PennantPark Investment (PNNT) Q1 2021 Earnings Call Transcript

PennantPark Investment (PNNT -1.81%)
Q1 2021 Earnings Call
Feb 10, 2021, 1:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good afternoon, and welcome to the PennantPark Investment Corporation's first fiscal-quarter 2021 earnings conference call. Today's conference is being recorded. [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 -- Chairman and Chief Executive Officer

Good morning, everyone. I'd like to welcome you to PennantPark Investment Corporation's first fiscal-quarter 2021 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 of our forward-looking statements.

Aviv Efrat -- Chief Financial Officer

Thank you, Art. I'd like to remind everyone that today's call is being recorded. Please note that this call is the property of 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 telephone numbers and PIN provided in our earnings press release, as well as on our website.

I'd also like to call your attention to the 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 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 -- Chairman and Chief Executive Officer

Thank you, Aviv. First, we hope that you, your families and those you work with are staying healthy. I'm going to spend a few minutes discussing how we fared in the quarter ended December 31, how the portfolio is positioned for the upcoming quarters, our capital structure and liquidity, the financials and then open it up for Q&A. Despite the challenging economic conditions brought on by the pandemic, we were pleased with our performance this past quarter.

We achieved a 14.5% increase in adjusted NAV. Adjusted NAV went up $1.10 from $7.59 to $8.69. We have several portfolio companies in which our equity co-investments have materially appreciated in value as they are benefiting from the K-shaped recovery. This is solidified and bolstering our NAV.

We will highlight those companies in a few minutes. As part of our business model, alongside with 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 December 31, our $217 million of equity co-investments have generated an IRR of 28% and a multiple on invested capital of 2.9 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 income generation, we have the opportunity to rotate out of our equity investments over time and into yield instruments. In addition, we have the ability to grow the PNNT balance sheet and that of our PSLF JV with Pantheon, which should also generate additional income for the company. Although we never predicted a global pandemic, as you may know, we have been preparing for an eventual recession for some time.

Prior to the COVID-19 crisis, we proactively positioned the portfolio as defensively as possible. The overall portfolio is constructed to withstand market and economic volatility. As of December 31, average debt-to-EBITDA in the portfolio was 4.4 times, and the average interest coverage ratio, the amount by which cash income exceeds cash interest expense, were 3.3 times. We have no nonaccruals on our book out of 89 different names in PNNT and PSLF.

We have largely avoided some of the sectors that have been hurt the most by the pandemic such as retail, restaurants, health clubs, apparel and airlines, although PNNT does have exposure to oil and gas, which we'll discuss later. The portfolio is highly diversified with 81 companies in 29 different industries. Since inception, PNNT has invested $6 billion at an average yield of 12%. This compares to an annualized realized loss ratio of about 25 basis points annually.

If we include both realized and unrealized losses, the annualized loss ratio was only 24 basis points annually. This strong track record includes our energy investments, our primarily subordinated debt investments made prior to the financial crisis and now some portion of the pandemic. Our performance through the global financial crisis and recession was excellent. During that recession, the weighted average EBITDA of our underlying portfolio companies declined by 7.2% at the bottom of the recession.

This compares to the average EBITDA decline of the [indiscernible] North American High Yield Index of down 42%. We are proud of this downside case track record in the prior recession. Based on tracking EBITDA of our underlying companies through COVID so far, we believe that our EBITDA decline will be substantially less than it was during the global financial crisis. Many of our portfolio companies are in industries such as government services and defense, healthcare, technology and software, business services and select consumer companies that are less impacted by COVID and where we have meaningful domain expertise.

We believe that we are experiencing a K-shaped recovery with some companies and industries in large beneficiaries of the environment. We are pleased that we have significant equity investments in four of these companies, which can substantially move the needle on our NAV. I would like to highlight those four companies. The four companies are: Cano, Wheel Pros, Walker Edison and PT Network.

Cano Health is the national leader in primary healthcare, who is leading the way in transforming healthcare to provide high-quality care at a reasonable cost to a large population. Our equity position has a cost and fair market value on December 31 of $2.5 million and $72.9 million, respectively. Cano has been experiencing rapid growth with revenues nearly quintupling and EBITDA more than tripling over the last three years. We believe there's a massive market opportunity for Cano to grow in the years ahead with the Medicare Advantage program.

During the quarter ended December 31, we received $1.9 million of cash by the return of capital. The merger with Jaws Acquisition is scheduled to close at the end of March or early April. At that time, we will receive another $6.7 million of cash and own 6,629,953 shares of Cano Health in a limited partnership controlled by a financial sponsor, where the sponsor will earn 20% of the exit proceeds. The shares will be locked up for six months.

From a valuation perspective, via the lock up, the independent valuation from value deposition was a 7% illiquidity discount to the traded value on December 31. Wheel Pros is the largest national distributor of aftermarket custom wheels. The company has consistently grown since our initial investment with revenue doubling and EBITDA tripling over the last 2.5 years. Our position has a cost of $1.1 million and a fair market value of $24.7 million as of December 31.

Walker Edison is a leading e-commerce platform focused on selling furniture exclusively online through top e-commerce companies. Since our investment was made in 2018, sales have more than tripled and EBITDA is up almost 4 times. Our position has a cost of $1.9 million and a fair market value of $15 million as of December 31. PT Network is the leading physical and occupational therapy provider in the Mid-Atlantic states.

Our equity investment in PT came to a restructuring, which came about after the company made several operational mistakes. We've always had a positive view of the industry and the outlook due to the industry tailwinds and demographics, which result in comparable companies trading at EBITDA multiples of 12 to 15 times. Under our ownership, we brought in an excellent management team who corrected those operational mistakes and has shepherded the company well through COVID. Our equity position has a cost of $23 million and a fair market value of $42 million as of December 31.

All four of these companies are gaining financial momentum in this environment, and our NAV should be solidified and bolstered from these substantial equity investments as their momentum continues. PNNT has the lowest percentage of energy investment since 2013. Energy investments represent only 6.5% of the overall portfolio. With regard to RAM Energy, the new credit facility led by Vast Bank under the Main Street Lending Program, materially lowered RAM's cost of capital and provide the runway to execute on its operating plan and time to wait for a recovery in prices.

During Q4, RAM was impacted by the lingering impact from COVID and a difficult 2020, which included higher debt, continued lower prices, reduced production and the impact of monetizing its hedge positioning at the time of the refinancing. Additionally, RAM began work on its last two uncompleted wells, which were finished recently. While still early, production of these wells is expected to be strong. Even though the December 31 quarter had several impacts, RAM is now on stable operational and financial footing that should benefit from higher prices and production.

The company is free cash flow positive after debt service, and we use any free cash flow to service and repay debt. We will have a more fulsome operating update on the company next quarter. As of December 31, equity represented approximately 35% of the portfolio. Our long-term goal continues to target that percentage down to about 10% of the portfolio.

The substantially higher valuation of Cano increased our percentage by approximately 9% this past quarter. As we monetize the equity portfolio, we are looking forward to investing the cash into yielding debt instruments to increase net investment income. We were active this past quarter making new ones. I'll walk through some of the highlights.

Applied Technical Services is a provider of nondestructive testing, calibration lab and consulting engineering services. We purchased $9.5 million of the first lien term loan and co-invested about $504,000 in common equity. Odyssey Investment Partners is the sponsor. Hancock Claims Consultants is the leading insurance claims services company focused on the residential roofing market.

We purchased $6 million of the term loan and purchased $450,000 of equity. Century Equity Partners is the sponsor. Rancho Health is a primary care provider in Southern California that is focused on offering value-based primary care. We purchased $3.7 million of first lien term loan and co-invested $1.1 million of common equity.

Light Beam Capital is the sponsor. We purchased $8.5 million of the first lien term loan and purchased $730,000 of common equity in Sigma Defense Systems. The company is a leading IT services provider and systems integrator of satellite communication equipment for mission-critical airborne surveillance programs. Sagewind Capital is the sponsor.

The outlook for new loans is attractive. We believe that middle-market lending is a vintage business. These vintages loans is likely to be the most attractive we've seen since the 2009 to 2012 time period. Leverage levels are lower, equity cushion is higher, yields are higher and the package of protections, including covenants, are tighter.

After enduring about five years of the late-cycle market for middle-market lending, it is refreshing to have attractive risk reward available to us. Let me now turn the call over to Aviv, our CFO, to take us through the financial results.

Aviv Efrat -- Chief Financial Officer

Thank you, Art. For the quarter ended December 31, net investment income totaled $0.12 per share. Looking at some of the expense categories, base fees totaled $4.1 million; taxes, general and administrative expenses totaled $1.3 million; and interest expense totaled $5 million. Net unrealized gain on our investments was $94 million or $1.39 per share.

Net unrealized depreciation on our credit facility was $0.19 per share. Net realized loss on investments was $0.26 per share. Our dividend was equal to our net investment income. Consequently, NAV per share went from $7.84 per share to $8.78 per share.

Adjusted NAV, excluding the mark-to-market of our liabilities, was $8.69 per share, up 14.5% from $7.59 per share. The increase in NAV was primarily due to an 8.6% valuation increase of the investment portfolio, which is now valued at 101% of cost versus 93% of cost last quarter. As a reminder, our entire portfolio, credit facility and senior notes are marked to market by our Board of Directors each quarter using the exit price provided by independent valuation firms, securities and 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 funds to value reinvestment.

Our spillover as of September 30 was $0.33 per share. Our GAAP debt-to-equity ratio, net of cash, was 0.9 times, down from 1.0 times last quarter. The regulatory debt-to-equity ratio, net of cash, which excludes SBIC debt was 0.7 times, down from 0.9 times last quarter. With regards to our NAV, our GAAP NAV was $8.78 as of December 31, up approximately 12% from the prior quarter, which reflects both the mark-to-market of our assets, offset by the mark-to-market of certain liabilities.

Assuming liabilities were not mark-to-market, adjusted NAV was $8.69, up approximately 14.5% from the prior quarter. We have ample liquidity to fund revolver draw, and we're in compliance with all of our credit facilities as of September 31. We have readily available borrowing capacity and cash liquidity to support our commitments. We have a strong capital structure with diversified funding sources and no near-term maturities.

We have $475 million revolving credit facility maturing in 2024 with a syndicate of banks, $119 million of SBA debentures maturing in 2026 and $86 million of unsecured notes maturing in 2024. We have been in consistent dialogue with our lenders and are thankful for their support. Our overall debt portfolio has a weighted average yield of 9.3%. On December 31, our portfolio consisted of 81 companies across 29 different industries.

The portfolio was invested 38% in first lien secured debt; 17% in second lien secured debt; 10% in subordinated debt, including 6% in PSLF; and 35% in preferred and common equity, including 3% in PSLF. 92% of the portfolio had a floating rate, all of which have a LIBOR floor. The average LIBOR floor is 1%. We have concluded in consultation with our Board to extend the incentive fee waiver through March 31, 2021.

Now let me turn the call back to Art.

Art Penn -- Chairman and Chief Executive Officer

Thanks, Aviv. To conclude, we want to reiterate our mission. Our goal is to generate attractive risk-adjusted returns through income, coupled with long-term preservation of capital. Everything we do is aligned with that goal.

We try to find less risky middle-market companies that have high free cash flow conversion, we capture our free cash flow, primarily 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 your continued investment and confidence in us. That concludes our remarks.

At this time, I would like to open up the call to questions.

Questions & Answers:

Operator

[Operator instructions] We'll take our first question from Casey Alexander with Compass Point. My apologies. Our first question is coming from Mickey Schleien with Ladenburg. Please go ahead.

Mickey Schleien -- Ladenburg Thalmann -- Analyst

Yes good afternoon. I had a similar question for PNNT that I have for PFLT, meaning that the fourth calendar quarter was a strong quarter for middle-market M&A, but both on balance sheet and senior loan fund portfolio shrank and the fee income was not particularly strong. Could you just give us some background on what's going on with that trend? And is it across the platform, something proactive that you're doing in terms of underwriting or something else?

Art Penn -- Chairman and Chief Executive Officer

Yes, thanks, Mickey. It's a good question. Now we had some refis earlier in the quarter and now we have very strong originations toward the end. We're very busy closing deals between Christmas and New Year's, and we have been very busy since then.

We're in the core middle market, which we define as 15 to 50 of EBITDA. So these deals have a longer gestation cycle. There's more due diligence. There's more negotiating of covenants.

And as a result, it's a more highly tailored bespoke business. We think it's got better risk-adjusted returns and more protections, and we get the added benefit of equity co-invest in many cases. But it's a more labor-intensive model. So we just had some early refinancing early in the quarter.

We were very busy toward the tail end of the quarter, and we remain busy going forward. We've never had a problem of ramping up over time. It just sometimes takes us a few quarters to ramp. And because we're so focused on capital preservation and being thoughtful, it may take us a little longer but we've never had a challenge ramping up any of these portfolios.

Mickey Schleien -- Ladenburg Thalmann -- Analyst

As a follow up, Art, to that question. Typically, the fourth calendar quarter is very busy. And then when the winter gets going, the first calendar quarter tends to be slow. But we're not in the normal cycle right now.

My sense is that there's a lot of pent-up demand and dry capital available. Do you think the first calendar quarter could be stronger than average just on a relative basis for the sector overall?

Art Penn -- Chairman and Chief Executive Officer

It's tough to say because I think, typically, you're right, there's a December effect and then sometimes the first calendar quarter is light. But then as things going, you may have a bunch of deals at the end of March and going into April. So you're right in pointing out that the business has some seasonality to it. Look, our teams are busy looking at deals and doing due diligence and negotiating things.

And we remain busy. Our eyes are on the longer-term prize, so we find really good to risk-adjusted returns for our vehicles and getting them to solid, appropriate leverage for the underlying risk. Hard for me really to give you any real strong guidance about calendar Q1 or Q2. We're pretty busy.

We like this vintage. We think this post-COVID vintage will be really good. It is really good, higher-quality companies than we saw pre-COVID, and where we are focused, which is this core middle market, not the upper middle market. We're still getting better risk-adjusted returns than we were before COVID.

We got lower leverage, higher equity underneath us, stronger covenants, fewer and more diligent to EBITDA adjustments and attractive equity co-invest. So this vintage for us in our core middle market zone feels very attractive. So we're very excited about it.

Mickey Schleien -- Ladenburg Thalmann -- Analyst

Could you remind us on PSLF? What is the fund's target leverage in terms of debt to equity, your target -- and your target ROE on your PSLF investment, excluding the members sub debt?

Art Penn -- Chairman and Chief Executive Officer

Yes. So look, PSLF is ramping as well. We think that can be a $450 million vehicle over time. That's kind of 1.5 times debt-to-equity, kind of a 12%-ish ROE.

So that will help ramp NII for PNNT. And PNNT obviously itself can have some dry powder. And then, of course, we have this equity rotation that we've been talking about and that we're looking forward to and working hard where we can to action that.

Mickey Schleien -- Ladenburg Thalmann -- Analyst

And that 12% that you just mentioned, is that purely on your equity investment? Or is that a blend of your equity investment on the subordinated debt...

Art Penn -- Chairman and Chief Executive Officer

Yes. Ex to your point, Mickey, it's the combination of the sub debt and the equity.

Mickey Schleien -- Ladenburg Thalmann -- Analyst

OK. My last question is just a housekeeping question. Can you just give us a sense of what the main drivers of the realized loss was this quarter?

Art Penn -- Chairman and Chief Executive Officer

Yes. The main driver was a company called MSPark or Nassau, which did a restructuring. And therefore, upon the restructuring, there was a realization event. Our second lien became equity.

We and others put our new second lien in place, and we and other lenders are the control players of the company. Thankfully, the company is bouncing back quite nicely, not quite back to where it was pre-COVID, but on its way back to where it was pre-COVID. And we're optimistic that as we get toward the tail end of 2021, it will be back kind of where it was pre-COVID and we'll be able to do reasonably well on the investment. The company generates a lot of free cash flow.

Even during the bottom part of COVID, it was still generating good free cash flow. But that realization event happened, and that's why you saw the realized loss in this quarter.

Operator

We're now taking our next question from Casey Alexander with Compass Point.

Casey Alexander -- Compass Point -- Analyst

Yes. Hi. Good afternoon. It's kind of a tricky question, but I think it sort of gets to what I think your balance sheet strategy is going forward.

Your leverage for the BDC has come down quite a bit with the transaction creating the JV. Attractive leverage is still there if you look through to the JV. So on balance sheet with PNNT, you previously had a target leverage ratio that was -- I don't know if the exact number is up around 1.5. Would you adjust that target leverage ratio to something lower, simply because most of your -- a lot of your first lien was transferred into the JV? So you have a different composition and also the equity has higher volatility to NAV? Would you be targeting a lower target leverage ratio? And if so -- I mean, at least until you have some success in rotating some of the equity and getting that equity percentage down?

Art Penn -- Chairman and Chief Executive Officer

It's a great question, and it is a tricky question. And you're right, you might be willing to put some amount. One amount of debt against first lien assets, another amount of debt against second lien and mezzanine assets and yet another amount of debt against equity assets. So to some extent, you've got to look to the underlying assets that you have and try to figure out what you're comfortable putting on relative to the asset and what the leverage is.

I think at this point, 1.5, particularly given the complexion of the underlying assets, is too high. I think we probably, over time, could target something like 1.3 depending on how things play through and what assets we have, but certainly would not be, at this point, back up to 1.5. I don't know if that answered your question directly or?

Casey Alexander -- Compass Point -- Analyst

Yes. So -- well, yes, it does. So if you're currently under one and you're willing to go to 1.3, and given the opportunity set, you do still have some substantial earnings power even without selling down some of the equity, if I understand that correctly.

Art Penn -- Chairman and Chief Executive Officer

That's right.

Casey Alexander -- Compass Point -- Analyst

I guess that's the final question. Thank you.

Operator

Thank you. And now we take our next question from Robert Dodd with Raymond Teams. Please go ahead.

Robert Dodd -- Raymond James -- Analyst

Yes. Hi everyone. On the equity, obviously, I mean, roughly one-thirds of the book, as you said. Target 10.

I mean, time line-wise, a very difficult question to answer. There's also kind of embedded in that question for me. How you balance -- obviously, you don't want to give up total return just to get coupon today, like you don't want the equity too early. But at the same time, equity is very high as a percentage of the book.

And I do think that you have expressed and investors would prefer it to be down, but perhaps not at the expense of giving up total return-adjusted income. So how are you balancing the view on that? I mean obviously, you don't control the exit of all these equity positions, but you do some. So how the view on that in terms of balance?

Art Penn -- Chairman and Chief Executive Officer

And that's another tricky question, Robert Dodd. And there's a one research analyst, I know he said, it's all about NAV. It's all about NAV. And so like we have some of these big wins in our -- in equity, right? We could try to exit them earlier and convert those to cash to generate NII earlier, in some cases, but you might be giving up some NAV upside if you exit earlier.

Some of these, you could go to the sponsor and say, "Buy us out." And someone would be happy to buy us out because they still see the next 10%, 20%, 30%, 40% upside if they do. And that is a challenge of running a vehicle that a lot of people want yield. So it's a tricky balancing act. And you're right, it's hard for me to answer your question, and maybe we can talk and you can run some good research about kind of NAVs should take priority in certain cases.

But that's how we've been playing it thus far. We've been saying, at this point, this vehicle, a lot of the upsell in the equity, let's ride that and squeeze that as much as possible, and we will monetize that in the most optimal way and then take those proceeds and put it into yield instruments. But clearly, there are some investors who say, "You know, it's all about yield. You kind of sell earlier, leave some money on the table, get out and start deploying it to cash-paying yield instruments." So today, we've been playing it to the maximization hand.

Well, we could pivot and start to take some of these gains earlier. We will probably, by definition, then be leaving some gains on the table. So that's the grapple that we have to be quite honest. It's nice to have wins.

It's nice to have victories. It's refreshing. It's nice to have energy being a relatively small manageable piece of this portfolio after so many years. So it's nice to be having these conversations.

But it is something we grapple with.

Robert Dodd -- Raymond James -- Analyst

Yes. And it's great to see the portfolio fair value above cost as well. So first time in a while, so I have to invest on that. I mean just one more, if I can.

I mean you talked about you're still seeing and this looks like it's going to be a very good picture. You're still seeing lower leverage, stronger covenants, etc., which is pre-COVID. How much more so, if that's more of a qualitative rather than quantitative, is that actually material? Or is it marginal? And then just given how competitive things are, how the PSLF market is, right? Can you hear me?

Art Penn -- Chairman and Chief Executive Officer

Robert?

Robert Dodd -- Raymond James -- Analyst

Can you hear me?

Aviv Efrat -- Chief Financial Officer

Robert? Yes, I can hear you, Robert. Or do you hear Robert's question?

Robert Dodd -- Raymond James -- Analyst

I guess so. Maybe I'll follow up with you.

Aviv Efrat -- Chief Financial Officer

Thanks Robert

Robert, I can hear you there. One second while we might have technical difficulties. So bear with us for 30 more seconds because I can hear you clearly, while we're trying to get Art back on the line here.

Operator

My apologies. [inaudible] and connect Mr. Penn. One moment, please.[Technical difficulty]

Aviv Efrat -- Chief Financial Officer

Give us a few more seconds here. I know his line was dropped earlier. So I guess we're experiencing the same technical difficulty here, Robert, but we do want to take your question.

Robert Dodd -- Raymond James -- Analyst

No problem for me. Telephonic difficulties are...

Aviv Efrat -- Chief Financial Officer

Yes.

Operator

Mr. Art can join the conference.

Art Penn -- Chairman and Chief Executive Officer

Hello? Hello. I'm sorry. I'm back. Some technical difficulties.

My apologies. Robert, you were asking a question.

Robert Dodd -- Raymond James -- Analyst

Yes, yes. So I mean just talking about you mentioned that you're still seeing low leverage, better terms and spreads currently in the middle market. If we look at the syndicated market, that all seems to pretty much be gone. Obviously, there's a lag between the two.

Tradition typically, I mean, do you think that the better terms you're seeing now if everything stays competitive, are going toward that point? Or do you think some of that benefit in better terms, coupons, etc., is just going to be sustained, I mean, over the near term. And I'm not asking that for years from now on, obviously, but over a somewhat prolonged period.

Art Penn -- Chairman and Chief Executive Officer

It's a great question. Just definitionally, just sort of want to level set it for everyone. We're focused on what we call the core middle market, which is companies with $15 million to $50 million of EBITDA versus the upper middle market, which is $50 million and above in our view. And $50 million and above is the threshold where we think companies can also access the broadly syndicated loan market or the high-yield market in some cases or some of our larger peers' traffic and they write big loans to bigger companies.

And that end of the market certainly has bounced back to where it was pre-COVID and really driven by the rebound of the broadly syndicated loan in high-yield markets. You're right that we're kind of away from the fray and below that radar. Certainly, the market is rebounded to some extent from where it was at the lows six months ago or so. But it's slow.

It's slow. We like this end of the market. Even before COVID, there was a lot less competition. Capital was a lot less commoditized.

We could still get covenants when everyone else was dealing with no covenants or covenant wide or covenant light. Even before COVID, our EBITDA adjustments were fully diligent. Even before COVID, we could get equity co-invest if we like the equity. So even pre-COVID, we still thought this kind of below $50 million of EBITDA was a good place to be positioned.

But certainly, over time, as the economy recovers and as capital flows back, it's certainly going to be tightening for sure. But what's new? That's how we've been operating for a number of years. We came into COVID and our senior book at about four times debt-to-EBITDA, which really positioned us well for COVID and kind of avoiding many of those sectors that got most impacted. So we were taking a more defensive posture going into this than many.

Robert Dodd -- Raymond James -- Analyst

I appreciate that. Thank you. Good quarter.

Operator

Thank you. We're taking our next question from Ryan Lynch with KBW. Go ahead.

Ryan Lynch -- KBW -- Analyst

Good afternoon. I have a couple of questions. In your prepared comments, you mentioned four companies that you felt pretty good about the upside in that growth NAV this quarter, as well as could contribute to the upside in the future. One company you didn't mention was Mid Ocean.

Just curious, that company has ridden up pretty significantly this quarter. Can you just provide a background on what that business does and then what drove the markup in that investment?

Art Penn -- Chairman and Chief Executive Officer

Yes. So it's a company that has been in the portfolio for a while. It was a restructured mezzanine investment where we, for a while, loan to debt and equity, the debt got refinanced, and we own a residual equity position. The company distributes products to service stations, to gas stations.

And they got hurt by COVID early on as people drove less, but has rebounded nicely. And they've been doing some very attractive add-on acquisitions at attractive multiples. So ever so gradually, the EBITDA of that company has been growing. It's not the what we call kind of the top of the K-shaped recovery where we're seeing things like Walker Edison or Wheel Pros or Cano, but it's kind of been a Steady Eddy grower.

And at some point in the next year or two, there may be an exit. We'll be able to get to convert that equity investment into cash. But yes, it was a nice valuation upside this quarter.

Ryan Lynch -- KBW -- Analyst

OK. And then from a higher level question, you mentioned the K-shaped recovery, obviously, but there's a lot of uncertainty of how the recovery or U.S. opening is going to take place and how long we're going to be dealing with COVID. How do the shape of the recovery, or your outlook on the reopening process, how does that shape your guys' underwriting or you guys are looking at a new company or just even the type of company or the industry that you are looking at?

Art Penn -- Chairman and Chief Executive Officer

Yes. So look, we've really honed it down and are focusing on five different sectors where we think we have really excellent domain expertise where these sectors have performed well during COVID where there's high free cash flow and where we can be among the smartest people in the room. So we mentioned in our prepared remarks that it's government services, defense, healthcare, software and technology, business services and consumer, where we have this deep domain expertise, where we know the right question to ask, when we had really good track records. And most of these sectors evolved and it performed relatively well from COVID.

So over time, you develop certain domain expertise in your business, we certainly have. And we certainly made mistakes elsewhere, too, as you know. So where we want to continuously improve and get better and better and kind of this is where our focus is going to be at this point and stick to that. It's a wide enough band that we can see substantial deal flow.

We can fill up our vehicles carefully and judiciously and do it very, very smartly. So I don't know if that answered your question there, Ryan. Did I answer your question?

Ryan Lynch -- KBW -- Analyst

No, that's helpful and that it's an impossible question to defer now, but it's good color on where you guys' head space is at, at this point. So those are all my questions. I appreciate the time this afternoon and really nice quarter, guys.

Art Penn -- Chairman and Chief Executive Officer

Thank you.

Operator

Thank you. And we take our next question from Kyle Joseph with Jefferies.

Kyle Joseph -- Jefferies -- Analyst

Good afternoon. Thanks for having me. A lot of my questions have been addressed. But as I said, two follow-ups on credit.

On the nonaccruals that were resolved during the quarter, was that driven more by recoveries? Or were those restructuring? I think you addressed one of those earlier, but just wanted to get your perspective there.

Art Penn -- Chairman and Chief Executive Officer

Yes. Thanks, Kyle. So yes, we talked about MSPark and [inaudible] earlier, one is in restructuring. And then the other one was PRA, which is an event-related business.

The sponsor agreed to put in additional equity beneath us. So that is back on accrual due to that investment by the sponsor.

Kyle Joseph -- Jefferies -- Analyst

Got it. And then more broadly on credit, can you give us a sense for revenue and EBITDA growth trends in the fourth quarter, that calendar fourth quarter? And how this compared to the third quarter? And any changes you've seen year-to-date?

Art Penn -- Chairman and Chief Executive Officer

Yes. It's a great question because we're trying to really precisely with our own portfolio figure out when was the bottom. March was the bottom. June was the bottom.

September. And it's challenging because in most cases, we get monthly financial statements. In some cases, we'll get quarterly. So we're trying to figure that out as we speak.

My off the cuff answer would be we think EBITDA on average was up 3% to 5% in the fourth quarter. That's guesstimating at this point. But give it another few months, and we'll have some precise data for you as we, hopefully, in the next call, we can kind of more precisely identify for you when the bottom of COVID was for us and what the trends are, but that's kind of a estimate at this point.

Kyle Joseph -- Jefferies -- Analyst

Got it. Thanks for the time and thanks for answering my questions.

Operator

Thank you. We're taking the next question from Melissa Wedel with J.P. Morgan. Please go ahead.

Melissa Wedel -- J.P. Morgan -- Analyst

First, I wanted to just touch on the pace of portfolio leverage. If I heard you right earlier in the call, you aren't reliant on some of the churning of those equities, the elevated equity positions in order to deploy capital. You also noted it's tough to give guidance on the origination side, but I thought I'd follow up on the flip side of that, which is do you have much visibility into expected repayment activity in the near term?

Art Penn -- Chairman and Chief Executive Officer

Yes. We don't see a lot of repayments in the near term, although sometimes you never know, but we don't see a ton of repayment. So I mean our goal and our thought is the portfolio is going to gradually grow over the coming quarters in a careful and thoughtful manner while we're looking to monetize these equity positions.

Melissa Wedel -- J.P. Morgan -- Analyst

OK. OK. Got it. And then as a follow up, this is sort of a broader strategic question.

I think we've seen across the BDC landscape some of the [inaudible] vehicles [inaudible] combine and reabsorbed with the primary BDC. Just curious if that's something that you guys have thought about with regard to PFLT and PNNT? And how you think about the puts and takes of something like that?

Art Penn -- Chairman and Chief Executive Officer

So it's a good question. It's a good question. And look, we're always trying to do anything we can to maximize shareholder value. And everything is always on the table when we evaluate it.

I think for us, at PNNT today, we've got a little bit of work cut out for us kind of to get PNNT where it should be. And then when we get it where it should be, we will lift our head up and figure out an answer and ask questions like you just asked. At our firm, it's important for you to know that we've got two separate strategies on both the public and the private side. We have an opportunistic strategy, which looks a lot like PNNT without the energy.

And in that strategy, for instance, we had a really excellent 2020, kind of a net 29% return to limited partners. And then we have a senior debt strategy that looks a lot like PFLT. And our private funds have like an 18% net return in 2020. So really excellent returns in our two separate strategies.

But look, first things first, we got to really need to deal with PNNT to get it in good shape before we even begin asking those questions. But after we get back in the right shape, we'll certainly open and we'll discuss all kinds of options.

Operator

Thank you. We're taking our next question from Jim Altschul from Aviation Advisory Service, Inc. He's going back.

Jim Altschul -- Aviation Advisory Service -- Analyst

Good afternoon gentlemen. Thanks for taking my call. A couple of things. In the fiscal year that ended, September 30, you repaid $31.5 million in SBA debentures.

Why did you do that?

Art Penn -- Chairman and Chief Executive Officer

Well, that's because we were getting repayments in the SBIC and there is a maturity coming up in a few years, and we earn the money back. So that's why we paid it back.

Jim Altschul -- Aviation Advisory Service -- Analyst

Makes sense. How do you decide, if you're looking at new opportunities, which assets to allocate to PennantPark itself, which to PSLF and which of the private funds? I may have asked this...

Art Penn -- Chairman and Chief Executive Officer

It's a good question. Yes. So yes, yes. So we have SEC exempt relief, which is kind of a similar box that all of our peers have, which says that when a deal comes in and it fits multiple [inaudible] and the characteristics of the loan fit multiple boxes, you allocate among the vehicles based on available capital.

So it's a mathematical calculation that gets done when the senior deal comes in or when a next deal comes in, where it gets allocated.

Jim Altschul -- Aviation Advisory Service -- Analyst

And I haven't looked too closely in the news for the fiscal year that ended September 31, there was a significant increase in PIK income, both in absolute terms and as a percentage of total revenues. Why was that? And are those PIK instruments performing?

Art Penn -- Chairman and Chief Executive Officer

Yes. It's a good question, and those are from the two former nonaccruals, which are PRA and now South MSPark. Those are the drivers of that.

Jim Altschul -- Aviation Advisory Service -- Analyst

So since they're former nonaccruals, that means you think it's now money good?

Art Penn -- Chairman and Chief Executive Officer

Well, we think they're money good. They may not be paying us cash interest. So in certain cases, it's you're keeping the cash in the company for cushion and for it to be able to weather COVID.

Jim Altschul -- Aviation Advisory Service -- Analyst

So in other words, as part of the restructuring, they gave you some PIK paper in lieu of the cash interest that you would do?

Art Penn -- Chairman and Chief Executive Officer

Yes. Yes.

Jim Altschul -- Aviation Advisory Service -- Analyst

Thank you very much.

Operator

Thank you. It appears that I have no further questions at this time. Mr. Penn, I'd like to turn the conference back to you for any additional or closing remarks.

Art Penn -- Chairman and Chief Executive Officer

Thanks, everybody, for participating today. We'll speak to you next in early May as we review our March quarter end. So thank you very much for your time today. Have a good day.

Operator

[Operator signoff]

Duration: 48 minutes

Call participants:

Art Penn -- Chairman and Chief Executive Officer

Aviv Efrat -- Chief Financial Officer

Mickey Schleien -- Ladenburg Thalmann -- Analyst

Casey Alexander -- Compass Point -- Analyst

Robert Dodd -- Raymond James -- Analyst

Ryan Lynch -- KBW -- Analyst

Kyle Joseph -- Jefferies -- Analyst

Melissa Wedel -- J.P. Morgan -- Analyst

Jim Altschul -- Aviation Advisory Service -- Analyst

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