Pennantpark Investment Corp (PNNT) 2015 Q3 法說會逐字稿

Good morning and welcome to the PennantPark Investment Corporation's Third 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 open for a question-and-answer session following the speakers' remarks (Operator Instructions). It is now my pleasure to turn the call over to Mr. Art Penn, Chairman and Chief Executive Officer of PennantPark Investment Corporation. Mr. Penn, you may begin your conference.

Thank you and good morning everyone. I'd like to welcome you to PennantPark Investment Corporation's Third 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 and PIN provided in our earnings press release, as well as on our website. I'd like to also 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.

Thanks, Aviv. I'm going to spend a few minutes discussing current market conditions followed by a discussion of investment activity, the portfolio, the financials, our overall strategy, then open it 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 in high yield markets, during the quarter ended June 30 those markets were relatively flat as high yield and leverage loan funds experienced some outflows, due to expectations of Fed tightening. We saw and participated in a more active environment in the quarter due to increased M&A and financing activity. We remain focused on long-term value and making investments that will perform well over several years that can withstand different business cycles. Our focus continues to be on companies or structures that are more defensive at a low leverage, strong covenants, and high returns. As credit investors, one of our primary goals is preservation of capital. 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've become a trusted financing partner for our clients. Since inception, PennantPark entities have financed companies backed by 150 different financial sponsors.

We've continued to invest in our platform. We've recently hired senior investment professionals for the West Coast and Midwest regions of the United States, along with hiring additional senior and middle level investment professionals for our New York office. With existing senior people in London and Texas, we have substantially widened our geographic footprint. These additional resources along with a broader overall platform resulting from the upcoming merger of MCG Capital with our sister company PennantPark Floating Rate Capital should drive significantly enhanced deal flow as PennantPark entities get more looks and can be even more relevant to our borrower clients.

We have been active and are well positioned. For the quarter ended June, 30 we invested $113 million. Expected IRRs generally range from 13% to 18%. Net investment income was $0.28 per share. We have met our goal of a steady, stable consistent dividend stream since our IPO over eight years ago despite the overall economic and market turmoil throughout that time period. We anticipate continuing the steady stable dividend stream going forward.

As you know BDCs are required to pay out to shareholders at least 90% of taxable income. As of last September 30, our undistributed taxable income was $0.21 per share. Since last September through June 30 due to realized gains in our portfolio, our undistributed taxable income has substantially increased. We have plenty of liquidity. As of June 30, we had in total about $480 million of available liquidity, consisting of $325 million of available credit facility, $75 million of SBIC debt financing in our second SBIC and over $80 million of cash on hand. Given the current market backdrop, we remain appropriately levered and have excess liquidity that we can use for both defensive and offensive purposes.

Last quarter, our Board of Directors authorized a stock repurchase program of up to $35 million worth of stock over 12 months. Last quarter we purchased 833,000 shares for about $8 million. We look forward to continuing this program. Our portfolio is constructed to withstand market and economic volatility.

We have a cash interest coverage ratio of 2.3 times and a debt to EBITDA ratio of 5.1 times at cost on our cash flow loans. We had some attractive realizations last quarter and generated about $14 million of realized gains. We are proud that since inception over eight years ago, through the recession and credit crisis, we've generated positive net realized gains for our shareholders. During the quarter ended June 30, we exited $18 million of Acentia subordinated debt and $2 million equity, with a blended IRR of 14.4%. SPG Boyd LTI was sold, which generated $14 million of proceeds on a $3 million equity co-invest. This was an 81% IRR on the equity and a blended 28.8% IRR on the mezzanine debt and equity, including the original $29 million debt investment.

Envision was sold leading to our $24 million second lien getting re-financed with a call premium, which generated 13.2% IRR. IDQ Holdings was sold leading to a 14% IRR on our $11 million first lien position. And finally Paradigm was sold generating $6 million of proceeds on our original $2 million equity co-invest leading to a 45.8% IRR on the equity and 25.7% blended IRR including the original $22 million mezzanine investment.

As we highlighted in our last few calls, with regard to our exposure to the energy industry, we have successfully invested in energy through 21 different companies since our inception over eight years ago. In 2014, we monetized three large subordinated debt and equity positions that generated proceeds of approximately $170 million and weighted average IRR of 17.8%. We 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've avoided many energy subsectors, geographies, as well as many undifferentiated service businesses with low barriers to entry. While the industry is challenged by low oil prices and rising supply, much of our exposure is senior in the capital structure with an asset-backed focus. 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 through proved, developed and producing reserves with hedges in place. There are also significant additional assets in the form of additional acreage, reserves and midstream assets. For instance, earlier this year, New Gulf generated additional liquidity by selling a portion of its non-core midstream assets for $85 million and is looking to sell further non-core assets.

With regard to RAM Energy, we are backing an experienced management team, which has performed well for us in the past and we are in a first lien position. Since last quarter, the company has remained current on its interest. We've temporarily waived the July 20 maturity of the company's $20 million Tranche B loan as the company continues to evaluate its assets and strategy in this market.

We continue to work productively with the company, including evaluating the sale of non-core assets and other options. That said, we do not believe that in the short run option of selling attractive assets at fire sale prices is prudent. In this challenging environment for oil prices, we intend on taking an approach that will maximize value in the long run. We believe that our underwriting criteria long-term approach should support our investment 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 also present attractive risk reward opportunities.

Across PennantPark entities, we've had only nine non-accruals out of 377 investments since inception over eight years ago, despite the recession during that time frame. Further, we are proud that even when we've 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 positive net realized cumulative gain since inception over eight years ago through the financial crisis, are testament to this long-term value orientation.

You may recall our prior investment in UP, Universal Pegasus an energy services company. Due to significant downturn in the company's industry and performance, our debt investment was restructured, we backstopped an equity raise and took control of the company. After changing management and improving performance, we subsequently sold it to a strategic buyer and generated double-digit overall return from inception of the investment.

Based on values as of June 30, we've recovered nearly 90% of capital invested so far on those [nine] companies that have been on non-accrual since inception. We have two non-accrual investments as of June 30 representing only 1.2% 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 or generating consistent steady dividend.

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. We purchased $12 million of Affinion's second lien debt. Affinion, designs markets and services, customer engagement and loyalty solutions. Affinion is an existing portfolio company, where we have historically been invested in the subordinated debt. We found it both relatively safe and opportunistically enhancing to our overall position, to move up the capital structure in instances where debt has traded down in the secondary market. AKA Diversified and Z Wireless is a Verizon Wireless premium retailer based primarily in the Midwest who invested $9 million of the first lien of revolver Atlanta Street Capital who is the sponsor. We purchased $15 million of add-on term loan to AP Gaming. AP Gaming manufacturers and sells slot machines. Gaming has historically been one of our most active and successful industries. Interior Specialists is a provider of design center services for homebuilders. We bought $25 million of first lien term loan. Littlejohn & Company is the sponsor. We bought an additional $10 million second lien term loan for Jacobs Entertainment, which operates gaming facilities.

Prime Security Services provide security monitoring systems and services to residential and commercial customers across the United States. We purchased $28 million of the second lien term loan. Apollo is the sponsor.

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 June 30, 2015, recurring net investment income totaled of $0.24 per share. In addition, we had $0.04 per share of other income. As a result, net investment income for the quarter was $0.28 per share. Looking at some of the expense categories, management fees totaled $11.7 million, general and administrative expenses totaled $1.7 million and interest expense totaled $6.6 million. During the quarter ended June 30, net realized gain from investment was $13.8 million or $0.18 per share. Unrealized loss from investments was $30.1 million or $0.40 per share. Unrealized gain from our debt was about $600,000 or $0.01 per share and the accretive effect of our share buyback was $0.01 per share. Consequently, entity per share went down $0.21 from $10.25 to $10.04 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 quotes 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 12.4%. On June 30, our portfolio consisted of 64 companies across 30 different industries and was invested 30% in senior secured debt, 47% in second-lien secured debt, 15% in subordinated debt and 8% in preferred and common equity. 71% of the portfolio has a floating rate, including 65% 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 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.

Thank you, sir. (Operator Instructions). Troy Ward, KBW.

Great, thank you and good morning, guys. Art, can you speak just a little bit on the energy portfolio quarter-to-date, there's obviously been additional oil price volatility. And can you just talk a little bit about what the impact to your fair valuation across. What's the impact of actual oil prices on that fair value process?

Yes, that's a great question. As you know, we have independent valuation firms looking at each and every investment every quarter. And it's certainly, oil prices should impact valuation, on the other hand, each company has its own story. They're to doing different things, kind of underlying in terms of what they're looking at in terms of non-core assets, and it's usually a combination of short term as well as long-term outlook that the valuation firms take into account each quarter when they're valuing these investments.

And you spoke about, one of the companies using an asset as a form of liquidity year-to-date, I think you said, what is the opportunity for some of these energy companies to find buyers of let's say non-core type of assets, so they can increase their liquidity in the near-term?

That's a great question. That's why we have the comment about both looking at non-core asset sales, but also we're not a seller of fire sale prices, we have to be long-term value investors. So it's assessing what's available out there to -- in terms of non-core assets, as well as the price and the opportunity for the long run. We mentioned Universal Pegasus in the comments, because that is an excellent case study of a situation, where for that particular company unfortunately everything went wrong, did what we needed to do, we converted some debt to equity, we invested more in the company, we changed out the CEO and over time, we worked it and we got back well more than our capital we ended up getting a double-digit return. So we may not get there with some of these companies, but we have a skill and expertise and mentality to do that if needed.

Okay. And then switching gears a little bit here, on DirectBuy your fair value was 58% in the quarter. Obviously that's a name that's been struggling for some time and then probably going through some form of additional restructuring. Another BDC in the space, we've talked about it before has it marked at 22%. Please provide some color on the valuation process and maybe speak to the differentiation in those to fair value marks?

Sure. We are on that particular name, we are on the Board of the company, and (inaudible) perspective. The other BDC is not -- the company is in transition. We are seeing that transition taking place. We're hopeful that the company will successfully transition and that could be the explanation for the two different valuations.

Okay. Then Aviv, Just one last question for you. On the income statement, you spoke to there is $0.04 of other income in the quarter. Can you provide just a little bit of color maybe on where that income was derived? Was there a fee? I assume there are normal origination fees, but was there an additional fee on any existing portfolio company for instance, maybe RAM on the Tranche B to extend that?

RAM is not one of them, but it's all over the map. We had like MidOcean that we exited or gave us a dividend, again it's non-recurring. IDQ, for example, we have recorded some penalty on that Tranche. And prepaid legal gave us some amendment fees on the -- so these are the three largest making up the $0.04.

Okay, great. Thanks, guys.

Thank you.

Douglas Harter, Credit Suisse.

Hi, this is actually Sam Choe filling in for Doug Harter. So given the recent weakness in the share price, I was wondering how you're thinking about the rate of the share repurchases going forward?

Choe, it's a great question. Look we make an assessment each quarter and where the stock is. Certainly the stock is more attractive today than it was last quarter as from a buying perspective. So we're excited actually to go out and buy some stock at this level.

Right. So it's dependent. So I mean, I was just wondering what you did this quarter, what's reflective of how you guys are going to carry out the rest of the year?

Yes. It's hard to and we shouldn't sit here and pan ourselves into a corner when we set up the program, we assume that we would methodically do it and rather at the end , and somewhat even pieces over the course of the year with the stock where it is, we may be a little bit more aggressive this quarter.

Got it. Thank you.

Chris York, JMP Securities.

Good morning guys and thanks for taking my questions. So just have one this morning and wanted to take a little bit step back and talk about investment environment. So with the sale of Antares to CPPIB, the pension fund has said that it intends to expand the offerings with the junior capital products. So, as one of the largest BDCs with a focus on sub-debt, how are you expecting the dynamics to change in the markets where you guys traffic?

It's a great question. We'll see this is all kind of perspective. The biggest competitive threat to all of us including Antares is the liquid markets, which have generally been variable over the last couple of years, the aggressive high yield market, the aggressive syndicated second lien market, so that's the biggest competitive thread. We've known Antares and the folks there for a long time, we believe them to be good investors and rational investors. So for us it's another rational player in the world that we are going to see. Business is usual for us as there's lots of good and rational competitors out there that we're happy to partner with, we'd be happy partner with them.

Great. Thanks, Art.

Thank you.

Mickey Schleien, Ladenburg

Yes, good morning Art, and I apologize if I'm sort of beating a dead horse here. But I do understand that the volatility in the oil and gas market makes it valuing the energy investments very difficult, but when I look at names like the New Gulf (inaudible), I saw that Bloomberg showed a trade on June 30, 58 but you valued it at 85. And I just want to understand what are the metrics the board is looking at? Maybe in that case that supports that kind of disparity?

Sure. Every quarter, there's an assessment made as to the liquidity and activity of names that are quoted. And in this case, it was determined that, that was not an active or liquid name, in which case we send it to the external valuation firm for independent valuation. The external valuation firm does take the broker dealer quote such that it is into account, looks at a variety of other factors and comes up with this value.

Okay. And Art, we actually saw some other BDCs nibbling in the energy markets, I understand that at PNNT the allocation is already fairly high, but is that providing you some opportunities either PNNT or PFLT to take advantage of?

That's a good question. We said in our prepared comments that it might be a good time to invest. Look we are fairly full, we believe in the diversified portfolio in terms of PNNT and we don't anticipate much movement up in terms of exposure to energy and oil and gas. And certainly for PFLT, which we set up to be even a different risk over the PNNT, we will be very light in energy.

Okay. Thanks for your time this morning.

Thank you.

Christopher Nolan, MLV and Company.

Hi, guys two questions. One, Aviv, when does the window for your share repurchases this quarter close, because according to the queue you haven't repurchased any shares so far in the current quarter.

Yes, in the queue, we disclosed it for the quarter ending June 30, we bought $8 million worth of share repurchase. And according to our quarterly standard, window opening, usually waiting 24 hours after we release the queue to let the news simmer and then the window usually opens.

Okay, because I was just looking at the cover of the Q and it indicates as of August 5, your share count is about the same as it was at June 30.

Well, that's right. We have a 30-day window after we announced earnings and that window for the prior quarter was over. We bought $8 million worth of stock. The window will open again tomorrow.

Great, thank you for the clarification. The second, did I hear you correctly in terms of RAM Energy on July 20 you're waiving a payment from them. Could you give a little detail on that please?

Yes, the RAM Energy is current on its interest, they have about $20 million piece that matured July 20, we have temporarily waived that maturity as they assess options and they're looking at all the options and we're working with them. It remains current on interest.

Okay. So this is really principal repayment. Correct?

Yes.

Great, thanks for taking my question.

Thank you.

Scott Valentin, FBR Capital Markets.

Hi, this is actually Tim Hayes for Scott. The yield on your debt investments declined in the quarter about 200 basis points I believe. How much of that was due to asset mix and with spreads widening, do you expect yields of new investments to be higher in the September quarter?

It's a great question. The yields were a little lower than our prior -- we had a deal that was on the bubble of getting done in the quarter, which would've kind of brought the average yield up to 12%. The mix this quarter was more heavily stretch senior unitranche personally-oriented deal. So -- where we feel safe, we're happy to take a little lower yield.

Okay. And so, do you expect that one investment to close in the next quarter?

We're working on. It may or may not close. We have other deals we're looking at and look where we're shooting overall to get a double-digit ROE, which means we need to have a healthy double-digit return on the portfolio and we're very focused both on credit quality and return.

Sure. Okay. And finally, are you seeing any new attractive energy related opportunities, or are you still cautious there just given the continued decline in oil?

We remain focused on our existing portfolio, working with those companies and giving them all of our focus and attention to help them through this period of low oil prices. There could be some bargains out there. Too early to tell.

Okay. Great, thank you.

Thank you.

Jonathan Bock, Wells Fargo Securities.

Hi, guys. Thank you, Its (inaudible) for Jon Bock, I just wanted to touch upon Affinion, which sources -- a good source of markdowns this quarter and actually with the CFPB, is the markdown related to say a fine or higher cost structure, which might result in more of a permanent impairment or is this sort of a mark-to-market given the situation, if you could give us any color there.

Yes, it's a mark-to-market on the situation. And they did have a deal and they did have a nice agreement with the CFPB which was less than expected. They did announce earnings a couple of days ago. The earnings were better than expected. The market, the paper, which is liquid they trade up a few points in the secondary market. We still think the value of some of the parts covers the debt. And that's why we're still focused heavily on this name. We in fact moved up capital structure, but some of the second lien this past quarter, which we think is very safe and had a good yield.

(Operator Instructions) Andrew Kerai, BDC Income Fund.

Yes. Hi, good morning. My questions have been asked and answered, but just wanted to reiterate, as shareholders we appreciate the buyback and unlike certain BDCs who made excuses as to why they choose not to repurchase shares at discounts, we appreciate you being proactive in that approach. So look forward to some more during the quarter.

Thank you, Andrew.

Melissa Wedel, JP Morgan.

Hi this is actually Melissa for Rick Shane. I was hoping to get a quick update on New Gulf and Energy & Exploration Partners, as those seem to have slightly larger markets on the quarter than some other energy investments. Thanks.

New gulf, as we said in our prepared remarks, last quarter sold some assets for $85 million, some non-core assets, midstream assets. They continue to work their cost structure, they continue to look for reasonable values on non-core assets and that's all I can really tell you there. The other one was ENXP, was that the one (Technical Difficulty). Nothing to report there.

Okay, thanks. As a follow-up, can you talk a little bit about how the energy companies in your investment are approaching their hedging practices right now, given where oil is trading?

It's a great question. Each company has its own view and again that's confidential information and we sign confidentiality agreements, but in some cases, management teams are loathed to be hedging here at these dollar prices. So that's the debate that almost all of these guys are having in their boardrooms as to whether you hedge here, whether you go un-hedged. The hedges from the past do roll off over time, so those hedges that were at higher prices have been rolling off. And I can tell you each management team in board is having this discussion about what to do about hedging going forward.

Okay, thanks.

Thank you.

And at this time, I would like to turn the conference back over to Mr. Penn for any additional or closing remarks.

Just want to thank everybody for being on the call today and thank you for your questions. We're happy to speak to you next quarter in the next quarterly conference call and intra-quarter, if you like, you know where to get hold of us. Thank you very much.

Thank you, sir. That does conclude today's conference call. We do thank you all for your participation.