Q4 2023 PennantPark Investment Corp Earnings Call
Please standby we are about to begin.
Good afternoon, and welcome to pennant Park investment Corporation's fourth fiscal quarter 2023 earnings Conference call.
Today's conference is being recorded.
At this time, all participants have been placed in a listen only mode.
The call will be opened for a question answer session. Following the Speakers' remark.
If you would like to ask a question at that time simply press star one on your telephone keypad.
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It is now my pleasure to turn the call over to Mr Art, Penn Chairman and Chief Executive Officer of Pennant Park Investment Corporation.
Mr. Penn You May begin your conference.
Good afternoon, everyone I'd like to welcome you dependent Park investment Corporation's fourth fiscal quarter 2023 earnings Conference call I'm joined today by Rick are Lori <unk>, our Chief Financial Officer.
Rich please start off by disclosing some general conference call information and included discussion about forward looking statements.
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 pennant Park investment Corporation and that any unauthorized broadcast of this call in any form is strictly prohibited.
An audio replay of the call will be available 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 filing with the SEC for important factors that could cause actual results to materially differ from these projections.
We do not undertake to update our forward looking statements unless required by law.
Obtain copies of our latest SEC filings. Please visit our website at pennant Park Dot com or call us at 212905 1000 at.
At this time I'd like to turn the call back to our chairman and Chief Executive Officer Art Penn.
Thanks, Ric we're going to spend a few minutes and comment on the current market environment for private credit.
Provide a summary of how we fared in the quarter ended September 30th how the portfolio is positioned for upcoming quarters. A detailed review of the financials then open it up for Q&A.
For the quarter ended September 30th our GAAP and core net investment income was 24 cents per share.
Adjusted any V increased 0.4% to $7.70 per share from seven to $7.67 per share GAAP and a V decreased slightly to $7 70 per share from $7 72 per share.
The debt portfolio continues to benefit from the current base rate environment as of September 30th our weighted average yield to maturity was 13%, which is up from 12, 7% last quarter and 10, 8% last year.
During the quarter, we continued to originate attractive investment opportunities and invested $61 million in two new and 31 existing portfolio companies at a weighted average yield of 11, 2%.
Before the investments in new portfolio companies the weighted average debt to EBITDA was 4.4 times. The weighted average interest coverage was one nine times and the weighted average loan to value was 36%.
Credit quality of the portfolio is stable, we had no new non accruals in the quarter ended September 30th.
As of September 30 is the portfolios weighted average leverage ratio through our debt security was five times and despite the steep increase in base rates over the past 12 months. The portfolio's weighted average interest coverage ratio at September 30th was 2.3 times.
We continue to believe that the current vintage of core middle market directly originated loans is excellent at.
Leverages lower spreads and OID or higher and covenants are tighter than the upper middle market.
<unk> reports, a covenant erosion in the upper middle market and the core middle market, we are still getting meaningful covenant protections.
We are seeing an increase in deal flow compared to the first half of 2023 and have a growing pipeline of interesting and attractive investment opportunities.
Since quarter end, we have continued to be active <unk> September 30th through November 10th we invested $131 million into new and existing investments and are continuing to see strong deal flow going into yearend.
At September 30th the JV portfolio equaled $804 million and during the quarter, the JV invested $57 million, including $48 million of purchases from P. N N T.
During the quarter the JV closed on a $300 million securitization. This new financing together with the existing committed junior capital from P. N N T and our JV partner will allow the JV portfolio to grow to over $1 billion of assets.
For the past 12 months P. N N T earned a 17, 2% return on invested capital in the JV.
We expect that with continued growth in the JV portfolio. The JV investment will enhance P. N N Ts earnings momentum in future quarters.
Now, let me turn to the current market environment.
From an overall perspective in this market environment of inflation rising interest rates geopolitical risks and a potentially weakening economy, we are well positioned as a lender focused on capital preservation in the United States or the floating interest rates on our loans can protect against rising interest rates and inflation.
We continue to believe that our focus on the core middle market provides the company with attractive investment opportunities, where we provide important strategic capital to our borrowers.
We have a long term track record of generating value by successfully financing growing middle market companies are five key sectors.
These are sectors, where we have substantial domain expertise the right questions to ask and have an excellent track record.
They are business services consumer government services, and defense healthcare and software technology <unk>.
These sectors have also been recession resilient and tends to generate strong free cash flow.
Approximately 12% of our portfolio is in government services in defense, which is a sector with a strong tailwind in this geopolitical environment.
And our software vertical we don't have any exposure to <unk> loans.
The core middle market, which is companies with 10 to 15 million of EBITDA is below the threshold and does not compete with the broadly syndicated loan or high yield markets. Unlike our peers in the upper middle market and the core middle market. Because we are an important strategic lending partner to process and package of terms, we receive it's attractive.
We have many weeks to do our diligence with care, we thoughtfully structure transactions with sensible credit statistics meaningful covenants substantial equity cushion to protect our capital attractive upfront OID and spreads and equity co investment. Additionally from a monitoring perspective, we received monthly financial statements to help us.
Stay on top of the companies.
With regard to covenants.
Unlike the erosion in the upper middle market virtually all of our originated first lien loans had meaningful covenants, which help protect our capital.
If there is a significant reason why we believe we are well positioned.
In this environment.
Many of our peers, who focus on the broadly syndicated loan and upper middle market States that those bigger companies are less risky.
That is a perception that may makes some intuitive sense, but the reality is different according to S&P lots of companies with less than $50 million EBITDA have a lower default rate and higher recovery rate and then launch the companies with higher EBITDA, we believe that the meaningful covenant protections of the core middle market.
Where theres more careful diligence and tighter monitoring have been an important part of this differentiated performance.
As a provider of strategic capital that fuels the growth of our portfolio companies in many cases, we also participate in the upside of the company by making an equity co investment.
Our returns on these equity co investments have been excellent over time overall for our platform from inception through September 30th we've invested over $410 million in equity call investments and have generated an IRR of 26% at a multiple on invested capital of two two times since.
Since inception P. N N T has invested $7 $6 billion.
At an average yield of 11, 3% and has experienced a loss ratio of approximately 20 basis points annually.
A strong track record includes our energy investments, which were primarily and primarily subordinated debt investments made prior to the financial crisis and recently the pandemic.
With regard to the outlook new loans in our target market are attractive and this vintage should be particularly attractive our experienced and talented team and our wide origination funnel is producing active deal flow.
Continued focus remains on capital preservation and being patient investors.
We want to reiterate our goal is to generate attractive risk adjusted returns through income coupled with long term preservation of capital, we seek to find investment opportunities and growing middle market companies that have high free cash flow conversion, we capture that free cash flow primarily through debt investments and we pay out those contractual cash flows in the form of dividends to our shareholders.
Let me now turn the call over to Rick our CFO to take us through the financial results.
Thank you art for.
For the quarter ended September 30, GAAP and core net investment income was 24 per share.
Operating expenses for the quarter were as follows interest and credit facility expenses were $9 million.
Management and incentive fees were $7 2 million.
General and administrative expenses were $1 6 million in provision for excise tax was <unk> 7 million.
For the quarter ended September 30, net realized and unrealized change on investments and debt, including provision for taxes was a loss of $2 5 million or <unk> <unk> per share.
As of September 30th our GAAP NAV was $7 70 per share, which is down 3% from $7 72 per share in the prior quarter.
Our adjusted NAV per share was $7.70.
Which is up 4% from the prior quarter.
As of September 30th our debt to equity ratio was 1.05 times and our capital structure is diversified across multiple funding sources, including both secured and unsecured debt.
As of September 30th our key portfolio statistics, whereas follows.
Our portfolio remains highly diversified with 129 companies across 27 different industries.
The weighted average yield on our debt investments was 13%.
We had one nonaccrual, which represents one 2% of the portfolio at cost and zero percent at market value.
The portfolio is comprised of 53% first lien secured debt.
8% second lien secured debt.
10% subordinated notes to PSL F.
5% other subordinated debt.
6% equity and PSL F and 18% in other preferred and common equity.
95% of the debt portfolio is floating rate.
Our debt to EBITDA on the portfolio is five times and interest coverage is two three times.
The portfolio as a whole has a meaningful cushion with regard to interest coverage on.
On a sensitivity basis for the portfolios overall interest coverage decreased to one times base rates would need to go up 200 basis points and EBITDA would need to decrease by 30%.
This analysis is based upon current run rate interest coverage and assumes a five 5% base rate.
Now, let me turn the call back to art.
Thanks, Rick.
Closing I would like to thank our dedicated and talented team of professionals for their continued commitment to PMT and its shareholders. 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.
Okay.
Operator, you on the line.
Okay.
And I apologize for the delay ladies and gentlemen, if you would like to ask a question. Please signal by pressing star one on your telephone keypad can anything a speaker phone. Please make sure you are.
Mute function is turned off to allow your signal to reach our equipment.
Again press Star one to ask a question.
We'll take our first question from Robert Dodd with Raymond James.
Please go ahead.
Hi, guys.
In response to.
To Rick's comment about the.
The decline in EBIT dollar that would be necessary to get to one times coverage.
Helpful but.
If I remember I think last quarter was 25% this quarter it would have to decline.
So can we read into that.
The EBIT dollar growth.
On a year over year or last quarter the trailing EBITDA.
5% I mean that seems quite a lot of the over the course of.
Just the quarter, but that does sound like that.
Acquired deterioration now is meaningfully more than it was a quarter ago I hope that makes sense.
Yes.
Yes, yes, thanks, Robert and thanks for the question in General that's right our Ebitdas.
As a general proposition in revenues in the portfolio are up are up a bit.
And they've continued overall too to trend positively.
Obviously, we have got different deals in the portfolio with different leverage amounts and <unk>.
Different kind.
Kind of the numbers are kind of calculated pressure each quarter based on.
The portfolio, we have at the time, but as a general proposition Youre right EBITDA is up.
Got it. Thank you and then look at it.
Hi, Paul any timing timing issues aside are you seeing any.
Change in the type of DLC, you're seeing today and early stage pipeline for US is one that you would expect.
<unk> entered the pipeline.
Months ago.
It might be closing now the early stage ones have any different characteristics.
And then the.
The other.
Albert.
Okay.
Not that I'm trying to think if theres anything any material difference I mean, we kind of we have our box our boxes are box generally which is.
For our kind of high free cash flow companies, who are willing to tolerate a certain amount of leverage.
Usually below five times well occasionally go above five times, if theres really good reason to do so either due to quick deleveraging our growth.
The company has got a moat and.
As a real reason to be and if theres a lots of.
Kind of equity beneath us from sponsors who we've done business with who we are.
We've known over time, we can handicap their behavior.
That's kind of our box now and the upper end of the quarter Middle market, We say the core middle market is 10% to 50 of EBITDA in the upper end in certain sectors and certain companies that are viewed as very strong theres a little bit of competition. There. So spreads in that piece of the market may be tightening a little bit as.
I think players believe the economy is in.
In better shape or the odds of a recession or a lower a and b.
Odds of a dramatic increase in interest rates are probably lower as well so.
Market participants are kind of saying this is kind of the zone of interest rates, we have the economy's feeling a little bit better. So on that upper end of the core middle market, we're seeing a bit and we're seeing a little bit of spread compression.
Got it thank you and congratulations.
Thank you.
Our next question comes from Paul Johnson of <unk>. Your line is open. Please go ahead.
Yeah. Good afternoon, guys. Thanks for taking my question.
Can you kind of answered my question in terms of just your EBITDA and growth rate trends in the portfolio Youre seeing this year on your answer to Robert but.
I guess.
Paul.
Okay.
Mr. Johnson. Your line is still connected are you able to hear me.
Okay.
Okay.
I apologize that Ross is audio.
Yes, well, let me you've gone operator.
And hopefully I'll come back and move to Maxwell furniture with true Securities. Sir Your line is open. Please go ahead.
Hi, I'm, calling in for Mark Hughes going forward do you have any guidance of what we should expect the mix of the portfolio to be should we expect it to stay around the current levels.
Like first lien as a percent of the total investments et cetera.
Yes, so good question.
You know.
As a general proposition, yes, it should be generally the same although we do continue to target.
Lower equity exposure, we have quite a few equity co investments that are performing well that we would hope over time as deal flow comes back because M&A comes back we'd hope to rotate.
You know a bunch of those equity positions into cash, which we can then put into yield instruments and those yield instruments would be a combination of first lien secured debt.
Occasionally a piece of second lien or Mezz.
And then the JV the JV has been very good we have.
The <unk> JV.
Be generating an upper teens 17 plus percent return.
You have capital and there is very very accretive.
To our shareholders. So looking to looking to rotate I think is about 18% of the portfolio and preferred and common equity that is not in that joint venture. We're looking to work that down over time.
Yes.
Thank you and do you have a figure for the percent of the portfolio that's under one times interest coverage.
Its.
I don't think Theres anything Thats under one times interest coverage right now.
Great and if I may sneak in one more is there any material or noteworthy sales and repayments thus far in <unk>.
Fiscal <unk>.
Yes, we put in a recent development subsequent event about our deal flow there has been very limited repayments quarter to date.
Okay.
Got it thank you.
And we will return to Paul Johnson with <unk>. Your line is open Sir Please go ahead.
Hey, guys, sorry about that I'm not.
Sure I think it's on my end here, but.
Just kind of given you don't like the growth obviously, you've had in the jv's.
For both of the BDC vehicles.
Over the last few years I'm, just curious what for the pennant platform what is kind of like the ideal hold size I guess, including again all the Tvs. The other funds that are managed in the platform in terms of the commitment from the dependent platform.
Yes. So it is public information, we put this out here or there, where we had about $6 8 billion of.
Of investable capital across the platform, including the Bdcs the Jv's.
Variety of private funds SMA clo's.
So if you think about it in profit terms of proper diversification.
2% position would be kind of a typical position that we take so 2% times $6 8 billion, you've got $135 million.
That would be a 2% position. So we say we can kind of.
50 to 150 is kind of Arizona.
Okay.
Got it thanks for that.
And then kind of last one just a little bit of housekeeping, but since we don't have the filings available I was wondering if you could just give the distribution on the JV for this quarter.
Sure.
Sure.
So the distribution from <unk> was $4 4 million and the distribution from P. TSS was 700000.
Thanks, and then does that also include probably doesn't but the.
The income from the <unk>.
The sub note piece Youre sub subordinated membership in the JV as well.
It does not that is just the equity dividend.
Thanks, Eddie can do you have that as well or.
I don't have the quantification of that now.
The Soi you can see the the amount of the.
The sub debt in the Soi in the end the coupon on it so.
We can try to get it for you here, but it's in the statement of investments that's part of the filing.
Okay. Thanks, that's all for me.
Yeah.
Thanks, Paul.
We'll go next to Kyle Joseph with Jefferies. Your line is open. Please go ahead.
Hey, good morning, Thanks for taking my questions.
I just wanted to pick your brain on competitive dynamics in the market, obviously, we've seen headlines.
Memories of banks pulling back even further from the space given everything that's gone on in that industry. This year and then on the other hand, yeah, there's been a ton of private capital right.
So just wanted to get kind of your thoughts on competitive dynamics for the industry as we head into 'twenty four.
Yes, it's a year and you've highlighted Kyle some good cross currents.
Currently we are we're seeing banks and regional banks exit the middle market on one hand on the other hand.
The private Bdcs are perpetual bdcs have had been raising capital most of those private perpetual folks are focused on the upper middle market.
Adding to the.
To the fire that's going on there and there's been reports an impressive about the erosion of covenants.
And covenant protections in the upper middle market. So we're not really seeing that may be on the upper end of our <unk>. We say we go from 10 to 50 of EBITDA as I said earlier, maybe at the upper end of that we're seeing a little bit more competition on on deals are in industries that are are very popular everyone thinks are very strong at this point.
So.
We're seeing in our World you know kind of in this <unk>.
The radar.
The core middle market, we're seeing the same.
We're seeing the same players.
And it's.
There's very little overlap.
Among the players I think.
S&P actually doesn't interesting chart, which stage two as part of their CLO research and.
Kind of middle market.
Middle market players and in kind of the.
Players we run into the most maybe we shared deals within 5% of the time.
So it's a massive.
A massive market theirs, we think over 2000 middle market private equity firms in America.
They have lots of dry powder, they are trying to do deals.
Yes, there has been a peers of ours, but theres not that many particularly those focused on the core middle market.
Which is why we can be very thoughtful and careful and do proper due diligence, where we're not rushed and where our capital is real meaning to the borrower.
So.
So we're just kind of taken it taken of one deal at a time.
Thankfully our default rate is.
Very low remains low and it's because we're you know we have this defensive posture.
Okay.
Got it very helpful and then just.
How the board is thinking about the dividend given kind of the shift in the forward curve and potential for rate reductions next year.
The type of claim Youre looking to add there.
Yeah. It's a good question, where it's an evolving question. Obviously, we were up until this quarter <unk> raised the dividend for a for many many quarters.
As our income Rosen as our default rate remained very very limited.
We pivoted to a monthly dividend a couple of months ago.
So here this quarter, we earned 24, we're paying out 21 cents.
I think for now we're just going to let it led to percolate.
Kind of keep a nice cushion to the monthly seven cent.
Per share dividend.
It will come up for air in a couple of months and see how things are looking and see about the trends in the portfolio C. C about interest rates.
This G. This JV this PSL up JV has been really really accretive.
Two to earnings and.
And hoped.
Hopefully it will continue to be very accretive to earnings.
No decisions, but it's something we're watching and.
And we're focused on.
Okay.
Great. Thanks, very much for taking my questions.
Thank you.
Okay.
Our next question comes from Melissa Wedel with Jpmorgan. Your line is open. Please go ahead.
Thanks for taking my questions.
Wanted to first thank you for the disclosure on activity levels in the December quarter to date.
Just to clarify.
With an 11.9% sort of average yield on that activity or should we think about that.
And sort of slow down.
And up on balance sheet or would that qualify for some of the JV.
Yes. It is.
So it's a good question. So it would qualify for both I know some of our peers.
Have different types of assets that they put in their JV versus what they put on balance sheet at the BDC some of our peers to maybe to put some broadly syndicated loans, there and Theyre Jv's, we put the same exact.
Loans, and we really allocate based on available capital.
And both both the balance sheet of the BDC and the JV have available capital today.
And one of the benefits is theres a couple of benefits of the JV one as we get the benefit of.
A smart institutional investor like our JV partner.
Two.
We can optimize leverage a little bit more.
So it's a more levered vehicle than we do in and its also all first lien. So we're not putting any mezzanine or any any any equity in that JV. It's all.
Kind of first lien senior secured debt.
And then that gets levered, a little bit more than we do on the BDC level. So let's say, it's levered two to one or maybe in the <unk>.
Optimized case is up to two and a half to one.
Which is higher than on balance sheet in the BDC, but it's also lower than it would be if it were kind of in a regular middle market CLO, we have a middle market CLO business.
With third party investors and there the the.
The equity gets Levered 401.
So a little bit more leverage in the BDC less levered than cielo as we do CLO technology as a financing tool for the joint venture and Thats very good financing matched financing long term financing for that joint venture, but we keep it leverage kind of in that two times to maybe two five times.
Range in and if we can continue that very high quality on this book of first lien loans.
The Roes can be very strong which is what we're saying.
So just to follow up on that you had.
Great next question Roger.
Leveraging the portfolio.
Lee with elevated repayment activity in the September quarter average came down a bit.
Is your thinking evolving at all on where you'd like to see.
Balance sheet leverage within the P&L.
Yes, no we're still at P. N N T targeting about one and a quarter times.
A little over one times as of.
As of September 30th So there is some capacity on balance sheet at PNM.
And so we're still targeting that one and a quarter times hopefully overtime, we can rotate some of this equity which will be <unk>.
Really accretive.
As we do that is middle market M&A comes back for sure we're going to be able to rotate it. It's been slower deal flow has been slower which means some of thats been on our balance sheet, a little longer than we would've hoped but that isn't that remains an opportunity.
Thank you.
Okay.
And with no other questions holding I'll turn the conference back to Mr. Penn for any additional or closing comments.
I just wanted to thank everybody for their participation today as we come to Thanksgiving next week, we certainly have a lot of gratitude for all of our investors. So thank you for.
For spending your time and in capital with US we're wishing everyone a thanksgiving of gratitude.
And we look forward to speaking to you next in early February after our next earnings release.
Very much.
Thank you. This concludes today's call. Thank you for your participation you may now disconnect.
Yeah.
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