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Edited Transcript of PNNT earnings conference call or presentation 10-May-19 2:00pm GMT

Q2 2019 PennantPark Investment Corp Earnings Call

NEW YORK May 23, 2019 (Thomson StreetEvents) -- Edited Transcript of PennantPark Investment Corp earnings conference call or presentation Friday, May 10, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Arthur Howard Penn

PennantPark Investment Corporation - Founder, Chairman & CEO

* Aviv Efrat

PennantPark Investment Corporation - Treasurer & CFO

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Conference Call Participants

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* Casey Jay Alexander

Compass Point Research & Trading, LLC, Research Division - Senior VP & Research Analyst

* Kyle M. Joseph

Jefferies LLC, Research Division - Equity Analyst

* Mickey Max Schleien

Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research & Supervisory Analyst

* Robert James Dodd

Raymond James & Associates, Inc., Research Division - Research Analyst

* Ryan Patrick Lynch

Keefe, Bruyette, & Woods, Inc., Research Division - MD

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Presentation

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Operator [1]

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Good morning and welcome to PennantPark Investment Corporation's Second Fiscal Quarter 2019 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.

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Arthur Howard Penn, PennantPark Investment Corporation - Founder, Chairman & CEO [2]

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Thank you, and good morning, everyone. I'd like to welcome you to PennantPark Investment Corporation's Second Fiscal Quarter 2019 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.

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Aviv Efrat, PennantPark Investment Corporation - Treasurer & CFO [3]

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Thank you, Art. I'd like to remind everyone that today's call is being recorded. Please note that this call is a property of PennantPark Investment Corporation and that any unauthorized broadcast of this call in any form is strictly prohibited. Audio replay of the call will be available by using the telephone numbers and PIN provided in our earnings press release as well as on our website.

I'd 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 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.

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Arthur Howard Penn, PennantPark Investment Corporation - Founder, Chairman & CEO [4]

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Thanks, Aviv. I'm going to provide an update on the business, starting with financial highlights, followed by a discussion of the overall market, the portfolio, investment activity, the financials and then open it up for Q&A. For the quarter ended March 31, 2019, we invested $184 million in primarily first lien secured debt at an average yield of 9.1%.

Core net investment income was $0.19 per share. We are pleased that our current run rate, net investment income covers our dividends. We purchased $7 million of our common stock this quarter as part of our stock repurchase program, which was authorized by our Board. We've completed our program and have purchased $29.5 million of stock. The stock buyback program is accretive to both NAV and income per share. As of September 30, we had taxable spillover of $0.30 per share, which provides further dividend cushion. With a generally stable underlying portfolio and substantial spillover, we believe that PNNT's stock should be able to provide investors with an attractive dividend stream, along with potential upside.

As you all know, the Small Business Credit Availability Act was signed into law in late March 2018. In February 2019, our shareholders approved the reduction of the asset coverage test from 200% to 150%. In connection with this reduction, we reduced our base fee from 1.5% to 1% on gross assets that exceed 200% of PNNT's NAV at the beginning of each quarter.

Over time, we are targeting a regulatory debt-to-equity ratio of 1.1 to 1.5x. We will not reach this target overnight. We will continue to carefully invest, and it may take us several quarters to reach the new target. We prepaid $250 million of our notes. In connection with that, we closed on the new $250 million credit facility with BNP to complement our existing $445 million credit facility and our $150 million SBIC II financing.

Our primary business of financing middle-market sponsors has remained robust. We manage relationships with about 400 private equity sponsors across the country from our offices in New York, Los Angeles, Chicago, Houston and London. And we've done business with about 180 sponsors. Due to the wide funnel of deal flow that we receive, relative to the size of our vehicles, we can be extremely selective with our investments. In this environment, we have not only been extremely selective, but we have generally moved up capital structure to more secure investments.

A reminder about our long-term track record. PNNT was in business in 2007, then as now focused on financing middle-market financial sponsors. Our performance through the global financial crisis and recession was solid. Prior to the onset of the global financial crisis in September 2008, we initiated investments which ultimately aggregated $480 million.

Average EBITDA of the underlying portfolio of companies was down about 7% to the bottom of the recession. According to the Bloomberg North American High Yield Index, the average high-yield company EBITDA was down about 40% during that same time frame. As a result, we had few defaults in attractive recoveries on the portfolio. The IRR of those underlying investments was 8%, even though they were done prior to the global financial crisis and recession. We are proud of this downside case track record. We've had only 13 companies go nonaccrual out of 223 investments since inception 12 years ago. Further, we are proud that even when we've had those nonaccruals, we've been able to preserve capital for our shareholders. It's been 2.5 years since we've had a nonaccrual at PNNT, and that run had to end at some point. As of March 31, 2019, we had one nonaccrual, which represents 1.4% of our overall portfolio at cost and market value. Since inception, PNNT has made 223 investments totaling about $5.3 billion at the average yield of about 12.2%. This compares to an annualized loss ratio, including both realized and unrealized losses, of about 32 basis points annually. This strong track record includes both our energy investments as well as our primarily subordinated debt investments made prior to the financial crisis.

At this point in time, our underlying portfolio indicates a strong U.S. economy and no signs of recession. We remain focused on long-term value of making investments that will perform well over an extended period of time and can withstand different business cycles. We are first call for middle-market financial sponsors, management teams and intermediaries who want consistent and credible capital. As an independent provider, free of conflicts or affiliations, we are a trusted financing partner for our clients.

In general, our overall portfolio is performing well. We have cash interest coverage ratio of 2.7x and a debt-to-EBITDA ratio of 5.2x at cost on our cash flow loans.

With regard to our energy-related portfolio, we are pleased that we made progress monetizing some of those investments at reasonable values over the last year. We are also pleased to see higher energy prices over the last few months, which resulted in increases in fair market value of our energy investments in this past quarter.

Ram is focusing on its Austin Chalk position in Eastern Texas. The company commenced the limited drilling program. The early results have been strong on an absolute basis and relative to other operators in the area. We are encouraged by the early performance. Ram plans to solely focus on the development of the Austin Chalk assets and monetize all of their assets over time. The positive fair market value increases of our energy portfolio this past quarter was more than offset by valuation declines in other assets as we move towards actual investments that are largely equity positions. As a result, our overall NAV was down for the quarter.

As of March 31, Park Holdings was our largest debt investment. We are pleased that the recapitalization and exit of that investment closed yesterday. It was a complex situation, and we are thankful of the efforts of everyone to make the deal happen, including the existing ownership, new investors, government agencies and regulators who all worked tirelessly to make it happen.

We received our interest and principal at about 98% of original cost. This resulted in a realized IRR of 13.8% and a multiple on invested capital of about 1.6x. We are thrilled with the realized returns of this investment and are looking forward to using these proceeds to further our strategic direction of a more diversified portfolio with more modest bite sizes, which are higher in the capital stack.

In terms of new investments, we've known these particular companies for a while, have studied the industries or have a strong relationship with the sponsor. Let's walk through some of the highlights. We purchased $1.2 million of revolver and $17.6 million of a first lien term loan of HW Holdco, and [we would]. The company is a business-to-business data, marketing and media company primarily serving the residential construction market, MidOcean Partners is the sponsor. We purchased $15.4 million of the first lien term loan and funded $900,000 of the revolver at Lombart Brothers. The company is a manufacturer and distributor of ophthalmic equipment. Atlantic Street is the sponsor. We funded $100,000 of revolver and $9.9 million of first lien term loan of Perforce Software. The company is a provider of version control project management and code testing software. Clearlake Capital is the sponsor. We purchased $41.5 million of the first lien term loan and funded $300,000 of revolver of TVC Enterprises. We also purchased $1 million of the common equity. The company provides membership-based legal services to commercial truck drivers. Gauge Capital is the sponsor.

Turning to the outlook. We believe that the remaining part of 2019 will be active due to growth and M&A-driven financings. Due to our strong sourcing network and client relationships, we're seeing strong deal flow.

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

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Aviv Efrat, PennantPark Investment Corporation - Treasurer & CFO [5]

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Thank you, Art. For the quarter ended March 31, 2019, core net investment income totaled $0.19 per share, including $0.01 per share of other income. We also had $0.07 per share of onetime financing costs relating to our new BNP facility and the make-whole of the payoff of our notes. After netting the incentive fees of $0.04 per share, the net effect of this onetime financing cost was $0.03 per share. Our GAAP NII was therefore $0.16 per share.

Looking at some of the expense categories, management fees totaled $4.5 million. General and administration expenses totaled $1.2 million. Onetime financing expenses totaled $4.9 million, and interest expense totaled $7 million. During the quarter ended March 31, unrealized loss from investment was $20 million or $0.30 per share.

Unrealized gain on our debt investment was $3.7 million or $0.06 per share. We had about $1 million or $0.01 per share of realized gains. The accretive effect of our share buyback was $0.03 per share. Our dividend exceeded our GAAP net investment income by $0.02 per share. Consequently, NAV went from $9.05 per share to $8.83 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 prices provided by independent valuation firms, securities and exchanges or independent broker-dealer quotes 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 has a weighted average yield of 10.6%. On March 31, our portfolio consisted of 66 companies across 29 different industries. The portfolio was invested 55% in first lien secured debt, 28% in second lien secured debt, 4% in subordinated debt and 13% in preferred and common equity. 89% of the portfolio had a floating rate.

Now let me turn the call back to Art.

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Arthur Howard Penn, PennantPark Investment Corporation - Founder, Chairman & CEO [6]

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Thanks, Aviv. To conclude, we want to reiterate our mission. Our goal is to generate an attractive risk-adjusted return 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 for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we'll take our first question from Kyle Joseph with Jefferies.

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Kyle M. Joseph, Jefferies LLC, Research Division - Equity Analyst [2]

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Art, just want to get a sense for your thoughts on yields going forward. Obviously, you guys are going through a portfolio mix shift. But on sort of apples-to-apples deals on the same layer of the capital spectrum, what sort of trends are you seeing in terms of yields?

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Arthur Howard Penn, PennantPark Investment Corporation - Founder, Chairman & CEO [3]

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Thanks, Kyle. From an apples-to-apples basis, I think kind of the first lien and stretch senior that we're doing kind of goes anywhere from L+475 to kind of L+700 if it's a stretch year first lien. And those have kind of been consistent over the last 2 or 3 quarters. We haven't seen a -- we've seen consistency, obviously, with the volatility in a broadly syndicated market in December that made -- we saw a moment of increased deals but -- yields. But things, apples-to-apples, are pretty stable.

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Kyle M. Joseph, Jefferies LLC, Research Division - Equity Analyst [4]

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Got it. And then just from a higher-level industry question, a lot of your peers and yourselves are increasing leverage and kind of like adjusting the investment style to a certain extent. Just wondering if you're seeing sort of any competitive changes in the industry as the industry ramps its leverage.

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Arthur Howard Penn, PennantPark Investment Corporation - Founder, Chairman & CEO [5]

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Yes, we haven't seen any real change. Obviously, capital formation in BDCs has been less robust, and publicly traded BDCs have been -- has been less robust in the last few years due to the applied fund fee rules. So the biggest capital formation has been in the private sector, private debt structures on a relative basis. The people who are managing both the public BDCs as well as the private funds generally have been around awhile or generally rational competitors. Every once in a while, you'll see a competitor who's trying to ramp in some way, shape or form, who does stuff that's irrational, but we haven't really seen much of that recently. So the competitive framework is pretty much consistent as it's been in the last few years. Typically, most of the middle-market sponsors have a handful of go-to lenders that they show deals to who are trusted lenders to them. And our goal is to get a first look and a last look -- or first call and the last look, so to speak, on the deals. And I think, generally, we do that. And where we want to be part of a deal, where we want to lead the deal, we have a very good hit ratio.

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Operator [6]

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And next, we'll go to Robert Dodd with Raymond James.

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Robert James Dodd, Raymond James & Associates, Inc., Research Division - Research Analyst [7]

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I was in fact on mute. [Can you hear me now]? Congrats on your park [exit]. Looking at obviously the new nonaccrual, Hollander, any more color you can give us about what the driver was for that getting to a tipping point? Because obviously [you mark --] still tends to imply that they've got good asset coverage. But on the nonaccrual side, is there any particular telling point that led to that event?

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Arthur Howard Penn, PennantPark Investment Corporation - Founder, Chairman & CEO [8]

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Yes. It's a good question. I think it's indicative a little bit about what's going on in the overall market. People say, "Gee, middle-market M&A levels activity has been a little bit lighter so far in 2019 than it was in '18." Obviously, you typically had the seasonality in the first quarter, but it has been lighter. And we think, in part, it is because buyers and financiers are being more skeptical of the pro forma adjustments. And you see a deal like Hollander where -- a lot of deals that we and everybody else do, they're roll-ups. They're doing acquisition after acquisition after acquisition. They're trying to consolidate an industry. And every once in awhile, you hit a bump when you're trying to do a lot. You're trying to do a lot at once, and those synergies or those savings don't necessarily come in. So that -- Hollander, we think, is a good company. It's the leader in its space of pillows and sheets. And we think, in that space, we know it's the leading company, but it was a -- it was 3 different companies put together. The last add-on acquisition, the integration did not go well, which is why you have the situation you have today. But this is indicative. Hollander is just one example of kind of the risks of what has gone in the middle market and why we think activity level's probably slowing down a little bit in '19 as we and everybody else. Buyers and financiers look and say, "Hey, before we buy this deal or finance this deal, we really want to do extra diligence on the add-on acquisitions and the pro forma adjustments." So Hollander, unfortunately, hit a road bump because they were trying to do too much at once. Operationally, it didn't -- it hasn't worked out as well as they would have hoped, so that deal is in restructuring right now. But it is indicative a little bit of what's going on in the overall market.

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Robert James Dodd, Raymond James & Associates, Inc., Research Division - Research Analyst [9]

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Got it. Got it. I appreciate that. So the other reason -- the follow-up question for that from me is if -- when you look through the rest of your portfolio, are there any other -- I mean, I predict they are the low-ups in the portfolio. So if that's kind of the driver for Hollander, are there any incremental concerns you have about additional assets that are kind of going through the same market dynamic in terms of maybe synergies not coming through, maybe low-ups not working out, et cetera?

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Arthur Howard Penn, PennantPark Investment Corporation - Founder, Chairman & CEO [10]

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Yes. So look, we think this slowdown is actually healthy for us and the rest of the market. We think -- obviously, we think the portfolio is appropriately marked. It's been done by the independent valuation firms. By and large, we think the market -- the marks reflect reality. So we're not really seeing this happen elsewhere in the PNNT portfolio. And I'll say also, on the other hand, to balance it out, we have some very nice co-invests which -- and you could see in the marks as well, which seem to be indicative of when it does work out, like DecoPac and Cano and Walker Edison and Wheel Pro (sic) [Wheel Pros]. In some cases, we do these equity co-invests. And when it works out, it could be very, very nice on the other hand. So one of the reasons we do co-invest is to help fill in the gap from when we do have some road bumps like we're having in Hollander.

So we think the portfolio, both on the debt side and the equity side, is obviously appropriately marked, but it's indicative of some of the puts and some of the takes that are going on. So we don't see anything near term, really, in the rest of PNNT's portfolio from the standpoint of -- from roll-ups, but there could be in the future, but also, there could be some nice upside elements from these equity co-invests.

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Robert James Dodd, Raymond James & Associates, Inc., Research Division - Research Analyst [11]

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I appreciate that. And then last one, if I can, kind of follows on from there as well. On the equity co-invest, obviously, some of them have got considerable value and obviously not producing income. You don't get the control in general when those are monetized. But what's your view on -- it is a pretty hot market out there but selling some of these assets, what's your kind of (inaudible) gut tell you about where or what the market's going to be for selling your equities given the players that may be in control of that and what they're viewing?

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Arthur Howard Penn, PennantPark Investment Corporation - Founder, Chairman & CEO [12]

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Yes. So in most cases, these players are middle-market financial sponsors. They are economic animals, by and large. And so generally, when you see a markup in the equity, as a general proposition, you're within 24 months of some sort of event generally, right? So -- and I think as we look at some of the equity compass we have, it's a general problem. Now in some cases, they may say, "Gee, we see so much value. We're going to hold on to the asset for longer. There's more to do." It might be a 36-month, 48-month hold. But generally, when the companies are performing well, and they can lock in a nice return, that they will do so.

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Operator [13]

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(Operator Instructions) Next, we will go to Mickey Schleien with Ladenburg.

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Mickey Max Schleien, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research & Supervisory Analyst [14]

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Just a couple of questions today. Put forward LIBOR curve currently negatively sloped. I'd like to ask how you're managing downside risk to the portfolio's yield in terms of the trends you're getting in LIBOR floors and whether you're starting to think about possibly doing more fixed-rate deals if you can get them or maybe hedging.

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Arthur Howard Penn, PennantPark Investment Corporation - Founder, Chairman & CEO [15]

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That's a great question, Mickey. And boy, a few months makes a big difference in terms of people's views on interest rates. So the LIBOR floor question is a great question. I think we all [ought to] start looking at it again. I think the implied LIBOR curve doesn't imply that rates are going down a lot, but it does imply that rates are going down some. So it's something we have to start thinking about it. Certainly, as you know, most of our financing -- or a lot of our financing in this case is floating rate. So we are matched, to some extent, assets to liabilities. And the SBIC financing is fixed, but -- for both our SunTrust and our BP facility float. So by and large, we're matched and the SBIC financing, of course, is attractive financing. So -- but I think you make an excellent point, we should start thinking about it. And I think just on the point of kind of doing fixed versus floating, I think the market never really -- you would have thought that as LIBOR increased over the last few years, sponsors and borrowers would have asked us to do fixed, and they really didn't, they really didn't. So now it's really up to us to debate do we ask for fixed if there's a downtick. It's a good question. Can't give you a solid answer on it right now but something we should certainly be thinking about.

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Mickey Max Schleien, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research & Supervisory Analyst [16]

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All right. I appreciate that. And I would point out that the forward curve's not always right. Just my follow-up question maybe. If you could just break out the main components of realized gains and the unrealized depreciation on your investments this quarter.

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Arthur Howard Penn, PennantPark Investment Corporation - Founder, Chairman & CEO [17]

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Sure. So on PNNT, the big losers from a mark-to-market were Affinion Park. As we said, it kind of got a little messy at the end, but we're thrilled with the result end zone to end zone. And PT Network were key of the -- were key -- 3 key downward movers and mark-to-market. MidOcean J&F (sic) [MidOcean JF] was up. Ram Energy was up. And U.S. Well was up. So those are -- there wasn't really much on a realized basis. Those were the unrealized ups and down movers.

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Operator [18]

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And next, we'll go to Ryan Lynch with KBW.

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Ryan Patrick Lynch, Keefe, Bruyette, & Woods, Inc., Research Division - MD [19]

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First one was on Superior Digital. It look like maybe your debt investment was converted or at least a portion was converted to an -- a preferred equity and then written down the quarter. Was there some sort of restructuring or something that went on in that investment?

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Arthur Howard Penn, PennantPark Investment Corporation - Founder, Chairman & CEO [20]

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Yes. That investment is underperformed. There was a restructuring in it. All investments valued at very low dollar amount at this point. So it's essentially coming to its end. It hasn't been pretty, but it's coming to its end.

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Ryan Patrick Lynch, Keefe, Bruyette, & Woods, Inc., Research Division - MD [21]

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Okay. And then on Ram, it sounds like they're going to be now -- you said they're going be focused on the Austin Chalk assets. Can you just remind us, were they involved in multiple areas before this? And what kind of drove their opinion to just focus on those assets? And if you were involved in other areas, were you just planning on selling it off, or what is kind of the thought behind that?

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Arthur Howard Penn, PennantPark Investment Corporation - Founder, Chairman & CEO [22]

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Yes. When Ram was started, it had a wide variety of different fields in a wide variety of areas. They did have a concentration in the Austin Chalk, and the Austin Chalk position in East Texas seems to be a very attractive position. So the idea is exit the ancillary positions where you can't get enough concentration, focus on the Austin Chalk in East Texas where you can have a concentrated position in an area that looks very, very good. They've drilled 3 wells in this area, and they're all in the top 10 wells in that region, including the top-producing well. So the region is starting to get some focus. The acreage that they have is in the middle of a bunch of strategics who may want to buy some attractive assets and acreage at some point in time. So the idea is prove out this Eastern Texas Austin Chalk position, drill a few more wells, prove it out a little bit more and perhaps it will be an attractive add-on acquisition candidate for one of the big strategics that's surrounding that area.

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Ryan Patrick Lynch, Keefe, Bruyette, & Woods, Inc., Research Division - MD [23]

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Okay. That's really helpful color on that one. And then the last question, first, congrats on the [Novada] exit, the park investment. But if I maybe take a step back and just look at when that investment was originally made in 2014, that was a 15% yield in second lien, $77 million investment that you made in PNNT. Can you maybe just talk about how PNNT's investment philosophy or maybe investment strategy has evolved over that time period? That doesn't seem like an investment you would be making in the entities today. So can you maybe just talk about now that, that investment's repaid, maybe how your investment strategy has kind of shifted a little bit in the recent years?

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Arthur Howard Penn, PennantPark Investment Corporation - Founder, Chairman & CEO [24]

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Yes. So -- and that's a great question. And our focus -- primary focus in PNNT today is on smaller bites, a more diversified portfolio. And generally, at the top of the capital stack, first lien or stretch senior. So we made that investment in a different time, in a different place. It was too -- looking back, it was too concentrated. It was a project financing second lien. We've had a very good gaming track record and even here, 13.8%, we're proud of it. But I think today, the mission of PNNT is, by and large, top the capital stack, very diversified smaller bites. And we're excited about the return we got on park, but we're just as excited about how it allows us to pivot and move up the capital stack and have a much more diversified portfolio.

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Operator [25]

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And next, we'll go to Casey Alexander with Compass Point Research.

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Casey Jay Alexander, Compass Point Research & Trading, LLC, Research Division - Senior VP & Research Analyst [26]

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Little bit of a math question here. Hollander Sleep Products had a 10% coupon. So that is still a loss of about $2 million a year of income or $0.03 a share. Also, your reinvestment rate, you've been investing mid money at about 9%, and park was a 14.5% coupon. If you reinvest those proceeds with 9%, that's a difference of about $0.06 per share of net investment income. How do you go about replacing what is arguably right now sort of the loss of $0.09 per share or more than 10% of your estimated annual NII?

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Arthur Howard Penn, PennantPark Investment Corporation - Founder, Chairman & CEO [27]

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Yes. I think -- on the math, I think Aviv will probably call you after the call, Casey and go through Hollander. I think he was just saying that your number sounds a bit high. On park, I think that's really a good question, which is it's indicative of how we're shifting the portfolio. So we are happy to get a very nice return on park. And then over time, we're not going to snap our fingers and immediately replace that income, over time judiciously and prudently move up capital structure to lower risk, lower reward assets and also judiciously and prudently increase our leverage to the higher target leverage. So the idea is, at the end of the day, when the dust clears, still have an attractive ROE but a safer ROE using a little bit more leverage but being higher in the capital stack. So you're right, I mean, park is a nice big coupon. It was a big chunky position, and we enjoyed the yield of that for a while, and that was great, and we're thrilled we got out at a reasonable price and good return. But we're not just going to snap our fingers, immediately replace it, thoughtfully, methodically, prudently up capital stack, more diversified bites. And when the dust clears, whenever it clears, it might take us a couple of quarters, it might take us 2 or 3 quarters, have a lower risk portfolio and a very attractive ROE.

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Casey Jay Alexander, Compass Point Research & Trading, LLC, Research Division - Senior VP & Research Analyst [28]

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Okay. Secondly, clearly, I don't understand something because the liability structure of PNNT and liability structure of PFLT are not broadly differentiated, and yet, PFLT had a $5 million charge for debt appreciation, and PNNT had a $3.6 -- $3.7 million gain for debt depreciation. And it's curious how one could have a charge and one could have a gain in the same quarter.

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Arthur Howard Penn, PennantPark Investment Corporation - Founder, Chairman & CEO [29]

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Yes, yes. That's a good question. So PFLT, as you know, has bonds that trade on the Tel Aviv Stock Exchange. And due to the market movement, those bonds rallied over the quarter. Now let's move over to PNNT. PNNT have bonds -- had bonds which we take out -- took out with a make-whole premium which hit GAAP NII, and we replaced that with a drawdown of our credit facility. And what happens is because our credit still is marked, whatever it's marked, '98, '99, I don't know off the top of my head where it's marked, but it was -- the credit facility went up substantially to pay off the bonds, then PNNT then enjoyed, if you want to call it that, the benefit of the increased NAV because you had a bigger credit facility marked in '98 or '99. I don't know if that was understandable but...

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Casey Jay Alexander, Compass Point Research & Trading, LLC, Research Division - Senior VP & Research Analyst [30]

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So at some point in time, when you paid down that credit facility, it will result in debt appreciation that would result in a charge against earnings at some future gain.

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Arthur Howard Penn, PennantPark Investment Corporation - Founder, Chairman & CEO [31]

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That's right. And then we'll have a new credit facility and the same thing will happen.

All right, Casey. Thank you so much. Operator, I think that's all of our questions. So look, I'd like to thank everybody for being on the call today, really appreciate it. And we'll be chatting with you in early August at our next conference call. Thank you very much.

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Operator [32]

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And that does conclude today's conference. We thank you for your participation. You may now disconnect.