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PennantPark Investment Corporation (NASDAQ:PNNT)

F3Q12 Earnings Call

August 9, 2012, 10:00 a.m. ET

Executives

Arthur H. Penn – Founder, CEO, Chairman of the Board of Directors

Aviv Efrat – CFO, Treasurer

Analysts

Troy Ward – Stifel Nicolaus

Mickey M. Schleien – Ladenburg Thalmann Financial Services, Inc.

Justin Baker – Sidoti & Co.

Richard Shane – JP Morgan

Arren Cyganovich – Evercore Partners

Jason Freuchtel – Suntrust

John Heck - Stevens

Operator

Good morning, and welcome to today’s PennantPark Investment Corporation third quarter, fiscal quarter 2012 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 opened for a question-and-answer session following the speakers’ remarks. (Operator Instructions).

It is now my please to turn the conference over to Mr. Art Penn, Chairman and Chief Executive Office of PennantPark Investment Corporation. Mr. Penn, you may begin.

Arthur Penn

Thank you, and good morning, everyone. I’d like to welcome you to our third fiscal quarter 2012 earnings conference call. I’m joined today by Aviv Efrat, our Chief Financial Officer. Aviv, please start off by disclosing some general conference call information and included discussion about forward-looking statements.

Aviv Efrat

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

I’d also like to call your attention to our 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 filing 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 SEC filings, please visit our website at www.pennantpark.com or call us at 212-905-1000.

At this time, I’d like to turn the call back to our Chairman and Chief Executive Officer, Art Penn.

Arthur Penn

Thank you, Aviv. I’m going to spend a few minutes discussing current market conditions followed by a discussion of investment activity, the portfolio, our overall strategy and then open it up for Q&A.

As you all know, the economic signals have continued to be mixed with many economists expecting a flat-to-slightly-growing economy going forward. With regard to the more liquid capital markets, and in particular the leveraged loan and high-yield markets, those markets have rallied this year so far as cash flows in the high-yield funds, leveraged loan funds and CLOs have been strong.

Risk reward in the middle market has generally remained attractive as the overall supply of middle-market companies who need some financing exceeds the relative demand of applicable lending capacity.

As debt investors and lenders, a flat economy is fine as long as we’ve underwritten capital structures prudently. A healthy current coupon with deleveraging from free cash flow over time is a favorable outcome. That said, as the more liquid markets have rallied, that overall tone has impacted the middle market. Pricing has started to compress and purchase price multiples and leveraged multiples have increased. As a result, we have become increasingly selective about which investments we make in this environment. Given our strong origination network and the size of our company, we can continue to prudently grow.

We mean focused on long-term value and making investments that perform well over several years. We continue to set a high bar in terms of our investment parameters and remain cautious and selective about which investments we add to the portfolio. Our focus continues to be on companies or structures that are more defensive, have low leverage, strong conveyance and high returns. With plenty of dry powder, we are well positioned to take advantage of investments 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 long-term trust. Our focus is on building long-term trust with our portfolio companies, management teams, financial sponsors, intermediaries, our lenders and of course, our shareholders.

We are first call for middle-market financial sponsors, management teams and intermediaries who want consistent credible capital. As an independent provider, free of conflicts or affiliations, we’ve become a trusted financing partner for our clients. Since its inception, PennantPark entities have financed companies backed by about 100 different financial sponsors. We have been active and are well positioned.

For the quarter ended June 30th, 2012, we invested about $90 million. The average yield on new debt investments was 13%. Expected IIRs generally range from 13 to 18%. Net investment income was $0.28 per share. We have met our goal of a steady, stable and growing dividend stream since our IPO over five years ago despite the overall economic and market turmoil throughout that time period. We are the only debt-oriented BDC to not cut its dividend during this time period.

As a result of our focus on high-quality new investments, solid performance of existing investments and continuing diversification, our portfolio is constructed to withstand market and economic volitility. The cash interest coverage ratio, the amount by which EBITDA, our cash flow exceeds cash interest expense continue to be a health 2.8 times. This provides significant cushion to support stable investment income.

Additionally, at cost, the ratio of debt to EBITDA on the overall portfolio was 4.7 times, another indication of prudent risk.

The structure of investments in our portfolio is also relatively low risk. It consists primarily of cash paid debt instruments and about 10% of the portfolio is preferred and common equity. We have plenty of liquidity. As of June 30th, we had in total about 200 million of available liquidity. We fully invested our SBIC and Aviv will give an SBIC update later. We have applied for a second SBIC license. There are no assurances that we will be awarded a second license, but if we are fortunate enough to receive one, we will be able to access up to another 75 million of debt capital.

As a reminder, we have exempted 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. Our $14 million debt position in Sheridan Health was refinanced. This was one of the dead instruments which had a sub-optimal yield that we had wanted to exit. We are fortunate that we were able to exit at par and because we purchased a portion of the investment during the downturn at a discount to par, we ended up generating an IIR of approximately 11%.

Despite the recession, PennantPark entities have had only six non-accruals out of about 200 investments since inception over five years ago.

As we have been indicating for the past few quarters, our subordinated debt instrument in UP support services has been challenged and it went on the non-accrual this past quarter. This company has been hurt by the delay in the Keystone Pipeline as well as some other items. Last quarter, we had purchased 13 million in the company’s first lien in order to both protect our existing investment as well as set ourselves up for maximizing recovery and a restructuring.

To refresh your memory about our business model, we try as hard as we can to avoid mistakes but defaults and realized losses are inevitable as a lender. We are proud of our track record underwriting credits with the cycle. One way we mitigate those loses is through our equity co-investment portfolio. We are optimistic that our co-investment portfolio, which includes names such as Trizetto, CT Outboard, Magnum Hunter, Cadman, Tekelec and Veritext, will generate gains over time.

From an interest rate standpoint, 5% of the portfolio has an interest rate that floats another 27% floats but has a floor which protects income in this low-base rate environment and the remaining 68% is fixed rate.

In terms of the investments, we had another quarter investing in attractive risk adjusted returns. Our activity was primarily driven by M&A deals and virtually all these investments, we have known these particular companies for a while, have studied the industries, have a strong relationship with the sponsor or have differentiated information flow.

Let’s walk through some of the highlights. We invested 15 million in the first lien debt of Aircell GoGo, which is the lead provider of in-flight internet connectivity. Ripplewood is the financial sponsor. LTI Flexible is a manufacturer of components for OEMs and a variety of industries. We invested 35 million of subordinated debt and 3 million in equity of this company. We were the [inaudible] mezzanine lender and we were able to secure our position in the new capital structure as the prior sponsor, Sentinal, sold the company to the new sponsor, Snow Phipps. We invested 40 million of subordinated debt and 4 million of equity in Service Champ. Service Champ is a distributor of consumable maintenance and replacement parts to oil-change and repair shops. Snow Phipps is it’s sponsor. Trus House is a provider of on-site cafeteria management services. We invested 19 million in the mezzanine debt and 1 million in the common equity of this company, which is sponsored by Gryphon Investors.

Turning to the outlook, we continue to believe that the remainder of 2012 will be moderately active. We are seeing a significant amount of middle-market M&A, which over time should drive a substantial portion of our investment activity. Due to our strong sourcing network and client relationships, we’re seeing strong deal flow.

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

Aviv Efrat

Thank you, Art. For the quarter ended June 30th, 2012, investment income totaled 29.4 million and expenses totalled 13.8 million. Management fees have totaled 8.4 million. General and administrative expenses totaled approximately 1.9 million. SBA and current facility interest expense totaled about 3.2 million. Accordingly, net investment income was 15.6 million or $0.28 per share.

During the quarter ended June 30th, net unrealized loss from investments was approximately 13.8 million or $0.24 per share. Net realized gain was 1.4 million, or $0.02 per share. Consequently, energy per share went from $10.38 to $10.16 per share.

As a reminder, our entire portfolio and our credit facility are mark-to-market by our Board of Directors each quarter is an exit price provided by an independent evaluation firm or independent broker dealer “when active markets are available under ASST 620 and 825”.

In case of the word “broker-dealer” are inactive, we use independent evaluation firms to value those investments.

Our overall debt-to-portfolio has a weighted average yield of 13.3%.

On June 30th, our portfolio consisted of 51 companies and was invested 31% in senior secure debts, 16% in second lien secured debt, 43% in subordinated debt and 10% in preferred and common equity.

Our SBICs have drawn the maximum amount, 150 million of SBA [inaudible]. We feel fortunate to have locked in the 150 million at a fixed holding rate of 4% for ten years when treasuries were near all-time lows. We have applied for a second SBIC license.

Now, let me turn the call back to Art.

Arthur Penn

Thank you, Aviv. To conclude, we want to reiterate our mission. Our goal is a steady, stable and growing dividend stream, 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 your 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

(Operator instructions).

We’ll go first to Troy Ward – Stifel Nicolaus.

Troy Ward – Stifel Nicolaus

Thank you, and good morning gentlemen. Looking at the portfolio, just kind of some of the new things you did, just a couple of clarifying questions. You had some sub-debt in both Service Champ and TrustHouse, that had a footnote that they are a delayed draw. Can you give us some collar on kind of what that means? Have they already funded, and if not, when do you expect them to, and what kind of yield, because there’s no yield associated with (inaudible) investments?

Arthur Penn

That’s an excellent question. Both companies anticipate doing annual acquisitions, so the deal is that we would provide additional capital under the same terms that we provided the initial capital. Assuming the company meets certain financial thresholds and financial governance, as they do add on acquisitions. So, it’s a way for the sponsors to know they have certain capital. It’s a way for us to invest additional capital in companies that are performing according to plan. Obviously if the companies are not performing according to plan, and the acquisitions don’t fit the box that we’ve all agreed to up front, we have no obligation to do the add-on delay draw financings. But it is there to kind of help the company grow.

Troy Ward – Stifel Nicolaus

So, when we think about the actual dollars invested, those aren’t actually invested in earning a yield right now, is what you’re saying?

Arthur Penn

That’s correct, they’re not invested in our yield. They perhaps will be, and again there’s no assurance that they will be drawdown. Usually these have something like 12 to 18 month terms. So if the sponsor does not find acquisitions that meet the box we’ve created upfront, they may go away in a year or 18 months, because nothing happened.

Troy Ward – Stifel Nicolaus

Now, is there any income associated – I noticed they have usually a couple points of OID, but if they’re never drawn then there never repaid, so the OID isn’t recaptured. Is there some upfront fee or something associated with these delayed draws?

Arthur Penn

When they draw, we get the upfront fee. So, there’s no either current income – There’s no current income at this point on those assets that are on our balance sheet. View them a little bit like a revolver.

Troy Ward – Stifel Nicolaus

Okay.

Arthur Penn

So, we really earn anything until they draw the capital down.

Troy Ward – Stifel Nicolaus

Okay, great. And then moving on to the environment, are you – your commentary seems a bit more cautious maybe then some of the other BDCs that we’ve heard this quarter. Can you give a little more collar on kind of where you’re seeing pressure? Is it pricing, is it leverage, is it covenant? And do you think maybe it’s you’re seeing more pressure maybe because you’re seeing a different deal flow? Can you just give us some more collar on what you’re seeing out there.

Arthur Penn

Sure, look we’ve been in environment where by and large the markets in general are not seeing a lot of fear out there. There’s not a lot of fear in the markets, when there’s more fear we generally like the risk/reward better as buyers. When there’s less fear in the markets, we need to be fearful. The big liquid capital markets have certainly shown a lack of fear as you’re seeing more covenant light deals, as you’re seeing leverage multiples go up, as you’re seeing yields getting compressed. The middle market is cushioned from that to some extent, that said some of that has seeped down a little bit into the middle market. Both the First Lien and the Mezz side I might add. And when you see leverage multiples creep up, and when you see yield creep down, you just kind of pullback a little bit and evaluate and say “You know what, we probably need to start raising the bar even more than we have”. We normally have a very high bar, we’re raising it even more as we speak due to those characteristics. Given the size of our vehicles, which are relatively medium sized out there, and given the size of our origination platform in the deal flow, we still think we can prudently grow in that environment. And by no means are we saying it’s ’07 yet. ’07 you may remember was a peaky time, and you know, people were leveraging up the companies six and seven times EBITDA and doing a lot of covenant like deals, and we all know how that ended. But we do need to be, you know, focused on vintage. You know, early ‘011 similarly there was a lot of buoyance in the markets, and that changed towards the end of the year as Europe put fear back into the world. And so far in ‘012 we had a little bit of a pullback in June, but you know, people are still pricing risk/reward pretty aggressively, and again we think we can find some deals that fit our vehicles and still prudently grow. But we need to be increasingly selective in this environment.

Troy Ward – Stifel Nicolaus

As we look to your originations, you know, call it over the last 12-18 months they kind of range between $45-$50 million in a quarter, as high as $150, so given the current environment, would you say that your origination pace would probably maybe towards the lower end of that range?

Arthur Penn

You know my answer to that, which is we take each deal as it comes. So, it’s hard to say whether we’re going to a $50 or $150 or zero, or $200. Despite a more buoyant environment, we could find a lot of really interesting deals. So, it’s hard to really put a pin in it. You could look at what our historical numbers are, which you just alluded to, but again it’s really hard for us to predict.

Troy Ward – Stifel Nicolaus

Well I had to try. And then one last one on the FBIC license, can you just remind me when you filed that application for the second license?

Arthur Penn

We filed the second application about a week and a half ago.

Troy Ward – Stifel Nicolaus

Okay, thanks guys.

Arthur Penn

Thank you.

Operator

Next we have Mickey Schleien –Ladenburg

Mickey Schleien –Landenburg Thalmann Financial Services, Inc.

Good Morning Art and Aviv.

Arthur Penn

Morning.

Mickey Schleien –Ladenburg Thalmann Financial Services, Inc.

Just a quick question on UP support, did you reverse the pick accrual for this year, and if so, how much was that?

Arthur Penn

We did not take any income in this past quarter, the quarter end of June. Up until then the company was paying, and last quarter’s mark was about $0.58 or $0.70 on the dollar. This quarter’s mark was about $0.38. So given the mark and given what was going with the company, we did not take any income this past quarter.

Mickey Schleien –Ladenburg Thalmann Financial Services, Inc.

Okay. Most folks are finishing up their 2011 tax returns. I always see some BDC’s declare a couple special dividends. Do you have spillover taxable income, and is there scope for you to possibly declare a special dividend given the sort of pace originations that you’re expecting?

Arthur Penn

We do have spillover which we do disclose as part of our 10K, which will be next quarter when we come out kind of in mid-November. You know, we evaluate every quarter, we sit with our board, I would not anticipate that we would have that type of spillover to do a special dividend, we are cushioned, and we like that rainy day fund. But we do have some spillover.

Mickey Schleien –Ladenburg Thalmann Financial Services, Inc.

You placed a fairly significant investment into Service Champ, I’m just curious what drew you to that particular company given the size of investment you’ve made there?

Arthur Penn

What drew us to Service Champ is really the predictability of the cash flows, it’s been a very stable, steady performer over a long period of time. They’re a distributor of consumable maintenance and replacement parts to oil change and repair shops. So, it’s a very steady, stable cash flow stream and it has been a good performer for a long period of time. It’s (inaudible) put in a big equity check. So, we felt that fit us very well.

Mickey Schleien –Ladenburg Thalmann Financial Services, Inc.

Okay, my last question. If some significant waiting’s in your Eureka Hunter and Last Mile, which were marked near par. Was there any scope to syndicate some of that to reduce your exposure to those two names?

Arthur Penn

Yes, we certainly always think about, you know, it’s one way we really try to mitigate risk is through massive diversification, and that’s one way as a lender you can get hurt, is if you don’t properly diversify. We have thought about those two, there are people we could sell down to, and we evaluate that constantly. Whether a 4-5% position makes sense, whether it doesn’t, what’s going on with the credit? There’s nothing to report on that, but we could if we wanted to kind of sell down some of those pieces.

Mickey Schleien –Ladenburg Thalmann Financial Services, Inc.

Okay, thanks for your time this morning.

Arthur Penn

Thank you.

Operator

(inaudible) to Justin Baker – Sidoti.

Justin Baker – Sidoti & Co.

Just a quick one here. My question was on the other income one. I know that that was a little high this quarter relative than normal. Can you just speak to how much of that was due to acceleration of fees, or “core” protection or anything along those lines, and what was involved there?

Arthur Penn

Yes, I mean, probably now I’m going to guestimate here 30% was probably amendment fees, and the remainder was repayment, prepayment stuff.

Justin Baker – Sidoti & Co.

Great, thank you.

Operator

And next we have Rick Shane of JP Morgan.

Richard Shane – JP Morgan

Hey guys, thanks for taking my questions this morning. One thing that stands out in the model over the last four quarters is really the consistency of repayments and exits and I’m assuming that that’s largely a function at this point in the maturity of the portfolio, that’s just going to be steady. I’d love to just sort of verify that that’s what’s going on and that we’re not misreading the data.

And then the other thing is, is there any insight you guys have into pending repayments this quarter that could sort of break that pattern?

Arthur Penn

Look, it’s a great question. We characterize all that in our other income line because that is not, you know, we don’t think of it as recurring, even though you’re right, historically it probably has been recurring, but it’s certainly not in the quality of earnings that you would get off of a, you know, interest payment. But it is true that if we do our underwriting correctly as we say, we do get paid off over time and then that results in prepayment penalties, which is terrific. I mean, when someone offers to pay you back, you say, thank you. Thank you for paying us back, that’s what you should be doing and so it’s hard to predict, you know, it will probably continue as long as we have a steady-ish kind of environment out there. Look, in the ’09 time period when everything stopped, no one paid back any debt, you know. We, by and large, got our interest income, that’s true and that’s why that’s a higher-quality earnings stream than prepayment penalties but in the ’09 time period, no one repaid debt. You were, you know, you felt fortunate to get your purchase paid, which we did. So you just have to take it with a grain of salt.

Richard Shane – JP Morgan

Okay. And part of it is we also look at it just from a balance sheet perspective. Is there – when you’ve had conversations with your portfolio companies, anything that you’re, you know, and some of your peers will periodically indicate a, you know, we think such and such is going to be refinanced this quarter and that might bring a little bit of lumpiness. Is there anything that you’re aware of at this point forward for the September quarter?

Arthur Penn

There’s a company called M-Mobile, which used to be called MedQuest, which is getting bought. So that mezzanine piece will be coming out and we will be getting a prepayment penalty on that.

Richard Shane – JP Morgan

Okay, great. Thank you.

Arthur Penn

Thank you.

Operator

And we’ll move onto our next question which will be from Arren Cyganovich of Evercore.

Arren Cyganovich – Evercore Partners

Thanks. Just touching on the competition question again, if you can talk about what you’re seeing, where you’re seeing the competition mainly from? Is it from other BDCs other market participants? And then maybe you can just comment a little bit about the overall activity seems to be pretty strong and sponsor activity seems to be pretty strong, so just maybe touch on the – while pricing may be getting a little bit worse, but it seems like the environment is fairly favorable altogether.

Arthur Penn

Yeah, no, the amount of deal flow is fairly robust and you know, every week when we do our investment committee meetings, we have a lot of deals we’re looking at. I mean, we are working really hard looking at a lot of deals. What’s going on though is the amount that actually fit our rigorous risk reward focus has gone down. So you’re working harder for less actionable opportunities from the standpoint of where we think our risk reward parameters are. I mean, yes, if we lowered our reward parameters, we could wave in a lot of deals. You know, we wanted the price met, is it 11 or 12%, we could be a lot more active. You know, we don’t do that. So it is active out there, you’re working hard for us, we’re working harder for the amount of actionable stuff that actually fits our bucket. That’s fine with us.

And in terms of the competition, it’s the same competitors we’ve always seen, by and large, they act rational, every once in a while you’ll see someone do something irrational. But there is a general lack of fear, which means, you know, there’s – the leverage is starting to creep up, the yields are creeping down, and you know, there’s been a bunch of deals we just let go and said, you know, we just can’t match what some of the other guys are doing and God bless them, we wish you the best whether it be in terms of leverage rations, whether it be in terms of yields or conveyance packages even. So you know, again, we feel like we can prudently grow given the size of our vehicle and given our origination platform we can prudently grow in this environment even though it is getting – feeling a little bit more ebullient. But you know, we – this is what we’re facing.

Arren Cyganovich – Evercore Partners

Thanks. And then touching back on Troy’s question about the AA draw, just so that I fully understand it, the trust out-services, we have two investments and like a sub-debt around 19 million, those are at currently not earning any interest and do you have any confidence in those being drawn down in the future?

Arthur Penn

Sure, I mean, when you go into these – when you go into these situations, you – the belief of everybody is that they will be drawn during that 12 to 18 month time period, but sometimes they’re not. We had one on Veritext, which went away, you know, Veritext decided that they didn’t need it. So you know, we all think that they’ll be utilized, which in some sense is kind of a forward underwrite, again, it’s got to fit the box, this box that we’ve agreed to up front, but you know, right now we’re not earning anything on it, it’s a mutual option for both the borrower and for us, we hope. We hope we can deploy capital in these companies [inaudible] but they may go away.

Arren Cyganovich – Evercore Partners

Okay. What would be the typical timeframe that you would have until that would be resolved?

Arthur Penn

The 12 to 18 months, it’s a 12-to-18 month threshold. Usually it’s 12 to 18 months and then they go away.

Arren Cyganovich – Evercore Partners

Okay. And then lastly, just touching on the UP support, you know, what’s your thought on timeline for a potential restructure with that?

Arthur Penn

You know, that’s a great question. We’re in the early days of restructuring discussions. Our hope is that it would be quick so our hope would be it could be done relatively quickly, i.e., you know, by the end of September 30th, but you never know, these things are complicated and you know, it could certainly take longer than that.

Arren Cyganovich – Evercore Partners

Thank you.

Arthur Penn

Thank you.

Operator

And next we have Jason Freuchtel – Suntrust.

Jason Freuchtel - Suntrust

Good morning. It looks like there was some appreciation in the value for Jacuzzi brands this quarter, but it’s still marked at 66% of fair value. Could you provide us with some detail on the developments on Jacuzzi brand as well as your expectations?

Arthur Penn

Sure. Jacuzzi’s traded up both because the liquids markets have traded up. This is a broker-dealer quoted piece of paper. As well as there’s a general belief out there that homebuilding related, building products related stuff is rebounding. And you certainly see that also in our Realigy position. Again, a broker-dealer quoted name that’s traded up and reported some decent earnings yesterday. So that’s really the reason. And you know, we evaluate Jacuzzi all the time. Are we a buyer, are we a seller, are we just hanging on? You know, we have seen a bit of a pickup in the building products on building-related stuff in terms of actual earnings.

Jason Freuchtel - Suntrust

Okay, great. Thanks.

Operator

And next we have John Heck of Stevens.

John Heck - Stevens

Good morning, guys. Let’s see, most of my questions have been asked I guess. The only thing I’d be interested beyond what we’ve already heard is, Art, can you talk about the underlying performance of the portfolio in terms of revenue trends and EBITDA trends?

Arthur Penn

Yeah, thanks, John. EBITDA, I mean, well, what we track is kind of EBITDA from inception investment to date. I don’t have the exact number off the top of my head, but I think we’re kind of in the mid, you know, in the mid-teens in terms of EBITDA being up relative to inception of investment to date. So that gives you a sense. Look, we’re seeing a – like I said earlier, we’re seeing a flat to slightly up economy, but certainly, we have outliers in our portfolio that are performing much better than that. We have outliers as we’ve discussed, you know, that are performing worse. But we’re seeing a sluggish – a sluggish economy. Again, [inaudible] a lender, we’re absolutely happy to put up a very healthy coupon as long as the credit quality if fine and we’ve underwritten it correctly. We think it’s a very good place to be.

John Heck - Stevens

It’s sluggish, I think you’ve kind of used that in the past. Have you seen an trajectory change over the past three months or still pretty comfortable with the consistency of things?

Arthur Penn

That’s a good question. It’s the same old sluggishness, flattish kind of economy to slightly up, based on the 50-some portfolio companies we have in PNNT as well as the 50-plus portfolio companies we have in PFLT, you know, it’s a 1 to 3% growing economy based on the 100 or so names we have.

John Heck - Stevens

Okay. And I guess, I do have one follow-up related to the UP question before. How much of the – your purchase of senior debt tranche now, how much of each tranche do you own there as a percentage of the entire capital structure?

Arthur Penn

We are not a blocking position in either of the first liens or the mezz, but we are very important in the process and we expect to be very important in the process which is one of the reasons we didn’t move up and buy some first liens to really set ourselves up as an active participant to help drive value through the restructuring. So we’re not baulking, but we’re important.

John Heck - Stevens

Okay. Thanks very much.

Arthur Penn

Thank you.

Operator

And that does conclude today’s question-and-answer session. At this time, I’d like to turn the conference back over to our speakers for any additional or closing remarks.

Arthur Penn

Thanks, everybody, for participating and a reminder, our next quarter is our 10-K so we’ll probably have our quarter call kind of mid-to-late November or right before Thanksgiving time. So a little bit lengthier time before we speak again, that’s really just due to the 10-K. I hope everyone has a good quarter. We’ll be talking to you soon.

Operator

And again, that does conclude today’s conference call. We’d like to thank you for your participation.

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