Q4 2019 Earnings Call
Good morning, and welcome to the Pet Park investment Corporation's fourth fiscal quarter 2019 earnings Conference call Today's conference is being recorded.
At this time, all participants have been placed any listen only mode. The call will be open for question answer session. Following the speakers remarks.
If you want to ask a question at that time simply press star one on your telephone keypad. If you would like to withdraw your question press star to on your telephone keypad.
And it's now my pleasure to turn the call over to Mr. Art, <unk>, Chairman and Chief Executive Officer opponent Park Investment Corporation. The Japan, you May begin your conference.
Okay.
Thank you 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 either front, our Chief Financial Officer.
Please start off by this was there some general conference call information and included discussion about forward looking statements.
Sure I would like to remind everyone that today's call is being recorded. Please note that'd be school did your property will kind of pork investment Corporation about 30 on authorized broke off of the school in any form is strictly prohibited.
A replay of the goal will be available by using the telephone numbers Centene provided in our earnings press release, because it relies 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 referred to our most recent falling with expertise we bought a doctor that could cause actual results to differ materially from these projections.
We do not undertake to update our forward looking statements on this report bundle.
I think all these Omar let us equity funds. Please visit our website at <unk> Dot Com Vocalocity once you might be roughly 1000.
At this time I'd like to critical Dr., <unk>, Chairman and Chief Executive Officer Art Yeah.
Thanks to be 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 open up for Q1 day.
For the quarter ended September Thirtyth 29 team. We invested 39 million are primarily first lien secured debt at an average yield of 8.4%.
Core net investment income was 17 cents per share.
As we've discussed we're generally moving into first lien secured positions higher in the capital structure and into a more diversified portfolio.
As of September Thirtyth 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're 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 a several quarters to reach the new target.
A careful and prudent increasing leverage against primarily first lien assets should we all he 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're pleased that an early September we managed 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 dollar offering of 5.5% unsecured notes.
In early October we also received the greenlight.
There are SB I see number three we are extremely gratified that our long term track record and excellent relationship with the S.P.A. will result in attractively priced to long term financing for the company.
Were also actively assessing a new senior loan joint venture similar to this successful joint venture a p. FLT, which can also increased earnings over time.
Since our credit facility Amendment in early September origination levels have normalized and sit since September thirtyth, we've originated approximately $70 million of new investments.
The combination of the amended credit facility unsecured bonds, SB actually three and a potential joint venture should provide a solid pathway for earnings growth at the company.
As of September Thirtyth, we had taxable spill over a 34 cents per share which provide significant dividend cushion.
Our primary business a 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, Houston, and we've done business with almost 185 different sponsors.
Due to the wide funnel deal for the we received relative to the size of our vehicles, we will continue to be extremely selective with our investments.
You will recall that in 2007 justice today PNNT. He was focused on financing middle market financial sponsors our performance is a global financial crisis and recession with solid.
Our to the onset of global financial crisis in September 2008, we initiated investments, which ultimately aggregated $480 million.
Investments performed well.
Would you put on the underlying portfolio companies fell down 7% at the bottom of the recession. According to Bloomberg North American high yield index. The average how you'll company EBITDA was down about 40% during that timeframe.
As a result, we have few defaults and attractive recoveries on that portfolio.
Our our those underlying investments was 8% even though they were done prior to the financial crisis in recession. We're proud of this downside case track record.
We've had only 13 companies going non accrual out of 232 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 shareholders.
As of September Thirtyth 29 team, we had no non accruals.
Since inception PNNT he has invested in about $5.5 billion.
I've assets at an average yield of 12.1%.
This compares to an annualized loss ratio, including both realized and unrealized losses.
Proximately 30 basis points annually.
The strong track record includes brought our energy investments as well as our primarily subordinated debt investments made prior to the financial crisis.
At this point of time, our underlying portfolio indicates a strong U.S. economy and no signs of a recession.
We remain focused on long term value and making investments that will perform well over an extended period of time and can withstand different business cycles.
Well first of all for Middle market financial sponsors management teams and every media Aries, who want consistent credible capital.
As an independent provider free of conflicts or affiliations, where our trusted financing partner for our clients.
In general our overall portfolio is performing well, where the cash interest coverage ratio of 2.6 times and a debt to EBITDA ratio 4.8 times that cost on our cash flow lines.
With regard to our energy exposure as of September Thirtyth, there's generally been no material change.
On a mark to market basis positive movements in the value of P.T. network and made Ocean Jane F were offset by valuation declines in Hollander and Gtx.
Calendar was written off during the quarter as discussed last quarter Hollander filed chapter 11 in May.
Our first strategy was a lender funded reorganization whereby the letters would take majority control. Unfortunately, we cannot get the majority of lenders to support a lender funded transaction and the company was sold to a third party.
Overall asset appreciation generated four cents per share of any became.
In terms of new investments, we've known these particular companies for a while has started the industries or have a strong relationship sponsor.
We purchased first lien revolver delay draw common equity Ulta mirror technologies.
Companies the government services contractor focusing on the modernization of technology for the U.S. defense and intelligence communities.
Clear skies the sponsor.
We purchased $15 million of the first thing turn alone of quantum spatial.
August spatial as a provider of geospatial solutions and the company gathers detailed mapping data sets provides analyses and generate insights for its customers Arlington capitals to sponsor.
We purchased first lien revolver and equity as far as Ginger global the company's a global market research platform that offers agencies and brands, both qualitative and quantitative data collection services gauge capitals the sponsor.
Turning to reality, we believe that the remainder of 2900 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 leave our CFO to take us through the financial results.
Thank you are.
For the quarter ended Septemberthirty 2019 core net investment income totaled 17 cents per share.
We also had a onetime three cents per share expense net of incentive fees 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.
Interest expense totaled $7.8 million, excluding a one time 4.4 million dollar chart.
Our investment gain four cents per share on our mark to market basis.
Our dividend exceeded our GAAP net investment income by four cents per share and our liability loss six cents per share on a mark to market basis, primarily due to the mark to market of our amended credit facility.
Consequently.
Maybe went from $1.74 cents per share to $8.68 per share.
During the quarter. We have also issued 75 million of unsecured bond trading on NASDAQ under the ticker BNP Keith.
We are not marking to market to these bonds as efficacy stuff has indicated they prefer this position for the regulatory asset coverage test. We are on we're targeting onetime costs off 2.7 million over four and a half years.
Subsequent to quarter end, the Greenshoe option was like a five for another $11.3 million, bringing the total bond amount to $86.3 million.
Our our regulatory leverage has increased to 0.9% 0.9 times on an Ivy from 0.5 times a year ago.
As a reminder, our entire portfolio credit facility and senior notes or Mark to market by our board of directors each quarter using the equity price provided by independent valuation firms security and exchanges for independent broker dealer quotes what hockey markets are available under ASV paid 20 825, Inc.
This is where broker dealer quotes are inactive we use independent valuation firms to value the investments.
Our overall that portfolio has a weighted average yield of 9.8.
Thanks.
On September Thirtyth, our portfolio consisted of 67 companies across 27 different industries.
That portfolio was invested 57% in first lien senior secured debt.
22% in second lien secured debt.
5% subordinated debt and 16% in preferred and common equity.
87% of the portfolio.
Floating rigs now let me turn to go back to armed.
Thanks, you need 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 fourth 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.
Concludes our remarks at this time I would like to open up the call to questions.
Thank you.
Okay question. Please take note by pressing star one on your telephone keypad areas again speakerphone. Please make sure I hear me assumption has turned off to Meyer said now to reach our equipment.
Well once again that is star one that I'd like to ask a question.
Well now take question, Robert Dodd with Raymond James.
Hi, guys, just a big obviously you laid out.
A number.
Got it.
Between the FDIC, the JV et cetera, et cetera that can grow earnings and I mean, if I look at the asset base for the at Avi I mean, if you just produce.
I'll take sustainable out we you can get to open running the dividend. The question is timing.
So can you give us any color on on.
How how fast you expect various things to ramp up I mean, you did say for the outlook you expect the remainder 29 team to be active.
Yes, B. I see obviously isn't available yet the JV is more just yet set presume that will all be on balance sheet, but can you give us any any kind of ballpark estimates of how you think the tightening their various initiatives to kind of play out to the point of growing that those earnings.
Oh, the covered the dividend.
It's a great question. So first on the on the new origination side as we've indicated with and subsequent event note.
Things are normalizing, we had to take a little pause in last quarter as we were redoing the credit facility to deal with greater than one the one leverage so originations for this quarter are kind of back to kind of normal range and and we do have plenty of liquidity. The two to two deal what's kind of normalized origination flow to the.
See I see we just got to Green license.
If you go forcing greenlight.
A couple of weeks ago.
Yeah, we have an internal debate here at 10, apart, we think it's probably three to six months away from starting to start ramping.
SP IC three so probably kind of mid 2020, we can.
If you want to try to model kind of mid 2020 is when we think we can start ramping that with regard to a joint venture. We're just going to be going out in the next couple of weeks with formal process to assess different partners.
Again, probably doesn't start ramping until kind of mid 2020 . So between now and then I think we're using internal capital that we've already raised through the through the credit facility through the bonds and then we start to see those two things kind of move into the limelight kind of mid to late 2020.
Got to appreciate that kind of on all just sticking to that JV.
For a.
Second I mean, when you look viewing candidates what's your.
Most JV that that I I think as we had the department static passive.
They involve the baby passive in terms of originating elements that go into the JV.
Would.
Would that be.
Reasonable to expect that feel are you trying to see cow upon as it can both provide capital light and and that all so.
They know what your nations to the table within that JV structure.
So you look to JV, we have right now with Kemper is being working fantastically, they're really terrific and they add a lot of value in terms of advice and.
And structure and way to think about thing so.
There are terrific value added partner NPS LT I think you know with regard to the new opportunity I mean, all options are on the table, we asked fiduciary need to look at all the different.
All the different flavors, and if Theres partners, who can add origination into the mix, that's something we need to evaluating should evaluate and behalf where investors.
Okay I appreciate it thank you.
Well 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 each of your guys equity portfolio.
Obviously fairly large sergei about a $193 million.
If I look at the top five investments may represent about a 130 million about 190 million.
I'm very familiar with the Ram energy and Matt.
Yes, both of those are energy investments, obviously have their own challenges potentially accident, but could you maybe talk about the other three in your top five so.
Video shade Peachy network in wheels Pro can you, maybe just give us some very high level overview of what those businesses do and what is the potential outlook for.
Actually exceed those investments they've all been written up pretty pretty meaningfully. So just how are you guys thinking about Bose.
Yes, Thats a great question happy to run through well pro is the only one that came through.
Through equity co invest and they are in the automotive wheel business.
Aftermarket driven in performing well to companies growing substantially since weve invested in it it's owned by a sponsor called clear like based in Los Angeles, obviously, the companies doing well and when you have an equity mark up like that in the sponsored company. It's really it's a question when.
And how much hopefully this company continues to perform well so.
So that's kind of that snapshot on that transaction companies EBITDA as I think north of 130 million moving down bottom with it was 50 $60 million. So it's been a nice been a nice ride PT network and Jane Eyre for both equity that we got through restructurings.
Both because of the markups, you're seeing had been performing pretty well Jane has had some issues after the restructuring it.
Distributes gas pumps and.
And products and services to gas stations.
Company seems to have turned around the results have gotten much better they've done some add on acquisitions that are accretive to earnings.
We have I think about a third of the company's equity.
Mid Ocean is the is the sponsor in the control shareholder onto the majority of the equity.
And the company's been a little recently, so thats why you've seen significant mark up there were some significant markdowns.
And its prior life, but it seems to have seem so sound is putting it on the way up.
PT network as 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 Companys performance is better than expected.
It's in an industry, where there's some very attractive multiples companies have been sold for some very attractive sale prices multiples of EBITDA.
So you've seen a mark up there.
As a result of both companies performance as well as where the comparable companies trade.
That does that answer your question just at this point, yes, right yeah.
That's very good due to helpful helpful background on all those different businesses.
Wanted to switch over to answer your question on the JV. Obviously, you guys are the very early stages of bad.
Im just trying to think about how do you guys think about kind of holistic we look through leverage across your your cross DPN into because obviously, putting a JV on move that structure with you guys will make an equity investment Internet and key and made it has this piss off balance sheet leverage so to extend to that grows and becomes a meaningful portion of.
Folio.
I think about that that off balance sheet leverage has a portion of the JV.
As a portion of your guys with 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're envisioning AMC as it looks very similar to the JV, we havent pflp or is it 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 we're now in the market as a firm middle market CLS, 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 than lower risk.
Lower return more Leveragable first lien and even with the joint venture.
I think still.
Reasonably leveraged and safely leverage we still have a second lien invest portfolio. As you mentioned, we have an equity co invest an equity portfolio.
We were monitoring those were not doing much in terms of new second lien or mess that said, we said to the team is theres really compelling second lien or mass out there we want to see it it's got to be Super compelling right now given where we are in cycle and the economy, but.
We still could do a little bit more in that but I think by enlarge the mission for this particular company at this point is.
Works down the second lien Mezz, the equity co invest and kind of.
Ramp up on the first lien side and put appropriate leverage against that.
That's leverage from our credit facility leverage from NSPI senior leverage from 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 JP Morgan.
Hey, guys two quick questions.
First obviously build in the cash position at the ended the quarter I'm, assuming that that has to do with the timing of debt issuance, but I just want to make sure that there's now.
Additional liquidity requirements that we should consider associated with any of the new facilities.
I know that when I was just the bond that we did you right okay great.
And then second question or.
Yes.
Related to Hollander.
Second company, we've seen this quarter or in the betting space.
That.
Ran into some challenges in the feedback we've had is it's a lot of its related to sort of disruption in that industry.
Which leads to a really interesting question, which is are there other engines industries that you're looking at this point, where do 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.
Your avoiding based upon that.
It's a great question something we think about all the time in our investment Committee and that's one of the most treacherous things things about investing for any investor in this environment is.
Investing into traditional business.
Is there disruption coming in if so when right. So.
Bedding is an area and retail certainly in area.
And you can take the seemed to any number of different industries, obviously, the hotel industry in a number of different industries. The taxi industry. There's been disruptive forces now we've spent a lot of time, France is talking about driverless cars.
One point out looks like it was coming sooner and may have some pushback, whereas I mean for the trucking industry was I mean for this industry that industry. So so it's something we all of US not only here have been apart, but all of us as investors need to be.
To be assessing.
Was maybe a small part of why hollander at issues, but still a piece of the pie 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 Theres a company in our portfolio Cold Walker Edison and it's one of the.
You see it hits in equity co invest Mark up this company cells furniture on the Internet.
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 Addison has been crushing it.
And has had significant EBITDA increases and you're seeing in our mark to market up because is participating.
In that trend so there's certainly a downside.
You have to be aware of and potentially theres upside.
Thank you can participate in as well. So that's just one in one example of a change there's another company in in the portfolio, where you see an equity marked up call Dominion services.
They are in the voting machine business there in the voting machine business. So just think about that and what's going on with voting machines today and.
Kind of the elections in all the issues around voting machines. This company has been a beneficiary because they may can not only.
They make voting machines that do both.
Paper and kind of that the ATM machine type voting machines, so theres both.
And ATM features and voting machines and there's a paper record. So this company has been a beneficiary of that change and you can see that any equity market in the portfolio. So it's a fashion any question. We could talk all day about Im happy to talk all day with you recall flying if you'd like.
But you know there's pluses minuses to all of this.
Well two comments there one I hope you have better things to be then talk to me all day, and second and I will make a bad debt pay down here.
Really does highlight how challenging things are you think about a mattress business ended his years my dad honestly business.
Into running to that.
Even in that sector, just circle underscores the challenges that are out there. Thank you.
Thank you.
Our next question comes from Mickey Schleien with Ladenburg.
Yes, good morning, or didn't leave I wanted to step back and ask a high level question. Historically PNM T was known as a BDC focused on.
Meet the middle market Neal sort of EBITDA of 25 million to 30 million and I, obviously more second lien mezzanine has the balance sheet as change and as your capital structure has changed what sort of EBITDA levels are you targeting now or and how is that affecting the.
Sourcing the deal flow that you're looking at.
Yes. Good question Mickey we're still kind of focused on the 15 50 EBITDA range. So the median still on the 20 530 million dollar zone, and we task our folks to go find good deals whether that be senior or second lien imagine the threshold in the bars substantially higher now on second lien Matt.
But we're still.
Open for business and.
And by the way, we think Thats, a really good place to be because it's below the threshold to broadly syndicated market.
Where the deals are mostly covenant lite, where the leverage is high and when there is very substantial EBITDA adjustments in our 15 to 50 zone, we're still getting covenants, the EBITDA adjustments or the adjustments that we buy off on and that we diligence we still have several months to do our due diligence we announced a rush.
To make a decision our average debt to EBITDA on senior debt is kind of in the mid fours.
So we think thats a good place to be and also with the this move to these very very large direct lenders. They really moved it to competing against a 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 at 15, 15, EBITDA, where we can we can still get covenants in where we can still due diligence whatever adjustments there aren't.
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 the risk and allows the higher leverage.
How 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 would imply that your crashed in your question just because the company does $25 million of EBITDA versus 170, certainly there's pluses and minuses.
We would rather do full due diligence really understanding or buying some covenant protection really diligence the adjustments and locked 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 theres a covenant, it's going to be said very very wide.
The EBITDA adjustments are larger and less diligence. So all day long, we'd rather finance, a well diligenced well structured.
$25 million EBITDA loan, then 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 where we're focused and thats whats populating.
Nichols.
I understand one last question or.
To the extent you're focused on first lien there's no great definition or universal definition. The first lien what I'm getting at is to what extent is first lien include Unitranche deals, which are obviously very popular in today's market and how actively do you sell out sell the first out pieces.
Yes, so I'll take the second one first which is we don't sell the first LP since we'd like being at the top.
First part of your question is really the challenging Mickey and I'm kind of smiling because as far as I can tell everyone has a different definition about unitranches, we've been going in our recently, what's your definition.
Good afternoon, Richard and they everyone's got their own definition, along the value of extra capital beneath it or whatever it is.
Hi, Thanks of the just the cuts through what we are doing our our risk is generally first lien top the capital structure no one above us and we're originating in the mid fours today and generating about an 8% return.
That's what we're now when you can call that stretch senior you can call that classic first lien call or whatever you want.
The definition of unit tranche is not clear and flops around and what was defined as unit tranche in 2010, certainly different and what's the find unit tranche in 2019. So we're just going to tell everybody. What we're doing it's mid fours debt to EBITDA eight ish percent yields average EBITDA company 20 580 million, that's what we're doing.
And and art just a follow up.
If a bank has extended a revolver ahead of you, which I know in some cases, you do yourself, but if it's a third party do you still classified your investment as a first lien or or or not.
Good question. It just depends on the size of that sometimes you get little AB else. So if the deals are half a multiple or beneath.
We'll still classified whats beneath that half a multiple as first lien.
In the markets marquee or which we don't do as if that's one and a half times or two times and then your junior to that we don't think you should be classifying that personally meds.
Junior debt.
Yes, I agree, though the issue is that even thats not consistent across the space, that's why why im asking good questions but.
Thats. It for me. This morning I appreciate your time thank you.
Thanks, Mike.
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 as an extension on the direction that Ryan was going which is you have a lot of equity in the portfolio 15, 16% close to 20% of your portfolio is controlled positions.
I have a lot of positions, where you had some say in it.
That are not income producing so yes.
It would seem to me that.
Being a little more aggressive getting those things out of the portfolio and turning goes into interest generating positions would be paramount because those are 100% accretive to and I and your dividend coverage. So how do you think about being more aggressive you know and.
In relation to the marks on those positions.
Probably investors don't care, what's your cost was on them originally they're more interested in improved dividend coverage, which makes them feel more comfortable about investing in the vehicle.
Oh Man you know I agree with the KC I'd love to get.
Equity down and which can then be rest and invested in income. So some of the things. We you know some of the deals we don't control like we don't control Jane F., We don't control wheel pro.
We do control some energy names now last I checked and Theres been a dearth of M&A and 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 and energy once they're starts to be M&A and energy all where she you know and if you have suggestion case or any and they want to phone as suggestions. We're all years right now with what to do with the 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.
Well look to monetize Pts a new one we're kind of in the first six months of that we still think there's some nice runway there that sector has been attracted the multiples are very attractive on exit we still need to consolidate those operations and get it pride in the best way for an event and that May take a year or two.
That's right in our wheelhouse and that's something that we can control ultimately so have you got your specific names. If you want if he wants more color on any of the specific names I think I covered energy I think I cover Jain from wheelbarrow, but as any other specific names case, you want ask about I'm totally open to doing that.
Well. Thank you for taking my question.
Yes.
Yes, I remain confident start feeling like asking question.
Well now Matt to David My is alky with confluence investment management.
Hi, good morning.
Couple of questions, you know kind of touching a little bit on what Mickey was asking about it you are shifting your focus more.
Two senior secured sort of profile whatever definition that may be.
And you think about your energy.
One of the observations.
Looking in is that the energy problems came more from the commodity price as opposed to where you were in the capital structure. So if you think past your existing positions.
Do you think that energy and M&A and its senior secured position, it's 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 quote you back to me you've paid intuition why not monetize that tuition by doing more energy loans right. That's.
That was a question and one point you asked me David and it's 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 for portfolios that today are only mostly by retail shareholders, which is what bdcs are.
I think we're going to avoid energy at this point in time.
Because we want to deliver stable cash flows you want to stay away from commodity risk.
And granted there might be some high popping DLC and I read an article Sam Zell is coming back in the energy space PC think as he thinks is reminiscent of real estate at the bottom end and maybe is right now we certainly hope is right, but at least for the time being certainly while we have you know the energy exposure, we have MPN entity I think the idea for PNM t. as to optimize.
Yes.
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 have been controlling as best 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 up the capital structure to safer.
Safer lower risk securities. Unfortunately, we cannot control where the price it WT is west Texas intermediate.
So that's one thing we can't control you might have seen we did marked down all three of our energy names last quarter that the markdown appropriately. So despite that we still had any be growth on the underlying assets. So it's just kinda. We just got a play it's real optimize the hand, we have with those names.
And and Casey's right and you're right over time, we got to kind of gets us equity percentage down but his question of of how and how do we best optimize the outcome for for investors.
Right. Thanks.
I'm agreement with that that overall pieces that it does seem to bring some real volatility in the credit risk in the in the portfolio, but can be disturbing to two people are looking for consistent income or predictable income.
Moving along a little bit too.
Your your comment that you are open to suggestions.
The things that.
I know coming up with the fair value for any investment is an art as much as a sign.
And.
Whether or not you could actually sell the position at that Mark is always.
Good question as well.
But it seems to me that if you could sell your.
Equity or your work out positions at anything that was higher than 70% of your mark.
Then the proceeds to buy back stock in mathematically you wind up doing something that's accretive and you get something off the balance sheet that is an income producing.
What are your thoughts on that come back.
It's an excellent point and that's what we tried to do we're always assessing.
No exits exit prices, the pluses and minuses, how 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 and some of our equity portfolio. We're talking about Jane if we talked about PT network, which is a relatively new position. So we're just starting to see how this kind of green shoots concept.
In some of these equity names. So it's always a question of.
I'll keep using analogy, how how high do you want that grass grow before yes harvested right. So.
You know again, it's a hard to I wish there were a black box or an algorithm I can put it into what you would say here's here's magically when you should sell these because these assets years magically what the capital structure should be debt and equity.
Some of these green shoots are starting to kind of come out of the ground and.
If we think they can really grow in some of them I think we can we think so.
Right. Thank for any of you might be to loan growth a little bit, but thats, something we constantly constantly assessing and talking about.
Yes, I do think that's kind of what your your job is to figure out when when do you can move on and maybe not all of the grass growth, but meantime, there there's a drag and when you have.
I haven't worked out in the past that are sort of your portfolio it kind of waste on the outlook in the future.
I wanted to move on to kind of a lots concept here that whenever you talked a BDC manager and.
Ask them, where in the middle Mark is where the middle market is the best parts to the lending.
The answer it always is wherever it is they happen to be lending. So if you look at the big guys. They talk about being over right.
Second big check hundred $200 million plus certainty of closing.
Something years.
Better balance sheets, better credit risk and then at the other specked into small guys you're looking at companies where pricing is more stable. The terms are more stable and so I want to think about where were you guys are.
So that this 15, the $50 million EBITDA land.
To some extent you are constrained because your stock is not going above net asset value for so long to now with the change in leverage you are able to increasing size your portfolio, but.
If you really have the ability to grow the company bigger larger equity base do you think that being the 15.
I mean that always is the optimal EBITDA.
Or would you.
I think that over time has passed.
The problem loans and theoretically you get back above net asset value would you want to be doing more of the 50 to 100 million bar.
Good.
Yes. Good question. So number one you're absolutely right everyone talks their book of course, everyone talks or book in terms of this 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 overtime 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 those numbers are out there we can send them to you if you'd like.
They are over over many years there over a cycle there have a recession financial crisis.
It's not pennantpark versus some other firms that say that's data that's verifiable.
Defaults and recoveries broadly syndicated versus middle market and you now see many of our big up rather in taking share out of the broadly syndicated so.
You can ask that question, that's verifiable data in terms of defaults and recoveries in terms of Howard constraints in our business and you you may have seen we are growing.
Non DTCC 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 FCC Exemptive relief. So we allocate capital across our platform to the Bdcs as well as the private vehicles under that Exemptive relief and that has helped us.
Grow bite size, because when you think about it if our average company is 25 of EBITDA and its leverage you know four and a half times, you're talking like what is 110 or $20 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 we're aiming for because our borrower clients. Our sponsor clients are saying to us hey, Ben apart, we'd likely to be bigger we'd likely to be a bigger piece of this deal we'd like it to do the whole deal.
So we're getting that we've made substantial progress with their private vehicles with our managed accounts.
And now with the Bdcs with their ability to grow through incremental leverage.
Were you know we're getting there you know and we're on the precipice and we're taking more and more share of those deals because those sponsor borrower clients want us to be taken bigger bite. We have no current intention of competing with the broadly syndicated market was companies with EBITDA 50, 60 70 million as we've said.
Competing with a market that is at a very aggressive the level in terms of leverage either no covenants or are 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 raised to be three b minus or.
We'll see they can have that share all day long say one.
They've got lots of capital deployed they can deploy quickly they can talk their books about the size of the companies, but it's a bubbly time to be competing against that market again, we like where are we are where we can control the diligence we can control covenants.
We can control, which EBITDA adjustments, we take or we don't take.
We've had an excellent track record.
Over many many years you know we've we shared with you a you know it's about a nine basis point annualized loss on our senior our senior business over many years.
They've got 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 I.
Thank you for that but that inside.
So last thing that unwanted touch on is the EBITDA add back.
And the erosion of the covenants.
Finally started to roll it up in greater frequency.
Called 18, or 24 months ago in that range somewhere.
So.
Do you think about.
Which is the bigger hazard you know I'm, not really sure which one it is at the EBITDA back or lack of covenant to the week covenants.
Having now had several quarters of when these concepts are first brought in if you look at overall market, particularly in the world Upper Middle market. When you think about EBITDA add backs that were put in place.
A couple of years ago. When you look at the credits today and that the ones that you've done the ones that just seen it didn't participate in.
How bad or the EBITDA Mrs versus.
The actual EBITDA, that's happening today versus what was projected versus add backs a couple of years ago and do you have any sense for how bad because add backs.
Great question, we don't have any data on that pain I can go through each I can go through each of our our Nonaccruals with you at any point tell you with the mistakes that were made I just can't tell you about the bajaj to adjustments and what are the they've been realized look we've had a reasonably good economy, we've had a reasonably good economy and.
Now and Thats covered for a lot of the issues and then as the saying goes when the tide.
It goes out we see whose swimming naked so the tied the tide is not going out.
So things seem to work, which is why you see record high leverage multiples record high adjustments.
By the way record high enterprise value multiples that the sponsors are paying so theres. This whole big logic of well the Companys worth 15 times, so can easily be leverage seven times and I've got great loan to value and.
And that May work. These maybe fantastic companies that will continue to do well and that may be just fine and that seven times by the way in adjusted seven times. So there's a whole logic that people are buying off on.
I will say from the time goes out we will see 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 works, but some of it didn't work in when it didn't work he was very very hard harsh the severity level.
Was very harsh because the sponsor maybe you know when sponsors paying 15 times, you're leveraging seven times, if theres a little bump the sponsor is more likely to fix it but if there's a big big bump there so out of the money the lenders leghold holding the bag. So.
Our experience just looking back from a decade ago as a lot of those companies do 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 at the EBITDA add back or because of lack the covenants, we haven't really seen the consequences because the economy.
Generally been pretty good.
Yes.
Hey, Thank you for your comments and then that that's everything I have this morning.
Right.
It appears there now for their telephone questions at this time I like the conference back up that's Mr. Chen for any additional or closing remarks.
We are certainly grateful here as we head into Thanksgiving for the relationships, we had with our investors in our research analysts. Thank you for.
Another another a year and 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.
Once again that does conclude today's conference when thinking about for your participation you may now disconnect.
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