Robert Dodd: Got it. Appreciate it. Thank you.
Christian Oberbeck: Thanks, Robert.
Operator: One moment for our next question. Our next question comes from Casey Alexander with Compass Point Research & Trading. Your line is now open.
Casey Alexander: Hi, good morning. First question with a little series of questions here. There was a quarter-over-quarter reduction in PIK income. Can you tell us what that is attributable to?
Michael Grisius: Just trying to look at it here.
Henri Steenkamp: I think, it was actually — a big part of it was Zollege, I think, because there was a PIK component to Zollege as well, Casey. And so obviously, going on to non-accrual, we also stopped the PIK on Zollege. I mean, PIK is very small in general for us. So, it has an outsized impact — not that it was a huge PIK amount, but it has an outsized impact because the overall amount is.
Casey Alexander: Okay. That’s fine. Thank you. Secondly, as part of your optionality, is it deemed dividend considered part of that optionality for some of the back income?
Christian Oberbeck: What do you mean by deemed dividend, Casey?
Casey Alexander: Well, I think you know what I mean.
Christian Oberbeck: You mean cash or non-cash?
Casey Alexander: Yes, the non-cash dividend.
Christian Oberbeck: Well, I think you obviously know that, that is an option. Yeah, absolutely. The statutory requirements for BDC is to pay out anything is — has an option for a stock issuance. So that is statutory option that is out there. We have not made a decision one way or the other on how to address that.
Casey Alexander: Okay. Does the JV own any Pepper Palace or Zollege?
Christian Oberbeck: No.
Casey Alexander: No, okay. Is the CLO experiencing — when you talk about individual credits, has it experienced actual defaults in the CLO?
Henri Steenkamp: No. It’s mainly been — it’s not necessarily defaulting assets, but the market price of a handful of assets has deteriorated significantly from a mark-to-market, which then makes it classified as a default for purposes of the valuation, which obviously lowers the principal cash flows that you use in your valuation.
Casey Alexander: So, in essence, it’s the bid price that puts it in violation of the CLO measuring stick. Is that what you mean?
Henri Steenkamp: Well, just for valuation purposes. So, if mark moves from, let’s say, 80 to 50, it is not necessarily in default from a payment terms perspective. But for purposes of our valuation, we treat it as a default. So, we take its cash flows out of the valuation.
Casey Alexander: Okay. Great. All right. And then, Chris, I’d like to invite you to take this opportunity to have kind of an open discussion with your shareholders about the manner in which you guys are raising equity and why you think a shareholder should be comfortable with the manner in which you’re raising equity in the market.
Christian Oberbeck: Sure. And I think it’s a very good question. I guess, when we started 13 years ago, I think the BDC had $50 million of equity. And today, we’re at $373 million of equity. And the bulk of that has come through share issuances over time. And fortunately, we’ve also had some very good success in terms of capital gains. And so, retention of capital gains has also contributed to that. And over that period of time, we’ve taken the BDC from kind of inconsequential BDC to certainly consequential relative to our niche in the marketplace, if you will, but we’re substantially larger than we were. We were like $80-something million. Now, we’re $1.1 billion. And so, we’ve built our franchise very substantially. And as you know and as you point out, there’s leverage capabilities in a BDC that have limits.
And in order to grow, one has to raise equity to grow. And we have done that over time. And pretty much, we’ve done it when we can and when we could have. And the results, I think if you look at our performance, total return performance, I think all the equity — relative to almost every period — I mean if you get to super short periods, trading and things like that, less than a year, less than six months, maybe it’s a problem. But I think if you look at annual periods or multiyear periods for all the parties that have invested in our equity and stayed with it for a year or more, I’m pretty sure that every single person has had a very, very sizable returns and generally speaking, has outperformed the industry average of the BDC. So, we think all our equity issuances have been accretive, if you will, for people that bought that stock that it’s gone up on a total return basis.
I think if you look at our stock right now, we have close to 16% earnings yield. That’s a very substantial earnings yield, which I think is helping to build our equity, cover our dividend by 40%. So, I think the stock is certainly, from our standpoint, in our internal ownership, very attractive stock to own. Now, we have traded below NAV. And as you know, one doesn’t issue stock, can’t issue stock below NAV at the BDC level. And so, as a manager, this past year, we issued about $50 million of stock and the manager itself has invested $4.5 million to basically support or subsidize that so that the BDC, when it sells that stock, gets 100% of NAV. And I think that, that investment by the manager is reflective of our belief in the business. In essence, it’s an investment by the manager in our equity, in our business, in the growth and opportunities that we see in the business.
