Pennantpark Investment Corp (PNNT) 2011 Q4 法說會逐字稿

Good morning and welcome to the PennantPark Investment Corporation fourth fiscal quarter 2011 earnings conference call. (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 2011 earnings conference call. I'm joined today by Aviv Efrat, our Chief Financial Officer. Aviv, please start off by disclosing some general conference call information and include a discussion about forward-looking statements.

Thank you, Art. I would 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 would also like to call your attention to the customary Safe Harbor disclosure in our press release regarding forward-looking information. Today's conference call may also include forward-looking statements and projections, and we ask that you refer to our most recent filings with the SEC for important factors that could cause actual results to differ materially from these projections. We do not undertake to update our forward-looking statements unless required by law.

To obtain copies of our latest SEC filings, please visit our website at www.pennantpark.com or call us at 212-905-1000.

At this time I would like to turn to call back to our Chief Executive Officer, Art Penn.

Thank you Aviv. I'm going to spend a few minutes discussing current market conditions, followed by a discussion of investment activity, the portfolio, our overall strategy and then open it up for Q&A.

As you all know, the economic signals have continued to be mixed with many economists expecting a flat to slightly growing economy going forward.

With regard to the more liquid capital markets and in particular the leverage loan and high-yield markets the substantial rally that we saw in 2010 stalled in the middle of 2011 and quoted prices of liquid leveraged finance assets saw a downturn during the summer through September 30. After September 30, the liquid markets have started to recover, although not back to the levels that they were midyear. The market softness has brought a much-needed breather to the more liquid capital markets, and we are pleased that there is more skepticism in the market. As dead investors and lenders, a flat economy is fine as long as we have underwritten capital structures prudently. A healthy current coupon with deleveraging from free cash flow over time is a favorable outcome.

We remain focused on long-term value and making investments that will perform well over several years. We continue to set a high bar in terms of our investment parameters and remain cautious and selective about which investments we add to our portfolio. Our focus continues to be on companies or structures that are more defensive, have low leverage, strong covenants and high returns. With significantly reduced competition in the middle market, we have taken advantage of the 2009 through 2011 vintages. The upcoming 2012 vintage should remain solid. With plenty of dry powder, we are well positioned to take advantage of the market opportunity.

As credit investors, one of our primary goals is preservation of capital. If we preserve capital, usually the upside takes care of itself. As a business, one of our primary goals is building long-term trust. Our focus is on building long-term trust with our portfolio companies, management teams, financial sponsors, intermediaries, our lenders, and, of course, our shareholders. We are a First Call for middle-market financial sponsors, management teams and intermediaries who want consistent, credible capital. As an independent provider free of conflicts or affiliations, we have become a trusted financing partner for our clients. As the market has gotten more active, we are completing more transactions for well-regarded financial sponsors with whom we have had long-term relationships. Since inception, PennantPark entities have finance companies backed by 73 different financial sponsors.

We have been active and are well positioned. For the quarter ended September 30, 2011, we invested about $138 million with an average yield on debt of 12.8% and expected IRRs generally ranging from 13% to 18%. Net investment income was $0.33 per share. We have continued to be active since quarter-end with a goal of growing income. We have met our goal of steady, stable and a growing dividend stream since our IPO about five years ago despite the overall economic and market turmoil. We just announced the dividend increase to $0.28 a share for this quarter.

As a result of our focus on high-quality new investments, solid performance of existing investments and continuing diversification of our portfolio is constructed to withstand market and economic volatility. The cash interest coverage ratio, the amount by which EBITDA or cash flow exceeds cash interest income continued to be a healthy 2.9 times. This provides significant cushion to support stable investment income.

Additionally at cost the ratio of debt to EBITDA on the overall portfolio is 4.7 times, another indication of prudent risk. These credit statistics are virtually the same as last quarter. The structure of investments in our portfolio is relatively low risk as well. It consists primarily of cash paid debt instruments, and only 7% of the portfolio is preferred and common equity. There were no new non-accruals last quarter. Out of 115 investments we have made since inception over four years ago, we have had only three companies on non-accrual, all of which have been reorganized. The statistics that we mentioned relating to interest coverage and EBITDA multiples highlight an important point about the vintage of our investments. Almost all of our current investments were made after June 20 when the credit market started to deteriorate. As a result, the investments completed after June 2007 tend to be in more defensive sectors, have lower leverage multiples, tighter covenants and better pricing. To date our investment thesis on those companies remains generally on track.

We are pleased with the performance of the portfolio through the stress test of the last few years. During the recession, on a weighted average basis based on costs, the EBITDA of the core portfolio was down only 7.2% from initial investment to its lowest point.

We are in good shape from the standpoint of liquidity. As of September 30, we had in total about $175 million of available liquidity, which included $74 million available under our credit facility, about $50 million of assets with coupons less than 9%, which we intend to continue selling and rotating into higher yielding new investments, and $51 million of cash in our SBIC after committed investments are settled.

With regard to those assets that have suboptimal below 9% coupons, we intend to continue to rotate the proceeds of those sales into higher yielding new investments, which could significantly enhance our income.

We continue to grow our SBIC, and Aviv will give an SBIC update later. The key highlight is that we drew down the remaining SBIC debt capital and were able to lock in a fixed rate on our entire $150 million line for an all-in rate of 4%. We feel fortunate to be able to lock in that fixed rate for the next decade at a time when treasury rates are near historical lows. We currently have ample cash in the SBIC, which we look forward to deploying.

We are also looking forward to applying for a second SBIC license when appropriate to be able to access up to another $75 million of debt capital.

As a reminder, we have exhibitive relief from the SEC to exclude SBIC debt from our asset coverage ratios, and SBIC accounting is cost accounting, not mark-to-market accounting. These facts highlight how the SBIC debt reduces overall risk of the Company.

We had some significant realizations last quarter. i2 was sold to IBM, and our $4.5 million equity co-investment was taken out for $10.7 million, resulting in an IRR of 29%. Our $7 million position and survey sampling was realized for $8.4 million over a four-month time period, resulting in an IRR of 173%. Additionally our $22.5 million position in specialized technology resources was refinanced at par. We are pleased with that result given that it was an illiquid piece of paper with a suboptimal coupon of LIBOR plus 700 with no LIBOR floor. We are looking forward to redeploying that capital at better risk-adjusted returns.

Realized gains for the quarter totaled $7.5 million and totaled $16.3 million for the fiscal year. Due primarily to the volatility of the liquid leverage finance markets, our NAV declined from $11.08 per share to $10.15 per share. This change was due primarily to the more liquid portion of our portfolio, which saw substantial market movements even when credit performance was stable. The market prices of liquid leverage financing instruments have recovered since September 30.

Aquilex was in the more liquid portion of our portfolio and saw a substantial underlying credit decline from where it was prior to the market downturn during the summer. Subsequent to quarter-end, we sold our position in Aquilex. Additionally subsequent to quarter-end, as we have expected and articulated to the market for a while, Hanley-Wood entered into restructuring discussions. This is the catalyst that we have been waiting for in order to convert a portion of our debt instrument to equity and capture some upside in the Company at an attractive valuation and at an attractive point in the cycle. Hanley-Wood is only an $8.7 million position or 1% of the portfolio at cost, and the income that was being generated at LIBOR plus 225 was not material. The market value of that position as of September 30 was $4.2 million. Hanley-Wood will be the first default we have had in about 18 months.

With regard to our investment in DirectBuy, we are disappointed with the situation, and the debt continues to trade poorly. The November 1 interest payment was made, and the sponsor has substantial equity invested beneath us. As a result, we believe they will continue to work hard to improve the Company's operations, manage their obligations and preserve their equity value. In any event, we do not believe that this situation is material to the earnings of PNNT.

To refresh your memory about our business model, we try as hard as we can to avoid mistakes, but defaults and realized losses are inevitable as a lender. We are proud of our track record underwriting credit through the cycle.

One way we mitigate those losses is through our equity co-investment portfolio. Realized gains on investments such as i2 help offset the inevitable losses that we have from time to time. We are optimistic that our co-investment portfolio, which includes names such as TriZetto, CT HealthPort, Magnum Hunter, Kadmon, and Veritext, will generate gains over time.

From an interest rate standpoint, 8% of the portfolio has an interest rate that floats, another 32% floats but has a floor, which projects income in this low base rate environment, and the remaining 61% is fixed rate. With regard to our capital structure, our existing credit facility matures in June of 2012. We have been having positive conversations with lead managers of our existing facility about leading a new facility.

In terms of new investments, we had another active quarter investing in attractive risk-adjusted returns. Our activity was driven by a mixture of M&A deals, refinancings and growth financings. In virtually all of these investments, we have known these particular companies for a while, have studied the industries, have a strong relationship with the sponsor or have differentiated information flow.

Let's walk through some of the highlights. We invested $12 million in the subordinated debt of DiversiTech. DiversiTech is a manufacturer and distributor of HVAC parts and accessories. Eureka Hunter Pipeline is a pipeline-gathering system located in the Marcellus shale region. We invested in $31 million of funded and $18 million of unfunded second-lien debt. Eureka is a subsidiary of a public company, Magnum Hunter Resources.

Interactive Health Solutions designs and administers employee wellness programs. We purchased $19 million of first-lien debt. CI is the sponsor. We purchased $33 million of subordinated debt in LTI flexible products. LTI manufactures components for OEMs in a variety of industries. Sentinel Capital Partners is the sponsor. Rock Finance is developing gaming properties in Cleveland and Cincinnati, Ohio. We purchased $16 million of second-lien debt. Rock Gaming and Caesars Entertainment are the sponsors.

Turning to the outlook, we continue to believe that the remainder of 2011 and 2012 will be active. We are seeing a significant amount of middle-market M&A, which should over time drive a substantial portion of our investment activity. Much of our business will be driven by companies that need a financing solution and don't have many options as finance companies, CLOs and local banks have exited the market. Due to our strong sourcing network and client relationships, we are seeing strong deal flow.

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

Thank you, Art. For the quarter ended September 30, 2011, investment income totaled $26.1 million and expenses totaled $11 million. Management fees totaled $7.8 million. General and administrative expenses totaled approximately $1.5 million. SBA and credit facility interest expense totaled about $1.8 million. Accordingly, net investment income was $15.1 million or $0.33 per share. This includes $0.03 of other nonrecurring income.

During the quarter ended September 30, net unrealized loss from investments was $53.8 million or $1.17 per share. Net realized gain was $7.5 million or $0.16 per share, and excess net investment income over dividend was approximately $2.8 million or $0.06 per share. Consequently NAV per share went from $11.08 to $10.15 per share.

As a reminder, our entire portfolio and our current facilities are mark-to-market by our Board of Directors each quarter using the exit price provided by an independent valuation firm or independent broker dealer quotations when active markets are available under ASC 820 and ASC 825. In cases where broker dealer quotes are inactive, we use independent valuation firms to value the investments.

Our overall debt portfolio has a weighted average yield of 13.3%. On September 30, our portfolio consisted of 48 companies and was invested 36% in senior secured debt, 20% in second-lien secured debt, 37% in subordinated debt and 7% in preferred and common equity.

Our SBIC continues to make progress. As of September 30, we had invested $75 million of our equity and had drawn the maximum amount, $150 million of SBA debentures in our SBIC subsidiary. We have $51 million of cash in the SBIC after committed investments are settled. We feel fortunate to have locked in the entire $150 million at a fixed own-in rate of 4% for 10 years when treasuries were near all-time lows. We are looking forward to applying for our second SBIC license when appropriate, which would result in up to an additional $75 million of SBA loans.

With regards to the dividend, as of September 30, our run-rate, net investment income assuming no change continued to be greater than our dividend of $0.28 per share. As you know, BDCs are obligated to pay out at least 90% of their net investment income. If we make no new investments and our portfolio continues to perform, our income will continue to be higher than our dividend. Additionally undistributed taxable net investment income in excess of dividends paid was approximately $5.1 million or $0.12 per share as of September 30, providing additional cushion for future dividends.

Now let me turn the call back to Art.

Thanks, Aviv. To conclude, we want to reiterate our mission. Our goal is a steady, stable and growing dividend stream. Everything we do is aligned to that goal. We try to find less risky middle market companies that have high free cash flow conversion. We capture that free cash flow primarily in debt instruments, and we pay out those contractual cash flows in the form of dividends to our shareholders.

In closing, I would like to thank our extremely talented team of professionals for their commitment and dedication. Thank you all for your time today and for your continued investment and confidence in us.

That concludes our remarks. At this time, I would like to open the call to questions.

(Operator Instructions). Troy Ward, Stifel Nicolaus.

Art, can you give us any color on what the current environment is with regard to refinancing your credit facility? I think if we looked at some of the peers that have done something, let's say, in the last six to nine months, it kind of feels like LIBOR plus 300, maybe 350 kind of environment. Can you provide any color on maybe just some general pricing terms that you think are probable as you look to refinance?

As you are looking at the comparables, that is fair. We are hoping based on our performance and our relationships we can do a little bit better. But let's keep expectations low and see if we can outperform.

And then as you think about your longer-term liability structure, I mean obviously the bank facility plays an important part in that, but you also have the SBIC currently maxed at $150 million and with the hopes of going up another $75 million. How do you look at expanding that even further with the convertible or maybe term debt in the future?

We do think it is important to have a variety of different financing tools. So SBIC, along with the credit facility, are certainly priorities, but we will assess other flavors of debt capital, whether that be insurance company, long-term debt capital, whether that be unsecured debt either straight unsecured debt or convert. The convert market right now is not favorable. But that may change over time. So we are going to assess all the different options and work our way through it, but we do as a firm think it is important to have a diversified set of financing tools.

Great. And then one of your exits in the quarter, Specialized Tech Resources, you talked about being illiquid, but it was kind of an unfavorable yield at L+7. Was that an exit that was driven by your team, or did a third-party seek you out?

The Company just -- thankfully the Company just performed, and this is kind of a basic tenant of our underwriting. We try to underwrite cash flow, and cash flow should be the exit if we are doing it right. Yes, it is great when there is an IPO or great when there is an M&A trade, but ultimately if the Company generates free cash flow and deleverages is they turn around and even it LIBOR plus 700, they said, gee, this is expensive debt. We can refinance it with the regular way L+300 facility or something. So that is what happened. They basically -- this was a second-lien piece. They basically refinanced it with lower-cost first-lien.

Okay. And then finally, as we just think on a broader scope, your credit performance has been very good since your IPO, and a lot of that, I think, has to do with the vintage of your assets. But if we look at where you have had higher volatility whether it is marks or actual credit quality, they seem to be in the larger, maybe a little bit more syndicated dealer quoted names. How do you view that market going forward and your appetite there?

The debate we are having in a perfect world, if you were in an ivory tower and you said I could lend at 4 times cash flow and get a 13% coupon from a big company or lend it 4 times cash flow and get 13% coupon to a small company, in an ivory tower, you would say, of course, you would finance the bigger company.

That said, we are living in a world with a lot of volatility in the broker-dealer more liquid end of the market. And today about a third of our portfolio is broker-dealer quoted, and we have liked that historically for several reasons.

Number one, it gives you liquidity from a defensive standpoint. It provides opportunities from an offensive standpoint. We certainly took advantage of that in 2009 and 2010 when we were able to buy paper at significant discounts in companies that we knew. And the key tenant of us in that more liquid end of the market is it is always in a situation where we feel we have very good information flow, very good relationships. We have an angle. We are seeing something that perhaps may be different than the overall market is seeing. So that has been the key tenet of it.

That said, we are certainly thinking about reducing the percentage of the broker dealer quoted percentage of our overall portfolio from where it is today to something lower given the volatility that we are seeing. There is no logical reason why something in Greece should really affect the middle market company in the United States, particularly when the Company's performance is stable or good, but that is the world we are living in where there is very high correlation on mark-to-market assets.

Joel Houck, Wells Fargo.

Could you give us a sense of what middle-market M&A trends are looking like particularly as we go into year-end, and are P sponsors becoming more or less active and maybe kind of your early read on 2012?

So we would say that the quarter -- this quarter that we are in now that ended December started off a little bit slow at lease for us given the cash and the turmoil, and it seemed like deal flow really slowed up at the beginning of the quarter. It is starting to pick up again. We are busy now. I cannot really give you any guidance as to what is going to close before December 31 or after December 31. And unlike last year where there was a real mission on the part of some people to close deals before year-end due to potential tax law changes, that is not in the market this year. So we are getting more active. It seems like the market is getting more active, and we are pretty busy. I don't know if that answers your question. Middle-market M&A is a big, big part of that. Of course, refinancing are always a big part of what we do, and there are some growth financings out there that we are looking at.

Okay. And are you guys seeing good opportunities in the secondary market given the volatility?

Yes. I mean goes back to the last question, which is, yes, we are probably going to be reducing the broker dealer percentage of our overall portfolio given the volatility, on one hand.

On the other hand, there are some really good situations out there where based on everything we can see and the information we are getting in the numbers, the Company's results are really good, yet the paper is still trading poorly. So we will selectively make some add-on investments or find new ones where we feel we've got a real information flow that says these are very high quality credits that we can pick up at bargain prices.

Okay. Good and then the last one on just looking at your recent write-downs, can you maybe talk about -- maybe give us a brief synopsis on Aquilex and DirectBuy? Did you guys miss anything in underwriting? And if you did, are you looking -- how are you looking to avoid those types of situations going forward?

I know, look, we are the first to admit that we are human beings and that we do make mistakes, and we try our best to learn from our mistakes. But we do make mistakes from time to time, and we are very upfront admitting those mistakes and not hiding from those mistakes. So Aquilex is a mistake. We have since sold out the position. We lost comfort with what was going on there. I don't want to go into a lot of detail here on a public call, but we lost comfort about how management team had its arms around that situation, and we decided to preserve capital and exit.

DirectBuy, again, I think we said it okay or well in our comments. We are disappointed so far. Based on what we can tell, the sponsor who has a lot of equity underneath us in this deal is working really hard to preserve their equity value in that situation, obviously based on where the paper is trading. We are disappointed with it so far, but they are now current on their interest. They did pay their coupon November 1, and we will see how it plays out. We think, though, in any event, in any scenario, the earnings hit from that, even in a worse case scenario, was not material to our Company.

John Stilmar, SunTrust.

I just wanted to touch base -- start off a little bit in terms of, like, capital decisions. Obviously the markets have been very choppy, and your decision to increase the dividend clearly one can look at that as a sign of confidence in your portfolio. But it seems like it is a curious time given everything that is going on for you to make that decision. Can you walk us through your thought process of increasing the dividend now, and what was the major catalyst that led you to do that? And then one other final question.

Sure. No, we feel, as we said in the comments, very good about the overall portfolio and the earnings power, as well as the opportunity we have with the liquidity we have, to drive income and drive income growth. We are very pleased with the SBIC financing and locking that in for 10 years at an all-in rate of 4%. We are feeling good about the early conversations we are having with our existing lead lenders about re-doing the credit facility. And ultimately we are obligated to pay out at least 90% of our earnings to our shareholders as a BDC. So it was never a question of if; it is a question of when. And all those factors came into play as we evaluated what to do with our dividend.

Perfect. And then to touch base on it, it seems like you guys have been traditionally having a portion of your portfolio in gaming, which has been -- a very seemingly cyclical business. And you made an investment this quarter, I think, with Rockland? Can you talk a little bit more about what gives you the comfort of what has traditionally been seemingly a discretionary item? Is it the structure? Is it the fact that there is a specific type of gaming that attracts you? Is there terms that are a little bit more beneficial, and why does that fit into your traditionally defensively oriented portfolio construction?

That is a great question. We are not sitting here saying we are going to lend money to companies in Las Vegas or anything. It is a very specific niche that we are focused on. The investment thesis is, if you basically put a box that looks a lot like a Wal-Mart but maybe a little bit fancier and you fill it with slot machines and you put it in your cities, those have been very good credit risks. They have been very safe. You can get a lien on the asset, and you have an entertainment venue close to high population centers.

So it worked out very well in Philadelphia. We had an investment in a company called Sugarhouse, which is a casino that fit right into City Center Philadelphia. We have an investment in Chester facility right outside of Philadelphia, which is doing well. We have a small investment in Yonkers up here in New York, and Rock Gaming is basically the same thing, which is Cincinnati Ohio and Cleveland. You know city locations, a box that is pretty basic. You are well set up to make money.

Arren Cyganovich, Evercore Partners.

I just wondered if you could talk a little bit about the tone of the portfolio company managements. You said that their EBITDAs are stable. How are they maintaining the stability? Is it a fairly stable topline, or are they still making cuts on the expense side? How is the overall environment?

It is all of the above. Some companies are seeing very good organic growth, and some are still watching the nickels and dimes the cost side and the working capital on the CapEx. So it is very specific to the particular situation.

I guess we are pleased, though, that for a chunk of the Company, we are seeing -- a chunk of the portfolio of companies we are seeing actual growth in revenues, which is better than we were seeing, let's say, a year or two ago where it really was all about the cost cuts and the managing of the working capital. So it's not -- look, the economy is not a rocket ship. It is flattish. It is sluggish. It is up a little bit, but, again, as a lender, if you have prudently capitalized the companies, that can be just fine.

That is helpful. And also with your SBIC exemption from your debt covenants or your debt cap, how comfortable are you going above a 1-to-1 debt-to-equity with your other debts? Are you going to try to keep -- do you have any kind of target or limit on the amount of leverage you are going to use?

We have said, look, in general, including the SBIC debt, in general putting it all -- assuming it is all on balance sheet or all part of BDC, we are still kind of a 0.6 to 0.8 times debt-to-equity overall.

That said, having this SBIC is an important safety valve and does give us the ability to go in excess of that and really in essence go in excess of 1 to 1. It is not our intention, but it is an important safety valve. And it is really nice from that standpoint. It's nice that it is traditional cost accounting in that vehicle, not mark-to-market accounting.

So it does derisk the Company. It is an important safety valve for the Company, and 10-year money at 4% is pretty good. So we are pleased with it, but we are prudent people. We believe in creating cushion everywhere in our system where we can create cushion and always having dry powder and liquidity, never being up against the edge is a key tenet of how we operate.

And then in your talks with amending your credit facility, do you feel that you will be able to increase the size of that facility when you refinance that?

We certainly hope so. We are certainly shooting for that, but we will see. It is a little too early to say.

With regard to the credit facility, we think we are going to have a lot more to say to you next quarter, so stay tuned.

Okay. And then I'm sorry, what was the amount of carryover income on a per-share basis that you have?

It is $0.12 a share or $5.1 million.

Rick Shane, JPMorgan.

Thanks for taking my questions. They have all been asked and answered. See you next quarter.

Bryce Rowe, Robert W. Baird.

Two questions for you. One, I was wondering does the size restriction tied to the SBIC-related investing cause you to rethink applying for that second license given how big you are now?

No. This SBIC financing for us we think is great. 10-year money at these low rates without mark-to-market accounting is a big, big plus for this Company. So assuming the SBA will have us, we will go for that license. We cannot guarantee if we are going to get it number one or when we would get it number two. But we are certainly going to go for it.

Okay. And then the second question, am I correct in seeing that one company makes up more than half of the $49 million of the defined suboptimal yielding investments?

That is Brand Energy probably, right? That is probably what you are thinking. We have two different pieces of Brand Energy second-lien. Brand Energy is a piece of the trends versus a piece of it. Sheraton is a piece of it. Jacuzzi is a piece of it. I think that pretty much adds up, but Brand Energy is probably the biggest -- individual name in that grouping.

Jasper Burch, Macquarie.

Just a real quick question on the SBIC. Do you have -- can you sell loans from the rest of your portfolio into the SBIC to sort of use up some of the extra draw?

No, I mean the SBIC basically -- the SBA wants you to put new financings in there. So (multiple speakers) it cannot be secondary. We could hold it for a couple of days at the BDC parent company level as a new deal and then move it into the SBIC, but we cannot take something we have owned for a year and move it in.

Okay. So that is helpful. So to use up that $52 million is all on new originations?

New originations and about half of what we have been doing historically does fit the SBIC.

Justin Baker, Sidoti.

Just a really quick one actually. I think you had said about $0.03 of net investment income this quarter came from one-time items. I was just wondering if you could break down what would be included in that?

Early the majority of it came from an upfront fee that we got on one of the securities. Historically or usually what we are doing is these upfront fees are being amortized, so that is being conservative accounting. So each time we are getting an upfront fee since it is a yield enhancer, we are amortizing it, let's say, over five years.

In this particular case, which is very unusual and very -- it is a one-time -- that upfront fee came in the form of common stocks. So a piece of paper that we received that we cannot amortize over the next five years, so we had to take it all in one lump sum. But, again, that is an exception rather than the rule.

Okay. Got it. And what was the amount on that one?

It was about $1.2 million on that one, a common stock that we received.

J.T. Rogers, Janney Montgomery Scott.

I had a quick question for you, Art. Debt to EBITDA was up only slightly from the prior quarter, but it has been creeping up over the last year. Given that you are seeing flat to up EBITDA in your portfolio of companies, is that increase in portfolio leverage driven by a higher leverage on new investments or exit of lower investments with lower leverage?

What happens, as you know, and as a lender it is inevitable, your good deals get taken out, right, your good deals get refinanced, and you are left with deals that -- the good news and bad news is they stay in your portfolio a long time, so you don't have to replace them. But they tend to be the higher leverage credits.

So, in addition, to the fact that the market certainly rebounded in general in terms of debt to EBITDA levels, if you look at vintages on average debt to EBITDA in 2009, which was a great time to lend, was in the 3%s, and as the market normalized in 2010 and 2011, debt to EBITDA went back into the 4%s. So it's a combination of refinancings of existing portfolio and the overall market driving higher debt to EBITDA levels.

And then also I just wondered if you could provide some more detail on the fundamental trends on some of the portfolio of companies where you saw weakness in the marks, I guess outside of DirectBuy and Aquilex that you have already talked about and specifically Affinion, Realogy and Penton maybe look like they declined.

Well, the mark-to-market on Affinion, Realogy and Penton certainly did because they are broker dealer quoted pieces of paper. Realogy is flat. Penton and Affinion are doing great.

So, if you look at potential buying opportunities where people -- where the market is giving you cheap paper at a real discount relative to the underlying fundamentals, Affinion and Penton would be two targets.

Mickey Schleien.

Given the rebound in the markets at least in October and a bit in November, could you give us a sense at least within a range how much of the unrealized losses you marked in the third quarter could be -- I'm sorry, in the fourth quarter, could be recuperated so far in the first fiscal quarter?

Look, we can tell you, and you can look at where high-yield our leverage loan indices have traded since quarter-end. Certainly there has not been a total rebound, maybe a rebound about of third of the way if you look at the overall indices if you want to use that as one fact. But these are all idiosyncratic situations, and it really just depends.

Okay. And in terms of the dividend, I'm sure everyone was pleased to see that it has increased. And if anything, I thought it was a little bit conservative. But what are your thoughts on potentially increasing it toward maybe the second half of this fiscal year given the run-rate of the portfolio?

We take the dividend quarter by quarter. We analyzed certainly our costs of our credit facility will be going up from LIBOR plus 100 unfortunately. So that will impact our cost of capital. So we are cushioned guys, though. We like running our Company at a cushion and earning more than our dividend. We think that is a key tenet of how we reduce risk in our company. So we take it quarter by quarter. We will see where we can get our earnings up to. We will see where our cost of capital comes in at, and we will make a determination.

Casey Alexander, Gilford Securities.

What is the proportion of -- the current proportion of fixed rate to floating rate loans in the portfolio?

It's about 61% fixed-rate, 32% floats, but has a floor and 8% has no floor.

Okay. Now that fixed rate has been moving up. Is that a change in underlying -- underwriting philosophy, or is that just market-driven?

That is just where the opportunities are or where they had been. We generally would like to keep it 50%ish or so, but that has been where the opportunities have been.

Plus, just to focus on matching, we now have $150 million of fixed debt with the SBIC. So that does help our overall matching.

At this time we have no further questions. I would like to turn the call back over to Mr. Penn for closing remarks.

Great. Thanks, everybody, for listening to us today. We will be back in early February, so speak to you then. Thank you very much.

Ladies and gentlemen, this does conclude today's conference call. Thank you for your participation. You may now disconnect.