Pennantpark Investment Corp (PNNT) 2015 Q4 法說會逐字稿

Good morning and welcome to the PennantPark Investment Corporation's fourth quarter FY15 earnings conference call. Today's conference is being recorded.

(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 fourth quarter FY15 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 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 as well as on our website.

I'd also like to call your attention to the customer 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 information 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 discussion of the portfolio, investment activity, the financials, and 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 and high-yield markets, during the quarter ended September 30, those markets softened as high yield and leverage loan funds experienced some outflows due to expectations of fed tightening and a potential weakening economy. This has impacted the tone of the middle market and has generally resulted in a better opportunity to invest in attractive risk reward.

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. 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, 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 over 150 different financial sponsors. We are excited to be approaching this improving investing market with substantial financial and human capital across our platform. From the standpoint of financial capital we have significant liquidity in PNNT and our sister company, PennantPark Floating Rate Capital, has recently nearly doubled its financial resources due to the merger with MCG Capital.

With regard to human capital, we have made investments in senior and mid level investment professionals across different geographies. With senior investment professionals in the Midwest, West Coast, Texas, and London, our geographic footprint has broadened. All of these senior professionals have worked with us in the past and come on board sharing our culture. As a result, we should be able to 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 September 30, 2015, we invested $116 million at an average yield of 12.2%, expected IRRs generally range from 13% to 18%, net investment income was $0.27 not per share. We have met our goal of a steady, stable, and consistent dividend stream since our IPO 8-1/2 years ago, despite the overall economic of market turmoil throughout that time period. Our goal is to continue this steady stable dividend stream going forward.

As you know, BDCs are required to pay out to shareholders at least 90% of taxable earnings. As of September 30, our undistributed taxable income was $0.53 not per share. This spillover amount grew from $0.21 per share last year due primarily to $30 million of realized gains from our portfolio during the year. This is substantial cushion that we can use to protect our dividend while we build income over the coming quarters.

We have plenty of liquidity. As of September 30, we had in total about $385 million of available liquidity consisting of $260 million of available credit facility, $75 million of SBIC debt financing in our second SBIC, and $50 million of cash on hand. We are pleased that much of our debt financing is fixed rate with long maturities, including our two issues of unsecured bonds, and our SBIC financing. We have remained appropriately levered and have excess liquidity that we can use for both defensive and offensive purposes.

We continue to make significant progress on our stock buyback program. Last quarter we purchased about 1.3 million shares for about $9.9 million, bringing our total purchases so far to 2.1 million shares for approximately $18 million. We look forward to continuing the program.

Our portfolio is constructed to withstand market and economic volatility. We have a cash interest coverage ratio of 2.4 times and a debt-to-EBITDA ratio of 5 times at cost on our cash flow loans. We've had some attractive realizations. We sold our investment in [Sun Park Holdings] to management and financial sponsors generated proceeds of $28 million and an IRR of 17%.

Additionally, after quarter end, foundation building materials we sold resulting in our $80 million second lien loan getting taken out of 102 and our $2 million equity co-invest getting realized at over $8 million. The blended IRR on this $82 million investment was about 20%. Over the course of 2015, we exited 10 equity co-investments and had net realized gains of $30 million.

As we've discussed in prior calls, several companies in our portfolio are experiencing challenges, including RAM Energy, New Gulf Resources, and Affinion. In all three of these cases we have either lead or had a leading role in capital structure discussions. The outcomes should serve to ultimately maximize value and recovery over the long term.

Affinion, as you may recall, is one of the largest customer engagement and loyalty solutions companies in the world. The company is comprised of four key operating segments, North American membership, loyalty, insurance, and international. We are enthusiastic about the prospects of three of the four businesses. However, the membership business has been challenged due to regulatory headwinds that have impacted their large financial institution clients.

The global loyalty business, which is experiencing favorable trends, has sticky revenue, high free cash flow conversion, and attractive growth opportunities. The company completed a debt exchange offer two years ago in November 2013, which extended maturities and reduced the company's cash interest burden. Unfortunately, the decline in North American membership exceeded expectations.

This month, after extensive negotiations, Affinion completed an exchange offer in which the 14.5% notes converted into 25% of the company's equity and a 13.5% notes converted into 75% of the company's equity. In order to boost liquidity, there is $110 million rights offering of new international notes with a 25% of the common equity attached. The exchange offer and rights offering result in PNNT owning about 9% of the common equity.

The company can now refocus on its operational transition, from the legacy membership business to higher growth and higher value-added segments such as loyalty and international. In addition, PennantPark's equity ownership should allow us to recover our investment as Affinion returns to growth and the market ascribes a higher multiple to the Company's earnings. We believe that to recapitalize business we will be able to grow from a stable foundation and that the Company's valuable segments will allow us to maximize our recovery over time. Our positions in the 14.5% and 13.5% notes were put on nonaccrual as of September 30. Our position in the Company's second lien should be enhanced by the new deleverage balance sheet.

With regard to the energy names, we have avoided many energy subsector's geographies as well as undifferentiated service businesses with a low barriers to entry. While the industry is challenged by low oil prices and a 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 approved, developed, and producing reserves. There are also significant additional assets in the form of additional acreage, reserves, and midstream assets.

With regard to Ram Energy, we are backing an experienced management team which performed well for PNNT in the past. RAM is in ENP company focused on the development and production of long life, slow decline, conventional assets in the permian, Mid-Con, and Ark-La-Tex basis. The company has more than 50,000 net acres and are all held by production.

In September, the last calculated 1P, or proven reserved [PD10] using the [Nimex drip] was greater than $55 million. The company is the operator of a vast majority of its acreage and production is approximately 1200 BOE PD. Despite the company's hedging program and completion of approximately $15 million of opportunistic asset sales at attractive prices of last year to generate liquidity, the continued weak commodity price environments may the company's capital structure unsustainable.

Since the last quarter, we have completed a consensual restructuring by converting our $20 million tranche B loan into 100% control equity position. Together with management, we decided that the best course of action was to recapitalize and not pursue additional assets sales today at fire sale prices. The company will be run a partnership with management. Recall that the CEO, Larry Lee, is a longtime industry veteran with whom we have successfully invested in the past. He has previously run a public company, which was subsequently sold. We believe that this restructuring will provide Ram with the room for growth and allow it to operate successfully in this market environment.

Additionally, we amended the credit agreements to include PIK toggle function on the $75 million first lien senior secured tranche A to provide maximum flexibility to build value over time. Our strategy in the future may include strategic acquisitions, divestitures, or mergers.

New Gulf resources is an EMP company that focuses on the development, production, and exploitation of oil-weighted assets in Woodbine and Eagle Ford shale areas of East Texas. The East Texas assets are situated in the [Halliday, Curden, Johnson Ranch, Centerville, and Bodias Creek Fields] with a significant concentration of oil in over 70,000 net acres. With a large block of contiguous acres, the Johnson Ranch area is a high value potential deep horizontal play with recent offset production of approximately 1500 BOE PD from a nearby operators. Several large energy companies, such as EOG and Apache, have highly productive acreage in and surrounding these areas.

While the company has aggressively responded to the lower price environment by selling its midstream natural gas assets for $85 million and marketing its other non-core assets, weak commodity prices have placed a strain on the company's liquidity. New Gulf is a private company and only discloses limited information to the public. The company has a $15 million RBL facility, $365 million of a second lien senior secured notes, and approximately $150 million of senior subordinated notes.

On October 30, New Gulf announced that it had retained advisers to review strategic alternatives to its capital structure. While we have placed New Gulf on nonaccrual, we believe the company has substantial asset value.

With regard to our energy exposure, we do not believe that 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 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 also present attractive risk-reward opportunities and our existing portfolio companies.

Across PennantPark entities, we've had only 11 companies on nonaccrual out of 385 investments since inception, 8-1/2 years ago despite the recession during that time frame. Further, we are proud that even when we had those 11 non-accruals we have 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 constantly monitor our deals and re-underwrite them in the face of new information. Every investment that does not have a broker-dealer quote or the broker dealer quote is inactive is independently valued by one of three nationally recognized valuation firms each and every quarter.

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. Although past returns are not necessarily indicative of future returns, our positive net realized cumulative gain since inception 8-1/2 years ago through the financial crisis are a testament to our long-term value orientation. You may recall our prior investment in UP, Universal Pegasus, and Energy Services Company. Due to a 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 a double-digit overall return from inception of the investment.

Based on values as of September 30, to date, we have recovered nearly 87% of capital invested on those 11 companies that have been on nonaccrual since inception of the firm. As a result of this track record of low non-accruals and high recovery rate, we're one of the few BDCs operating before the recession which has preserved capital for shareholders while generating consistent, steady dividend. With regard to our dividend, our Board has continually evaluating the earning power of the Company relative to the dividend. Our substantial spillover cushion of $0.53 per share gives us the opportunity to protect our dividend while we build income and evaluate our portfolio and the market without rushing to make a decision on the dividend at this point.

In terms of new investments we had another quarter investing in attractive risk-adjusted returns and virtually all of 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 lent an additional $9 million of second lien term loan to Balboa Capital. Balboa provides equipment leases to small and medium-sized businesses in the US. The company is owned by management.

Language Line is a provider of on-demand spoken interpretation services. We purchased $40 million of the second lien term loan; Avery Partners is the sponsor. We lent $30 million in the first lien term loan to Sunborn International, which operates the Sunborn London Hotels, the (inaudible) family is the owner. This investment was a result of our presence in London.

US Med is a direct-to-consumer mail order medical supply distributor focused on patients with chronic conditions. We invested about $9 million in the first lien loan. HIG is the sponsor.

Turning to the outlook, we believe that the remainder of 2015 will continue to be active to growth and M&A driven financings. Due to our strong sourcing network and client relationships, we are seeing active deal flow.

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

Thank you, Art. For the quarter ended September 30, 2015, recurring net investment income totaled $0.21 per share. In addition, we had $0.06 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 $11.7 million, general and administrative expenses totaled about $800,000, and interest expense totaled $6.7 million.

During the quarter ended September 30, unrealized loss from investment was $16 million or $0.22 per share. Unrealized loss from our debt was about $600,000 or $0.01 per share. Realized losses from investments was $1.8 million or $0.02 per share, and the accretive effect of our share buyback was $0.04 per share.

Consequently, entity per share went down $0.22 from $10.04 to $9.82 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 investments.

Our overall debt portfolio had a weighted average yield of 12.1%. On September 30, our portfolio consisted of 61 companies across 30 different industries and was invested 31% in senior secured debt, 47% in second lien secured debt, 14% in subordinated debt, and 8% in preferred and common equity. And 71% of the portfolio has a floating rate, including 65% with a floor and the average LIBOR floor is 1.4%.

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 long-term preservation of capital. Everything we do is aligned and at goal. We try to find less risky middle market companies that have high free cash flow conversion, we capture that free cash flow primarily in debt instruments, and we pay out those contractual cash flows in the form of dividends to our shareholders.

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

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

(Operator Instructions)

Rick Shane, JPMorgan.

Sorry about that good morning, guys. I'd just like to talk a little bit about two things. Obviously you been buying back shares about $10 million a quarter and I'd like to talk about leverage.

The market is implicitly giving you the opportunity to buy your stock back at about a 30% discount to NAV, but I think more importantly when you look at it on a levered basis about a 16% discount to the value of the underlying assets that are marked to fair value. Given everything, isn't that really the best opportunity for investment for you at this point?

And then you talk about liquidity and I think you guys are sort of at the right point right now we're looking at it as about 170% assets to equity ex the SBA loans, which is appropriate. How much more leverage do you think you can take on given the current environment?

Those are great questions, Rick, and they're all kind of important and they all relate to each other and of course it's all a balancing act and, yes, we really like the buyback.

That's why we did it and when we announced a couple of quarters ago our thought was and it remains that we will methodically over the four quarters buy the $35 million, see where we are at that point in time, lift our head up, see what the opportunities in the deal market is, see where our leverage is and make a decision based on that. So we are excited to continue to buyback. We also are excited to have a liquidity we have.

Our SBIC licenses are obviously a great port of call and a first port of call because it's long-term financing. It uses cost accounting. It's attractive financing, so we clearly hope to optimize and use all of the SBIC financing that we can use, and then are additional excess liquidity.

We're still thinking overall leverage in the same zone that we always have. We just would really like those SBIC licenses. As we've always said, they are great for both offensive and defensive purposes. And then we have to really manage our portfolio. What are the deals that are coming in? We have to make sure that they are attractive, they should be compelling, the deals that we're doing, and then we have to manage our portfolio, pro forma for some of these non-accruals. Equity as a percentage of the portfolio is going to end up probably being a double-digit number.

A little higher than we'd like, so we are going to need to manage the equity portion of our portfolio. And as we have been doing, we had $30 million of realized gains over the last 12 months, continue to hopefully realized gains from the equity portfolio which will be additional cash to use to put into interest paying debt instruments.

Okay. Great that's are helpful and appreciate the point on the increase in the equity positions as well. Thank you.

Thank you.

Arren Cyganovich, D.A. Davidson.

Thanks. You just kind of touched on this a little bit, but your equity positions, what's your ability to I guess direct sales there. Often times you are not in a control position and realize those gains and help get the NII coverage on a recurring basis back up a little bit higher?

Yes. So, look, as you know many cases and where we've had most of these gains have been in equity co-invests in LBOs. Last year was a very prolific year. We still have some very good nice embedded numbers in our equity portfolio that we're hoping will roll out and will turn into cash over the next 12 months.

Unfortunately we are not the driver of many of those, those just happen over time as companies perform or deleverage or ultimately get sold. Impossible for us to time it. Again, we take a long-term view on all these things and over time we believe we're going to be able to, as we have from inception, be able to have enough realized gains to offset losses and maybe even be positive at the end of the day.

So even though we're not thrilled obviously with some of these developments in the non-accruals, we are optimistic in the long run like we have in the past that some of these will turn into interesting exit opportunities for us. We'll gain back the vast majority of the money we've invested a potentially more, and then turn that into cash paying debt instruments as well.

Thanks. And with respect to RAM Energy, when you make the decision to allow companies to go towards a PIK toggle that ends up 100% PIK, how do you usually think about that decision whenever you have a couple of those in your portfolio? (multiple speakers) Go ahead.

On RAM specifically, we're just getting in there as a control investor, so the reason we did the PIK toggle is it gives us optionality either way, depending on what we find out, how much cash flow they develop. They could sell off some assets to pay cash. There could be enough cash flow from operations to pay cash.

On the other hand, we also want to maximize the opportunity to maximize value in the enterprise and to make sense for us to PIK for a little while. If that's the best way to maximize value, we will certainly look at it. We are excited to be partnering with Larry Lee and his team.

They are a great management team. They've done well for us in the past. They have a great track record. So it's going to be interesting to work with him and his team and we're excited about that opportunity, but the PIK toggle gives us maximum optionality as we get in there and figure out what the various tools are.

Okay. And then just lastly, on the repayment of Foundation Building, is there going to be any fee income associated with that or will that all be treated as realized gains?

So about $80 million of debt taken out of [$102 million], so that is a prepayment penalty which will go into other income, and then the $2 million of equity co-invest turned into $8 million of proceeds or $6 million realized gain.

Okay. Thank you.

Thanks.

Greg Mason of KBW.

Great. Thanks. Art, I just wanted to get a little more clarity on the dividend. It sounds like you're not going to do anything for a while based on your spillover, but I just wanted to get just a little more color on what you're thinking about the dividend near term and longer term.

Well, we have the substantial spillover. We have a lot of liquidity. We think the market is coming -- is becoming a little bit more of a buyer's market which means better risk-adjusted returns, better yields. So there's really nothing we can make a decision on at this point. We have to see how to deal flow is, where the yields are coming in.

We have to see how our spillover works overtime. We're looking forward to using the SBI licenses a little bit more fully, so there's really nothing we can do at this point in terms of making a decision. We don't think it's prudent to make a decision until we see how this plays out over the coming quarters.

Okay. Great. And then my next question was on the SBIC usage. You've been at $150 million drawn here for now four years. I know some of that you were waiting to get your second license, but you've had that for a while and not yet drawn on it. So was that a conscious effort or was that asset not fitting? And do you think you'll be able to more aggressively use the remaining $75 million in the coming quarters?

It's a great question. It was -- look, we've always loved the SBIC financing and it's been our goal to use it but we've always like having it a little bit in our back pocket as well.

Both for offense of and defensive purposes given the ability to get 2-to-1 leverage given the long-term cheap financing and given the fixed rate on it. So we've tried to find deals to go into it. We're finding I think in this more of a buyers market that we're coming into, we have been finding more deals that fit into the SBICs. So we're hopeful that in the coming couple of quarters will be able to fill them all up.

Great. Thanks. Appreciate it, Art.

Thank you.

Doug Mewhirter from SunTrust.

Hi. Good morning. First, just a quick clarification. Do you have exemptive relief on cross investing with PFLT?

Yes, we do. We have SEC exemptive relief.

Okay. I thought you did, I just wanted to clarify that. Also, looking at the portfolio, some of your other bigger energy investments, so -- Linc and Bennu seem to have avoided the nonaccrual or restructuring bogie.

Is there any -- I guess is it company specific characteristics or are they just a little bit more well capitalized? How are they shaping up right now? Obviously they've been marked down, but I assume that's market related.

Yes. Look, the energy portion of the portfolio has been marked down pretty heavily, which is fair and again reiterating that we send 100% out to external valuation firms every quarter.

Look, the fact that circumstances change all the time with these companies. We're hopeful that they will avoid nonaccrual. We think they are capitalized well, but we don't really know because we don't really know what the future will hold, but we think they've been appropriately marked and we're hopeful that they will stay on accrual.

Okay. And just one last one just to clarify because there's a lot of ins and outs of nonaccrual. What are the four -- you said there's four -- what exact ones are they current on nonaccrual as of the end of the quarter?

The four names currently on nonaccrual are Affinion, New Gulf, DirectBuy, and Greatwide which sometimes goes under the name Transportation 100.

Okay. Thanks. That's all my questions.

Great. Thank you.

Doug Harter of Credit Suisse.

Thanks. I was hoping you could give a little more color on what were kind of the unusual fee incomes that you had during the quarter.

Yes. That's a great question.

We sold Sutton Park, which was a control equity investment. We also were a lender to that company. So the vast majority of the other income was prepayment penalties from that loan.

Got it. And I mean you highlighted the $0.06. Is that the entirety of the prepayment income? And kind of what has that averaged over the past year or several quarters?

So, we do highlight or we do separate other income in our revenue statement, in our income statement, and that is what we determine as kind of one-time fee events, amendment waivers, prepayment penalties, so that has gone from $0.01 to $0.08 a quarter.

It's usually something but there's a risk that sometimes we don't have some of these fee events. Just to clarify, upfront fees on deals we do not take as other income or as fees. We amortize that over the life of the loan so the 2- or 3-point upfront fee to us is OID that we amortize over the life of the loan.

Perfect. Thank you, Art.

Yes.

Mickey Schleien of Ladenburg.

Good morning, Art. I noticed that PIK income relative to total investment income jumped a pretty substantially in the fourth quarter and I would like to ask you whether you are particularly concerned about any investments that are on PIK accrual that are potentially going to go on PIK nonaccrual?

Yes. So that's a great question and the way to -- no, we're not. The way to look at it is where the investments are mark to market. If it's a PIK deal and it's $0.95 on the dollar, we think there's a justification obviously for not having any concern about it.

Obviously if it's a PIK deal and it's $0.40 on a dollar, totally different kettle of fish. So, we feel like we did not accrue any income for New Gulf and we did not accrue any for Affinion ended 9/30, so we feel like we've got a very clean income statement.

Okay. And talking about marks -- Art, the same question I asked last quarter. I looked again at New Gulf and at the end of the second calendar quarter, so June that [11-3/4%] second lien you marked it at [85%] and it had traded at [58%]. Now it's marked at 71%, and I saw a trade in September at [31%]. I think you said in your prepared remarks that perhaps you and the Board have more insight into the named than the market does. Is that what's causing the disparity or do you -- does the Board feel the market is too pessimistic on this particular name?

Well, what happens is when there's a broker dealer quote, it's up to us to figure out if the broker dealer quote active and liquid, right? So we always have to ask ourselves what's the exit price to market participants in an orderly market? In that particular name there was only one buyer who takes his bid down every other day, so there's -- if there is a trade -- and I think the one trade that happened was a distressed seller who was a forced seller.

So you sit there and say, okay, that's not really an active market, you have a distressed seller and a buyer who takes his bid down every day. That's an interesting fact, but it's not really an active market. You send the investment to the external third-party valuation firm who does take the broker dealer quote into account, takes that one trade from a distressed seller, and the one buyer who keeps lowering his bid everyday, they take that into account.

Then they look at other market comps, what reserves are going for in the public equity markets and the other debt markets, they look at all those different elements and come up with their number. Their number in the cases of the energy deals is based on the value of the reserves based on the number of market comparables.

Okay. Appreciate that color. My last questions a little more philosophical. Obviously, your NAV per share declined pretty substantially over the last fiscal year.

I'm just curious whether you've thought meaning the external managers considered revising the management agreement to lower the base management team and introduce a look back which is more in line with recent vintage BDCs?

Yes. The Board is always looking at all the arrangements and they are always looking at the comps and the peers and performance. That said, we have had a lot of realized gains during those 12 months and the view is that in the long run it's cash in and cash out.

And historically we've had very good cash out relative to the cash in. Sometimes there's a mark to market negative, but in the long run it's cash in and cash out, and so far our performance has been strong.

Art, can you just remind me, when does the external management contract at PNNT come up for renewal?

Every February.

February. Okay. Thanks for your time this morning.

Jonathan Bock of Wells Fargo Securities.

Hey, guys this is actually [Jamie Serafin] filling in for Jonathan. Just had a quick question regarding kind of the share repurchases and your leverage. We've seen both of them kind of tick up recently. We've also seen some solid tailwinds and other income, so just kind of curious how should we be looking were thinking about portfolio activity in the coming quarters?

Look, it's -- again, it's -- thank you for the question. It's a balancing act between equity realizations, between leverage, between new deals, and between the buyback and we're balancing those all the time. We're looking at those all the time.

We intend to keep within the leverages zone that we have, although as we've said it is nice to have those SBIC licenses which gives you some extra defense and offensive firepower. So I think we're going to keep operating the way we're operating, looking at the market, trying to find good deals, keep our leverage reasonable, execute on the buyback. Over time try to convert some of these equity investments as we have the co-investments and in certain cases where we have to convert debt to equity try to convert them to cash over time at reasonable levels.

Awesome. Thanks. Think that will be all for me actually.

Christopher Nolan of FBR.

Art, did you mention that Pennant now owns 100% of the equity of RAM?

Yes, we own 100% of the equity. We are operating the company in partnership with management. We really like the management and we view them as a partner in the deal.

And can you give us a little detail in terms of what does RAM's balance sheet look like? I mean obviously you have the debt component, but is there a bank in front of you, what's [your] for your debt, what's the EBITDA turns on that right now?

Yes. So we're the only partner, only debt player in the capital structure. The company doesn't disclose EBITDA and frankly we're getting into the company and learning more about it with management. We have nothing else to disclose at this point.

All right. So if there is a capital -- excuse me, a liquidity squeeze or so forth, we should look that Pennant will probably be stepping in to one degree or another?

Potentially, although since we are the only debt to capital structure we could allow a reserve base loan on top of us if we want to do that. One of the ways we've made good returns in the past is by lending additional money to companies that we've lent to that have under performed and rest assured that any loan -- any additional capital we put into any of these companies we think will be on attractive terms.

Great. Okay. Thanks for taking my question.

Thank you.

Bryce Rowe of Baird.

Thank you. Art, just wanted to ask a question about RAM as well. I certainly understand the conversion from debt to equity on that second tranche -- [B tranche], but curious what kind of triggers are realized loss versus an unrealized loss given the equity now is valued at zero? Thanks.

Yes. So, look, it's the -- every time there's some kind of restructuring the various accounts and lawyers take over and usually there's a call whether something's realized or unrealized.

What we've traditionally done in restructurings when it is still middle of the game, which for us in RAM it certainly is we think the middle of the game because we think there's a lot more opportunity and life to this investment, as will [UP] and some of the other examples that we've talked about, we usually keep it unrealized until there is an event down the road that's clear. That there is an actual event.

Okay. Thank you.

Thank you.

John Hecht of Jefferies.

Yes. Thanks very much. A couple questions. First, just to make sure I got my notes right. For New Gulf, did you convert both tranches or just one of them?

So New Gulf, we -- it is -- the thing that we disclosed on New Gulf is that they hired and advisor on October 30 to assess their options. There is nothing else we can say at this point. It's early days and we don't yet know where that's all going to play out.

Okay. The -- and I guess a little bit of tag onto the prior question. Do you forward the companies where you have substantial ownership now or your nonperforming companies? Can you give us a sense of the liquidity profile for getting the asset kind of -- the asset coverage liquidity profile and when you might need to think about cash infusions or raising capital for these companies?

Look, we take it day by day, week by week, month by month. We think these companies, once they are restructured, have very flexible capital structures that give them room to run and run for a while. So the idea behind the restructuring is that it is not a Band-Aid, that it's a long-term or longer-term approach.

Okay. And then, Aviv, you mentioned a couple post quarter take-outs. Can you give us a sense for what kind of fee income we might have already earned on those just so we can consider that in our near-term model?

Sure. So the Foundation Building Materials was taken out. It was sold. Our $80 million tranche taken out of [$102 million]. So that 2 points is a one-time repayment penalty, repayment fee.

And the $2 million cost investment in the equity was taken out of the $8 million. That's what we disclosed in terms of post quarter end events.

Okay. That's very helpful. Thanks. And update on DirectBuy? It is just a name you kind of highlighted a little bit in the past.

Yes. Look, they are changing their business model quite substantially. Again, the company is capitalized to have time to do that.

It's going to take some time. We're optimistic about the business model change will ultimately take, but it will be -- it's a long-term process.

Okay. Thanks very much, guys.

Thank you.

That concludes today's question and answer session. I would like to turn the conference back to our presenters for any additional or closing comments.

Just want to thank everybody for their attention today and their interest in the Company, and will talk to you in early February.

With that, ladies and gentlemen, that does conclude today's call. We'd like to thank you again for your participation.