-lien secured positions, higher in the capital structure and into a more diversified portfolio. As of March 31, first-lien exposure was 60% of the portfolio up from 55% year ago. The first lien portion of the portfolio has an average yield of 8.1% indicating a lower risk portfolio in the direct lending space. The overall portfolio is constructed to withstand market and economic volatility. As of March 31, the average debt-to-EBITDA on the portfolio was 4.6 times. The average interest coverage ratio, the amount by which cash income exceeds cash interest expense was 2.8 times. Our focus has been on traditional middle market companies, where we have benefited from terms, covenants and structures much more attractive to lenders than those of larger companies. These terms enable us to see potential challenges in portfolio companies and be positioned to assist and protect our capital much sooner than the low-to-no covenant loans which are typical of larger borrowers. We have largely avoided some of the sectors that have been hurt the most by the pandemic such as retail, restaurants, apparel and airlines. Although PNNT does have exposure to oil and gas, which we'll discuss later, the portfolio is highly diversified with 87 companies in 30 different industries. As of March 31, we had no non-accruals. On average, our assets were marked down approximately 8.6% in the quarter, primarily reflecting softening market conditions due to COVID-19. Excluding the energy investments assets were marked down approximately 5%. Our growing team and capital resources have put us in a position to be both active and selective whereby we only invested in approximately 4% of the opportunities we were shown over the past year. Since inception, PNNT has invested $5.9 billion at an average yield of 12%. This compares to an annualized realized loss ratio of about 24 basis points annually. If we include both realized and unrealized losses, including the unrealized losses through March 31, the annualized loss ratio is only 42 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. 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 an investments which ultimately aggregated $480 million. The investments performed well, average EBITDA of the underlying portfolio of companies fell about 7% at the bottom of the recession. According to the Bloomberg North American high-yield index, the average high-yield company EBITDA was down about 40% during that timeframe. As a result, we have 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 253 investments since inception 13 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. Now, let's turn to the outlook ahead. In the coming quarters and how our portfolio is positioned, we've been communicating on a constant basis with management teams and the private equity sponsor owners of our portfolio companies. As mentioned previously, we’re gratified that our historical investment focus has protected us from some of the worst hit areas of the economy such as retail, restaurant, hospitality, apparel and airlines. We've been pleased with the way our portfolio companies have moved to rapidly adjust costs and are focused on shoring up liquidity. Looking forward to the quarter ended June 30 and beyond, there remains meaningful uncertainty about the timing and pace of reopening the economy and its impact on the portfolio. Nevertheless, where things stand today, our analysis suggests that the vast majority of the companies in our portfolio have sufficient liquidity to pay their interest payments as they come due in the coming quarters. Having said that, we expect that certain portfolio companies will ask for amendments allowing temporary covenant release given the substantive impact of the shutdown on their operating performance. We are comforted that most of the loans in our portfolio benefit from real covenants, which stepped down. These covenants may require some amendments in the current environment, but they allow us to monitor the portfolio closely and to ensure companies are taking appropriate actions to protect our investment. There are some companies in our portfolio that have seen significant drops in revenue due to COVID such as companies in the gaming industry and the energy industry. Gaming represented only 3.7% of the portfolio as of March 31, across five investments. Two of the gaming companies are undertaking construction fixed projects, which provide them with interest reserves into mid-2021 two properties, our regional facilities, his primary customer base does not need to get on a plane. Those properties were experiencing record performance prior to the shutdown. Owners of those facilities have aggressively cut costs and while we do not know when the properties will re-open? I'll have cash on the balance sheet that will allow cushion to reopen in the third or fourth quarter. We have one small residual loan to a wholly owned subsidiary of a large investment grade company. With regard to investments in the energy industry. Those investments represent 7.9% of the overall portfolio with oil hitting all time low prices last month. The entire energy industry is facing unprecedented challenges, as a result of COVID-19 and the massive global reduction in oil demand. Many oil and gas companies have decided to shut in oil production in the wake of this environment. Last quarter, we recapitalized Ram and converted all of our remaining debt obligations to equity. And while Ram's operating performance remains good, it is curtailing and shutting in all oil production possible. Both Ram and ETX has suspended all drilling activities and reduced all nonessential capital expenditures, expenses and personnel. With the reduction of demand and storage shortages expected to continue during the summer, until the economy reopens, revenues and cash flow will be materially reduced. While Ram has financial hedges in place, they will only partially mitigate the impact of low oil prices. Ram will largely rely on those hedges over the coming quarter for cash flow. On the positive side, many of our portfolio companies are in industries such as government services, defense contracting, software, communication and cybersecurity, which collectively comprise a substantial portion of our portfolio and should be less impacted by COVID. With regard to our financials, I'll give some summary highlights, and Aviv will go into more detail. Our net investment income was $0.15 per share below our dividend of $0.18 per share. Our GAAP net debt-to-equity ratio was 1.59 times, and our regulatory net debt-to-equity ratio, which excludes SBIC debt, was 1.59 times. As many of you know, in early 2009 in response to the global financial crisis, we started marketing many of our liabilities, our credit facilities and bonds to market to better align asset and liability values. This reduces volatility of NAV in times of market volatility, such as we have today. The additional benefit at the time and for the ensuing decade was that it reduced the volatility of our leverage as calculated for the regulatory asset coverage test. About nine months ago, the SEC guided us and for regulatory asset coverage purposes, they would prefer we mark the liabilities at cost in that market, which we now do for that test. As a result, we will be highlighting both GAAP leverage and regulatory asset coverage leverage. With regard to NAV, our GAAP NAV was $7.71 per share as of March 31, down approximately 12% from the prior quarter, which reflects both the markdown of assets, offset by certain liabilities. Assuming liabilities were not mark-to-market, adjusted NAV would have been $6.97, down approximately 20% from the prior quarter. With regard to leverage, we've been targeting a regulatory debt-to-equity ratio of 1.1 to 1.5 times. Our net regulatory asset coverage ratio was 1.59 times and was above the upper end of our range for this past quarter. This was primarily due to an 8.6% decrease in the mark-to-market of our portfolio. We had ample liquidity from revolver draws, and we're in compliance with all of our facilities as of March 31. As of today, we have liquidity to support our commitments. We are looking to carefully manage our leverage over time, and we expect to stay in compliance with both regulatory requirements and covenants under our credit facilities. We have a strong capital structure with diversified funding sources and no near-term maturities. We have a $435 million revolving credit facility maturing in 2024 with the syndicated banks, a separate $250 million credit facility maturing in 2024, $134 million of SBA debentures maturing in 2026 and $86 million of unsecured notes maturing in 2024. We've been in consistent dialogue with our lenders and are thankful for their support. Regarding our capital structure, we have two initiatives in process. First, we're continuing to move forward with our application to the SBA, following up on our green light letter we received for our SBIC III and are hopeful of receiving that license in the near future. Second, as we discussed on our February call, we are actively assessing a new senior loan joint venture similar to the successful joint venture that we have in PFLT. This JV would increase both our earnings and financial flexibility over time. Last quarter, we shared our plan to grow our income over time, which included rotating out of equity investments and using the proceeds to invest in cash-paying debt instruments as well as moving forward on both SBIC III and the potential JV. Due to COVID, unfortunately, those plans got delayed, in particular, the plan to rotate out of equity investments. As a result, we have reassessed our earnings relative to our dividends in the new environment. Our Board and management team regularly evaluate the earnings power of the company relative to the dividend. And given the uncertain economic environment due to the pandemic, we have concluded in consultation with our board that it is prudent to adjust our dividend to $0.12 per share for the June 2020 quarter. We are all personally disappointed regarding this reduction. This is undertaken with serious 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 recurring income with gains or other income contributing to long-term NAV growth. As earnings grow over time, we intend to adjust our dividend upward. In conjunction with the dividend adjustment and to demonstrate alignment with shareholders, we have decided in consultation with our board to voluntarily waive all incentive fees for the next two quarters. With regard to our stock price, we believe that the share price of PNNT does not accurately reflect the long-term value of the company. As we stated earlier, the average debt-to-EBITDA of our underlying portfolio as of March 31 was 4.6 times, translating this into the language of value investors at the stock price of PNNT today well below NAV, we, the shareholders in a portfolio of companies at a multiple of about 2 times cash flow. Even in a recession with potential declines in cash flow, value investors should be able to appreciate that attractive low multiple. As previously disclosed, directors, officers and employees of PennantPark Investment Advisers purchased about 208,000 shares of PNNT in February and March because we thought it was an excellent investment opportunity and to demonstrate strong alignment of interest with our shareholders. 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 March 31, net investment income totaled $0.15 per share. Looking at some of the expense categories, management fees totaled $6.8 million; taxes, general and administrative expenses totaled $1.5 million; and interest expense totaled $9 million. Net unrealized loss on our investment was $121 million or $0.18 per share, net realized gains was $1.4 million or $0.02 per share and unrealized appreciation of our credit facilities was $0.73 per share. Our dividend exceeded our GAAP net investment income by $0.03 per share. Consequently, NAV per share went from $8.79 to $7.71 per share. Adjusted NAV, excluding the mark-to-market of our liability was $6.97 per share. The decline in NAV was primarily due to an 8.6% valuation decline of the investment portfolio combined with increased leverage. As a reminder, our entire portfolio, credit facility and senior notes are mark-to-market by our Board of Directors each quarter using the exit price provided by independent valuation firms, securities and exchanges or independent broker-dealer 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 9.1%. On March 31, our portfolio consisted of 87 companies across 30 different industries. The portfolio was invested 60% in first-lien senior secured debt, 19% in second-lien secured debt, 5% in subordinated debt and 16% in preferred and common equity. 94% of the portfolio had a floating rate of which 90% as LIBOR floor. The average LIBOR floor is 1%. 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 take our first question today from Mickey Schleien, Ladenburg Thallman.

Good morning, Art and Aviv. Just a couple of questions. Art, could you give us a sense of split of the unrealized depreciation of the portfolio this quarter between the mark-to-market adjustments, given the volatility in the credit markets and actual credit deterioration among the portfolio companies?

Mickey, you're talking about the assets on the asset side?

Yes.

So it's about 80% – 80%, 85% market, the rest would be credit.

Okay. And similar question I would ask for PFLT. Can you give us a sense of the portfolio's average EBITDA? And in the case of PNNT, the EBITDA in the second-lien deals meaningfully higher than that average?

Yes. The average EBITDA is kind of in that $35 million, $40 million zone and yes, the second-lien deals going to estimate the average EBITDA is kind of more like $75 million to $100 million kind of zone.

Okay. And lastly, art, I understand clearly that the deal flow is very skimpy right now, but there is some stuff going on. And you, like everyone else is setting the bar very high. My question is, how do you approach underwriting for anything in this environment, given the complete uncertainty as to how long the COVID pandemic is going to last? And we still don't really know what ultimately the impact on the economy is going to be. So even if someone comes through the door with a strong balance sheet and a nice product. I'm really curious to understand how you're thinking about the underwriting in general.

Yes. And it's a great question, and it is early to say because there hasn't been a lot of deals. But as you think about the fair mark as of 3/31, which was a very volatile time, kind of solid well-performing non-COVID names were marked, I don't know, anywhere between $0.94 and $0.97, $0.98 on the dollar, depending on the credit quality, et cetera, which equates to maybe 150 or 200 basis points wider in terms of yield. And I think those are kind of still accurate in terms of indicative levels that people are indicating or looking at potential new deals kind of strong non-COVID names, maybe 150, in certain cases, 200 basis points-ish lighter than it would have been 60, 90 days ago.

And on – to the extent those deals are coming through the door, I'm just wondering, how many people are going to be sitting at the table trying to bid on that given the scarcity of deal flows. In other words, isn't it reasonable to assume that, for the most part, portfolios are going to tread water at best with a focus on follow-on investments as opposed to actual new deal flow?

Yes. Look, I think most of – and I think you've heard it from the industry. Look, most people are focused on their existing portfolio companies and making sure that the resources and focus and talent is on those existing portfolio companies and to the extent there's new deals, generally, there's a pretty high bar. So inevitably, as hopefully things settle in over the coming months or quarters, the deal machinery will start again, and there'll be much more new deal formation. I think anyone has got a substantial portfolio, wants to make sure that the focus, the capital of the talent is on the existing names first. And that’s with us as well.

I understand. That’s really helpful, Art. I appreciate your time and I wish everyone there all the best. Thank you.

Thanks, Mickey. You too.

Kyle Joseph of Jefferies is up next.

Good morning, guys. Thanks for taking my questions. Just wanted to get your thoughts obviously, you had no nonaccruals at March 31, but I guess it would be helpful. Can you give us a sense for what revenue and EBITDA growth was in the first quarter and a sense for how that has trended since March 31?

Yes, it's an excellent question, Kyle. Look, the first quarter – first calendar quarter of the year was, by and large, a strong quarter up until the last couple of weeks. So EBITDA, on – in general, was growing at 3% to 6% as a general proposition. Obviously, we have a different world since COVID hit. And that's what we're endeavoring to do is with each portfolio company endeavoring to understand what's going on with our underlying operations, with their EBITDA, with their liquidity. We've been pleased that the actions that the sponsors and the management teams, by and large, have taken to cut costs to harbor liquidity. As we said in the comments, we've asked majority of them, we feel pretty good about meeting their obligations in June and September. So by and large, they've done a good job doing what they need to do. But in terms of how much will EBITDA be down case by case, industry by industry, a big chunk of our portfolio isn't some safer stuff and then we have a piece of the portfolio that's obviously more impacted.

Got it. That's helpful. And then just one follow-up from me. I kind of want to get your sense for yields going forward, given your progress on the portfolio rotation, the lower rate environment, your LIBOR floors on the portfolio and then – given the current deal environment where it sounds like there's not a lot of deals getting done. Yes.

Well, yes. Certainly, spreads are wider than they were. Interesting. We have about 94% of this portfolio that has – excuse me, 90% of the portfolio at a LIBOR floor. And the floor is 1%. So in fact, in reality today, we're seeing a little – we will see a little bit of ups. Last quarter, I think all BDCs saw some ups and downs in terms of LIBOR's movement, but now with floors, we may see some ups, not material, but ups in terms of income with the floors that are in place. And certainly, over time, if you project this out, and we saw this kind of coming out of the GFC, the global financial crisis. Spreads and yields will go up over time, and inevitably, we will have some paydowns and payoffs and excess cash flow sees some maturities. And over time, the yields on BDC portfolios, including ours, should go up. And that will be, at that point, a tailwind, not a headwind. That said, we start to get through this time period where credit becomes the primary thing, not necessarily spread. So that's one of the reasons we moved up capital structure, and we're willing to take a lower yield. We wanted to have a big chunk of this portfolio and as low-risk as possible, a portion of the direct lending space.

Got it. Very helpful. Thanks for answering my questions.

Our next question comes from Robert Dodd, Raymond James.

Hi, guys. I hope everyone’s doing okay. I got a few questions. I'll start on Ram first. And I appreciate the color you give. You do have hedges in place for a good chunk of production. But as you say you can realize those in the near-term. So what level – how long the business is sliding amount of volume over the next couple of years have hedged out? How long would those – can those hedges provide for coverage of what OpEx there is, then obviously, the interest expense for Macquarie and then your loan spend into Ram?

Yes. It's a great question. And every day, we're working on that, which is how low can we cut the costs? What kind of scouting crew can we keep in place? Clearly, we're talking to Macquarie all the time who is the bank on Ram and trying to figure out the runway. And it's been a good cordial relationship with them and the management team is excellent. So the hedges do help us for a while, a quarter or two or maybe three. But clearly, we got a hunker down and try to move things to the right, move for a better environment, manage the cash flow. So we can circle back after this and try to get you some more color. There is a fairly robust website which around it gives a bunch of information, but that's exactly the question that we're working on every day with that particular company.

And then the obvious one is would you have the – obviously, it's a business you've supported significantly. You just restructured it or recapitalized it. Would – if hypothetically, we get out to that Q3 and oil hasn't rebounded and things. Would you and the board, I guess, be willing to essentially recapitalize again and put more capital in? Or have you had enough of putting money in to Ram at this point?

After six years and – on one hand, we've had enough, of course, it's been a tough six years in energy. On the other hand, of course, we have to be good fiduciaries and look at the facts and circumstances at a particular point in time. And if it's a good investment, and we think it will – the investment would help us in staying on one feet. As a good investment, we have to kind of look at in isolation from the capital that's been put in the past. And if it's a good investment, we would certainly look to do it. At the same time, it's been a long run, and it's been a – there's been substantial headwinds in the energy space. So can't really answer that question now, but we have to make good investments on one hand and be good fiduciaries on the other hand.

Got it. Thank you. And then one more, if I can. On the leverage side, obviously, with the markdowns, et cetera, and the leverage is quite high. While the market in Q2, calendar Q2, for origination activity is pretty muted. I mean, I do think we could see activity or opportunities ramp up but your leverage is obviously quite high. So how – what's the plan, so to speak? Do you think that where you could potentially delever or rotate in a very tough environment to be doing that? So to be able to take care of – to advantage of some of those opportunities as we go into the back half of the year?

So look, we're looking forward to the two newer initiatives. The SBIC III as well as a joint venture. I mean the joint venture discussions obviously went on hold for a couple of months. But there – things have solidified, we're back having some very good discussions with some terrific parties, and that would be a way to create additional capital, to create additional financial flexibility and to be able to play some offense as well. So I think that would be a nice way to do that.

Got it. Thank you. I appreciate it.

Thanks, Robert.

We will go next to Rick Shane, JPMorgan.

Hey, guys. Thanks for taking my question and I hope everybody is doing well. When you look at the portfolio by maturity distribution, a couple of interesting things. First, your investment in Triad matures this year. It's carried right near par. You've been in there for almost five years. I'm assuming that, that reflects your confidence in that particular business. But curious, as we move through the year, how you're going to think about that? And also, are there any upcoming anticipated prepayments other than maturities that you would expect in 2020?

Yes. So we have been – it's a good question, Rick. We have been getting some nice excess cash flow sweeps. Triad is one of the companies that's been – they are a provider to some of the stores and the retailers that are actually essential and doing well in this environment, and they've been generating a lot of cash flow. So they've been even post quarter-end, paying down and generating a lot of excess cash flow. Triad might be 1.5 times leveraged at this point. So we feel good about that one. And there are some other companies that are generating excess cash flow that we're the beneficiary of. So, as we talked about in our remarks, we had a gaming company that was bought by an investment grade or it was refinanced by an investment-grade – the investment-grade parent. So there are events that do create cash along the way. And ultimately, it's about cash flow, cash flow, cash flow. And so we underwrite and we are seeing some of that kind of come to the fore. And look, I mean a lot of the portfolio is kind of very solid, stable, non-COVID related names. And there's another form of cash there, which is there are, there are buyers of certain of these assets if we want to sell. And I think fairly attractive prices, not what they were a month or two ago, but certainly, in the mid-90s, maybe upper-90s in certain cases, there's an opportunity to sell certain assets if we need liquidity. So, and we're looking at all of the above, including as well as, as I said, the joint venture and these can be all forms of both defense and helping us play offense as well.

Got it. Thank you. One other question related to maturities and marks. If we look at the maturities plotted or if we look at the marks plotted by maturities, 2024 maturity seem to have the most conservative marks. And I realized there are a couple of different things that go in into that. There's a little bit more sub-ordinated or second lien in that vintage. But it also seems to be coincident with the 2018 originations. I'm curious if you think that there is some sort of that that reflects sort of what we've anecdotally been aware of lease or credit over time? And if we should expect as that evolves a little bit more pressure on the 2025 and 2026 maturity pools as well.

It's a great question. I need to look into that, and let's maybe circle back offline. My blink is that it's probably idiosyncratic versus vintage. Because we generally have an idiosyncratic business, but let's talk about it afterwards.

Okay. Terrific. Thank you, Art. And I hope everybody is well.

Our next question is from Ryan Lynch, KBW.

Hey, good afternoon guys. And thanks for taking my questions and hope you guys all are doing well. My first question had to do with your commentary on pursuing a JV similar to what you have in PFLT. So, my question has to do around with one, to pursue a JV, you have to obviously commit new capital into that fund and just given across GM&T and really all BDCs. So to some extent, capital is pretty tight right now. So how are you comfortable committing capital to – from your own liquidity position today? How are you comfortable funding and pulling down that liquidity to put into that JV from a capital position, number one. And then number two, JVs inherently have off-balance sheet leverage. And just so your guys' current leverage today is running around 1.6 times or so. Why are you also comfortable with adding on additional off balance sheet leverage today. So if you could address those two from a liquidity standpoint, funding more capital into a potentially created JV as well as the higher leverage on your balance sheet, creating more leverage off balance sheet.

Yes, that's terrific question. Right. And the way we're thinking about it is we would contribute both certain assets that we currently have to the joint venture. So it would not be a cash contribution, it would be a contribution of assets, and it may very well include a contribution of an existing credit facility that we already have into that joint venture. Then the JV partner would buy a piece of the equity of the joint providing dry powder for new investments and also potentially providing dry powder to PNNT. So that's kind of how we're thinking about taking an existing portfolio with existing credit as the base and as the core of the joint venture, with the goal of potentially growing it over time with additional debt and equity.

Okay. That makes sense. It could actually address those, those two concerns of created potentially more liquidity and actually potentially reducing leverage if it goes. Okay. That makes sense. And then just the other one. I know you mentioned you have the green light letter for SBIC III. Can you just talk about – I don't believe you've actually received the third license yet just agreed by letter, but correct me if I'm wrong in that. And then can you just talk about, obviously, the SBA right now has – it's been pulled in a lot of direction – is pretty busy right now. So can you just talk about is there really much attention or focus do you believe, being put on giving out new SBIC licenses? Or are they mostly resources kind of pulled away in other directions from the federal government?

Yes, good question. Look, we're having good dialogue. We got the green light. They are asking a bunch of questions and the license process is moving. So there is dialogue back and forth and, they ask us questions, we respond. So, we're hopeful that, we will get it. We don't have any transparency in terms of what's going on in the SBA, although you're right. They've got their hands full with the Triple T program. But we see, there's a pulse. We seem to be having a good dialogue. We're hopeful, of course, there's never any, never any guarantees.

Okay. That's a fair enough. Those are all my questions. I appreciate the time today.

Thank you, Ryan.

Our next question is from Casey Alexander, Compass Point.

Hi. Good morning. Also my wish is that everyone is well and I'd like to comment that I'm sure that the shareholders appreciate the incentive fee waiver for the next two quarters. I think that's well appreciated by shareholders. And I know that I appreciate the adjusted NAV that's being offered frankly, the debt – the liability mark-to-market has always been kind of a source of confusion and frustration. So, I certainly appreciate the disclosure on that. As it relates to the new dividend as opposed to setting a set level, why don't just pay-as-you-go? I think this is going to become a, the thing that that rates moved so much, conditions change. And, why try to set a level, why not just pay as you go and you know, if you earn $0.14 next quarter, pay $0.13 bank sum for the future and take that approach to it.

Yes, look, that is something that we will, we should consider, I know there's a big BDC that's still in that other than I know, we know some well-respected investors who have suggested that in the past, you are now suggesting it on our conference call. So, you know, look, we, we evolve, we're flexible. Our goal is to always get better at what we do. So certainly, we're going to listen and we're going to see how the market goes and see how things go. At this point we wanted to pick a level that we thought was not going to strain us and that we thought was relatively easy and we captured some downside and just created a cushion for that. But, you may be right. I mean it's something that we'll take on the revisement, and we'll see how the market goes, and there may be a lot to be said for that.

Okay. Secondly, can you give you one of the businesses that wasn't mentioned but, but clearly has been challenged through this have been healthcare services such as physical therapy outfits? And you guys have a reasonably significant investment in a physical therapy company, and it's been quite successful. But I'm sure it must be somewhat challenged. Do you have any color on the physical therapy company? And those are also, I think, starting to open up a little more from just essential needs. Do you get any early color on that ramp?

Yes. No. It's a great question. It's a big investment for us. From a macro standpoint, we think it's a terrific industry and has the right kind of tailwind kind of in terms of kind of the aging in America, as well as its efficacy for a relatively small amount of money, the outcomes can be very powerful. So it's a terrific company. It's kind of an excellent management team that we helped install obviously, this has hurt it. The locations are mid-Atlantic. So outside of the New York area, which is helpful. And even during the depths of this, they were kind of at 40% or 50%, so they were never shut down. There was always an essential service that customers came to day in and day out and some of it's been handled by telehealth and some people are still coming in. It is starting to open up. It is starting, the green shoots are starting to come out and, we're hopeful that we can, this company can be back, doing well again in the coming, in the coming quarters. But you're right, it's kind of COVID-19 did significantly impact that business, company has a ton of liquidity. Thankfully management team has done a good job creating liquidity, done a good job of managing the variable costs and, we feel that for the next couple of quarters at least, they can get through this, while hopefully the economy and their business reopen.

Now I do know that they closed several locations and transferred essential patients to reasonably contiguous locations, have they reopened all of the locations? Or are they still operating at something less than full capacity?

I believe, but don't quote me on it, and I can get you on online with one of my colleagues afterwards, I believe there's still a few locations that are not, not open.

Okay. Thank you for that. And in your press release, there's a statement that any continued increase in unrealized depreciation could result in reaching relevant covenants on the credit facilities. I was wondering if you know – and this is more for Aviv, do you know the minimum shareholder equity required for the two credit facilities?

Yes. And essentially, just as a caveat, this disclosure is driven by most of our lawyers. It's kind of a blanket statement. So it does not try to insinuate that we're closed or about to breach any one covenant or another, as you know, as of March 31, our growth facility on PNNT as well as other current facilities in our shop have passed and is in good shape. But yes, the minimum shareholder levels have been met. We're not close to approaching that. So we feel comfortable in that respect as well.

Casey we need plenty of room , but it's not close at hand. We can call you back. I think it's some number well, well, well beneath.

If I could, if I could get that number on those two, in a follow-up call that would be great. Great. Alright, again thank you for taking my questions. And again, I think shareholders appreciate the waivers and I certainly appreciate the additional disclosures. So thank you for that.

Thanks Casey. And everyone at this time, there are no further questions. I'll hand the conference back to Mr. Art Penn for any additional or closing remarks.

Thanks everybody for being on today. We hope everyone stays safe and healthy and we'll chat with you next in early August after our June earnings. Thank you very much.

Ladies and gentlemen, that does conclude today's conference. We would like to thank you all for your participation today. You may now disconnect.