Pennantpark Investment Corp (PNNT) 2014 Q1 法說會逐字稿

Good morning and welcome to the PennantPark Investment Corporation's First Fiscal Quarter 2014 Earnings Conference Call. At this time, all participants have been placed in a listen-only mode. The call will be opened 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 for PennantPark Investment Corporation. Mr. Penn, you may begin your conference.

Thank you and good morning everyone. I'd like to welcome you to PennantPark Investment Corporation's first fiscal quarter 2014 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 included 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-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'd like to turn the call back to our Chairman and 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, the financials, the overall strategy, and then open it up for Q&A.

As you all know, the economic signals have turned positive, but many economists are expecting a slowly growing economy going forward. With regard to the more liquid capital markets, and in particular the leverage loan and high yield markets, those markets have remained strong due to substantial cash flows into high yield funds, leveraged loan funds, and CLOs. Risk reward in the middle-market has generally remained attractive, as the overall supply of middle-market companies who need financing exceeds the relative demand of applicable lending capacity.

As debt investors and lenders, a slow growth 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 have continued to be selective about which investments we make in this environment. Given our strong origination network and the size of our company, we believe we can continue to prudently grow. We remain focused on long-term value and making investments that will perform well over several years and can withstand different economic cycles.

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 plenty of dry powder, we are well positioned to take advantage of investment opportunities as they arise.

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 credit providers 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. Since inception, PennantPark entities have financed companies backed by 129 different financial sponsors. We have been active and are well positioned. For the quarter ended December 31, 2013, we invested $228 million and our net new investments were $84 million. The average yield on new debt investments was 12.4%. Expected IRRs generally range from 13% to 18%. Net investment income was $0.27 per share.

We have met our goal of a steady, stable and consistent dividend stream since our IPO nearly seven years ago, despite the overall economic and market turmoil throughout that time period. We are one of the only BDCs to not cut its dividend during this time period. We anticipate continuing this steady, stable dividend stream going forward. We are perfectly content under-earning our dividend temporarily as we carefully and prudently invest in this environment.

Given the current market backdrop, we remain conservatively levered and have plenty of excess liquidity that we can use for both defensive and offensive purposes. For the quarter ended December 31, our overall leverage ratio was approximately 63% and only about 42% excluding SBIC debt. As a result of our focus on high-quality new investments, solid performance of existing investments and continuing diversification, our portfolio is constructed to withstand market and economic volatility.

The cash interest coverage ratio, the amount by which EBITDA and cash flow exceeds cash interest expense, continued to be a healthy 2.7 times. This provides significant cushion to support stable investment income. Additionally, at cost, the ratio of debt to EBITDA on the overall portfolio was 4.4 times; another indication of prudent risk.

We have plenty of liquidity. As of December 31, we had in total nearly $300 million of available liquidity, consisting of $190 million of available credit facility, $75 million of new SBIC debt financing in our second SBIC and over $30 million of cash on hand. As a reminder, we have exempted relief from the SEC to exclude SBIC debt from our asset coverage ratios and SBIC accounting as cost accounting not mark-to-market accounting. These facts highlight how the SBIC debt reduces overall risk of the Company.

We had some attractive realizations last quarter. For example, Brand Energy was sold and our $41 million investment in second lien was taken out generating 15.3% IRR. Escort repaid our $23 million subordinated debt investment, which generated 17.8% IRR. We sold our $16 million position in [Rock Finance] and generated an IRR of 14.3%. Good Sam Enterprises re-financed our $12 million investment and we generated a 17.8% IRR.

Our overall NAV was up about 3% this quarter and a key driver of that upside was due to the positive price movement of our investment in Affinion. Affinion rose from about $0.58 on the dollar to a value of about $0.89 on the dollar, due to better financial results and an exchange offer which creates financial cushion for the Company. Despite the recession, across PennantPark entities we've had only seven non-accruals out of 318 investments since inception nearly seven years ago. We currently have no non-accruals on our books.

To refresh your memory about our business model, we try as hard as we can to avoid mistakes, but the faults and realized losses are inevitable as a lender. We are proud of our track record of underwriting credit through the cycle. One way we mitigate those losses is through our equity co-investment portfolio. We are optimistic that our co-investment portfolio will generate gains over time.

In terms of new investments, we had another quarter investing in attractive risk-adjusted returns. Our activity was primarily driven by refinancings, growth financings and acquisition financing. In virtually all these investments, we've known these particular companies for a while, have studied the industries or have a strong relationship with the sponsor.

Let me walk through some of the highlights. We invested about $22 million in second lien debt and $2 million in the common equity of Foundation Building Materials. FBM is a distributor of drywall and other building products. CI is the sponsor.

Old Guard Risk Services provides workers' compensation claims and administration solutions to insurance carriers. We purchased $30 million of the first lien term loan and $1 million of common equity. The company is owned by management. We purchased $15 million of subordinated debt and $2 million of equity at Power Products. Power Products designs, manufactures and distributes branded electrical tools, components and power conversion solutions. Sentinel Capital is the sponsor.

Randall-Reilly is a business-to-business media and information company primarily to the trucking and construction end markets. We purchased $30 million of subordinated debt. Investcorp is the sponsor. We invested $11 million of the first lien term loan and $2 million of common equity of Superior Digital Displays, which is a digital media company which operates digital billboards in and around Times Square. The investment was made to back a management team in the industry.

Turning to the outlook, we believe that 2014 will be active due to both growth and M&A driven financings. Due to our strong sourcing, network and client relationships, we're seeing active 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 December 31, 2013, recurring net investment income totaled $0.23 per share. In addition, we have $0.04 per share of other income. As a result, net investment income for the quarter was $0.27 per share. Looking at some of the expense categories, management fees totaled $10.2 million, general and administrative expenses totaled $1.7 million and interest expense totaled $4.6 million.

During the quarter ended December 31, net unrealized gain from investment was approximately $16 million or $0.22 per share. Realized gain from investments was $3 million or $0.04 per share and unrealized gain from our notes was $4 million or $0.06 per share.

Excess dividend over net income was about $700,000 or $0.01 per share. Consequently, NAV per share went up $0.31 from $10.49 to $10.80 per share. As a reminder, our entire portfolio, credit facility and senior notes are mark-to-market by our Board of Directors each quarter using exit price provided by independent valuation firms, securities exchanges or independent broker-dealer quotations when active markets are available under ASC 820 and 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 13.2%. On December 31, our portfolio consisted of 66 companies across 28 different industries and was invested 26% in senior secured debt, 34% in second lien secured debt, 29% in subordinated debt and 11% in preferred and common equity. 52% of the portfolio had a floating rate, including 49% with a floor and the average LIBOR floor is 1.6%.

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 consistent dividend stream, coupled with the preservation of capital. Everything we do is aligned to that goal. We try to find less risky middle-market companies that have high free cash flow conversion. We capture that free cash flow primarily in debt instruments and we pay out those contractual cash flows in the 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. That concludes our remarks. At this time, I would like to open up the call to questions.

(Operator Instructions). Greg Mason, KBW.

Great. Good morning, everyone. Art, as we look at your $228 million of originations, this is actually your largest origination activity since the crisis back in 2008. Can you talk about -- were you seeing more interesting opportunities in the market, was that market-driven or company-specific driven? What led to the strong originations this quarter?

It's a great question. Certainly, part of it is probably a little bit of a year-end wave, certainly not the amount of year-end wave that we've had in the past, but a little bit of that. But probably, more importantly, it was just idiosyncratic deals that we happened to find this past quarter. You can't really attribute a particular phenomenon to it, perhaps part seasonal. Look we're working as hard as we've worked in a long time to find good risk award, given the market conditions and we just had a good quarter from that standpoint.

It sounds based on that last comment the overall market dynamic still remain difficult?

Look, we're focused on maintaining our low-risk high-reward mentality. The portfolio has a debt to EBITDA ratio of about 4.4 times and a yield over 13%. So, we are working really hard to maintain credit quality, maintain low debt to EBITDA ratios on companies that are defensible and stable. And I'm glad to say we met that this past quarter, quarter ended December, it's early for this first calendar quarter.

But as you've seen we have -- our growth over the last year, year and a half has been muted, if at all, we've kind of been stable and slightly growing and that's kind of the outlook, we're working really hard to maintain credit quality, yield characteristics and we don't see a change anytime soon and we're just going to keep our head down and try to find good deals.

Great. Then a couple of company-specific questions. You made an additional investment in UP this quarter. Obviously, there's been a lot of talk about the Keystone Pipeline here recently. Can you give us some color on adding to your investment there?

Yes. So UP, we bought a piece of first lien that was owned by a European bank. Given the issues with some European banks there, we are looking to exit that piece of the first lien. We are a second lien lender and an equity holder in the company. So, we were opportunistic and bought the piece of first lien at a healthy discount to par, having really good information about the company obviously, but they were for sellers.

So we were able to move up capital structure and get what we think is a very attractive risk-adjusted return in the first lien. And the chatter about the Keystone pipeline is more positive now, but it's been a long-running saga. We certainly don't count on it. Counting on decisions from Washington DC with an uncertain time frame has been futile over the last few years unfortunately. It will be great if things come through, but we don't count on it in our investment analysis.

Great, then one last thing. You've talked about in the past a lot of potential opportunities to exit equity investments, Enviro-Solutions is kind of your largest equity piece there. Any updates or thoughts about potential monetization of that equity piece?

Yes. We're hopeful that over the course of the next six to 12 months we will be able to look to move that position or exit that situation. Nothing firm, you can't count on it, but that would be our goal.

Great. Thanks, Art.

Thank you.

Greg Nelson, Wells Fargo Securities.

Hey guys. Thanks so much for taking my question. Art, just a couple from me. When you guys are thinking about the SBIC license there, what's sort of the timeline and the pipeline to put some light on that and get that to work?

Thanks, Greg. We have funded the equity and SBIC too. We're looking forward to drawing down debt. Again, it's very idiosyncratic about what deals come in and do they indeed fit the box of the SBIC and the definition of what a small business is for that box. Clearly, if we find deals that fit, we'd love to put them in there. I'd say the outlook is probably again over the next six to 12 months, where we can more fully utilize or fully utilize that $75 million of potential financing.

Great. Great. Thanks. I appreciate the color. And then just another quick one, more deal specific. On Old Guard, I know I saw you guys put about $30 million to work there in a first lien yielding about 12.5%. Obviously, it's a little higher where the market is there. I'd like to hear the thought process about that deal and is there other stuff like that out there that has a good risk-adjusted return like that?

Yes, now this was a deal -- good question -- it's a deal we spent a lot of time on, it's a complex deal. It's a basically business services solutions company to insurance carriers, as a result it's very complicated. There's some regulatory elements that insurance carriers have. This also is a non-sponsored deal, so we partnered with management. As you know, roughly 80% or so of what we do is sponsor oriented. We do some of our flow that's not sponsored. We realize that there is a different risk adjusted return that required when you are not -- when you do not have a sponsor and there is a risk-adjusted return that you can get when you are in a non-sponsored deal. So we're very thoughtful about it, do a ton of diligence, understand -- try to understand everything about the business. As a result, due to the complexity of the business, due to the fact that it was a non-sponsored deal, we thought we structured a very attractive risk-adjusted return in a first lien plus warrants type of scenario for our shareholders.

All right, great. Thanks very much for the questions.

Thank you.

(Operator Instructions). Mickey Schleien, Ladenburg.

Good morning, Art and Aviv. Most of my questions have been asked, but I was hoping you could walk us through the Affinion transaction, including any realized gains there. And just a couple of housekeeping questions. what were your taxable earnings in the quarter and was there any return of capital in fiscal '13?

Okay, I'll walk through Affinion and then I'll kick it over to Aviv for the taxable earnings questions.

NA

So we owned a piece of Affinion paper, subordinated debt, that was exchanged into a new piece of subordinated debt at a higher coupon, plus warrants in the company. So, what we had last quarter marked at about $0.58 on the dollar, the package of debt plus warrants on exchange was worth about $0.89 on the dollar. That was an exchange and that was not realized, that was unrealized in that exchange. So the original cost kind of continues on the new investment.

Additionally, we moved up capital structure a bit and bought some of the paper that was higher in the capital structure, which still had a very healthy cash pay yield that we thought was relatively safe and provided a nice coupon. With that, I'll kick it over to Aviv to talk about taxable earnings.

Currently, for tax purposes, once a year we do calculate and September 30 of '13 was the last time that we calculate and we show in the 10-K our taxable earning versus GAAP earning. In general, there is fairly small differences between GAAP and tax, so it should not be anything material, but always there is a small deviation. So we do not advertise the taxable earning quarter-by-quarter, but you should think about our GAAP versus tax to be fairly aligned, maybe $0.01 per share off or maybe $0.02 depends on the quarter. But it's fairly aligned, GAAP versus tax.

And, Aviv, was there -- I haven't had a chance to look, but was there return of capital in fiscal '13.

The answer is no. There was no return on capital actually since inception.

Thank you.

John Heck, Stevens.

Good morning, guys. Thanks for taking my questions. The first question, I do think it's related to Affinion, but your weighted average yield was up in the quarter. However, the new investment yield was a little bit down. I wonder if you can explain how that weighted average yield was placed in that realm.

Yes, you're exactly right John. It was Affinion's yields going up for a position that we did already own was the driver of that.

Okay. And then, I wonder if you can talk about the source of the volumes in the quarter of the -- you had pretty good flow in this quarter, how much of it was new M&A opportunities versus dividend recaps versus re-fis, and just given what you've seen over the last couple quarters, where do you think that composition will move to as we move through calendar year '14?

Just looking at the list of deals we did this past quarter, dividend recap, if any -- I mean, I think, it may have been 10% of what we did and that would be usually in companies that we've been following a while, we know where we're already in. M&A versus re-fi, I'd say of the 90% left of that, other than the 10% that might have been dividends, I'd say it's probably 50-50 M&A versus re-fi. In other words, 10% -- this is all me just guessing off the cuff -- 10% dividend related, 45% M&A, 45% re-fi.

And generally speaking, is that consistent with where it was throughout the year, last year or is it changing and with that change does that create optimism of any type to you?

Look, and you can see in our activity level and look there is, maybe I kind of should have added this element there. Some of these financings that are re-fi or growth financings where Old Guard Risk Services, which we just talked about, was really a growth financing, it was refinancing existing debt, but it was giving the Company some cushion to grow. Superior Digital, a growth financing. Foundation Building Materials is an example, it was an M&A financing, but that's a consolidation play. So we're hoping that that company grows and there was a delayed-draw element there.

So, I'd say the new element that we saw this past quarter and perhaps a chunk of the driver is we're seeing some companies that are taking the capital for growth purposes, which kind of jives with the fact that we are finally seeing a gradually and slowly growing economy and these companies are willing to accept our style of debt in order to fuel their growth.

Okay. That's great color. Thanks. And final question, just looking at the competitive environment, it's something we've all been focused on in the last year. Any emerging competitions? There was a (inaudible) Financial Times article this morning talking about middle-market CLO is being formed. Any change from the commercial banks or hedge funds or CLOs that leads you to believe there is more potential compression or do you think it's sort of stabilizing at this point?

I do believe it's kind of stabilizing. As usual, it will in some sense cues from the more liquid capital markets. The phenomenon had been that more liquid capital markets would come down market and finance smaller companies, thereby changing the tone in the middle-market. With the high yield market now under some stress due to the potential of rising interest rates or some of the emerging markets' turmoil, perhaps that's going to be a helpful trend.

Haven't seen a ton of it move over to liquid loan market at this point. As you know, we secretly or not so secretly hope for a little bit of a correction, so there is a little bit more of a little bit of fear in the marketplace, so that we can get better risk reward in general. So, we're hopeful that the tide is washing out now as those people move away from the liquid high yield market and as people see a little bit more capital market turmoil that the liquid markets will recede a bit and will provide a better overall tone in the middle-market.

Okay. Great. Thanks very much guys.

Thank you.

Arren Cyganovich, Evercore.

Thanks. You've talked about in the past a target leverage of kind of 0.6 to 0.8 times. I'm just curious as to your thoughts on where you see that going near term and would you look at the first draw down with the SBIC before you'd hit the equity market again?

Look, we all changed our view about what appropriate leverage is for this portfolio. We still believe it's 0.6 to 0.8 times. Again it's 0.4 times, excluding the SBIC debt, which is our SEC exempt really. Look, we take it deal by deal, day by day, inevitably we're going to some re-fis. Hopefully, inevitably we'll be able to find deals to fill those re-fis and hopefully we can slowly grow and still maintain our debt discipline.

We're not looking at the market everyday and thinking about when to access the market, but of course, we always are thinking about things and always looking at the market as every BDC should. Our head is firmly in trying to find a good deal or two or three, and that's the driver. We're not sitting here micro-managing, whether a 0.6 or 0.65 or 0.7, we need to find good deals and we need to find good deals first to replace the deals that are good deals that are getting refinanced.

Okay. And then the BDC legislation has been a topic that's been increasing among investors recently. Is there any view that you have on that? And then what would you do in terms of your targeted leverage ratio if that would actually increase, would you like if they go up or would you just move a little bit further up the capital structure and go up with a more senior portfolio investment?

We're not hearing any news on the BDC legislative fronts, positive or negative. The tone still is very positive, but again, I don’t know when Washington will pass a lawyers is a tough thing to bet on. Look, to us it's all very asset specific, if you have a piece of mezzanine debt or second lien debt, we don't think you should leverage them more than one-to-one, anyway even if the law were changed.

If you have a decent first lien debt depending on the kind of first lien debt, you perhaps would be willing to leverage it more than one-to-one. So really just depends on the portfolio and what's in the portfolio. We are first and foremost focused on getting our shareholders a solid risk-adjusted return and capital preservation. So, look if the law changed, we probably would take it up a bit on an overall blended basis, it probably wouldn't be north of one-to-one, but if the rules were two-to-one, it will at least make us feel a little bit more comfortable, edge it up from 0.6 to 0.8 to something a little higher, but hard to say it'll just depend on the portfolio at that time.

Makes sense. Thanks a lot.

Thank you.

Doug Harter, Credit Suisse.

Thanks. My questions have been asked and answered. Thank you.

Scott Valentin, FBR Capital Markets.

Good morning. Thanks for my question. Just with regard to the portfolio composition in terms of senior and second lien. There is a very slight shift, I think senior secured loans dropped from 28% to 26% of the portfolio and you had this commensurate increases in second lien and sub-debt. Is that idiosyncratic reflection of the deals you saw or is there a kind of a content shift maybe little bit more down the capital structure to protect the yield?

Good question. It's just idiosyncratic, it's deal-by-deal. Obviously in a perfect world, we'll find a piece of first lien with a stellar credit with great covenants and a very high yield and low debt to EBITDA and that's perfection. And then everything that you chip away at and it becomes slightly less perfect. Perfection was perhaps a lot of what we saw in the '08, '09 time period. We're in a world where perfection is not possible, so you have to figure out in each deal what you're willing to live with to protect and preserve capital and get the appropriate return.

Okay. And I think earlier, you mentioned new investments came on an average yield of 12.4%. Just wondering do you see growing lower going forward given the liquidity out there?

We don't know. Our goal is to keep it that or north, but possibly if we go -- if the yield goes south of 12.4%, presumably it's because we believe the credit is rock solid and we think the return makes sense relative to the risk.

Okay. One final question. You mentioned estimated yield volatility hitting in the high yield market, have you seen anything in the middle-market at all, how has it been in the middle-market?

Middle-market usually kind of has a delayed response mechanism to what goes on in the liquid markets. So, if there continues to be more choppiness in the liquid markets, it will take a while, but inevitably the tone will move to the middle-market.

Okay, thanks very much.

Thank you.

J.T. Rogers, Janney Capital Market.

Good morning. Thanks for taking my question. I just -- I know you're in a seasonally slow period, but I was wondering if you could comment on directions of yield on the new investments and maybe leverage. Just since the start of the year, are we seeing a stable weighted average yield on new investments, lower leverage, higher leverage.

Yes. So, on the activity we're seeing thus far in the quarter through February 6 or through the morning, till 10.33 am on Feb 6, it's consistent. The deals we're looking at the credit quality and yields consistent with what we saw in the quarter ended 12/31.

Okay, great. And then it sounds like you guys are a more positive on at least the macro backdrop. Would do you all consider looking at potentially more distressed securities and TXU's out there and this is -- there is talk that they've been looking at restructuring later this quarter. Is that something that you all would be interested in?

I mean, we're trying to figure out where our highest value-add is. We don't have it -- with regard to TXU, we don't have any particular focus or view or we haven't filed the credit, so in that case it will not be applicable to us. And again, we generally focus on middle-market, we generally focus on where we can add an extra value-add or have some extra insight and TXU is not one of this.

Okay. Thanks for taking my question.

Thank you.

Chris York, JMP securities.

Yes, good morning. Thanks for taking my questions. Most of them have been asked, but I'd be curious to learn if you have seen private equity sponsors trim orders, especially lenders like yourself in the middle-market due to more restrictive financing at banks as a response to the leveraged lending guidelines that went effect in May.

It's a great question. There is a lot of chatter about the regulations and how they are impacting banks. We believe it's impacted the market a little at this point. Nothing that would be material in terms of empirical evidence. This is just kind of chatter and what we here. As the year progresses through 2014, we'll see if it becomes material and we'll see if it's helpful to middle-market lenders like BDCs. So far, we're not seeing a ton of empirical evidence to suggest that it's there, but we are hearing in certain cases, it is helpful, but stay tuned.

Sure. Great. Thanks for that color, Art.

Thank you.

Doug Mewhirter, SunTrust.

Hi, good morning. Just two questions; both are kind of more big picture oriented. First, if the equity market, I guess, continues on its recent downtrend, how do you think that will affect the dynamics of your business? Would there be more M&A, because the targets would be cheaper or would the deal flow dry up a little bit because maybe people are a little more risk averse or have you noticed any -- how those patterns are played out in the past with corrections like this?

It's a great question. Hard to say. Look, as we've seen, a lot of markets are correlated. So, as we've said, for us, it'd be nice if there was a little bit of correction in all the markets, it would make risk reward even better than it is today. Certainly, the liquid markets would be the first to feel it.

In a mark-to-market world, everything is correlated, good news, bad news, there's a little bit more fear in the market where we can get better risk reward. But the bad news is everything is correlated. So asset value, stock prices, et cetera end up usually correlating to that. That said, in the last few weeks, even though the equity markets have been choppy and the high yield markets have been choppy, the leveraged loan markets have been a lot less choppy. They're down a little bit, but not really that materially. So -- or perhaps there is a little bit of de-linkage where the leveraged loan markets and floating rate assets remained stable, while the high yield and equity markets go to a choppier time frame. Hard to say at this point.

Okay. Thanks for that. And one last question. Could you, I guess, describe in just a few words, I'm sure there's a huge piles and piles of legal documents to explain this but what is the difference between an SBIC qualified investment or loan and I guess a mainstream non-SBIC PennantPark type loans you said you --?

It's a question and you're right, it's an arcane world of definitions. Usually it's due to companies who have net worth and net income below a certain level, right? So those are the two drivers and then there's a whole world of what's the NAIC code and does the NAIC -- does this particular company fit within an NAIC code that makes it good from the SBA's standpoint.

So in many of the companies we have very healthy equity cushions, which makes the net worth high and not low, which even though you would look at the company on its face value and say gee isn't this is a small business, because the equity cushion is high, it does not fit the SBA's threshold or the credit might be good and there is positive net income, but because the net income is too high, it doesn't fit the SBA's threshold.

So even though you might look at the company and say it's a small business from the standpoint of the substance, it doesn't fit. On the other hand, there's companies that are very large companies. You could use the example of General Motors when it had the restructuring, had negative net worth and negative net income. So under the strict definition of the SBA's guidelines, that would've been defined as a small business. Right?

That said, we would never buy GM paper and put it in the SBIC even though it fits the guidelines, because it doesn't fit the purpose and the substance of what the SBA is getting at which is the money is there to finance small and mid-sized businesses in America. So there's a whole arcane world where you can spend hours talking about it at your convenience. But that's the gist of what the rules are.

That's actually a fairly pretty concise definition based on what you've said. And with that just a quick follow-up on that and then I will rejoin the queue. The loans that you extend and SBIC or the type of securities you extend do they fall under a more of one bucket. Do you tend to make more subordinated or more senior, more equity or where is that sort of just based on the company and the particular characteristics of the SBIC or not personally has a input into it?

That's right. It's the company and whether it fits, it's not necessarily if it's first lien, second lien, secondly major, mezz or equity. It's more, is this company defined as a small business.

Okay. Thanks. That's all my questions.

Thank you.

Casey Alexander, Gilford Securities.

Good morning, guys. I'm almost sorry to ask this question, but some BDC's mark their debt to market and some don't. And during the quarter you guys got $0.10 of NAV appreciation from marking your debt liabilities to market. I'm curious why do it, when you know at the end of the day you are going to pay these off at par. I'm just kind of curious why marking to market?

It's a great question and to clarify it's about $0.06 of NAV appreciation, we've got not $0.10. To us it's a very cheap insurance policy, that's all. And this is really just to align the measurement characteristics of both our assets and our liabilities for the purposes of the SEC asset coverage test, so that we're matched for purposes of that test. If you're going to mark your assets, mark your liabilities and there's a matching -- and there is a matching which is protective of the company and the shareholders to do that. We obviously are going to pay a 100 cents on the dollar at the end of it. We will pay back on 100 cents on the dollar. In fact any every BDC through the downturn, even some ones that had different credit characteristics from us paid back every penny of debt during the downturn.

For us, this is just a very cheap insurance policy to protect the shareholders and the company in the event that the market blow up so that we do not run afoul the SEC asset coverage test. From the standpoint of the actual mark-to-market since the bonds do trade on the NYSE, we just take whatever that price is at the end of the quarter and plop it into our balance sheet.

Okay. Great. Thank you.

Thank you.

Jim Altschul, Aviation Advisors.

Good morning, thanks for taking my questions. Got a couple of things. First of all with regard to the two SBICs, am I correct in deducing that the first SBIC, the $150 million of debentures or whatever that you call them, have been fully drawn, but that the $75 million in the second SBIC has not yet been drawn?

That's correct. For SBIC II we've put the equity in which is $32.5 million of equity and we hope to draw the $75 million as debt over the next six to 12 months.

Okay. And with the -- post SBIC we've got $150 million that's been drawn because of -- if I remember correctly, it's very difficult to repay an SBIC ventral for prepay rather, once you've taken it down. Has that money been put to work?

Yes, the vast majority has been put to work and every once a while we fully drill, we put it all the work, every once a while, we'll get a re-fi in that portfolio and then we'll fill that and we'll have cash on the SBIC's balance sheet, SBIC I's balance sheet and then as deals come in, they will fill that bucket.

Are you able to -- with regard to the $75 million in the second SBIC, are you able to draw that in tranches so you can sort of only take it down when you actually have the loan you want to put on the books?

That's exactly correct.

Excellent. And the final question, and I know this is imprecise, but you did not quite cover the dividend by and in your announcement obvious talk about difference of a cent. But you also added some assets to the books during the quarter. Would you be able to give a rough estimate of all the assets that the additional $200 million odd in loans that you put on the books in the -- added to the portfolio in the quarter. And then in the portfolio, as of the beginning of the quarter, would you have covered the dividend?

So for the quarter ended 12/31 as we said, we had recurring income of $0.23 a share and $0.04 of other income due to what you've mentioned Jim, which is a little back-end weighting, our recurring run rate would be north of $0.23. Moving on its way towards the dividend. So it's kind of somewhere in between. And inevitably we have other income every quarter and we'll, I'm sure, have other income this quarter ended March.

We're very sensitive towards this and we want to maintain credit quality of course, we could put a lot of money to work quickly and amply cover the dividend as that doesn't fit our investment discipline of making sure that we preserve capital and get good risk-adjusted returns.

Okay. Just to rephrase in light of what you said, to rephrase question slightly and I'll be through. You said the recurring income is $0.43 a share? If you added in the course of the quarter $200 million odd in additional investments, if all of those investments had been on the books as of October 1, so therefore you would have earned the full quarter's worth of--?

Look, Jim, so the net growth, we put on $200 million plus, but we also had refinancing. So the net growth of new assets was $84 million to be exact.

Okay.

So you can do the math and there is a bunch of great research analysts who have been on this call who can do the math. We'll see what origination are this quarter versus refinancings, and you can do the math as to what that would mean. Again, if we wanted to put the money all at work today and amply cover our dividend, we could do that. First and foremost, we have to pick the right credits and preserve capital.

Also our decision is that we are not going to cut the dividend at this point since we do think we can gradually and slowly grow and maintain our investment discipline. So for us, it does make sense to cut the dividend at this point. So, that's kind of where we are.

Excellent. Well, thank you for your thorough answers to all my questions.

Thanks, Jim.

And with that, that does conclude today's Q&A session, I'd like to turn the conference back over to our speakers for any additional or closing comments.

Thanks everybody for being on the call today. We appreciate your support and we will talk to you next quarter.

And with that, ladies and gentleman that does conclude today's conference call. We'd like to thank you again for your participation.