Q3 2024 PennantPark Investment Corp Earnings Call

You are currently on hold for today's Pennant Park Investment Corporation's third fiscal quarter 2024 earnings conference call.

Operator: Corridor 2024 Earnings Conference Call. At this time, we're still admitting additional participants and plan to be underway shortly. We appreciate your patience and please remain on the line.

Speaker Change: At this time, we're still admitting additional participants and plan to be underway shortly.

Operator: Please stand by. We're about to begin. Good afternoon, and welcome to the Tenet Park Investment Corporation's 3rd fiscal quarter 2024 earnings conference call. Today's conference is being recorded. At this time, all participants are in place in the list and only mode. The call will be open to questions in the answer session following the speaker's remarks. If you'd like to ask a question at that time, simply press star one on your telephone keypad.

Speaker Change: Please stand by, we're about to begin.

Speaker Change: Good afternoon and welcome to the PennantPark Investment Corporation's 3rd Fiscal Quarter 2024 Earnings Conference Call. Today's conference is being recorded. At this time, all participants have been placed in the listen-only mode.

The call will be open for a question and answer session following the speaker's remarks.

Speaker Change: If you'd like to ask a question at that time, simply press star 1 on your telephone keypad.

Speaker Change: 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 Pennant Park Investment Corporation. Mr. Penn, you may begin your conference.

Arthur Penn: Good afternoon, everyone. I'd like to welcome you to Tenant Park Investment Corporation's third fiscal quarter, 2024 earnings conference call. I'm joining Dave. I leave the Lord out of our chief announcement. Rick, please start off by disclosing some general conference call information and include a discussion about forward-looking statements. Thank you, Art.

Art Penn: Good afternoon, everyone. I'd like to welcome you to PennantPark Investment Corporation's 3rd Fiscal Quarter 2024 Earnings Conference Call.

Speaker Change: I'm joined today by Rick Allorto, our Chief Financial Officer.

Speaker Change: Rick, please start off by disclosing some general conference call information and include a discussion about forward-looking statements.

Rick: I'd like to remind everyone that today's call is being recorded. Please note that this call is the property of Pennant Park Investment Corporation and that any unauthorized broadcast of this call in any form is strictly prohibited. An audio replay of the call will be available on our website. I'd also like to call your attention to the customary safe harbor disclosure in our press release regarding forward-looking information. Today's conference call may also include forward-looking statements and projections, and we ask that you refer to our most recent filings with the SEC for important factors that could cause actual results to differ materially from these projections.

Rick Allorto: Thank you, Art. I'd like to remind everyone that today's call is being recorded.

Rick Allorto: 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.

Rick Allorto: An audio replay of the call will be available on our website.

Rick Allorto: I'd also like to call your attention to the customary safe harbor disclosure in our press release regarding forward-looking information.

Rick 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.

Rick: We do not undertake to update our forward-looking statements unless required by law. For copies of our latest SEC filings, please visit our website at PennantPark.com or call us at 212-905-1.000. At this time, I'd like to turn the call back to our chairman and chief executive officer, Art. Thanks, Rick.

Rick Allorto: 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 Penn.

Arthur Penn: We're going to spend a few minutes and comment on the current market environment for private middle market credit. How did we do in the quarter I did you in 30? of 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 ending June 30, our gap in net investment income was $0.24 per share, and our core net investment income was $0.21 per share. GAAP and adjusted NAV decreased 2.2% to $7.52 per share from $7.69.

Art Penn: Thanks, Rick.

Art Penn: We're going to spend a few minutes and comment on the current market environment for private middle market credit, how we fared in the quarter ended June 30th.

Speaker Change: and the portfolio is positioned for the upcoming quarters.

Speaker Change: Detailed review of the financials, and then open it up for Q&A.

For the quarter ending June 30th, our gap in net investment income was 24 cents per share and our core net investment income was 21 cents per share.

Rick Allorto: Gap in adjusted NAV decreased 2.2% to $7.52 per share from $7.69 per share.

Arthur Penn: The decrease in NAB for the quarter was due primarily to evaluation adjustments on the non-accurred loans, partially offset by increases in several equity investments. As of June 30th, our portfolio totaled $1.2 billion, and during the quarter, we continue to originate attractive investment opportunities and invest $163 million in 11 new and 42 existing portfolio companies at a weighted average yield of 12 percent. We continue to see an attractive vintage in the core of the market for investments in new portfolio companies, as the average density of the dollar was 3.4 times. The weighted average interest coverage was 1.9 times, and the weighted average loan that I used was 50%.

Rick Allorto: The decrease in NAV for the quarter was due primarily to evaluation adjustments on the non-accrual loans, partially offset by increases in several equity investments.

Art Penn: As of June 30th, our portfolio totaled $1.2 billion, and during the quarter we continue to originate attractive investment opportunities and invest $163 million in 11 new and 42 existing portfolio companies at a weighted average yield of 12%.

Art Penn: We continue to see an attractive vintage in the core metal market. For investments in new portfolio companies, the weighted average debt to EBITDA was 3.4 times, the weighted average interest coverage was 1.9 times, and the weighted average loan-to-value was 50%.

Arthur Penn: As of June 30, the portfolios weighted average of leverage ratio to our depth security was 4.3 times, and the portfolios weighted average interest coverage was two times. These attractive credit statistics are a testament to our selectivity, conservative orientation, and our focus on the core middle market. During 2024, the market yield on first lien term loans tightened 50 to 75 basis points.

Art Penn: As of June 30th, the portfolio's weighted average leverage ratio to our debt security was 4.3 times, and the portfolio's weighted average interest coverage was 2 times.

These attractive credit statistics are a testament to our selectivity, conservative orientation, and our focus on the core middle market.

Art Penn: During 2024, the market yield on first lien term loans has tightened 50 to 75 basis points.

Arthur Penn: As the credits statistics jump highlight indicate, we continue to believe that the current vintage of poor mental markets or racially originated loans is excellent, and the core metal market leverage is lower, spreads 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're still getting meaningful covenant protection. At June 30th, the JV portfolio equaled $926 million, and during the quarter, the JV invested $56 million, including $38 million in purchases from PNNT. During the quarter, the JV made a special dividend of $4.2 million, and Pennant's share was $2.5 million.

As the credit statistics just highlight and indicate, we continue to believe that the current vintage of core middle market directly originated loans is excellent.

And the core middle market leverage is lower, spreads 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're still getting meaningful covenant protections.

Art Penn: At June 30, the JV portfolio equaled $926 million, and during the quarter, the JV invested $56 million, including $38 million of purchases from PNNT.

Art Penn: During the quarter, the JV made a special dividend of $4.2 million and PNNT share was $2.5 million.

Arthur Penn: The dividend is the distribution of the JV's cumulative, undistributed net investment income. The special dividend is another indicator of the earnings power of the JV. With its current capital base, the JV portfolio can grow to $1.1 billion. We're having discussions with our J.V. partners.

Art Penn: The dividend was the distribution of the JV's cumulative, undistributed net investment income. The special dividend is another indicator of the earnings power of the JV.

With its current capital base, the JV portfolio can grow to $1.1 billion.

Arthur Penn: partner to potentially grow the J.V. Over the last 12 months, PNNT earned a 19.5% return on invested capital in the joint venture. We expect that with continued growth in the JV portfolio, the JV investment will enhance PN&T's earnings momentum in future quarters. Product Quality remains strong; we have three nonacrules as of June 30th.

Art Penn: We're having discussions with our JV partner to potentially grow the JV.

Over the last 12 months, PNNT earned a 19.5% return on invested capital in the joint venture. We expect that with continued growth in the JV portfolio, the JV investment will enhance PNNT's earnings momentum in future quarters.

Art Penn: Credit quality remains strong. We had three non-accruals as of June 30th.

Arthur Penn: Non-accruals represented 4.2% of the portfolio cost and 2.5% of the market value. 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 the core middle market provides the company with attractive investment opportunities where we provide important strategic capital to our borrowers. We have a long-term track record of generating value by successfully financing growing companies, growing middle market companies, in five key sectors. These are sectors where we have substantial domain expertise. Another great question is to ask them if they have an excellent track record.

Art Penn: Non-accruals represented 4.2% of the portfolio cost and 2.5% of market value.

Speaker Change: 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 the core middle market provides the company with attractive investment opportunities, where we provide important strategic capital to our borrowers.

Arthur Penn: These sectors have also been recession resilient and tend to generate strong free cash flow. The Corp Middle Market, Companies with 10 to 50 million in EBITDA, is below the threshold and does not compete with a broadly syndicated or high yield market, 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 are attractive. We have many weeks to do our diligence with care.

Art Penn: We have a long-term track record of generating value by successfully financing growing companies, 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. There are business services, consumer, government services and defense.

healthcare and software and technology. These sectors have also been recession resilient and tend to generate strong free cash flow.

Art Penn: The Corp Middle Market.

Art Penn: which are companies with $10 to $15 million of EBITDA is below the threshold and does not compete with the broadly syndicated or high-yield markets, unlike our peers in the upper middle

Art Penn: and the Core Middle Market because we are an important strategic lending partner.

Speaker Change: The process and package of terms we received is attractive.

Arthur Penn: We thoughtfully structure transactions with sensible credit statistics, meaningful covenants, substantial equity questions to protect our capital, attractive spreads, and equity co-investment. Additionally, from a monitoring perspective, we receive monthly financial statements to help us stay on top of the company. 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're well positioned in this environment. Many of our peers should focus on the upper middle market, those bigger companies are less risky. That is a perception that may make some intuitive sense, but the reality is different.

Speaker Change: We have many weeks to do our diligence with care, we thoughtfully structure transactions with sensible credit statistics, meaningful covenants, substantial equity questions to protect our capital, attractive spreads, and equity co-investment.

Art Penn: Additionally, from a monitoring perspective, we receive monthly financial statements to help us stay on top of the companies.

Art Penn: With regard to covenants, unlike the erosion of the upper middle market, virtually all of our originated first lien loans have meaningful covenants to help protect our capital.

Art Penn: This is a significant reason why we believe we're well positioned in this environment.

Art Penn: Many of our peers should focus on the upper middle market state. Those bigger companies are less risky.

Speaker Change: That is a perception that may make some intuitive sense, but the reality is different. According to S&P, loans to companies with less than 50 million in EBITDA have a lower default rate and higher recovery rate than loans to companies with higher EBITDA.

Arthur Penn: According to S&P, loans to companies with less than $50 million in 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 Corp. Mark the Loans, more careful diligence, and tighter monitoring, have been an important part of this differentiated form as a provider of strategic capital, which fuels the growth of our portfolio companies. In many cases, we participate in the upside of the company by making an equity co-investment.

Art Penn: 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.

Art Penn: As a provider of strategic capital which 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 Penn: Our returns on these equity investments have been excellent over time; overall, for our platform from inception through June 30, we have invested over $511 million in equity co-investment, generated an IRR of 26%, and have generated a multiple of uninvested capital of two times. Since inception nearly 17 years ago, PNNT has invested $8.2 billion with an average yield of 11.3%, and it has experienced a loss ratio on invested capital of about 20 basis points annually.

Art Penn: Our returns on these equity co-investments have been excellent over time. Overall, for our platform, from inception through June 30th, we have invested over $511 million in equity co-investments.

Art Penn: have generated an IRR of 26% and have generated a multiple uninvested capital of two times.

Speaker Change: Since inception nearly 17 years ago, PNNT has invested $8.2 billion at an average yield of 11.3 percent.

Art Penn: and has experienced a loss ratio on invested capital of about 20 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.

Arthur Penn: 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 in our wide origination funnel is producing active deal flow. Our continued focus remains on capital preservation and being patient.

Art Penn: With regard to the outlook, new loans on our target market are attractive. Our experienced and talented team and our wide origination funnel is producing active deal flow. Our continued focus remains on capital preservation and being patient investors.

Rick: We want to reiterate our goal to generate attractive research else to return through income, coupled with long-term preservation of capital. We seek to find investment opportunities in growing middle-market companies and in high-free cash flow conversion. We capture that free cash flow primarily in debt instruments, and we pay out those contractual cash flows in the form of dividends to our shareholders. Let me now turn the call over to Rick, our CFO, to take us through the financial results. Thank you, Art.

Art 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 in growing middle-market companies and have high free cash flow conversion.

Art Penn: We capture that free cash flow primarily in debt instruments, and we pay out those contractual cash flows in the form of dividends to our shareholders.

Rick: For the quarter ended June 30th, GAAP net investment income was $0.24 per share, and core net investment income was $0.21 per share. During the quarter, we received a special dividend of 2.5 million, or 3 cents per share, from the JV, which consisted of cumulative undistributed net investment income from prior periods. Given the non-recurrent nature of this dividend, we have excluded it from our poor net investment. Operating expenses for the quarter were as follows.

Rick Allorto: Let me now turn the call over to Rick, our CFO , to take us through the financial results.

Rick Allorto: Thank you, Art. With the quarter ended June 30th, GAAP net investment income was $0.24 per share and core net investment income was $0.21 per share.

Rick: During the quarter, we received a special dividend of $2.5 million, or $0.03 per share, from the JV, which consisted of cumulative undistributed net investment income from prior periods.

Rick Allorto: Given the non-recurring nature of this dividend, we have excluded it from our core net investment income.

Rick Allorto: Operating expenses for the quarter were as follows.

Rick: Interest and credit facility expenses were $11.5 million. Base Management and Incentive Fees were $7.5 million. General and Administrative Expenses were 1.5 million, and provision for excise taxes was $0.7 million. For the quarter ended June 30th, net realized and unrealized change on investments and debt, including provision for taxes, was a loss of $12 million.

Rick Allorto: Interest and credit facility expenses were $11.5 million.

Rick Allorto: Base Management and Incentive Fees for $7.5 million.

Rick Allorto: General and administrative expenses were $1.5 million and provision for excise taxes was $0.7 million.

Rick Allorto: For the quarter ended June 30th, net realized and unrealized change on investments and debt, including provision for taxes, was a loss of $12 million.

Rick: As of June 30th, our gap and adjusted NEV was $7.52 per share, which is down 2.2% from $7.69 per share in the prior quarter. As of June 30, our debt to equity ratio was 1.5 times, and our capital structure is diversified across multiple funding sources, including both secured and unsecured debt. As of June 30th, our key portfolio statistics were as follows. Our portfolio remains highly diversified, with 144 companies across 30 different industries.

Rick Allorto: As of June 30th, our gap and adjusted NEV was $7.52 per share, which is down 2.2% from $7.69 per share in the prior quarter.

Rick Allorto: As of June 30th, our debt-to-equity ratio was 1.5 times, and our capital structure is diversified across multiple funding sources, including both secured and unsecured debt.

Rick: The weighted average yield on our debt investments was 12.7%. We had three non-accruals, which represented 4.2% of the portfolio. Cost and 2.5% at market value. The Portfolio is comprised. 56% first lien secured debt, 5% second lien secured debt, and for cent subordinate notes to PSLF. 4% of the subordinated debt, 6% equity in PSLF, and 19% in other preferred and common equities. 96% of the debt portfolio is floating rate, meaning that EBITDA on the portfolio is 4.3 times, and the interest coverage ratio is 2.0 times.

Art Penn: As of June 30th, our key portfolio statistics were as follows.

Art Penn: Our portfolio remains highly diversified with 144 companies across 30 different industries.

Art Penn: The weighted average yield on our debt investments was 12.7%.

Art Penn: We had three non-accruals, which represent 4.2% of the portfolio.

Art Penn: at cost and 2.5% at market value.

Rick Allorto: The portfolio is comprised

Rick Allorto: 56% First Lien Secured Debt.

Rick Allorto: 5% Second Lien Secured Debt.

Rick Allorto: 10% subordinated notes to PSLF.

Rick Allorto: 4% Other Subordinated Debt

Rick Allorto: 6% equity in PSLF and 19% in other preferred and common equity.

Rick Allorto: 96% of the debt portfolio is floating rate.

Rick Allorto: That EBITDA on the portfolio is 4.3 times and interest coverage ratio is 2.0 times.

Arthur Penn: Now let me turn the call back to our, 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. They conclude their remarks at this time. I would like to open up the call to questions. Thank you.

Rick Allorto: Now, let me turn the call back to Art.

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.

Speaker Change: That concludes our remarks at this time. I would like to open up the call to questions.

Operator: Thank you. If you'd like to ask a question, please signal by pressing star 1 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 1 to ask a question. We'll take our first question from Mark Hughes on Truist.

Speaker Change: Thank you. If you'd 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.

Speaker Change: We'll take our first question from Mark Hughes with Truist.

Mark Hughes: Yeah, thank you. Good morning. Good afternoon.

Mark Hughes: Yeah, thank you. Good morning. Good afternoon.

Arthur Penn: The return potential, you described the very good 19 and a half percent return on invested capital in the JV. If you increase the size of that, as apparently you're discussing, what's the, how does that change the return profile, and is that level of return sustainable?

Speaker Change: The return potential, you know, you described very good the 19.5% return on invested capital in the JV.

Mark Hughes: If you increase the size of that, as apparently you're discussing, how does that change the return profile and is that level of return sustainable?

Arthur Penn: It's a good afternoon. It's our good question. Look, we certainly, the returns of these vehicles, the BDC itself, or the JV, are high now. We've been in a high interest rate environment. So I would say to the extent that interest rates start to come down, yields will come down across the platform in the BDC as well as the JV. Today, we've had a really good credit performance in that JV. There's never an assurance that we'll continue that, but we're very pleased with the upper teens.

Speaker Change: Hey Mark, good afternoon. It's Art. Good question. Look, certainly the returns of these vehicles, the BDC itself or the JV,

Speaker Change: are high now. We've been in a high interest rate environment. So I would say to the extent that interest rates start to come down, yields will come down across the platform in the BDC as well as the JV.

Speaker Change: Today, we've had really good credit performance in that JV. There's never an assurance that we'll continue that, but we're very pleased with the upper teens. I think, you know, if you want to model it, you can certainly be modeling it into the upper teens.

Arthur Penn: I think if you want to model it, you can certainly model it into the upper teens. And, you know, to the extent we finalized the arrangement to upsize the JV, whatever capital PNNT puts in, you can certainly model it at an attractive return on that capital, which should certainly be accreted to PNNT.

Speaker Change: And, you know, to the extent we finalized the arrangement to upsize the JV, whatever capital PNNT puts in, you know, you can certainly model it at an attractive, you know, return on that capital, which should certainly be accreted to PNNT.

Arthur Penn: And then the dividend trajectory, you had a special dividend this quarter, obviously, refresh me on how that has trended over time, what the usual pacing has been on those sorts of dividends. Yeah, I mean, Rick's gonna get you the

Speaker Change: And then the dividend trajectory, you had a...

Speaker Change: Special dividend this quarter, obviously. Refresh me on how that has trended over time, what the usual pacing has been on those sorts of dividends.

Rick: Yeah, I mean, Rick's going to get you the historical data. I mean, usually we take whatever the NII for the JV is. We pay out the majority of it, and we leave a little cushion, and that cushion accumulates over time. We paid out this amount, which is about three cents a share, because we wanted to pay out all the undistributed income as we look to potentially upsize the JV, so everyone kind of comes in kind of with a fresh slate. Rick, you know, historically. Yeah. So, Mark, the I'll say kind of the regular, you know, kind of core dividend from the JV is about $4.8 million a quarter.

Speaker Change: Yeah, I mean Rick's gonna get you the historical. I mean usually we take whatever the NII for the JV is.

Speaker Change: We pay out the majority of it and we leave a little cushion and that cushion accumulates over time.

Speaker Change: We paid out this amount, which is about three cents a share, because we wanted to pay out all the undistributed income as we look to potentially upsize the JV, so everyone kind of come in with a fresh slate.

Speaker Change: Rick, you know historically. Yeah so Mark the I'll say kind of the regular you know kind of core dividend from the GAV is about 4.8 million a quarter.

Arthur Penn: And then the, uh... Equity Co-Invest, Is that something where you might think about either increasing or decreasing the pacing? You know, the pacing. Has your experience recently been, you know, kind of more or less favorable and historical? It turns into that influences your appetite on a go-forward basis. That's a great question. You know, for us, it's usually...

Rick Allorto: Yeah. Yeah.

Rick Allorto: And then the, uh...

Rick Allorto: Equity Co-Invest

Rick Allorto: Is that something where you might think about either increasing or decreasing, you know, the pacing? Has your experience recently been, you know, kind of more or less favorable in historical?

Speaker Change: terms, and does that influence your appetite on a go forward basis?

Arthur Penn: Great question, you know; for us, it's usually less macro and more micro; we're looking at the particular companies, the investments, the entry multiples, you know, the growth parameters. You know, prototypical deals for us.

Speaker Change: That's a great question. For us, it's usually less macro and more micro. We're looking at the particular companies, the investments, the entry multiples, the growth parameters.

Arthur Penn: We're starting out with a company that's doing 10 to 20 of EBITDA. The sponsor has a growth trajectory in mind. There's a delayed raw term loan. We're helping fuel that growth. So the goal is to take that $10 to $20 million of EBITDA company, grow it to $30, $40, $50, and above, with our debt capital being a driver of that. So in many cases, it makes some sense for us to participate in some of that equity by co-investing side-by-side with the sponsor. These are not intended to be large equity bets, intended to just be a kind of relatively small amount, but over the course of time, 5% to 10% to maybe 15% of the portfolio.

Speaker Change: You know, prototypical deals for us. We're starting out with a company that's doing 10 to 20 of EBITDA. The sponsor has

Speaker Change: a growth trajectory in mind. There's a delayed raw term loan. We're helping fuel that growth.

Speaker Change: So the goal is to take that $10 to $20 million REBA.company, grow it to $30, $40, $50, and above.

Speaker Change: with our debt capital being a being a driver of that. So in many cases, it makes some sense for us to participate some of that equity by co-investing side-by-side with the sponsor. These are not intended to be large equity bets.

Speaker Change: intended to just be a kind of relatively small amount but over the course of time, you know, five to 10 to maybe 15% of the portfolio.

Speaker Change: Appreciate it. Thank you.

Robert Dodd: We'll take our next question from Robert Dodd with Raymond James.

Speaker Change: Thank you.

Speaker Change: We'll take our next question from Robert Dodd with Raymond James.

Arthur Penn: Hi guys, excuse me, sorry. First one; I may have missed this. There's been a lot of calls this morning. On the JV, you just talked about that you paid out the excess so that as it gets upside, everybody comes in on the same level. Can I read into that there's the intent to maybe not just upsize it with the existing partner, but is there an intent to maybe expand the number of partners that are involved in that, Jamie?

Robert Dodd: Hi guys. First one, I may have missed this, there's been a lot of calls this morning. On the JV, you just talked about it, you paid out the excess so that as it gets upside, everybody would come in on the same.

Speaker Change: Can I read into that, there's the intent to maybe not just upsize it with the existing partner, but is there an intent to maybe expand the number of partners that are involved in that, Jay-Z? Yes. Okay.

Speaker Change: Yeah, that's a good question. You know, it's working really well with our existing JV partner. It's been great, Simpatico.

Speaker Change: We started with them kind of right after COVID, so kind of, you know, it's been, we're kind of three, four years old. I think if we had another third party, we'd probably just set up a separate JV.

Arthur Penn: I think if we had another third party, we'd probably just set up a separate JV. Just, you know, when you start to get more different deciders around the table, it may get more complex, and each JV partner has their own way of thinking about things, etc. So I think we're open to another JV over time if we can find the right partner who sees credit the way that we see it and sees the world the way that we see it. So I think that's something that's certainly potentially on the table for PNNT.

Speaker Change: Just, you know, you start to get more different deciders around the table, it may get more complex and each JV partner has their own.

Speaker Change: I think we're open to another JV over time if we can find the right partner who sees credit the way that we see it and sees the world the way that we see it, so I think that's something that's certainly potentially on the table for PNNT.

Robert Dodd: Got it. Thank you.

Speaker Change: Got it. Thank you. Just on the market outlook, right? I mean, in terms of pipeline demand, how do you expect...

Arthur Penn: Just on the market outlook, right? I mean, in terms of pipeline demand, do you expect the recent volatility in the market, very short term, so who knows how long it's going to last, to affect demand in your area of the market? I mean, yeah, there's been some BSLs called in a very large market, but that's not the area you're typically competing in. And so do you expect that if the volatility does persist? that it will affect? Sponsor Activity in York Sedgman or any thoughts on how we have been doing.

Speaker Change: The recent volatility in the market, very short term, so who knows how long it's going to last.

Speaker Change: to affect demand in your area of the market? I mean, yeah, there's been some BSLs pulled in the very large market, but that's not the area you're typically competing in. And so, do you expect if the volatility does persist?

Speaker Change: that it would affect

Speaker Change: Sponsor activity in your segment or any thoughts on how all that's working out?

Arthur Penn: Yeah, you know, when you look back over many years, and we've been at Pennant Park now for 17 years of business, you know, when you have market shocks, it takes a little while for the core middle market to impact first. Obviously, the broadly syndicated loan market has an impact fairly immediately, which then gets articulated to the upper middle market, which then gets articulated to the core middle market where we sit.

Speaker Change: Yeah, you know, when you look going back over many years, and we've been at Pennant Park now 17 years of business, you know, when you have market shocks,

Speaker Change: It takes a little while for the core middle market to impact first, obviously, the broadly syndicated loan market.

Speaker Change: has an impact fairly immediately, which then gets articulated to the upper-middle market, which then gets articulated to the core-middle market where we sit. So typically it takes up to six months.

Arthur Penn: So typically, it takes up to six months before the choppy market starts to impact our market. What are we supposed to do in the meantime? We could wait. We're never in a rush to invest. We've learned lessons over the years.

Speaker Change: of a choppy market before it starts to impact our market.

Speaker Change: What are we supposed to do in the meantime? We could wait. We're never in a rush to invest. We've learned lessons over the years. You never should be in a rush to invest, or we're never in a rush to invest.

Arthur Penn: You never should be in a rush to invest, or we're never in a rush to invest. On the other hand, when you find great companies and great capital stacks. You know, it's always a good time to invest because we feel like great companies and great situations end up working out no matter what the scenario is. So I think if this choppiness continues, we certainly are going to be thinking about the macro and seeing what's going on, but we're also going to be, as always, looking at the micro and trying to find excellent companies that we can back and support excellent sponsors and try to work both sides against the middle. I don't know if that makes sense or that you understand what I'm saying.

Speaker Change: On the other side, when you find great companies and great capital stacks...

Speaker Change: You know, it's always a good time to invest because we feel like great companies, great situations end up working out no matter what the scenario is. So I think if this choppiness continues, we certainly are going to be thinking about the macro.

Speaker Change: and seeing what's going on, but we're also going to be, as always, looking at the micro and trying to find excellent companies.

Speaker Change: that we can back and support excellent sponsors.

Speaker Change: and try to work both sides against the middle.

Arthur Penn: It's, yeah, I think I get the general idea. Again, one more, on the non-accruals, or the new non-accruals, but there was a new non-accrual last quarter flop, it's been restructured, and the debt's back on accrual in one quarter. You had another new non-accrual this quarter. I mean, is this a similar kind of thing where it's going to be very short term and a quick restructuring, or can you give us any color on what you expect kind of the timeline this year? Yeah, yeah, yeah. The FLOC, you know, that was a restructuring we converted.

Speaker Change: I don't know if that makes sense or that you understand what I'm saying. Yeah, I think I get the general idea. On the non-accruals, or the new non-accruals, but there was a new non-accruals last quarter flop. It's been restructured. The debt's back on accrual in one quarter.

Speaker Change: You had another new non-equal this quarter, I mean is this a similar kind of thing where it's going to be very short term and a quick restructuring or can you give us any color on what you expect kind of the timeline this time?

Arthur Penn: He has a flock; we know that was a restructuring, we converted that to equity, we put more money into it. We now control the company. This company is the new non-accrual. It's called Pragmatic.

Speaker Change: Yeah, yeah. Yeah, the flock, you know, that was a restructuring, we converted that to equity, we put more money into it.

Speaker Change: We now control the company. This company is the new non-accrual. It's called Pragmatic. They provide corporate training solutions to product managers.

Arthur Penn: They provide corporate training solutions to product managers. In many cases, in technology and other industries, the sponsor injected equity underneath us. So this is a little bit different. These sponsors injected equity underneath us. We are not in control at this point. The evaluation came in in the low 60s, and it's a PIC instrument, so given that the valuation came in the low 60s, and it's PIC. We decided ourselves to put it on, not because it's cruel.

Speaker Change: In many cases, technology and other industries. The sponsor injected equity underneath us, so this is a little bit different. The sponsor injected equity underneath us. We are not in control at this point. The valuation came in in the low 60s.

Speaker Change: and it's a PIC instrument. So given the valuation came in the low 60s and it's PIC, we decided ourselves to to put it on non-accrual.

Arthur Penn: We'll take our next question.

Paul Johnson: 'll take our next question from paul johnson with k b w

Unknown Speaker: Good morning or good afternoon. Thanks for taking the time to answer my questions. You guys seem to be approaching kind of max leverage on the balance sheet and on the BDC and also GAB. Have the, you know, [inaudible] http://www.pennantpark.com. I know you're obviously in discussions to expand that as well. But you just kind of talk about your investment capacity here, you know, as we sit here, that kind of 1.5 times leverage, we kind of Infecting to kind of pull back here a little bit and, you know, focus on just recycling.

Paul Johnson: Yeah, good morning or good afternoon. Thanks for taking my questions.

Paul Johnson: you guys seem to be approaching kind of max leverage on the balance sheet and on the b c and also the g the

Speaker Change: at least kind of the you know informal sort of arget sily he had mentioned up the falsor for the

Speaker Change: I know you're obviously

Speaker Change: actuallyally in discussions to expand that as well but can you just kind of talk about your investment capacity here as we sit kind of one point five times leverage should we kind of be

Paul Johnson: afcting to come pull back here a little bit and you know

Arthur Penn: Yeah, Paul, that's a great question. I think that's a fair statement, which is that we're fully leveraged now. We're going to use the JV to deleverage. That's the first thing we're going to do.

Speaker Change: basun just the cycling capital

Speaker Change: Paul, that's a great question. I think that's a fair statement, which is we're full-leverage now.

Speaker Change: we're going to use the jv to to deleverage

Arthur Penn: And then, over time, we do expect and hope to get some rotation on the equity portfolio. M&A is starting to pick up again. There are some really interesting equity positions in there. So we're very hopeful that we can rotate some of the equity, which will create Dry Powder, too.

Speaker Change: That's, that's the first.

Speaker Change: thing we're going to do and then

Paul Johnson: Over time we do expect and hope to get some rotation on the equity portfolio.

Speaker Change: You know, M&A is starting to pick up again, there are some...

Paul Johnson: Really interesting equity positions in there. So, you know, we're very hopeful that we can we can rotate some of the equity which will create dry powder to invest in cash paying debt securities

Speaker Change: I appreciate that and then

Arthur Penn: Appreciate that and then Really, I mean, the portfolio overall has an experience of kind of... Transcription by Rev.com Page of the overall return on savings. Unknown Speaker 0

Speaker Change: Really, I mean, the portfolio overall has an experience of time.

Speaker Change: Spread Compression. But I mean, within the JV, have you, you know, seen any spread compression there? I mean, should we be kind of tempering expectations for, you know, these additional special dividends and maybe just...

Speaker Change: The overall return on Citi's great compression at all.

Arthur Penn: Yeah, I mean, look, it's been a great time to be in the lending business, particularly if you just select good companies that pay you back, right? So we've got a really good track record in general; we've got a really good track record in the JV.

Speaker Change: Yeah, I mean, look, it's been a great time.

Speaker Change: to be in the lending business, particularly if you can select good companies that pay you back, right? So, we've got a really good track record in general, we've got a really good track record in the JV. Obviously, when you have assets that are primarily floating rate,

Speaker Change: and their spread compression and yields start coming down for sure. You know, yields and returns are going to come down, you know, in the space. What I can tell you is on the liability side,

Speaker Change: We've seen spread compression also. If you were on the call or listened in to our earlier call on PFLT,

Paul Johnson: PFLT just recently did a securitization CLO financing.

Paul Johnson: and we got 50 basis points of compression on the liability side in that recent securitization. So, if you see it on the asset side, in some way, shape, or form, you're going to see it on the liability side, sometimes sooner, sometimes later.

Arthur Penn: If you see it on the asset side, in some way, shape, or form, you're going to see it on the liability side, sometimes sooner, sometimes later. Our credit facility, we also redid in PFLT. Again, we did it as a tighter spread. It may take a little while for it to get to 100%, but if asset spreads are coming down, liability spreads are coming down.

Paul Johnson: You know, our credit facility, we also redid in PFLT, again, we did it as a tighter spread. So it may take a little while for it to, you know, you're never fully 100% matched, but if asset spreads are coming down, liability spreads are coming down, you know, as well.

Arthur Penn: Thanks for that. And then one more on the JV. What level, or if any, do you have tech loans within https://www.pennantpark.com?

Speaker Change: Thanks for that. And then one more on the JV. What level, or if any, do you have of tech loans within the JV? Does the structure allow tech, and then kind of what percentage?

Arthur Penn: Yeah, it's very small. We don't have it. I don't know, but I think we have it at hand here. We can certainly call you back, but our level of pick is very low. In the J.V., you know, we've had one non-accrual in the J.V. today, Dynata research now, so it's been, you know, I think it's very, very clean, but we can, we can call you back where we can call you back later, but it's a very low number in terms of pick.

Speaker Change: I'll admit that he is.

Speaker Change: Yeah, it's very small. We don't have it at, I don't think we have it at hand here. We can certainly call you back, but our level of pick is very low.

Speaker Change: in the JV. You know, we've had in the nearly four years, we've had one non-accrual in the JV to date, Dynata Research now, so it's been, you know, I think it's very very clean, but we can we can call you back, Rick can call you back later, but it's a very low number in terms of pick.

Unknown Speaker: That'd be great. Well, that's all from me. Thanks for taking my question.

Rick Allorto: That'd be great. Well, that's all for me. Thanks for taking my questions.

Melissa Wedel: We'll take our next question from Melissa Wedel, with J.P. Morgan.

Rick Allorto: Thanks, Bob.

Speaker Change: We'll take our next question from Melissa Wedel with J.P. Morgan.

Arthur Penn: Good afternoon. Thanks for taking my questions today. Art, you touched on my first one.

Melissa Wedel: Good afternoon. Thanks for taking my questions today. Art, you touched on my first one. I know that equity rotation has been, you know, a long-term goal, at least for part of the allocation there.

Melissa Wedel: I know that equity rotation has been, you know, a long-term goal, at least for part of the allocation there. You mentioned it just now, and that remains part of the strategy. Given the sort of general sentiment around expecting pick-up-and-deal activity in the second half and its rates coming down, you didn't mention it earlier, but I'm wondering if there are any, if you feel like part of the portfolio is particularly well-positioned for that. Is there anything that we should be thinking about in terms of, you know, sort of modeling and timing and rotating part of that?

Speaker Change: You mentioned it just now, that remains part of the strategy.

Speaker Change: Given the sort of general sentiment around expecting a pickup and deal activity in the second half and its rates come down, you didn't mention it earlier, but I'm wondering if there are any, if you feel like part of the portfolio is particularly well-positioned for that. Is there anything that we should be thinking about in terms of...

Arthur Penn: Yeah, that's a good question. You know, it's working really well with our existing JB partner. It's been great to have some had to go. We started with them kind of right after COVID, so kind of, you know, it's been, we're kind of three, four years old.

Speaker Change: You know, sort of modeling and timing and rotating part of that.

Arthur Penn: It's a great question, and the last thing we want to do is over-promise and under-deliver, Melissa, right? So...

Arthur Penn: Uh, look, you're right, we believe deal activity is going to pick up, we believe interest rates are coming down, and we certainly hope and believe that a portion of that equity portfolio is going to rotate. It's hard for us to put out an estimate or guidance on the amount and the timing other than that that continues to be a goal of ours. And as you know, much of it is not in our control. Much of it is with equity co-investments, in particular. We're riding side by side with private equity.

Speaker Change: Look, you're right, you know, we believe deal activity is going to pick up, you know, we believe interest rates are coming down.

Speaker Change: We certainly hope and want and believe that a portion of that equity portfolio is going to rotate.

Speaker Change: It's hard for us to put out an estimate or guidance on the amount and the timing other than that continues to be a goal of ours.

Speaker Change: And as you know, much of it is not in our control. Much of it is with the equity co-investments in particular. We're riding side by side with the private equity firm.

Melissa Wedel: Yes, OK, understood, and then a follow-up question. I just wanted to revisit the dividend and the decision to take that up. A little quarter or two ago. You know, given sort of the earnings power of the portfolio right now, given sort of the tail end that came from the one-time dividend from PSLF this quarter, which sort of met the dividend level on a quarterly basis, how are you thinking about dividend coverage and just generally about the earnings power of the portfolio given the potential for, you know, really a lower rate environment as we go forward? And I will keep in mind everything you just said about expanding JV.

Speaker Change: Yep. Okay, understood. And then, follow-up question, I just wanted to revisit the dividend and the decision to take that up.

Speaker Change: a little, a quarter or two ago.

Speaker Change: You know, given sort of the earnings power of the portfolio right now, given sort of the tail end that came from the one-time dividend from PSLF this quarter, which sort of...

Speaker Change: met the dividend level on a quarterly basis.

Speaker Change: How are you thinking about dividend coverage and feeling just generally about the earning power of the portfolio, given the potential for, you know, really a lower rate environment as we go forward? And I keep in mind everything you just said about expanding the JV.

Arthur Penn: Yeah, look, it's a great question. We're trying to, you know, kind of balance the earnings power of the portfolio, the JV, the potential upsizing of the JV, and equity rotation. And we do have about a buck a share of spillover. You know, so, you know, we got to pay that out, you know, and we want to kind of pay it out judiciously over time, in a careful fashion, knowing that we're fairly fully levered at this point.

Speaker Change: Yeah, look, it's a great question. We're trying to, you know, kind of balance earnings power of the portfolio, the JV, the potential upsizing of the JV, and equity rotation, and we do have about a buck a share of spillover.

Paul Johnson: You know, so, you know, we got to we got to pay, pay that out, you know, and we want to kind of pay it out judiciously over time.

Paul Johnson: In a careful fashion, knowing that we're fairly fully levered at this point.

Arthur Penn: So we're balancing all these different competing interests, or different interests, I should say, you know, in terms of paying out the spillover, in terms of looking at the earnings power of the company, you know, and all the different elements of that. So, you know, kind of that really led to our decision to boost the dividend last quarter to eight cents a month, in large part, and do it with all the different elements, including the very large spillover.

Paul Johnson: So we're balancing all these different competing interests or different interests, I should say, you know, in terms of paying out the spillover.

Paul Johnson: in terms of looking at the earnings power of the company, you know, and all the different elements of that. So, you know, kind of that really led to our decision to boost the dividend last quarter to $0.08 per month.

Paul Johnson: In large part, due to all the different elements, including the very large spillover.

Melissa Wedel: Okay, that's all full, thanks, sir.

Art Penn: Okay, that's helpful. Thanks, Art.

Operator: And at this time, if there are no further questions, I'll turn the call back to Art for any additional or closing remarks. Thank you.

Speaker Change: And at this time, there are no further questions. I'll turn the call back to Art for any additional or closing remarks.

Arthur Penn: Thank you everybody for participating today. We really appreciate your interest in the company. A reminder that next quarter is our 10K, so the quarterly call will be a little bit later than usual. We're going to be targeting mid-November for the quarterly earnings release. In the meantime, I'm wishing everybody a terrific summer and fall.

Art Penn: Thank you everybody for participating today. We really appreciate your interest in the company. A reminder that next quarter is our 10K, so the quarterly call will be a little bit later than our normal. We're going to be targeting mid-November for the quarterly earnings release and the quarterly call. In the meantime, wishing everybody a terrific end of summer and fall.

Operator: This does conclude today's conference. We thank you for your participation.

Art Penn: speak to you next quarter.

Operator: 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 Penn Financial at Park Investment Corporation. Mr. Penn, you may begin your conference.

Arthur Penn: Obviously, when you have assets that are primarily floating, right? And there's spread compression, and yields start coming down for sure. Yields and returns are going to come down in the space. What I can tell you is on the liability side, we've seen spread compression also. If you were on the call or listened to our earlier call on PFLT, PFLT just recently did a securitization CLO financing, and we got 50 basis points of compression on the liability side in that recent securitization.