Q4 2021 Pennantpark Investment Corp Earnings Call
Good morning, and welcome to the pennant Park investment Corporation's fourth fiscal quarter 2021 earnings Conference call. Today's call is being recorded at this time all participants have been placed in a listen only mode.
The call will be opened for question and answer session. Following the Speakers' remarks, if he would like 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 two on your telephone keypad. It is now my pleasure to turn the call over to Mr. Art, Penn Chairman and Chief Executive Officer of Pennant Park Investment Corporation.
Mr. Peng. Please go ahead.
Yeah.
Good morning, everyone I'd like to welcome you here dependent Park investment Corporation's fourth fiscal quarter 2021 earnings Conference call.
I'm joined today by Richard <unk>, Our Chief Financial Officer, Richard Please start off by disclosing some general conference call information and included discussion about forward looking statements.
I would like to remind everyone that today's call is being recorded. Please note that this call is the property of <unk> investment Corporation and that any unauthorized broadcast of this call in any form are strictly prohibited.
Audio replay of the call will be available by using the telephone numbers and pin.
<unk> provided in our earnings press release as well so now web site.
I 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.
Copies of our latest SEC filings. Please visit our website at <unk> dot com or call us at 202, <unk> five 1000.
I'd like to turn the call back to our chairman and Chief Executive Officer Pat.
Thanks Richard.
I am going to spend a few minutes discussing how we fared in the quarter ended September 30th.
The portfolio is positioned for the upcoming quarters, our capital structure and liquidity the financials.
And then open it up for Q&A.
We are pleased with our performance this past quarter.
We achieved a two 6% increase in adjusted NAV.
Adjusted NAV went up 25 per share from $9 58 to $9 83 per share.
We are particularly pleased that our AAV today is up over 12% from what it was pre Covid on December 31 2019.
Net investment income was <unk> 17 per share, including <unk> <unk> per share and other income which includes one time dividend payments on equity positions. These.
These dividend payments highlight the value of our equity portfolio.
We have several portfolio companies and what's your equity investments have materially appreciated in value as they are benefiting from the recovery. This is solidifying and bolstering our any day.
As part of our business model alongside the debt investments, we make we selectively choose to co invest in the equity side by side with the financial sponsor.
Our returns on these equity co investments have been excellent over time overall.
Overall for our platform from inception through September 30, or $246 million of equity co investments have generated an IRR of 28% at a multiple on invested capital of three times.
In a world where investors may want to understand differentiation among middle market lenders are long term returns on our equity co investment program or a clear differentiator.
With regard to net investment income we have a three pronged strategy, which includes one growing assets on balance sheet or P&L.
As we move towards our target leverage ratio of one five times debt to equity from <unk> nine times number two growing our <unk> JV with pantheon to about $550 million of assets from approximately $405 million of assets through balance sheet optimization, including a potential securitization and three.
The opportunity to rotate out of our equity investments over time, and it's a cash pay yield instruments.
We are well on our way to implementing the NII growth strategy.
The September quarter was a busy period for us at <unk>.
As we originated $165 million of new loans far outpacing the repayment activity.
As a result of the investment portfolio of P&C increased by approximately $110 million to $1 6 billion from $1 5 billion.
Tsls investment portfolio also grew this quarter to $405 million from $386 million, an increase of $19 million.
PMT generated $9 million of cash proceeds from our equity portfolio in the September quarter.
We continue to be active since September 30, <unk> had new funded investments net of repayments and sales of $98 million.
We are focused on the core middle market, which we generally define as companies with between $10 million of $50 million of EBITDA.
We like the core middle market because it is below the threshold and does not compete with the broadly syndicated loan or high yield markets as such we do not compete with markets, where leverages higher equity cushion lower covenants are light wide or nonexistent information rights. Your pure EBITDA adjustments are higher unless diligence and the timeframe from.
Making an investment decision.
Decision is compressed on.
On the other hand, where we focus on the core middle market generally our capital is more important to the borrower as such Leverages lower equity cushion is higher we have real quarterly maintenance covenants. We received monthly financial statements to be on top of the Companys EBITDA adjustments are more diligence and achievable and we typically have six to eight weeks.
To make thoughtful and careful investment decisions.
According to S&P loans with companies with less than $50 million of EBITDA have a lower default rate and a higher recovery rate.
And those loans to companies with higher EBITDA.
Our portfolio performance remains strong as of September 30th average debt to EBITDA on the portfolio was four nine times and the average interest coverage ratio the amount by which cash interest income exceeds cash interest expense was three two times.
We have no non accruals on our book in <unk>.
The company is highly diversified with 97 companies in 2009 different industries.
Since inception, <unk> has invested $6 4 billion.
At an average yield of 12%. This compares to a loss ratio of about 13 basis points annually.
This strong track record includes our energy investments are primarily subordinated debt investments made prior to the financial crisis and now the pandemic.
As we analyzed our 14 year track record of P&G. It is clear that our returns took a step function up starting in 2015.
The IRR of our investments made prior to 2015 was nine 8%.
Since 2015, we have achieved a 13, 9% IRR.
We believe this is due to four key factors.
Number one better company selection within industry verticals, where we have domain expertise.
To avoid investments in the energy industry and other cyclicals.
Three excellent results from our equity co investment program and for a substantially increased focus on core middle market companies, where our capital can be more important to the underlying borrowers.
Core middle market to us means below $50 million of EBITDA.
Our performance through the global financial crisis, and recession was good.
During that recession, the weighted average EBITDA of our underlying portfolio companies declined by seven 2% at the bottom of that recession.
This compares to the average EBITDA decline of the Bloomberg North American high yield index.
A 42%.
Based on the tracking of EBITDA, where underlying companies through COVID-19.
EBITDA decline was substantially less than what it was during the global financial crisis.
Median EBITDA decline at the bottom of Covid in June 2020 was one 4%.
This compares favorably to the 7% decline in EBITDA during Covid of the credit Suisse High yield index.
Many of our portfolio companies are in industries, such as government services healthcare technology software business services, and select consumer companies, where we had meaningful domain expertise.
We believe that we are experiencing a strong recovery with some companies in the industry as being beneficiaries of the environment.
We're pleased that we have significant equity investments in several of these companies, which can substantially move the needle of our NAV.
PMT has amongst the lowest percentage of energy investments since 2013.
Energy investments represent only six five.
<unk> of the overall portfolio.
Ramazan stable operational and financial footing and is benefited from higher prices and production.
While Ram analyzes its hedging weekly today, the majority of its oil and NGL liquid production is unhedged to the upside which comprises the majority of revenues.
Approximately two thirds of its natural gas production is hedged at various varying prices.
As a result Ram will continue to benefit from rising prices.
As of September 30th equity represented approximately 32% of the portfolio.
Long term goal continues to target that percentage down to about 10% of the portfolio.
As we monetize the equity portfolio, we are looking forward to investing the cash into yielding debt instruments to increased net investment income.
The outlook for new loans is attractive we are as busy as we've ever been in 14 years in business reviewing and doing new deals.
With our experienced talented and growing team, our Wi funnels, producing active deal flow.
You then carefully and thoughtfully analyzed so that we can be selective as to what ends up in our portfolio.
Let me now turn the call over to Richard our CFO to take us through the financial results.
Thank you all for the quarter ended September 30, net investment income totaled <unk> 17 per share.
Which includes a one time dividend payments from equity investments of <unk> <unk> per share.
Looking at some of the expense categories base management fee and performance based incentive fees totaled $5 2 million.
Taxes general and administrative expenses totaled $1 million and interest expense totaled $5 7 million.
Net realized gains on investments was $5 6 million.
<unk> per share.
Unrealized gains on our investments were $7 $6 million or <unk> 11 per share.
And the value of our credit facility increased our NAV by <unk> <unk> per share.
Our net investment income was in excess of our dividend by <unk> <unk> per share.
Consequently, NAV per share went from $9 59 per share to $9 85 per share.
Up two 7% from the prior quarter adjust.
Adjusted NAV.
Excluding the mark to market of our liabilities was $9 83 per share up two 6% from $9 58 per share the prior quarter.
As a reminder, our entire portfolio credit facility and senior notes are marked to market our board of directors each quarter using the exit price provided by independent valuation firms securities exchanges. So independent broker dealer quotes when active markets are available under ASC 820, and <unk> 25.
In cases, where broker dealer quotes.
Active we use independent valuation firms to value the investments.
Our GAAP debt to equity ratio net of cash was <unk> nine times.
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, when the syndicate of banks.
$64 million of SBA debentures maturing in 2027 and 2028.
<unk> $86 million of unsecured notes maturing in 2024.
And $150 million of unsecured notes maturing in 2026.
Subsequent to September 30, <unk> issued $165 million of unsecured notes maturing in 2026 with an interest rate of 4%.
We used $886 $3 million of the proceeds to fully redeem the 2024 notes, which bear interest of five 5%.
This will reduce our annual interest expense by approximately $1 3 million and would be accretive to net investment income.
Our overall.
That portfolio has a weighted average yield of 9%.
At September 30, our portfolio consisted of 97 companies across 29 different industries.
The portfolio was invested 44% in first lien senior secured debt.
14% in second lien secured debt, 10% in subordinated debt, including 5% in <unk>.
And 32% in preferred and common equity.
Clearly, 3% Mpls.
92% of the debt portfolio has a floating rate all of which has a LIBOR floor.
Average LIBOR floor is 1% now let me turn the call back to art.
Thanks Richard.
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.
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.
In closing our remarks at this time I would like to open up the call to questions.
Thank you if you'd like to ask a question. Please press star followed by the number one on your telephone keypad, if youre, calling from a speaker phone. Please make sure. Your mute function is off just your signal can reach our equipment.
Again Sterling to ask a question.
And first we'll go to Casey Alexander from Compass point Your line is open.
Yes, Hi, good morning, first is just kind of a maintenance question for Richard Richard in the redemption of the 2024 notes what will the one time charge be.
For the acceleration of debt offering expenses, and then secondly, where do you intend to enter that on the income statement because it used to be that those were charged off against NII now we've seen several bdcs that are charging that as a as a capital loss instead of.
Pre NII loss.
Yes, Anthony this is Richard yes.
<unk>.
Unamortized offering cost.
September 30 was $1 $75 million related to that is what I will note that this amount of charge offs for the first quarter of 2022.
We do intend to put that through NII.
It's interesting that you've mentioned that it's something that we can.
Maybe explore with semi audit firm.
Point.
Legal run through interest expense.
Yes.
Several companies recently that are charged at as a as a capital loss.
When you take a look at that.
Second Lee.
I'd love to hear your thoughts on not changing in a material way.
<unk> over quarter, Mark on Ram simply because.
It was maybe the best quarter for price performance of the underlying energy benchmarks.
We took a look at that.
At the balance sheet of Ram and it's built up a nice amount of cash much of which probably came in this last quarter.
And not that we're necessarily.
Happy about not marking it up because if its cheaper relative to the energy benchmarks and that attracts more buying interest then we're all for it but we'd love to hear your thoughts on not changing the mark on Ram.
Yes, so look the thank you Casey this is art.
The valuation firms do.
Evaluations every quarter I think they are primarily focused on the.
The M&A market.
For assets like this.
And unfortunately, there hasnt been a lot going on to date.
We certainly hope that as oil and gas continues to perform well and have a healthy price like this.
There will be more M&A activity and then once we see M&A activity.
It will establish value better and b, perhaps we can sell ram into a bit of an M&A wave.
And again liquid on the name so.
I think it's a good point about the company doing well generating cash flow. It's cash is building on the balance sheet.
Really really good performance not shocking given the price of oil and gas.
What's really driving the valuation for the valuation firms as kind of the M&A or lack thereof.
Frankly, it's tough to really put a pin in it right now because there hasnt been much M&A.
Okay. Thank you for that.
I'm curious if art if you could share with me sort of the board's thoughts on the dividend you have been out earning the dividend for a while now.
Is it simply that the boards not comfortable turning it up yet because of the still the amount of equity or what will it take to start that conversation.
Yes, it's a good question and the board talks about it all the time.
First I wanted to I think Theyre pleased and I am pleased that we are.
Covering the dividend reasonably well and were not worried about covering the dividend. So that's 0.1 thankfully.
This quarter, we had <unk> of other income so if you did away with that for <unk>.
You'd be a 13th.
So.
But that.
Other income comes every quarter and when we back out the dividend from the equity company that also eliminates.
The incentive fee, so really it's not even <unk> from that it's more like two.
So you know so really.
And other income comes in every quarter in some form or fashion, so really I would.
Calculate the core run rate of this quarter of having been <unk>.
Alright, So case, you're where you want to raise the dividend too.
Just.
Sure look I mean.
Yeah.
We are.
Other income has been zero on occasion and it has been for this quarter was <unk>. So.
We know where we know we want and we know our dividend as recurring and we don't want to it's a good question I know you've raised hey, why don't you have a variable dividend and thats something we could talk about.
<unk>, but I think in our minds, we've been saying Gee whatever our dividend is we don't we want to sleep at night, knowing that we're covering it.
And that there is some cushion and that our shareholders know and are worried about.
Our dividend is so we're just coming out of his time, when or whether we're running a 13th or 14th or whatever run rate you think you're modeling youre right I think as we grow.
PNM team as we grow the joint venture and importantly, as we rotate the equity positions. The chunky equity positions, we certainly would like to and would hope to raise the dividend, but it is something thats on a quarterly discussion every quarter, let's see where we end up.
This upcoming quarter, both in terms of the balance sheet, our run rate and importantly, how we're how we're feeling about the rotation, but it's the right question and thank you for asking it and we can certainly talk about all the different at different dividend formulations offline.
But in our minds, we've wanted to play conservative.
Alright, great. Thank you for taking my questions I appreciate it.
Thank you.
And next we'll go to Robert Dodd from Raymond James Your line is open.
Hi, guys.
Congrats on the quarter.
Yeah.
Casey's question about Ram.
If I look at <unk>.
Obviously, the enterprise value.
It is down.
Values cash balances out.
EBITDA is up.
Cash flows et cetera year over year, but the enterprise value implied in the market.
And then just your comment that the <unk>.
Valuation consultant looks at that.
Can you give us any idea of what metrics are actually looking at I mean, clearly, it's not an enterprise value to EBITDA or anything like that.
Or EBITDA.
Enterprise value to reserves I mean, what's the framework.
Using to evaluate that given all the metrics, one way and the fair value year over year yellow.
Yes.
In light with Casey it sounds like.
It sounds like Raymond James has a bid for Ram, which we're always happy to entertain Robert.
So.
Look I mean all of these.
I do not have a bid for that.
That's.
All of the holiday all of these elements are taking into account production is taken into account reserves are taken into account. The comparables are taken into account and of course, the M&A activity or lack thereof is taken into account in all of these things go into the bucket and it's a question of what what which of these factors do the valuation firms prioritize what are they lean on.
And and.
<unk> recently, it's been.
Kind of where as we all know we are we would be more than happy to entertain proposals on this company for people, who want to buy the company, which ultimately then becomes okay. What are people willing to pay for the company as much as production and reserves and all these other things so.
So.
There just hasnt been the trades, yet I mean, I think we're starting to see some action in E&P.
And as this as this last longer inevitably we hope that we will see more but they take all these factors into account.
But at this point it's.
What is the as we always say, what's the exit value to the market participants in an orderly market.
That's the accounts and the valuation firms will.
As you asked that question of themselves. We ask that question is management, what's the exit value to market participants and an orderly market of this particular asset. So that's what everyone's trying to get at.
Understood and then one.
The more general question about obviously the equity book overall, I mean, the market's early active generally.
Has you all.
Expect high expectation, maybe too small or what but how is your.
Your hope.
How quickly you can you can.
Some of it.
Equity position has that.
Changed over the course of let's say the last six months as market activity has picked up or is it still.
<unk> company.
Company specific that.
High levels of market activity.
Move your expectations about how fast equity can be monetized.
Yeah. That's a good it's a good question look you can see what's going on with debit and evaluation with pivot PT network.
You can see the valuation has been up that that that indicates something can indicates value and and.
That's an indication that maybe on that one it can be a little tighter than we thought in terms of timeframe right.
Rams really challenging to figure out, but we think we've just discussed Ram.
Kanno, Canada was a public stock and we're kind of.
Part of part of your writing that it's been a little volatile. So and then you have the what I'll call. The regular way equity co invest the one that generated the.
The other income this quarter Green veracity of Urtext summit was a small equity co invest and we got liquid on so you have the normal pitter-patter of the what I'll call. The regular sized equity investments, which continue to every quarter generate.
Generate some cash and on the big ones.
It's harder to harder to predict but I think the marks can tell you something.
Okay I appreciate that thank.
Thank you.
Yeah, congrats on the quarter Okay.
Thank you.
Next we'll go to Ryan Lynch from K B W. Your line is open.
Hey, good afternoon. Thanks.
Thanks for taking my questions arent really nice quarter, all around I did wanted to talk about.
The portfolio activity over the last several quarters.
Gross fundings have been accelerating as well as maybe more importantly, net fundings have really accelerated the last several quarters and then it looks like that's continuing.
In fiscal Q1 can you just talk about whats really driving that acceleration and then as well as you talked earlier about focusing on kind of the core middle market.
Let me just hear what Youre competitive standpoint, obviously, there's been a lot of capital raised but a lot of capital. That's been raised two really big values by very big shops that are focusing more on upper middle market lending. So I'm. Just curious are you seeing those those players that are focusing on upper middle market might be also continue to.
It also invest in the core middle market as well so that competition is kind of really the same or even accelerating just any comments on that would be helpful. Yes. Thanks. Thanks, Ryan. So the first question as activity levels in volume. It has been an extremely active 2021 and I know you've heard that from some of the other bdcs driven.
By a lot of factors.
There was no deal flow for four year and a half.
There was the thought that taxes would increase so that brought a lot of sellers to market.
And see values are pretty high so if youre thinking about selling your company you can get a pretty good value. So those three factors really contributed to <unk>.
Very healthy deal flow volumes in the middle market. The tax issue seems to have gone away for now.
But the die is cast for 2021, where you were super active we're going to be active.
Going into year end.
What's 2022 look like we think it will be active we don't think its going to be as active as 'twenty. One we certainly think there might be a little pause in January and February like there typically is seasonally in our business. So.
So we think we'll be active coming into the end of 'twenty. One we think first quarter of 'twenty two will be a little light and we still think there's going to be a lot of activity in 'twenty. Two because values are are attractive for sellers because financing is plentiful.
And Theres still a lot of <unk>.
Companies don't want to do deals now.
<unk> focus is on the core middle market, which is kind of $50 million of EBITDA and below.
And our average median EBITDA is somewhere like a $25 million to $30 million.
And Youre right with the with the Giants in the direct lending industry, raising so much money their business for their business model is challenging for them to focus on companies below $50 million EBITDA every once in a while we'll see them come down to 40.
But when you have the amount of capital they have to deploy.
Really going after and competing against the broadly syndicated loan market and that's why you see the.
These announcements about record large.
Quarter unquote direct loans that some of our larger peers are doing they are really eating into the BSL space.
The broadly syndicated loan space, because we have so much money to deploy what they can do is im not giving you giving you their pitch. They can they can offer something that they think is a value to those sponsors into those borrowers.
That they think is accretive and obviously the borrowers borrowers think are accretive as we look at it.
They are competing with a broadly syndicated loan space.
Our leverage is high yields are low equity cushions low.
Your.
Your opportunity to do real due diligence is short you have to make quick decisions, it's covenant light.
So god bless God bless them, we hope, they're making good credit decisions. We hope the borrowers are happy with the capital they are providing and it is a large market for them to go after.
Where we focus below $50 million of EBITDA.
Our capital is more important to the borrowers we can get much more reasonable leverage we can do our diligence in a comfortable time span of six to eight weeks, we get covenants that have meaning we get real equity cushion.
We can select selectively get co invest and I'll go into that in a minute which can.
Add some significant value to the portfolio, so that whole kind of mixture of being important to the borrowers is important and where we really have honed in where we can add the most value and it's showing up in our numbers.
One we're starting out with a sponsor who has identified an industry or a company that they think has good growth characteristics either inorganic growth because it's a fragmented industry that they can consolidate or good organic growth and we can start out with that company and that kind of 10 to 20 million of EBITDA.
And there is a real game plan to take that 10 to 20 of EBITDA up to 30, 40, 50 and higher.
We're out of that capital is very important at inception, and then we can help drive the growth with our debt capital and we can obviously by definition have a front row seat on financing those companies as they grow.
And then we can also participate in the equity co invest and participate in the upside that we're helping to drive with our debt.
So that's really the model that we Havent pennant park today, where we think we can add the most value to both the borrowers are on one side and our investors of course on the other side, where the track record is really quite good over the last handful of years.
Post 2015, we've had like a 13, 7% IRR as we've dug more and more and more into that core middle market as we've participated into those equity co invests.
And frankly, whereas there is the most valuable arent where kind of away from the Fray, we're not really competing with the Giants, we're not competing with the broadly syndicated loan market.
And we can do proper due diligence and really understand what we're what we're lending to.
Sorry for the rant, but I think I answered your questions.
You covered it and you gave a lot of additional color and detail. So that's very helpful.
My other question I wanted to talk about another control company outside of Ram <unk>.
<unk> networks that had a significant write up this quarter you guys have some of the financial information in your 10-K, you seen obviously accelerating revenues and it looks like this is the first year they've actually turned a profit. So obviously the fundamentals are strong there can you just give an update on what is.
Driving that improvement in fundamentals I know that there was a management change.
A bit ago.
I'd just love to hear an update on that business. Yes. So look first of all industry wide and we like the industry is.
As people are aging they need more physical therapy.
<unk> therapy is very.
Cost efficient as a treatment versus other types of treatments.
Physical therapy as an industry is has a lot of tailwind that we've always like that even when we went to the company originally.
There was there were some management miscues.
A ways back that's when we do.
Did the restructuring and where we became the control equity.
We are.
Brought in a new management team.
Excellent.
And they've done great work, you know getting the company's operations are in line.
And it's a blocking and tackling business. If you do the blocking and tackling correctly. You can you can do very well. So that's what's going on they are doing some small add on.
Acquisitions, which are accretive to the equity value.
And.
It's really working of course Covid was you know a bump in the road during Covid people.
Didn't or couldn't or we're reluctant to go into a physical therapy location.
But now that we're kind of coming out of Covid.
We're seeing very good very good numbers.
I appreciate that update.
All for me.
Thank you.
And next we will go to Mickey <unk> from Ladenburg. Your line is open.
Yes, good morning, or good afternoon alright.
You know a lot of good questions already asked.
And I don't want to beat a dead horse on Ram, but when you look at the cash and the free cash flow in the leverage and the nature of the debt. It looks like the company could afford to pay you a dividend is that something youre contemplating over the.
The relative near term or would you prefer to retain capital in the business.
Good question and I think the issue regarding that surrounds the you remember Ram got the attractive mainstream.
<unk> financing.
During the jaws of Covid for $40 million, just a very low yielding.
Instruments long term instrument very flexible instrument, one way its not flexible as youre not allowed to take dividends.
So thats. The conundrum, you know you want to keep that very attractive debt instrument in there.
Because it does provide a lot of stability and permanently to the company of course, we'd love to pay dividends.
So that's what that's what we're grappling with and today. Unfortunately lenders are still not if we should know if you said hey, just replace those guys with somebody else.
It's certainly something we think about.
Lenses, many lenders are still reluctant to lend to the oil patch for obvious reasons, including past performance, including ESG.
ESG issues, but it's something we should consider and will consider as hopefully the industry falls out.
Perhaps if this continues and the prices remained strong we could.
We could look at a recapitalization or paying off that loan and getting cash flow to shareholders. It certainly something we'd like to do.
Art can you partially pay down the debt and I realize it's cost effective but you know nobody's, earning much on cash these days it probably would still be accretive or they don't allow that either.
You can again, it's just like it's the question same similar kind of stance around our dividend policy, which as.
We like being a bit defensive and just having the extra <unk>.
Safety of mind.
At this point, but at some point, if we continue to generate a ton of cash and we just have all this excess cash might you pay off the whole thing I mean, that's a that's an option at some point.
But right now that's hopefully oil and gas prices stay high for a long time and then there's more cash on the balance sheet.
Then that's great.
Great.
The company will be sold by then I don't know, but yes.
Yeah.
We'll see where it goes.
And my.
My last question could you just touch on what issues are confronting mail south if any given the decline in the equity valuation.
<unk> has been a challenge it's a shared mail direct mail company many of their customers are retail and restaurants.
Who have been impacted by Covid, who are having labor shortages themselves. So they don't want to advertise because they couldnt deal with the amount of customers that would come in even if they did advertise.
So we're working it hard it was marked down appropriately this quarter.
It's going to be a grind we're committed until we think it's a good company ultimately generates good cash flow but.
But that's going to take a little longer to work through.
But it's not having problems servicing its debt at least not now.
No no so even in this environment still generating sufficient cash flow to service the debt.
That's it for me this afternoon I appreciate your time thank you.
You mean.
And next we'll go to Kyle Joseph from Jefferies. Your line is open.
Hey, good morning, Thanks for having me on a lot of my questions have been addressed but just outside the energy and equity investments really wanted to get a sense for.
The outlook for credit performance and how our portfolio companies are doing obviously, we know.
No non accruals, obviously, given strong, but just give us a sense for where their revenue growths are trending EBITDA grows.
Any sort of like macro concerns you have weather inflation or supply chain issues.
Yeah, so by and large the portfolio is performing well by and large these companies.
Our well positioned.
And if they need to raise pricing due to inflation or labor or supply chain. They can do so.
Because there.
They are important providers to their customers. So average EBITDA margins of 25% to 30%, which indicates very high value added.
You know so so ebitdas are up now it's kind of what are you comparing to if you're comparing to the middle of Covid. They are up a 100%, 200% that's kind of not even relevant to even compare it to COVID-19, but they're certainly back and in many cases ahead of where they were in 2019.
Some of these companies are kind of different companies than they were in 2019, they've done a bunch of add on acquisitions they morph themselves.
But the portfolio is generally performing really really strongly from a revenue and EBITDA standpoint.
Sure we share with you the credit stats three times interest coverage on average so we feel we feel by and large very good about our portfolio, but when you have like 70 8100 names in our portfolio by definition.
There may be an amber two or three that may be getting hurt by labor or.
Or supply chain or inflation, but by and large it's it's a it's a very strong very strong book.
Got it appreciate the color thanks for answering my questions.
Thank you Kyle.
And next we'll go to Melissa Wedel from Jpmorgan. Your line is open.
Good afternoon.
Yes.
Alrighty.
Well appreciate you talking about.
I hope all of you.
Your line.
Comment you made earlier about the competitive landscape.
Certainly with.
The larger platform we have there.
Thank you.
Essentially taking share from the VFR market.
Price compression.
So really in that space.
How are you thinking about spread compression and term.
The core middle market area that youre, okay. Thanks.
Think that we should be stable.
Stabilization.
Any forward or an equal that there could be.
Two questions.
Yeah. It's a good question I think it's kind of been stable for a while.
I think that's.
You know once you get to a kind of we're kind of into zone of L. 500, <unk> 700.
That's kind of our general zoned for first lien.
You know, we we can't we can't afford to go much below that.
Yes, we have some.
Fantastic other way to make money, maybe a co invest that we think is a terrific co invest but.
But I think that's kind of our zone.
And we need to.
Remain disciplined about it but we don't we don't we're not seeing pressure just because I think the competition.
Is less I mean, we don't have the kind of competition that you might see in the upper middle market.
Understood.
Thank you.
It'd be helpful just to hear from.
From you guys about your take on sort of the non sponsor space.
Another BDC.
Get a little bit of yield enhancement from going to sort of the non sponsor.
Okay.
So.
Would love an update on how you're thinking about that basin.
Thank you yeah, no yeah look it's a it's a legitimate space it's by definition.
A different risk adjusted return different risk reward you should get for lending to a non sponsor because if things don't go well the lender becomes the sponsor as opposed to where there is a sponsor if things don't go well the sponsor.
Well generally.
More money and if you look at it and looked at our Covid experience.
I think we had 15 times or 15th situations, where across the platform, where they need more equity at 14 times the sponsor put more money in onetime the sponsor did so to different risk adjusted return and should be.
<unk> viewed that way.
I think potentially as we look at PNM.
In particular versus let's say a P. F. L. T. We might you be doing more non sponsor thoughtfully and carefully I mean, you could argue our gaming portfolio. We've had a very nice track record financing casinos, that's essentially non sponsor business for us and has very has had very attractive.
Returns and continues to have attractive returns so.
So it's something we look at it on a case by case basis, you may see us carefully and thoughtfully, particularly in industries, where we have real domain expertise. Our five key industries, we may do a little bit more in those areas. When we really think it's a strong risk adjusted return.
Okay.
Okay.
And next we'll go to Jim Altschul from Aviation Advisory Service. Your line is open.
Good afternoon gentlemen.
And I apologize if you've discussed this in prior calls and news releases and I overlooked it.
In the news release, todays news release or yesterday's news release.
You announced that you had no companies on non accrual as of September 20th September 30th 2020, you did have a few companies on non accrual.
What what happened to those companies in the last fiscal year.
I mean, as you know Jim Theres no companies as of September 30th and Theres No companies today on non accrual are you talking about the company's last year that were on non accrual yes.
As of September 32020, I'm, sorry, we didn't say this right.
Hugh.
Pat I don't know.
At least in front of me you did have at least a few companies on non accrual what what happened in the in the last year with regard to the companies that were on non accrual as of September 32020.
You know I got to go back and refresh my memory on those two companies I'm happy to talk to offline as to what happened I mean by definition either.
And then one on one and one is one of the three directions. They started paying us again.
They were sold or there was a restructuring I don't.
A lots going on in the last year.
Fresh my memory as to what those two companies weren't in what the ultimate what the ultimate situation once but I'm happy to talk offline.
Okay.
A smaller question I see that there was some decrease in the administrative expenses, which is a good thing why was that.
Yes, I know.
They have grown their <unk> platform.
Both in the Bdcs and outside of the Bdcs, we have a very.
Nice and growing non BDC private fund business you saw we for instance price too close to a middle market CLO last week.
We're building, we built a very nice company.
In addition to the Bdcs outside of the Bdcs and the G&A gets allocated.
Across a wider platform, which helps helps all the vehicles.
Excellent.
Thank you very much.
Thanks, Jim.
And with no further questions in the queue I'll turn it back to art Penn for closing remarks.
Just want to thank everybody for being on the call today and your interest in the company and we look forward to speaking with you in early February.
In the meantime have a great Thanksgiving and a terrific happy and healthy holiday season.
Yeah.
And that does conclude our call for today. Thank you for your participation you may now disconnect.
Okay.
Yeah.
Okay.
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