PennantPark Investment (PNNT) Q4 2021 Earnings Call Transcript

PennantPark Investment (PNNT 1.03%)
Q4 2021 Earnings Call
Nov 18, 2021, 12:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to the PennantPark investment corporation's fourth fiscal quarter 2021 earnings conference call. Today's call 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, please go ahead.

Art Penn -- Chairman and Chief Executive Officer

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 -- 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 the 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 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 to 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

Thanks, Richard. I'm going to spend a few minutes discussing how we fared in the quarter ended September 30, 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 31, 2019. Net investment income was $0.17 per share, including $0.03 per share in other income, which includes onetime 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 30, our $246 million of equity co-investments have generated an IRR of 28% and a multiple on invested capital of three 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 regards to net investment income, we have a three-pronged strategy, which includes: one, growing assets on balance sheet at PNNT as we move toward 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 $1.15 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 30, 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 define 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 the 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 nonexistent, information are fewer, EBITDA adjustments are higher and less diligence and the time frame 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's, EBITDA adjustments are more diligent 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 has 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 30, average debt-to-EBITDA in 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 nonaccruals on 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 at 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 of 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 investments in the energy industry and other cyclicals; three, excellent results from our equity co-investment program; and four, a substantially increased focus on core middle market companies where our capital can 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 of our 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.

Our median 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 of the environment.

We are pleased that we have significant equity investments in 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 its 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 30, 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 are looking forward to investing the cash into 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 funnel is producing active deal flow that we can then carefully and thoughtfully analyze so that we could 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 -- Chief Financial Officer

Thank you, Art. For the quarter ended September 30, net investment income totaled $0.17 per share, which includes a onetime dividend payment 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 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 the prior 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 exchanges, 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 revolving credit facility maturing in 2024 with a syndicate of 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 30, 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 bear 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 30, 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, all of which has a LIBOR floor. The average LIBOR floor is 1%. Now let me turn the call back to Art.

Art Penn -- Chairman and Chief Executive Officer

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.

Questions & Answers:

Operator

Thank you. [Operator instructions] And first, we'll go to Casey Alexander from Compass Point. Your line is open.

Casey Alexander -- Compass Point -- Analyst

Hi. Good morning. First is just kind of a maintenance question for Richard. Richard, in the redemption of the 2024 notes, what will the onetime 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 -- Chief Financial Officer

Yes. Casey, this is Richard. Yes, the unamortized offering cost at September 30 was $1.75 million related to the 2024 notes, of 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've mentioned that, something that was maybe [inaudible] audit firm. But at this point, legal run through interest expense.

Casey Alexander -- Compass Point -- Analyst

Yes. 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 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 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, then we're all for it. But I would love to hear your thoughts on not changing the mark on RAM.

Art Penn -- Chairman and Chief Executive Officer

Yes. So look, 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 will 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 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. Really, really good performance, not shocking given the price of oil and gas. And I think what's really driving the valuation for the valuation firms is kind of the M&A or lack thereof. And frankly, it's tough to really put a pin in it right now because there hasn't been much M&A.

Casey Alexander -- Compass Point -- Analyst

OK. I'm curious, 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 the Board is not comfortable pennying it up yet because of the -- still the amount of equity? Or what will it take to start that conversation?

Art Penn -- Chairman and Chief Executive Officer

It's a good question and the Board talks about it all the time. Look, first, I want to -- I think they're pleased and I'm pleased that we are covering the dividend 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 did away with that $0.04, you'd be at $0.13, right?

Casey Alexander -- Compass Point -- Analyst

But that other income comes every quarter. And when we back out the dividend from the equity company, that also eliminates the incentive fees. So really, it's not even $0.03 from that, it's more like $0.02. So 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 -- Chairman and Chief Executive Officer

All right. So Casey, what do you want to raise the dividend to?

Casey Alexander -- Compass Point -- Analyst

Just [inaudible]

Art Penn -- Chairman and Chief Executive Officer

I mean, I think it has been zero on occasion. It has been $0.04. This quarter was $0.04. So we know we know our dividend is recurring and it's a good question.

I know you raised, "Hey, why don't you have a variable dividend?" And that's something we could talk about off-line. But I think in our minds, we've been saying, "Gee, 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 aren't worried about whatever our dividend is. "So we're just coming out of the time 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, 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 in this upcoming quarter, both in terms of the balance sheet, our run rate and importantly, how we're feeling about the rotation. But it's the right question, and thank you for asking it. And we can certainly talk about all the different dividend formulations offline.

But in our minds, we wanted to play conservative.

Casey Alexander -- Compass Point -- Analyst

Thanks for taking my question. I appreciate it.

Operator

And next, we'll go to Robert Dodd from Raymond James. Your line is open.

Robert Dodd -- Raymond James -- Analyst

Hi guys. Congrats on the quarter. Following up to Casey's question about RAM. I mean, if I look at year over year, obviously, the enterprise value you're carrying is down.

Reserve values are up. Cash balance is up. EBITDA is up. And cash flow's up, etc., year over year, but the enterprise value implied in the market is [inaudible] And I understand your comment at the valuation consultant [inaudible] Can you give us any idea of what metrics they're actually looking at? I mean, clearly, enterprise value to EBITDA or anything like that or even 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 in the fair value year over year with the other?

Art Penn -- Chairman and Chief Executive Officer

And like with Casey, it sounds like Raymond James has a bid for RAM, which we're always happy to maintain, Robert. So look...

Robert Dodd -- Raymond James -- Analyst

I do not have a bid for that.

Art Penn -- Chairman and Chief Executive Officer

All these elements are taken into account. Production is 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 which are these factors do the valuation firms prioritize? What do they lean on? And recently, it's been as we all know, we would be more than happy to entertain proposals on this company for people who want to buy the company, which ultimately then becomes, OK, 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 E&P. And as this lasts longer inevitably, we hope that we will see more, but they take all these factors into account.

But like at this point, as we always say, what's the exit value to the market participants in an orderly market? That's the accountants, the valuation 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 -- Raymond James -- Analyst

Understood. And then one more general question about, obviously, the equity book overall. I mean, the market is really active generally. I mean, has your expectation, maybe to word, but how's your hope on how quickly you can liquidate some of these equity positions? Has that changed over the course of, say, the last 6 months as market activity has picked up? Or is it still -- it's so company-specific that high levels of market activities don't necessarily move your expectations about how fast equity can be monetized?

Art Penn -- Chairman and Chief Executive Officer

Yes, it's a good question. Look, you can see what's going on with and the valuation with [inaudible] Network. You can see the valuation has been up. That indicates something, it indicates value.

And that's an indication that maybe on that one, it can be a little tighter than we thought in terms of time frame, right? RAM is really challenging to figure out but we think we've just discussed RAM. Cana was a public stock and we're kind of part of the -- you're writing that and it's been a little volatile. So -- and then you have the -- what I'll call the regular way, the equity co-invest, the one that generated the other income this quarter, Green Veracity or 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, generate some cash.

And on the big ones, it's harder to predict but I think the marks can tell you something.

Robert Dodd -- Raymond James -- Analyst

I appreciate that. Thank you. Congrats on the quarter again.

Art Penn -- Chairman and Chief Executive Officer

Thank you.

Operator

Next, we'll go to Ryan Lynch from KBW. Your line is open.

Ryan Lynch -- KBW -- Analyst

Hi, good afternoon. Thanks for taking my question. Art, really nice quarter all around. I did want to talk about the portfolio activity.

Over the last several quarters, gross fundings have been accelerating as well as maybe more importantly, net fundings that really accelerated the last several quarters, and it looks like that's continuing in fiscal Q1. Can you just talk about what's really driving that acceleration? And then, as well as you talked earlier about focusing on kind of the core middle market. I would love to just hear what your competitive standpoint. Obviously, there's been a lot of capital raised, but a lot of capital has been raised to really big values by very big shops that are 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 the competition is kind of really the same or even accelerating? Just any comments on that would be helpful.

Art Penn -- Chairman and Chief Executive Officer

Thanks, Ryan. So the first question is activity levels and volume. It has been an extremely active 2021, and 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 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 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, 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's still a lot of companies that want to do deals. Now where we focus is on the core middle market, which is kind of $50 million of EBITDA and below. And our average median EBITDA is somewhere like at $25 million, $30 million.

And you're right, with the giants in the direct lending industry raising so much money, 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 these announcements about record large direct loans that some of our larger peers are doing.

They're really eating 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 giving you 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, yields are low, equity cushion is low, your opportunity to do real due diligence is short. You have to make quick decisions, it's covenant light.

So God bless them. We hope they're making good credit decisions. We hope the borrowers are happy with the capital they are providing, and it is a large market for them to go after. Where we focus, below $50 million of EBITDA, 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 selectively get co-invested, and I'll go into that in a minute, which can 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 an industry or a 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 in the 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 tech 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 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 had at Pennant Park 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. 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, 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 -- KBW -- Analyst

You covered it and you gave a lot of additional color in detail, so that'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 a 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 just want to hear an update on that business.

Art Penn -- Chairman and Chief Executive Officer

Yes. So look, first of all, industrywide, 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 a 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 getting the company's operations in line.

And it's a blocking the 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 it's really working. Of course, COVID was a bump in the road. COVID people 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 -- KBW -- Analyst

I appreciate that. That's all for me.

Art Penn -- Chairman and Chief Executive Officer

Thank you.

Operator

And next, we'll go to Mickey Schleien from Ladenburg. Your line is open.

Mickey Schleien -- Ladenburg Thalmann -- Analyst

Good afternoon. Art, 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 the relative near term or would you prefer to retain capital in the business?

Art Penn -- Chairman and Chief Executive Officer

Good question. And I think the issue regarding that is surrounds the -- you remember, RAM got that attractive Main Street Loan financing 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 want to keep that very attractive debt instrument in there 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, landed are still not -- if you said, "Hey, just replace those guys with somebody else." It's certainly something we think about. Many lenders are still reluctant to lend to the oil patch for obvious reasons, including past performance, including ESG, ESG issues. But it's something we should consider and will consider as hopefully, the industry thaws out. 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 -- Ladenburg Thalmann -- Analyst

Art, can you partially pay down the debt? I realize it's cost effective but nobody is earning much on cash these days. It probably would still be accretive or they don't allow that either?

Art Penn -- Chairman and Chief Executive Officer

You can. Again, it's just like it's the question, it's the same similar kind of stance around our dividend policy, which is we like being a bit defensive and just having the extra 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, we might just pay off the whole thing. I mean, that's an option at some point.

But right now, look, hopefully, oil and gas prices stay high for a long time and then there's more cash on the balance sheet. And then that's great. That's great. Perhaps the company will be sold by then, I don't know, but we'll see where it goes.

Mickey Schleien -- Ladenburg Thalmann -- Analyst

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 -- Chairman and Chief Executive Officer

Yes. 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 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 it 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 -- Ladenburg Thalmann -- Analyst

But it's not having problems servicing its debt, at least not now?

Art Penn -- Chairman and Chief Executive Officer

No, no. So even in this environment, it's still generating sufficient cash flow to service the debt.

Mickey Schleien -- Ladenburg Thalmann -- Analyst

OK. That's it for me this afternoon. I appreciate it. Thank you.

Operator

And next, we'll go to Kyle Joseph from Jefferies. Your line is open.

Kyle Joseph -- Jefferies -- Analyst

Hi, good afternoon. A lot of my questions have been addressed. But just outside the energy and equity investments, I really want to get a sense for the outlook for credit performance and how portfolio companies are doing. Obviously, we know no nonaccruals, so credit is obviously doing strong.

But just give us a sense for where the revenue growth are trending, EBITDA growth and any sort of like macro concerns you have, whether inflation or supply chain issues.

Art Penn -- Chairman and Chief Executive Officer

Yes. 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 are important providers to their customers. So average EBITDA margins are 25% to 30%, which indicates very high value added.

So EBITDAs are up now. It's kind of what you're comparing to, if you're comparing it to the middle of COVID, they're up 100%, 200%. It's kind of not even relevant to even compare it 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. We should share with you the credit stats, three times interest coverage on average.

So we feel, by and large, very good about the portfolio. But when you have like 70, 80, 100 names in the 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 -- Jefferies -- Analyst

I appreciate the color. Thanks for taking the questions.

Operator

And next, we'll go to Melissa Wedel from J.P. Morgan. Your line is open.

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

[inaudible] question has already been asked on [inaudible] I was hoping that you could contextualize a comment you made earlier about the competitive landscape. Certainly with the larger platforms going after sort of, I think, you essentially taking share from the BSL market, there's been some spread compression, particularly in that space. How are you thinking about spread compression and 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 -- Chairman and Chief Executive Officer

It's a good question. I think it's kind of been stable for a while. I think once you get to kind of -- we're kind of in the zone of L500 to L700 kind of that's kind of our general zone for first lien. We can't afford to go much below that unless we have some fantastic other way to make money, maybe a co-invest that we think is a terrific co-invest.

But I think that's kind of our zone and we need to remain disciplined about it. But 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 -- J.P. Morgan -- Analyst

Understood. And then I think it would be helpful just to hear from you guys about your take on sort of the nonsponsor space. You've been seeing some other BDCs get a little bit of yield enhancement from going to sort of the [inaudible] origination sources. So just want an update on how you think about that space and any value that you see there.

Thank you.

Art Penn -- Chairman and Chief Executive Officer

Yes. Look, it's a legitimate space. It's, by definition, a different risk-adjusted return, different risk reward you should get for lending to a nonsponsor 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 put more money. And if you looked at our COVID experience, I think we had 15 times or 15 situations where across the platform where they need more equity and 14 times [inaudible] to put more money in one time the sponsor didn't.

So it's a different risk-adjusted return and should be viewed that way. I think potentially as we look at PNNT, in particular versus, let's say, PFLT, we might be doing more nonsponsor thoughtfully and carefully. I mean, you can argue our gaming portfolio, we've had a very nice track record financing casinos. That's essentially a nonsponsor 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 carefully and thoughtfully, particularly in industries where we have real domain expertise. 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 -- J.P. Morgan -- Analyst

Thank you.

Operator

And next, we'll go to Jim Altschul from Aviation Advisory Service. Your line is open.

Jim Altschul -- Aviation Advisory Service -- Analyst

Good afternoon gentlemen. And I apologize if you've discussed this on prior calls or news releases and I overlooked it, but in the news release, today's news release or yesterday's news release, you announced that you have no companies on nonaccrual as of September 30, 2020, you did have a few companies on nonaccrual. What happened to those companies in the last fiscal year?

Art Penn -- Chairman and Chief Executive Officer

Jim, there's no companies as of September 30 and there's no companies today on nonaccrual. Are you talking about the companies last year that were on nonaccrual?

Jim Altschul -- Aviation Advisory Service -- Analyst

Yes, as of September 30, 2020, we didn't faze this right. You and I don't know release in front of me, you did have at least a few companies on nonaccrual. What happened in the last year with regard to the companies that were on nonaccrual as of September 30, 2020?

Art Penn -- Chairman and Chief Executive Officer

I got to go back and refresh my memory on those two companies. I'm happy to talk to you offline as to what happened. I mean, by definition, they either went one of three directions. They started paying us again.

They were sold or there was a restructuring. A lot has gone on in the last year. I have to refresh my memory as to what those two companies were and what the ultimate situation was. But I'm happy to talk offline.

Jim Altschul -- Aviation Advisory Service -- Analyst

OK. One smaller question. I see that there was some decrease in administrative expenses, which is a good thing. Why was that?

Art Penn -- Chairman and Chief Executive Officer

Yes. 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, priced to close a middle market CLO last week.

So we've built a very nice company in addition to the BDCs outside of the BDCs and the G&A gets allocated across a wider platform, which helps all the vehicles.

Jim Altschul -- Aviation Advisory Service -- Analyst

Thank you very much.

Operator

And with no further questions in the queue, I'll turn it back to Art Penn for closing remarks.

Art Penn -- Chairman and Chief Executive Officer

I 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

[Operator signoff]

Duration: 37 minutes

Call participants:

Art Penn -- Chairman and Chief Executive Officer

Richard Cheung -- Chief Financial Officer

Casey Alexander -- Compass Point -- Analyst

Robert Dodd -- Raymond James -- Analyst

Ryan Lynch -- KBW -- Analyst

Mickey Schleien -- Ladenburg Thalmann -- Analyst

Kyle Joseph -- Jefferies -- Analyst

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

Jim Altschul -- Aviation Advisory Service -- Analyst

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