PennantPark Investment Corporation

Good morning and welcome to the Pennant Park Investment Corporation's fourth fiscal quarter 2021 earnings conference call. 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 question and answer session following the speaker's remarks. If you would like to ask a question at that time, simply press star 1 on your telephone keypad. If you would like to withdraw your question, press star 2 on your telephone keypad. 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, please go ahead.

Good morning, everyone. I'd like to welcome you to Pennant Park Investment Corporation's fourth fiscal quarter 2021 earnings conference call. I'm joined today by Richard Chung, our Chief Financial Officer. Richard, please start off by disclosing some general conference call information and include a discussion about forward-looking statements.

Thank you, Aud. I'd like to remind everyone that today's call is being recorded. Please note that this call is the 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 pennantpark.com or call us at 212-905-1000. At this time, I'd like to turn a call back to our Chairman and Chief Executive Officer, Art Penn.

Thanks, Richard. I'm going to spend a few minutes discussing how we fared in the quarter ended September 30th, how the portfolio is positioned for the upcoming quarters, our capital structure and liquidity, the financials, and then open it up for Q&A. We are pleased with our performance this past quarter. We achieved a 2.6% increase in adjusted NAV. Adjusted NAV went up 25 cents per share. from $9.58 to $9.83 per share. We are particularly pleased that our NAV today is up over 12% from what it was pre-COVID on December 31st, 2019. Net investment income was 17 cents per share, including 3 cents per share in other income, which includes one-time dividend payments on equity positions. These dividend payments highlight the value of our equity portfolio. We have several portfolio companies in which our equity investments have materially appreciated in value as they are benefiting from the recovery. This is solidifying and bolstering our NED. As part of our business model alongside the debt investments we make, we selectively choose to co-invest in the equity side by side with the financial sponsor. Our returns on these equity co-investments have been excellent over time. Overall for our platform from inception through September 30th, our $246 million of equity co-investments have generated an IRR of 28% and a multiple on invested capital of three times. In a world where investors may want to understand differentiation among middle market lenders, our long-term returns on our equity co-investment program are a clear differentiator. With regard to net investment income, we have a three-pronged strategy, which includes, one, growing assets on balance sheet of PNNT as we move towards our target leverage ratio of 1.25 times debt to equity, from 0.9 times. Number two, growing our PSLF JV with Pantheon to about 550 million of assets from approximately 405 million of assets through balance sheet optimization, including a potential securitization. And three, the opportunity to rotate out of our equity investments over time and into cash pay yield instruments. We are well on our way to implementing the NII growth strategy. The September quarter was a busy period for us at PNNT, as we originated 165 million of new loans, far outpacing the repayment activity. As a result, the investment portfolio of PNNT increased by approximately 110 million to 1.26 billion from 1.15 billion. PSLF's investment portfolio also grew this quarter to 405 million from 386 million, an increase of 19 million. PNNT generated 9 million of cash proceeds from our equity portfolio in the September quarter. We continue to be active. Since September 30th, PNNT has had new funded investments, net of repayments and sales of $98 million. We are focused on the core middle market, which we generally define as companies with between 10 million and 50 million of EBITDA. We like the core middle market because it is below the threshold and does not compete with the broadly syndicated loan or high yield markets. As such, we do not compete with markets where leverage is higher, equity cushion lower, Covenants are light, wide, or non-existent. Information rights are fewer. EBITDA adjustments are higher and less diligence. And the timeframe for making an investment decision is compressed. On the other hand, where we focus in the core middle market, generally our capital is more important to the borrower. As such, leverage is lower, equity cushion is higher. We have real quarterly maintenance covenants. We receive monthly financial statements to be on top of the companies. EBITDA adjustments are more diligence than achievable. and we typically have six to eight weeks to make thoughtful and careful investment decisions. According to S&P, loans with companies with less than 50 million of EBITDA have a lower default rate and a higher recovery rate than those loans to companies with higher EBITDA. Our portfolio performance remains strong. As of September 30th, average debt to EBITDA on the portfolio was 4.9 times and the average interest coverage ratio, the amount by which cash interest income exceeds cash interest expense was 3.2 times. We have no non-accruals on our book in PNNT and PSLF. The company is highly diversified with 97 companies and 29 different industries. Since inception, PNNT has invested $6.4 billion and an average yield of 12%. This compares to a loss ratio of about 13 basis points annually. This strong track record includes our energy investments, our primarily subordinated debt investments made prior to the financial crisis, and now the pandemic. As we analyzed our 14-year track record at PNNT, it is clear that our returns took a step function up starting in 2015. The IRR of our investments made prior to 2015 was 9.8%. Since 2015, we have achieved a 13.9% IRR. We believe this is due to four key factors. Number one, better company selection within industry verticals where we have domain expertise. Two, avoidance of investments in the energy industry and other cyclicals. Three, excellent results from our equity co-investment program. And four, a substantially increased focus on core middle market companies where our capital can be more important to the underlying borrowers. Core middle market to us means below 50 million of EBITDA. Our performance through the global financial crisis and recession was good. During that recession, the weighted average EBITDA of our underlying portfolio companies declined by 7.2% at the bottom of that recession. This compares to the average EBITDA decline of the Bloomberg North American High Yield Index of 42%. Based on the tracking of EBITDA of our underlying companies through COVID, our EBITDA decline was substantially less than what it was during the global financial crisis. Our median EBITDA decline at the bottom of COVID in June 2020 was 1.4%. This compares favorably to the 7% decline in EBITDA during COVID of the Credit Suisse High Yield Index. Many of our portfolio companies are in industries such as government services, healthcare, technology, software, business services, and select consumer companies where we have meaningful domain expertise. We believe that we are experiencing a strong recovery with some companies and industries being beneficiaries of the environment. We are pleased that we have significant equity investments in several of these companies which can substantially move the needle of our NEV. PNNT has among its lowest percentage of energy investments since 2013. Energy investments represent only 6.5% of the overall portfolio. RAM is on stable operational and financial footing and has benefited from higher prices and production. While RAM analyzes its hedging weekly, today the majority of its oil and NGL liquid production is unhedged to the upside. which comprises the majority of revenues. Approximately two-thirds of its natural gas production is hedged at varying prices.

As a result, RAM will continue to benefit from rising prices.

As of September 30th, equity represented approximately 32% of the portfolio. Our long-term goal continues to target that percentage down to about 10% of the portfolio. As we monetize the equity portfolio, we are looking forward to investing the cash into yielding debt instruments to increase net investment income. The outlook for new loans is attractive. We are as busy as we have ever been in 14 years in business, reviewing and doing new deals. With our experienced, talented, and growing team, our wide funnel is producing active deal flow that we can then carefully and thoughtfully analyze so that we can be selective as to what ends up in our portfolio. Let me now turn the call over to Richard, our CFO, to take us through the financial results.

Thank you, Art. For the quarter ended September 30th, net investment income totaled 17 cents per share, which includes a one-time dividend payment from equity investments of 3 cents per share. Looking at some of the expense categories, base management fee and performance-based incentive fees totaled $5.2 million. Taxes, general, and administrative expenses totaled $1 million, and interest expense totaled $5.7 million. Net realized gains on investments was $5.6 million or $0.08 per share. Unrealized gains on our investments were $7.6 million or $0.11 per share. Change in the value of our credit facility increased our NAV by $0.01 per share. Our net investment income was in excess of our dividend by $0.05 per share. Consequently, NAV per share went from $9.59 per share to $9.85 per share. up 2.7% from the prior quarter. Adjusted NAV, excluding the mark-to-market of our liabilities, was $9.83 per share, up 2.6% from $9.58 per share the prior quarter. 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 exchanges on 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 GAAP debt-to-equity ratio net of cash was 0.9 times. We have a strong capital structure with diversified funding sources and no near-term maturities. We have a $435 million revolving credit facility maturing in 2024 from the Syndicate of Banks, $64 million of SBA debentures maturing in 2027 and 2028, $86 million of unsecured notes maturing in 2024, and $150 million of unsecured notes maturing in 2026. Subsequent to September 30th, PNNT issued $165 million of unsecured notes maturing in 2026 with an interest rate of 4%. We used $86.3 million of the proceeds to fully redeem the 2024 notes, which bear interest of 5.5%. This will reduce our annual interest expense by approximately $1.3 million and would be accretive to net investment income. Our overall debt portfolio has a weighted average yield of 9%. On September 30th, our portfolio consisted of 97 companies across 29 different industries. The portfolio was invested 44% in first lien senior secured debt, 14% in second lien secured debt, 10% in subordinated debt, including 5% in PSLF, and 32% in preferred and common equity, including 3% in PSLF. 92% of the debt portfolio has a falling rate, all of which has a liable floor. The average liable floor is 1%. Now, let me turn the call back to Art.

Thanks, Richard. 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 pre-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. If you'd like to ask a question, please press star followed by the number one on your telephone keypad. If you're calling from a speakerphone, please make sure your mute function is off to ensure your signal can reach our equipment. Again, Star 1 to ask a question. And first, we'll go to Casey Alexander from Compass Point. Your line is open.

Yeah, hi, good morning. First is just kind of a maintenance question for Richard. Richard, in the redemption of the 2024 notes, what will the one-time charge be for the acceleration of debt offering expenses Secondly, where do you intend to enter that on the income statement? Because it used to be that those were charged off against NII. Now we've seen several BDCs that are charging that as a capital loss instead of a pre-NII loss.

Hey Casey, this is Richard.

An amortized offering cost that

September 30th was $1.75 million related to the 2024 notes. That is the amount of the kind of charge-offs for the first quarter of 2022. We do intend to put that through NII. It's interesting that you've mentioned that. It's something that we could maybe explore with our SMI audit firm. But at this point, we believe it will run through interest expense.

Yeah, we've seen several companies recently that have charged that as a capital loss. So you might want to take a look at that. Secondly, I'd love to hear your thoughts on not changing in a material way the quarter over quarter mark on RAM simply because Thank you for joining us. Thank you, Casey. This is Art.

The valuation firms do the valuations every quarter. I think they're primarily focused on the M&A market for assets like this.

And unfortunately, there hasn't been a lot going on to date.

We certainly hope that as oil and gas continues to perform well and have a healthy price like this, that there will be more M&A activity and then once we see M&A activity, A, it'll establish value better and B, perhaps we can sell RAM into a bit of an M&A wave and get liquid on the name. So I think it's a good point about the company doing well, it's generating cash flow, its cash is building on the balance sheet, really good performance, not shocking given the price of oil and gas. I think what's really driving the valuation for the valuation firms is kind of the M&A or lack thereof. And frankly, it's tough to really put a pin in it right now because there hasn't been much M&A.

Okay, thank you for that. I'm curious if you could share with me sort of the board's thoughts on the dividend. You've been out earning the dividend for a while now. Is it simply that the board's not comfortable pennying it up yet because of still the amount of equity, or what will it take to start that conversation?

It's a good question, and the board talks about it all the time. Look, first, I think they're pleased, and I'm pleased that we are covering the dividend reasonably well, and we're not worried about covering the dividend. So that's point one, thankfully. This quarter we had $0.04 of other income. So if you did away with that $0.04, you'd be at $0.13, right?

But that, you know, other income comes every quarter. And when we back out the dividend from the equity company, that also eliminates the incentive fee. So really, it's not even $0.03 from that. It's more like $0.02. So, you know, so the really and other income comes in every quarter in some form or fashion. So really, I would I would calculate the core run rate of this quarter of having been 15 cents.

All right.

So, Casey, what do you want to rate the dividend to?

Just, you know, I mean, I think we we we

Other income has been zero on occasion. It has been $0.04. This quarter was $0.04. We know our dividend is recurring. It's a good question. I know you've raised, hey, why don't you have a variable dividend? That's something we could talk about offline. I think in our minds, we've been saying, gee, whatever our dividend is, we want to sleep at night knowing that we're covering it and that there's some cushion and that our shareholders know and aren't worried about Whatever our dividend is. So we're just coming out of the time when we're whether we're running a 13 cents or 14 cents or whatever run rate you think you're modeling. You're right. I think as we grow PNNT, as we grow the joint venture, and importantly, you know, as we rotate the equity positions, the chunky equity positions, we certainly would like to and would hope to raise the dividend. But it is something that's on a quarterly discussion every quarter. Let's see where we end up this upcoming quarter, both in terms of the balance sheet, our run rate, and importantly, how we're feeling about the rotation. But it's the right question, and thank you for asking it, and we can certainly talk about all the different dividend formulations offline. But in our minds, we've wanted to play conservative.

Great. Thank you for taking my questions. I appreciate it.

Thank you.

And next we'll go to Robert Dodd from Raymond James. Your line is open.

Hi, guys. Congrats on the quarter. Following up to Casey's question about RAM. I mean, if I look at year over year, obviously, the enterprise value you're carrying is down. Reserve values are up. Cash balance is up. EBITDA is up. Cash flow is up, et cetera, year over year. But the enterprise value implied in the market is down. and I understand your comment that the valuation consultant looks at that. Can you give us any idea what metrics they're actually looking at? I mean, clearly it's not an enterprise value to EBITDA or anything like that or even an enterprise value to reserve. So, I mean, what's the framework that they're using to evaluate that given all the metrics move one way and the fair value year over year moves the other?

You know, and like with Casey, it sounds like Raymond James has a bid for RAM, which we're always happy to entertain, Robert. So, look, I mean, all these things are...

I do not have a bid for that.

All these elements are taken into account. Production is taken into account. Reserves are taken into account. The comparables are taken into account. And, of course, the M&A activity or lack thereof is taken into account. And all these things... Go into the bucket, and it's a question of which of these factors do the valuation firms prioritize? What do they lean on? And recently, it's been kind of where, as we all know, we would be more than happy to entertain proposals on this company for people who want to buy the company, which ultimately then becomes, okay, what are people willing to pay for the company? As much as production and reserves and all these other things. So So, look, there just hasn't been the trade yet. I mean, I think we're starting to see some action in EMP. And, you know, as this lasts longer, inevitably, we hope that we will see more. But they take all these factors into account. But, like, at this point, it's, you know, what is the, as we always say, what's the exit value to the market participants in an orderly market? That's the accountants and the valuation firms will always ask that question of themselves. We ask that question as management. What's the exit value to market participants in an orderly market of this particular asset? So that's what everyone's trying to get at.

Understood. And then one more general question about obviously the equity book overall. I mean, the market's really active generally. I mean, has your... Expectation may be too strong a word, but has your hope on how quickly you can liquidate some of these equity positions, has that changed over the course of, say, the last six months as market activity has picked up? Or is it still, it's so company specific that high levels of market activity don't necessarily move your expectations about how fast equity can be monetized?

Yeah, that's a good question. Look, you can see what's going on with Pivot and the valuation with Pivot PT Network. You can see the valuation has been up.

That indicates something.

It indicates value. And that's an indication that maybe on that one, it can be a little tighter than we thought in terms of timeframe, right? You know, RAM's really challenging to figure out, but we think we've just discussed RAM. Cano is a public stock and, you know, we're kind of part of riding that and it's been a little volatile. And then you have what I'll call the regular way equity co-invest, the one that generated the other income this quarter, Green Veracity or Veritex. Summit was a small equity co-invest that we got liquid on. So Ryan Lynch from KBW. Your line is open.

Hey, good afternoon and thanks for taking my questions. Art, really nice quarter all around. I did want to talk about the portfolio activity over the last several quarters. Gross funding has been accelerating as well as maybe more importantly, net fundings have really accelerated the last several quarters and it looks like that's continuing in fiscal Q1. Can you just talk about what's really driving that acceleration? and then as well as you know you talked earlier about focusing on kind of the core middle market I would love to just hear you know what your competitive standpoint obviously there's been a lot of capital raised but a lot of capital has been raised in really big values by you know very big shops that are you know focusing more on upper middle market lending so I'm just curious are you seeing those those players that are focusing on upper middle market lending also continue to also invest in the core middle market as well so that competition is kind of really the same or even accelerating. Just any comments on that would be helpful.

Yeah, thanks, Ryan. So the first question is activity levels and volume. It has been an extremely active 2021, and I know you've heard that from some of the other BDCs, driven by a lot of factors. A, there was no deal flow for a year and a half. B... There was the thought that taxes would increase, so that brought a lot of sellers to market. And C, values are pretty high. So if you're thinking about selling your company, you can get a pretty good value. So those three factors really contributed to very healthy deal flow volumes in the middle market. The tax issue seems to have gone away for now, but the die has been cast for 2021. We're super active. We're going to be active going into year end. What's 2022 look like? We think it will be active. We don't think it's going to be as active as 21. We certainly think there might be a little pause in January, February, like there typically is seasonally in our business. So we think we'll be active coming into the end of 21. We think first quarter of 22 will be a little light. And we still think there's going to be a lot of activity in 22 because values are attractive for sellers, because financing is plentiful. and there's still a lot of companies that want to do deals. Now, where we focus is on the core middle market, which is kind of 50 million of EBITDA and below. And our average median EBITDA is somewhere like a 25, 30 million. And you're right, with the giants in the direct lending industry raising so much money, for their business model, it's challenging for them to focus on

companies below 50 million.

But every once in a while we'll see them come down to 40. But when you have the amount of capital they have to deploy, they're really going after and competing against the broadly syndicated loan market. And that's why you see these announcements about record large, quote unquote, direct loans that some of our larger peers are doing. They're really eating into the BSL space, the broadly syndicated loan space. because they have so much money to deploy. What they can do is, I'm not giving you their pitch, they can offer something that they think is of value to those sponsors and to those borrowers that they think is accretive and obviously the borrowers think are accretive. As we look at it, they are competing with the broadly syndicated loan space where leverage is high, yields are low, equity cushion's low, your opportunity to do real due diligence Thank you for joining us. We get covenants that have meaning. We get real equity cushion. We can selectively get co-invest, and I'll go into that in a minute, which can add some significant value to the portfolio. So that whole kind of mixture of being important to the borrowers is important, and where we really have honed in where we can add the most value, and it's shown up in our numbers, is when we're starting out with a sponsor who's identified an industry or a company that they think has good growth characteristics either inorganic growth because it's a fragmented industry that they can consolidate or good organic growth. And we can start out with that company and they kind of 10 to 20 million of EBITDA and there's a real game plan to take that 10 to 20 EBITDA up to 30, 40, 50 and higher where our debt capital is very important at inception and then we can help drive the growth with our debt capital and we can obviously by definition have a front row seat on financing those companies as they grow and then we can also participate in the equity co-invest and participate in the upside that we're helping to drive with our debt. So that's really the model that we have at Penn and Park today where we think we can add the most value to both the borrowers on one side and our investors of course on the other side where the track record has really gotten quite good over the last handful of years. You know, post 2015 we've had like a 13.7% IRR as we've dug more and more and more into that core middle market as we've participated into those equity co-invests. And frankly, where there's the most value, we're kind of away from the fray. We're not really competing with the giants. We're not competing with the broadly syndicated loan market. And we can do proper due diligence and really understand what we're lending to. So sorry for the rant, but I think I answered your questions.

You covered it and you gave a lot of additional color and detail, so it's very helpful. My other question I wanted to talk about, another control company outside of RAM, PT Networks, that had a significant write-up this quarter. You guys have some of the financial information in your 10K. You've seen, obviously, accelerating revenues, and it looks like this is the first year they've actually turned a profit. So obviously the fundamentals are strong there. Can you just give an update on what is driving that improvement in fundamentals? I know that there was a management change a bit ago. I'd just love to hear an update on that business.

So look, first of all, industry-wide, and we like the industry as people are aging, they need more physical therapy. Physical therapy is very cost-efficient as a treatment versus other types of treatments. So physical therapy as an industry has a lot of tailwinds, and we've always liked that, even when we went to the company originally. There were some management miscues a ways back. That's when we did the restructuring and where we became the control equity. We brought in a new management team who's excellent, and they've done great work getting the company's operations in line. And it's a block-and-tackling business. If you do the block-and-tackling correctly, you can do very well. So that's what's going on. They're doing some small add-on acquisitions, which are accretive to the equity value. And, you know, it's really working. Of course, COVID was, you know, a bump in the road. These during COVID people, you know, didn't or couldn't or were reluctant to go into a physical therapy location. But now that we're kind of coming out of COVID, we're seeing very good, very good numbers.

I appreciate that update. That's all for me. Thank you.

And next we'll go to Mickey Schein from Bladenburg. Your line is open.

Yeah, good morning or good afternoon. Art, you know, a lot of good questions already asked. I don't want to beat a dead horse on RAM, but when you look at the cash and the free cash flow and the leverage and the nature of the debt, it looks like the company could afford to pay you a dividend. Is that something you're contemplating over the relative near term, or would you prefer to retain capital in the business?

Good question, and I think the issue regarding that surrounds the – during the jaws of COVID for $40 million. It's a very low-yielding instrument, long-term instrument, very flexible instrument. The one way it's not flexible is you're not allowed to take dividends. So that's the conundrum. You want to keep that very attractive debt instrument in there because it does provide a lot of stability and permanency to the company. Of course, we'd love to pay dividends. So that's what we're grappling with. And today, unfortunately, lenders are still not, if you said, hey, just replace those guys with somebody else, it's certainly something we think about. Many lenders are still reluctant to lend to the oil patch for obvious reasons, including past performance, including ESG issues. But it's something we should consider and will consider as hopefully the industry thaws out. Perhaps if this continues and the prices remain strong, we could look at a recapitalization or paying off that loan and getting cash flow to shareholders. It's certainly something we'd like to do.

Art, can you partially pay down the debt? I realize it's cost-effective, but nobody's earning much on cash these days. It probably would still be accretive, or they don't allow that either.

You can. Again, it's just like it's the question. It's the same similar kind of stance around our dividend policy, which is we like being a bit defensive and just having the extra safety of mind at this point. But at some point, if we continue to generate a ton of cash and we just have all this excess cash, we might just pay off the whole thing. I mean, that's an option at some point. But right now, look, let's hopefully oil and gas prices stay high for a long time and then There's more cash on the balance sheet, and then that's great. Perhaps the company will be sold by then. I don't know, but we'll see where it goes.

And my last question, could you just touch on what issues are confronting MailSouth, if any, given the decline in the equity valuation?

Yeah, MailSouth has been a challenge. It's a shared mail, direct mail company. Many of their customers are retail and restaurants who have been impacted by COVID who are having labor shortages themselves, so they don't want to advertise because they couldn't deal with the amount of customers that would come in even if they did advertise. So we're working it hard. It was marked down appropriately this quarter. It's going to be a grind. We're committed to it. We think it's a good company. Ultimately, it generates good cash flow, but that's going to take a little longer to work through.

But it's not having problems servicing its debt, at least not now, right?

No, no. Even in this environment, it's still generating sufficient cash flow to service the debt.

Okay. That's it for me this afternoon. I appreciate your time. Thank you.

Thank you, Maggie.

And next we'll go to Kyle Joseph from Jefferies. Your line is open.

Hey, good morning. Thanks for having me on. A lot of my questions have been addressed, but just outside the energy and equity investments, I really want to get a sense for The Outlook for Credit Performance and how portfolio companies are doing. Obviously, we know non-accrual, so credit's obviously doing strong. But just give us a sense for where their revenue growths are trending, EBITDA growths, and any sort of macro concerns you have, whether inflation or supply chain issues.

Yeah. So by and large, the portfolio is performing well. By and large, these companies are well-positioned. that if they need to raise pricing due to inflation or labor or supply chain, they can do so because they are important providers to their customers. So average EBITDA margins are 25% to 30%, which indicates very high value added. So EBITDAs are up. Now, it's kind of what are you comparing to? If you're comparing to the middle of COVID, they're up 100%, 200%. It's kind of not even relevant to even compare it to COVID. but they're certainly back and in many cases ahead of where they were in 2019. Some of these companies are kind of different companies than they were in 2019. They've done a bunch of add-on acquisitions. They've morphed themselves. But the portfolio is generally performing really, really strongly from a revenue and EBITDA standpoint. We share with you the credit stats, three times interest coverage on average. So we feel by and large very good Thank you, Kyle. And next we'll go to Melissa Weedle from J.P. Morgan. Your line is open.

Good afternoon, thanks for taking my questions today. I agree that a lot of good questions have already been asked and answered, so appreciate your candor there. I was hoping that you could contextualize a comment you made earlier about the competitive landscape, certainly with the larger platforms going after sort of, I think you said essentially taking share from the BSL market. There's been some spread compression, particularly in that space. How are you thinking about spread compression and terms in the core middle market area that you're focused? Do you think that we should be seeing some stabilization going forward, or do you think that there could be some continued compression?

It's a good question. I think it's kind of been stable for a while. I think that's, once you get to kind of, we're kind of in the zone of L500 to L700. That's kind of our general zone for first lean. We can't afford to go much below that unless we have some fantastic other way to make money, maybe a co-invest that we think is a terrific co-invest. But I think that's kind of our zone, and we need to remain disciplined about it. But we're not seeing pressure just because I think the competition – is less. I mean, we don't have the kind of competition that you might see in the upper middle market.

Understood. Thanks for that. And then I think it would be helpful just to hear from you guys about your take on sort of the non-sponsor space. We've been seeing some other BDCs get a little bit of yield enhancement from going to sort of the non-sponsor origination. and other sources. So I just would love an update on how you think about that space and any value that you see there. Thank you.

Yeah, look, it's a legitimate space. It's by definition a different risk adjusted return, different risk reward you should get for lending to a non-sponsor because if things don't go well, the lender becomes the sponsor as opposed to where there is a sponsor. If things don't go well, the sponsor will generally put more money in. If you looked at our COVID experience, I think we had 15 times or 15 situations where across the platform where they needed more equity and 14 times the sponsor put more money in, one time the sponsor didn't. So it's a different risk adjuster return and should be viewed that way. I think potentially as we look at PNNT in particular versus let's say a PFLT, We might be doing more non-sponsor thoughtfully and carefully. I mean, you could argue our gaming portfolio, we've had a very nice track record financing casinos. That's essentially a non-sponsor business for us and has had very attractive returns and continues to have attractive returns. So it's something we look at on a case-by-case basis. You may see us carefully and thoughtfully, particularly in industries where we have real domain expertise. Our five key industries We may do a little bit more in those areas when we really think it's a strong risk adjusted return.

Thanks, sir.

Thank you.

And next we'll go to Jim Altschul from Aviation Advisory Service. Your line is open.

Good afternoon, gentlemen. And I apologize if you've discussed this in prior calls or news releases and I overlooked it. In the news release, today's news release or yesterday's news release, you announced that you have no companies on non-accrual as of September 30th, 2020. You did have a few companies on non-accrual. What happened to those companies in the last fiscal year?

Jim, there's no companies as of September 30th and there's no companies today. on non-accrual. Are you talking about the companies last year that were on non-accrual?

Yes. As of September 30, 2020, you did have at least a few companies on non-accrual. What happened in the last year with regard to the companies that were on non-accrual as of September 30, 2020?

Thank you for having me.

A small person, I see that there was some decrease in general administrative expenses, which is a good thing. Why was that?

Yeah, no, we have grown the Pennapark platform both in the BDCs and outside of the BDCs. We have a very nice and growing non-BDC private fund business. You saw we, for instance, priced a closed middle market CLO last week. So we're building, we built a very nice company. in addition to the BDCs outside of the BDCs, and the G&A gets allocated across a wider platform, which helps all the vehicles. Excellent.

Thank you very much. Thanks, Jim.

And with no further questions in the queue, I'll turn it back to Art Penn for closing remarks.

I just want to thank everybody for being on the call today and your interest in the company, and we look forward to speaking with you in early February. In the meantime, have a great Thanksgiving and a terrific happy and healthy holiday season.

And that does conclude our call for today. Thank you for your participation. You may now disconnect.