Pennantpark Investment Corp (PNNT) 2007 Q4 法說會逐字稿

Good morning and welcome to PennantPark Investment Corporation's fourth-quarter and fiscal-year 2007 results conference call. At this time, all participants have been placed on listen-only mode. The call will be open for a question-and-answer session following the speakers' remarks. (OPERATOR INSTRUCTIONS)

It is now my pleasure to turn the call over to Mr. Art Penn, Chairman and Chief Executive Officer of PennantPark Investment Corporation. Mr. Penn, you may begin your conference.

Thank you and good morning, everyone. I would like to welcome you to our fourth fiscal quarter 2007 earnings conference call and our second earnings call as a public company. I'm joined today by Aviv Efrat, our Chief Financial Officer. Aviv, please start off by disclosing some general conference call information and include a discussion about forward-looking statements.

Thank you, Art. I'd like to remind everyone that today's call is being recorded. Please note that this call is the property of PennantPark Investment Corporation and that any unauthorized broadcast of this call in any form is strictly prohibited. Audio replay of the call will be available by using the telephone numbers and PIN provided in our earnings press release.

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 statements and projections, and we ask that you refer to our most recent filing with the SEC for important factors that could cause actual results to differ materially from these projections. We do not undertake to update our forward-looking statements unless required by law.

To obtain copies of our latest SEC filings, please visit our website at www.PennantPark.com, or call us at 212-905-1000. At this time, I would like to turn the call back to our Chairman and Chief Executive Officer, Art Penn.

Thank you, Aviv. I would like to begin today with an overview of the strong long-term opportunity we have in the marketplace. We raised $294 million of equity in April, and then in June closed a $300 million credit facility with attractive terms, including a long five-year maturity and a low interest rate of LIBOR plus 100. Our infrastructure including our entire team is fully in place and producing.

With our permanent equity capital base and our long-term credit facility, we are now among the most liquid companies in the BDC space and have the capital resources to make long-term investment decisions based on fundamental value.

We paid dividends of $0.14 per share in our first quarter of operations; $0.22 per share in our second quarter; and we just announced a 22% share -- per share dividend payable for the quarter ended December 31.

We continue to make substantial progress building our sourcing network and investment franchise. We have become a first call for a number of middle-market financial sponsors, management teams, and intermediaries who want consistent, credible capital in the middle of their capital structures. As independent provider free of conflicts or affiliations, we are rapidly becoming a trusted financing partner for our clients.

The leveraged finance capital markets are in the middle of a major correction, with substantial volatility. risk/reward is readjusting to more rational levels, and capital is becoming less commoditized. Many forms of competitive capital have exited the marketplace.

This de-commoditization of capital is a great benefit to us as we look to deploy the majority of our assets going forward. The correction has unfortunately impacted the broker-dealer quotes on our existing portfolio, which is primarily in more liquid instruments of larger, inherently less risky companies. I'll go into more detail in our existing portfolio in a moment.

We've been clear since our inception in April that we were at a peak of the credit cycle. Our intention has been and will continue to be to keep plenty of powder dry to take advantage of any correction. In the meantime we would only invest selectively in situations that met our rigorous criteria.

We view ourselves as value investors. We're not a production shop focused on meeting quarterly origination goals. The correction that is going on in the market today presents a wonderful long-term opportunity for PennantPark.

As of September 30, we had approximately $270 million of permanent equity capital and owned about $160 million of low-risk, liquid, first-lien secured debt. Combined with our undrawn credit facility, we have about $420 million of liquidity out of a total asset size of approximately $540 million as of September 30, 2007. In other words, we can now deploy the vast majority or about 80% of our total purchasing power at much better risk/rewards than we have seen in many years. As investors, the 2008 and 2009 vintage years could be the best we have seen since the 2002 to 2004 time period.

As we indicated on last quarter's call, we specifically decided to slow down our new investment activity until we had a little more clarity on the new equilibrium in the middle market. For the quarter ended September 30, we only invested $41 million in six investments in our core asset classes of second-lien secured debt, subordinated debt, and equity. Our new core debt investments during this quarter had an average yield of 15.2%, up from 12.2% the prior quarter, bringing the average yield on our core investments to 13%.

In many cases we added onto existing investments and credits we know and like at more attractive prices than we paid initially. We have known many of these particular companies for a while, have a strong relationship with the sponsor, or have proprietary information flow.

We're comfortable with the creditworthiness of our investments. To date all of our investments are performing and not one has breached a covenant, let alone defaulted. Let's walk through some of the highlights.

We invested $12.3 million in second-lien secured and subordinated debt, and another $3.7 million of equity coinvest in Performance Inc. Performance is the largest independent bike dealer and direct marketer of bicycles and accessories in the United States. This was to back the acquisition of the company by financial sponsor North Castle.

Affinion is a leading affinity marketing company controlled by Apollo. We purchased $8.1 million of subordinated debt at a discount as an add-on investment.

Specialized Technology Resources or STR manufactures encapsulants for solar power panels and also is in the quality assurance testing business. We invested $2.5 million of second-lien secured debt as an add-on investment. STR is controlled by CSFB Merchant Banking.

TransFirst is a leading transaction processing company. We invested $2.4 million in second-lien secured debt at a discount as an add-on investment. Welsh, Carson is the financial sponsor.

We invested $6.1 million in the subordinated debt of Realogy at a discount. Realogy is a leading real estate brokerage and services company controlled by Apollo. This is an add-on investment.

Finally in another add-on we invested $6.2 million in the second-lien secured debt at a discount of Saint Acquisition or Swift, a leading trucking and transportation company.

I want to spend a minute on Swift and Realogy. Both of these investments are liquid securities and both investments are quoted down since we made our initial purchases. These securities are quoted down because they're perceived as tied to the economic cycle and have become convenient shorts for investors betting on an economic cycle. We are clearly disappointed with these quotes.

We have invested in these companies for several reasons. These are the largest companies in their respective industries in the United States. Swift is the largest trucking company and Realogy is the largest real estate brokerage firm in the United States. The market contemplated potential economic weakness when these deals were originally closed, and that was priced and structured into the initial deals at the time. The capital structures and covenant structures give these companies ample flexibility. Even under various recessionary scenarios, we expect these loans to perform.

We generally do not see in our day-to-day business in the middle market companies of this size. Swift and Realogy have annual cash flow of approximately $400 million and $700 million, respectively. We typically deal with $20 million to $40 million cash flow companies in our day-to-day business. We've known and followed these companies for a while, and we have good information flow.

Lastly, the equity cushions underneath us are substantial. Over $1 billion of equity from the company's founder in Swift and $2 billion of equity from Apollo in Realogy. Before we lose a dime as subordinated debt investors in these deals, the founder of Swift would have lost $1 billion and Apollo would have lost $2 billion in Realogy. This is Apollo's largest investment ever. Knowing a little bit about each of these parties, we think they will fight hard to preserve the value of their equity investments.

As we analyzed the situations during the quarter with our value orientation, we came to the conclusion that we have long-term conviction around these names, and what was an attractive yield when the deals were done became more attractive at discounted prices. We are now at a full position in each from a diversification standpoint.

On our cost, Swift is yielding 14.8% and Realogy is yielding 13.8%. We're carefully watching the financial results and collecting a high current cash yield. We believe over time these companies will be able to pay their interest and principal and will generate a solid return for shareholders.

I also want to take a minute to discuss the valuation paradox today in the BDC space. There are two forms of valuation. One form of valuation occurs when a security is relatively liquid and is quoted by broker-dealers; and the other is when a security is illiquid, and an independent valuation firm and the Board assign a value. The liquid securities are typically associated with larger companies who need syndicates, underwriters, and larger groups of investors to come together to provide capital.

Our investments in these types of companies tend to have lower risk profiles than smaller companies who are financed by one or two parties and also provide diversification to our portfolio. This liquid portion of our portfolio is either our initial portfolio of first-lien secured debt that we purchased pre-IPO to provide initial dividend yield to shareholders or, alternatively, opportunistic investments. However, they have had a much greater effect on our NAV than if they had been illiquid instruments.

The valuation of the illiquid securities has been less impacted by the capital markets correction, as valuation firms and boards tend to be focused on long-term enterprise value and less impacted by the daily volatility of the capital markets. This long-term approach makes sense since BDCs have permanent equity capital and generally make long-term investment decisions aligned with their permanent capital.

For the record, while we are committed to using broker-dealer quotes for liquid investments for the sake of transparency, we believe a long-term view is justified across our portfolio in today's markets. The valuation on the illiquid instruments is likely a better reflection of long-term economic value than the emotional and volatile trading of the more liquid capital markets.

The main point we want to make is the following. Because of differing valuation methodologies, comparison on their face of net asset values of different BDCs and other like vehicles can be misleading, similar to comparing apples and oranges.

Let me now turn the call over to Aviv, our CFO, to take us through the financial results.

Thank you, Art. For the period from inception to September 30, 2007, investment income totaled $13.1 million and net expenses totaled $5.8 million. General and administrative expenses totaled $1.7 million, excluding non-recurring expenses. Interest and credit facility expenses totaled $1.8 million. Accordingly, net investment income was $7.3 million or $0.35 per share.

In order to clarify, our base management fee was 1.5% of assets through September 30, 2007, and is presented in our statement of operations as a 2% gross fee minus 50 basis points of a fee waiver.

Our overall debt portfolio has a weighted average yield of 10.1%, up from 9.3% last quarter. The lower-risk first-lien secured debt portfolio yielded 7.5%; and the core debt portfolio of second-lien secured and subordinated debt yielded 13%, up from 12.2% last quarter.

Our core portfolio has eight names with an average investment size of $16.5 million. Our first-lien secured debt portfolio has 30 names with an average investment size of $5.3 million.

As of September 30, our net asset value per share was $12.83, down from $13.74 last quarter. This decline was due to unrealized depreciation coming from the overall correction in the leveraged finance markets. As a reminder, all of our portfolio companies are marked to market by our Board of Directors each quarter using independent broker-dealer market quotations, or are fair valued with the assistance of independent valuation firms.

Now let me turn the call back to Art.

Great, thanks, Aviv. In summary, we continue to be excited about today's overall market environment and our long-term opportunity. We have high-quality companies in our core portfolio, and we have plenty of liquidity to add more investments at much better risk/reward than we have seen in years.

As of September 30 we had about 80% of our total liquidity available to take advantage of the 2008 vintage deals. Due to our strong sourcing network and client relationships, we are seeing strong deal flow.

That said, we remain steadfast in our investment discipline and will reiterate that quarter-to-quarter you should expect us to have both periods of relative inactivity and periods in which will invest more actively. In our view, this market correction will take a while to fully unfold. In that vein, you'll see us continue to be selective until there is a bit more clarity on where the risk/reward equilibrium settles. We may also be opportunistic and purchase secondary paper at a discount. Either way you'll certainly see us invest in better risk/rewards than we have seen in years.

We will continue to focus on creating a portfolio of primarily debt instruments with an allocation to equity coinvestments. Our priority is on companies that generate strong free cash flow. The goal is to capture that free cash flow primarily in debt instruments and then translate that cash flow to our shareholders through a growing dividend stream.

In closing, I would like to thank our extremely talented and growing team of professionals for their commitment and dedication. In particular I want to thank the leaders of that team, including Geoffrey Chang, Sal Giannetti, and Whit Williams on the investment side, and Aviv Efrat on the financial and administrative side.

Thank you all for your time today and for your continued investment and confidence in us. That concludes our remarks. At this time, I would like to open up the call for questions.

(OPERATOR INSTRUCTIONS) Jim Ballen, Bear Stearns. Sanjay Sakhrani, KBW.

Thanks. Art, could you maybe just talk about the game plan from here on out? I think you touched on the investment pace and being selective. But should we expect that you may lever up first and then think about sort of liquidating some of the senior debt?

That is a great question, Sanjay. Look, this is a case-by-case basis. In terms of activity level going forward, as we said, we're going to continue to be selective, only invest in deals that we really love, that are fairly compelling to us.

It is a decision each time whether to draw down on our credit facility or sell part of our first-lien portfolio to create the liquidity. Clearly if we think our first-lien portfolio over time is worth par or close to par, we're going to be reluctant to sell that down.

Now, there are pieces in that portfolio that are trading closer par that we would obviously clearly sell down sooner than the ones that are trading more poorly. I do not know if that answers your question, Sanjay.

It maybe ties into sort of my second question, which is maybe you could just talk about your outlook for 2008 and sort of what you think or what you guys are assuming when making your investment decisions. Because that would sort of lead you to sort of understand where the quotes would go from here on out, potentially..

Look, our outlook is we have no more crystal ball than anybody else as to whether the economy is flat or down or we're going into recession. Clearly the economy is mixed in the best case scenario.

So what you'll see us do over the coming quarters is continue to diversify from an industry standpoint. You'll see different types of industries working their way into this portfolio, including healthcare, including energy. And you'll see us continue to invest in companies that we feel will really have really solid capital structures and can perform in almost any scenario.

But we do not have any more crystal ball than anybody else. We're going to be judicious and prudent. Whether this market correction we are in lasts another three months or six months or a year, again we do not have any more crystal ball than anybody else. We always, though, want to make sure we have got excess capital and liquidity on hand to take advantage of opportunities.

Are there any baseline assumptions you are making in terms of the cash flows at Realogy and Swift in maybe a recessionary environment?

We have to be careful because on those two credits we have signed a confidentiality agreement; so information about those companies in some cases is confidential.

You know, Realogy has already been down for several years. You can make in that case more assumptions about continued deterioration if you would like; and we have in downside and recessionary cases. But the company has a ton of capital and cash on its balance sheet. It has got a large unfunded revolver. The cash interest that it has to make is relatively low.

So with that credit as well as with Swift, which also has a lot of cash on the balance sheet and an unfunded revolver, we feel comfortable that you can run pretty severe downside recessionary cases, and those capital structures were structured to weather the storm.

Okay. My final question, could you maybe just talk about the competitive environment? Is sort of Pennant's value proposition as an independent source resonating well among equity sponsors?

Yes, we have no problem originating deal flow. We're getting lots of incoming inquiry. We -- people are certainly open to having us finance them. Certainly there's been many players that have exited the market, whether it be capital that was not really long-term capital into the mezzanine marketplace, whether that be from either CLO-type vehicles or hedge-fund type vehicles that were not long-term players in the marketplace.

So right now what you're left with in our day-to-day market are the people who have been around for a long time, have long-term financing either through a permanent equity capital or long-term private equity style funds, and who know how to invest in this kind of marketplace.

By and large, I would call them rational competitors. By and large the folks who remain we would be happy to club with and do deals with and share deals with.

Okay, great. Thank you.

Scott Valentin, FBR Capital Markets.

Actually two questions. First, it seems like based on your activity during the quarter that you are seeing more I guess relative value in large company investments versus the small middle-market investments.

Two, can you talk maybe about the most attractive part of the capital structure? Clearly we've seen a big shift in structuring of transactions with more equity being put up. But is the senior part of the structure looking more attractive now? Or is it still really the second lien and subordinate?

Two questions there. One was where we saw value. Look, in this past quarter ended September 30, with the market correction going on -- particularly in credits where we had a real view and we liked the risk/reward and the risk/reward got even better -- we did add on. So that was the case.

I would anticipate, though, going forward a greater percentage of our portfolio will be directly originated, traditional mezzanine-type deals that are not quoted by broker-dealers, that are illiquid, where we are getting a higher yield, we're getting more upfront fee, we're getting better call protection, and we're getting an equity coinvest.

Probably the best part of all of that is the leverage levels have come down and are lower than they were. So if you look at kind of where the mezz market was at the peak, six months ago, you would say the average yield was 12% or 13%; an upfront fee of 1.5% or 2%; and debt-to-EBITDA 6 to maybe 7 times debt the cash flow. Today the market looks more like it is 5 times or 5.5 times debt-to-cash flow; a 14% coupon; an upfront fee of 2% to 2.5%; and an equity coinvest. And by the way, that equity coinvest is at a much lower multiple of EBITDA than in the prior market.

So we're real excited about that opportunity, and that is where more and more of this portfolio is going to be going over time is those directly originated mezzanine yields. Scott, I am not sure I answered your full question.

You did. Thank you.

Rick Shane of Jefferies.

Thanks for taking my questions. One is just sort of a practical question, then one is more a little bit hypothetical. Have you funded anything post the close of the quarter? We did not see it in the press release.

Yes, we have been doing deals since 9/30. We continue to be prudent, and we continue to find good risk/reward. As I alluded to earlier, what you'll see in the quarter ended 12/30 -- and obviously we will report in early February -- will be a diversification of the portfolio into other industries, really rounding out the portfolio, and continuing to see higher yields than we saw in our first quarter of operation on the core product.

Got it. How much you funded quarter to date?

We do not give that information.

Okay. The second question, again given the liquidity position this is more hypothetical. But the strategy as stated originally was first lien was basically going to be liquidity store; and then migrate down the capital stack into higher-yielding securities.

Given the depreciation in value of the first-lien securities, the senior securities, if you were fully invested today would your strategy be to sell off those first-lien investments in order to generate liquidity? Or would you go out and raise additional capital?

Again I realize this is a long way away. But if market stay at these levels, we just want to understand how that will play out over time.

That is a great question. It is a tough thing to say, tough thing to predict. For us it is always about the individual investment decision on the buy or the sell. So look, the reason the first-lien portfolio is quoted down is exactly the reason we're now getting 14%-plus on the mezz versus a 12% or 13%.

So you hate to crystallize a loss and realize a loss. It may make sense in certain cases to do so. Clearly if something is trading more poorly and we still think over the long run it is worth par, we're going to be loathe to sell that asset and we will hold on to it. If something is trading in the upper 90s, it is an easier decision for us to do so.

So on a case-by-case basis as we make investments, we make a decision -- is there something in our first-lien portfolio that we want to sell to finance that? Or do we want to draw down the credit facility? You know, always under -- always subject to the thought that we always want to have dry powder and excess liquidity.

In terms of where you sell your stock, that is always a corporate finance decision. It is probably a while down the road before we do that or contemplate that, given the liquidity we have.

Right; and again we certainly appreciate that. I mean, it is almost so remote at this point it is not worth asking. But philosophically I think everybody needs to understand that. We certainly do, so thank you.

Jim Ballan, Bear Stearns.

Can you talk a little bit -- a lot of my questions have been answered. But can you talk a little bit about maybe just compare and contrast your experience so far with Pennant to -- obviously there is a very different market with Apollo, but just what the experience has been similar and what has been different.

No, obviously it is a different time. You may remember, Jim, that we did Apollo as really a pure blind pool when we -- and we did not have any investments in the company at IPO. As a result, there too early on investors were disappointed that the dividend yield -- there was really not much of a dividend yield and the stock traded poorly for a six-, nine-month period out of the gates.

As we built that company, as we got traction, as we did deals, as we ramped, it all worked and it was a big success, as you know. It was obviously a different market cycle. We did that deal in '04; and I left Apollo about a year ago, at the end of '06. So that was a very good experience.

Here obviously, by the time we were doing the IPO here at PennantPark, the market had evolved to saying -- to do an IPO you need to have a portfolio. You need to have some dividend yield out of the blocks. So what we did pre-IPO was buy the least risky, most liquid investments we could find, which are first-lien senior secured loans. Which was what we did pre-IPO. We ramped a portfolio of $250 million so that we could provide dividend yield out of the blocks.

So now, what has gone on obviously is the market is correcting. We still think the credit quality of all those investments is fine and in the long run we are going -- if we wanted to hold them to maturity, they would mature and we would get par. But we're dealing with the margin correction.

The positive of the market correction, of course, is it is a wonderful opportunity to buy, which is -- when we look at the '08 vintage, it is likely to be a better vintage than the '04-'05 vintage, which is what we did in Apollo. The '02-'03 vintage were great times to be in this business. And as the market rallied '04, '05, '06, '07, those deals that were done in '02, '03 ended up being gold. We think '08 and '09 might be similar type opportunities.

So we are in a much better position on the other hand of capturing that opportunity than we were last time around.

Yes. It seems to me that over the longer term you've got the opportunity to have higher yields than maybe in the same period than Apollo was able to do. That's great. All right, thanks a lot, Art.

Scott Valentin, FBR Capital Markets.

Thanks for taking the follow-up. Just kind of an opinion question. What do you think needs to happen to get conditions to improve in the leveraged loan market and kind of in the space where you guys play?

Look, I think the quoted market is trading on fears of an economic slowdown, clearly. So that is what is going to drive the quoted piece of the portfolio.

Now for us, again, we are long-term value investors. If something is trading down, and we still like the credit, and we think it is built to weather a store, and we're getting a nice yield for our shareholders, we will potentially buy more. But it is really kind of the economic uncertainty is what is hanging over the leveraged loan markets.

Thank you.

Brian Rohman of Weiss, Peck & Greer.

Thank you for taking the call. Here is sort of a general question. Who can pay 14%, 15% on a loan at this point? Are there deals to be done at rate levels like that?

Yes. You know what -- who is generally paying is a company that it is undergoing a buyout or a company that has a big CapEx program. So typically the only reason someone is going to pay us 14% is because they think their return on equity is 20% or 25% or 30% or 40%.

And you are the only act, only game in town.

Well, we're not the only game. There's others who are in our business, but that is what mezzanine capital is. You know, you take the public high yield market as a proxy. If the public high yield market is a 10%, 11%, 12% instrument, what should we be getting paid for illiquidity? You know? So that is -- those are kind of the questions.

What does the pipeline look like in sort of order of magnitude volume after you clean up the existing pipeline that is still backlog?

We're in the middle of that cleanup or probably towards the end of the cleanup. I'm talking about in middle market. I am not referring to the big liquid deals that Wall Street is still long.

But the middle market is correcting, has corrected, and we think for now it is finding some form of equilibrium where a I said the typical mezz deal is around a 14% with a 2%, 2.5% upfront fee and a 5 to 5.5 times leverage multiple and some equity coinvest. That is where it is today.

Some companies do $15 million, $20 million, $30 million of EBITDA. You know, don't know whether that is going to stay where it is or not.

One of the phenomena that always seems to occur on Wall Street though is, when you get returns like that, that capital quickly comes back in and bids those yields down. Any thoughts on how long you might stay at this level?

Well, again, is all going to be related to on one hand what the return on equity is going to be from people who are borrowing at these rates, and does that ROE go down or go up?

Also kind on the other end of the spectrum where kind of the high yield and leveraged loan markets are trading as a proxy for liquid credit risk. So the mezzanine asset class kind of trades between those two bands.

So that is -- look, how long do cycles last? I don't know. We had a bear market for a year or two years last time around, before it started rallying. I do not know if this is going to be a six-month phenomenon or an 18-month phenomenon.

A couple other quick questions. The marks that you took, there are a couple of bigger marks -- was it Realogy or something? The trucking company, and there was one other one. How did you get those marks again?

Those are all broker-dealer quotes. We use the bid side. We do not use the midmarkets.

Okay, and is there any -- not just these ones, but the ones that have taken the bigger marks. Are there any issues with cash flows on them at this point?

As we said, all these credits are performing. We do not see any covenant defaults. With those two in particular, we have done all kinds of stress testing in recessionary cases. These capital structures were built to weather what we're going through right now, so.

Some of the BDCs do a ranking system, I think, like 1 through 4 or 1 through 5, and then you get the weighted number based on their assessment. Do you do that? Are you going to do that? Thought about doing it, whatever?

We did it last time at Apollo; and two notes on that. Number one, the most important thing you get is you get the mark-to-market every quarter. If you want to see what is marked down or what is marked up or what is flat, you get it right there.

The rating system, at least based on my experience, ends up building -- ends up create a big bureaucracy. You end up setting there debating -- is it a 1, a 2, a 3, a 4?

You end up and everyone like debates what it is, when the most important thing is right there in the 10-Q, which is the value.

Yes, I never thought about the bureaucracy part. All right, thanks for taking my question.

Ajay Jain, UPS.

As it relates to Realogy and Swift, I do not know if the information is in the 10-K or not and we might be able to figure it out from the broker-dealer quotes. But can you comment on how much of the $24 million in the mark-to-market losses are related to just those two high-yield investments? I am just wondering how disproportionate the impact was in the quarter.

It is in the 10-K. Aviv is going to look at it right now as we speak. Meantime we will take the next question; and then I will answer that. But any other questions, Ajay?

Yes, just real quick. Relative to the $41 million in investments last quarter, at this time you've obviously got very good visibility on the outlook for the December quarter. I know you're reluctant to quantify the investment level. But just directionally can we expect the pace of investment activity to be higher or lower sequentially? Can you give any comment on that?

I hate to give intra-quarter guidance, particularly since we keep saying we are not a production shop. You know, we are value. Some quarters will be, some quarters will be lower. So I really hesitate to give you guidance.

We are making -- we have made investments. We are making investments. You'll see a broadening in the diversification of the portfolio.

To your first question, about $12 million of the markdown was related to those two credits.

Okay, so roughly half?

Yes.

Okay, thank you very much.

(OPERATOR INSTRUCTIONS) Rick Shane, Jefferies.

Thanks for taking a follow-up question, but I think Brian Rohman raised a very interesting point. Regarding the fact that as things get better spreads will come in, which raises another interesting question.

Are there prepayment or lockout provisions in the loans that you're making now? Or is their risk that you sort of make these risky loans now -- or a perception of risky loans now -- at really attractive yields, and then things actually get better, sentiment improves, and those loans all go away very quickly on you? You basically get adversely selected.

That is a great question. On the illiquid deals, a typical mezz deal has a noncall period for a while, call it two to maybe three years; some call premiums after that. You're also getting an upfront fee. So you're essentially buying it at 98 or 97.5; noncall [too]; call it 104, 103, 102, 101 after that. So there is a penalty for calling us out, and there is some lockout period.

Also importantly in those deals there is an equity coinvest option typically. That is where you do get to participate in the upside as things get better, as companies refinance or want to dividend or IPO or sell. As an equity coinvestor we participate in that upside.

Great, thank you very much.

(OPERATOR INSTRUCTIONS) There are no further questions registered at this time. I'd like to turn the meeting back over to Mr. Penn.

Great, thank you, everybody. We appreciate your support and interest today, and looking to talking to you in early February. Have a happy holiday, happy new year.

Thank you. The conference has now ended. Please disconnect your lines at this time. We thank you for your participation.