Pennantpark Investment Corp (PNNT) 2017 Q1 法說會逐字稿

Good morning and welcome to PennantPark Investment Corporation's first fiscal quarter 2017 earnings conference call. Today's conference is being recorded. At this time, all participants have been placed in a listen-only mode. The call will be opened for a question-and-answer session following the speakers' remarks. (Operator Instructions) It's now my pleasure to turn the conference over to Mr. Art Penn, Chairman and Chief Executive Officer of PennantPark Investment Corporation. Mr. Penn, you may begin your conference.

Thank you and good morning, everyone. I'd like to welcome you to PennantPark Investment Corporation's first fiscal quarter 2017 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 followed by a discussion of the overall market, the overall portfolio, investment activity, the financials, and then open it up for Q&A. For the quarter ended December 31, 2016 we invested $229 million at an average yield of 11.2%. Net investment income was $0.21 per share, which included $0.02 per share of a fee waiver. NAV increased from $9.05 per share to $9.11 per share. As we mentioned last quarter, we are adjusting our dividend to $0.18 per share starting this quarter ending March 30. We believe that this dividend rate is sustainable. As a result, we believe that PNNT stock should be able to provide investors with a steady dividend stream along with potential upside as the energy market stabilizes and our equity co-invests mature.

With regard to the overall market, the economic signals have been moderately positive. With regard to the more liquid capital markets and in particular to the leverage loan and high yield markets, during the quarter ended December 31 those markets experienced strength as high yield and leveraged loan funds experienced inflows due to a belief in a stronger economy and rising interest rates. 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 a 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 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 170 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 2.5 times and a debt to EBITDA ratio of 4.9 times at cost on our cash flow loans.

We are pleased that we have diversified funding sources with several features that reduce the overall risk to the Company. First, we have $321 million of long-term unsecured bonds and have only utilized about 25% 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 exempted relief from the SEC to exclude SBIC debt from our BDC asset coverage test and SBIC accounting is cost accounting now 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 these features, we provide substantial safety to our shareholders, bondholders, and lenders in the event of market volatility.

Additionally, with asset yields coming down over the last several years, we are looking to create 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. On the asset side of our balance sheet as indicated, we're prioritizing secured assets. Investments secured by either our first or second lien are 72% of the portfolio. Due to all of these factors, we remain comfortable with our targeted regulatory debt to equity ratio of 0.6 times to 0.8 times. 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 a prolonged lower energy prices and should benefit from the gradually improving environment.

We believe it will take more time for us to maximize the recovery on the energy portfolio. Despite the great recession and credit crisis, PennantPark Investment Corporation has had only 12 companies going non-accrual out of 182 investments since inception 10 years ago. 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 we underwrite them in the face of new information. 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 December 31, today we have recovered about 80% of the capital invested in those 12 companies that have been on non-accrual since inception of the firm. It might be helpful to highlight our long-term track record over 10 years including the great recession. Since inception, PNNT has made 182 investments totaling about $4.2 billion at an average yield of about 13%. Including both realized and unrealized losses, PNNT lost only about 45 basis points annually. In terms of exits, we had two equity co-invests leave the portfolio when the companies were sold. Our $2.3 million equity investment in Vestcom was realized at $11.6 million for a 65% IRR and a $1.5 million equity investment in Power Products was realized at $5.1 million for a 57% IRR. In terms of new investments, we had an active quarter investing in attractive risk-adjusted returns.

In virtually all these investments, we've known these particular companies for a while, have studied the industries, or have a strong relationship with the sponsor. Let's walk through some of the highlights. We invested $38 million in a second lien term loan for Acre Operating Company, which provides hardware, software, and ancillary products used in security systems. LLL Partners is the sponsor. Cano Health operates medical clinics in South Florida, we lent $10 million of first lien term loan and purchased $2 million of equity co-invest. InTandem Capital Partners is the sponsor. We invested $15 million in the first lien term loan of East Valley Tourist Development Authority, which owns the Fantasy Springs Resort and Casino in Palm Springs, California. Harbortouch Payments is a non-bank payment solutions provider, we invested $22 million in a second lien term loan. Searchlight Capital Partners is the sponsor.

We lent $14 million of first lien term debt and purchased $1 million of equity co-invest in Juniper Landscaping of Florida, which provides landscaping services. BS Fund is the sponsor. Montreign Operating Company will operate the Montreign Resort and Casino being built in Upstate New York, we invested $23 million in the first lien term loan. Empire Resorts is the sponsor. We lent $13 million of senior subordinated debt to Sonny's Enterprises, Sonny's manufactures and distributes car wash equipment and parts. Sentinel Capitals is the sponsor. Sotera Defense Solutions is a technology and engineering solutions firm serving many governmental agencies. We bought $19 million of first lien term loan. Aries is the sponsor. Turning to the outlook. We believe that 2017 will be active due to growth in 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 us through the financial results.

Thank you, Art. For the quarter ended December 31, 2016 recurring net investment income totaled $0.16 per share. In addition, we had $0.03 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 $8.1 million, general and administration expenses totaled $1.6 million, and interest expense totaled $6.7 million. During the quarter ended December 31, unrealized gain from investment was $25 million or $0.36 per share. We also had unrealized gain from our various debt instruments of $6 million or $0.08 per share. We had about $22 million or $0.31 per share of realized losses. Excess dividend over net income was $5 million or $0.07 per share. Consequently, NAV per share went up $0.06 from $9.05 to $9.11 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 depicted price provided by independent valuation firms, security and exchanges, or independent broker dealer quotations 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 investment. Our overall debt portfolio has a weighted average yield of 11.9%. On December 31, our portfolio consisted of 60 companies across 27 different industries. The portfolio was invested in 39% senior secured debt, 33% in second lien secured debt, 16% in subordinated debt, and 12% in preferred and common equity. 78% of the portfolio has a floating rate including 71% with a floor and the average LIBOR floor is 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 would like to open up the call to questions.

Thank you. (Operator Instructions) Kyle Joseph, Jefferies.

I just wanted to get a little more color on the deal flow in the quarter, obviously it was very active, one of your more active periods in recent memory. I was just wondering is that demand driven, is some of that just a bit of timing in terms of one deal actually getting completed, and sort of your outlook for deal flow and whether that's changed at all over the last call it three months?

So, there is a seasonality to our business. Seasonally many deals do get closed in the December quarter and the first quarter of the calendar year is a little slower and we're seeing those trends certainly this year as well as almost every year we've been in business. Additionally, the quarter ended September 30 was a very light quarter for us and since each of these deals are idiosyncratically originated and diligenced, as you know, it's really hard for us to predict when deals are going to happen or not. We had a light September quarter, we had a very active December quarter. We don't yet know how the March quarter is going to be although as typical, January usually pretty light, but backlog seems to be decent and building. So, we don't know whether it's going to close on this side of March 30 or the other side of March 30. We're comfortable with our investment team and the looks we get and the overall market relative to the size of this fund is very large. So, we feel as though we can continue to generate attractive risk-adjusted returns.

And then just maybe a little more color on your outlook for credit. I know you guys are highlighting that you're focused on investing higher up the capital spectrum. But at the same time, we've seen your non-accruals trend down and we saw some unrealized appreciation in the portfolio. And so just sort of your outlook for credit kind of more on a near-term basis and then maybe if you take it out a few years, your outlook?

The economy seems to be doing well. This cycle has lasted longer than we would have thought. That said, given this point in the cycle and given what we're trying to do at PNNT, we want to try to find really great companies and not reach for yield and try to stay as high in the capital structures we can and find companies that we think are really safe. So, it seems like the economy is doing just fine. We still want to have a lower volatility lending portfolio in the portion of our book that is not equity and not energy related.

Rick Shane, JPMorgan.

And Kyle really sort of touched on my key theme, which is sort of the velocity of originations and exits during the quarter, but love to get your sense. Is there any impact on the sponsor community from uncertainty around taxes and do you think that there was any delay in closing deals related to sponsors potentially waiting for a better tax year in 2017?

That's a very insightful question and you would have thought that if you're seller of a company in particular. If you're selling your company, you might have wanted to time that sale to be in January for the potential prospects of a lower tax bill. Interestingly we did not really see that. We still saw the same behavior like we kind of always do, which is for some reason people want to try to get deals done and dusted before year-end, maybe they thought the tax situation was uncertain and a burden in the hand. So, we did not see much impact although you would have thought rationally there would have been.

And when you're talking to sponsors out there right now, what is their sort of preferred form of exit? Is this M&A, is this public exits? As they're reaching end of life on funds, how are they thinking about exiting their positions?

Look, I think the nice thing about selling the company is you're entirely out. You get a nice price, as far as we could tell multiples are very high. There are some sponsors who elect if the company is big enough. Now most of the companies we're financing are generally not big enough to make attractive IPO candidates. Every once in a while there is one like elf., the cosmetics company we invested in, was on such a growth trajectory. It's a consumer cosmetics company. The sponsor there elected to do the IPO and not take all the chips off the table, but let it ride for a little while as a public company. So, it depends on the particular situation. The vast majority of the deals we do, the companies are really too small to be attractive IPO candidates.

I'm more curious if you think the exits now are M&A driven or actually just sort of sales to other sponsors because it does seem like a lot of these companies serially move through the private equity community?

That's an insightful point and there is quite a few sponsor-to-sponsor deals. So what we have to recognize as a lender is we've got to number one, protect our capital. Obviously every once in a while we do these equity co-invests. But when multiples are very high, we should and we do try to shy away from the equity co-invest when the multiples are high or when see it's a sponsor-to-sponsor trade, it is a signal for us to be even more cautious than normal.

Doug Mewhirter, SunTrust.

First, a very quick numbers question for Aviv. I noticed your effective interest rate on your average debt balance on the liability side of your balance sheet was down sequentially by quite a bit. Is that just a function of your drawing more off of your credit line versus fixed debt or was there something else there or timing issues and is that a pace that we could expect for the balance of the year?

That's exactly right. It's more growing on the revolving credit facility versus the fixed and yes, a lot of it has to do with timing. So as the deals close, obviously we draw just in time cash from the credit facility. So it's hard to predict what it will be next quarter, but we definitely think it will be in that zipcode, but it's hard to predict what to put in your model for next quarter.

Art, on the exit side looking at your portfolio and based on conversations with your portfolio companies, do you have any kind of outlook on exits activity for this quarter? It actually seemed to be a little bit low for this just immediate past quarter?

Yes, it was a low and what happens with some of our bigger companies when they can get sold or if they're bigger and they have the opportunity to access the broadly syndicated or publicly traded high yield markets, sometimes they do. So, we finance companies that have generally $10 million of EBITDA up to $40 million or $50 million of EBITDA. Once they get up to the $40 million or $50 million and you have a bullish broadly syndicated or high yield market which is what you do now and you can refinance our higher yielding piece of paper with something lower, they look to do it. So, we had I think $60-ish million or $70-ish million of repayments last quarter and I think we're going to at least have that this quarter, but we'll see. But the broadly syndicated markets are very [variable] right now.

I noticed in your opening remarks you had two separate investments in casino companies or companies that own casinos. And on one hand, casinos are classic defensive investment because people say gambling never gets affected in the economy, but also I know casinos are very highly local businesses and they have their own sort of risk. I just wonder if you could just go into more of what made these particular ones attractive? And also I assume they don't qualify for SBA financing because they're gambling.

That's right. And we don't call it gambling, Doug, we call it gaming. Gaming, it does not fit in the SBICs. We've been making gaming investments almost since inception of the firm. Our investment thesis is pretty similar in almost all cases. If we can get a first mortgage on a box and we think the box is in a good location relative to the population base and the likely usage, those have been very good investments. To-date touchwood, we've had an excellent track record in that. The two deals this quarter were Montreign Casino, that's a Catskills property sponsored by Empire Resorts, which is ultimately Genting, very large global gaming operator. They put a ton of equity underneath of us. We think it's going to be an attractive market, particularly relative to the amount of debt that's on the balance sheet.

Fantasy Springs, which is the one in Palm Springs, has been operating for a while and so that's not a new build. That's an existing cash flow where they did a recapitalization. There was reduced debt on that balance sheet and we felt good about the cash flow relative to the debt and relative to the Palm Springs market. But ultimately it's about the population base and the customer base relative to the number of gaming facilities that are in the market. We got comfortable with both of these. These are usually top of the capital structure first lien, every once in a while we'll do a second lien where it's a special situation, but these two were first mortgages.

Paul Johnson, KBW Investments.

I just had a couple questions on a couple of portfolio companies. The first one being ETX Energy, I was wondering if you guys could kind of provide an update as far as what sort of drove that fair value mark higher this quarter over last. And then also I guess in conjunction with that, if that's something you're seeing across the board with other energy investments or if it's more related to a particular type of business or region or anything like that?

Number one, just overall energy is feeling better. Anecdotally the tone is better. I think investors in energy companies and management teams are a little bit more on their toes than their heels now. There's been a bunch of capital markets activity, there's starting to be M&A activity so the tone has gotten better. ETX did its restructuring, this company used to be called New Gulf, about six months ago and for the first quarter or two we or the independent valuation firms kept the value roughly at deal value of the restructuring. Now that the company is six months out, the valuation firms looked at the actual underlying assets; where the assets were located, where the comps were trading and are trading; and that's why we're starting to see some lift in the valuation of that name. We think ETX/New Gulf has some very interesting reserves in places where those reserves are. A year ago at this time people thought it was not worth a lot of money, today people are thinking as worth more money. We'll see. We're very hopeful about ETX and my comments also apply to the overall energy space as well.

And then sort of along with that, I was wondering if you can kind of provide sort of a current update on US Well Services as well given that another BDC disclosed that they had restructured their first lien loan, but I'm not sure if it was in the same tranche as you guys or anything like that, but just kind of an update on that business as well?

So, it's good question and there was an out of co restructuring that was completed about a week ago. We are in the term loan and lenders did provide a revolver. So pro forma for that redo, PNNT will hold about $2.3 million of L+600 revolver 1% floor. So, we participate in a very attractive revolver. And then we have $9.5 million of a reinstated term loan L+900 with a 1% floor or if it's PIK, it's L+1100 with a 1% floor and PNNT will own about 5.9% of the equity of the company.

Okay. And then the last one was more of like a general question. I was wondering if you can kind of inform investors as far as these loans that you're making for a typical first lien, second lien, or any mezzanine loan that you guys would make; are these generally quarterly or semi-annual payments? And then just kind of walk me through the basic structure as far as how those coupons reset over time, is it something that's reset at the beginning of the quarter or payable at the end of the quarter so there's effectively like a quarterly lag if you will between the reset date in terms of interest rates moving up if it's stepped up?

Yes, that's exactly right. It's usually quarterly. It usually is set at the beginning of the quarter, but payable at the end of the quarter.

Christopher Nolan, FBR & Company.

Aviv, the yields on the portfolio were flat quarter-over-quarter despite the increase in senior secured. Is this really just because of timing issues for new investments coming in?

That's right. We put about 11.2%, that's the yield on the new additions that we put. Nevertheless the overall portfolio remained at 11.9%. So combine that with some of the exits we had and the timing we put in the new investments, that's the reason why you see the overall portfolio yield has not changed.

And so on that basis, we should expect some decline in the current quarter, right?

Look, it was strategically as we think about what we're trying to do and we're trying to have a less volatile lower risk with a more secured higher in the capital structure portfolio. We're happy to trade-off and get higher quality companies, better credits, lower yield. What's really going to drive NII is usage of the SBIC rotating the equity co-invest, seeing some more gains on our energy portfolio. That's going to drive NII much more than whether our portfolio is going from 12% to 11%. So, you should expect to continue kind of yields over time going down to 11%. Hopefully we can be very efficient with all the other tools we have; SBIC, equity rotation, energy investments; to more than offset that.

Then Art, is the focus more on senior secured to higher up the capital structure focus on particular industries, or is it just across the board?

It's generally across the board although given where we are in the cycle, we're trying to continue to find less risky industries, less risky companies. We have plenty of equity co-invest and we have some energy stuff. So, we've got some higher beta stuff with some interesting upside. Rest of the portfolio, we want ourselves and everyone else to sleep at night and feel safe about the income coming in and feel safe about the dividend. Obviously we adjusted our dividend for ourselves and everyone else to feel comfortable about it. So we really wanted to be viewed as a safe solid sustainable dividend with some upside in income from the SBIC, from equity rotation, from energy that would mean NAV upside, and potentially from LIBOR going up. Obviously most of our liabilities are fixed, most of the assets are 80% or floating. At some point, we and the other BDCs will benefit from LIBOR going up.

Okay. And then on the realized losses, what were drivers there?

The big realized loss was Bennu, which is an oil and gas company that got liquidated during the quarter. Very disappointing outcome that had been marked down consistently over time and that drove the big realized loss.

And how about American Gilsonite?

American Gilsonite roughly had no real material change in market. That went through its restructuring and went through its bankruptcy and came out and we have a couple pieces of debt and a piece of equity in the newly restructured company and that's on the balance sheet as of 12/31.

And lastly, Trust Inns Limited, I saw there was an $8 million unrealized depreciation, that's really --?

That's a British company owns a bunch of pubs, steady stable business we believe. That markdown has nothing to do with the credit, it's really a par asset; but because it's in sterling, you saw the markdown there in the asset and you also saw a markdown in the liability of our credit facility. So just to be clear, most of the markdown is in the credit facility because we borrow sterling so that we can lend in sterling. So, that we really hedge from a currency basis, our foreign investments. So in that case we borrowed sterling to lend to the pub company in the UK. When you see that markdown, in this case it's only from the currency. You see the markdown in our credit facility, which again is almost a 100% offset in NAV.

Final question. Given that you're focusing more higher in the capital structure, are you looking for deals where you are first in line or is there usually a bank in front of you?

It's all facts and circumstances of the particular situation. We don't love revolvers so every once in a while we have to do the revolver or we let someone come in ahead of us in the revolver or we tried out the revolver and be pari passu, but revolver is not efficient for us to own so we try to stay away from them. So, every once in a while we'll have someone come in ahead of us. Sometimes we'll be a classic second lien where we have a first lien ahead of us, sometimes we'll be kind of a hybrid where we're somewhere between the first lien and the second lien, and sometimes we'll be a classic first lien. So, it just depends on the facts and circumstances of the situation. And also if we have someone ahead of us, we want to know who they are, what their character is, how they behave in downside scenarios. We're very focused on who is in the capital structure with us.

Jonathan Bock, Wells Fargo Securities.

Finn O'Shea in for Jonathan Bock this morning. First, just wanted to ask a quick follow-up in fact to Mr. Nolan's question just now. We saw the bias toward first lien, which is more conservative, but your yields are I think you said 11.2% on average, which is very strong in today's market. So can you sort of describe a little more the nature of those deals if they represent new origination efforts or if not, how they differ from second lien or sub in terms of quality?

So, it's a great question and look these are all a mix. We don't have any one size fits all. So in certain cases when we're investing in a smaller company like Cano or like Juniper Landscaping, those were first liens. Those were smaller companies. Those were essentially unitranche where it was our piece of paper and a sponsor so we were able to get an attractive yield on those. In certain cases we'll do second liens and that was certainly what we did in Acre Operating Company, that's what we did in Harbortouch. So, it's a mix of different things. We did classic mezzanine debt in Sonny's Enterprises. Some people think mezzanine is a product of the past and certainly mezzanine you don't see a lot of it around anymore.

But every once in a while when a sponsor that we know and like and we've got a good track record with asks us to do mezzanine and we really feel comfortable with the credit which we feel, on Sonny's we did a $30 million classic mezzanine deal. Sotera Defense, that was a loan we already had. We bought some more in the secondary market. That is a first lien, it's a stretch year first lien. So, you're right to get 11% blended, there's not a lot of what we call classic first lien in the bunch. The classic first lien when it comes into PennantPark usually ends up in PFLT. So these were stretch your first lien, some second lien, some mezz, or some companies that were probably little smaller and we were able to get a higher return.

And on those smaller ones, Cano and Juniper I think you mentioned, what kind of percentage did you guys speak for in those deals?

100% or pretty close to 100%. Every once in a while, the sponsor will say can they kind of put a friend in for a little bit. But we're I think on both those the sole lender.

Then you mentioned Sotera as well in the secondary market. Did you buy the same tranche or did you buy from someone ahead of you like a banker?

Same tranche. That one has a maturity coming up so we think there's a catalyst at some point for that one.

Okay. What percent of the portfolio roughly is PIK toggle, but currently paying all cash?

What percentage is PIK toggle, but currently paying all cash?

How much in cost, your fair value roughly?

In terms of overall, about 15% of our revenues is either PIK or OID. We'd have to get back to you, Finn, on you're asking the companies that have the PIK toggle option, what percentage are paying cash. I'd venture to guess a low percentage of the companies that have the PIK toggle option are paying cash, but we will give you a shout later today with the specific number, but I'd venture to say it's pretty low.

Mickey Schleien, Ladenburg.

This is late in the call, there's not a lot left to ask, but I did want to go back to leverage. I think in your prepared remarks you mentioned that from a regulatory perspective, you're looking for 0.6 times to 0.8 times so you're in that tranche now or in that range now. But your total leverage has exceeded 1 times in terms of debt to equity for the first time. So, could you give us some color on what your total leverage target is as well?

So we by the way, Mickey, also look at net of cash so there's a reasonable amount of cash on the balance sheet. So from a regulatory standpoint, we were 0.64 times at 12/31 and total deducting cash, we were at 0.94 times. Look, we're working it. Obviously there's some stuff that we like that fits the SBIC which does not hit the regulatory and that's very attractive long-term financing, we like that. And the rest of it whether we're targeting 95 or 100 or something a little over, it's going to be dependent on NAV, it's going to be dependent on how we can rotate the equity portfolio, it's going to depend on a lot of other factors. But we're focused on keeping leverage reasonable, keeping liquidity in our portfolio. I think about 25% of the portfolio does have a broker dealer quote so there's always a source of liquidity if we need it. So we're looking at it hard, we're on top of it and we're just trying to optimize the outcome for everybody.

And Art, have the credit agencies seen these new leverage numbers yet for Pennant?

We keep the agencies up to date and we've been exuding for a while that we're moving to a lower risk, lower volatility, more secured portfolio that perhaps can justify slightly higher leverage and our NAVs been trending positive. So, we're always in touch with the agencies. They are a very important constituent for us. I think we mentioned last call when people said why don't you do more of a stock buyback, we said we're really focused on keeping our investment grade ratings. We're on watch from S&P and Fitch and we are focused on keeping our ratings, which is the biggest reason we're not pursuing a stock buyback at this point.

Okay. Art, can you remind us how much SBIC debt capacity you still have available?

Aviv, you want to take that?

So, SBIC II can ultimately take $150 million. We have borrowed about $40 million or so to-date on the SBIC II so we have plenty of room to grow there and a reminder that we can always have the option to do SBIC III for an extra $50 million. That's kind of a preview, but we have plenty of room to grow in SBIC II.

You said, SBIC II has $40 million outstanding out of the $70 million, right?

To-date, yes.

Okay. So, there's a little bit there without an SBIC III?

That's is correct.

There's a quite bit there.

And is there enough given the constraints of the collateral and the credit facility and the advance rates, could you equitize SBIC III without issuing additional equity?

Given that fact we have some liquid assets in the portfolio, we always have the option to create liquidity that way.

Okay. Art, I appreciate your comment on Trust Inns and I suspected that was the issue. Is that also the situation with Goldsun, which is your other British investment?

Yes. So Goldsun is another UK company, same thing. The valuation firms marked it at par in sterling and then it was a question of translating that back to dollars.

Okay. And lastly, you're somewhat outearning the new dividend of $0.18, but $0.02 of that is the fee waiver that goes through the end of this year. How are you and the Board thinking about the management agreement with respect to fees and as well as lookbacks and perhaps to align it a little bit more with what we've seen in the more recent vintage BDCs?

The Board looks at it all the time. Just to note that's a 60% fee waiver for the rest of 2017. The energy piece of the book today is only 10% or 11% so just to point out that fact. We hope that the energy piece goes up with NAVs going up in energy, but we waived the fees for all of 2017. The Board and management talk about it all the time and then there is focus on that.

(Operator Instructions) Casey Alexander, Compass Point Research and Trading.

Most of my questions have been asked already, but I did have a couple. One, you seem to have still substantial borrowing capacity under the credit facility, even substantially more than that would be necessary to achieve your target leverage ratio. Have you considered taking that down, some at all to reduce some of your unused fee commitments?

It's a great question, Casey. We think about it all the time. It's the push-pull of completely optimizing to the last penny versus in a [FICC] world some people say always stockpile liquidity because you never know when you are going to need it. So, that's the push-pull we have internally as we debate that question. It's an excellent question. Right now we're keeping where it is, but it's a great question.

Okay. And secondly, just so I don't have to go to try to figure it out through 30 different sets of numbers. On Bennu, your realized loss, was that a liquidation of the company or was it a sale to a third-party of your position and how did the closeout price compare to your third quarter mark?

The company was liquidated, we got a very low number and it was lower than our mark. So, we missed that one. It's a mistake from the get-go and it's painful.

Chris York, JMP Securities.

So I just have one as most have been asked and I did miss your prepared remarks so forgive me if I missed it. Have you been locked up in the elf equity and if so, when does that that expire?

That's a great question. We are locked up, I think we're locked up for another month or two and then we're going to assess options.

Jim Young, West Family Investments.

It's somewhat of a follow-up to Chris's question with respect to your deferred and common equity exposure, which is still relatively substantial and you seem to suggest it's going to be climbing over time. Just wondering do you have a target in mind either percentage or absolute dollars by the end of this fiscal year and I would estimate that would get redeployed into like first lien loans if that capital becomes available?

That's a great question. Certainly elf is a meaningful investment, which is about 2% of the portfolio. We're at about 12% as of quarter-end as of December 31. We've always said 5% to maybe 10% of the portfolio should be equity. Now some of that is equity co-invest, some of that is where you convert debt to equity and sometimes it's out of your control because hopefully your equity gets marked up and you made some good investments as was the case with elf and then unfortunately every once in a while you have markdowns. But we think as an overall proposition, a 5% to 10% of the portfolio in equity is the right place to be.

Art, 5% to 10% is still a pretty wide range. I guess in this environment, would you be more inclined to be at the lower end or the higher end of that range?

Look, as we look at new deals, certainly when we have the equity co-invest option if the multiples are very high, we're probably going to decline those equity co-invests. So in terms of the new deals where we have the option to co-invest in the equity, you would say would come down. We cannot tell you with absolute foresight once we are already in equity co-invest and where they're going to be value going forward; some of them work out really well and some of them don't. And then we have the equity pieces that we get from restructurings. We talked about American Gilsonite. We converted debt to equity, that's a little bit less in our control. We obviously don't want to make investments that go through restructurings, but every once in a while it happens and you have to convert debt to equity. So yes, in a perfect world 5%. But I think just in terms of the reality of the way the business works with deals that go well, some deals that don't go well, 5% to 10% is the relative range.

Thank you. That concludes today's question-and-answer session. At this time, I would like to turn the conference back over to Mr. Art Penn for any additional or closing remarks.

Just want to thank everybody for being on the call today and for your interest in PNNT and we'll speak to you next quarter. Thank you very much.

This concludes today's conference. Thank you for your participation.