PennantPark Investment Corporation

and I were about to begin. Good morning and welcome to the Penn and Park Investment Corporation's first fiscal quarter 2020 earnings conference. Today's call is being recorded. At this time, all participants have been placed in a listen-only mode. The call will be open for a question and answer session following the speaker's remarks. If you would like to ask a question at any time, simply press the star key followed by the digit one on your telephone keypad. If you would like to withdraw your question, please press star 2. It is now my pleasure to turn the call over to Mr. Art Penn, Chairman and Chief Executive Officer of Pennant Park Investment Corporation. Mr. Penn, you may begin your conference.

Thank you, and good morning, everyone. I'd like to welcome you to Pennant Park Investment Corporation's first fiscal quarter 2020 earnings conference call. I'm joined today by Vivek Vafrat, our Chief Financial Officer. Aviv, please start off by disclosing some general conference call information and include a discussion about forward-looking statements.

Thank you, Art. I'd like to remind everyone that today's call is being recorded. Please note that this call is a property of Penn and Park 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 PennandPark.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 Pimm.

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. We were active in the quarter ended December 31st, 2019. We invested $174 million in primarily first lien secured debt at an average yield of 8.8%. Our NEV increased from $8.68 per share to $8.79 per share. Net investment income was $0.15 per share, which was all recurring income. We had no other income in the quarter. Other income is typically $0.01 to $0.03 per share. As we have discussed, we are generally moving into first lien secured positions higher in the capital structure and into a more diversified portfolio. As of December 31st, first lien exposure was 57% of the portfolio, up from 48% a year ago. Along with a lower risk portfolio, we are prudently targeting higher leverage. As of December 31st, regulatory leverage was 1.06 times. Over time, we are targeting a regulatory debt to equity ratio of 1.1 to 1.5 times. We will not reach this target overnight, We will continue to carefully invest, and it may take us time to reach the new target. A careful and prudent increase in leverage against primarily a first lien portfolio should lead to higher earnings. In early October, we also received a green light for our SBIC III. We are extremely gratified that our long-term track record and excellent relationship with the SBA will result in attractively priced long-term financing for the company. We are also actively assessing a new senior loan joint venture similar to the successful joint venture at PFLT, which can also increase our earnings over time. Our recently amended credit facility, issuance of unsecured bonds last fall, SBIC3, and a potential joint venture should provide a solid pathway for earnings growth. Solid coverage of our dividend should come as a result of this prudent increase in leverage. Above and beyond a prudent increase in leverage, earnings should grow as we exit performing equity investments and reinvest those proceeds in loans. As of the last fiscal year, we had taxable spillover of 34 cents per share, which provides significant dividend cushion. 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 and Houston. And we've done business with about 190 sponsors. Over the last 12 months, About 65% of the companies we invested in were existing borrowers. These were generally cases where we had an option to continue to finance an existing borrower or could opt out. To us, this incumbency is the best of both worlds, staying with solid credits with reduced competition or choosing to exit. In a market where investors are asking about differentiation among middle market direct lenders, the value of incumbency can't be overstated. with 135 borrowers in our overall platform, we are deriving substantial benefits of incumbency. Our growing team, capital resources and incumbency, put us in a position to be both active and selective. Today, we're only investing in approximately 4% of the opportunities we are shown. Due to the wide funnel of deal flow that we receive, we will continue to be extremely selective with our investments. As you will recall, In 2007, just as today, PNNT was 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. The investments performed well. Average EBITDA of the underlying portfolio companies fell about 7% at 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 timeframe.

As a result, we had few defaults and attractive recoveries on that portfolio. The IRR of those underlying investments was 8%, even though they were done prior to the financial crisis and recession.

We are proud of this downside case track record.

We have had only 13 companies go on non-accrual out of 245 investments since inception over 12 years ago. Further, we are pleased that even though we have had those non-accruals, we've been able to preserve capital for our shareholders. As of December 31st, 2019, we had no non-accruals. Since inception, PNNT has invested in about $5.8 billion and an average yield of about 12%. This compares to an annualized loss ratio, including both realized and unrealized losses of approximately 30 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 a recession. We remain focused on long-term value and making investments that will perform well over an extended period of time and can withstand different business cycles. We are our 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 are a trusted financing partner for our clients. In general, our overall portfolio is performing well. We have cash interest coverage ratio of 2.7 times and a debt to EBITDA ratio of 4.7 times that cost on our cash flow loans. With regard to Ram Energy, as we have discussed, Ram is focusing on its core 13,500 contiguous gross acres auction chalk project in the Giddings Field outside of Houston, Texas. This area has received renewed focus. Ram's first seven wells have all ranked in the top 20 wells in terms of initial production, with four of these in the top 10, including the number one and number three wells in the Austin Chalk. Ram's acreage is surrounded by well-known and active strategic oil and gas companies. Today, Ram has over 100 potential additional locations in this project. We decided to convert a portion of the company's outstanding debt to equity and today we have about 40 million of funded revolver outstanding. That in addition to the 30 million funded portion of a Macquarie loan represents less than three times leverage on RAM's 2020 estimated EBITDA, which is consistent with comparable companies in the industry. 18% of our portfolio was preferred in common equity as of December 31st. This is higher than our long-term target of five to 10%. A substantial portion of the growth in equity is due to the positive performance of quite a few investments. The strong performance of MidOcean J&F, Wheel Pros, ITC Rumba, DECO PAC, PT Network, Walker Edison, Dominion, and others has resulted in markups in those equity positions over the last few quarters. About $120 million, or nearly half of our equity portfolio, has increased in value over the past 18 months, where we can envision an exit over the next 12 to 24 months. Our goal is to make substantial progress over the next 12 to 24 months in exiting equity positions at attractive prices. As we reinvest those proceeds into our core cash-paying debt instruments, our income should grow. To give you a sense, if we were to exit only $60 million of that $120 million and reinvest in loans consistent with our recent yields, our NII would increase about 1.5 cents per share per quarter. If we were to exit all $120 million, and I would increase by $0.03 per share per quarter. On a mark-to-market basis, this past quarter, positive movements in the value of MidOcean J&F and PT Network were offset by valuation declines in ETX. Overall asset appreciation generated $0.18 per share of NEB gain. In terms of new investments, we've known these particular companies for a while, have studied the industries, or have a strong relationship with a sponsor. Let's walk through some of the highlights. We purchased $13.7 million of DRS Holdings Dr. Scholl's First Lean Term Loan with Revolver and Common Equity. Dr. Scholl's is a leading brand in the foot care category in North America, including insoles, skin treatments, and orthotics. Yellowwood is the sponsor. We purchased $2.9 million of ECM Industries First Lean Term Loan with Revolver and Common Equity. ECM is a provider of a broad range of tools and consumables for electrical and harsh environment applications under highly regarded brands. Sentinel Capital Partners is the sponsor. We purchased $5.5 million of Sargent and Greenleaf first lien term loan. Sargent and Greenleaf is a global manufacturer of high end locks for safes, for residential ATM and government end markets. Open Gate Capital is the sponsor. We purchased $5.2 million of first lien term loan of Tele Guam Holdings. The company is a quad plate telecom operator in Guam. Huntsman and Family Investments is the sponsor. Turning to the outlook, we believe that the remainder of 2020 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. The quarter ended December 31, 2019. Net investment income totaled $0.15 per share. Looking at some of the expense categories, management fees totaled $5.5 million, Taxes, general and administrative expenses totaled $1.5 million, and interest expenses totaled $8.9 million. Our investment gained 18 cents per share on a mark-to-market basis. Our dividend exceeded our GAAP net investment income by 3 cents per share. And our liabilities reduced NIV 4 cents per share on a mark-to-market basis. Consequently, NAD per share went from $8.68 per share to $8.79 per share. During the quarter, we exercised the green shoe of our unsecured bond, trading on the NASDAQ under the ticker PNNTG, and issued an additional $11.3 million. The total amount of the bond is $86.3 million. As 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 and exchanges, or independent broker dealers 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 9.6%. On December 31st, our portfolio consisted of 78 companies across 30 different industries. The portfolio was invested in 57% first-linked and secured debt, 20% in second-linked and secured debt, 5% in subordinated debt, and 18% in preferred and common equity. 98% of the portfolio has a floating rate. 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 for questions.

Thank you. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, star 1 if you would like to ask a question. We'll pause for a moment. and we'll first hear from Kyle Joseph of Jefferies.

Hey, good morning, guys, and thanks for taking my questions. First question, just wanted to talk about sort of the pace or the cadence of deployment during the quarter. You know, was it a little bit back-weighted in the quarter? I just want to get a sense for the yield dynamics in the quarter.

Thanks, Kyle. Yes, you know, as usual, We had a large number of deals closed right around the year end, December 31st. So a big chunk of the flow came right at year end and shortly thereafter. So it's a very active quarter in general. We're pleased with the activity, like the risk-adjusted returns we were getting, but it was very back-end loaded.

Got it. And then just on the yields, obviously, you guys are subject to market movements. You're subject to and lastly we've been seeing portfolio rotation. Obviously you guys are only in control of one of those aspects but at least in terms of the portfolio rotation can you give us a sense for how much progress you've made, how much more of the portfolio there is to rotate which would ultimately pressure an asset that I know that rotating equity into yield in essence would actually enhance the yield on the portfolio. So just give us a sense on the progress you've made and how much would you have left to check if you are?

Yeah, it's a good question. And look, as the saying goes, it's a process. You know, a while ago we said, look, we're in this environment. We are going to be much more cautious about second lean events given where the leverage ratios were. And we're going to pivot and do more first lean and take advantage of the higher leverage The higher leverage availability in the BDC space. So we're in the midst of that transition today. First lean exposure is 57% of the portfolio, up 10%, about 10%, 9% from last year, which is 48%. Almost everything we're doing going forward is going to be first lean, where we'll be able to leverage it up a bit more. Occasionally we'll do a second lean or meds, but it's going to have to be very, very compelling for us. So we're kind of in the middle of this transition of, More first lean, higher leverage, lower yield but made up with leverage, safer portfolio, and at the same time working on exiting as best we can our equity investments and replacing those with cash paying debt instruments. The fact that a bunch of the equity investments are performing very well and the valuations are rising is a good sign. It sets a nice foundation for exit over the coming quarters. Again, we don't really control most of that, but it sets up this dynamic where over time, with increased leverage, with the ability to exit these equity investments, not only should we see solid dividend coverage, we should see some growth well beyond that. So that's the game plan. We knew it was not going to be flipping a switch and turning the lights on. We knew it was going to take some time. We are in the middle of that, and it's very labor-intensive. We're committed to it. We think in the end it will be a much better company, much better cash flow stream, and NAB for our shareholders.

Got it. That's very helpful. Thanks very much for answering my questions. Thank you.

Once again, Star 1, if you'd like to ask a question or make a comment, we'll next hear from Robert out of Raymond James.

Hi, guys. On the equity book, obviously, which went up this quarter because of them and some other things, but can you give us any color that you're willing to on what proportion of the book, if any, is in active discussions to exit or, you know, is it all just, you know, it's, you know, obviously it's a process, but, you know, is it all sitting out there or is any of it, you know, Currently in active discussion.

It's a good question, you know, because sometimes we are in the room when we, you know, we're in the room where it happens, and sometimes we're not in the room where it happens. So, and I know, Robert, you like Broadway. So there is a portion of the book, I'm going to say, of that 120 million, you know, 10 to 20 percent, we're in the room where it happens, and, you know, we know of discussions at this point. The rest of it, we are not in the room where it happens. And you would hope and think that as the companies perform well and as they're in the hands primarily of middle market financial sponsors, it's just a matter of time. It might be six months. It might be a year. It might be 18 months or two years. But it should just be a matter of time until that value is realized.

Got it. Got it. Thank you. On the JV, you said you're actively assessing. So where... which act would you be in, so to speak, to bring Broadway into it? I mean, is that early stages? I mean, any color you can give us on when something might go live on that front?

Yeah, so we're actively assessing proposals right now from potential parties, from potential partners. So we are hopeful that by the time we speak in early May, we'll have something more concrete to talk about.

Thank you. And then just one on RAM, which, as you say, you restructured it a little bit. It looks to be doing pretty well. Will that, and you obviously just got another permit, I think, to drill just a couple of days ago. Will there be more needed debt, either from you guys or from Macquarie, to fund incremental wells? I mean, again, you just got one permitted, so is that going to require more debt capital or is the drilling program through this year already funded from Capital Lab?

We're kind of done with 10 wells. There's two more potential wells in this project at this point. That would come from Macquarie. We will see one day at a time. Again, the reason we did this recap as we wanted the debt to EBITDAs to be in the zone of where the comparables were, which is about three times EBITDA. We would only go forward with the other two wells if we felt we could keep it within the zone. In terms of our capital, I think at this point we're set. We're not planning to put any more capital in. The idea, rolling back the tape over the last number of quarters, and we've shared this with everybody, is we thought we had a really good We had some really good acreage there in this Giddings Field area and the mission has been to prove it out so that we can position the company as best as possible for moving it to the right long-term hands. We are not the right long-term hands for these assets. There are three or four big strategics who are active and surrounding Our acreage. So the idea has been proved out to best position the company for potential exits in the strongest way. So the wells have been very good. The seven wells where we have our results are all in the top 20 in that area. So we think we're setting ourselves up as best we can for a potential exit. But it's a volatile market out there in energy, as we all know, and we can do what we can do. But in terms of our capital commitment, at this point we're finished and the additional wells would come from Macquarie if we decide to go with those additional two wells.

Got it, got it. Thank you. And then one more if I can. Obviously your indication of a target regulatory leverage 1.1 to 1.5, it's pretty wide range. Obviously you're sitting at 18% equity in the portfolio right now. Where in that range would you be willing to go if equity for the time being remains at 20% of the portfolio. And where would it need to be for you to be willing to go to the 1.5?

Yeah, it's really, it's a good question. It really, for us, depends on the underlying assets. You know, as you know, most of what we're doing is first lien senior secured. You know, the debt-to-debt of what originated today in the senior basis is 4 to 4.5 times. We're getting 8 to 9%. That kind of collateral, as we know, in a more dramatic world, could go into a middle market CLO and be leveraged four to one. We're not suggesting that, but we are suggesting that as we have more senior collateral. Depending on what's financing that, whether it be SBIC, credit facility, or otherwise, we would potentially take it towards the upper end of that range, assuming what we have by and large is first lien senior secured loans.

Got it. Thank you.

Thank you.

Next, we'll hear from Mickey Schleen of Ladenburg Thalmann.

Yes, good morning, Art. I want to follow up on Robert's question about leverage. Just to clarify, is the target you announced a regulatory target or a total debt-to-equity target?

It's a regulatory, which, just to be clear, excludes SBIC financing.

Okay, I understand. and can you walk us through the dynamics of winding down SBIC 1 and putting SBIC 3 into place and what proportion of your deal flow in today's market is SBIC compliant?

Yeah, so SBIC financing is a 10-year financing. Once you get kind of past the midpoint at five years, the SBA says, hey, we really need to see a game plan. for getting us fully paid out by the end of year 10. So after five years, you don't really increase it that much. You really have to start winding it down. And we're getting towards the back end of SBIC2. And so we've kind of started winding it down. And we paid back a bit of the SBA debt last quarter. As part of that, and as part of our relationship, we're pleased we got a green light letter. Again, I just want to be clear, green light letter is, we think, very good and usually leads to getting a license. We are still in the licensing process. We think we'll get a license, but there are no guarantees. We like the financing. It's very attractive. In terms of what fits, usually, there's a lot of arcane rules around what fits and what doesn't. Usually, if a company has some form of manufacturing in the United States, it fits as a general rule of thumb. As you look at our portfolio today, about 25% or so of the portfolio kind of fits. That actually fits nicely with the size of potential SBIC3 and is a nice adjunct to our tools.

Does 25% of your deal flow fit? In other words, Are you willing to invest in businesses that are oriented toward manufacturing given where we are in the economic cycle?

That's a good question. What we say is when we do manufacturing, it's usually light manufacturing. So we generally avoid heavy capex, big cyclical capex, pulp and paper, steel, chemicals. It's usually lighter manufacturing, which by the way is a lot of what's going on in the economy. But it is about 25%. and many more.

How long from a green light letter typically to a license? I know there's a lot of moving parts, but would that be a calendar year 2020 event in your mind?

Yeah, I mean, we think of it as a six-month process. So since we got the license kind of, I think in, when did we get the license?

Just around October of this year. Six months is very safe. Assumption, but we never know. Obviously, we're in the process.

and how would you capitalize SBIC 3, Art?

Yeah, we'll be with new, you know, it's all new deals. You need to provide a dollar of equity and over time you get up to $2 of debt so we would borrow to finance the equity portion of the SBIC.

And the credit facilities allow for that, is that correct?

Ryan Lynch of KBW.

Hey, good morning. Thanks for taking my questions. First one, just wanted to talk about RAM a little bit from a higher level. Art, how do you balance, you know, thinking about exiting an investment like RAM that seems to be performing pretty well and making some pretty good progress, but is in a very out of favor industry? So clearly, I think RAM is an investment on your balance sheet that I think investors would like to see you guys exit. and many more, particularly because of the equity component and the sector. But you're trying to sell that into a sector that is very out of favor today. So how do you weigh trying to get out of that investment investors probably want to see you get out of, but also wanting not to give up a significant amount of value in a sector that's really out of favor today?

It's a great question, something we grapple with all the time. All options are on the table. We know we're not the best long-term holder for this asset, particularly as the wells are performing extremely well and there are some active strategics right around the geography. We know we're not the best long-term holder and we'd rather not sell into weakness either. That's the conundrum. It is an important investment for us. We do want to convert it to cash over time. So we have to play it out. We now have a very active website on RAM. Anyone can go to it. I encourage anyone to go to it. It really shows the geography and the wells and gives you a sense of the results versus the comparables and the peers and who the peers are. So we are open-minded and happy to take suggestions from people how we can maximize the value of that asset. So it may just take some time. RAM is important, but I don't want to obsess on it because we have a lot of other... Thank you. Thank you.

I had a question regarding your leverage. So your target regulatory leverage is 1.1 to 1.5. I'm just wondering, obviously, the SBIC debentures do not count against that. That's about 20 points of additional leverage that you guys have on. You can include the SBIC to your total leverage. If you guys get another SBIC license, that can even become a larger component. So I'm just wondering... Do you guys think about total leverage at all as you guys are operating, or is your main focus just going to be on that regulatory leverage target?

Look, we obviously think about overall leverage as well, and we think about what's the appropriate leverage against the particular asset. So clearly we're doing primarily first lien senior secured loans today, which obviously as we've said, there are ways to finance that to much more aggressive leverage than even 2 to 1. 2 to 1 is the BDC regulatory gap, regulatory limit and in theory, if you had the SBICs, I guess we could get to 2 to 1 launch on an overall basis. Again, that would be against, at that point in time, mostly a senior book. We're not there yet. It's going to take some time. Don't know that we're going to want to even get there at that point in time, but It does give us a lot of dry powder, particularly against senior assets to generate earnings in a safe way.

Okay. And then last one on your, obviously you guys have the green light hoping to get another SBIC license. Do you know where the all-in rates would be if you were to get an SBIC license today and draw down some of the ventures? Do you know where those current all in costs are today, roughly.

Yeah, those are like 3.5% to 4.5% as a general indicative zone.

Okay, those are all my questions. I appreciate the time today. Thanks, Ryan.

Next, we'll hear from Rick Shane of J.P. Morgan.

Hey, guys. Thanks for taking my questions this morning. First, by and large, From a government's perspective, I believe you guys now have two of the three board seats. I'm curious from an ownership perspective, could you just tell us a little bit more about the capital structure? What percentage of the capital does your equity represent? What percentage of ownership do you have?

So we own all the equity. That said, we have a program for management to participate in upside and participate in a potential exit. So for us, management's key here. We think we've got a great management team led by Larry Lee and some really talented operators. And we think highly of them, and we have arrangements in place where they will participate in upside.

But we do want 100% of the equity at this point.

Got it. Okay, great. And then this is obviously related in a tangential way. Historically, BDCs that have had higher concentrations of equity investments have traded at significant discounts to NAD. You're obviously highly aware that you're addressing that in terms of your outlook. I am curious, given the discount and that opportunity, How important is repurchasing shares as you move forward? You haven't been particularly active on the buyback the last several quarters, but given the discount and given that investment opportunity, how do you weigh it against deploying new capital?

It's a good question, Rick, and it's something we and the board talk about regularly, which is capital allocation. We've now done two buybacks. The last one ended a couple quarters ago. Management's been buying the stock regularly, even past then, and will continue to do so. It's something we evaluate. It's on the table all the time. As you said, we want to exit some of these equity investments, and that will be a nice thing to happen when it happens. and then we'll evaluate all the different options in front of us, whether it be new investments, buybacks, etc.

Got it. I understand the signaling implications of management buying shares and that's important and the market certainly looks to that. But given the discount to NAV, the company buying shares is different not only because of the signaling impact, but more importantly because of the potential investment return associated with that.

I agree, and that's why we've done two buybacks in the last few years and why it's always something...

I lost you. Can you hear me?

Yeah, as I said, it makes a lot of sense, which is why we've already done two buybacks, and it's something that we continue to discuss regularly.

I appreciate that. Thank you, guys.

Thank you.

Next, we'll hear from Casey Alexander of Compass Point Research.

Hi, good morning. I just have one question. The reclassification of the RAM loan into equity and the additional equity that you put into RAM, was that done at the 930 valuation or the 1231 valuation?

If you look at it, Casey, as of 930, the fair market value of the bundle of RAM was $124 million. We put $10 million of new money in, bringing that to $134 million. and as of 12-31, that value of $134, which was at $930, is worth about $138. So there was a markup in the valuation of the overall bundle because the wells have had excellent performance and as we discussed, we converted some of that debt to equity during that time period.

But was it was the conversion of the debt to equity also at the 930 valuation?

It was done at the 930 valuation. It was debt that we converted at that valuation and where it was marked as at 930. All right, that's the only question I have. Thank you for taking my question. Thank you, Casey.

Next, we'll hear from David Miyazaki of Confluence Investment Management.

Hi, good morning.

You talked a little bit about the overall shift that you're moving more towards senior secured with what you have on the balance sheet. I'm just wondering from a broad perspective, when you talk about doing only 4% of your deal flow, what kind of trends are you seeing across the entire underwriting opportunity with regard to revenue and EBITDA trends for your target markets? Is it stable? Is it getting a little better?

Yeah, no, the economy as a general proposition is in good shape. I mean, we're seeing, you know, solid in a mid-single digit revenue and EBITDA growth as a general proposition across the economy. There are certain areas of weakness. You know, auto related has been a little weak. Manufacturing that had been related to tariffs is a little weak. Thank you for joining us. and our lane has been a good one in that kind of first lean mid-4s to low-4s debt to EBITDA zone. We think it's a really good risk-adjusted return in a market where people are saying, gee, the cycle's long in the tooth and multiples are high and what do we do? You know, 8% to 9% on first lean at 4, 4.5 times debt to EBITDA to us seems like a really solid place to put money and then you have and many more.

Thank you for joining us.

and certain times second leaner Mez is really attractive. We'll go there when that's really attractive. The biggest driver has been the elevated leverage levels on second leaner Mez and being obviously subordinated. So in PNNT we do do second leaner Mez periodically. The bar is really high now because we want to see reasonable leverage and it's six and a half times leverage or whatever the market in general seems to be. In general we're not We don't really like going that deep in the capital structure at those elevated leverage levels. Occasionally, we see a company that just really clears the bar that we love that we'll do on that basis. But as a general proposition, once we get much above five times in any security, we start to get a little nosebleed as a general proposition. Sometimes we'll go a little bit above when we see very strong growth or quick deleveraging. But generally, once you get above five times, we start to become a little allergic. So that's the primary thing. Now, fortuitously, at roughly the same time, the BDC rules changed, and BDCs can now leverage their assets more than one-to-one. So that puts us in a position, a lot of BDCs in a position to say, okay, you know, you can move higher in the capital structure, be safer, and put more leverage in, and, you know, when it all comes out in the wash, you have a very attractive ROE. So that was, this has all happened roughly at the same time. and for now, we think this is appropriate for PNNT. There may be a time, a year or two down the road, when we say, gee, that second lien deal, you know, is at 12 or 13 percent at four and a half or five times debt to EBITDA is really attractive. We're going to do more of those. So, you know, that's kind of how we think about it.

Well, that's very helpful and I know that's the way that you thought about it coming out of the last credit cycle. If you could contrast that with the SBIC loans that you're making, it's great that you're making progress on your license. Congratulations on that front. However, I think that it's probably fair to say that you're not going to be doing senior security floating rate loans with the SBIC underwriting. Can you talk a little bit about how you're working in that dynamic where The ability to go up and down the capital structure is more limited than the SBIC and how you're going to underwrite against the backdrop of the high leverage that you're talking about and the support made with loans.

It is true that the SBIC does not discriminate between first lien and second lien MS. So that's true. So it is a very good vehicle to see good second lien MS deals. That's totally accurate. That said, first and foremost, we have to be good investors. And if we can borrow at 3% or 4%, Thank you for joining us. at the time. Now, SPSC financing is a 10-year facility. You ramp it over five years. So, who knows what's going to happen over the course. You know, hoping we get a license here in the next few months. You know, you got five years of investment ramped from then. We'll see. You know, most importantly, we have to be good investors and put good risk-adjusted returns on the balance sheet.

I know that this is five years is a long time to think about, but Would you say in the current environment that it's probably likely that you won't ramp this license, assuming you get it as quickly as the previous ones, because the subordinated loans are carrying so much more leverage?

No, I mean, I think, you know, I think the reality is once we get the license, if it's a solid deal, first lien or second lien or otherwise, and if it's the SBIC, we're going to put it in there. It's attractive financing, and it's long-term money, and if we end up filling it up with First Link, we end up filling it up with First Link. It's still hourly accretive to our shareholders. Okay, great. Thanks for your help.

Appreciate it.

It appears there are no further questions at this time. I'll turn the call back over to Art for any additional or closing comments.

Thanks everybody. I just want to thank everybody for being on the call today. We appreciate it and we will speak to you in early May, which will be our next quarterly call. Thank you very much.

That does conclude today's conference. Thank you all for your participation. You may now disconnect.