Pennantpark Investment Corp (PNNT) 2015 Q1 法說會逐字稿

Good morning, and welcome to the PennantPark Investment Corporation's First Fiscal Quarter 2015 Earnings Conference Call. Today's conference is being recorded. 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 of 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 2015 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'd like to remind everyone that today's call is being recorded. Please note that this call is a 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 provided in our earnings press release as well as on our website.

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 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'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 up for Q&A.

As you all know, the economic signals are moderately positive with many economists expecting a slowly growing economy going forward. With regard to the more liquid capital markets, and in particular the leveraged loan and high-yield markets, during the quarter ended December 31st those markets experienced volatility due to cash outflows and leveraged loans and high-yield funds. A less robust broadly syndicated loan and high-yield market helped the overall tone in the middle market.

Risk reward in the middle market is 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. After several years of spread compression, we believe 2015 could finally be a year of yield expansion. We remain focused on long-term value and making investments that will perform well over several years and can withstand different business cycles.

Our focus continues to be on companies and structures that are more defensive, have low leverage, strong covenants and high returns, with plenty of dry powder, we're 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 in middle market financial sponsors, management teams and intermediaries, who want consistent credible capital. As an independent provider free of conflicts or affiliations, we've become a trusted financing partner for our clients. Since inception, PennantPark entities have financed companies backed by 145 different financial sponsors.

We have been active and are well positioned. For the quarter ended December 31, 2014, we invested $159 million. The average yield on new debt instruments was 12.6%. Expected IRRs generally range from 13% to 18%. Net investment income was $0.26 per share. We've met our goal of a steady, stable and consistent dividend stream since our IPO nearly eight years ago, despite the overall economic and market turmoil throughout that time period. We anticipate continuing this steady, stable dividend stream going forward.

As you know, BDCs are required to payout to shareholders at least 90% of taxable earnings. As of September 30th, our undistributed taxable income was $0.21 per share, which provide substantial cushion. With the additional equity and long-term debt capital we raised in September, we believe we will be able to cover the dividend as we deploy our capital into an increasingly attractive market in 2015.

As previously mentioned, we have plenty of liquidity. As of December 31st, we had in total over $550 million of available liquidity, consisting of $420 million of available credit facility, $75 million of new SBIC debt financing in our second SBIC and over $54 million of cash on hand. Given the current market backdrop, we remained appropriately levered and have plenty of excess liquidity that we can use for both defensive and offensive purposes.

At quarter end, our overall net leverage ratio, accounting for cash on the balance sheet, was approximately 69% and only about 50% excluding SBIC debt. Taking into account the recent exit of our investment in Patriot National, which I'll comment on in a minute, those percentages are 60% and 41%, respectively.

Our overall portfolio was constructed to withstand market and economic volatility. The cash interest coverage ratio, the amount by which EBITDA or cash flow exceeds cash interest expense, continued to be healthy 2.5 times. This provides substantial cushion to support stable investment income.

Additionally, at cost, the ratio of debt to EBITDA on the overall portfolio was 4.8 times, another indication of prudent risk. We had some attractive realizations last quarter and generated $8.6 million of realized gains. For example, Convergent refinanced our $24 million subordinated debt position and generated a 14.8% IRR. We remained an equity co-investor and received a dividend as part of the financing. Our $14 million second lien debt position and $4 million equity investment in [CT HealthPort] was monetized at an IRR of 13.1% on the debt and 17.3% blended including the equity, as the company was sold to a new sponsor.

With regard to our exposure to the energy industry, we have successfully invested in energy through 21 different companies since our inception nearly eight years ago. Our investment thesis and structuring our tailored to the specific dynamics of each sub-sector and incorporate several broad underwriting principles.

We're focused on opportunities backed by sponsors or experienced management teams who have deep experience to be successful across the industry.

Together with our own contacts, industry consultants and engineers, these resources have aided us meaningfully in the past. We have avoided certain energy sub-sectors, geographies, as well as many undifferentiated service businesses with low barriers to entry.

For exploration and production, we'd like to be senior in the capital structure with an asset-backed focus and strategic hedging to mitigate downside. We look to remain in low cost areas with growing production and experienced management teams with proven project capabilities. In 2014, we successfully monetized several large subordinated debt and equity positions in the oilfield service and midstream sector.

Eureka Hunter, Universal Pegasus and (inaudible) generated proceeds of approximately $170 million at a weighted average IRR of 17.8%. Our existing portfolio, including the exploration and production companies, fit into our theme of being senior in the capital structure backed by substantial asset coverage, including proved, developed, and producing reserves, with substantial hedges in place. There are also significant additional assets in the form of additional acreage, reserves and midstream assets.

For instance, in RAM Energy, we are backing an experienced management team who has performed well for PennantPark Investment Corporation in the past, we are a first lien position and the company has hedged most of its oil production at over $75 per barrel for the next 3.5 years.

In New Gulf we are investing in resources that we have previously reviewed, the majority of its oil production is hedged at over $95 per barrel for 2015 and it has valuable midstream assets.

We believe that our underwriting criteria and long-term approach should support our investments through this period of low energy prices and allow us to realize attractive returns. While mindful of our desire to maintain a diversified portfolio, the current situation may well present attractive risk-reward opportunities.

Across PennantPark entities we've had only nine companies on non-accrual out of 350 investments since inception nearly eight years ago, despite the recession during that time frame. Further, we are proud that even when we have had those nine non-accruals, we've been able to preserve capital for our shareholders.

Through hard work, patience and judicious additional investments in those companies, we've been able to find ways to add value. We always monitor and re-underwrite our deals in situations where the best long-term value for shareholders is created by taking control of the companies and providing capital and expertise we do. Our realized cumulative gain since inception eight years ago through the financial crisis are testament to this long-term value orientation.

Based on the values as of December 31st, we recovered 94% of the capital invested so far in those nine companies that have been on non-accrual since inception. We had two non-accrual investments as of December 31st, representing only 1.7% of the portfolio at cost. As a result of this track record of low non-accruals and high recovery rate, we're one of the few BDCs who was in operation before the recession, who has preserved capital for shareholders while generating a consistent steady dividend.

Since quarter-end, our position in Patriot National was exited at a premium due to the company's IPO. Our $50 million debt position was taken out at a premium of $2.8 million, which will result in other income of $0.04 per share for the quarter ending March 31st. Our warrants in the company were taken out at a value of $8.7 million. As a result, we received liquidity of about $60 million and a realized gain of $0.13 per share, resulting in an NAV increase of $0.08 per share.

In terms of new investments, we had another quarter investing in attractive risk-adjusted returns. And 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's walk through some of the highlights. Howard Berger is a provider of branded and private label hardware and houseware related products in North America. We purchased $41 million of second lien term loan, Littlejohn & Company is the sponsor. In line with our successful track record of investing in gaming projects in or near population centers, we invested $75 million in the second lien debt of Parq Holdings.

Parq is constructing a gaming and hotel complex in Downtown Vancouver, Canada. The company is owned by Paragon Gaming, Dundee and Canadian Pension Funds. (inaudible) and engineering tooling. We purchased $13 million of subordinated debt and $1 million of equity. The company is sponsored by Sentinel Capital Partners.

Turning to the outlook, we believe that the remainder of 2015 will continue to be active due to growth in 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 31st, 2014, recurring net investment income totaled $0.24 per share. In addition, we had $0.02 per share of other income. As a result, net investment income for the quarter was $0.26 per share.

Looking at some of the expense categories; management fees totaled $11.6 million, general and administrative expenses totaled $1.5 million, and interest expenses totaled $6.5 million.

During the quarter ended December 31st, net realized gains from investment was $8.6 million or $0.11 per share. Unrealized losses from investments was $53 million or $0.71 per share. And unrealized gain from our notes was $1 million or $0.02 per share.

Excess dividends over net income was about $1.5 million or $0.02 per share. Consequently, NAV per share went down $0.60 from $11.03 to $10.43 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 the exit price provided by independent valuation firms, securities and 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 investment.

Our overall debt portfolio has a weighted average yield of 12.5%. On December 31st, our portfolio consisted of 66 companies across 29 different industries and was invested 32% in senior secured debt, 44% in second lien secured debt, 16% in subordinated debt, and 8% in preferred and common equity. 70% of the portfolio has a floating rate, including 64% with the floor, and the average LIBOR floor is 1.3%.

Now, let me turn the call back to Art.

Thanks, Aviv. To conclude, we want to reiterate our mission. Our goal is steady, stable and consistent dividend stream, coupled with long-term 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 flow 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.

Thank you. (Operator Instructions) We'll take our first question today from Doug Mewhirter with SunTrust. Please go ahead.

Hi, good morning. I just have three quick questions. First, obviously, it looks like you're kind of knocking up on the upper end of your debt ratios and the share prices is not really cooperating with issuing equity right now, given your multiple. So would it be right to assume that you would use your sort of liquidity provided by your exits to fund most of your new investments and you wouldn't anticipate meaningfully growing the portfolio, or do you actually have some room on your SBIC to maybe show some organic portfolio growth over the next couple of quarters?

Yeah. Thanks, Doug. I think after Patriot National, I think we said that we're at about 60%, gross 40% excluding SBIC. So we think we've got some reasonable run rate. We say we're at kind of 0.6 to 0.8 is our general target zone. We keep extra cushion both for defensive and offensive purposes depending on the market.

And this may sound like a silly question, given the state of the market. But with -- I mean, are there any opportunities for additional energy investments or you kind of taking a wait-and-see approach right now?

Well, it's a great question, something we think about, certainly we feel like we're comfortable with our existing energy exposure. That said, there are some really great bargains out there. So some we're thinking about, but we're being cautious and careful and very thoughtful about what we do. Certainly, if we see really compelling value and a compelling way to increase income and potentially the dividend for shareholders, we got to assess those options.

Yeah. And my last question, you have that long-term 13% to 18% IRR bogie that you have with your investments. Given that your own dividend yield is actually hitting on that lower end of the spectrum, would it be prudent to do a small amount of buybacks or maybe it would be a better investment -- maybe some of your investments that are hitting on the lower end of that range?

Look, we as management, our Board are always assessing our options and always trying to figure out the right long-term orientation for all of our stakeholders. So, it's something we think about from time-to-time. We do take a long-term view and capital is very precious, whether it's pressures to a BDC, a finance company or a bank. So there is math and then there is always the intangible positive having excess liquidity in a finance company kind of [construct]. But it is something that we do as a Board and management team talk about.

Okay, great, thanks. That's all my questions.

We'll take the next question from Troy Ward with KBW. Please go ahead.

Great. Thank you and good morning, guys. Art, can you talk a little bit about JF acquisition, the Jones and Frank that went on non-accrual this quarter. Looking into kind of what they do as a business, list, service, distribution and talking -- and fuel handling for, it looks like convenience stores and gas stations. Can you speak to whether or not that has -- it's an energy problem that it's related to the energy exposure or if that's kind of a one-off that's unrelated to the drop in oil prices?

Yeah, it's actually an interesting question. These guys distribute gas pumps to gas stations at convenience stores and gas stations, et cetera. So it's driven by retail gas distribution which you would imagine in a lower gas price environment would be a good place to be. This company has messed up on their computer systems and ERP implementation. We've got to mark I think about $0.87 on the dollar, which indicates kind of we feel like even in a potential restructuring our recovery level will be relatively high.

Okay, great. I was reading about it, it didn't feel like there was any direct oil. I just want to make sure they didn't have any ancillary business that I couldn't see. And then also going on non-accrual, as we look backwards at the valuation, it didn't look like it was under much stress. Is it on non-accrual because in your sub-debt piece, are you being blocked by the senior in lieu of some type of restructuring?

Yes, so there is negotiation going on between the senior, the sub-debt and the equity about things as they messed up their computer and ERP system. And so, yes, we're not getting current cash interest on that investment at this point.

Okay, great. And then on the originations, you had a little bit higher number than we anticipated in our model. Can you just provide just for kind of get the run rate, the timing on those deals, were they more front or back-end loaded in the quarter?

They were mostly back-end loaded in the quarter. So that may have impacted our income. Remember, we did an equity offering in September, which we thought was a good timing. And normally when you do an equity offering, you do under earn your dividend for a little while as you're investing those proceeds, so that's what's going on here with us, and most of our originations past quarter was back-end loaded.

Okay, great. And then kind of good segue, from that equity offering that was first equity offering you've done in quite a long time; and as you said, today it looks pretty well timed. Are you seeing spreads that are wider and I know you're seeing them, I guess, but are the borrowers realizing that the market is different and are accepting these wider terms and how is it impacting covenants?

It's a great question. We do think it will become more, it is more of a buyer's market and it will become more so over the course of the year. It's certainly been a seller's market for last three or four years. We're seeing it, in some cases deals are continuing to fly off the shelves, in some cases they're running into a more turbulence, so it's kind of case-by-case. And borrowers reactions are as diverse as human behavior. Some borrowers reactions are more realistic, some borrowers reactions are kind of walking away and they think they'll come back in a later date and get more attractive term.

So case-by-case, it makes it certainly more interesting for us as a lender to, in certain cases, be able to drive yields, to be able to drive covenants lot more aggressively than we have over the last three or four years.

Okay. And then one last topic. Being here at the KBW/ Stifel platform, we have a lot of retail clients, and we get a lot of inbound calls about the proxy solicitation process that was going on with PNNT over the last month or so. And obviously, Art, you said in a press release a couple weeks ago that you have no reason to issue shares at these low levels. So, can you just speak to why you ask for permission to sell below book value, which you have to do in a BDC, you have to get shareholder permission. Why do you do that if you have no intention of issuing at these levels?

It's a great question, and we get all the time, I'm happy to talk about. So thank you for bringing it up. We have in PNNT for the last six years, gotten pre-approval to issue below book value; and the reason we have is that people who have been with us for a while and have seen our behavior in good markets and not so good markets, have come to trust that we will behave in their best interest.

Our historical track record is clear. During the financial crisis, we did issue shares below NAV only when it was absolutely clear, that the proceeds could be deployed in a way that would increase income and shareholder dividends. So that was in fact what happened in times of market turmoil and chaos, there are great deals to be done. If it's absolutely clear to us as management and our Board of Directors, that by issuing at a small discount to book, there might be small dilution on NAV basis, but there might be very large accretion on an income and dividend basis because we're seeing such good deals, that's why we try to get pre-approval, we try not to bother shareholders, during the year we have -- once a year we go for a vote, we ask for a vote, we've gotten it over time and I think it's because shareholders come to trust that we will only use it in the sense of trying to create income and increase dividends.

Great thanks, Art.

Douglas Harter, Credit Suisse.

Thanks. I was hoping, Art, you could give us a little bit of outlook as far as what pre-pays might look like? Do you expect those to slow now that spreads have backed up a little bit?

It's a great question. It is more of a buyers' market so that does imply prepaids will slow up in general, that said, if we have very good well performing portfolio companies even in a choppy environment they're going to get sold or refinanced. So it probably slows down a little bit, it probably slows down a little bit in line with the market moving to a buyers' market.

Thanks, Art.

(Operator Instructions) We'll go next to Chris York with JMP Securities.

Good morning, guys. Thanks for taking my questions. In light of the decline in the price of crude and the risk that has caused your energy portfolio, which is the largest sector. Have you guys made any changes in your thinking as it relates to portfolio management?

Good question. We're always, on an individual basis we're underwriting each and every credit; and we don't spend a ton of time thinking about macro factors. For us it's usually credit-by-credit, deal-by-deal, does the deal make sense. We are very focused, of course, on diversification, diversification around industry, diversification around geography. When the market gives you opportunities, whether they'd be on an industry basis or an overall market basis to get really good risk adjusted returns, where we get a little bit more aggressive, but we're pleased we have liquidity at this point, we're pleased that the market is moving in our direction, but we're going to very thoughtfully methodically deal-by-deal continue to underwrite credits.

Got it. And then, could you talk a little bit about the performance at our largest credit being RAM Energy and then potentially share the terms of the credit, like leverage and whether or not the borrower employs hedges?

Yeah. The borrower does employ hedges and that's one of the areas of great comfort for us there, the majority of their production for the next three and half years is hedged at over $75 a barrel. We are in a first lien position, so we're feeling good. It's a management team that we've known for a long-time, we back them successfully in a prior iteration, they're on the Permian and Ark-La-Tex basins. Their predecessor company which is lead by Larry Lee was sold to Halcon Resources in 2011, and this company acquired about 60,000 net acres from Chaparral in July of 2014. They also have producing assets in Oklahoma and really it's more of a traditional play, they focus on operational improvements and drilling low cost vertical wells. It will opportunistically seek to divest non-core assets and we think there's great asset value in this particular situation.

Got it. And then are you -- how are you thinking about the maturity of that Tranche B, which is up from, I guess, maturity in this year?

It's great to have that kind of structure where we do have a maturity which gives us a really seat at the table here in the coming handful of months. So, as we say, the company has got great asset value, the company generates nice cash flow, so we're optimistic that things will work out well for RAM Energy.

Got it. That's it from me. Thanks.

Mickey Schleien, Ladenburg.

Yes, good morning. Art, my first question relates to again the oil and gas investments. If you look at the spot price of oil now versus December 31, we're still down a little bit more, obviously not nearly the correction we saw in the fourth quarter, but I'm curious where if you were to post NAV today, would there be more pressure on the marks in the oil and gas investments?

We don't think so.

Okay. In terms of leverage and target leverage; my first question is in relation to cash, do you have good amount of cash and now you have more from Patriot. How -- under perfect world, how low could the cash balances go in order to help fund investments?

It's a good question. A big chunk of the cash we have is in SBIC I. So that's dependent on our origination of deals that fit the SBIC. We are -- there is going to be deal this upcoming quarter that does fit the SBIC. Obviously, we do not lower our standards as investors or whatever fits our investment standards fits. If it happens to fit the SBIC, that's great. We love that SBIC structure and that's the first port of call, obviously when something does fit. So we've got cash in the SBIC, we don't really have cash on the balance sheet, otherwise we paid down our revolver.

Okay. And in terms of the target leverage number that you gave, [grew] the range, I think you said 0.6 to 0.8 times, does that include or exclude the SBIC leverage?

Yeah. 0.6 to 0.8 times, we tell everybody is inclusive of total leverage including the SBIC's. Now, what is implied in that, is not only do we have cushions going up to one-to-one; but as you know, SBIC leverage can be greater than one-to-one, it can be two-to-one. So that implies a ton of cushion, which we'd like to have both for defensive purposes as well as for offensive purposes, whenever the market gets chaotic. Number one, you don't want to be foreseller when the market gets chaotic; and number two, you want to be an opportunistic buyer. So that 0.6 to 0.8 times gives us kind of double cushion; and this goes to kind of how you want to run your BDC, your finance company or your bank, if you're in this business, having excess liquidity to us is always something you want to have.

Okay. And that's sort of a good segue to my last question, which is related to the stock repurchase. I do understand, I think, the market understand that capital is precious and it's a difficult decision to allocate the capital; but looking at your stock price today, with the discount to NAV, we see 23% upside to NAV plus a 13% dividend yield which would imply a total return on sort of mid 30s. I just don't understand what else is out there in the market that could be more attractive than buying the stocks, so why not at least nibble at the stock and if nothing else, it will help prop up the stock and get you back to a point where issuing equity is not a problem?

Yes. As I said earlier, Mickey, it's something we're evaluating as we evaluate all options on behalf of our stakeholders. I will remind you that we were not one of those BDCs when our stock was trading well over book value that every six months came to the market to issue stock. We're very judicious, very thoughtful and careful. As an issuer, we're going to be judicious and thoughtful and careful as we consider those other options.

Okay. Those were all my questions. Thanks for your time.

Thank you.

Jonathan Bock, Wells Fargo Securities.

Good afternoon or good morning, Art, and thank you for taking my question. My question pertains to the SBIC and originating deals that fit, because we've seen some BDCs chose to lever those faster and we're just curious, Art, what would you consider the governor here in your mind that makes portions of your deal flow not as applicable to that type of debt? And kind of going forward, how -- I know that's the first place you go, but are there ways to source assets in an easier manner, I don't know if you're able to purchase those from friends or club deals et cetera, that could allow you to build that up faster or not, kind of interested in the governors and kind of the outlook as to you have one investment coming in. Is it fair to assume that it should be quicker in the future or not?

Yes, it's a great question and we analyze it all the time. As it becomes more of a buyer's market and we become more involved in down the middle of the fairway buyouts et cetera, you would expect more to go into the SBICs. We've been in an environment in the last few years where it's been a seller's market; and on these down the middle of fairway deals where borrowers can get single-digit subordinated or second lien debt that we don't like as a general proposition with little or no covenants, that's hurt our ability to source for the SBICs.

So as the market we think normalizes, it becomes more of a buyer's market. We will be able to utilize and that's this deal that we're talking about, we're referring to coming in this quarter to down the middle of the fairway buyout, where it's kind of right to our forehand and it's going to fit and we would expect more of the down the middle of the fairway deals to do.

It's just interesting, two of our big verticals as you know are gaming and energy, those are two verticals that the SBICs don't really like financing.

Yes, I appreciate that. And then maybe a question, as we've seen a bit of a shakeup in, will say, more of liquid credit relative to liquid credit, because your liquid credit generally has a six-month lag for your stereotypical middle market deal that doesn't get put out to bid.

Art, do you see opportunities to perhaps given that you'll be a little flush with liquidity and you've already considered the stock buyback and are looking at it, which we appreciate so thank you for those comments; but then also seeing opportunity to perhaps deploy in the more liquid credit securities that might allow you to get in and leverage a little bit more and boost earnings in this timeframe or would you chose to perhaps play the slower developing deals that are a bit more proprietary, but in this case might actually carry the same yield, that's what you could find in a more liquid credit offered at 11% something to that effect?

That's a great question. If you look at our track record over the eight years, certainly during the '08, '09, 2010 time period when you could source liquid credit and buy dollar for $0.70 or $0.80 and get a very healthy yield and move towards the top of the capital structure, we did a bunch of that and that is one of the reasons that we saw very good NAV and income and dividend growth during that time period.

So as we move towards more of a buyer's market, we hopefully will see nice opportunities in the secondary market for liquid credits. There will only be in situations where we think we have a unique view, where it's a company we follow for a long time, we know the sponsor, we know the management team. We don't just want to be, if we do a buying on-the-run stuff, it's going to be stuff where we think we have a differentiated angle and view than in the market place. So we did a bunch of that in the financial downturn. You could expect some of that to the extent opportunities arise in next year too.

Alright. Art, thank you so much.

Thank you.

Christopher Nolan, MLV & Company.

Art, question on RAM Energy. Was the write down primarily related to concerns on cash flow or was it lower asset values for RAM, given they bought the Chaparral property and possibly there might been valued at lower valuation later on?

It's a great question, what does fair market value mean. To us, we still think we are at least getting $0.100 and a $1 back. As you know, we are obligated to fair market value, names each quarter. We either get broker dealer quotes, where they're active or we send everything to independent valuation firms; and the fair value process is one that looks at comparables, what are comparables trading at. So we think we're going to get $0.100 plus on the $1 back, but due to fair market value, it's marked down a bit. So that's why we point out the difference between realized and unrealized, right?

To us, it's always about in the long run cash in and cash out. You have a mark-to-market while you're in an investment which is based on comparables, but we point out how our actual cash performance has been over a long period of time, through the recession, through the downturn in our deals.

Great. And a related question is, how does the strength of the sponsor factor into your valuation calculation, if a sponsor might have heavy energy exposure and their position might be weakened overall, does that affect your fair value for these investments?

Well, the management sponsor is always important to us, we see it all the time, having a great management is key, having great management is key. This management team at RAM is one that's done well by us in the past, we think they're excellent management and we think they know how to deal with this type of environment.

Great, thanks for the questions.

[Andrew Kerai, BDC Income Fund].

Yes. Hi, good morning. Thank you for taking my questions. Just had a -- just looking at new goal for resources, noticed you marked down the subordinate piece a bit more this quarter, you're still holding the second lien piece, basically a par. I was hoping from you a little bit of color; one, on how much bank debt is ahead of that second lien piece; and secondly, how much equity cushion you have below the sub-debt component?

Yes. So, a good question. The only thing ahead of the senior piece is a Reserve Base Loan or RBL, which is $50 million. So, some other people might characterize this piece as a first lien depending on how you view the RBL ahead of you or not. So we characterize it as second lien. Typically these companies like all companies have revolvers that are normal companies have ABL, energy companies have RBL.

The sub-debt piece for us was essential, a bit of an equity co-invest, we knew the subordinated debt had a coupon on it, and had a bunch of warrants on it. There is a [bulk load] of warrants on that piece. So to us, that's an equity co-invest style piece and will be more volatile by definition over time.

Sure. Thank you. Certainly makes sense. Then sort of here that I heard the dialog on Patriot again correctly. So the $2.8 million that you're getting as a fee on the take out of your debt, just $0.04 a share and then separately based on your warrant mark up as well, that's an additional $0.08 on a NAV rate upright. So combined, if you take the core income piece plus the $0.08, you're talking about $0.12 a NAV from both a third core income and then the $0.08 of realized gain, is that correct?

That's correct.

Okay, certainly. And then lastly, I just had the spillover income that you mentioned, that's -- can you just -- if you could just repeat that as well? I think I heard $0.21 if I'm not mistaken?

So this is once a year we are obligating, [our BDCs] are obligated to disclose their undistributed taxable income. So that was September 30th, it was $0.21.

Great, thank you. I just wanted to say -- just wanted to reiterate, it's good to see as an investor, you're taking at least some of the marks on the oil and gas book, as opposed to a couple of your peers, who this morning seemed to be holding on their private energy investments at par, so certainly appreciate you taking an honest fair value look at your book.

Thank you very much.

Jim Young, West Family Investments.

Yes, hi. Art, you had mentioned that 2015 could be a year of yield expansion. Can you just help us better understand what conditions have changed relative to last couple of years and are you talking about maybe like 10 basis points or just like 50 basis points plus in 2015 that you think could occur?

Well, it's a great question. Thankfully in our world, we don't deal on 10 basis point increments. If it's about 10 basis points, we're not adding much value. So look, we think about things in 50 basis point, 100 basis point type increments. Drivers are cash flows in the mutual funds, drivers are concerns about interest rates, a choppier market et cetera, et cetera, geopolitical risks. So it just appears to be the last few months going back into the prior quarter, more of buyer's market where we can drive terms a bit more.

Can you just give us a sense on the change in the terms that you're seeing with respect to the covenants, debt-to-EBITDA, et cetera?

Sure, I mean, look, when saying -- when the wind blows, it impacts all of these issues. So certainly most importantly for us it's credit quality is incredibly important keeping the debt-to-EBITDA rational and low; and then it's about yield and it's about covenants, and we've been able to drive covenants, we've been able to drive yield and we've been able to drive credit quality; and in couple recent deals, the equity sponsors put in additional equity to deleverage. We've seen an increased willingness to engage on covenant negotiations. We've seen an increased willingness to pay a little bit more yield. So it impacts the whole thing.

And we'll take our last question from Casey Alexander with Gilford Securities.

Hi, good morning. Thanks for taking my questions, and sorry to pile on; but looking at the portfolio and this is similar to what some other people have done. Your first lien experienced on average low-single-digit mark downs, if we ex out RAM; and the second lien was more 10% to 25% mark downs and the sub-debt was 30% to 60%. Were these valued by the Board or were they third-party valued, first of all?

Secondly, given the volatility as you moved down the capital structure in energy, how does that color your underwriting approach going forward?

So, with just valuation process, Casey; first we, the manager, takes a swag at valuing, then we send all of our files to external third-party valuation firms. It's 100% every quarter, okay?

100% every quarter, that's great.

100% every quarter, external valuation firms do their analysis, they do their book. They talk to our auditors, and the auditors have their own valuation group that interacts with the independent valuation firms; and then those numbers go to the Audit Committee of the Board, okay? In eight years, through the downturn, the Board has never moved $0.01 of what the independent valuation firm said should be the value, okay? So basically, that's what goes into the 10-Qs and 10-Ks. We're committed to external valuation, we're committed to fair valuation and that's the process.

Now, as I said, there is a score card, ultimate score card, which is cash in and cash out over time; and then there is the score card while you own an investment. On some of these energy names, we think we're getting all of our money back, right, and more; and if you look at our track record over eight years, even through the financial crisis, even through some defaults, we've gotten all of our money back and more.

So I would kind of caution people, certainly unrealized gains and unrealized losses are a mark-to-market and they were a report card along the way; but if you look at our track record, underwriting credit through the cycle, managing non-accruals, it's been excellent. Past results are never guarantee of future performance, of course.

That's for sure and we know that.

We think we know how to deal with deals that -- or markets or industry that have bumps along the way. We've had an excellent track record doing it. So that would be my statement on that.

Okay, great. Thanks for taking my question.

Thank you.

Ladies and gentlemen, that does conclude our question-and-answer session. At this time, I'd like to turn the call back over to Mr. Penn for any closing comments.

Thank you, everybody. We appreciate your time today and your interest in us, and we will talk to you next quarter.

Ladies and gentlemen, that does conclude today's conference, and we thank you for your participation.