Nov 18, 2021
Operator
Good morning and welcome to the PennantPark Investment Corporation’s Fourth Fiscal Quarter 2021 Earnings Conference Call. Today’s call is being recorded.
At this time, all participants have been placed in a listen-only mode. The call will be open for question-and-answer session, following the speakers’ remarks.
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, please go ahead.
Art Penn
Good morning, everyone. I’d like to welcome you to PennantPark Investment Corporation’s fourth fiscal quarter 2021 earnings conference call.
I’m joined today by; Richard Cheung, our Chief Financial Officer. Richard, please start off by disclosing some general conference call information and include a discussion about forward-looking statements.
Richard Cheung
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 broadcasts of this call in any form is strictly prohibited. Audio replay of the call will be available by using the telephone numbers and pin provided in our earnings press release, as well as on our website.
I also like to call your attention to the customary Safe Harbor disclosure in our press release regarding forward-looking information. Today’s conference call may also include forward-looking statements and projections, and we ask that you refer to our most recent filings with the SEC for important factors that could cause actual results to differ materially from these projections.
We do not undertake to update our forward-looking statements unless required by law. To obtain copies of our latest SEC filings, please visit our website at pennantpark.com or call us at 212-905-1000.
At this time, I’d like to turn the call back to our Chairman and Chief Executive Officer, Art Penn.
Art Penn
Thanks, Richard. I’m going to spend a few minutes discussing how we fared in the quarter ended September 30th.
How the portfolio is positioned for the upcoming quarters, our capital structure and liquidity, the financials and then open it up for Q&A. We are pleased with our performance this past quarter.
We achieved a 2.6% increase in adjusted NAV. Adjusted NAV went up $0.25 per share from $9.58 to $9.83 per share.
We are particularly pleased that our NAV today is up over 12% from what it was pre-COVID on December 31st, 2019. Net investment income was $0.17 per share, including $0.03 per share in other income, which includes one-time dividend payments on equity positions.
These dividend payments highlight the value of our equity portfolio. We have several portfolio companies in which our equity investments have materially appreciated in value, as they are benefiting from the recovery.
This is solidifying and bolstering our NAV. As part of our business model alongside the debt investments we make, we selectively choose to co-invest in the equity side by side with the financial sponsor.
Our returns on these equity co-investments have been excellent over time. Overall, for our platform from inception through September 30th, our $246 million of equity co-investments have generated an IRR of 28% and a multiple on invested capital of 3 times.
In a world where investors may want to understand differentiation among middle-market lenders, our long-term returns on our equity co-investment program are a clear differentiator. With regard to net investment income, we have a three-pronged strategy which includes, one, growing assets on balance sheet of PNNT, as we move towards our target leverage ratio of 1.25 times debt to equity from 0.9 times.
Number two, growing our PSLF JV with Pantheon to about $550 million of assets from approximately $405 million of assets through balance sheet optimization, including a potential securitization, and three, the opportunity to rotate out of our equity investments over time and into cash pay yield instruments. We are well on our way to implementing the NII growth strategy.
The September quarter was a busy period for us at PNNT, as we originated $165 million of new loans far outpacing the repayment activity. As a result, the investment portfolio of PNNT increased by approximately $110 million to $1.26 billion from $1.1 5 billion.
PSLF’s investment portfolio also grew this quarter to $405 million from $386 million, an increase of $19 million. PNNT generated $9 million of cash proceeds from our equity portfolio in the September quarter.
We continue to be active since September 30th, PNNT has had new funded investments, net of repayments and sales of $98 million. We are focused on the core middle market, which we generally defined as companies with between $10 million and $50 million of EBITDA.
We like the core middle market, because it is below the threshold and does not compete with a broadly syndicated loan or high yield markets. As such, we do not compete with markets where leverage is higher, equity cushion lower, covenants are light, wide or non-existent, information rights are fewer, EBITDA adjustments are higher and less diligence and the timeframe for making an investment decision is compressed.
On the other hand, where we focus on the core middle market, generally our capital is more important to the borrower. As such, leverage is lower, equity cushion is higher, we have real quarterly maintenance covenants.
We receive monthly financial statements to be on top of the company, EBITDA adjustments are more diligence than achievable and we typically have six to eight weeks to make thoughtful and careful investment decisions. According to S&P, loans with companies with less than $50 million of EBITDA have a lower default rate and a higher recovery rate than those loans to companies with higher EBITDA.
Our portfolio performance remains strong. As of September 30th, average debt to EBITDA on the portfolio was 4.9 times and the average interest coverage ratio, the amount by which cash interest income exceeds cash interest expense was 3.2 times.
We have no non-accruals in our book in PNNT and PSLF. The company is highly diversified with 97 companies in 29 different industries.
Since inception, PNNT has invested $6.4 billion and an average yield of 12%. This compares to a loss ratio of about 13 basis points annually.
This strong track record includes our energy investments, our primarily subordinated debt investments made prior to the financial crisis and now the pandemic. As we analyze our 14-year track record at PNNT, it is clear that our returns took a step function up starting in 2015.
The IRR of our investments made prior to 2015 was 9.8%. Since 2015, we have achieved a 13.9% IRR.
We believe this is due to four key factors. Number one, better company selection within industry verticals where we have domain expertise.
Two, avoidance of investments in the energy industry and other cyclicals. Three, excellent results from our equity co-investment program.
And four, the substantially increased focus on core middle market companies, where our capital could be more important to the underlying borrowers. Core middle market to us means below $50 million of EBITDA.
Our performance through the global financial crisis and recession was good. During that recession, the weighted average EBITDA for underlying portfolio companies declined by 7.2% at the bottom of that recession.
This compares to the average EBITDA decline of the Bloomberg North American high yield index of 42%. Based on the tracking of EBITDA of our underlying companies through COVID, our EBITDA decline was substantially less than what it was during the global financial crisis.
Meeting EBITDA decline at the bottom of COVID in June 2020 was 1.4%. This compares favorably to the 7% decline in EBITDA during COVID of the Credit Suisse high yield index.
Many of our portfolio companies are in industries such as government services, healthcare, technology, software, business services and select consumer companies, where we have meaningful domain expertise. We believe that we are experiencing a strong recovery with some companies and industries being beneficiaries in the environment.
We are pleased that we have significant equity investments and several of these companies, which can substantially move the needle of our NAV. PNNT has among its lowest percentage of energy investments since 2013.
Energy investments represent only – 6.5% of the overall portfolio. RAM is on stable operational and financial footing and has benefited from higher prices and production.
While RAM analyzes it’s hedging weekly. Today, the majority of its oil and NGL liquid production is unhedged to the upside, which comprises the majority of revenues.
Approximately two-thirds of its natural gas production is hedged at various – varying prices. As a result, RAM will continue to benefit from rising prices.
As of September 30th, equity represented approximately 32% of the portfolio. Our long-term goal continues to target that percentage down to about 10% of the portfolio.
As we monetize, the equity portfolio, we’re looking forward to investing the cash and to yielding debt instruments to increase net investment income. The outlook for new loans is attractive.
We are as busy as we have ever been in 14 years in business, reviewing and doing new deals with our experienced, talented and growing team, our wide funnels producing active deal flow that we can then carefully and thoughtfully analyze, so that we can be selective as to what ends up in our portfolio. Let me now turn the call over to Richard, our CFO to take us through the financial results.
Richard Cheung
Thank you, Art. For the quarter ended September 30th, net investment income totaled $0.17 per share, which includes a one-time dividend payments from equity investments of $0.03 per share.
Looking at some of the expense categories, base management fee and performance-based incentive fees totaled $5.2 million. Taxes, general and administrative expenses totaled $1 million, and the interest expense totaled $5.7 million.
Net realized gains on investments was $5.6 million or $0.08 per share. Unrealized gains on our investments were $7.6 million or $0.11 per share.
Change in the value of our credit facility increased our NAV by $0.01 per share. Our net investment income was in excess of our dividend by $0.05 per share.
Consequently, NAV per share went from $9.59 per share to $9.85 per share, up 2.7% from the prior quarter. Adjusted NAV, excluding the mark-to-market of our liabilities was $9.83 per share, up 2.6% from $9.58 per share to prior quarter.
As a reminder, our entire portfolio credit facility and senior notes are marked-to-market and our Board of Directors each quarter using the exit price provided by independent valuation firms. Securities Exchanges or independent broker-dealer quotes when active markets are available under ASC 820 and 825.
In cases where broker-dealer quotes are inactive, we use independent valuation firms to value the investments. Our GAAP debt to equity ratio, net of cash was 0.9 times.
We have a strong capital structure with diversified funding sources and no near-term maturities. We have a $435 million of revolving credit facility maturing in 2024 with a syndicated banks.
$64 million of SBA debentures maturing in 2027 and 2028, $86 million of unsecured notes maturing in 2024 and $150 million of unsecured notes maturing in 2026. Subsequent to September 30th, PNNT issued $165 million of unsecured notes maturing in 2026 with an interest rate of 4%.
We used $86.3 million of the proceeds to fully redeem the 2024 notes which pay an interest of 5.5%. This will reduce our annual interest expense by approximately $1.3 million and will be accretive to net investment income.
Our overall debt portfolio has a weighted average yield of 9%. On September 30th, our portfolio consisted of 97 companies across 29 different industries.
The portfolio was invested 44% in first lien senior secured debt, 14% in second lien secured debt, 10% in subordinated debt, including 5% in PSLF, and 32% in preferred and common equity, including 3% in PSLF. 92% of the debt portfolio has a floating rate, of which, has a LIBOR floor, the average LIBOR floor is 1%.
Now, let me turn the call back to Art.
Art Penn
Thanks, Richard. To conclude, we want to reiterate our mission.
Our goal is to generate attractive risk adjusted returns through income, coupled with long-term preservation of capital. Everything we do is aligned to that goal, we try to find less risky, middle market companies that have high 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. And first we’ll go to Casey Alexander from Compass Point.
Your line is open.
Casey Alexander
Yeah, hi. Good morning.
First is just kind of a maintenance question for Richard. Richard, in the redemption of the 2024 notes, what will the one-time charge be for the acceleration of debt offering expenses?
And then secondly, where do you intend to enter that on the income statement? Because it used to be that those were charged off against NII.
Now, we’ve seen several BDCs that are charging that as a capital loss instead of a pre-NII loss?
Richard Cheung
Yeah. Hey, Casey, this is Richard.
Yeah, the unamortized offering cost at September 30th was $1.75 million related to the 2024 notes. That is the kind of charge offs for the first quarter of 2022.
We do intend to put that through NII, but it’s interesting that you mentioned that it’s something that we could maybe explore with probably some of the audit firm. But at this point, you know we believe it’ll run through interest expense.
Casey Alexander
Yeah, we’ve seen several companies recently that have charged that as a capital loss. So you might want to take a look at that.
Secondly, I’d love to hear your thoughts on not changing in a material way, the quarter-over-quarter mark on RAM, simply because you know, it was maybe the best quarter for price performance of the underlying energy benchmarks. We took a look at the balance sheet of RAM and it’s built up a nice amount of cash much of which probably came in this last quarter.
And not that that we’re necessarily unhappy about not marking it up, because if it’s cheaper relative to the energy benchmarks and that attracts more buying interest than we’re all for it. But we’d love to hear your thoughts on not changing the mark on RAM.
Art Penn
Yeah, so yeah you know look the – Thank you, Casey, this is Art. The valuation firms do the valuations every quarter.
I think they’re primarily focused on the M&A market for assets like this. And unfortunately there hasn’t been a lot going on to-date.
We certainly hope that as oil and gas continues to perform well and have a healthy price like this, that there will be more M&A activity. And then once we see M&A activity, a, it’ll establish value better and b, perhaps we can sell RAM into a bit of an M&A wave and get liquid on the name.
So you know I think it’s a good point about the company doing well, it’s generating cash flow, its cash is building on the balance sheet. You know really good performance not shocking given the price of oil and gas.
I think what’s really driving the valuation for the valuation firms is kind of you know the M&A or a lack thereof. And you know frankly it’s tough to really put a pin in it right now because there hasn’t been much M&A.
Casey Alexander
Okay, thank you for that. I’m curious if, Art, if you could share with me sort of the Board’s thoughts on the dividend, you’ve been out earning the dividend for a while now.
Is it simply that that the Board’s not comfortable penning it up yet because of the still the amount of equity? Or you know, what will it take to start that conversation?
Art Penn
And it’s a good question and the Board talks about it all the time. But first, I want to – I think they’re pleased and I’m pleased that we are covering the dividend you know reasonably well and we’re not worried about covering the dividend, so that’s point one thankfully.
This quarter, we had $0.04 of other income. So if you get away with that $0.04, you’d be at $0.13, right.
So –
Casey Alexander
But that, you know, other income comes every quarter and when we back out the dividend from the equity company that also eliminates the incentive fee. So really it’s not even $0.03 from that it’s more like $0.02.
So, you know, so the really, and other income comes in every quarter in some form or fashion. So really, I would calculate the core run rate of this quarter of having been $0.15.
Art Penn
All right, so Casey, why do you want to rate dividend too?
Casey Alexander
Just as you know –
Art Penn
Look I mean, I think we, you know, other income can – it has been zero on occasion and has been $0.04, this quarter was $0.04. So, you know, we know we want – we know our dividend is recurring, and we don’t want to – and it’s a good question, and you’ve raised a why don’t you have a variable dividend?
And that’s something we could talk about you know offline. But I think in our minds, we’ve been saying, geez, whatever our dividend is, we don’t – we want to sleep at night knowing that we’re covering it, and that there’s some cushion and that our shareholders know and are worried about whatever our dividend is.
So, we’re just coming out of the time when we’re – whether we’re running at $0.13 or $0.14 or whatever run rate you think you’re modeling. You’re right, I think as we grow PNNT, as we grow the joint venture and importantly you know as we rotate the equity positions, the chunky equity positions, we certainly would like to and would hope to raise the dividend, but it is something that’s on a quarterly discussion every quarter.
Let’s see where we end up this upcoming quarter, both in terms of you know the balance sheet and our run rate. And importantly you know how we’re feeling about the rotation.
But it’s the right question and thank you for asking it. And we could certainly talk about all the different dividend formulations offline.
But in our minds, we wanted to play it conservative.
Casey Alexander
Right, great. Thank you for taking my questions.
I appreciate it.
Art Penn
Thank you.
Operator
And next we’ll go to Robert Dodd from Raymond James. Your line is open.
Robert Dodd
Hi, guys. Congrats on the quarter.
Following up to Casey’s question about RAM. I mean, if I look at NAV, obviously, the enterprise value you’re carrying is down, where reserve value is up, cash balance is up, you know, EBITDA is up.
You know and cash flow is up, et cetera, year-over-year, but the enterprise value implied in the market. Is that – and I understand your comments are that the valuation consultant looks at that?
Can you give us any idea what metrics they’re actually looking at? I mean, clearly, it’s not an enterprise value to EBITDA or anything like that or even an enterprise value to reserve.
So I mean what’s the framework that they’re using to evaluate that given all the metrics move one way and their fair value year-over-year with the other?
Art Penn
Yeah and like with Casey, it sounds like Raymond James has a bid for RAM which we’re always happy to entertain, Robert. So look, I mean you know the only thing –
Robert Dodd
Typically I do not have a bid for that. That I –
Art Penn
All the – all these elements are taken into account, productions taken into account, reserves are taken into account, the comparables are taken into account. And, of course, the M&A activity or lack thereof is taken into account and all these things go into the bucket and it’s a question of what – which are these factors do the valuation firms prioritize?
What do they lean on? And you know recently it’s been you know kind of where, as we all know, we are – we would be more than happy to entertain proposals on this company from people who want to buy the company, which ultimately then becomes, okay, what are people willing to pay for the company as much as production and reserves and all these other things.
So look there just hasn’t been the trades yet. I mean, I think we’re starting to see some action in in E&P.
And you know as this last longer inevitably, we hope that we will see more, but they take all these factors into account. But like – at this point, it’s you know what is the – as we always say, what’s the exit value to the market participants in an orderly market?
That’s you know, that’s the accountants and evaluation firms will always ask that question of themselves, we ask that question as management, what’s the exit value to market participants in an orderly market of this particular asset? So that’s what everyone’s trying to get at.
Robert Dodd
Understood. And then one more general question about obviously, the equity book overall.
I mean, the markets really active generally. I mean, has your expectation may be too stronger word, but has your hope on how quickly you can liquidate some of these equity positions?
Has that changed over the course, of say, the last six months as market activity is picked up? Or is it – it still if so you know company specific that you know a high level of the market activity you don’t necessarily move your expectations about how fast equity can be monetized?
Art Penn
Yeah, that’s a good – it’s a good question. And look, you can see what’s going on with Pivot and evaluation with Pivot PT Network.
You can see the valuation has been up that that it indicates something and indicates value. And you know that’s an indication that maybe on that one, it can be a little tighter than we thought in terms of timeframe, right.
You know, RAM’s really challenging to figure out but we think we’ve just discussed RAM, Cano, Cano was a public stock and you know we’re kind of part of you know providing the ends it’s been a little volatile. So and then you have that what I’ll call the regular way, equity co-invest the one that generated the other income this quarter Green Veracity or Veritext, Summit was a small equity co-invest that we got liquid on.
So, you have the normal pitter patter of the, what I’ll call the regular-sized equity investments, which continue to every quarter you know generate some cash. And on the big ones you know, it’s harder to predict, but I think the marks can tell you something.
Robert Dodd
Yeah I appreciate that. Thank you and, yeah, congrats on the quarter again.
Art Penn
Thank you.
Operator
Next we’ll go to Ryan Lynch from KBW. Your line is open.
Ryan Lynch
Hey, good afternoon and thanks for taking my questions. Art, really nice quarter all around.
I did want to talk about the portfolio activity over the last several quarters. Gross funding have been accelerating as well as you know maybe more importantly you know net fundings have really accelerated the last several quarters, and it looks like that continuing in fiscal Q1.
Can you just talk about you know what’s really driving that acceleration? And then as well as you know you talked earlier about focusing on kind of the core middle market, I would love to just hear you know what your competitive standpoint because obviously there’s been a lot of capital raised, but a lot of capital has been raised seen really big values by you know very big shops that are you know focusing more on upper middle market lending.
So I’m just curious, are you seeing those players that are focusing on upper middle market lending also continue to also invest in the core middle market as well, so that you know competition it’s kind of really the same or even accelerating? Just any comments on that would be helpful.
Art Penn
Yeah, yeah Thanks. Thanks, Ryan.
So the first question is activity levels and volume, it has been an extremely active 2021. I know you’ve heard that from some of the other BDCs driven by a lot of factors.
A, there was no deal flow for a year and a half, b, there was the thought that taxes would increase. So that brought a lot of sellers to market.
And C, values are pretty high. So if you’re thinking about selling your company, you can get a pretty good value.
So, those three factors really contributed to very healthy deal flow volumes in the middle market. The tax issue seems to have gone away for now.
But the die has been cast for 2021 we were super active, we’re going to be active you know going into year end. What’s 2022 look like?
We think it will be active. We don’t think it’s going to be as active as ‘21.
We certainly think there might be a little pause in January and February like there typically is seasonally in our business. So we think we’ll be active coming into the end of ‘21, we think first quarter of ‘22 will be a little light.
And we still think there’s going to be a lot of activity in ‘22, because values are attractive for sellers, because financing is plentiful. And there still a lot of you know companies that want to do deals.
Now, you know where we focus is on the core middle market, which is kind of $50 million of EBITDA and below and our average mean EBITDA is somewhere like $25 million, $30 million, and you’re right with the giants in the direct lending industry raising so much money, their business – for their business model, it’s challenging for them to focus on companies below $50 million of EBITDA every once in a while we’ll see them come down to $40 million. But when you have the amount of capital they have to deploy, they’re really going after and competing against the broadly syndicated loan market.
And that’s why you see the – all these announcements you know about record large, “direct loans” that some of our larger peers are doing, they’re really leading into the BSL space, the broadly syndicated loan space, because they have so much money to deploy, what they can do is, I’m not going to giving their pitch, they can offer something that they think is a value to those sponsors and to those borrowers that they think is accretive, and obviously the borrowers think are accretive. As we look at it, they are competing with a broadly syndicated loan space, where leverage is high, the yields are low, equity cushion’s low, your opportunity to do real due diligence is short, you have to make quick decisions, it’s covenant light.
So God bless you know God bless them, we hope they’re making good credit decisions, we hope the borrowers are happy with the capital they’re providing, and it is a large market for them to go after. Where we focus below $50 million of EBITDA, you know, our capital is more important to the borrowers, we can get much more reasonable leverage, we can do our diligence in a comfortable time span of six to eight weeks, we get covenants that have meaning, we get real equity cushion, we can select – selectively get co-invest, and I’ll go into that in a minute, which can you know add some significant value to the portfolio.
So that whole kind of mixture of being important to the borrowers is important. And where we really have honed in where we can add the most value, and it’s shown up in our numbers, is when we’re starting out with a sponsor who’s identified in industry or company that they think has good growth characteristics, either inorganic growth pieces, it’s a fragmented industry that they can consolidate or good organic growth.
And we can start out with that company and that kind of $10 million to $20 million of EBITDA, and there’s a real game plan to take that $10 million to $20 million of EBITDA up to $30 million, $40 million, $50 million and higher, where our debt capital is very important at inception. And then we can help drive the growth with our debt capital.
And we can obviously, by definition, have a front row seat on financing those companies as they grow. And then we can also participate in the equity co-invest and participate in the upside that we’re helping to drive with our debt.
So that’s really the model that we have at PennantPark today, where we think we can add the most value to both the borrowers on one side and our investors, of course, on the other side, where the track record has really gotten quite good over the last handful of years you know post 2015, we’ve had like a 13.7% IRR as we’ve dug more and more and more into that core middle market as we’ve participated into those equity co-invests. And frankly, where there’s the most value and we’re kind of away from the fray.
We’re not really competing with the giants. We’re not competing with the broadly syndicated loan market.
And we can do proper due diligence and really understand what we’re lending to. So, sorry for the rant, but I think I answered your questions.
Ryan Lynch
You covered it and you gave a lot of additional color and detail. So it’s very helpful.
My other question I wanted to talk about another control company outside of RAM, PT Networks that had a significant write up this quarter. You guys have some of the financial information in your 10-K.
You’ve seen obviously accelerating revenues and it looks like this is the first year they’ve actually turned profit. So obviously the fundamentals are strong there.
Can you just give an update on what is driving that improvement in fundamentals? I know that there was a management change a bit ago.
I’d just love to hear an update on that business.
Art Penn
Yeah. So look, first of all, industry-wide and we like the industry as people are aging, they need more physical therapy.
Physical therapy is very cost efficient as a treatment versus other types of treatments. So Physical Therapy as an industry has a lot of tailwinds, and that we’ve always liked that even when we went to the company, originally.
There were some management miscues ways back, that’s when we did the restructuring. And where we became the control equity.
We brought in a new management team who’s excellent and they’ve done great work you know getting the company’s operations in line. And it’s a blocking-and-tackling business, if you do the blocking-and-tackling correctly, you can do very well.
So that’s what’s going on. They’re doing some small add-on acquisitions which are accretive to the equity value.
And you know it’s really working. Of course, COVID was you know a bump in the road, because these during COVID, people you know didn’t or couldn’t or were reluctant to go into a physical therapy location.
But now that we’re kind of coming out of COVID. We’re seeing very good numbers.
Ryan Lynch
Appreciate that update. That’s all from me.
Art Penn
Thank you.
Operator
And next, we’ll go to Mickey Schleien from Ladenburg. Your line is open.
Mickey Schleien
Yeah, good morning or good afternoon. Art you know a lot of good questions already asked.
And I don’t want to beat a dead horse on RAM. But when you look at the cash and the free cash flow and the leverage and the nature of the debt, it looks like the company could afford to pay you a dividend.
Is that something you’re contemplating over you know the relative near-term? Or would you prefer to retain capital in the business?
Art Penn
Good question and I think the issue regarding that is surrounds the, remember, what RAM got that attractive mainstream loan financing you know during the jaws of COVID for $40 million, it’s a very low yielding instrument, long-term instrument, very flexible instrument. The one way it’s not flexible is, you’re not allowed to take dividends.
So that’s the conundrum. You know, you want to keep that very attractive debt instrument in there.
You know, because it does provide a lot of stability and permanency to the company. Of course, we’d love to pay dividends.
So that’s what we’re grappling with. And today, unfortunately lenders are still not, if you said, hey, just replace those guys with somebody else.
It’s certainly something we think about you know many lenders are still reluctant to lend to the oil patch for obvious reasons, including past performance, including ESG you know ESG issues. But it’s something we should consider and what consider as hopefully the industry thaws out you know perhaps if this continues and the prices remain strong, we could look at a recapitalization or paying off that loan and getting cash flow to shareholders, it’s certainly something we’d like to do.
Mickey Schleien
Yeah, Art, can you partially pay down the debt? I realize it’s cost effective, but you know nobody’s earning much on cash these days, probably would still be accretive or they don’t allow that either.
Art Penn
You can, again, it’s just like it’s the question, it’s a same similar kind of stance around our dividend policy, which is you know we like being a bit defensive and had just having the extra you know safety of mind at this point. But at some point, if we continue to generate a ton of cash and we just have all this excess cash, might just pay off the whole thing.
I mean, that’s an option at some point. But right now, let’s hopefully, oil and gas prices stay high for a long time and then there’s more cash on the balance sheet.
And you know then that’s great you know that’s great. You know, perhaps the company would be sold by then, I don’t know.
But you know we’ll see where it goes.
Mickey Schleien
And my last question, could you just touch on what issues are confronting Mailsouth, if any, given the decline in the equity valuation?
Art Penn
Yeah, Mailsouth has been a challenge. It’s a shared mail, direct mail company, many of their customers are retail and restaurants who have been impacted by COVID, who are having labor shortages of themselves.
So, they don’t want to advertise because they couldn’t deal with the amount of customers that would come in, even if they did advertise. So, we’re working out hard, it was marked down appropriately this quarter.
It’s going to be a grind. We’re committed to it.
We think it’s a good company ultimately generates good cash flow. But that’s going to take a little longer to work through.
Mickey Schleien
But it’s not having problems servicing its debt, at least not now.
Art Penn
No, no, no because even in this environment, still generating sufficient cash flow to service the debt.
Mickey Schleien
Okay, that’s it from me this afternoon. I appreciate your time.
Thank you.
Art Penn
Thank you, Mickey.
Operator
And next we’ll go to Kyle Joseph from Jefferies. Your line is open.
Kyle Joseph
Hey, good morning. Thanks for having me on.
A lot of my questions have been addressed, but just you know, outside the energy and equity investments really want to get a sense for the outlook for credit performance and how portfolio companies are doing obviously, we know no non-accruals so credit obviously doing strong, but just you know, give us a sense for you know where the revenue growths are trending, EBITDA growths and any sort of like macro concerns you have whether inflation or supply chain issues?
Art Penn
Yeah, so by and large the portfolio is performing well, by and large these companies are well positioned, that if they need to raise pricing due to inflation or labor or supply chain, they can do so. Because they’re you know they are important providers to their customers.
So, average EBITDA margins are 25% to 30%, which indicates very high value-added. You know, so EBITDAs are up now you know it’s kind of what are you comparing to, if you’re comparing to the middle of COVID, they’re up a 100%, 200% you know it’s kind of not even relevant, even compared to COVID.
But they’re certainly back and in many cases ahead of where they were in 2019. Some of these companies are kind of different companies than they were in 2019.
They’ve done a bunch of add-on acquisitions, they’ve morphed themselves. But the portfolio is generally performing really, really strongly from a revenue and EBITDA standpoint you know we share with you the credit stats, 3 times interest coverage on average.
So you know we feel by and large very good about a portfolio, but when you have like 70, 80 or 100 names in a portfolio, by definition, there may be a name or two or three that may be getting hurt by labor or supply chain or inflation. But by and large, it’s a very strong book.
Kyle Joseph
Got it. Appreciate the color.
Thanks for answering my question.
Art Penn
Thank you, Kyle.
Operator
And next we’ll go to Melissa Wedel from JPMorgan. Your line is open.
Melissa Wedel
Good afternoon and thanks for taking my question. I’m afraid that question either getting back and it’s already been asked and answered.
So appreciate your candor there. I was hoping that you could contextualize a comment you made earlier about the competitive landscape circling with you know the larger platforms going after sort of, I think you said taking – essentially taking share from the BSL market, there’s been some spread compression particularly in that space.
How are you thinking about spread compression in terms in the core middle market area that you’re focused? Do you think that we should be seeing some stabilization going forward?
Or do you think that there could be some continued compression?
Art Penn
It’s a good question. I think it’s kind of been stable for a while you know I think that’s you know once you get to a kind of you know we’re kind of in the zone about L 500 to L 700 you know kind of that’s kind of our general zone for first lien.
You know we – I don’t – we can’t afford to go much below that you know unless we have some you know fantastic other way to make money, maybe a co-invest that we think is a terrific co-invest. But you know I think that’s kind of our zone.
And you know we you know we need to you know remain disciplined about it, but we don’t – we’re not seeing pressure, just because I think the competition is less, I mean, we don’t have the kind of competition that you might see in the upper middle market.
Melissa Wedel
Understood. Thanks for that.
And then I think you know it’d be helpful just to hear from you guys about your take on sort of the non-sponsor space, we’ve been seeing some other BDC get a little bit of yield enhancements and going to sort of the non-sponsor origination sources. So I just would love an update on how you think about that space and any value that you see there?
Thank you.
Art Penn
Yeah, look, it’s a legitimate space. It’s by definition a you know a different risk adjusted return different risk reward you should get for lending to a non-sponsor, because if things don’t go well, the lender becomes the sponsor as opposed to where there is a sponsor, if things don’t go well, the sponsor will generally you know put more money and if you look at – looked at our COVID experience, I think we had 15 times or 15 situations where across the platform where they needed more equity or 14 times the sponsor put more money and one time the sponsor didn’t.
So it’s a different risk adjusted return and should be you know viewed that way. I think potentially as we look at PNNT in particular versus let’s say a PFLT, we might do be doing more non-sponsor thoughtfully and carefully.
I mean, you can argue our gaming portfolio, you know, we’ve had a very nice track record financing casinos, that’s essentially non-sponsor business for us and has had very attractive returns and continues to have attractive returns. So it’s something we look at on a case by case basis.
You may see us you know carefully and thoughtfully, particularly in industries where we have real domain expertise you know our five key industries, we may do a little bit more in those areas when we really think it’s a strong risk adjusted return.
Melissa Wedel
Thanks, Art.
Art Penn
Thank you.
Operator
And next we’ll go to Jim Altschul from Aviation Advisory Service. Your line is open.
Jim Altschul
Good afternoon, gentlemen. And I apologize if you’ve discussed this on prior calls or news releases when I overlooked it.
But in the news release, today’s news release from yesterday’s news release, you announced that you have no companies on non-accrual as of September 20th - September 30th, 2020, you did have a few companies on non-accrual. What happened to those companies in the last fiscal year?
Art Penn
Jim, there’s no companies as of September 30th. And there’s no companies today on non-accrual.
Are you talking about the companies last year that were on non-accrual?
Jim Altschul
Yes. What happened – as of September 30th, 2020, on some evidence basis, that’s right, you had and I don’t know have the news release in front of me, you did have at least a few companies on non-accrual.
What has – what happened in the last year with regard to the companies that were on non-accrual as of September 30th, 2020?
Art Penn
You know I got to go back and refresh my memory on those two companies. I’m happy to talk to offline as to what happened.
I mean, by definition, they either one – one of three directions, they started paying us again, they were sold or there was a restructuring. I don’t you know, a lots gone on the last year and I have to refresh my memories to what those two companies were and what the ultimate situation was, but I’m happy to talk offline.
Jim Altschul
Okay. One smaller question, I see that there was some decrease in you know the administrative expenses, which is a good thing.
Why was that?
Art Penn
Yeah, no, we have grown the PennantPark platform both in the BDCs and outside of the BDCs. We have a very nice and growing non-BDC private fund business.
You saw we, for instance, price to close to a middle market CLO last week. So we’re building – we built a very nice company in addition to the BDCs, outside of the BDCs and the G&A gets allocated you know across a wider platform, which helps all the vehicles.
Jim Altschul
Excellent. Thank you very much.
Art Penn
Thanks, Jim.
Operator
And with no further questions in the queue, I’ll turn it back to Art Penn for closing remarks.
Art Penn
Just want to thank everybody for being on the call today and your interest in the company and we look forward to speaking with you in early February. In the meantime, have a great Thanksgiving and a terrific happy and healthy holiday season.
Operator
And that does conclude our call for today. Thank you for your participation.
You may now disconnect.