Q1 2024 PennantPark Investment Corporation Earnings Call
Operator: Please stand by. Your conference is about to begin. Good afternoon, and welcome to the Pennant Park Investment Corporation's first quarter 2024 earnings conference call. Today's conference is being recorded. At this time, all participants have been placed in a listen-only mode.
Please standby your conference is about to begin.
Good afternoon, and welcome to the pennant Park investment corporations first quarter 'twenty 'twenty four earnings Conference call. Today's conference is being recorded at.
At this time all participants have been placed in a listen only mode. This call will be opened for a question and answer session. Following the Speakers' remarks, if you'd like to ask a question at that time simply press star one on your telephone keypad.
Operator: This call will be open to a question and answer session following the speaker's remarks. If you'd like to ask a question at that time, simply press star 1 on your telephone keypad. If you'd like to withdraw your question, press star 2 on your telephone keypad. It is now my pleasure to turn the call over to Mr. Art Penn, Chairman and Chief Executive Officer of PennantPark Investment Corporation. Mr. Pennant, you may begin your conference. Good afternoon, everyone.
If you'd like to withdraw your question Press Star two on your telephone keypad.
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 opinion, you may begin your conference.
Good afternoon, everyone I'd like to welcome you dependent Park investment Corporation's first fiscal quarter 2024 earnings Conference call I'm joined today by Rick <unk>, Our Chief Financial Officer, Rick. Please start off by disclosing some general conference call information and included discussion about forward looking statements.
Rick Alloro: I'd like to welcome you to PennantPark Investment Corporation's first fiscal quarter 2020 earnings conference call. I'm joined today by Rick Alloro, our Chief Financial Officer. Rick, please start off by disclosing some general conference call information and include a discussion about forward-looking statements. Thank you, Art.
Thank you art I'd like to remind everyone that today's call is being recorded. Please note that this call is the property pennant Park investment Corporation and that any unauthorized broadcast of this call in any form is strictly prohibited.
Rick Alloro: 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. An audio replay of the call will be available on our website.
An audio replay of the call would be available on our website.
Rick Alloro: 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 by law. To obtain copies of our latest SEC filings, please visit our website at pennandpark.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 Pennant. Thank you, Rick.
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.
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.
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.
Thank you Rick we're going to spend a few minutes and comment on the current market environment for private credit.
Art Penn: 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 December 31st, how the portfolio is positioned for upcoming quarters, a detailed review of the financials, and then open it up for Q&A. For the quarter ended December 31st, our GAAP and coordinated investment income was $0.24 per share. The gap in adjusted NAV decreased 0.6% to $7.65 per share from $7.70 per share.
A summary of how we fared in the quarter ended December 31st.
The portfolio is positioned for upcoming quarters, a detailed review of the financials.
And then open it up for Q&A.
For the quarter ended December 31st our GAAP and core net investment income was 24 cents per share.
GAAP and adjusted NAV decreased <unk>, 6% to $7 65 per share from $7 70 per share.
Art Penn: As of December 31st, our portfolio grew to $1.2 billion, or 16% from the prior quarter. During the quarter, we continued to originate attractive investment opportunities and invested $231 million in 12 new and 32 existing portfolio companies at a weighted average yield of 11.9%. For the investments in new portfolio companies, the weighted average debt to EBITDA was 3.7 times, the weighted average interest coverage was 2.4 times, and the weighted average loan to value was 55 percent. The credit quality of the portfolio is stable. We had no new non-accruals at the quarter end of December 31.
As of December 31st our portfolio grew to $1 $2 billion or 16% from the prior quarter.
During the quarter, we continued to originate attractive investment opportunities and invested $231 million in 12, new and 32 existing portfolio companies at a weighted average yield of 11, 9%.
For the investments in new portfolio companies the weighted average debt to EBITDA was three seven times. The weighted average interest coverage was two four times and the weighted average loan to value was 55%.
Credit quality of the portfolio is stable, we had no new non accruals in the quarter ended December 31.
Art Penn: As of December 31st, the portfolio's weighted average leverage ratio through our debt security was 4.9 times, and despite the increase in base rates through 2023, the portfolio's weighted average interest coverage ratio was 2.2 times. On average, we have seen a 25 basis point tightening and first lien spread. However, we continue to believe that the current vintage of core middle market directly originated loans is excellent.
As of December 31st the portfolio's weighted average leverage ratio through our debt security was four nine times and despite the increase in base rates through 2023.
Portfolio was weighted average interest coverage ratio was two two times.
On average we have seen a 25 basis point tightening of first lien spreads. However, we continue to believe that the current vintage of core middle market directly originated loans is excellent.
Art Penn: Leverage is lower, spreads and up-front OID are higher, and covenants are tighter than in the upper middle market. Despite covenant erosion in the upper middle market, in the core middle market, we are still getting meaningful covenant protection. At December 31st, the JV portfolio equaled $858 million, and during the quarter, the JV invested $81 million, including $8 million of purchases from PNNT.
Average is lower spreads in upfront OID or higher and covenants are tighter than the upper middle market.
Despite covenant an erosion in the upper middle market and the core middle market, we are still getting meaningful covenant protections.
At December 31, the JV portfolio equaled $858 million and during the quarter, the JV invested $81 million, including $8 million of purchases from P. N N T.
Art Penn: Over the last 12 months, PNNT earned a 19% return on invested capital into the JV. We expect that with continued growth in the JV portfolio, the JV investment will continue to enhance PNNT's earnings momentum in future quarters. Now let me turn to the current market environment. In an uncertain market environment, we are well positioned as a lender focused on capital preservation in the United States. 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 for our borrowers. We have a long-term track record of generating value by successfully financing growing middle market companies in five key sectors. These are sectors where we have substantial domain expertise, know the right questions to ask, and have an excellent track record. They are business services, consumer, government services, and defense, healthcare, and software and technology.
Over the last 12 months P. N N T earned a 19% return on invested capital into the JV.
We expect that with continued growth in the JV portfolio. The JV investment will continue to enhance P. N N Ts earnings momentum in future quarters.
Now, let me turn to the current market environment.
And in an uncertain market environment, we are well positioned as a lender focused on capital preservation in the United States.
We continue to believe that our focus on the core middle market provides the company with attractive investment opportunities, where we provide important street, Jason strategic capital to our borrowers.
We have a long term track record of generating value by successfully financing growing middle market companies and five key sectors.
These are sectors, where we have substantial domain expertise.
Questions to ask and have an excellent track record there.
There are business services consumer government services, and defense health care and software and technology.
Art Penn: These sectors have also been recession resilient and tend to generate strong free cash flow. The core middle market, which is companies with $10 to $50 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, in the core middle market because we are an important strategic lending partner. The process and package of terms we receive is attractive. We have many weeks to do our diligence with care.
Sectors have also been recession resilient and tends to generate strong free cash flow.
The core middle market, which is company, which are companies with 10 to 50 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.
In the core middle market, because we are an important strategic lending partner a process and package of terms we receive is 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 spreads.
Art Penn: We thoughtfully structure transactions with sensible credit statistics, meaningful covenants, substantial equity cushions to protect our capital, attractive spreads, upfront OID, and equity co-investment. Additionally, from a monitoring perspective, we receive monthly financial statements to help us stay on top of the companies.
Front, OID 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 have meaningful covenants, which help protect our capital. This is a significant reason why we believe we're well positioned in this environment.
Art Penn: With regard to covenants, unlike the erosion in the upper middle market, virtually all of our originated first lien loans have meaningful covenants that help protect our capital. This is a significant reason why we believe we are well positioned in this environment. Many of our peers who focus on the upper middle market state that bigger companies are less risky. That is a perception that may make some intuitive sense, but the reality is different.
Any of our peers, who focus on the upper middle market state 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 loves the companies with less than 50 million of EBITDA have a lower default rate and higher recovery rate than loans to companies with higher EBITDA.
Art Penn: According to S&P, loans to companies with less than $50 million of EBITDA have a lower default rate and higher recovery rate than loans to companies with higher EBITDA. We believe that the meaningful covenant protections of core middle market loans, 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 participate in the upside of the company by making an equity co-investment. Our returns on these equity call investments have been excellent over time.
We believe that the meaningful covenant protections of core middle market loans more careful diligence and tighter monitoring had been an important part of it is differentiated performance.
As a provider of strategic capital that fuels the growth of our portfolio companies in many cases, we 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.
If we're off our platform from inception through December 31st we've invested over $448 million in equity co investments and have generated an IRR of 26% and a multiple on invested capital of two one times.
Since inception, nearly 17 years ago P. N N T has invested $7 $8 billion at an average yield of 11, 3%.
Art Penn: Overall, for our platform, from inception through December 31st, we've invested over $448 million in equity co-investments and have generated an IRR of 26% and a multiple on invested capital of 2.1 times. Since inception nearly 17 years ago, PNNT has invested $7.8 billion at an average yield of 11.3% and has experienced a loss ratio on invested capital of approximately 18 basis points annually. This strong track record includes investments of primarily subordinated debt made prior to the global financial crisis, legacy energy investments, and recently, the pandemic. With regard to the outlook, new loans in our target market are attractive. Our experienced and talented team and our wide origination funnel are producing active deal flow. Our continued focus remains on capital preservation and being patient investors.
It has experienced the loss ratio on invested capital of approximately 18 basis points annually.
This strong track record includes investments are primarily subordinated debt made prior to the global financial crisis legacy energy investments and recently the pandemic.
With regard to the outlook new loans in our target market are attractive our experienced and talented team and our wide origination funnel is producing active deal flow and a continued focus remains on capital preservation and being patient investors.
We want to reiterate our goal 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 instruments, 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.
Rick Alloro: We want to reiterate our goal to generate attractive, risk-adjusted returns through income, coupled with a long-term preservation of capital. We seek to find investment opportunities in growing middle-market companies that have high free cash flow conversion. We capture that free cash flow primarily through debt instruments, and we pay out those contractual cash flows in the form of dividends to our shareholders. I will now turn the call over to Rick, our CFO, to take us through the financial results. Thank you, Art.
Thank you art for the quarter ended December 31, GAAP and core net investment income was 24 cents per share.
Operating expenses for the quarter, whereas follows interest and credit facility expenses were $9 6 million.
Base management and incentive fees were $7 3 million.
General and administrative expenses were $1 4 million in provision for excise taxes, or a <unk> 4 million.
For the quarter ended December 31, net realized and unrealized change on investments and debt, including provision for taxes was a loss of 5 million or <unk> <unk> per share.
Rick Alloro: For the quarter ended December 31st, GAAP and Core Net Investment Income was $0.24 per share. Operating expenses for the quarter were as follows. Interest and credit facility expenses were $9.6 million. Base management and incentive fees were $7.3 million. General and administrative expenses were $1.4 million, and provision for excise taxes were $0.4 million.
As of December 31, our GAAP and adjusted NAV was $7 65 per share, which is down <unk>, 6% from $7 70 per share in the prior quarter.
As of December 31, our debt to equity ratio was one four times and our capital structure is diversified across multiple funding sources, including both secured and unsecured debt.
Rick Alloro: For the quarter ended December 31st, the net realized and unrealized change on investments and debt, including provision for taxes, was a loss of $5 million, or $0.08 per share. As of December 31st, our gap, and adjusted NAV was $7.65 per share, which is down 0.6% from $7.70 per share in the prior quarter. As of December 31st, our debt-to-equity ratio was 1.4 times, and our capital structure is diversified across multiple funding sources, including both secured and unsecured debt. As of December 31st, our key portfolio statistics were as follows. Our portfolio remains highly diversified with 139 companies across 30 different industries. The weighted average yield on our debt investments was 12.6%. Pick income equaled only 3% of total investment income.
As of December 31, our key portfolio statistics were as follows.
Our portfolio remains highly diversified with 139 companies across 30 different industries.
The weighted average yield on our debt investments was 12, 6%.
Pik income equaled only 3% of total investment income.
We had one nonaccrual, which represents 1% of the portfolio at cost at zero percent at market value.
The portfolio is comprised of 58% first lien secured debt, 7% second lien secured debt now.
9% subordinated notes to PSL at.
4% other subordinated debt.
5% equity in PSL F.
And 16% in other preferred and common equity.
96% of the debt portfolio is floating rate.
And debt to EBITDA on the portfolio is four eight times and interest coverage is two two times.
Rick Alloro: We had one non-accrual, which represents 1% of the portfolio at cost and 0% at market value. The portfolio is comprised of 58% first lien secured debt, 7% second lien secured debt, 9% subordinated notes to PSLF, 4% other subordinated debt, 5% equity in PSLF, and 16% in other preferred and common equity.
Now, let me turn the call back to art.
Thanks, Rick and closing I would like to thank our dedicated and talented team of professionals for their continued commitment to P. N N T 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.
Thank you if you'd like to ask a question. Please signal by pressing star one on your telephone keypad, if you're using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment again press star one to ask a question.
Art Penn: Ninety-six percent of the debt portfolio is floating rate, and debt to EBITDA on the portfolio is 4.8 times, and interest coverage is 2.2 times. Now, let me turn the call back to Art.
And well pause just briefly to assemble our queue.
Art Penn: Thanks, Rick. In closing, I'd like to thank our dedicated and talented team of professionals for their continued commitment to PNNT 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. Thank you. If you'd like to ask a question, please signal by pressing star one on your telephone keypad. If you're using a speaker phone, please make sure your mute function is turned off to allow your signal to reach our equipment.
And our first question comes from Mark Hughes of K BW. Please go ahead.
I'll go with the Mark Hughes part of that good good afternoon, Rick what did you say the EBITDAR coverage.
<unk>.
Was on the overall portfolio.
So EBITDA was four eight times and the interest coverage was two two times.
Yeah, Yeah. Thank you and then.
Okay.
Nuance now about the attractiveness of either subordinated debt or the preferred or common.
Operator: Again, press star one to ask a question, and we'll pause just briefly to assemble our queue. And our first question comes from Mark Hughes of KBW. Please go ahead.
Yeah.
First lane.
It's obviously been attractive but.
Anything about the dynamic where you might see.
Mark Douglas Hughes: I'll go with the Mark Hughes part of that. Good afternoon, good afternoon, good afternoon.
A little bit more of a preference for some of those other categories.
Rick Alloro: Rick, what did you say the EBITDA cover was on the overall portfolio? So EBITDA was 4.8 times, and the interest coverage was 2.2 times. No, no, no.
Yeah, Thanks, Mark and by the way just to clarify Mark users with truest.
And.
Look we are we do invest across the capital structure. Obviously, it's been really good to do first lien in this higher yield environment with the vintage and the good credit stats as of Wells you know classically will do equity co invest.
Mark Douglas Hughes: Any nuance now about the track? That are the preferred or common funds. The first lane has obviously been attractive, but anything about the dynamic... more of a prep, and those other categories?
To participate in some of the upside.
There are interesting second lien sub debt Empress deals to look at they just haven't been that interesting relative to first lien recently.
Alright.
But we will continue to look and if we have real conviction will.
Art Penn: Yeah, thanks, Mark. And by the way, just to clarify, Mark Hughes is with Truist, and Look, we do invest across the capital structure. Obviously, it's been really good to do first lien in this higher yield environment with the vintage and the good credit stats, as well as, classically, we'll do equity co-invest to participate in some of the upside. There are interesting second lien, sub-debt, and PREF deals to look at. They just haven't been that interesting relative to first lien recently, but we will continue to look, and if we have real conviction, we'll potentially take a look at adding some of that to the portfolio judiciously and carefully. Thank you. Next, we go to the line of Robert Dodd with Raymond James. Please go ahead.
We will potentially kind of kind of take a look at adding some of that to the portfolio judiciously and carefully.
Thank you.
Next we go to the line of Robert Dodd with Raymond James. Please go ahead.
Hi, guys and congratulations on the quota.
Just on the activity in the quarter.
Hi.
My prepared remarks can you give us an idea how much.
Much of that origination was really late in the quarter because it certainly looks like it originated in law.
Interest income didn't move that much.
Our late stage.
I presume a considerable portion of that was very late.
How much.
Yes, Thank you Robert.
So about 40% of the origination was done in the month of December.
Yeah.
Got it thank you.
And then looking.
As you said some of my questions have already been answered on a previous call.
Robert Dodd: Hi guys, and congratulations on the quarter. Just on the activity in the quarter, I didn't catch this if you said that. Can you give us an idea how much of that origination was really late in the quarter? Because it certainly looks like it.
Some of the key sectors that you.
You look at that business there as you can see what the government et cetera.
Any.
Change in relative.
Art Penn: You originated a lot; interest income didn't move that much. I presume a considerable portion of that was very late, but just how much? For about 40% of the origination was done in the month of December. Got it. Thanks. And then looking, I mean, as you said, some of my questions had already been answered on a previous call.
Tim.
Oh.
Yeah.
Kind of the activity.
The initial preliminary pipeline maybe.
Paul with the rest of the year is it concentrated in those sectors.
Are you does it really mesh with your.
Yeah.
<unk> all.
Art Penn: So you know, some of the key sectors that you look at, like business services and the new government, etc., change their relative attractiveness there? I mean, in kind of the activity, the initial preliminary pipeline, maybe for the next, for the rest of the year, is it concentrated in those sectors? Does it really mesh with your preferences?
Yes. It is.
How does that look.
Potential opportunities by interest.
So in general.
Look we've been very active in defense and government services, where one of the leading lenders in that space given.
What's going on geopolitically, we feel like there's really nice tailwind to that space.
So we've been very active there.
Art Penn: Or, you know, is, you know, how's that look? and some of the potential opportunities by. So in general, look, we've been very active in defense and government services. We're one of the leading lenders in that space, given what's going on geopolitically. We feel like there are really nice tailwinds to that space. So we've been very active there, and for us, we have a really good track record. It's very stable, steady, and now potentially growing. Healthcare continues to be an active business for us. Now, you know, some of our peers have stumbled a little bit in healthcare. We've thankfully, you know, avoided some mistakes.
For Us we've had a really good track record is very stable steady and now potentially growing.
Health care continues to be active for US now some of our peers have stumbled a little bit in healthcare we've thankfully.
Avoided.
Did some mistakes and our way of looking at it and.
Avoiding reimbursement risk keeping leverage low trying to get behind the companies that are helping bring high quality care at a low cost has generally performed well from a credit standpoint.
And then business services, which is a big catch all business services can mean, a lot of things. We're active there we've been less active and tax slash software, it's always been one of our smaller verticals.
We're worried we lend against cash flow, we don't lend against revenue and we land.
Art Penn: And, you know, our way of looking at it and avoiding reimbursement risk, keeping leverage low, trying to get behind companies that are helping bring high-quality care at a low cost has generally performed well from a credit standpoint. And then business services, which is a big catch-all. Business services can mean a lot of things, and we're active in them. We've been less active in tech slash software. It's always been one of our smaller verticals.
Uh huh.
At reasonable levels of cash flow. So we it's a <unk>.
Sector for us it is not one of our bigger sectors.
And then consumer remains.
Sector for us, we've been a little bit more cautious there.
Evan.
Given some of the volatility around potential volatility around the consumer we've done better there when we've had brands that have some meaning and we haven't done a lot. There recently, but if you look at kind of what's worked for us and what hasn't worked brands that have meaning have worked so so it's really.
Art Penn: You know, we lend against cash flow. We don't lend against revenue. And we lend, you know, at reasonable levels of cash flow. So we've, you know, it's a sector for us. It's not one of our bigger sectors.
It's really been government services defense health care and business services is kind of.
The big three for us.
Perfect. Thank you.
On that point I mean.
You'd like to say business services white buckets as health care.
Art Penn: And then the consumer remains a sector for us. We've been a little bit more cautious there, given some of the volatility around, potential volatility around the consumer. We did better there when we had brands that had some meaning. And we haven't done a lot there recently.
And to your point, Yeah, you didn't do a lot of physician office roll up so things like that so.
All.
Et cetera.
So.
Yes.
Is it is the interest there isn't it.
Art Penn: But if you look at kind of what's worked for us and what hasn't worked, brands that have meaning have worked. So it's really, you know, it's really been government services, defense, health care, and business services. That's kind of, you know, the big three for us. Thank you. And on that point, I mean, you like to say business services are in the white bucket, and so is healthcare.
The intersection between health care that government is it Oh got it.
Yes.
You have had some successes in that area.
What's looking particularly maybe you don't want it sounds like the coke, but what's the.
Narrow areas in within that looking.
Good bye now.
Art Penn: And to your point, yeah, you didn't do a lot of, say, physician office roll-ups or things like that. So, you know, all the reimbursement risk, et cetera. I mean, so, what is the interest there? Is it, you know, the intersection between health care and government? Is it health care and tech? I mean, just, you have had some successes in that area. So, I mean, what's looking particularly, maybe you don't want to say on a public call, but what's looking at narrower areas within that are looking. Goodbye.
Yeah, I mean, there's a number of different.
Nishu this is such a vast.
Industry, it's about 20% of the GDP of the United States.
There is there is so many different niches of care and services and.
And synergies to be had.
Among small or medium sized providers and putting them together and then dealing with payers who.
Who want.
I want to.
We want to get synergies around who they are paying as well so.
We can offline we can go through some of the names in the portfolio, but it's a wide variety of different kinds of ways too.
Art Penn: Yeah, I mean, there are a number of different niches. It's such a vast industry; it accounts for about 20% of the GDP of the United States. There are so many different niches of care and services and synergies to be had, you know, among small or medium-sized providers and putting them together and then dealing with, you know, payers who want to, you know, want to get synergies around who they're paying as well. So, you know, we can – offline, we can go through some of the names in the portfolio, but there are a wide variety of different kinds of ways to, you know, articulate stable or growing healthcare niches with high free cash flow where you're providing care at a reasonable cost that payers view as a reasonable cost. So it's enormous.
Articulate.
Hopefully stable or growing healthcare niches with high free cash flow.
Where you are providing care at a reasonable cost that payer's view as a reasonable cost.
It's enormous we can certainly go go to go into it offline, but it.
It's all in there in the in the.
Soi statement of investments.
And people can look and see and I'll go in to the interpellation to the websites of these companies and see kind of the stuff we're doing.
Got it got it. Thank you one last one if I can on credit obviously interest coverage et cetera.
Now, let's get obviously, there's always going to be some.
Module companies in the portfolio, but that's always always the case for anybody I mean in terms of.
So are you seeing any emerging signs.
Weakness, maybe not even in the portfolio but across.
Art Penn: We can certainly go into it offline, but, you know, it's all in there in the SOI, the Statement of Investments, and people can look and see, you know, go and do the interpolation to the websites of these companies and see kind of the stuff we're doing. One last one, if I can, on credit. Obviously, interest coverage, etc., that looks good. Obviously, there's always going to be some marginal companies in the portfolio, but that's always the case for anybody. Transcripts provided by Transcription Outsourcing, LLC, are businesses that are coming to market now. I mean, it just seems everything's hanging in on a credit front, broadly speaking, much better than I would have thought if you'd asked me, certainly, you know, like two. So, is anything catching up to anybody yet, or is it just, you know, everything picks along, and everything's, you know, doing relatively fine Yeah, we agree. It's, it's, you know, as lenders are skeptics by nature, we presume and we underwrite assuming a recession, which is how we underwrite and, If you rewind the tape to some of these calls a year or two ago, we were saying very clearly we're underwriting and assuming a recession. That has not appeared yet.
Businesses.
Coming to market now I mean, it just seems everything's hanging in on a credit front wise broadly.
With that I would have thought if you'd asked me.
Two years ago.
So is there anything catching up to anybody yet or is it just you know.
Everything takes longer and everything's doing relatively hard.
Yeah, we agree it's.
<unk>.
Lenders were skeptics by by nature, we we presume and we underwrite assuming a recession, which is how we underwrite and.
If you if you rewind the tape to some of these calls a year or two ago, we were saying very clearly we are underwriting and assuming a recession.
That has not appeared so again our credits generally performed very well because we underwrote assuming a recession now we did not assume that base rates go going way back we did not assume base rates would be where they are today. So that's been that's been that's been that has been the surprise if for us it's been by and large good because the yields we're getting are excellent.
If these base rates continue to persist of course.
And a portfolio of 100 or 150 names theres going to be some companies that over time.
Just.
It's just too expensive for and whether there'll be amendments and things of that nature as this higher for longer trend continues.
If when the fed starts easing that we'll give some of these companies are a little bit of a break in a breather.
Art Penn: So again, our credits generally performed very well because we underwrote assuming a recession. But we did not assume that base rates... Going way back, we did not assume base rates would be where they are today, so that has been the surprise. For us, it's been, by and large, good because the yields we're getting are excellent. If these base rates continue to persist, of course, in a portfolio of 100 or 150 names, there's going to be some companies that, over time, you know, just, you know, it's just too expensive for and where there'll be amendments and things of that nature as this higher for longer trend continues.
But by definition, if these base rates persist for a while and any portfolio of this magnitude in the magnitude of our peers, there's going to be companies peeling off and needing amendments and extensions.
Needing needing.
Meeting, leaving some relief because you can't have 100 150 companies all going up to the right altogether no matter. How good you are and we think we're pretty good we think some of our peers are pretty good by and large ebitdas are growing 5% to 10% and where we're really thrilled with that but by definition, there's always a handful of companies that.
<unk>.
They're going to need some help.
Got it thank you.
Next we go to the line of Casey Alexander with Compass point. Please go ahead.
Art Penn: If and when the Fed starts easing, that will give some of these companies a little bit of a break and a breather. But by definition, if these base rates persist for a while in any portfolio of this magnitude and the magnitude ever appears, there will be companies peeling off and needing amendments and extensions and needing some relief because you can't have 100 or 150 companies all going up to the right all together, no matter how good you are. And we think we're pretty good at it.
Hi, good afternoon, thanks for taking my questions.
Pretty simple stuff here. This one is just first maintenance the weighted average yield dropped.
If I'm correct about 40 bps quarter over quarter, which is actually a fair amount in this environment is that new weighted average impacted by the fact that you're now carrying the government securities in the portfolio as opposed to <unk>.
Art Penn: We think some of our peers are pretty good. And by and large, cheaper dollars are growing 5% to 10%, and we're really thrilled with that. But by definition, there are always a handful of companies that are going to need some help. Got it. Thank you. Next, we go to the line of Casey Alexander with CompassPoint. Please go ahead. Hi, good afternoon.
Categorizing them as cash and cash equivalents.
Well I'll take the first crack and then kick it over to Rick I mean for sure. We've seen as we said spread compression. So the new deals are that are coming in.
Call. It 25 bps tighter from a spread compression standpoint, since we have been very active.
The weighted average certainly has come down Rick I don't know if you have any other commentary other than that.
I'll just confirm that the government securities are not included in the calculation of the weighted average yield so they're not impacting the outcome okay.
Casey Alexander: Thanks for taking my questions. And pretty simple stuff here. This one is just first maintenance. The weighted average yield dropped, if I'm correct, about 40 pips quarter over quarter, which is actually a fair amount in this environment. Is that new weighted average impacted by the fact that you're now carrying government securities in the portfolio as opposed to categorizing them as cash and cash equivalents? Well, I'll take the first crack and kick it over to Rick.
Alright, and then secondly.
I noticed in the Soi that Jeep that you've made a new loan of $50 million to mid ocean and if I'm not correct.
And maybe I am not correct, maybe but I think you've been sort of in and out in and around that name for quite a while did.
Could you kind of walk us through your history with mid Ocean and what you found attractive to put a new $50 million in this quarter.
Art Penn: I mean, for sure, we've seen, as we said, spread compression. So the new deals that are coming in, call them 25 beeps tighter from a spread compression standpoint since we have been very active. Rick, I don't know if you have any other commentary other than that.
It's a great question and you're very astute at at highlighting this this is a company called J F petroleum.
Which we've had for a while it was originally a mezz deal.
And then it was a restructured deal where we owned a chunk of equity.
It was a restructured once again.
Where we basically just became an equity holder.
The company has seen a resurgence.
Theres been some very smart add on acquisitions that have been made the.
Rick Alloro: I'll just confirm that the government securities are not included in the calculation of the weighted average yield, so they are not impacting the outcome. All right, then secondly, I noticed in the SOI that you made a new loan of $50 million to MidOcean. And if I'm not correct, and maybe I'm not correct, maybe, but I think you've been sort of in and out and around that name for quite a while. Did you kind of walk us through your history with MidOcean and what you found attractive to put a new $50 million in this quarter? It's a great question and you're very astute at highlighting this. This is a company called JF Petroleum which we've had for a while. It was originally a Mez deal.
The company has come back very very strongly and you can track the value of the equity.
Theres, an equity piece thats been marked up.
It's coming back strong.
And company.
I've learned not to over promise Casey and you can appreciate that accompanies coming back strong.
Put it at that.
And we'll see where we go.
Alright, Thank you for taking my questions.
Next we go to the line of Paul Johnson with <unk>. Please go ahead.
Hey, good morning, Thanks for taking my questions I was just hoping to get a.
A little bit more color, maybe on just what kind of what drove the depreciation this quarter or was it just sort of broad across the book or were there any <unk>.
Art Penn: Then it was a restructured deal where we owned a chunk of equity. Then it was restructured once again, where we basically just became an equity holder. The company has seen a resurgence, and there have been some very smart add-on acquisitions that have been made. The company's come back very, very strongly, and you can track the value of the equity. You know, there's an equity piece that's been marked up. It's coming back strong, and the company, you know, we'll see. I've learned not to overpromise, Casey, and you can appreciate that.
Loans in particular that were.
Mainly drove that.
Yeah. So.
So picking up to Casey's last point <unk> was up substantially the three loans that have been marked down our flock financial.
Walker Edison, which was the restructuring which remains challenged.
And a company called Atlas purchaser Atlas purchaser. So those are the big three the three biggest Dick's.
Declines in la.
Loans that got marked down.
Art Penn: The company's coming back strong, let's just put it at that, and we'll see where we go. All right, thank you for taking my question. Next, we go to the line with Paul Johnson with KBW. Please go ahead.
And during the quarter.
Got it yeah, thanks for that.
I did notice flock financial I did notice that was a bigger loan in your portfolio was marked down this quarter I was just curious if you could just kind of.
Paul Johnson: Yeah, good morning. Thanks for taking my questions. I was just hoping to get a little bit more color maybe on just what kind of things drove the depreciation this quarter. Transcripts provided by Transcription Outsourcing, LLC.
Maybe just tell us what that business is and kind of what drove the weaker mark this quarter.
Yes, it's a specialty finance company.
Art Penn: Yeah, so, picking up on Casey's last point, JNF was up substantially. The three loans that have been marked down are Flock Financial, Walker Edison, which was a restructuring that remains challenged, and a company called Atlas Purchaser. So those are the big three, the three biggest declines in loans that got marked down during the quarter. Got it, yeah, thanks for that. I did notice Flock Financial; I did notice that was a bigger loan in your portfolio that was marked down this quarter. I was just curious if you could maybe just tell us what that business is and kind of what drove the weaker mark. Yeah, it's a specialty finance company.
Are.
They are focused on.
Busted credit card receivables auto receivables.
And.
And they've they've had some recent stumbles.
We are in there working with them to.
Two to help solve the problem it could be really good sector they've made some they've made some mistakes.
And we're in there working with the company and trying to.
Trying to help them grow solve their problem and build back up.
Okay.
Got it appreciate the color there.
Two more just on the equity co investments it sounds like there could be some possible rotation. There this year, which would be great. I was wondering if it's at all possible.
Art Penn: They are a, they are focused on busted credit card receivables, and auto receivables, and they've had some recent stumbles. We are in there working with them to help solve the problem. It could be a really good sector. They've made some mistakes. And we're in there working with the company and trying to help them grow, solve their problems, and build back up. Got it, appreciate the color there.
Quantify that in any way, maybe without names or if theres even just.
Particular industry that maybe you would expect that you know, it's kind of ripe for deals.
Any sort of clues there would be would be helpful.
Yes, so we had in the quarter ended December we had.
A company called TBC get sold and we had we had some equity in that this quarter so far.
Year to date, we just had a.
Art Penn: Two more, just on the equity co-investment, it sounds like possible rotation there this year, which would be great, if at all possible. I can't quantify that in any way, maybe without, you know, names, or..., is it's a particular industry that maybe you'd expect that's kind of ripe for deals there. Yeah, so in the quarter ended December, we had a company called TBC get sold, and we had some equity in that this quarter so far. Here today, we just had an exit company sell, like, I can't tell you the name, but obviously, it'll be public, you know, at the end of May, when we talk in May. So we're starting to see, are starting to see as M&A, you know, kind of hopefully gets back going again, good news and bad news, you know, you know, kind of we will inevitably get repayments of some of our better That's both; that is, good news and bad news at the same time.
And exit the company got sold I cant tell you the name, but obviously it will be public.
In May when we talk in May so we're starting to see.
Starting to see as M&A kind of hopefully gets back going again.
Good news and bad news.
We will we will inevitably get repayments of some of our better deals.
That's both that is good news than bad news at the same time and then as we've said equity co investment is typically part of the packaging. Many of these we will get liquid.
On some equity pieces, nothing that major or material, but.
<unk> and threes and fives can all add up over time in there and they're very helpful and as we've said.
<unk> have been multiple on invested capital has been north of two times historically.
In both PVC and the one I'm, referring to were kind of in the three to four times <unk> zones. So.
Kind of we'll say, it's you can't count on it but as deal flow.
Grows we hope to see some more equity rotation.
Got it thanks for that art and last one I'm. Just wondering you know if you guys have any sort of.
Art Penn: And then, as we've said, equity co-investment is typically part of the package. In many of these, we will get liquid on some equity pieces. Nothing that major or material, but twos, threes, and fives can all add up over time. And they're very helpful. And as we've said, you know, our MOICs have been multiple, and invested capital has been north of two times historically. And both TVC and the one I'm referring to were kind of in a three to four times MOIC zone.
Within the portfolio I mean, if you've seen trends of higher take utilization from your sponsors or even if you have any idea.
If that's the case, if you're seeing higher take utilization what sort of percent of your loans might be on pick at the moment I would just assume obviously with base rates, where they're at I.
Expect it to stay high for you know even for into the rest of the year.
Art Penn: So, you know, kind of, you know, we'll see. It's, you can't count on it. But as deal flow grows, we hope to see some more equity rotation. www.pennantparkinvestment.com. Got it. Thanks for that, Art.
That could be something we would see but just curious to get your thoughts on that.
Rick you want to talk about Pic income fall.
<unk> for the quarter Pik income was about 3%.
Total income.
Currently it's at a relatively low low percentage.
Paul Johnson: And last one, wondering, you know, if you guys have any sort of idea within the portfolio? I mean, if you've seen trends of higher pick utilization from your sponsors, or even if you have any idea, if that's the case, on PICC at the moment. I would just assume, obviously, base rates where they're at and stay high the rest of the year. That could be something, etc., and all of the people that you saw.
Outlook from an outlook standpoint, Paul.
Look as we said if this higher for a longer trend continues inevitably.
Some companies are going to need some some relief and.
Part of part of amendment structures could be could be <unk>, 3%. It feels really good now we're very proud of that but we.
We'll just see how long this higher for longer.
<unk> continues and quite possibly could go higher than 3%.
Okay.
Thanks, That's all for me I appreciate the answers today.
Thank you.
We go next to Brian Mckenna with citizens JMP. Please go ahead.
Art Penn: Thanks. Thank you. Thank you. Thank you. Thank you. Thank you. Rick, you want to talk about PIC income? Yeah, Paul, for the quarter, PIC income was about 3% of total income, so it's...
Okay, Great. Most of my questions have been asked but I just had one question for you. So we've seen some consolidation.
The public BDC universe, and I think really what some of these.
Rick Alloro: Currently, it's at a relatively low level. You know, outlook, you know, from an outlook standpoint, Paul, look, as we said, if this higher for longer trend continues, inevitably, some companies are going to need some relief, and part of the amendment structures could be pecked.
Consolidation announcements are getting at our greater scale and bigger kind of public vehicles. So.
Would you ever look to merge P. N N <unk> just to kind of create a bigger publicly traded vehicle and if that's something you would look at I mean, what would kind of have to take place are aligned for that too.
Art Penn: So 3% feels really good now. We're very proud of that. But we'll just see how long this hire for longer trend continues and, quite possibly, could go higher than 3%. Thanks, that's all for me. Appreciate the... today. We go next to Brian McKenna with Citizens JMP. Please go ahead.
Take place.
Yes. Thank you. So look we all things are always on the table. So let me just state that we're always looking for ways to.
Enhance shareholder value.
Brian McKenna: Okay, great. Most of my questions have been asked, but I just had one question for you. So, we've seen some consolidation in the public BDC universe, and I think really what some of these consolidation announcements are getting at are greater scale and bigger kinds of public vehicles. So, you know, would you ever look to merge PNNT with PFLT just to kind of create a bigger publicly traded vehicle? And if that's something you would look at, I mean, what would kind of have to take place or align for that? Yeah, thank you. So, look, we all things are always on the table.
Over time <unk> has had a different investment.
Orientation, a little bit little bit lower in the capital stack a little bit higher higher return. In addition, PMT is as we know has had a chunkier lumpier.
Performance and.
NAV.
So.
And it's not traded as well quite frankly <unk> had what we think is a fairly pristine.
Track record so it's something we look at from time to time.
<unk>.
We are always looking to say hey, does it makes sense to have two different strategies.
As it makes sense to have two different strategies.
Art Penn: So let me just state that we're always looking for ways to enhance shareholder value. You know, over time, PNNT has had a different investment orientation, a little bit a little bit lower in the capital stack, a little bit higher higher return. In addition, PNNT, as we know, has had a chunkier, lumpier performance and NAV. So, and it's not traded as well, quite frankly, as PFLT.
P&C hopefully.
Gets less lumpy.
And hopefully trades better than that that discussion might be something kind of more and more current but it's something we look at something we evaluate and.
And it's a good question.
Helpful. Thank you.
We'll go next to Melissa Wedel with JP Morgan. Please go ahead.
Art Penn: PFLT's had what we think is a fairly pristine you know track record so it's something we we look at from time to time you know we are always looking to say hey does it make sense to have two different strategies you know is it make sense to have two different strategies you know as PNNT hopefully gets less lumpy and hopefully trades better, then, you know, that discussion might be something, you know, kind of more current. But it's something we look at, something we evaluate, you know, and, and it's a good question. I'm going to go next to Melissa Wiedel with J.P. Morgan, please go ahead. Good afternoon.
Good afternoon, Thanks for taking my question.
Mine have also mostly asked already but I thought I'd touch on portfolio leverage certainly with a really productive December quarter in terms of origination.
Clearly a lot of action.
And above.
<unk> identified your target.
Or is that are you comfortable at current levels or would you consider.
Sort of a grid holding out at the government security then.
On account of that towards your target.
Yes, so there's a couple of different things in your question.
First the JV kind of the way the JV works is we we usually season assets at the BDC level P&L and then.
Melissa Wiedel: Thanks for taking my questions. Mine have also been mostly asked already, but I thought I'd touch on portfolio leverage, certainly with a really productive December quarter. In terms of origination, it seems like portfolio leverage has risen above where you identified your target as being. Is this, are you comfortable at current levels, or would you consider, sort of rotating out of government securities and taking a march down a bit towards your target? Yeah, so there's a couple different things in your question. First, the JV, you know, kind of the way the JV works is we usually season assets at the BDC level at PNNT, and then, after their season, they may move on to the JV, so December 31st was a moment in time. It was a moment in time.
After the season, they may move on to the JV. So December 31 was a moment in time.
It was a moment in time so.
Our goal is really to kind of get down to kind of our core target, which is around the zone of one five times.
So one four times were a little higher than that so we're going to look to get back down to our target as assets move from the BDC level to the JV over time, Rick do you want to cover that.
The Treasury the government securities and what we do in <unk>.
How we do it so just to clarify.
Sure. So at quarter end, we are executing and putting on balance sheet. Some some U S treasuries.
Art Penn: So, you know, our goal is really to kind of get down to kind of our core target, which is around the zone of 1.25 times. So 1.4 times, we're a little higher than that. So, you know, we're gonna look to get back down to our target as assets move from the BDC level to the JV over time. Rick, do you want to cover the treasuries, the government securities, and what we do and how we do it, just to clarify? Sure, so at quarter end, we are executing and putting on the balance sheets some U.S. Treasuries, just from a perspective of kind of balance sheet optimization in terms of how we think about utilizing kind of that 30% bad asset bucket. We don't call it the bad asset bucket. We say it's a good asset bucket, but it's the 30% asset bucket. So RJV, just to be clear, RJV's been really successful.
Just from a perspective of kind of balance sheet optimization.
In terms of kind of how we think about utilizing kind of that 30% bad asset bucket.
So we don't call it a bad asset bucket, we say, it's a good asset bucket, but it's the 30% asset above average industry bucket. So our JV just to just to be clear. Our JV has been really successful it's been really accretive for <unk> shareholders.
And we like that as part of our 30% bucket and we like having room in that we might grow the JV, we might do another JV.
Keeps us keeps the op. It keeps a very good option for the company open to optimize that 30% bucket.
Okay.
Helpful. I appreciate it.
Separate question.
Seemed like there was a lot of activity.
A new company.
In the December quarter, I was just curious what youre seeing in terms of the.
Sort of existing companies.
Incremental.
<unk>.
Any trend anything worth noting.
Rick Alloro: It's been really creative for PNNT shareholders, and that's part of our 30% bucket. And we like having room in that. We might grow the JV. We might do another JV.
Yeah look it's a lot of what we do is start off with companies as a platform.
In a particular sector, where the private equity sponsor.
Yes says Hey, this is a platform company, we're going to go execute.
Art Penn: Keeps us, it keeps a very good option for the company open to optimize that 30% bucket. Okay, that's helpful. I appreciate it.
A strategy of doing add on acquisitions.
And we are fine.
Sam either with delayed draws are just just add ons and incrementals.
Art Penn: Separate question, there seemed like there was a lot of activity, both for new companies and existing companies, in the December quarter. I was just curious what you're seeing in terms of existing companies and how they're using proceeds of incremental borrowing. Any trends, anything worth noting?
And it's part of our normal flow.
Again, this is where our equity co invest can be helpful, where we're helping them grow the grow the platform and we can participate in the upside so nothing really dramatic. It's just we were active in that calendar Q4 and that activity included the existing portfolio of companies.
Okay.
Okay.
Art Penn: Yeah, look, a lot of what we do is start off with companies as a platform in a particular sector where the private equity sponsor, you know, says, hey, this is our platform company. We're going to go execute a strategy of doing add-on acquisitions, and we finance them either with the late draws or just add-ons and incrementals. And it's part of our normal flow.
Companies, drawing down on existing facilities or youre seeing some incremental add ons.
Yeah.
In most cases, there is a delay draw term loan that structured at the beginning of a deal.
And that delay draw is meant to be relatively easy for the borrower to access to do add on acquisitions.
Art Penn: Again, this is where our equity co-investors can be helpful, where we're helping them grow the platform, and we can participate in the upside. So nothing really dramatic, it's just that we were active in that calendar Q4. And that activity included existing portfolio companies. Okay, so that was companies drawing down on existing facilities, or you're seeing some incremental add-ons. Well, in most cases, there's a delay draw term loan that's structured at the beginning of a deal, and that delay draw is meant to be relatively easy for the borrower to access to do add-on acquisitions or grow subject to certain thresholds, so much of that is delay draw, you know Occasionally, it's an incremental that's not a delay draw, but much of it is a delay draw that's being drawn.
Or or grow.
Subject to certain thresholds so much of that is delayed draw.
Delay draw term loan facility as being drawn.
Occasionally it's an incremental that's not not a delay draw but much of it is a delay draw that's being drawn.
Okay.
Got it thanks Mark.
Yeah.
And we now have we have no further questions I'd like to turn the floor back to Mr Art Penn for any additional or closing remarks.
Thanks, everybody for being on the call today, we look forward to speaking to you next in May have a great day.
Okay.
This concludes today's conference we thank you for your participation you may disconnect your lines at this time.
[music].
Art Penn: Got it. Thanks. And we now have no further questions. I'd like to turn the floor back to Mr. Art Penn for any additional or closing remarks.
Okay.
Okay.
Art Penn: Thank you everybody for being on the call today. We look forward to speaking to you next in May. Have a great day. This concludes today's conference. We thank you for your participation.
[music].
Yeah.
[music].
Operator: You may disconnect your lines at this time, www.pennantparkinvestment.com. Thank you for watching, www.pennantparkinvestmentcorp.com www.pennantparkinvestment.com www. PennantPark.com www. PennantParkInvestmentCorp.com www. PennantParkInvestmentCorp.com www. PennantParkInvestmentCorp.com
Okay.