Q2 2024 PennantPark Investment Corp Earnings Call
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Operator: Good afternoon, and welcome to the Pennant Park Investment Corporation's second fiscal quarter 2024 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 open for a question and answer session following the speaker's remarks. If you would like to ask a question at that time, simply press star 1 on your telephone keypad. If you would 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 Pennant Park Investment Corporation. Mr. Penn, you may begin your conference.
Good afternoon, and welcome to the pennant Park investment Corporation's second fiscal quarter 2024 earnings Conference call. Today's conference is being recorded at this time all participants have been placed in a listen only mode.
Arthur Howard Penn: The call will be open for a question and answer session. Following the Speakers' remarks, if you would like to ask a question at that time simply press star one on your telephone keypad. If you would 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.
Arthur Howard Penn: Penn Chairman and Chief Executive Officer of Pennant Park Investment Corporation. Mr. Payne you May begin your conference.
Arthur Howard Penn: Good afternoon, everyone. I'd like to welcome you to PennantPark Investment Corporation's second fiscal quarter 2024 earnings conference call. I'm joined today by Rick Allorto, our chief financial officer. Rick, please start off by disclosing some general conference call information and include a discussion about forward-looking statements.
Arthur Howard Penn: Good afternoon, everyone I'd like to welcome you dependent Park investment Corporation's second fiscal quarter 2024 earnings Conference call I'm joined today by Rick <unk>, Our Chief Financial Officer Rick.
Arthur Howard Penn: Rich please start off by disclosing some general conference call information and included discussion about forward looking statements.
Richard Thomas Allorto: Thank you, Art. I'd like to remind everyone that today's call is being recorded. Please note that this call is the property of PennantPark Investment Corporation and that any unauthorized broadcast of this call in any form is strictly prohibited. An audio replay of the call will be available on our website.
Richard Thomas Allorto: 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.
Richard Thomas Allorto: An audio replay of the call will be available on our website.
Richard Thomas Allorto: I'd also like to call your attention to the customary Safe Harbor disclosures in our press release regarding forward-looking information. Today's conference call may also include forward-looking statements and projections, and we ask that you refer to our most recent filings with the SEC for important factors that could cause actual results to differ materially from these projections. We do not undertake to update our forward-looking statements unless required by law. To obtain copies of our latest SEC filings, please visit our website at pennantpark.com or call us at 212-905-1000. At this time, I'd like to turn the call back to our Chairman and Chief Executive Officer, Art Penn.
Richard Thomas Allorto: I'd also like to call your attention to the customary safe Harbor disclosures in our press release regarding forward looking information.
Richard Thomas Allorto: 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.
Arthur Howard Penn: We do not undertake to update our forward looking statements unless required by law.
Arthur Howard Penn: To obtain copies of our latest SEC filings. Please visit our website at Penn at Park Dot Com or call us at 212905 1000.
Richard Thomas Allorto: At this time I'd like to turn the call back to our chairman and Chief Executive Officer Art Penn.
Arthur Howard Penn: Thanks Rick. We're going to spend a few minutes and comment on the current market environment for private middle market credit, and provide a summary of how we fared in the quarter ended March 31st. How the portfolio is positioned for the upcoming quarters, a detailed review of the financials, and then open it up for Q&A. For the quarter ended March 31st, our gap in core net investment income was $0.22 per share. We are pleased to announce that the Board of Directors has approved an increase in the monthly dividend to $0.08 per share. The increase will be effective beginning with the June monthly dividend, which will be payable on July 1st to shareholders of record as of June 14th.
Arthur Howard Penn: Thanks, Rich, we're going to spend a few minutes and comment on the current market environment for private middle market credit provide a summary of how we fared in the quarter ended March 31.
Arthur Howard Penn: This represents a 14% increase in the monthly dividend. The gap in adjusted NAV increased 0.5% to $7.69 per share from $7.65. As of March 31st, our portfolio grew slightly to 1.2 billion, or 2% from the prior quarter. During the quarter, we continued to originate attractive investment opportunities and invested $188 million in six new and 43 existing portfolio companies at a weighted average yield of 11.7%. For the investment in new portfolio companies, the weighted average debt to EBITDA was 4.3 times.
Arthur Howard Penn: Now the portfolio is positioned for the upcoming quarters, a detailed review of the financials and then open it up for Q&A.
Arthur Howard Penn: The way that average interest coverage was 2.1 times, and the weighted average loan to value was 40%. We added two new investments to non-accrual status and removed one investor. Non-accruals represent 3.7% of the portfolio at cost and 3% at market value. For the quarter ended March 31st, PIC income remained low at only 2.9% of total investment income, which we believe is among the lowest in the BDC sector.
Arthur Howard Penn: For the quarter ended March 31st our GAAP and core net investment income was 22 cents per share.
Arthur Howard Penn: We were pleased to announce that the board of directors has approved an increase in the monthly dividend to <unk> <unk> per share.
Arthur Howard Penn: The increase will be effective beginning with the June monthly dividend, which will be payable on July one two.
Arthur Howard Penn: To shareholders of record as of June 14th.
Arthur Howard Penn: This represents a 14% increase in the monthly dividend.
Arthur Howard Penn: GAAP and adjusted NAV increased 0.5% to $7 69 per share from $7 65.
Arthur Howard Penn: As of March 31st our portfolio grew slightly to $1 2 billion or 2% from the prior quarter.
Arthur Howard Penn: During the quarter, we continued to originate attractive investment opportunities and invested $188 million in six new and 43 existing portfolio companies.
Arthur Howard Penn: Weighted average yield of 11, 7%.
Arthur Howard Penn: For the investments in new portfolio companies, the weighted average debt to EBITDA was 4.3 times.
Arthur Howard Penn: The weighted average interest coverage was two one times and the weighted average loan to value was 40%.
Arthur Howard Penn: We added two new investments to non accrual status and we removed one investment.
Arthur Howard Penn: Non accruals represented three 7% of the portfolio at cost and 3% at market value.
Arthur Howard Penn: For the quarter ended March 31st Pik income remains low at only two 9% of total investment income, which we believe is among the lowest in the BDC sector.
Arthur Howard Penn: As of March 31, the portfolio's weighted average leverage ratio through our debt security was 4.4 times, and the portfolio's weighted average interest coverage was 2.2 times. These attractive credit statistics are testament to our selectivity and Conservative Orientation, as well as our focus on the core middle market. On average, we have seen a 50 basis point tightening of first lien spreads over the last six months.
Arthur Howard Penn: As of March 31st the portfolio's weighted average leverage ratio through our debt security was four four times.
Arthur Howard Penn: The portfolio's weighted average interest coverage was 2.2 times these.
Arthur Howard Penn: These attractive credit statistics are testament to our selectivity.
Arthur Howard Penn: And conservative orientation as well as our focus on the core middle market.
Arthur Howard Penn: On average we have seen a 50 basis point tightening of first lien spreads over the last six months how.
Arthur Howard Penn: However, we continue to believe that the current vintage of core middle market loans directly originated is excellent. The core middle market leverages lower, spreads and upfront OID are higher, and covenants are tighter than in the upper middle market. Despite covenant erosion in the upper middle market and the core middle market, we are still getting meaningful covenant protection. On March 31st, the JV portfolio equaled $924 million, and during the quarter, the JV invested $113 million, including $103 million of purchases from PNNT. With its current capital base, the JV portfolio can grow to $1.1 billion. Over the last 12 months, PNNT earned a 17.5% return on invested capital in the JV.
Arthur Howard Penn: However, we continue to believe that the current vintage of core middle market directly originated loans is excellent.
Arthur Howard Penn: In the core middle market, Leverages, lower spreads and upfront OID or higher and covenants are tighter than in the upper middle market.
Arthur Howard Penn: Despite covenant erosion in the upper middle market and the core middle market, we are still getting meaningful covenant protections.
Arthur Howard Penn: At March 31, the JV portfolio equaled $924 million and during the quarter. The JV invested $113 million include.
Arthur Howard Penn: Including $103 million of purchases from P. N N T.
Arthur Howard Penn: With its current capital base of the JV portfolio, you can grow to $1.1 billion.
Arthur Howard Penn: Over the last 12 months P. N N T earned a 17, 5% return on invested capital in the JV.
Arthur Howard Penn: We expect that with continued growth in the JV portfolio. The JV investment will enhance P. N N Ts earnings momentum in future quarters.
Arthur Howard Penn: We expect that with continued growth in the JV portfolio, the JV investment will enhance PNNT's earnings momentum in future quarters. Now, let me turn to the current 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 core middle market opportunities 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 and five key sectors. These are sectors where we have substantial domain expertise, know the right questions to ask, and have an excellent track record. There are business services, consumer, government services, and defense, healthcare, and software and technology.
Arthur Howard Penn: Now, let me turn to the current 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 core middle market opportunities provides the company with attractive investments, where we provide important strategic capital to our borrowers.
Arthur Howard Penn: We have a long term track record of generating value by successfully financing growing middle market companies and five key sectors.
Arthur Howard Penn: There are sectors, where we have substantial domain expertise and the right questions to ask and have an excellent track record.
Arthur Howard Penn: There are business services consumer government services, and defense health care and software and technology.
Arthur Howard Penn: These sectors have also been recession resilient and tend to generate strong free cash flow. In the core middle market, companies with 10 to 50 million in EBITDA, those companies are below the threshold, and we do not compete with the broadly syndicated low- and high-yield markets, unlike our peers in the upper 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 and structure Thoughtfully Structured Transactions with Sensible Credit Statistics.
Arthur Howard Penn: These sectors have also been recession resilient and tends to generate strong free cash flow.
Arthur Howard Penn: In the core middle market companies with $10 million to $15 million of EBITDA. Those companies are below the threshold and we do not compete with the broadly syndicated loan or high yield markets. Unlike our peers in the upper market.
Arthur Howard Penn: In the core middle market, because we are an important strategic lending partner the process and package of terms we receive is attractive.
Arthur Howard Penn: 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 and upfront OID as well as an equity co investment.
Arthur Howard Penn: Meaningful Covenants, Substantial Equity Cushions to Protect Our Capital, Attractive Spreads and Upfront OID as well as an Equity Co-Investor. Additionally, from a monitoring perspective, we receive monthly financial statements to help us stay on top of the company.
Arthur Howard Penn: Additionally from a monitoring perspective, we received monthly financial statements to help us stay on top of the companies.
Arthur Howard Penn: With regard to covenants, unlike the erosion in the upper middle market, virtually all of our originated first lien loans had meaningful covenants, which helped 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.
Arthur Howard Penn: 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.
Arthur Howard Penn: This is a significant reason why we believe we are well positioned in this environment.
Arthur Howard Penn: Many of our peers, who focus on the upper middle market state that those bigger companies are less risky.
Arthur Howard Penn: That is a perception that may makes some intuitive sense, but the reality is different.
Arthur Howard Penn: According to S&P, loans to companies with less than $50 million of EBITDA have a lower default rate or 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 becoming an equity co-investor.
Arthur Howard Penn: According to S&P launch with companies loans to companies with less than 50 million of EBITDA have a lower default rate or higher recovery rate than loans to companies with higher EBITDA.
Arthur Howard Penn: We believe that the meaningful covenant protections of core middle market loans more careful diligence and tighter monitoring had been an important part of this differentiated performance.
Arthur Howard Penn: 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.
Arthur Howard Penn: Our returns on these equity co-investments have been excellent over time. Overall, for our platform, from inception through March 31st, we've invested over $469 million in equity co-investments, and I've generated an IRR of 26% and a multiple of uninvested capital of 2.1 times. Since inception, nearly 17 years ago, PNNT has invested $8.1 billion at an average yield of 11.3% and has experienced a loss ratio on invested capital of approximately 19 basis points annually.
Arthur Howard Penn: The returns on these equity co investments had been excellent over time.
Arthur Howard Penn: Overall for our platform from inception through March 31st we've invested over $469 million and equity co investments and have generated an IRR of 26% and a multiple on invested capital of two one times.
Arthur Howard Penn: Since inception.
Arthur Howard Penn: Nearly 17 years ago P. N as he has invested $8 $1 billion at an average yield of 11, 3%.
Arthur Howard Penn: As experienced the loss ratio on invested capital of approximately 19 basis points annually.
Arthur Howard Penn: The strong track record includes investments in primarily subordinated debt made prior to the global financial crisis, our 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 large origination fund are producing active deals. Our 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.
Arthur Howard Penn: This strong track record includes investments in primarily subordinated debt.
Arthur Howard Penn: Prior to the global financial crisis, our legacy energy investments and recently the pandemic.
Arthur Howard Penn: With regard to the outlook new loans in our target market are attractive.
Arthur Howard Penn: Spirit and talented team and our wide origination funnel is producing active deal flow. Our continued focus remains on capital preservation and being patient investors.
Arthur Howard Penn: 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.
Arthur Howard Penn: 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 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.
Rick: I have high free cash flow conversion, we capture that free cash flow, primarily through debt instruments and pay out those contractual cash flows in the form of dividends to our shareholders.
Richard Thomas Allorto: For the quarter ended March 31st, GAAP and Core Net Investment Income was $0.22 per share. Operating expenses for the quarter were as follows: interest and credit facility expenses were $11.9 million, base management and incentive fees were $7.2 million, general and administrative expenses were $1.9 million, and provision for excise taxes were $0.8 million.
Arthur Howard Penn: I'll turn the call over to Rick our CFO to take us through the financial results.
Speaker Change: Thank you art.
Richard Thomas Allorto: For the quarter ended March 31, GAAP and core net investment income was 22 per share.
Richard Thomas Allorto: Operating expenses for the quarter, whereas follows.
Richard Thomas Allorto: And credit facility expenses were $11 9 million base management and incentive fees were $7 2 million.
Richard Thomas Allorto: General and administrative expenses were $1 9 million and provision for excise taxes were a point $8 million.
Richard Thomas Allorto: For the quarter ended March 31st, the net realized and unrealized change on our investments and debt, including provision for taxes, was a gain of $1.8 million, or $0.3 per share. As of March 31st, our gap in adjusted NAV was $7.69 per share, which is up 0.5% from $7.65 per share in the prior quarter. As of March 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 March 31st, our key portfolio statistics were as follows. Our portfolio remains highly diversified with 138 companies across 30 different industries.
Richard Thomas Allorto: For the quarter ended March 31, net realized and unrealized change on our investments and debt, including provision for taxes was a gain of $1 8 million or <unk> <unk> per share.
Richard Thomas Allorto: As of March 31st our GAAP and adjusted <unk> was.
Richard Thomas Allorto: It was $7 69 per share, which is up 5% from $7 65 per share in the prior quarter.
Richard Thomas Allorto: As of March 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.
Richard Thomas Allorto: The weighted average yield on our debt investments was 12.5%, so pick income equals only 2.9% of total investment income. We had two non-accruals, which represent 3.7% of the portfolio at cost and 3% at market value. The portfolio is comprised of 58% first lien secure debt and 5% second lien secured debt. 10% subordinated notes to PSLF, 4% Other Subordinated Debt, 6% equity in PSLF, and 17% in other preferred and common equity. 97% of the debt portfolio is floating rates. Debt to EBITDA on the portfolio is 4.4 times, and interest coverage is 2.2 times. Now, let me turn the call back to Art.
Richard Thomas Allorto: As of March 31st our key portfolio statistics, whereas follows.
Art: Portfolio remains highly diversified with 138 companies across 30 different industries.
Richard Thomas Allorto: The weighted average yield on our debt investments was 12, 5%.
Art: Pik income equaled only two 9% of total investment income.
Art: We had two non accruals, which represents three 7% of the portfolio at cost and 3% at market value.
Richard Thomas Allorto: The portfolio is comprised of 58% first lien secured debt.
Richard Thomas Allorto: 5% second lien secured debt.
Art: 10% subordinated notes two P. S L L.
Art: 4%, others subordinated debt.
Art: 6% equity in P. S L S.
Art: And 17% in other preferred and common equity.
Richard Thomas Allorto: 97% of the debt portfolio is floating rate.
Art: Debt to EBITDA on the portfolio is four four times and interest coverage is two two times.
Richard Thomas Allorto: Now, let me turn the call back to art.
Arthur Howard Penn: Thanks, Rick. In closing, I'd like to thank our dedicated and talented team of professionals for the continued commitment, PNNT, and 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.
Art: Thanks, Rick in closing I'd like to thank our dedicated and talented team of professionals for their continued commitment to P. N N T and its shareholders.
Arthur Howard Penn: 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.
Speaker Change: Thank you.
Operator: If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star 1 to ask a question. We'll go ahead and take our first question from Brian McKenna with Citizens JMP.
Speaker Change: If you would 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.
Brian J. McKenna: And we'll go ahead and take our first question from Brian Mckenna with citizens J M P.
Brian J. McKenna: All right, thanks. I just had one question on the dividend and coverage. So great to see the 14% increase in the monthly distribution, but that equates to 24 cents on a quarterly basis. And so, if I look at NII for the period, that came in at 22 cents. So I'm curious, why set the new dividend above the 1Q NII run rate? Does that imply you expect some healthy growth and core earnings moving forward? And ultimately,
Brian J. McKenna: Alright. Thanks, I just had one question on the dividend and coverage so great.
Brian J. McKenna: Great and a 14% increase in our monthly distribution that equates to 24 cents on a quarterly basis and so if I look at NII in the period that came in at 22. So I'm curious why is it that the new dividend above the <unk> NII run rate does that imply you're expecting healthy growth in core <unk>.
Brian J. McKenna: Earnings moving forward and ultimately where do you think you will shake out on dividend coverage over the next several quarters.
Arthur Howard Penn: Thanks Brian, it's a good question. First, it's important for everyone to know we have a lot of spillover, probably about a dollar a share of spillover that, you know, we're going to need to pay out a significant portion of that, you know, anyway. Now, then you turn to what's our recurring, ongoing NII. And we believe that based on the performance of the portfolio, based on continued growth of the joint venture, that $0.24 is achievable on a recurring basis. So that led us to these two factors, the key factors that led us to the dividend.
Speaker Change: Yes, Thanks, Brian It's a good question.
Arthur Howard Penn: First it's important for everyone to know we have a lot of spillover probably about a dollar a share of spillover.
Brian J. McKenna: Okay, I got it. It makes sense. Thank you.
Arthur Howard Penn: That we're going to need to be in a pay out a significant portion of that you know anyway. Now then you turn to what is a recurring ongoing.
Brian J. McKenna: NII.
Brian J. McKenna: And we believe that that based on the performance of the portfolio based on continued growth.
Brian J. McKenna: Of the joint venture that that 24 cents is achievable on a recurring basis anyway. So that led us to those two factors are the key factors that led us to the dividend increase.
Speaker Change: Okay got it makes sense. Thank you.
Robert James Dodd: And our next question will come from Robert Dodd with Raymond James.
Brian J. McKenna: And our next question will come from Robert Dodd with Raymond James.
Arthur Howard Penn: Hi, guys. Can you give us a rundown on Flock, obviously, the new call and what you're, yeah, the situation there is there and what your plans are? I mean, you know, what, what? Unknown Executive, Kyle Joseph, Mickey Schleien, Brian McKenna, Richard Allorto,
Robert James Dodd: Hi, guys can you give us.
Arthur Howard Penn: A rundown on coverage.
Arthur Howard Penn: Over to you the new non accruals.
Arthur Howard Penn: The situation there is that and what your plans are I mean.
Arthur Howard Penn: You know what.
Speaker Change: A quick question what point does it make sense for a business like that that's all that makes sense.
Arthur Howard Penn: To just keep it as a portfolio company.
Arthur Howard Penn: Rhonda.
Arthur Howard Penn: Operator.
Arthur Howard Penn: The specialty finance niche business yourself.
Arthur Howard Penn: Yeah, so the company's name is Flock Financial, and it's involved in financing and purchasing busted consumer receivables. It's an area that, Robert, you focus on as well as BDCs. We think it's a really interesting vintage where we recapitalized the company, converted some debt to equity, and we put some more capital in. Peel, The Growth, of the company because we think it's a very good vintage for that space to be, you know, adding on assets and growing that company. So we're gonna grow the company. We've added, you know, excellent management to that team. And you're right there.
Speaker Change: Yeah. So so the company's name as flock financial and it's.
Arthur Howard Penn: It's involved answer specialty finance company involved in financing and purchasing.
Arthur Howard Penn: Busted consumer receivables, it's an area that Robert you you you focus on as well as Bdcs.
Arthur Howard Penn: We think it's a really interesting vintage where we recapitalize the company, we converted from debt to equity and we put some more capital in.
Arthur Howard Penn: To fuel the growth.
Arthur Howard Penn: Of the company because we think it's a very good vintage.
Arthur Howard Penn: For that space to be adding on assets and growing that company. So we're going to we're going to grow the company we've added.
Arthur Howard Penn: Excellent management to that team.
Arthur Howard Penn: You know, once you kind of get that company in a good position, it's a company that we could sell. It's a company that we could hold. It certainly generates a very attractive yield. But, you know, first things first, we got to get the company on the right track. We've reconstituted management, brought some ex-managers back into the company, added some board oversight, and put some capital into the company so that they can deploy, you know, into this attractive, So that was that the biggest, yeah, that was the biggest.
Arthur Howard Penn: And you're right. There you know once you once you kind of.
Arthur Howard Penn: Get that company in a good position, it's a company that we.
Arthur Howard Penn: We could sell it's a company that we could hold it certainly generates a very attractive yield.
Arthur Howard Penn: So first things first we got to get the company on the right track, we've reconstituted management brought some X managers in back into the company added some some board oversight and put some capital into the company. So that they can deploy into this attractive market.
Arthur Howard Penn: So that was that that was the biggest.
Arthur Howard Penn: Yeah that was the biggest non accrual we also put Walker Edison, which is much smaller position. That's been marked down for a number of quarters, we proactively put that on non accrual as well.
Arthur Howard Penn: I understood. At what point do you think, for one way or the other, whatever, whatever the path is, could do, at what point do you think that capital could become income for you?
Arthur Howard Penn: Understood.
Arthur Howard Penn: Okay.
Arthur Howard Penn: What point do you think.
Arthur Howard Penn: One way or the other.
Arthur Howard Penn: Whatever whatever the passage.
Arthur Howard Penn: Good.
Arthur Howard Penn: What point do you think that capital could become.
Arthur Howard Penn: Income producing.
Arthur Howard Penn: Certainly, we think within the next year that's our goal. We think it's kind of a, you know, we're building in a, you know, one-year horizon to start, you know, clicking yield again. Again, we've added to the management. We just want to kind of get things stabilized and then also moving in the right direction with growth.
Speaker Change: Certainly we think within the next year, that's our that's our goal. We think it is kind of a you know we're building in our you know one year horizon to two to start clicking.
Robert James Dodd: Got it. I appreciate that.
Robert James Dodd: Clicking yield again again, we are we've added to the management and we just want to kind of get things stabilized and then also moving in the right direction with growth.
Arthur Howard Penn: On the JV, obviously, it holds the same kind of assets as on the balance sheet. You still want to grow that. It's extremely attractive maternal capital through that structure. Can you give us an update on how... Obviously, it depends on the market environment, but how large would you like that to be, say, a year?
Speaker Change: Got it I appreciate that one on the JV, obviously, you got the same kind of assets.
Arthur Howard Penn: On balance sheet.
Arthur Howard Penn: You still want you want don't want to go with that.
Arthur Howard Penn: Attractive with total capital through that structure.
Arthur Howard Penn: Okay.
Arthur Howard Penn: How how.
Arthur Howard Penn: But we think depending on the market environment, but how large would you like that to be say a year from now.
Arthur Howard Penn: Yeah, so...
Arthur Howard Penn: So, you know, as of March 31st, it was 924 million; based on the current capital, we can get that to a billion dollars, and we are in discussions about potentially growing that joint venture, and we're open to doing other JVs. It's been a terrific structure for PNNT. It's been a good structure for PFLT. You know, when you're generating an upper teens return consistently, it's something that, you know, we like, it's very good for shareholders. We're managing more assets, we're not increasing our base fees. So it's an attractive yield and return for shareholders on a cost-efficient basis. So, we're going to look to potentially upsize this JV, and who knows, maybe we'll do other JVs over time.
Speaker Change: Yes. So so you know as of March 31st It was $924 million based on the current capital we can get that to 1 billion won.
Arthur Howard Penn: And we are in discussions about potentially growing that joint venture and we're open to doing other jv's.
Arthur Howard Penn: It's been a terrific structure for P. N N T. It's been a good structure for P. F L T.
Arthur Howard Penn: You know when you're generating an upper teens return consistently it's something that we like it's very good for shareholders. We we're managing more assets, we're not increasing our base fees. So it's attractive.
Arthur Howard Penn: Yield and returns for shareholders on a cost efficient basis. So we're going to look to potentially upsize. This JV in and who knows maybe we'll do other jv's overtime.
Speaker Change: Got it thank you.
Speaker Change: Thank you.
Operator: And moving on to Mickey Schleien with Ladin.
Arthur Howard Penn: And moving on to <unk>.
Mickey Max Schleien: Each line with Ladenburg.
Mickey Max Schleien: Hi Art and Rick. Art, just to follow up on the JV.
Mickey Max Schleien: Hi, Art and Rick just.
Mickey Max Schleien: Just to follow up on the JV.
Mickey Max Schleien: You you've already funded your commitments to the capital structure of the JV pants.
Mickey Max Schleien: Pantheon still has some unfunded commitment.
Mickey Max Schleien: This target of $1 1 billion does that assume pantheon finishes funding their commitment and and what's stopping that from occurring.
Arthur Howard Penn: You've already funded your commitments to the capital structure of the JV. Pantheon still has some unfunded commitments. This target of $1.1 billion, does that assume Pantheon finishes funding their commitment, and what's stopping that from occurring?
Mickey Max Schleien: Yeah, you know it's a good question and Maverick May know off the top I think we've all funded if if we haven't funded we're gonna be all funding shortly.
Arthur Howard Penn: Yeah, you know, it's a good question. I recommend off the top that we've all funded. If we haven't funded, we're going to be all funding shortly. Right now, it's a 60-40 split between PNNT and Pantheon, so we're a quarter or, at most, two quarters away from capping out to that, you know, billion one.
Ladin: Shortly right now to 60 40 split between P. N N T and pantheon. So we're we're we're a quarter or Max two quarters away of of capping out to that 1 billion won.
Arthur Howard Penn: And then the question is, is that where we stand? Or do we upsize? Do we do another JV? So all options are on the table, clearly. We like the structure. PennTown is a terrific partner, by the way, and we're optimistic that we can do more over time.
Arthur Howard Penn: And then the question is is that where we stand or do we do we upsize do we do another JV. So all options are on the table clearly.
Arthur Howard Penn: We like the structure.
Arthur Howard Penn: It's a terrific partner by the way.
Arthur Howard Penn: And.
Arthur Howard Penn: You know, we're we're optimistic that we can we can do more over time.
Arthur Howard Penn: So so art as that.
Mickey Max Schleien: So, Art, as that JV grows, how are you going to manage the non-qualified asset bucket, which is already at 22%?
Arthur Howard Penn: JV grows how are you going to manage the nonqualified asset bucket, which was already at 22%.
Arthur Howard Penn: Yeah, so we're constantly watching the 30% bucket. You may see that at quarter end, we've been purchasing T-bills on the balance sheet of PNNT, which is a qualifying asset, which can help expand the 30%.
Art: Yes, so where we're constantly watching the.
Arthur Howard Penn: We're constantly watching the 30% bucket you may see that at quarter end, we've been purchasing T bills.
Arthur Howard Penn: On the balance sheet of P. N N T, which is qualifying assets, which which can help expand the 30% bucket.
Mickey Max Schleien: Okay, I appreciate that. And the leverage at the JV is running around two times. Is that where you want to see it? That's counting the notes to the members as debt. Is that about where you want it to be?
Speaker Change: Okay, I appreciate that and.
Mickey Max Schleien: The leverage at the <unk>.
Mickey Max Schleien: <unk> is running around two times is that where you want to see it.
Speaker Change: That's counting the notes to the members is that is that about where you want it to be.
Arthur Howard Penn: You know, notes to the members, it's all part of the Junior Capital, so we're kind of looking at... 2 to 1, $2 of external debt to $1 of junior capital, which would include the subordinated notes that we in Pantheon own along with the equity. So to us, that's junior capital. We leverage that, you know, two to one or so. Two to one.
Mickey Max Schleien: Yeah, and the notes to the members we can't it's all part of the junior capital. So we're kind of looking at two.
Arthur Howard Penn: Two to one $2 of external debt to one dollar of junior capital, which would include the subordinated notes that we and pantheon one.
Arthur Howard Penn: One along with the equity so to US that's junior capital we leverage that.
Arthur Howard Penn: Two to one or so.
Mickey Max Schleien: 2-1. Okay, that's it for me this afternoon. Thanks, Art. Thanks, Mickey.
Speaker Change: Two to one okay. That's it for me this afternoon. Thanks art.
Mickey Max Schleien: Thanks Mickey.
Operator: And the next question will come from Mark Hughes with Truett.
Mickey Max Schleien: And the next question will come from Mark Hughes with Truest.
Mark Douglas Hughes: Yeah, thank you. I think that you've addressed a lot of this. I was going to just ask about the sustainability of returns in the JV. You talked about high teens here recently. Is that something that's sustainable with that structure, or just assuming kind of reasonable returns in the underlying investment? Yeah, we believe it is.
Mark Douglas Hughes: Yes. Thank you I think you've addressed a lot of it I was going to just ask about the sustainability of return then the JV you talked about.
Mark Douglas Hughes: The team here recently.
Mark Douglas Hughes: Is that something that sustainable with that structure or just assuming a kind of a reasonable return and.
Mark Douglas Hughes: The underlying investments.
Arthur Howard Penn: Yeah, we believe it is. Obviously, if rates come down, you know, if and when rates come down, yields will, these are floating rate assets, of course, yields will come down. We do finance the JV with floating rate liabilities, either credit facilities or floating rate securitization, CLO financing. So it's matched, albeit, when rates are higher, you get a higher ROE.
Mark Douglas Hughes: Yeah, we believe it is obviously if rates come down.
Arthur Howard Penn: If and when rates come down you know yields well. These are floating rate assets of course yields will come down we do finance the JV with floating rate liabilities, either credit facilities or floating rate securitization CLO financing. So it's matched albeit when rates are higher you get a you get a higher Roe.
Arthur Howard Penn: And then, of course, it's about credit performance. And can we continue to have very strong credit performance? I think we can.
Arthur Howard Penn: And then of course, it's about credit performance and can we continue to have very strong credit performance I think we can.
Arthur Howard Penn: You know, the portfolio as a senior portfolio that we do here is well constructed, conservatively underwritten. I think we've been sharing with you the senior loans we're doing today are kind of, you know, 4.3 times debt to EBITDA last quarter, interest coverage 2.1 times, and a loan devalued about 40%. So that's kind of what's populating that joint venture, and then we leverage that with the floating rate credit facilities and the floating rate securitization. So we're optimistic, although if rates come down, it may be hard to retain that.
Arthur Howard Penn: The portfolio as a senior portfolio that we do here is well constructed conservatively underwritten.
Arthur Howard Penn: We've been sharing with you the senior loans that we're doing today are kind of.
Arthur Howard Penn: Four three times debt to EBITDA was last quarter or interest coverage to one times and our loan to value of about 40%. So that's kind of what's populating that joint venture and then we leverage that with the floating rate credit credit facilities and the floating rate securitization. So we're optimistic although.
Arthur Howard Penn: If rates come down it may be hard to retain that and of course, we got to keep underwriting credit well in and try to minimize the non accruals.
Speaker Change: I appreciate it thank you.
Speaker Change: Thank you.
Operator: And we'll take a question from Casey Alexander. Hi, good afternoon.
Arthur Howard Penn: And we'll take a question from Casey Alexander with Compass point.
Casey Jay Alexander: Thanks for taking my questions, Art. I'm just curious that in the schedule of investments block, it is listed as a sub-debt position. So I'm just kind of curious why you guys who are ahead of you? And why would it be you guys who are making the decision to put management in place?
Casey Jay Alexander: Hi, good afternoon, Thanks for taking my questions art.
Casey Jay Alexander: I'm just curious in the schedule of investments block is listed as a sub debt position. So I'm just kind of curious why you guys. Who's ahead of you and why would it be you guys, who who is making the decision to put management in.
Arthur Howard Penn: Yeah, so great question. So this is a specialty finance company. Regions Bank is the senior lender. We are a mezzanine lender, or subordinated debt, and as part of the restructuring, we're converting some of the mezzanine debt to equity. And we're doing some additional mezzanine debt, which is junior to Regions Bank. So this was a non-sponsored deal. So it was a founder that was running the company. And, you know, when the company needed extra liquidity, we were the ones who provided the liquidity. And between the liquidity provided and the conversion of debt to equity, we were in a majority.
Art: Yes. So great question. So this is a specialty finance company.
Arthur Howard Penn: Regions Bank is the senior lender.
Arthur Howard Penn: We are we are a mezzanine lender subordinated debt.
Arthur Howard Penn: As part of the restructuring were converting some of the mezzanine debt to equity.
Arthur Howard Penn: And we're doing some additional mezzanine debt, which is junior to two.
Arthur Howard Penn: To reach US bank. So this was a non sponsored deal.
Arthur Howard Penn: So it was a founder that I was running the company.
Arthur Howard Penn: And.
Arthur Howard Penn: When the company needed extra liquidity with him more than once you provided the liquidity in between the liquidity that you provided and the conversion of debt to equity we were in a majority equity position.
Casey Jay Alexander: Okay, great. That's an excellent color. Thank you. Just, as a matter of course, is there any Flock or Walker Edison that is also in the JV?
Speaker Change: Okay, Great that's excellent color. Thank you.
Casey Jay Alexander: Just as a matter of course is there any flock or Walker Edison that is also in the JV.
Speaker Change: I think no actually no there's no there's no Walker Edison and the JV or flock.
Arthur Howard Penn: I think, no, actually no, there's no Walker Edison in the JV or Flock.
Casey Jay Alexander: Okay, great. And lastly, I think you mentioned it, but I think I whiffed it. What was the company that came off non-accrual in the quarter?
Arthur Howard Penn: Okay, Great and lastly, I think you mentioned it but I think ive whiffed. It what was the company that came off nonaccrual in the quarter.
Arthur Howard Penn: Yeah, the company historically was called MailSouth; it changed its name to MSpark. It's been marked at zero for the last few quarters. It got sold, and we realized that zero, unfortunately, but it's now off the SOIBs.
Casey Jay Alexander: Yeah as a company historically it was called mail south its name change to M spark.
Arthur Howard Penn: It's been marked at zero for the last few quarters.
Arthur Howard Penn: Got sold and.
Arthur Howard Penn: We realized that zero Unfortunately.
Arthur Howard Penn: But it's now off the Soi because the company got sold.
Casey Jay Alexander: All right, great. Well, sorry to hear that, Rizal, but thanks for taking my questions. I appreciate it. Thank you. Moving on to Kyle Joseph with Jeff.
Speaker Change: Alright, great well, sorry to hear that resolved, but alright, thanks for taking my questions I appreciate it.
Kyle Joseph: Thank you.
Casey Jay Alexander: And moving onto Kyle Joseph with Jefferies.
Kyle Joseph: Hey, good morning. Thanks for taking my questions. Apologies if I missed this, but just wanted to get a sense of competition and spreads. It looks like your yields for the quarter were fairly stable. Just give us a sense of what, what, what base rates versus spreads there, and it looked like the yields on new investments were a little lower, but I've been hearing kind of mixed messages about banks either exiting or entering the space and just kind of what you're seeing in terms of competition.
Casey Jay Alexander: Hey.
Kyle Joseph: Good morning, Thanks for taking my question apologies if I missed this but just wanted to get a sense for for competition.
Kyle Joseph: And spreads it looks like your yields for the quarter were were fairly stable.
Kyle Joseph: Give us a sense of you know what well.
Kyle Joseph: Base rates versus spreads there and it looks like the yields on new investments were a little lower but just kind of been hearing kind of mixed messages about banks, either exiting or entering the space and just kind of what youre seeing in terms of competition.
Arthur Howard Penn: Yeah, it's a good question, Kyle, and we did not cover that earlier. Spreads have contracted about 50 basis points. Over the last six to nine months in the core middle market, which is where we focus, you know, under 50 of EBITDA, And that's just what the market has been. There's been M&A flow has been a little light. We've been busy; as you can tell, a lot of our busyness comes from both new platforms and existing companies, but the spreads have tightened a bit.
Speaker Change: Yeah. It's a good question Kyle and we did not cover that earlier spreads spreads have contracted about 50 basis points.
Arthur Howard Penn: The last six to nine months in the core middle market, which is where we focus under 50 of EBITDA.
Arthur Howard Penn:
Arthur Howard Penn: And Thats just what the market has been the M&A flow has been a little light we've been busy as you can tell them a lot of our busyness comes from both new platforms and existing companies, but spreads have tightened a bit.
Arthur Howard Penn: Average 550 over the risk-free rate in our space, and that, along with what we think are attractive credit statistics like 4.3 times debt to EBITDA, interest coverage of 2.1 times, and a loan to value of 40%.
Arthur Howard Penn: The average $5 50 over the risk free rate in our space that along with what we think are attractive credit statistics like four three times debt to EBITDA intra.
Arthur Howard Penn: Interest coverage of two one times, our loan to value of 40%. So we still think those credit stats along with a call. It a $5 50 over risk free rate averages is very attractive.
Arthur Howard Penn: So we still think those credit stats, along with a call it a 550 over risk-free rate averages, is very attractive, you know, very attractive risk reward. Unclear what happens between now and year-end. We are optimistic. We believe there's going to be a lot of activity between now and your end, a lot of deal flow. And there may be a scenario where supply and demand widens, spreads again, no guarantees, but you can certainly see that if a lot of supply hits the market, which we think is a possibility, spreads may widen again. But either way, what's most important for us is that we are credit oriented. We're focused on credit, and we're okay taking a little lower yield if the credit is well undervalued.
Kyle Joseph: Great, thanks for taking my question.
Kyle Joseph: You know very attractive risk reward.
Kyle Joseph: Clear what happens between now and yearend we are optimistic we believe theres going to be.
Kyle Joseph: You know a lot of activity between now and year end a lot of deal flow.
Kyle Joseph: And there may be a scenario where supply demand widens spreads again, no guarantees, but you can certainly see that if a lot of supply hits the market, which we think is a possibility spreads may widen again, but either way. We are most important for us as we are credit oriented.
Kyle Joseph: We're focused on credit and we're OK taken a little lower yield if the credit is well underwritten.
Kyle Joseph: Great. Thanks for taking my question.
Speaker Change: Thank you.
Operator: And that does conclude the question and answer session. I'll now turn the conference back over to Mr. Art.
Kyle Joseph: And that does conclude the question and answer session I will now turn the conference back over to Mr Art Penn.
Arthur Howard Penn: Thank you everybody for participating. We really appreciate it. Next time, we'll be doing the call in early August for the June 30th quarter. In the meantime, wishing everybody a terrific spring and summer. Speak soon.
Art: Thanks, everybody for participating we really appreciate it next time, we'll we'll be doing the call in early August for the June 30th quarter in the meantime, wishing everybody a terrific spring and summer speak soon.
Operator: Thank you. That does conclude today's conference. We do thank you for your participation. Have an excellent day.
Speaker Change: Thank you that does conclude today's conference. We do thank you for your participation have an excellent day.
Operator: Okay.
Operator: Yeah.
Operator: Yeah.
Operator: [music].