Q1 2021 Pennantpark Investment Corp Earnings Call
I think he's a detriment you currently on hold for today's conference call. At this time viewed assembling today's audience on tends to be on the V. Shortly thank you.
And for your patience and please remain on the line.
Yes.
[music].
Good afternoon, and welcome to depend on Park investment Corporation's first fiscal quarter of 'twenty 'twenty, One earnings conference call.
Today's conference is being recorded.
This time, all participants have been placed in a listen only mode.
Cause them to be open for a question and answer session. Following the Speakers' remarks, if he would like to ask a question that debt down simply press star one on your telephone keypad.
If you would like to redraw on your question.
Stock too on your telephone keypad.
It is now my pleasure to turn the call over to Mr Art, Penn Chairman and Chief Executive Officer of Penn On Park Investment Corp. Mr.
Mr. Penn You May begin your conference.
Yeah.
Good morning, everyone I'd like to welcome you depend on Park investment Corporation's first fiscal quarter 2021 earnings Conference call.
I'm joined today by V that for on our Chief Financial Officer cause. He's please start off by disclosing some general conference call information and included discussion about forward looking statements.
Thank you art.
To remind everyone that today's call is being recorded.
Please note that this call is the property on.
Park investment Corporation and that any unauthorized broadcasts on this call in any form is strictly prohibited.
Audio replay on the call it'll be available by using the telephone numbers provided in our earnings press release is willing.
On our website.
I'd also like to call your attention to the customary safe Harbor disclosure on our press release regarding forward looking information.
Today's conference call May also include forward looking statements and projections and we ask that you have.
Refer to our most recent filings with that.
Important factors that could cause actual results may differ materially from these projections.
We do not undertake to update our forward looking statements unless required by law.
Well, thank God people on our latest SEC filings please visit our website.
And the park dotcom or Carlos do you want to argue off on 1000.
At this time I'd like to turn to call back flow, Chairman and Chief Executive Officer Art.
Yeah.
Thank you Ludwig.
First we hope that you your families and those you work with are staying healthy.
I'm going to spend a few minutes discussing how we fared in the quarter ended December 31st.
Our portfolio is positioned for the upcoming quarters, our capital structure and liquidity the financials and then open it up for Q&A.
Despite the challenging economic conditions brought on by the pandemic. We are pleased with our performance this past quarter.
The 14, 5% increase in adjusted day any day.
Adjusted any day.
One dollar and 10 cents from.
$7.59 to $8.69.
We have several portfolio companies and what's your equity call investments have materially appreciated in value.
Benefiting from the case shaped recovery.
This is solidified and bolstering our any day.
Highlight those companies on a few minutes.
As part of our business model alongside the debt investments, we make we selectively choose to cologuard.
And the equity side by side with the financial sponsor our returns on these equity co investments have been excellent overtime well.
Well, we're all for a platform from inception through December 31st our children and $17 million of equity co investments are generating an IRR of 28% and a multiple on invested capital of two nine times.
On a world where investors may want to understand the differentiation among middle market lenders are long term returns on our equity co investment program on a clear differentiator.
With regard to income generation, we have the opportunity to rotate out of equity investments over time, and it's a yield instruments. In addition, we have the ability to grow the P&L balance sheet and that of our P. S. L. J D with pantheon, which should also generate additional income from the company.
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 at the Pennsylvania as possible.
The overall portfolio is constructed to withstand market and economic volatility.
At December 31st average debt to EBITDA on the portfolio was four four times and the average interest coverage ratio, the Napa, which cash income exceeds cash interest expense was $3 three times.
We have no non accruals on our books out of 89 different names and P. N N T N P F L X.
We have largely avoided some of the sectors that have been hurt the most by paying down debt such as retail restaurants health clubs apparel and airlines, although P. N N. She does have exposure to oil and gas, which we'll discuss later.
Total is highly diversified with 81 companies in 29 different industries.
Inception P. N N T is investing $6 billion at an average yield of 12%.
Paris to an annualized realized loss ratio of about 25 basis points annually.
If we include both realized and unrealized losses, the annualized loss ratio was only 24 basis points annually.
This strong track record includes our any of our energy investments are primarily subordinated debt investments made prior to the financial crisis and now some portion of the pandemic.
Performance through the global financial crisis on recession was excellent during that recession, the weighted average EBITDA below underlying portfolio companies declined by seven 2% on at the bottom of the recession.
On Paris, the average EBITDA decline of the Bloomberg North American high yield index of down 42%.
How does this downside case track record in the prior recession.
Just on tracking EBITDA on July companies from covered so far we believe that our EBITDA decline will be substantially less than it was during the global financial crisis.
Many of our portfolio companies on industries, such as government services Defense Health care technology, and software business services and select consumer companies.
We're less impacted by Covid.
We have meaningful domain expertise.
We are experiencing AK shaped recovery with some companies and industries being large beneficiaries of the environment.
Please that we have significant equity investments in four of these companies, which we which can substantially move the needle all that on a day.
I would like to highlight those four companies before companies, our Caddo wheel Pros Walker Edison and P. T network.
<unk> health is a national leader in primary health care, leading the way in transforming health care to provide high quality care at a reasonable cost to a large population.
Our equity position has a cost and fair market value on December 31st of.
$2 5 million and $72 9 million respectively.
That was been experiencing rapid growth with revenues nearly contract Quinn topline and EBITDA more than tripling over the last three years.
We believe there is a massive market opportunity for Canada growth in years ahead with the Medicare advantage program.
During the quarter ended December 31st we received $1 9 billion of cash, although we're trying with capital.
With jobs acquisition is scheduled to close at the end of March or early April.
We will receive another $6 7 million of cash.
And on 6.629 million 953 shares of Chemo Hall in a limited partnership controlled by a financial sponsor from the sponsor will earn 20% of the extra proceeds.
The shares will be locked up for six months from.
On the valuation perspective, do a walk up the independent valuation from day to position with a 7% illiquidity discount to the traded value on December 31.
[noise] wheel pros is the largest national distributor of aftermarket, possibly on the company has significant consistently grown since our initial investment with revenue doubling in EBITDA tripling over the last two and a half years.
Our position as a cost of $1 1 million and a fair market value of $24 7 million as of December 31.
Walker Edison is a leading ecommerce platform focused on selling furniture exclusively online true top E commerce companies.
Since our investment was made in 2018.
Total more than tripled on EBITDA is up almost four times.
Physician has a cost of $1 9 million and a fair market value of $15 million as of December 31.
P T network as the leading physical and occupational therapy provider in the mid Atlantic States.
Our equity investment in P. T. He came to our restructuring which came about after the company made several operational mistakes.
We've always had a positive view of the industry and the outlook through the end of Q2, the industry tailwind and demographics, which result in comparable comparable companies trading at EBITDA multiples of 12 to 15 times.
Under our ownership we brought in an excellent management team who collected this operation on mistakes and has shepherded the company walk through Covid.
Our equity position has a cost of $23 million and a fair market value of $42 million as of December 31st.
All four of these companies are getting financial momentum in this environment and are any of these should be solidified and bolstered from the substantial equity investments and their momentum continues.
P N N T has the lowest percentage of energy investment since 2013.
Energy investments represent only six 5% of the overall portfolio.
With regard to Ram energy, the new credit facility led by Beth Bank under the main Street lending program materially lowered ranch cost of capital and provides you want to wait to execute on its operating plan and time to wait for a recovery in prices.
During Q4 and was impacted by the lingering impacts from Covid and a difficult 2020, which included higher debt continued lower prices reduced production.
The impact on monetizing its hedge position at the time of the refinancing.
Additionally, ran began work on a class two uncompleted wells, which will finished recently.
Still early production of these wells is expected to be strong.
Even though the December 31 quarter at several impacts Ram is now on stable operational and financial footing and should benefit from higher prices in production.
The company's free cash flow positive after debt service and we use any free cash flow to service and repay debt.
You'll have a more fulsome operating update on the company's next quarter.
As of December 31st equity represented approximately 35% of the portfolio.
Our long term goal continues to target that percentage down to about 10% of the portfolio.
The substantially higher valuation of Canada increase that percentage by approximately 9% this past quarter.
As we monetize the equity portfolio, we are looking forward to investing cash into yielding debt instruments to increase net investment income.
We were active this past quarter, making new loans I'll walk through some of the highlights.
Apply technical services as a provider of non destructive testing calibration lab in consulting engineering services, we purchased $9 $5 million on the first lien term loans and call invested about 504000 in the common equity Odyssey investment partners is the sponsor.
And called claims consultants is a leading insurance claims services company focused on the residential roofing market. We purchased 6 million on the term loan and purchase program 50000 of equity century equity partners is the sponsor.
Rancho health as a primary care provider in southern California that is focused on offering value based primary care.
We purchased $3 7 million of first lien term loans and co invested $1 1 million of common equity like capital on the sponsor.
We purchased $8 5 million in the first lien term loans and purchased 730000 of common equity and Sigma defense systems. The companies a leading it services provider and systems integrator of satellite communication equipment for mission critical airborne surveillance programs Sage when capital is the sponsor.
We all look for new loans is attractive we believe that middle market lending as a vintage business. This vintage of loans is likely to be the most attractive we've seen since 2009 to 2012 time period.
Leverage levels are lower equity cushion is higher yields are higher and the package of protections, including covenants as covenants are tighter.
During about five years of the late cycle market from middle market lending. It is refreshing to have attractive risk reward available to us So I mean all day.
Let me now turn the call over to leave our CFO to take us through the financial results.
Thank you art.
For the quarter ended December 31, net investment income total debt to offense for sure.
Looking at some of the expense categories.
Fees totalled $4 1 million taxes general and administrative expenses total of about $1.3 million and interest expense totaled $5 million.
Net unrealized gains on our investment was $94 million or $1.39 per share.
Net unrealized depreciation on our credit facilities was <unk> 19 cents per share.
Net realized loss on investment was 26 cents per share.
Our dividend was equal to our net investment income.
Consequently entity per share went from $7 84 per share.
So $8 78 loans.
Sure.
Adjusted EBITDA, excluding the mark to market on bar liabilities was $8.69 per share up 14, and a half a percent from $7.59 per share.
The increase was primarily due to an eight 6% valuation increase.
The investment portfolio, which is now valued at 101% of cost versus 93% of cost last quarter.
As a reminder, our.
Our entire portfolio credit facility and senior notes on a mark to market by our board of directors each quarter using the exit price provided by independent valuation firms securities on exchanges or independent broker dealer quotes when active markets are available under a C H 'twenty and 'twenty five.
I think I can say is where broker dealer quotes are inactive we.
Use independent valuation firms to value the investment.
Our spill over is.
It was on September 30th well 43 cents per share.
Our GAAP debt to equity ratio net of cash was at.
0.9 times down from one point with your line.
On last quarter.
Our regulatory debt to equity ratio net of cash, which excludes FDIC debt was 0.7 times down from one nine times last quarter.
With regards to on.
Our GAAP and are you on $8 78, then that's probably something that reversed pop up on.
Nearly 12% from the park water, which reflects both the mark to market of our assets offset by the mark to market on certain liabilities.
Assuming liabilities were non mark to market adjusted on a D.
The $8 61 thing up approximately 14, 5% from the prior quarter.
We have ample liquidity to fund revolver draws and we're in compliance with all of our credit facilities as of September 31st.
We have readily available borrowing capacity and cash liquidity to support all of the commitments.
We have a strong capital structure with diversified funding sources and no near term near term maturities.
We have $475 million revolving credit facility maturing in 2024 with a syndicate of banks.
119 million of SBA debentures maturing in 2026.
86 million of unsecured notes maturing in 2024.
We have been in consistent dialogue with our lenders on our thankful for their support.
Our overall debt.
The portfolio has a weighted average yield of nine 3%.
On December 31, our portfolio consisted of 81 companies across 29 different industries.
Therefore, our portfolio was invested 48% in first lien secured debt.
17% in second lien secured debt.
10% in subordinated debt, including 6% EPS on it.
45% in preferred and common equity, including 40% N P S on it.
92% of the portfolio had a floating rate all of which had a LIBOR floor.
The average LIBOR floor is 1%.
We have concluded in consultation with our board to extend the incentive fee waiver through March 31, 'twenty 'twenty one.
Now, let me turn the call back to art.
Thanks Aviv, just 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 as a line 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 on 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 if you would like to ask a question. Please signal by pressing star one on your telephone keypad.
If you're using a speaker phone. Please make sure you're on mute function is turned off to allow your signal that he got a quick one again the star one to ask a question.
What day quick first question from Casey Alexander with Compass point.
And my apologies our first question is coming from Mickey <unk>.
Good day, Denmark. Please go ahead.
Yes, good afternoon art and Aviv.
I have a similar question for PMT that I have for P. S O T a.
The fourth calendar quarter was a strong quarter for middle market.
M&A, but on.
On balance sheet in senior loan fund portfolio shrink and the fee income was that particularly strong could you just give us some background on you know what.
What's going on with that trend and is it across the platform you know something proactive debt.
You were doing in terms of underwriting or or something else.
Oh, Thanks, Mickey. It's good question you know we had some refis earlier in the quarter and then we have a very strong originations.
Towards the towards the end, we were very busy closing deals between Christmas and new years, and we've been very busy since then.
We're in the core middle market, which we define as 15 of 50 of EBITDA. So these all these deals to you know have a longer gestation cycle theres more due diligence, there's more negotiating with covenants.
And as a result, it's a it's a more highly tailored bespoke business. We think it's got better risk adjusted returns are more protections and we get the added benefit of equity co investment medications.
But it's true.
They are more labor intensive model. So we just had some early refinancings early in the quarter, we were very busy towards the tail end of the quarter on we remain net.
Going forward, we we've never had to have a a problem on the ramping up over time. It just sometimes takes us a few quarters.
To ramp and you know because we were so focused on capital preservation and being thoughtful.
Take us a little longer but we've never had it had a challenge ramping up any of these portfolios.
As a follow up to that question you know typically the fourth calendar quarter is very busy and then when the winter gets going the first calendar quarter tends to be slow, but we're not in a normal cycle right. Now my sense is that there's a lot of pent up demand on dry capital available do you think the first calendar quarter.
It could be stronger than average shifts on a relative basis for the sector overall.
Yeah, it's tough to say because I think you know typically you're right. There's a december effect.
And then sometimes the first calendar quarters of light, but then those things you're on you you may have a bunch of deals at the end of March and going into the Air Force. So youre right in pointing out that the business has some seasonality to it okay.
Our teams are busy looking at deals.
You're doing due diligence from negotiating things and we remain busy week in our eyes on that longer term price zone on really good risk adjusted returns for our vehicles on getting them too.
Solid appropriate leverage for for the underlying risk.
Heart from me really to give you any any real strong guidance about you.
You know Q2 calendar Q1, or Q2, we're pretty busy.
We like this vintage we think this post COVID-19 vintage.
We'll be really good at it was really good you know higher quality companies and we saw pre COVID-19 and where we're focused which is this core middle market might be upper middle market.
We're still getting better risk adjusted returns and then we were hopeful that with we got lower leverage higher equity underneath us.
Stronger covenants fewer and more diligence to EBITDA adjustments.
And attractive equity from there. So this vintage for us in our core middle market zone.
You know it feels very attractive so I'm very excited about it.
Thank you for that.
Remind us on P. S. L. S. What is the fund's target.
Leverage in terms of debt to equity your target and your target ROE on your P. S. A lot of investment excluding the members sub debt.
Yeah. So a P. S. L up is ramping as well, we think that can be a 450 million dollar.
Vehicle overtime.
That's kind of one five times debt to equity.
On a 12% ish.
So that will that will help ramped NII from P and M to M and P. M. N. T. Obviously itself can have some dry powder and then of course, we have this equity rotation that we've been talking about and Oh.
We're looking forward to and are working hard where we came to two a day.
Net.
And that 12% that you just mentioned is that purely on your equity investment or is that a blend of your equity investment on the subordinated debt.
Yeah excellent point Mickey it's the combination on the sub debt and the equity.
My last question just a housekeeping question can you just give us a sense of what the main drivers of the realized loss was this quarter.
Yeah. The main driver was a company called M spark or mail, south, which did a restructuring and therefore on upon the restructuring and that was a realization events.
Our second lien became equity.
We and others put on a new second lien in place.
And we and other lenders on the control players of the company.
I believe the company is bouncing back quite nicely not quite back to where it was pre COVID-19, but honest way back to where it was pre COVID-19 and we're optimistic that as we get towards the tail end of 'twenty 'twenty, one it'll be back kind of where it was pre COVID-19 and I won't be able to do reasonably well on the investment company generates a lot of free cash flow even through.
On the bottom bottom part of Covid, we're still generating good free cash flow. So.
With that realization event happened and that's why you're solving net realized loss this quarter.
I understand thank you for that and thank you for your time. This afternoon I appreciate it. Thank you.
Thank you real net taking our next question from Casey Alexander of Compass point.
Right.
Yeah, Hi, good afternoon.
Yeah.
It's down about a tricky question, but I think it sort of gets too.
What I think your your balance sheet strategy is going forward yeah, you're your leverage for the BDC has come down quite a bit with the transaction, creating the J D.
On effective leverage is still there if you look through to the JV. So on balance sheet with P. N. N. T. You previously had a target leverage ratio that was I don't know the exact number is up around 1.5 would you adjust that target leverage ratio two <unk>.
<unk> lower.
Simply because most of your a lot of your first lien was transferred into the JV. So you have a different composition and also the equity has higher volatility to NAV would you be targeting a lower target leverage ratio and if so I mean at least until you had some success.
In rotating some of the equity and getting that that equity percentage down.
It's a great question and if Theres a trick question and Youre right you know there's a you.
You might be willing to put some amount what amount of debt on against first lien assets.
The amount of debt against second line or mezzanine on assets and yet another amount of debt against equity assets so to.
To some extent you got to look to the underlying assets that you have and try to figure out what you know where you're comfortable putting on a relative to the assets with the leverage is I think at this 0.1 0.5, particularly given the Ah <unk>.
The complexion of the underlying assets. It was just too high I think you know, we probably overtime could target something like one point great.
Yeah, depending on how things play through and and you know what assets, we have but certainly would not be.
At this point back up from over 1.5.
Hope that answers your question directly or yeah, so well yeah. It does say if you're you know currently under one and you're willing to go to 1.3, when given the opportunity set.
You do still have some substantial earnings power on even without a selling are.
Selling down some of the equity if I understand that correctly.
That's right.
All right Great. That's my only question. Thank you.
Thank you.
Thank you and I'll take our next question from Robert Dodd with Raymond James. Please go ahead.
Yes, Hi, hi, everyone on.
The equity obviously on them.
You know what I'll say that's it.
The book is as you said.
Target Ted I mean timeline wise, a very good but very difficult question to answer there's also kind of embedded in that question.
Uh huh.
How you balance you've always seen don't want to give up total which are just to get coupons a day like it would be you know what.
Right.
Too early but at the same time equity is it is very high as a percentage of the book and I do think what do you have expressed at investors would prefer it to be down, but perhaps not.
Rents are giving up total but sort of just the income so how are you balancing.
On the view on that I mean, obviously, you don't control the exit from these equity positions, but you did something so how's that being.
Has the view on that in terms of balance.
And there's another tricky question Robert on it and you know Theres a one on research analysts I know he says it's all about any of it and it's all about any day and and you know like we have some of these big wins are in equity right.
Could try to actually Jim earlier.
And convert those to cash to generate an on line earlier.
In some cases, but you might be giving up some on the upside if you exit earlier.
You know on some of these you could go to the sponsors day in our buys out and some of them would be happy to balls up because they still see the next 10 2030, 40% upside if they do.
And why did he challenged on running a vehicle that you know a lot of people want yield you know so it's a tricky balancing act and you're right. It's hard for me to answer.
Your question and maybe we can talk to you know you've given some good research about kind of any day is should take priority in certain cases.
But that's how we've been playing a tough story, we've been saying that's at this point you know this vehicle you know a lot of the op sorry on the equity lots of ride that and squeeze that as much as possible and we will monetize that.
Most optimal way.
And and then take those proceeds and put it into yield instruments, but clearly there are some investors who say you know it's all about yields you know you kind of sell earlier leave some leave some money on the table get out.
And start deploying into cash paying yield instruments today, we've been playing it to the maximization.
Our hand, but we could we could pivot and and start to take some of those gains earlier, we will probably by definition won't be leaving leaving some gains on the total. So so that's that's the that's the grapple that nobody has to be quite honest.
Nice to have wins, it's nice to have victories. It's it's refreshing its nice day of energy would be a relatively small manageable piece on this portfolio. After so many years. So it's nice to be having these conversations.
But it is it is something we grapple with.
And it's nice to see portfolio fair value above cost as well.
Time in a while so congrats on that I think just one more if I can I mean you.
You talked about you know you're still seeing you know acquisitions. It looks like it's going to be very good because it's still stable on average Charlotte covenants et cetera.
Perfect.
How much was that if you could use that as more of a.
Qualitative and quantitative on this.
Actually material as it is at Marshall and then just given how competitive things on how Robert is yes. Our market is right can you hear me.
Robert.
Can you hear me Robert.
Yeah, I can hear a Robert argued here Robert sportsman.
I guess, maybe I'll follow up with efficiency.
[laughter] Robert I can hear you there one second while we might have on technical difficulties. So if you bear with us for 30 more seconds debt I can hear you clearly.
Well, we're trying to get back on the line here.
That's helpful.
My apologies desktop on connect misstep on one moment please.
Yeah.
Sure.
Yeah.
Give us a couple of more a few more seconds here I know his line was dropped earlier, so I guess, we're experiencing the same difficulty technical difficulty.
Here, Robert but we do want to take it I guess.
So on this.
Telephonic difficulties Oh, yeah, there are a lot of lifestyle elements.
Yep.
Mr. Robert on joined.
Confidence.
Hello, Hi, it's hard on back on some technical difficulty on my apology, Robert Robert You were asking a question.
Yeah, Yeah, yeah. So I mean, just talking about you mentioned that you're still seeing low leverage but at a time.
And spreads currently in the middle market. If we look at the syndicated market that all seems to pretty much be gone I don't think she there's a lag between the two.
Tradition, typically that theres been a line I mean it.
Do you think the better terms, you'll see it now.
Everything stays competitive all going towards that right or do you think some of that benefit.
Better terms coupons et cetera.
Moving to be sustained.
Over over the net.
About three years from now on BC.
A prolonged period.
It's a great question and you know just a definitional range to seven worker to level set for everyone.
We're focused on what we call the core middle market, which is companies with $15 million to $50 million on EBITDA.
First is the upper middle market, which is $50 million and above and our view on $50 million above the threshold, where we think companies can also access the broadly syndicated loan market or the high.
The yield market in some cases, where some of our larger peers traffic.
Alright, thank loans to bigger companies.
That entered the market certainly has bounced back to where it was pre COVID-19 really driven by the average balance of the broadly syndicated loan and high growth markets Youre right that were kind of away from the fray at below that.
Radar certainly the market is.
Rebounded to some extent from where it was at the lows in our six months ago or so.
But it's it's slow.
No.
Like just entered the market even before Covid there was a lot less competition capital and work on a lot less commoditized.
Could still get covenants whenever one else with dealing with no covenants or covenant wide or covenant light.
Even before Covid, our EBITDA adjustments from fully intelligence EBITDA.
Before Covid, we could get equity called us if we like the equity.
So even pre Covid, we still thought this kind of almost 50 of EBITDA what was it.
Good place to be positioned.
But certainly over time as the economy recovers and as capital flows back it's certainly going to be.
Tightening for sure, but but what's now that's how we've been operating for a number of years, we came into COVID-19.
And our senior book.
About four times debt to EBITDA, which really positioned us well for coke for Covid and kind of avoiding any of those sectors that I've got most impacted so we were taking on more defensive posture drilling into investment banking.
Okay I appreciate it thank you.
Great quarter.
Thank you.
Thank you for taking our next question from Ryan Lynch with K B W.
Please go ahead.
Hey, good morning argument.
Good afternoon, I guess I should say.
I have a couple of questions.
In your prepared comments you mentioned four companies.
That you felt pretty good about the upside in that.
That growth now this quarter as well.
Contributing to outside in the future one company EBIT ratio, which Nick Ocean. Just curious that company was rigged up pretty significantly. This quarter can you just provided background on on what that business guards I mean, what drove up there on the markup on that investment.
Yeah. So.
It's a company that we've.
It's been on the portfolio for a while.
It was a restructured mezzanine investment where we.
For a while on a debt and equity the checkout refinanced.
And we on our residual equity position.
Company distributes products to service stations to gas stations.
Yes.
It could get hurt by Covid early on as people drove less but has rebounded nicely.
They've been doing some very attractive add on acquisitions at attractive multiples.
So gradually the EBITDA on the company has been growing.
It's not the what we call kind of the top of the case shape recovery, where we're seeing.
Things like Walker Edison, a real price or kind of a but it's kind of been steady.
Steady Eddie grower and at some point in the next year or two.
There may be an exit will be able to can I pick up on that equity investment into cash, but yes. It was a good price.
Thanks valuation upside this quarter.
Okay.
And then from from a higher level question.
You mentioned that the decade shape recovery, obviously, but there's a lot of uncertainty.
How are you.
Recovery or are you guys open it's going to take place on how long, we're going to be dealing with COVID-19.
How does the shape of the recovery of your outlook on on the reopening profit how is that.
Net shape.
Underwriting and you guys are looking at a new company or just EBITDA type of company or the industry debt that you are looking at.
Yeah. So look we've we really hard to GAAP.
Our focusing on five different sectors, where.
Where we think we have really excellent domain expertise.
Where these sectors have performed well during COVID-19, where theres high free cash flow and where we can be.
Among the smartest people on the room.
So.
We mentioned in our P&L.
Our prepared remarks.
Government services Defense Health care.
Software and technology business services on consumer.
You know, where we are we have this deep domain expertise, where we know the right questions to ask when we've had a really good track records.
And then in skin.
And most of these sectors at all of them they performed relatively well from a car right now.
Over time, we developed certain domain expertise in the business, we certainly havent and we've certainly made mistakes elsewhere too.
So where we are we want to continuously improve and get better and better and kind of true. This is where our focus is going to be here at this point and.
And and and stick to that it's a wide enough a band that we can see six months on pay off well.
Can fill up our vehicles carefully and judiciously and people are very very.
Very smartly. So that's I don't know if I answered your question the airline can I answer your question.
No that's helpful context.
Hospital question Dara to differ now, but it but it's good good color on where you guys hedge stages at this point so.
Those are all my questions I appreciate the time this afternoon junior debt.
Nice quarter guys.
Thank you.
Thank you from could take our next question from Kyle Joseph with Jefferies.
Please go ahead.
Hey, good afternoon, and thanks for having me on.
Well on my questions have been addressed but I just had two to follow up on credit on the non accruals that were resolved during the quarter was that was that driven more by recoveries or where there is restructuring I think you addressed one of those earlier, but just wanted to get your perspective there.
Yeah. Thanks, Kyle So, yes, we've talked about and spark mail south earlier on so on term restructuring.
And then the other one was PRA PRA, where 200 country weighted business.
Sponsor on Greek put in additional equity beneath us.
That is back on accrual to hear back from that investment by the sponsor.
Got it and then more broadly on credit can you give us a sense for revenue and EBITDA growth trends in the in the fourth quarter debt calendar fourth quarter, and how those compared to the third quarter and any changes you've seen year to date.
Yes, it's a great question, because we're trying to really precisely with our own portfolio you figure out which one was on the bottom.
Where is the bottom.
March where it could bottom jewelry for bond in September and it's challenging because in most cases, we get monthly financial statements in some cases on a quarterly.
So we're trying to figure that out as we speak my off the cuff.
You know.
Answer would be we think EBITDA on average was up 3% to 5% on a fourth quarter. That's that's my guesstimate at this point, but give it another few months and we'll have some precise data from the Iraq. We hopefully on the next call. We can kind of more precisely identify for you when the bottom I cover.
It was for us.
And you know what the trends on but that's kind of a guesstimate at this point.
Got it thanks for thanks for the time and thanks for answering my questions.
Thanks, Matt.
Thank you for taking the next question from Melissa Wedel with JP Morgan.
Please go ahead.
Good afternoon, guys. Thanks for taking my question.
On the first I wanted to just touch on the case.
Portfolio leverage if I heard you right earlier in the call.
You aren't relying on turning those assets the elevated equity investment.
Are you deploying capital.
Right.
You also.
No that it's tough to give guidance on on the origination side, but I have a follow up on on the flip side of that which is do you have much visibility in Q I think they came on in the next year.
We don't see a lot of repayments on the near term.
Although sometimes you never know, but we don't see a ton of kind of repaying debt. So I mean, our alcohol.
Call it as the portfolio's going to gradually grow.
Over the coming quarters.
Careful thoughtful manner.
While we are looking to monetize these equity positions.
Okay. Okay.
And then as a follow up this is sort of a broader strategic question I think we're seeing across the BDC landscape. Some on the funeral along vehicles.
On a combined.
Primary BDC I'm just curious if that's something that you guys on about with regard to P&L and cash.
And on T and how you.
About 1%.
Okay.
Net.
So that's a good question. That's a good question and look we're always trying to do anything we can to maximize shareholder value.
Everything is always on the table on we will evaluate I think for us the TNMP today.
We've got you know a little bit of work cut out for us.
The GAAP P&L, where it should be.
And then remember where we get to where it should be where we will lift our head up and figure out.
Figure out the answer and ask questions like you just.
I wanted to just ask.
At our firm it's important for you to know that we've got two separate strategies on our on broker.
Broker public and the private side, we are on an opportunistic strategy.
Which looks a lot like PMT without the energy.
And in that strategy for instance, we on a really excellent 2020, right now kind of on net 29% return to the limited partners and then we have a senior debt strategy.
It looks a lot like P F L T.
And now on a private contract like a 19% net return.
In 2020, so really excellent returns.
And our two separate strategies from our first things correctly.
We gotta do we need to do with P&C together than good share performance income began asking those questions.
But after we get back on in the right shape, where we're certainly open and we'll discuss all kinds of options.
Thanks Mark.
Thank you for taking our next question from Jim on this call from Aviation Advisory Service Inc. Please go ahead.
Good afternoon, good afternoon, gentlemen, thanks for taking my call.
A couple of things.
Okay.
<unk>.
The fiscal year that ended on September 30th.
We paid $31 $5 million in SBA debentures are why don't you do that.
Well, that's because we were getting on repayments at the U.
SP I see.
There is a maturity coming up in a few years.
We are we are we are the money back. So that's why we that's why we're kind of back.
Makes sense.
How do you decide.
We're looking at new opportunities, which assets to allocate to pennant park itself, which to P. S left on which the private funds.
Just a quick question on that yeah. So yeah, yeah. So we have FCC exemptive relief, which is kind of a similar box that we're on.
All of our peers.
Which says that when a deal comes at a six multiple on the characters of the characteristics of the loan multiple boxes, you allocate amongst the V vehicles based on available capital. So it's a mathematical calculation that gets done you know what I've seen it will come in on what it meant and they'll come in.
Where it gets allocated.
And.
Okay.
I haven't looked at closely on the news release for the fiscal year that ended September 31, there was a significant increase in pick income both on absolute terms on that as a percentage of total revenues.
Why was that and those pick instruments performing.
So those are that's a good question and those are probably two former non accruals, which on a PRA <unk> spark.
Those are the drivers on that.
So since their former non accruals that means it's now you think it's a money good.
Well, we think there are money good day, they may not be paying us cash interest.
So on cases, it's true.
Yeah.
Keeping the cash on the company for Cushing.
For it to be up on the liner Warner content.
Oh, so in other words as part of the restructuring.
Great. Thank you I gave you some pick paper.
And rewards on the cash interest that you would do.
Yes, okay.
Okay.
Thank you very much.
Thank you.
Thank you. It appears there are no further questions at this time, Mr. <unk> I'd like to turn the conference back to you for any additional or closing remarks.
Thanks, everybody for participating today will speak to you next in early May as we review on March.
Uh Huh March quarter at so thank you very much few times a day have a good day.
This concludes today's call. Thank you for your participation you may now disconnect.