Dec 1, 2017
Executives
Art Penn - Chairman and Chief Executive Officer Aviv Efrat - Chief Financial Officer
Analysts
Casey Alexander - Compass Point Research Paul Johnson - KBW Doug Mewhirter - SunTrust Robinson Humphrey Rick Shane - JPMorgan Kyle Joseph - Jefferies Joseph Mazzoli - Wells Fargo Securities
Operator
Good morning and welcome to PennantPark Investment Corporation's Fourth Fiscal Quarter 2017 Earnings Conference Call. At this time all participants have been placed on 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 of PennantPark Investment Corporation. Mr.
Penn you may begin your conference.
Art Penn
Thank you, and good morning, everyone. I'd like to welcome you to PennantPark Investment Corporation's fourth fiscal quarter 2017 earnings conference call.
I'm joined today by Aviv Efrat, our Chief Financial Officer. Aviv, please start off by disclosing some general conference call information and include a discussion about forward-looking statements.
Aviv Efrat
Thank you, Art. I'd like to remind everyone that today's call is being recorded.
Please note that this call is a property of PennantPark Investment Corporation and that any unauthorized broadcast of this call in any form is strictly prohibited. Audio replay of the call will be available by using the telephone numbers and pin provided in our earnings press release as well as on our Web site.
I'd also like to call your attention to the customer 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 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.
Art Penn
Thanks, Aviv. I'm going to provide an update on the business starting with financial highlights, followed by a discussion of the overall market, the portfolio, investment activity, the financials and then open it up for Q&A.
For the quarter ended September 30, 2017, we invested $129 million at an average yield of 9.5%. About 57% of our new investments were in first lien secured debt and 39% was in second lien secured debt, which is in line with our strategy of developing a lower-risk, more secured portfolio.
Net investment income was $0.18 per share, which included $0.02 per share of a fee waiver. NAV remained relatively stable at $9.10 per share.
The small reduction in NAV was due primarily to mark-to-market on our credit facilities and bonds. After quarter end, and consistent with their periodic review, the board approved an amended investment advisory agreement lowering the base management fee to 1.5% per annum and the incentive fee to $0.175 -- 17.5%.
The incentive fee floor will remain at 7%. This new agreement will take effect on January 1, 2018.
The existing 16% overall waiver of fees will remain in place until then. As of September 30th, we had taxable spillover of $0.26 per share.
With the new fee agreement, a stable underlying portfolio and substantial spillover, we believe that PNNT stock should be able to provide investors with an attractive dividend stream along with potential upside as the energy market stabilizes and our equity investments mature. Our primary business of financing middle-market sponsors has remained robust.
We manage relationships with about 400 financial sponsors across the country from our offices in New York, Los Angeles, Chicago, Houston and London. We have done business with about 180 sponsors.
Due to the wide funnel of deal flow that we receive relative to the size of our vehicles, we can be extremely selective with our investments. In this environment, we have not only been extremely selective, but we have generally moved up capital structures to more secure investments.
A reminder about our long-term track record. PNNT was in business in 2007, primarily as a subordinated and mezzanine investor, then as now focused on financing middle-market financial sponsors.
Our performance through the global financial crisis and recession was excellent. Average EBITDA of the underlying portfolio was down about 7% to the bottom of the recession.
The average high yield company EBITDA was down about 40% during that same timeframe. As a result, we had few defaults and attractive recoveries on that primarily subordinated and mezzanine portfolio.
In this environment, due to our deep and broad investment team, we are seeing more deals than ever. We are using our tried and true underwriting discipline in middle-market sponsored deals.
We generally are high in the capital stack and have substantial junior capital beneath us to provide cushion. As a result, we believe that we can continue to provide attractive risk-adjusted returns for our shareholders even in this environment.
We remain focused on long-term value and making investments that will perform well over an extended period of time and can withstand different business cycles. Our focus continues to be on companies and structures that are more defensive, have low leverage, strong covenants and high returns.
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 credit providers 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.
Our portfolio is constructed to withstand market and economic volatility. In general, our overall portfolio is performing well.
We have cash interest coverage ratio of 2.7x and a debt-to-EBITDA ratio of 5.2x at cost on our cash flow loans. With asset yields coming down over the last several years, we are looking to create attractive risk-adjusted returns in our portfolio.
We have a three point plan to do so. Number one, we are focused on lower risk, primarily secured investments, thereby reducing the volatility of our earnings stream.
Investments secured by either a first or second lien are about 75% of the portfolio. We -- number two, we are also focused on reducing risk from the standpoint of diversification.
As our portfolio rotates we intend to have a more granular portfolio with modest bite sizes relative to our overall capital. Number three, we look forward to continuing to monetize the equity portion of our portfolio.
Over time, we are targeting equity being between 5% and 10% of our overall portfolio. As of September 30, it was 15% of the portfolio.
With regard to our capital structure we remain comfortable with our target regulatory debt-to-equity ratio of 0.6x to 0.8x. We are currently at 0.5x regulatory debt-to-equity.
On an overall basis, we are targeting overall GAAP leverage of 0.8x. As of today, we are currently at 0.8x overall GAAP leverage and our net leverage debt minus cash is 0.75x.
With regard to our energy portfolio, there are four names in our energy portfolio. The two that are related to oil field services, American Gilsonite and U.S.
Well, have started performing better as drilling activity has picked up. Increased values on those two names helped our NAV over the past two quarters.
With regard to our two E&P names, Ram and ETX, they have been aided by the modestly-higher oil and gas prices. It will take time for us to maximize our recovery.
Even if the two E&P investments were marked to zero, our NAV would have been $7.80 as of September 30. This indicates the potential upside value to our stock as we monetize those and other investments, over time.
During the quarter, we recast the capital structure of Ram Energy. The new capital structure consists only of a $35 million tranche of first lien debt and the rest of the capital structure is common equity.
This simplified structure provides multiple benefits for Ram and PNNT. First, the reduced debt profile positions Ram to execute its strategy.
Second, for PNNT, the reduced debt load comes with the requirement that Ram pay at least half its interest in cash. With the new capital structure, Ram paid all of its interest in cash for the quarter ended September 30.
We are encouraged that the energy markets are potentially rebounding but more importantly somewhat stable. This enhances the M&A environment in the sector and our ability to evaluate strategic options for Ram and our other energy-related companies.
PennantPark Investment Corporation has had only 12 companies go on nonaccrual out of 191 investments since inception over ten years ago. Further, we are proud that even though we had those nonaccruals, we've been able to preserve capital for our shareholders.
Through hard work, patience and judicious additional investments in capital and personnel in those companies, we've been able to find ways to add value. Based on values as of September 30, today we have recovered about 82% of capital invested in those 12 companies that have been on nonaccrual since inception of the firm.
We currently have no investments on nonaccrual. It might be helpful to highlight our long-term track record over 10 years, including the global financial crisis and recession.
Since inception, PNNT has made 191 investments totaling about $4.5 billion at an average yield of about 13%. Including both realized and unrealized losses, PNNT lost only about 35 basis points annually.
We're proud of this track record, which includes both our energy investments as well as our primarily subordinated debt investments made prior to the financial crisis. In terms of new investments, our focus is on senior-oriented cash-paying secured assets.
On virtually all of these investments, we've known these particular companies for a while, have studied the industries or have a strong relationship with a sponsor. Let's walk through some of the highlights.
We invested $20 million in the first lien term loan and $2 million in the revolver for Allied America, which is an operator of destination management services, primarily for corporate and business events. CI Capital is the sponsor.
SFP Holding is a fire and life safety company, including fire sprinkler and suppression services. We lent $17 million of first lien term loan and invested $1 million of common equity.
CI Capital is the sponsor. We invested $36 million in the second lien term loan and $3 million of common equity in DecoPac, which is a supplier and marketer of cake decorating solutions for bakeries and cake decorating enthusiasts.
Snow Phipps is the sponsor. eCommission is an online finance platform that specializes in providing real estate agents with advance payment of commissions.
We invested $20 million in the first lien term loan and $1 million in the equity. Lightyear Capital is the sponsor.
Turning to the outlook. We believe that the remainder of 2017 will be active due to growth in M&A-driven financings.
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
Thank you, Art. For the quarter ended September 30, 2017, net investment income totaled $0.18 per share.
Looking at some of the expense categories, management fees after waiver totaled $7 million, general and administrative expenses totaled $2 million and interest expense totaled $6 million. During the quarter ended September 30th, unrealized loss from investments was flat.
We also had unrealized losses from our various debt instruments of $5 million or $0.07 per share. We had about $200,000 or about $0.01 per share of realized losses.
Consequently, NAV per share went down $0.08 from $9.18 to $9.10 per share. As a reminder, our entire portfolio, credit facility and senior notes are marked-to-market by our Board of Directors each quarter using the exit price provided by independent valuation firms, securities and exchanges or independent broker-dealer quotations when active markets are available under ASC 820 and 825.
In cases where broker-dealer quotes are inactive, we use independent valuation firms to value the investments. Our overall debt portfolio has a weighted average yield of 11.5%.
On September 30th, our portfolio consisted of 55 companies across 27 different industries. The portfolio was invested in 40% first lien secured debt, 35% in second lien secured debt, 10% in subordinated debt and 15% in preferred and common equity.
82% of the portfolio had a floating rate. Now let me turn the call back to Art.
Art Penn
Thanks, Aviv. To conclude, we want to reiterate our mission.
Our goal is to generate attractive risk-adjusted returns through income, coupled with long-term preservation of capital. Everything we do is aligned to that goal.
We try to find less risky middle-market companies that have high free cash flow conversion. We capture that free cash flow primarily in debt instruments, and we pay out those contractual cash flows in the form of dividends to our shareholders.
In closing, I'd like to thank our extremely talented team of professionals for their commitment and dedication. Thank you, all for your time today and for your continued investment and confidence in us.
That concludes our remarks. At this time, I would like to open up the call to questions.
Operator
Thank you [Operator Instructions]. Our first question is from Casey Alexander of Compass Point Research.
Your line is open.
Casey Alexander
First of all, let me state, I think that the shareholders should be very pleased with the reduced management and incentive fees that puts you in line with best-in-class PDC, so I think that, that's a terrific decision by the Board of Directors. Let me ask you a couple of questions.
First of all, your leverage ratio coming out of the quarter was around 0.81 times, which is sort of the north end of where you want to be. But net leverage ratio is more like 0.7 times.
Which should we be looking at when we're judging how you stand versus your target leverage ratio?
Art Penn
So thanks, Casey. We don't really hold that much cash, it's just kind of situational.
So total leverage, net leverage 0.75, 0.8 times, that's kind of the zone where we're going to be and where we're operating where we can maintain our investment-grade rating. And we think it's also prudent given the environment and the portfolio.
Casey Alexander
Okay. Secondly, it looks like you took your SBA debentures down some during the quarter, and yet at the same point in time, you took your investments up.
Could you give us some color on, is that reflective of the change in sort of your underwriting scheme towards maybe larger deals that aren't -- that don't fit the requirements of SBA? Or could you give us some color on that, please?
Art Penn
Sure, it's a good question. And look, SBIC I for us is coming to its maturity.
So we -- believe it or not, it's already been -- this is a 10 year loan, essentially, so we're coming towards the end of SBIC I, so we do need to start paying that off at the same time as we are -- our goal is to ramp SBIC II and then potentially get into SBIC III. So it's really just managing the maturity of our liabilities.
Casey Alexander
So that would be, as companies pay down in SBIC I, you're using that as an opportunity to break that down, but you can still originate into SBIC II?
Art Penn
That's correct.
Casey Alexander
Okay. That's very helpful.
And then can you give us some sense, environmentally, how things look out there right now, and also what type of year-end activity you expect? And if you think tax reform is affecting the type -- expected tax reform is affecting the type of year-end activity that you -- is it changing at all?
Are things happening that are different than what you might normally see at year-end?
Art Penn
Yes, so these are all good questions. I think the environment remains the same, which is, it's a very toppy environment, overall.
The size of our vehicles relative to our team and the origination flow that's coming in, we're comfortable investing across our platform, PNNT, PFLT and otherwise, and we're getting a lot of looks and we can be very selective about what comes into these portfolio. So kind of our origination pace that you've seen the last few quarters, probably in a general ballpark, kind of continues.
We -- interestingly, we have not yet seen any changes around tax reform in terms of activity, M&A activity, in part because I don't think anyone really knows how it's all going to shake out until it's actually done. But it might be an interesting thing to see when it's done and dusted if people behave differently in the 1 month or less that we have in 2017 to do things.
Casey Alexander
Yes, well, I was just kind of wondering if maybe sellers might be saying, can we push this off into '18 in anticipation of potentially more favorable tax treatment on the sale, I was just wondering about that. But that's all I have.
I appreciate your taking my questions.
Operator
The next question is from Paul Johnson of KBW.
Paul Johnson
Just sort of given its importance to boosting earnings, I'm just sort of curious, generally how much control do you guys have over the sale process of your equity investments?
Art Penn
It's a good question, it's just really case by case. At Ram, we have full control.
ETX, we're one of a few lead equity holders. American Gilsonite, we're one of the few lead equity holders.
And U.S. Well, we're not a lead equity holder.
We're along for the ride there.
Paul Johnson
Okay. So we're like at 15% or so, I think, on fair value basis of the portfolio.
I know you mentioned like 5% to 10% as sort of your goal, over time. Do you guys have any sort of timeline for that goal, over time?
Do you guys have any sort of timeline for that goal?
Art Penn
Look, we'd like to get there as soon as possible while we maximize value for our shareholders. So we've said, the oil and gas investments, it may take us a while.
Certainly, the environment is feeling better. Certainly, with a stable and -- stable environment in the underlying prices, M&A is picking up and it allows people to strike deals.
Our goal is to move it along as quickly as possible while at the same time maximizing value. We could have two years ago disgorged a lot of these investments at a terrible price, and the decision was, at that point in time, that for -- in the long-term interest of shareholders, that it made sense to wait, to be more judicious and thoughtful about how and when we exited so that we could maximize value.
We never wanted to feel like we were exiting exactly the wrong time. So it's feeling like a better time now.
We hope it continues to be better, and we're hoping that over the coming couple of years, we can monetize the energy and energy investments as well as our equity portfolio and take those cash proceeds and invest them in cash-paying debt instruments.
Paul Johnson
Sure, sure, sure, that's appreciated. And then my last question is, just as you rotate your portfolio into more first lien senior secured, you guys sort of have an idea of where your portfolio yield trends to over time?
Art Penn
Yes, no, we're -- I think we've said right now, the blended yield is something like the mid-11's; that's certainly going to come down, if this environment continues, of course. LIBOR is moving up and in the right direction, so that may be a countervailing thing.
But look, over time, should it come down to 11% or maybe a little bit lower, sure. The average yield on the deals we did this past quarter was in the mid-9's.
That's probably a little lower than targeted. We had some really nice top-of-the-capital structure stuff that we felt very comfortable from the capital preservation.
So does it end up in the 10% or 11% zone on a blended basis? It's probably something like that.
Operator
Our next question is from Doug Mewhirter of SunTrust.
Doug Mewhirter
I had a question on your -- the management and incentive fee, the new management and incentive fee and, first, I do think that was the right move for shareholders given your changing portfolio and structure and the changing environment. I was wondering if you could shed some light over how you calculated that or how you decided upon that.
Was it -- did you sort of back into what your expected earnings power might look like pre-fee and then, say, okay, well, we would -- if we cut this much out, we can maintain earnings power? Or is it more, did you sort of back into it from your current fee waiver and sort of understand -- and sort of looked at where your portfolio is going from a credit perspective?
Or was there some sort of different process?
Art Penn
Yes, it's a good question. It was a board-driven process.
And a lot of what you said did go into it. I mean, we elected a couple of years ago to take the 16% waiver because we didn't think it right that we earn $0.10 of management or incentive fee on an energy portfolio which was underperforming and has underperformed.
So that 16% came from the portion of our portfolio cost that was in energy. This fee construct that's now permanent is roughly in the same ballpark, 1.5% and 17.5%.
Also, what went into it is looking at the underlying investments and the move up in capital structure and the move down in yield, looking at the comparables and the peers and what was going on in the industry and among other factors. So the board spent a lot of time on it over the last year or two as they have with that fee waiver.
So we wanted to provide a clear view for shareholders in terms of what the arrangement was going forward, so models could be calculated and cash flows could be calculated. And we also wanted shareholders to participate in the upside.
We basically cut our fee due primarily energy; the rest of our track record over 10 years including the crisis has been very strong, but we wanted shareholders to participate, hopefully, in the upside in energy as it happens.
Doug Mewhirter
Just shifting gears to my second and final question. How would you characterize your, I guess, year-over-year trailing 12 month sales and/or EBITDA growth for your nonenergy -- the underlying companies that are not energy in your portfolio?
Art Penn
Yes. It's -- I don't have the exact number at my fingertips, Doug, but it's consistent with a slowly-growing economy, overall.
Our portfolio, kind of is generally broadly across the economy and it's a generally slow-growth environment. There, obviously, are some companies doing really well, some companies that are doing less well.
But as a general proposition, what you're seeing in our economy is kind of what you're seeing in our portfolio, which is just fine for a primarily debt portfolio.
Operator
Thank you. Our next question is from Rick Shane of JPMorgan.
Your line is open.
Rick Shane
When we look at the total investment income, there was a sequential decline, and that really seems to be driven by income, specifically interest income off the affiliated investments. I'm trying to get a sense of what the run rate is going forward.
Is there anything that created a quarterly drag or should we sort of start thinking about investment income off that $27.9 million quarterly base?
Art Penn
So the real culprit was the recasting of the capital structure of Ram Energy. So just to be very granular about it, we had a $70 million loan to Ram that had a 10% coupon on it.
It was paying all PIK over the quarter. At the beginning of the quarter, we recasted that into $35 million of first lien, 8% and $35 million of equity.
So you took $70 million loan that was PIK-ing at 10%, you now reduced it to $35 million at 8%. That 8% for the quarter ended September 30th was paid in cash.
And going forward, that $35 million will be an 8% yielding piece of paper, at a minimum 4% cash up to 4% PIK? So that's the real culprit in the run rate that was reflected in the 9/30 numbers.
So kind of what you're seeing is kind of the run rate going forward. We typically, and you can do a statistical analysis over time, we typically have at least $0.02 a share of other income, which is prepayment penalties, amendment fees, waivers, et cetera.
Sometimes it's a little bit more, sometimes it's a little bit less. But kind of the run rate that you're seeing for the quarter ended September is kind of the expected, if you want to say the expected run rate, over time.
We'll see where LIBOR goes. We'll see if we'll see more spread compression in the portfolio.
I don't know -- I don't know where that's going to all going to shake out, but that gives you a sense about how you should be thinking about run rate.
Rick Shane
So, Art, I hear what you're saying there, and I understand the other income fluctuates and that was zero this quarter and, again, that's a relatively volatile metric. But when we look at the interest income off affiliated, that fell about $3 million.
If you were to just zero a $70 million 10% investment, that's about $1.75 million a quarter. So there's presumably something else there as well.
That explains maybe 60% of the decline in interest income there but not 100%.
Art Penn
Good question. Don't -- I'm looking at Aviv, we don't know off the top of our head.
Let's go back to the numbers after the call and we'll give you a shout.
Operator
[Operator Instructions] Our next question is from Kyle Joseph of Jefferies.
Kyle Joseph
Thanks for taking my questions, most of them have been answered, but I wanted to delve into credit a little bit. Obviously, your guys' credit performance has been very strong.
That hasn't necessarily been the case for the industry. Just kind of wondering how you guys have been able to differentiate yourselves in terms of credit performance and others.
Is it because of where they're investing in the capital spectrum, or specific industries that they're investing in?
Art Penn
It's a good question. We don't study our peers that much.
What we do is try to focus on what we've done right over time and where we've made mistakes over time. And we do try to continuously improve and continuously learn lessons and there's always lessons to learn.
Our middle-market sponsor financing business, which is something we've been doing for a decade now, originally mostly in subordinated or mezzanine debt now, now less so. It's the same style of investing we've had.
We find companies that generally have high free cash flow conversion. I think one of the nice things in this market is sponsors are putting in records amount of equity as cushion.
I mean, if you compare the environment we're in today versus the environment in 2007, for good or for ill, the equity cushions and the equity checks are larger. So that does provide more inherent comfort and cushion should something go wrong.
That said, there's no guarantee that these loans will pay off and there's no guarantees that the credits are any better. We have avoided retail.
We have avoided restaurants. So that's been helpful.
And we try to find these companies that we think will have sustainable free cash flow, so that's what we're sticking to and it's worked pretty well. But again, there's always lessons to learn, there's always things that we're taking in.
And looking at this environment, one of the biggest things you've got to focus on is the risk of secular change. What happens when an Amazon comes on site?
What happens to industries? What's going to happen when the driverless car comes in?
I mean, we're always trying to, to the extent we can, analyze these things, try to predict, try to protect ourselves, but that is something, as investors, we all have to focus on and with a greater and greater sense of urgency as change keeps accelerating.
Kyle Joseph
And then just in terms of this quarter, given we're kind of two thirds of the way through it. We've seen a little bit more volatility and broader credit market.
You guys had an active quarter ending 9/30 in terms of originations. Can you give us any sense of sort of the characteristics of the market this quarter?
Art Penn
Yes. So we -- it was a relatively few amount of deals that we did in the quarter ended September 30th.
Average debt to EBITDA, 4.1x on this slate of deals. These were idiosyncratic deals where we had a really good sponsor relationship.
And virtually all these cases, big equity checks. I mean, one of them, there was a 74% equity -- two of them had a 74% equity check interestingly enough, one had a 65% equity check, one had a 60% equity check.
The lowest equity check we did this quarter was 37% and interestingly, we think that deal may be getting taken out in the not-too-distant future. So to my point about big equity, equity cushions beneath us, is kind of what we're seeing.
So we were not buying the market. We were buying individual idiosyncratic deals with sponsors that we've done a lot of business with over time.
Operator
And the next question is from Jonathan Bock of Wells Fargo Securities.
Joseph Mazzoli
Joe Mazzoli, filling in for Jonathan Bock. So with new investments this quarter more focused and kind of the path forward, more focused on first lien or senior secured investments, how should we think about maybe your ability to increase the regulatory leverage ratio, going forward?
I know you guided, I think, it was 0.6 to 0.8, and I think that was kind of on a GAAP basis. But as the capital structure potentially shifts more upmarket, would you expect that regulatory leverage to increase?
Art Penn
Yes, it's a good question, Joe, and this is something we're monitoring, but for regulatory purposes as well as total GAAP purposes. There's a lot of things going on here.
Number one is what's prudent and judicious in this market relative to our underlying portfolio. Number two, we are focused on maintaining our investment-grade rating.
And number three, we still have work to do, in particular, our energy portfolio, which takes time, effort and focus and is not totally set yet. It's something that requires focus.
So we think for now, kind of 0.8 GAAP leverage is the zone we're operating to and that shakes out to 0.5 or 0.6 regulatory. As we hopefully work the energy portfolio, get liquid on some of our equity co-invest, derisk -- continue to derisk the portfolio, we'll continue to evaluate and come up for air and evaluate both regulatory and GAAP.
But first things first, we got to operate this portfolio. We got to get these companies on solid, really solid footing and continue to do the work in the underlying portfolio to derisk it before we get there.
Joseph Mazzoli
That's very helpful. And just quickly, so we've got $194 million of SBA debentures.
So I'm suspecting that we should expect that to kind of go down over the next couple of quarters to that $150 million level, with the one license remaining. Are you actively seeking a third license?
Art Penn
So I'll take it over to Aviv. But no, you should not expect an overall balance going down because while SBIC I is going down over time gradually, SBIC II should be growing.
Aviv, would you...?
Aviv Efrat
Yes, that is true. You will see SBIC I, as mentioned earlier, as deals are rolling off because we did not want to reinvest it in [great tail] risk.
We will pay off SBIC I. Conversely, as new deals come in the door, that's basically the SBIC II, we'll gladly ramp that up and we have plenty of room there to grow that.
So we should look at the $200 million SBIC II that you have roughly right now. Liability is roughly what it's going to be going forward as SBIC II ramps up a little bit.
Joseph Mazzoli
And then just as a final question here. Certainly some significant progress with Ram Energy and it's good to know that the energy portfolio is stabilizing.
But specifically for the recasting of the balance sheet, improving the cash flow to PennantPark, is this something that you see as an opportunity within other portfolio companies to increase the cash flow component of investment income? I think PIK is about 14% in the most recent quarter.
Do you see other opportunities to reduce PIK income?
Art Penn
We agree. We want to -- I don't know, another one of our goals is to reduce the amount of PIK income.
So when we can do that, we do that. I don't think there's no comparable situation to Ram out there that's large like that.
But certainly, we would like to exit at appropriate prices on situations where we have PIK income and we want to replace it with cash pay income. So that's certainly a goal.
Operator
At this time, I see no other questions in queue. I'll turn it to Mr.
Penn for closing remarks.
Art Penn
I just want to thank everybody for their focus and attention and their support, and we look forward to speaking with you all in early to mid-February, which will be our next quarterly earnings. Thank you very much for being on the call today.
Operator
Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program.
You may now disconnect. Everyone, have a great day.