Pennantpark Investment Corp (PNNT) 2016 Q4 法說會逐字稿

Good day, and welcome to the PennantPark Investment Corporation's fourth quarter FY16 earnings conference call. Today's conference is being recorded.

(Operator Instructions)

It is 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 fiscal quarter 2016 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 customary Safe Harbor disclosure in our press release regarding forward-looking information. Today's conference call may also include forward-looking statements and projections, and we ask that you refer to our most recent filings with the SEC for important factors that could cause actual results to differ materially from these projections.

We do not undertake to update our forward-looking statements unless required by law. To obtain copies of our latest SEC filings, please visit our website at www.pennantpark.com or call us at 212-905-1000. At this time, I'd like to turn the call back to our Chairman and Chief Executive Officer, Art Penn.

Thank you, Aviv. I'm going to provide an update on the business, starting with financial highlights, a discussion of our dividends and energy portfolio, followed by discussion of the overall market, the overall portfolio, investment activity, the financials, and then open it up for Q&A.

For the quarter ended September 30, 2016, we invested $23 million at an average yield of 12.6%. New investment activity can move from one quarter to the next. Since quarter end, we've invested $52 million, and believe that the remainder of the quarter will be active.

Net investment income was $0.21 per share, which included $0.02 per share of a fee waiver. NAV increased 1.2% from $8.94 per share to $9.05 per share.

With regard to our dividend, our Board and management regularly evaluate the earnings power of the Company relative to the dividend. Given the continued weakness in energy, and overall yield compression in the market, we've concluded in consultation with our Board that it is prudent to pay our $0.28 per share dividend for the December 2016 quarter, and then reduce the dividend to $0.18 per share for the March 2017 quarter.

We're all personally disappointed regarding this reduction, which is our first dividend reduction in our nearly 10-year history, in spite of the fact that we went public prior to the Great Recession. This is undertaken with great consideration, and we believe it is the right decision at this time. This should allow us to return to the environment where we expect to continually earn or exceed our dividend through net investment income, with gains contributing to long-term NAV growth.

During the past year, we've had the opportunity to restructure most of our challenged energy names. Generally, post restructuring, these companies are now positioned to weather a period of prolonged lower energy prices. We believe it will take us more time for us to maximize the recovery on the energy portfolio. Additionally, with asset yields coming down over the last several years, we're looking to create an attractive risk-adjusted returns in our portfolio. We intend to focus on lower risk, primarily secured investments, thereby reducing the volatility of our earnings stream.

For the quarter ended September 30, we waived base and incentive fees which equaled the percentage of the cost value of our energy portfolio, 16%, as of December 31, 2015. This waiver amounted to $1.5 million representing $0.02 per share. In consultation with the Board, this 16% waiver of base and incentive fees will be extended and continued through December 31, 2017, as the energy investments need more time to maximize recoveries.

We believe that this waiver demonstrates a strong commitment to our shareholders, and our focus on our energy portfolio. Given the continued headwinds and volatility, we continue to focus on our energy portfolio which includes those companies in our schedule of investments listed as oil and gas, and energy and utilities.

Our focus is on companies that have strong management teams, attractive asset portfolios, and the ability and time to endure the current market conditions. We intend to work with our portfolio of companies to ensure that they have the resources, personnel, capital, and runway to maximize our long-term recovery to weather this tumultuous period.

While energy prices have somewhat stabilized over the last quarter or two, they continue to be low on an absolute basis. As of September 30, 2016, our energy portfolio had a cost of $181 million, and was marked at $125 million. This represents 14% of the cost, and 11% of the market value of our overall portfolio, respectively.

As we have mentioned previously, independent third-party valuation firms value all of our non-actively quoted investments. Many have asked us, what happens to NAV and NII, if our energy investments are completely written off? While we do not think our energy investments are worthless, and believe that they're fairly valued, as of September 30, NAV would have been $7.29 per share or about 20% lower, if all the energy investments were written off.

If all the energy investments were put on nonaccrual, NII would decrease by about $0.03 per share per quarter. As shareholders and managers, we are disappointed with the performance of our energy portfolio, and intend to work diligently to recover our capital on our energy investments, and to grow our NII back to historical levels. We do not believe that the short line option of selling these assets at fire sale prices is prudent, or will maximize returns for our shareholders.

That said, we monitor each situation and investment on a case by case basis. In this challenging environment for oil prices, we intend on taking an approach that will maximize value in the long run. We believe that the recovery in this sector will be gradual and will take time. We remain committed to NAV preservation and maximizing recoveries.

In general, there have been no recent material developments in our larger energy names, RAM Energy and ETX Energy, formerly known as New Gulf Resources. Bennu Oil & Gas remains on non-accrual. The company has entered a forbearance agreement with its lenders. While Bennu continues to work with its lenders on a possible restructuring, it needs all lenders to agree on a consensual plan, or faces a valuable lease expiration, and the liquidation or sale of its assets.

As mentioned last quarter, American Gilsonite, a natural resource company went on nonaccrual. On October 24, a prepackaged bankruptcy plan was filed. PennantPark is a member of the ad hoc committee of note holders, and under the plan will have a Board seat.

As a result of the plan, PNNT is providing $4.1 million of a DIP loan, at LIBOR plus 900 with a 1% floor issued in [96]. Upon emergence of the bankruptcy, the DIP loan will convert into a15% exit facility.

Additionally PNNT's $25.4 million face amount of debt will convert into $9.4 million of [17]% debt, and $5.5 million of common equity which implies a recovery of 59% at plan value. Given the bankruptcy process, we cannot comment further at this time.

In addition to the fee waiver, several other factors are helping to offset the energy issues. Last December, SBIC legislation was passed which raised the amount of available borrowings to $350 million, which will enable us to continue to use the program, and create value for our shareholders. We are finding attractive investments for SBICs and believe that our SBIC licenses will enable us to [avail] ourselves of that capital.

This past quarter, our latest tranche of long-term SBIC financing was locked in at an historically low rate of 2.4%. We look forward to fully utilizing the upside of $[150] million of borrowing capacity in SBIC 2, and utilizing an additional $50 million of borrowing capacity in a potential SBIC 3.

This past quarter, our portfolio company, JA Cosmetics Health Beauty completed an IPO. As a result, our initial equity co-investment of $2.5 million, was worth 10 times the cost, or about $25 million as of September 30. This unrealized gain helped drive our overall NAV higher. Over time we intend to exit this stock, and reinvest the proceeds into debt instruments.

Similarly, we have other equity co-investments that we're hoping to exit in the coming quarters, which can be reinvested into debt instruments. As of September 30, our spillover income was $0.41 per share, providing additional financial cushion to support our dividends into the future.

With regard to the market, the economic signals have been moderately positive. 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 experienced strength, as high yield and leveraged loan funds experienced inflows due to a continuing benign interest rate environment, and stability in the energy market.

We remain focused on long-term value, and making investments that will perform well over a long period of time, 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. We continue to be highly selective in this environment. As such, we like to have a prudent amount of liquidity, in order to capitalize upon opportunities should a dislocation 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, and 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 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 over 160 different financial sponsors. Our portfolio is constructed to withstand market and economic volatility. In general, our non-energy portfolio is performing well, despite a mixed domestic and global economy. We have cash interest coverage ratio of 2.4 times, and debt-to-EBITDA ratio of 5 times at cost on our cash flow loans.

We're pleased that we have diversified funding sources, with several features that reduce overall risk to the Company. First, we have $321 million of long-term unsecured bonds, and have only utilized less than 10% of our long-term $545 million credit facility. Second, as we discussed, we're utilizing the expanded capacity under the new SBIC legislation. SBIC financing creates financial cushion, in that we have [exemptive] relief from the SEC to exclude SBIC debt in our BDC asset coverage test, and SBIC accounting is cost accounting, not mark-to-market accounting.

Third, to better align the measurement of asset and liability values, for both GAAP and the BDC asset coverage test, we mark both our assets and liabilities to market. As a result of all these features, we've provided substantial safety to our shareholders, bondholders, and lenders in the event of market volatility. On the asset side of our balance sheet as indicated, we are prioritizing secured assets. Investments secured by either a first or a second lien, are 70% of the portfolio.

Due to all these factors, we remain comfortable with our target regulatory debt to equity ratio of 0.6 times to 0.8 times. Across PennantPark entities, we've had only 14 companies go on non-accrual out of more than 400 investments since inception nearly 10 years ago, despite the recession during that time frame.

Further, we are proud that even when we have had those non-accruals, we've been able to preserve capital for our shareholders. Through hard work, patience, and judicious additional investments in capital and personnel 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. 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. Based on values as of September 30, today we have recovered about 80% of the capital invested in those 14 companies that have been on nonaccrual since inception of the firm.

It might be helpful to highlight our long-term track record of over nearly 10 years, including the recession. Since inception, PNNT has made nearly 180 investments, totaling about $4 billion, with an average yield of 13%. Including both realized and unrealized losses, PNNT lost only about 50 basis points annually.

Turning to the outlook, we believe that the remainder of 2016, we'll 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 September 30, 2016, recurring net investment income totaled $0.17 per share. In addition, we had $0.02 per share of other income, and $0.02 per share from the fee waiver. As a result, net investment income for the quarter was $0.21 per share.

Looking at some of the expense categories, management fees, [after] waiver totaled $7.9 million. General and administrative expenses totaled $1.8 million, and interest expense totaled $7 million. During the quarter ended September 30, unrealized gain from investment was $23 million, or $0.32 per share, primarily due to the IPO of JA Cosmetics Health.

We also had unrealized loss from our various debt instruments of $12 million or $0.16 per share. We had about $[2] million or $0.02 per share of realized gains. Excess dividend over net income was $5 million or $0.07 per share. Consequently, NAV per share went up $0.11 from $8.94 to $9.05 per share.

And a reminder, our entire portfolio, credit facility and senior notes are marked-to-market by our Board of Directors each quarter using the exit price provided by independent valuation firms, securities exchanges, or independent broker-dealer quote when active markets are available under ASC 820 and 825. In case the broker-dealer quotes are inactive, we use independent valuation firms to value the investment.

Our overall debt to portfolio had a weighted average yield of 11.9%. On September 30, our portfolio consisted of 56 companies, across 27 different industries. The portfolio was invested in 35% in senior secured debt, 37% in second lien secured debt, 15% in subordinated debt, and 13% in preferred and common equity. [79%] of the portfolio had a floating rate, including 72% with a floor, and the average LIBOR floor was 1.2%. Now let me turn the call back to Art.

Thanks, Aviv. To conclude, we want to reiterate our mission. Our goal is to generate attractive risk-adjusted returns through income, 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'd like to open up the call to questions.

(Operator Instructions)

Doug Mewhirter from SunTrust.

Good morning. This is actually Matya Rothenberg on for Doug. Thank you for taking my questions. You've mentioned that originations have picked up since the end of this quarter. Are you able to characterize the exits and repayments as well? And have you seen any early impact from the election?

Thank you for the question. We have been active on the originations side this quarter, and it looks like it's going to be an active quarter end, and we have had, as usual, some repayments. Again, I can't give you any firm guidance at this point as to where we're going to end up.

In terms of the election, I don't know if the election -- maybe the election has had some impact. The high-yield bond market has traded off, as government bond yields have risen. So the bond market, in general, the high yield bond market has traded off. So that might present opportunity for us and some other BDCs.

By the same token, the floating rate market, which is about 80% of our assets, continues to be strong. So, we're pleased that the vast majority of our liabilities are fixed, at a fixed rate. And on the asset side, we have some nice upside in yield, in terms of our floating rate portfolio.

Thank you. And then, it looks like your other income line came down a little bit this quarter. Is there something going on there, and how should we think about it going forward?

Other income is -- primarily comes from pre-payment penalties, one-time amendment or fees that we get on the underlying portfolio. And that ebbs and flows with the call premiums we get when our deals get refinanced. So, it's been $0.02, $0.03, $0.04 a quarter. Sometimes it's been higher than that, when we've had big call premiums.

It's probably averaged $0.02, $0.03 a quarter. But it's something we characterize as other income because it's not necessarily recurring.

I understand. Okay, thank you. That's all I have for now.

Thank you.

Rick Shane of JPMorgan.

Hey, guys. Thanks for taking my questions this morning. I'd like to focus a little bit on the thought process around the dividend level for 2017. So, I understand the rationale for a cut, but I'd like to talk about the level. You have $0.41 of spill-over income. You had roughly $0.21 of recurring income this quarter. Art, you talked about, if you were to put all of the energy investments on non-accrual, that would cut $0.03.

So I think that $0.18 represents an almost worst-case run rate. And that's without considering the spillover and without considering the reinvestment of some of the gains that you've had. I'm curious why it's so low, and is there something we need to think about going forward as you transition the portfolio?

That's a great question. Of course, we, as I said, we spent a lot of time debating this. It's been 10 years, and this is our first dividend cut, and we don't ever want to do it again. We don't ever want to go through this again. We're going to do everything humanly possible.

Our $0.21 consists of $0.17 kind of recurring on the portfolio, $0.02 of other income, and the $0.02 of the fee waiver. We do believe with this new level we can meet or exceed, on an NII basis going forward, the $0.18 easily. We hope we can, and we hope over time we can get back into the mid-$0.20s.

To get back into the mid-$0.20s we are going to need to invest a little bit more. And I said where we're active we're going to need to use the cash on the balance sheet, we're going to need to use the SBIC licenses, and we're also going to need to rotate those equity co-invests like e.l.f. which aren't earning income. But over time we'll rotate out of those, and invest those proceeds into cash-paying debt instruments.

So, our goal, Rick, is to get back into the mid-$0.20s. But that said, we wanted a dividend level that we, and no one else, would be concerned about going forward, that we could easily meet or exceed going forward so that people could view it as a real base that's sustainable, and then we could provide upside in terms of NII, and hopefully NAV growth over time. And at some point, energy is going to rebound, and that will be a powerful tailwind to our NAV growth.

Okay. Great. Thank you, Art.

(Operator Instructions)

Kyle Joseph of Jefferies.

Morning, guys. Thanks for taking my questions. Art, just wanted to get a sense for the terms on the new deals you've done quarter to date, in terms of yields, leverage, as well as seniority?

Yes. It's been a mix of both stretch senior and second lien. I'd say, over time, and you heard in our remarks, we don't feel like we want to be reaching for yield. We want to have a consistent cash flowing portfolio. We want to reduce volatility in the portfolio.

So we have been, historically, kind of generating yields of 12%-plus. Given the yield compression in the market, we think gradually our average yield will work down into the 11%s, somewhere into the 11%s on a yield-to-maturity basis.

Again, we amortize OID over the life of the deal. We don't characterize our upfront fees into income.

So, over time, we're going to -- in order to reduce risk to the portfolio, we will work our yield, and they'll end up working their way down. Again, it's going to be a mix of senior and second lien, first lien and second lien deals.

Great. Thanks. And then, I was just looking for a little more color on the competitive environment. So is the competitive environment -- is it mostly other BDCs, and what non-BDCs are you seeing in deal flow?

Look, the biggest competitor over the last few years has been the liquid markets, the broadly syndicated market, and the high-yield market. And when those liquid markets are aggressive, they will dip down into smaller companies which impacts us, other BDCs, and the overall direct lending universe. The nice thing about what's going on right now is with the high-yield market backing up due to treasury backups, there's a little bit more -- there's a little less firmness in the broadly syndicated market, which is helping our origination and helping our yields this quarter.

Great. And then, just one last one from me: I haven't had time to spin through the K. But can you give us a reminder of what happens to Pennant in a rising rate environment, given what rates have done post election?

We're, again, in liabilities we're mostly fixed. We've only drawn at this point -- we have plenty of liquidity, that's -- we're in a very good liquid position.

On the liability side, we're mostly fixed rate, with our two types of bonds, as well as our SBIC financing. And we've drawn about 10% as of quarter end, about 10% of our revolver, which is our only liability that floats.

And then on the asset side, we're about 80% floating. And since LIBOR is about 90 basis points right now, and our LIBOR floors are about 100, we're on the verge of piercing through and getting some nice upside if LIBOR continues to go up.

Great. Thanks for answering my questions.

Christopher Nolan of FBR & Company.

Hey, Art, given the focus on derisking the portfolio going forward, should we look for higher balance sheet leverage ratios than in the past?

Look, we are in a really fortunate liquid position right now. Again, we are targeting 0.6 to 0.8 times regulatory leverage. So we're at the low end of that right now.

So look, we hope to be using our SBIC facilities. We hope to be using our regular facilities as we find, hopefully, attractive risk-adjusted returns.

And as a follow-up, answering your earlier question, you indicated where the loan yields could dip down to the 11% area. Is that mostly due to focusing on lower-risk investments, or is that mostly due to just the changing market environment?

There has been yield compression over the last few years. We don't want to feel like we have to reach or stretch for yield. We want to, most importantly, find very good risk-adjusted returns. So, a combination of where the market is, a combination of where we want to be in the capital structure, kind of more secured, leads us to set the expectations in the 11%s.

And finally, just a strategic question: Given the election and the prospect of changing regulatory environments and so forth like that, what are your thoughts right now in terms of -- how does this affect your strategy, your thinking of the market? Anything you could share on that would be helpful.

It's a good question. It's too early to tell. We're kind of in the early days, and we'll see what the legislative calendar brings in terms of both our underlying portfolio companies in healthcare, for instance, as well as other industries, as well as what it might mean for the BDC industry, in terms of legislation or other rules that are guided by the SEC. So we're waiting and seeing. We really can't make decisions at this point, because there's not enough information to make a decision on.

Great. Thanks for taking my questions.

Jonathan Bock of Wells Fargo.

Good morning. Joe Mazzoli filling in for Jonathan Bock. The first question: The stock is trading at quite a significant discount to net asset value. We see that the stock repurchase agreement expired earlier -- or excuse me, the stock repurchase program expired earlier this year. So, with the significant discount and the significant dry powder -- leverage came down quite a bit this quarter -- why not enact large-scale stock repurchase program to complement lower-risk new investment activity?

It's a good question, and the Board and the Management are always assessing. We did a significant repurchase program a few quarters ago.

The only thing -- we do focus, again, on our credit ratings. We worked very hard to get an investment-grade rating. We have been fully leveraged, at least historically. We will continue to assess a stock buyback program.

You will be seeing Management making purchases in the market in the coming days. So, that's all I can say to you, at this point, on that point.

Okay. Yes. That certainly makes sense. Obviously, the ratings are a consideration here.

So, we didn't see any SBIC growth in the quarter, but you do have about $107 million of capacity, up to the $300 million limit for two licenses. So, we know that only certain deals fit within the SBA requirements. So, how quickly do you expect to draw down additional debentures here? Is that something that you would target or you more so look at your origination pipeline and fill this bucket when certain deals that fit those requirements come along?

Look, we're investors first, and we want to find good risk-adjusted returns, and they will go into whatever buckets they go into. The SBIC buckets are somewhat arcane. Obviously, if something fits that first port of call, we put it in the SBIC.

We were fortunate; we locked in about $25 million of the SBIC financing at the 2-handle long-term rate this past quarter. We did get some repayments in the SBIC, as well.

So, our people know that we want to find great risk-adjusted returns. And when we find something that fits the SBIC, that's terrific. But we don't want to change the way that we invest or originate due to that.

We certainly appreciate that, and we know the market appreciates that conservative perspective. Just one final question in relation to repayments in the quarter, or sales repayments: It looks like one of the largest repayments was the $40 million second lien investment in the Language Line. It looks like this was a sale. I don't believe this was repaid. If you could just provide some color?

I know the second lien traded up recently. Did this just look like a good exit opportunity? Or did the thesis change around the credit profile of this investment?

The company got sold to a large French communications company. So, the deal was repaid with that M&A exit.

Okay. My mistake. That was a repayment. That's it for me. Thank you very much for taking my questions.

(Operator Instructions)

Mickey Schleien of Ladenburg.

Good morning, Art. I wanted to follow up on the first question. I do understand that you can't forecast exactly what repayments will be by the end of the calendar quarter. But you should be able to give us a sense of what they've been so far this quarter, correct? Can you give us some color on that?

I can tell you that, as of today, we've originated more than we've gotten paid back. How about that?

Okay.

And that I would hope that would continue. I would hope that would continue through quarter end.

Now, let's also -- I always want to give you the other side of the story. When a company pays you back, that's a nice thing, too. I mean, sometimes, as we know, companies do not pay you back. When companies pay you back and they take you out, sometimes there is call premiums, that's okay. We should be thankful for companies paying us back.

We do hope -- and we would estimate that we would have growth in our assets this quarter. We do have a very robust pipeline. But sometimes companies just pay you back and that is what it is.

That's a good segue into actually the activity for the quarter that you just finished. It was a relatively low level of investments and a high level of repayments. You mentioned one large exit due to a company being sold. Was that generally a lack of deal flow in the PE community, combined with spread compression, or your unease with the terms in the market? Or how would you characterize the dynamics of your investing activity in the fourth fiscal quarter?

You touched on a lot of the issues. I think if you rewind the tape, you remember the Brexit event, and then the market went on a tear for a while. To my point about who your competition really is, the broadly syndicated and liquid markets went on a tear and started taking out and started refinancing some of our portfolio, including some M&A trades, like Language Line.

The benefit of that was a company like e.l.f. Cosmetics, e.l.f Beauty, you did a very nice IPO in our equity co-invest, and the rest of our equity co-invest portfolio has been generally doing very well. There is gives and there is takes. And again, we've been cautious and conservative around what we want to put in our portfolio, and we are trying to really reduce the volatility of the earning stream.

You touched on a lot of the issues. It was a little bit of all of the above; we are seeing a much more robust environment here in this quarter. I would call this quarter kind of a more normal, quote-unquote, quarter for us, in terms of originations.

In terms of those originations, I'm assuming a good portion of your cash is in the SBIC. Is that correct?

Yes. We have some cash outside the SBIC, but most of the cash that we have on our balance sheet is inside the SBIC.

Okay. So, you have that to put to work. Remind me, I don't have the K in front of me, but you haven't fully equitized the SBIC subsidiaries so far, is that right?

We are getting close to equitizing the second SB -- we have fully equitized SBIC I. We are getting close to being pretty fully equitized in SBIC II.

So, no problem getting to the $300 million, in terms of equity capital in the SBICs?

No, that won't be a problem, and it won't be a problem for us to draw on the $300 million.

Okay. Terrific. Those are all my questions. Thank you.

David Miyazaki from Confluence Investment Management.

Art, I guess we're in a rather unfortunate chapter in what has been a pretty good book over time with your dividend cut. I did want to revisit the topic that Joe had brought up earlier regarding share repurchases. We appreciate that you bought back a fair amount of stock in the past, and I think your fee waiver gives you some credibility that you are willing to take on less income as a manager by weighing fees.

I think that you have been able to dismiss some of the skepticism that investors may have for managers who don't buy in stock, by doing that. When we look at the current price on the new dividend, you'd be buying in stock that would have a yield around 10%. And it'd be so accretive to the net asset value, that it's hard to see why you wouldn't do that right now, and institute a pretty significant share repurchase (multiple speakers).

You make a great point. Certainly, as I said, personally, you will be seeing some purchases. We are on watch with the agencies.

So, this is a debate that you always have. And that investment grade rating is, we think, important for the Company long run. We, of course, will evaluate and always evaluate a stock buyback, along with all the other elements.

Of course, on the alignment issue, if our income is less, in addition to the 16% fee waiver, our incentive fee will be less, in addition to the 16% fee waiver. So, we, as Management, believe we are appropriately aligning ourselves.

Again, we are all disappointed. (Multiple speakers) we've been very proud of our 10-year track record of never cutting a dividend. And this was something that we thought about a lot and agonized about a lot.

And so, look, we are aligning ourselves. Of course, we will take this feedback into account. We will talk to our Board about a buyback going forward, as we always do, as well as the dividend level, as well as Management alignment. And we will work hard to be completely aligned with our shareholders. Of course, we are big shareholders ourselves.

Art, I appreciate that. I know that you worked long and hard on getting an investment-grade rating. Is the cost-of-capital advantage for having an investment grade rating so important that it outweighs the basic math of buying back shares right now because (multiple speakers)?

Look, David, you and I have been having some form of this discussion, now, going on a decade. The issue becomes -- and we all lived in, and thankfully lived through, the 2008/2009 time period. At the time you need capital, that investment-grade rating has infinite value, or can have infinite value. It's hard, on a day-to-day basis in a relatively benign environment like we have today, to put a value on that, right?

It's hard for us. Everything looks fine. The economy generally looks fine. The credit markets generally look fine to say kind of trade that off. But there was a time, and you lived through it with us and others, when capital access had infinite value, or almost infinite value. It's hard for all of us to sit here and discount that value today.

That's what we take into account when we talk about stock buybacks and our investment-grade rating and what's the dividend level and how much leverage do we put on the balance sheet? How much secured debt versus how much unsecured debt? These are -- unfortunately, it's not a black-and-white answer. There is some shade of gray in all of this. And unfortunately, there's not a black box that you can just put all the inputs in, and out says you should -- here is how much leverage you should have, here's how much unsecured you should have, here's where your stock buybacks should be.

Believe me, we get the math of buying back stock, and we will always assess that as an option. Please understand that taking a long-term historical perspective as Management, as Management and as investor -- and you are an investor who's been in the industry a long time -- when that capital is needed, at that tough time, it has really, really, really high value. That's the kind of thing we are trying to grapple with when we try to make these decisions.

Okay. Great. That's helpful commentary.

Shifting gears on you, if I may, as you talked about moving to more secured positions in your underwriting, would you expect that this would change the amount of deals that you'd be looking at, with regard to what could fit into the SBIC? And would it affect at all how you might view underwriting in tandem with your sister company, PennantPark Floating?

On the SBIC, again, we have our investment parameters. If it fits the SBIC, of course, if that's the first port of call. But if it's a good deal, we want to be doing it.

We do have liquidity to be doing good deals if we think they're really compelling. And we think that in this environment, which has seen yield compression, and if we want to have a mostly secured portfolio, we have about 70%-plus secured. In general, our average yields are going to come down into the 11%s.

Then, in terms of PFLT -- PFLT, along with every other BDC, has the same issue, which is yield compression. PFLT has a different risk adjusted return threshold. So, PFLT has been originating in the 8% zone. PNNT, historically, has been in the 12% zone.

We'll talk about PFLT tomorrow. Yield compression has been everywhere, and in order to get good risk-adjusted returns, PFLT, like PNNT and like others in the industry, may have to take a little less yield.

Okay, great. Thank you for your answers.

There appear to be no more questions at this time. I'd like to turn it back to Art Penn for any additional or closing remarks.

Thanks, everybody. Want to appreciate everyone's time and attendance today on the call. We appreciate your support, and we'll be talking to you in early February at our next earnings conference call. Thank you very much.

This does conclude today's presentation. Thank you for your participation. You may disconnect.