PennantPark Investment's CEO Discusses F1Q 2014 Results - Earnings Call Transcript

Feb. 6.14 | About: PennantPark Investment (PNNT)

PennantPark Investment Corporation (NASDAQ:PNNT)

F1Q 2014 Earnings Conference Call

February 6, 2014 10:00 ET

Executives

Art Penn - Chairman and Chief Executive Officer

Aviv Efrat - Chief Financial Officer

Analysts

Greg Mason - KBW

Greg Nelson - Wells Fargo Securities

Mickey Schleien - Ladenburg

John Hecht - Stephens

Arren Cyganovich - Evercore

Doug Harter - Credit Suisse

Scott Valentin - FBR Capital Markets

J.T. Rogers - Janney Capital Markets

Chris York - JMP Securities

Doug Mewhirter - SunTrust

Casey Alexander - Gilford Securities

Jim Altschul - Aviation Advisors

Operator

Good morning, and welcome to the PennantPark Investment Corporation’s First Fiscal Quarter 2014 Earnings Conference Call. At this time, all participants have been placed on a listen-only mode. The call will be opened for a question-and-answer session following the speakers’ remarks. (Operator Instructions)

It is now my pleasure to turn the call over to Mr. Art Penn, Chairman and Chief Executive Officer for PennantPark Investment Corporation. Mr. Penn you may begin your conference.

Art Penn - Chairman and Chief Executive Officer

Thank you and good morning everyone. I’d like to welcome you to PennantPark Investment Corporation’s first fiscal quarter 2014 earnings conference call. I am joined today by Aviv Efrat, our Chief Financial Officer. Aviv, please start off by disclosing some general conference call information and included discussion about forward-looking statements.

Aviv Efrat - Chief Financial Officer

Thank you, Art. I’d like to remind everyone that today’s call is being recorded. Please note that this call is the property of PennantPart 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.

I would 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 fillings with the SEC for important factors that could cause actual results to differ materially from these projections. We do not undertake to update our forward-looking statements unless required by law. To obtain copies of our latest SEC filings, please visit our website at www.pennantpark.com or call us at 212-905-1000.

At this time, I would like to turn the call back to our Chairman and Chief Executive officer, Art Penn.

Art Penn - Chairman and Chief Executive Officer

Thank you, Aviv. I am going to spend a few minutes discussing current market conditions, followed by discussion of investment activity, the portfolio, the financials, the overall strategy, and then open it up for Q&A. As you all know, the economic signals have turned positive, but many economists are expecting a slowly growing economy going forward.

With regard to the more liquid capital markets and in particular the leverage loan in high yield markets, those markets have remained strong due to substantial cash flows into high yield funds, leverage loan funds and CLOs. Risk reward in the middle market has generally remained attractive as the overall supply of middle-market companies who needs financing exceeded the relative demand of applicable lending capacity. As debt investors and lenders, a slow growth economy is fine as long as we have underwritten capital structures prudently. A healthy current coupon with de-leveraging from free cash flow over time is a favorable outcome.

We have continued to be selective about which investments we make in this environment. Given our strong origination network and the size of our company, we believe we can continue to prudently grow. We remained focused on long-term value and making investments that will perform well over several years and can withstand different economic cycles. We continue to set a high bar in terms of our investment parameters and remain cautious and selective about which investments we add to our portfolio. Our focus continues to be on companies or structures that are more defensive, have low leverage, strong covenants and high returns. With plenty of dry powder, we are well-positioned to take advantage of the investment opportunities as they arise.

As credit investors, one of our primary goals is preservation of capital. If we preserve capital, usually the upside takes care of itself. As a business, one of our primary goals is building the long-term trust. Our focus is on building long-term trust with our portfolio companies, management teams, financial sponsors, intermediaries, our credit providers and of course our shareholders. We are first call (ph) for middle-market financial sponsors and management teams and intermediaries who want consistent credible capital. As an independent provider free of conflicts or affiliations, we have become a trusted financing partner for our clients. Since inception, PennantPark entities have finance companies backed by a 129 different financial sponsors. We have been active and are well-positioned.

For the quarter ended December 31, 2013, we invested $228 million. And our net new investments were $84 million. The average yield on new debt investments was 12.4%. Expected IRRs generally ranged from 13% to 18%. Net investment income was $0.27 per share. We have met our goal of a steady, stable and consistent dividend stream since our IPO nearly seven years ago despite the overall economic and market turmoil throughout that time period. We are one of the only BDCs to not cut its dividend during this time period. We anticipate continuing the steady, stable dividend stream going forward.

We are perfectly contend under-earning our dividend temporarily as we carefully and prudently invest in this environment. Given the current market backdrop, we remain conservatively levered and have plenty and excess liquidity that we can use for both defensive and offensive purposes. For the quarter ended December 31, our overall leverage ratio was approximately 63% and only about 42% excluding SBIC debt. As a result of our focus on high quality and new investments, solid performance of the existing investments and continuing diversification, our portfolio was constructed to withstand market and economic volatility.

The cash interest coverage ratio, the amount by which EBITDA or cash flow exceeds cash interest expense continued to be a healthy 2.7 times. This provides significant cushion to support stable investment income. Additionally, at cost, the ratio of debt to EBITDA on the overall portfolio was 4.4 time, another indication of prudent risk. We have plenty of liquidity, as of December 31, we had in total nearly $300 million of available liquidity consisting of $190 million of available credit facility, $75 million of new SBIC debt financing in our second SBIC and over $30 million of cash on hand. As a reminder we have exemptive relief from the SEC to exclude SBIC debt from our asset coverage ratios and SBIC accounting is cost accounting, not mark to market accounting. These facts highlight how the SBIC debt reduces overall risk of the company.

We had some attractive realizations last quarter. For example, Brand Energy was sold and our $41 million investment in second-lien was taken out generating a 15.3% IRR. Escort repaid our $23 million subordinated debt investment which generated a 17.8% IRR. We sold our $16 million position in Rock Finance and generated an IRR of 14.3%. Good Sam Enterprise has refinanced our $12 million investment and we generated a 17.8% IRR.

Our overall NAV was up about 3% this quarter and the key driver of that upside was due to the positive price movement of our investment in Affinion. Affinion rose from about $0.58 on the dollar to the value of about $0.89 on the dollar due to better financial results and an exchange offer which creates financial cushion for the company. Despite the recession across PennantPark entities, we have had only seven non-accruals out of 380 investments since inception nearly seven years ago. We currently have no non-accruals on our books.

To refresh your memory about our business model we try as hard as we can to avoid mistakes but default and realized losses are inevitable as a lender. We are proud of our track record of underwriting credits through the cycle. One way we mitigate those losses is through our equity co-investment portfolio. We are optimistic that our co-investment portfolio will generate gains over time. In terms of new investments we had another quarter investing in attractive risk adjusted returns. Our activity was primarily driven by refinancings, growth financings and acquisition financings. And virtually all these investments we have known these particular companies for a while, have studies the industries or have a strong relationship with the sponsor.

Let’s walk through some of the highlights. We invested about $22 million in second-lien debt and $2 million in the common equity of Foundation Building Materials. FBM is a distributor of drywall and other building products. CI is the sponsor. Old Guard Risk Services provides workers’ compensation claims and administration solutions to insurance carriers. We purchased $30 million of the first-lien term loan and $1 million of common equity. The company is owned by management. We purchased $15 million of subordinated debt and $2 million of equity of Power Products. Power Products designs manufactures and distributes branded electrical tools components and power conversion solutions. Sentinel Capital is the sponsor. Randall-Reilly is the business to business media and information company primarily to the trucking and construction end markets. We purchased $30 million of subordinated debt and West Corp is the sponsor. We’ve invested $11 million of the first lien term loan and $2 million of common equity of Superior Digital Displays, which is a digital media company which operates digital billboards in and around Times Square. The investment was made to back the management team in the industry.

Turning to the outlook we believe that 2014 will be active due to both growth and M&A driven financnigs. Due to our strong sourcing network and client relationships, we’re seeing active deal flow.

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

Aviv Efrat - Chief Financial Officer

Thank you, Art. For the quarter ended December 31, 2013 recurring net investment income totaled $0.23 per share. In addition we have $0.04 per share of other income. As a result, net investment income for the quarter was $0.27 per share.

Looking at some of the expense categories, management fees totaled $10.2 million, general and administrative expenses totaled $1.7 million and interest expense totaled $4.6 million. During the quarter ended December 31 net unrealized gain from investments was approximately $15 million or $0.22 per share. Realized gain from investments was $3 million or $0.04 per share and unrealized gain from our notes was $4 million or $0.06 per share. Excess dividend over net income was about $700,000 or $0.01 per share. Consequently, NAV per share went up $0.31 to $10.80 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 price provided by independent valuation firms, securities exchanges or independent broker-dealer quotations when active markets are available under ASC 820 and 825. In cases where our booker-dealer quotes are inactive, we use independent valuation firms to value the investments.

Our overall debt portfolio has a weighted average yield of 13.2%. On December 31, our portfolio consisted of 66 companies across 28 different industries and was invested 26% in senior secured debt, 34% in second-lien secured debt, 29% in subordinated debt and 11% in preferred and common equity. 52% of the portfolio has a floating rate including 49% with a floor and the average LIBOR floor is 1.6%.

Now let me turn the call back to Art.

Art Penn - Chairman and Chief Executive Officer

Thanks, Aviv. To conclude, we want to reiterate our mission. Our goal is a steady, stable, and consistent dividend stream coupled with the 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 the call to questions.

Question-And-Answer Session

Operator

Thank you. (Operator Instructions) And we’ll go first to Greg Mason of KBW.

Greg Mason - KBW

Great. Good morning everyone. Art, as we look at your $228 million of originations. This is actually your largest origination activity since the crisis that hit back in 2008. Can you talk about – are you seeing more interesting opportunities in the market, was it market driven or company specific driven. What led to these strong originations this quarter?

Art Penn

It’s a great question. Certainly part of it is probably a little bit of a year end wave certainly not the amount of year end wave that we’ve had in the past, but a little bit of that, but probably more importantly it was just idiosyncratic deals that we happen to find this past quarter. You can’t really attribute a particular phenomenon to it perhaps part seasonal before working is hard as we worked in a long time to find good risk reward given the market conditions and we just had a good quarter from that standpoint.

Greg Mason - KBW

So, it sound based on the last comment, the overall market dynamics still remain difficult.

Art Penn

Well, if we are focused on maintaining our low-risk, high reward mentality, the portfolio has a debt to EBITDA ratio about 4.4 times and a yield over 13%. So we are working really hard to maintain credit quality, maintain low debt to EBITDA ratios, find companies that are defensible and stable. And I am glad to say we met that this past quarter, at quarter ended December. It’s early for this first calendar year quarter, but as you have seen here we have our growth over the last year, year and a half has been muted if at all. We have kind of been stable and slightly growing and that’s kind of the outlook. We are working really hard to maintain credit quality yield characteristics and we don’t see it changing anytime soon and we are just going to keeping our head down try to find good deals.

Greg Mason - KBW

Great. And then a couple of company-specific questions, you made an additional investment in UP this quarter obviously there has been a lot of talk about the Keystone Pipeline here recently. Can you give us some color on adding to your investment there?

Art Penn

Yes. So, the UP, we bought a piece of first lien that was owned by European bank given the issues with some European banks, they were looking to exit that piece of the first lien. We are a second lien lender and an equity holder in the company. So we were opportunistic and bought the piece of first lien at a healthy discount to par having really good information about the company obviously, but they were fore sellers. So we were able to move up capital structure and get what we think is a very attractive our risk adjusted return in the first lien and the chatter about the Keystone Pipeline is more positive now, but it’s been a long running saga. We certainly don’t count on it, counting on decisions from Washington D.C. within a certain timeframe has been futile over the last few years unfortunately. It will be great if things come through, but we don’t count on it in kind of our investment analysis.

Greg Mason - KBW

Great. And then one last thing, you talked about in the past the lot of potential opportunities to exit equity investments Enviro-Solutions is kind of your largest equity piece there, any updates or thoughts about the potential monetization of that equity piece?

Art Penn

Yes, we are hopeful that over the course of the next 6 to 12 months, we will be able to move to – move that position or exit that situation, nothing firm, you can’t count on it, but that would be our goal.

Greg Mason - KBW

Great, thanks, Art.

Art Penn

Thank you.

Operator

Our next question will come from Greg Nelson of Wells Fargo Securities.

Greg Nelson – Wells Fargo Securities

Hi, guys. Thanks so much for taking my question. Art, just a couple from me, when you guys are thinking about the SBIC license there, what sort of the timeline and the pipeline to put some money on that and get that to work?

Art Penn

Thanks, Greg. We have funded the equity in SBIC too. We are looking forward to drawing down that. Again it’s very idiosyncratic about what deals come in and do they indeed fit the box of the SBIC in the definition of what are small businesses for that box. Clearly, if we find deals that fit, we would love to put them in there, I’d say the outlook is probably again over the next 6 to 12 months, where we can more fully utilize or fully utilized that $75 million of potential financing.

Greg Nelson - Wells Fargo Securities

Great, great, thanks, I appreciate the color. And then just another quick one, more deal specific, on the Old Guard, I saw you guys put about $30 million to work there, first lien yielding about 12.5%, obviously it’s a little high where the market is, are there – I might be hearing the thought process about that deal and if there are other stuff like that out there that has a good risk adjusted return like that?

Art Penn

Yes, this was a deal, good question to deal. We spent a lot of time on, it’s a complex deal. It’s a basically business services solutions company to insurance carriers as results are very complicated, there are some regulatory elements that insurance carriers have. This also is a non-sponsored deal. So we have partnered with management. As you know, roughly 80% or so of what we do was sponsor oriented. We do some of our flow that’s non-sponsor. We realize there is a different risk adjusted return that required when you are not – when you do not have a sponsor and there is a risk adjusted return that you can get when you are in non-sponsor deal. So we are very thoughtful about it to what kind of diligence understand, try to understand everything about the business. As a result, due to the complexity of the business, due to the fact that it was a non-sponsor deal. We thought we structured a very attractive risk adjusted return in the first lien plus warrants type of scenario for our shareholders.

Greg Nelson - Wells Fargo Securities

I agree. Thanks very much.

Art Penn

Thank you.

Operator

(Operator Instructions) And we’ll go next to Mickey Schleien of Ladenburg.

Mickey Schleien - Ladenburg

Good morning, Art and Aviv. Most of my questions have been asked, but I was hoping you could walk us through the Affinion transaction including any realized gains there and just a couple of housekeeping questions, what were your taxable earnings in the quarter and was there any return of capital in fiscal ‘13?

Art Penn

Okay. I will walk through Affinion and then I will kick it over to Aviv for the taxable earnings questions. So we owned a piece of Affinion paper, subordinated debt that was exchanged into a new piece of subordinated debt at a higher coupon plus warrants in the company. So that what we had our last quarter market had, it’s about $0.58 in the dollar. The package of debt plus warrants on exchange was worth about $0.89 on the dollar. That was an exchange. That was not – that was not realized, that was unrealized, that exchange. So the original cost kind of continues on the new investment. Additionally, we moved up capital structure a bit and bought some of the paper that was the higher in the capital structure, which still had a very healthy cash per yield that we thought was relatively safe and provided a nice coupon. With that, I’ll kick it over to Aviv to talk about taxes.

Aviv Efrat

Certainly, for tax purposes, once a year we do calculate in September 30, ‘13 was the last time that we calculate them show in the 10-K, our taxable earning versus GAAP earnings. In general there is fairly small differences between GAAP and tax, so we shouldn’t – it should not be anything material, but always there is small deviations. So we do not advertise the taxable earnings quarter-by-quarter, but you should think about a GAAP versus tax to be fairly aligned, maybe $0.01 per share off or maybe two depends on the quarter, but it’s fairly aligned GAAP versus tax.

Mickey Schleien - Ladenburg

And Aviv was there – I haven’t had a chance to look, but was there return of capital in fiscal ‘13?

Aviv Efrat

There is no – that was no return of capital actually since inception.

Mickey Schleien - Ladenburg

Thank you.

Operator

Our next question will come from John Hecht of Stephens.

John Hecht - Stephens

Good morning guys. Thanks for taking my questions. The first question I do think it’s related to Affinion, but your weighted average yield was up in the quarter, however, the new investment yield was a little bit down. I wonder if you can explain how that weighted average increased in that realm?

Art Penn

Yes, you are exactly right, John. It was Affinion’s yields going up for a position that we did already own was the driver of that.

John Hecht - Stephens

Okay. And then I wonder if you can talk about the source of the volumes in the quarter – pretty good flow in this quarter how much of it was new M&A opportunities versus dividend recaps versus refis and just given what you have seen over the last couple of quarters, where do you think that composition will move to as we move to 2014?

Art Penn

I mean, just looking at the list of deals we did this past quarter. Dividend recaps, if any, I mean I think was – may have been 10% of what we did and that would be usually accomplished that we have been following a while. We know where we are already in. M&A versus refi, I’d say of the 90% left of that, other than the 10% that might have been dividends. And so it’s probably 50:50 M&A versus refi. In other words, 10%, this is only just guessing lot of the cost, 10% dividend related, 45% M&A, 45% refi.

John Hecht - Stephens

And generally speaking, is that consistent with where it was throughout the year, last year or is it changing – and with that change is that great optimism of any type to you?

Art Penn

Look and you could see in our activity level and look there is and maybe I kind of should have added this element, there is some of these financings that are refi or growth financings for this Old Guard Risk Services, which we just talked about was really a growth financing. It was refinancing existing debt, but it was giving the company some cushion to grow. Superior Digital, a growth financing. Foundation Building Materials as an example was an M&A financing, but that’s a consolidation play. So we are hoping that that company grows and there was a delay to our element there. So I would say the new element that we saw this past quarter and perhaps a chunk in this driver is we are seeing some companies that are taking the capital for growth purposes, which kind of jives with the fact that we are finally seeing a gradually and slowly growing economy. And these companies are willing to accept our style of debt in order to fuel their growth.

John Hecht - Stephens

Okay, that’s great color. Thanks. And final question, just looking at the competitive environment, it’s something we have all been focused on the last year. Any emerging competitions there was Financial Times article this morning talking about middle market CLO is being formed. Any change from the commercial banks or hedge funds or CLOs that which you believe there is more potential compression or do you think it’s sort of stabilizing at this point?

Art Penn

Our view would be, it’s kind of stabilizing as usual it will in some sense take its skews from the more liquid capital markets, the phenomenon had been that the more liquid capital markets would come down market and finance smaller companies, thereby changing the tone in the middle market. With a high yield market now under some stress due to the potential of rising interest rates or some of the emerging markets turmoil, perhaps that’s going to be helpful trend haven’t seen it trying to remove our liquid loan market at this point. As you know, we secretly or not so secretly hope for a little bit of a correction. So there is a little bit more of a little bit of a fear in the marketplace so that we can get better risk reward in general. So we are hopeful that the tide is washing out now as both people move away from the liquid high yield market and as people see a little bit more capital market turmoil that the liquid markets will received a bit and we’ll provide a better overall term in the middle market.

John Hecht - Stephens

Alright, great. Thanks very much guys.

Art Penn

Thank you.

Operator

And next we will take Arren Cyganovich of Evercore.

Arren Cyganovich - Evercore

Thanks. You have talked about in the past of target leverage is kind of 0.6 to 0.8 times I am just curious as your thoughts on where you see that going near-term and would you look to first draw down the SBIC before you get the equity market again?

Art Penn

So we are – look we won’t change our view about what appropriate leverage is for this portfolio, we believe it’s 0.6 to 0.8 times. Again, it’s 0.4 times excluding the SBIC debt, which is our SEC exemptive relief. Look we take a deal by deal, day by day inevitably we are going to get some refis. Hopefully inevitably we’ll be able to find deals to fill those refis. And hopefully we can slowly grow and still maintain our debt discipline. We are not looking at the market everyday and thinking about when to access the market, but of course we always are thinking about things and always looking at the market as every BDC should. Our head is firmly and trying to find a good deal or two or three and that’s the driver. We are not sitting here micro managing whether a 0.6 or 0.65 or 0.7, we need to find good deals and we need to find good deals first to replace the deals that are good deals that are getting refinanced.

Arren Cyganovich - Evercore

Okay. And then the BDC legislation has been a topic that’s been increasing among the industries recently, is there any view that you have on that? And then what would you do in terms of your targeted leverage ratio if that would actually increase, would you like they go up or would you just move a little bit further up the capital structure and go a little bit more senior on your portfolio investments?

Art Penn

We are not hearing any news on the BDC legislative fronts positive or negative. The tone still is very positive, but again I don’t know when Washington will pass a law, it’s a tough thing to bet on. Look in fact it’s all asset-specific if you have a piece of mezzanine debt or second-lien debt we don’t think you should leverage it more than one to one anyway even if the law were changed. If you have a piece of first-lien debt depending on kind of first-lien debt you perhaps would be willing to leverage it more than one to one. So really just depends on the portfolio and what’s in the portfolio. We are first and foremost focused on getting our shareholders a solid risk adjusted return and capital preservation. So look if the law changed we probably would take it up a bit on an overall blended basis, it probably wouldn’t be north of one to one, but if the rules were two to one it will at least make us feel a little bit more comfortable hedge it up from 0.6 to 0.8 to some a little higher. But hard to say it will just depend on the portfolio at that time.

Arren Cyganovich - Evercore

It makes sense. Thanks a lot.

Operator

And we will go next to Doug Harter of Credit Suisse.

Doug Harter - Credit Suisse

Thanks. My questions have been asked and answered. Thank you.

Operator

And then Scott Valentin of FBR Capital Markets has our next question.

Scott Valentin - FBR Capital Markets

Good morning. Thanks for taking my question. Just with regard to the portfolio compensation in terms of senior and second lien, there is a very slight shift I think senior secured loans job from 28% to 26% of the portfolio and you had just commensurate increases in second lien and sub debt, is that idiosyncratic just reflection of deals that you saw or is there a kind of a content to shift maybe a little bit more down the capital structure to protect the yield?

Art Penn

Good question. It’s just idiosyncratic. It’s deal-by-deal. Obviously, in a perfect world, we will find a piece of first lien with a stellar credit, with great covenants and a very high yields and low debt to EBITDA and that’s perfection. And then everything that you chip away at, it becomes slightly less perfect. Perfection was perhaps a lot of what we saw in the ‘08/09 time period, we are in a world where perfection is not possible, so you have to figure out in each deal what you are willing to live with to protect and preserve capital and get the appropriate return.

Scott Valentin - FBR Capital Markets

Okay. And I think earlier I mentioned new investments came on at average yield of 12.4%, just wondering, I mean, (indiscernible) lower going forward given all the liquidity out there?

Art Penn

We don’t know. Our goal is to keep it that or north, but possibly if we go if the yield goes south of 12.4, presumably it’s because we believe the credit is rock solid and we think the return makes sense relative to the risk.

Scott Valentin - FBR Capital Markets

Okay. One final question, you mentioned some of yen volatility hitting in the high yield markets, have you seen anything in the middle market at all as it blends the middle market?

Art Penn

No, middle market usually kind of as a delayed response mechanism to what goes on in the liquid markets. So there continues to be more choppiness in the liquid markets. It will take a while, but inevitably the tone will move to the middle market.

Scott Valentin - FBR Capital Markets

Okay, thanks very much.

Art Penn

Thank you.

Operator

And our next question will come from J.T. Rogers of Janney Capital Markets.

J.T. Rogers - Janney Capital Markets

Good morning. Thanks for taking my question. I just – I know we are in a seasonally slow period, but I was wondering if you could comment on directions of yield on new investments and maybe leverage just since the start of the year, while we are seeing stable weighted average yield on new investments lower leverage, higher leverage?

Art Penn

Yes. So, on the activity we are seeing thus far in the quarter through February 6 or through the morning through 10.33 AM on February 6, it’s consistent that the deals we are looking at the credit quality and yields are consistent with what we saw in the quarter ended 12/31.

J.T. Rogers - Janney Capital Markets

Okay, great. And then it sounds like you guys are more positive on the at least the macro backdrop, would you all consider looking at potentially more distressed securities, TXUs out there and is a – there is talk that then look at restructuring later this quarter, is that something that you all would be interested in?

Art Penn

I mean what we are trying to figure out where our highest value add is we don’t have with regard to TXU, we don’t have any particular focus or view or we haven’t filed the credit. So in that case, it would not be applicable to us. And again, we generally focus on middle market. We generally focused on where we can have an extra value add or have extra insight and TXU is not one of this.

J.T. Rogers - Janney Capital Markets

Okay, thanks for taking my questions.

Art Penn

Thank you.

Operator

We’ll move next to Chris York of JMP Securities.

Chris York - JMP Securities

Yes, good morning. Thanks for taking my questions. Most of them have been asked, but I’d be curious to learn if you have seen private equity sponsors through more of the specialty lenders like yourself in the middle market due to more restrictive financing at banks as a response to the leverage to lending guidelines that went into effect in May?

Art Penn

It’s a great question. There is a live chatter about the regulations and how they are impacting banks. We believe it’s impacted the market a little at this point, nothing that would be material in terms of empirical evidence. This is just kind of chatter on what we hear. As the year progresses through 2014, we will see if it becomes material and we will see if it’s helpful to have middle market lenders like BDCs. So far we are not seeing a ton of empirical evidence to suggest that it’s there, but we are hearing in certain cases it is helpful, but stay tuned.

Chris York - JMP Securities

Sure. Great, thanks for that color, Art.

Art Penn

Thank you.

Operator

And now we’ll move on to Doug Mewhirter of SunTrust.

Doug Mewhirter - SunTrust

Hi, good morning. Just two questions. Those are kind of more big picture oriented. First, if you have any market I guess continues on its – the recent downtrend. How do you think that will affect the dynamics of your business, would there be more M&A because the targets would be cheaper or would the deal flow dry up a little bit because maybe people are a little more risk averse or have you noticed any – how those patterns have played out in the past with the corrections like this?

Art Penn

It’s a great question. Hard to say look as we’ve seen a lot of markets are correlated. So as we’ve said for us it would be nice if there was a little bit of correction in all the markets, it would make risk reward even better than it is today. Certainly the liquid markets would be the first to feel it. We’re in a mark-to-market world, everything is correlated, good news, bad news, a little bit more fear in the market we can get better risk reward, but the bad news is everything is correlated. So asset value stop prices etcetera and up usually correlating to that. That said in the last few weeks even though the equity markets have been choppy and the high yield markets have been choppy the leverage loan markets had been a lot less choppy. They’re down a little bit but not really that materially. So perhaps there is a little bit of de-linkage where the leverage loan markets and floating assets remain stable while the high yield and equity markets still to a choppy or timeframe, hard to say at this point.

Doug Mewhirter - SunTrust

Thanks for that. And one last question, could you I guess describe in a – just a few words, I’m sure there is a huge piles and piles of legal documents explained in this. But what – how – what – the difference between an SBIC qualified investment or loan and a I guess a mainstream non-SBIC PennantPark type loan, you said…

Art Penn

So, right, simple question and you’re right. It’s in our cane world of definitions. Usually it’s due to companies who have net worth and net income below a certain level, right. So those are the two drivers. And then there is a whole world of what’s the NAIC code and thus the NAIC does this particular company fit within an NAIC code that makes a good from the SBI, SBA standpoint. So in many of the companies we have very healthy equity cushions, which makes the net worth high and not low, which even though you would look at the company on it’s face value and say geez this is a small business because the equity cushion is high it does not – at the SBI, SBA’s threshold or the credit might be good and there was positive net income but because the net income is too high it doesn’t fit with the SBA’s threshold. So even though you might look at the companies head to small business from the standpoint of the substance it doesn’t fit.

On the other hand there are companies, they are running large companies. You could use the example of General Motors when they had a restructuring, a negative net worth, a negative net income. So under the strict definition of the SBA’s guidelines that what have been defined is a small business, right. That said we would never buy GM (ph) paper and put it in the SBIC even though it fits the guidelines, because it doesn’t fit the purpose and the substance of what the SBA is getting at which is the money there to finance small and mid-sized businesses in America. So there is a whole lot of cane world we can spend how I was talking to you about it at your convenience but that’s the gist of what the rules are.

Doug Mewhirter - SunTrust

That’s actually a fairly, pretty good nice definition based on what you said. And would that just a quick follow-up on that and then I’ll rejoin the queue. The loans that you extend in SBIC or the type of securities you said are do they fall into a more of one bucket, would you tend to make more subordinated or more senior, more equity or is that sort of just based on the company and the particular characteristics of SBIC or not doesn’t really have a input into it?

Art Penn

That’s right. It’s the company and whether it fits, it’s not necessary of what’s first lien, second lien mezz or equity, it’s more – is this company defined is a small business.

Doug Mewhirter - SunTrust

Okay, thanks. That’s all my questions.

Art Penn

Thank you.

Operator

Our next question will come from Casey Alexander of Gilford Securities.

Casey Alexander - Gilford Securities

Good morning guys. I am almost sorry to ask this question but some BBCs mark debt to markets and some don’t. And in the quarter you guys got $0.10 of NAV appreciation from marking here debt liabilities to market. I am curious why do it when at the end of today you are going pay these off at par, I am just kind of curious why mark into market?

Art Penn

Yes, it’s a great question gentleman and to clarify that $0.06 of NAV appreciation we got now 10. To us it’s a very cheap insurance policy that’s all. And this is really just to align the measurement characteristics both our assets and our liabilities for the purposes of the SEC asset coverage test. So that were matched for purposes of that test. If you are going mark your assets, market liabilities and there is a matching – and there is a matching which is protective of the company and shareholders to do that. We obviously are going to pay $0.100 on the dollar at the end of it.

We are – we will pay back $0.100 on the dollar in fact any – every BBC through the downturn even someone that had different credit characteristics from us paid back every penny of debt during the downturn. For us this is just a very cheap insurance policy to protect the shareholders and the company in the event of the market blow up, so that we do not want to fail the SEC asset coverage test. From the standpoint the actual mark to market since the bond we trade on the NYSE will just take whatever that prices at the end of the quarter and profit into our balance sheet.

Casey Alexander - Gilford Securities

Okay, great. Thank you.

Art Penn

Thank you.

Operator

And now we will move onto Jim Altschul of Aviation Advisors.

Jim Altschul - Aviation Advisors

Good morning, thanks for taking my questions. Got a couple of things, first of all with regard to the two SBICs am I correct in reducing that the first SBIC the $150 million the debentures or whatever that you call them have been fully growing, but that the $75 million in the second SBIC is not yet been drawn?

Art Penn

That’s correct. For SBIC 2 we have put the equity in which is $32.5 million of equity and we hope to drive the 75 of debt over the next 6 months to 12 months.

Jim Altschul - Aviation Advisors

Okay. And with the first SBIC with that $150 million that’s been grown because if I remember correctly it is very difficult to repay the SBIC conventional or prepay rather once you have taken it down and is that money been put to work?

Art Penn

The vast majority has been put to work every once a while. We fully drove we put it all the work. Once in a while we will get a refi in that portfolio and then we feel that unlock cash on the SBIC’s balance sheet. SBIC 1’s balance sheet and then as deals come in this is able to fill that pocket.

Jim Altschul - Aviation Advisors

Are you able to with regard to the $75 million in the second SBIC are you able to draw that in tranches, so that you can sort of only take it down when you actually have only for the loan you want to put on the books?

Art Penn

Okay. That’s exactly correct.

Jim Altschul - Aviation Advisors

Thanks and the final question and I know this is emphasized but you did not quite cover to dividends by and in your announcement obvious talk about difference of a cent. But you also added some assets to the books during the quarter. Would you be able to give a rough estimate of all the assets with the addition of $200 odd million in loans that you put on those books that it’s the portfolio on the quarter have been on the – in the portfolio as of the beginning of the quarter, would you cover the dividend?

Art Penn

For the quarter ended 12/31 as we said we had recurring income of $0.23 a share and $0.04 of other income. Due to what you’ve mentioned Jim which is a little back end weighting. Our recurring run rate would be north of $0.23. Moving on his way towards the dividend so its kind of somewhere in between and evitably we have other income every quarter and I am sure have other income this quarter ended March. We are very sensitive towards this and we want to maintain credit quality of course we could put a lot of money to work quickly and hence we recover the dividend as that doesn’t fit our investment discipline making sure that we preserve capital and get good risk adjusted returns.

Jim Altschul - Aviation Advisors

Okay. Just this – to rephrase and then what would you set to rephrase and then lot of what you said to rephrase the questions slightly and then it will be through. Is that the recurring income is $0.43 a share?

Art Penn

Okay. If you added in the course of the quarter, $200 odd million in additional investments, if all of those investments have been on the books as of October 1, so therefore you would have earned the full quarter’s worth of…

Art Penn

Look, Jim, so the net growth, we put on $200 plus million, but we also had refinancing. So the net growth of new assets was $84 million to be exact.

Jim Altschul - Aviation Advisors

Okay.

Art Penn

So you can do the math and there is a bunch of great research analysts who have been on this call who can do the math. We will see what origination are this quarter versus refinancings. And you can do the math as to what that would mean. Again, if we wanted to put the money out of work today and happy to cover our dividend we could do that. First and foremost, we have to pick the right credits and preserve capital. Also this is – our decision is that we are not going to cut the dividend at this point since we do think we can gradually and slowly grow and maintain our investment discipline. So for us, it does make sense to cut the dividends at this point, so that’s kind of where we are.

Jim Altschul - Aviation Advisors

Excellent. Well, thank you for your thorough answers to all my questions.

Art Penn

Thanks, Jim.

Operator

And with that, that does conclude today’s Q&A session. I would like to turn the conference back over to our speakers for any additional or closing comments.

Art Penn - Chairman and Chief Executive Officer

Thanks everybody for being on the call today. We appreciate your support and we will talk to you next quarter.

Operator

And with that, ladies and gentleman that does conclude today’s conference call. We would like to thank you again for your participation.

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