Q2 2025 PennantPark Investment Corp Earnings Call
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Speaker Change: Good afternoon, and welcome to the Pennant Park Investment Corporation's 2nd Disgill Quarter 2025 Earnings Conference Call.
today's conference is being recorded.
Speaker Change: 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 speakers or marks.
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.
Speaker Change: Good afternoon, everyone. I'd like to welcome you to Pennant Park Investment Corporation's second fiscal quarter 2025 earnings conference call. I'm joined today by Rick Allorto, our chief financial officer.
Rick Allorto: Rick, please start off by disclosing some general conference call information and included discussion about forward-looking statements.
Rick 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.
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 Allorto: We do not undertake to update our forward-looking statements unless required by law.
Rick Allorto: To obtain copies of our latest SEC filings, please visit our website at PennantPark.com or call us at 212-905-1000.
Rick Allorto: At this time, I'd like to turn the call back to our Chairman and Chief Executive Officer, Art Penn.
Art Penn: Thanks, Rick. I'm going to spend a few minutes and comment on the current market environment for private middle market credit.
Art Penn: How we ferried on the quarter ended March 31st, our dividend coverage and spill-over-income balance and how the portfolio is positioned for upcoming quarters.
Art Penn: Rick will provide a detailed review of the financials and then we'll open it up for Q&A.
Art Penn: With regard to the current market environment, despite continued volatility in the broader markets we had a solid quarter, particularly given the seasonally slower start to the fiscal year.
Art Penn: Our platform continues to prove its strength, enabling us to support our existing portfolio companies and private equity borrowers with strategic capital solutions to help grow their businesses.
Art Penn: Approximately 80% of our originations came from existing borrowers about 20% were new platform investments.
Each underwritten with attractive credits, statistics, and yields.
Art Penn: Our ability to remain active and disciplined during uncertain periods reinforces the value of our longstanding relationships and the breadth of our origination capabilities.
Art Penn: Looking ahead, we expect originations to remain concentrated among existing portfolio companies with select opportunities from high-quality new platforms.
Art Penn: In this evolving environment, pricing will likely increase and leverage will moderate as buyers and lenders adjust to a new risk framework.
Art Penn: We believe the strongest assets those with demonstrated growth in tire resilience will still command premium valuations and attract sponsor interest. As always, we will remain rigorous in our underwriting and highly selective in pursuing new investments.
Art Penn: Throughout the past year we have reduced the leverage of strength in our balance sheet.
Art Penn: PNNT is a position to take advantage of current market opportunities. As is typically the case, market volatility creates opportunities and the upcoming vintage of loans is shaping up to be particularly attractive.
Art Penn: We continue to see solid investments in the core middle market. During the quarter, for investments in new portfolio companies, the weighted average debt to EBITDA was 3.9 times, the weighted average interest coverage was 2.3 times, and the yield to maturity was 11.6 percent.
Art Penn: In the core metal market, the market yield on first lean term loans appears to have stabilized in the Silver Plus 500 to 550 range for high quality assets.
Art Penn: As the credits statistics just highlighted indicate we continue to believe that the current vintage of core middle market directly originated loans is excellent.
Art Penn: and the core metal market leverages lower and spreads are higher than in the upper metal market.
Art Penn: We continue to get meaningful covenant protection while the upper middle market is primarily characterized as covenant light.
Art Penn: With regard to how the current portfolio is positioned, over the past several weeks our team has been closely evaluating the potential impact of tariffs across the portfolio and our police to report that exposure is limited.
Art Penn: As of March 31st, the Portfolio's weighted average leverage ratio through our death security was 4.7 times and the Portfolio's weighted average interest coverage ratio was 2.1 times.
Art Penn: These attractive credit statistics are testament to our C-lectivity, conservative orientation and our focus on the core middle of market.
Art Penn: We continue to believe that our focus on this core middle market provides the company with attractive investment opportunities, where we provide important strategic capital to our borrowers.
Art Penn: We have a long-term track record of generating value by successfully financing growing middle-market companies in five key sectors.
Art Penn: These are sectors where we have substantial domain expertise, another right question to ask and have an excellent track record. There are business services, consumer, government services, and defense, healthcare, and software technology.
Art Penn: These sectors have been recession resilient, tend to generate strong free cash flow and have limited direct impact to the recent tariff increases and uncertainty.
Art Penn: The core middle market, companies with 10 to 50 million of EBITDA is below the threshold and does not compete with a broadly syndicated loan or high yield markets, unlike our peers in the upper middle market.
Art Penn: and the core middle market because we are an important strategic lending partner, the process and the impact of terms we receive is attractive.
Art Penn: We have many weeks to do our diligence with care, we thoughtfully structure transactions with sensible credit statistics, meaningful covenants, substantial equity cushions to protect our capital, attractive spreads, and equity and 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 in the upper middle market, virtually all of our originated first lean loans have meaningful covenants which help protect our capital.
Art Penn: Credit quality of the portfolio has remained strong. We have three non-cruels as of March 31st which represented 1.6% of the portfolio at cost and 0.4% at market value.
Art Penn: Two new investments were added and one prior investment was removed as a return to a cruel status.
Art Penn: Subsequent quarter end, one non-accrual investment was put back on accrual and pro forma for this subsequent event. PNNT's non-accruals represent only 1.4% of the portfolio at cost and 0.3% at market value.
Art Penn: Since inception nearly 18 years ago, PNNT has invested $8.8 billion and an average yield of 11.3% and has experienced a loss ratio and invested capital of approximately 20 basis points annually.
Art Penn: This strong track record includes investments of primarily subordinated debt instruments, made prior to the global financial crisis, legacy energy investments, and recently the pandemic.
Art Penn: as a provider of strategic capital who fuels the growth of our portfolio companies and many cases we participate in the upside of the company by making an equity
Art Penn: Our returns on the equity investments have been excellent over time.
Art Penn: Overall for our platform from inception, through March 31st we have invested over $566 million in equity co-investments.
Art Penn: and I've generated an IRR of 26% and I'm multiple on the vested capital of two times.
Art Penn: We've previously communicated our plans to rotate out of our larger equity positions and redeploy that capital into interest paying debt investments, which will drive an increase in our more net investment income.
Unfortunately, the current market environment has delayed that program.
Art Penn: As we continue to pursue our equity rotation plan, in the near term we are comfortable maintaining our current dividend level as the company has a significant balance of spill over income which the fund is required to distribute.
Art Penn: PNNT has $58 million or 88 cents per share of undistributed spillover income, and we will use the spillover income to cover any shortfall and coordinate investment income versus the dividend while we position ourselves for equity rotation in the future.
Art Penn: As of March 31st, our portfolio totaled $1.2 billion and during the quarter we continued to originate attractive investment opportunities and invested $177 million in three new and 52 existing portfolio companies at a weighted average yield of 10.7%.
Art Penn: Our PSLF Joint Venture portfolio continues to grow and be a significant contributor to our core NII.
Art Penn: At March 31st, the JV portfolio grew to $1.4 billion, and during the quarter, the JV invested $170 million at a weighted average yield of 10.1%, including $154 million of purchases from PNNT.
Art Penn: Over the last 12 months, PNNT's average NII return on Invested Capital in the JV was 18.3 percent.
Art Penn: Our JV has the capacity to increase its portfolio to 1.6 billion, and we expect that with additional growth in the JV portfolio, the JV investment will enhance PNNT's earnings of momentum and future quarters.
Art Penn: From now look perspective, our experienced and talented team and our wide origination fundals producing active deal flow. Our continued focus remains on capital preservation and on being patient investors.
Art Penn: We want to reiterate our goal to generate attractive risk-adjustive returns through income coupled with long-term preservation of capital.
Art 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 dead instruments and we pay out those contractual cash flows in the form of dividends to our shareholders.
Art Penn: Let me now turn the call over to Rick, RCFO to take us through the financial results.
Rick Allorto: Thank you, Art. For the quarter-ended March 31st, Gap and Coordinate Investment Income was 18 cents per share.
Copperating expenses for the quarter were as follows [inaudible]
Interest and Credit Facility Expenses were 10.6 million.
Rick Allorto: base management and incentives were $6.4 million, general and administrative expenses were $1.6 million, and provision for excite taxes were $0.6 million.
Rick Allorto: For the quarter-ended March 31st, net realized and unrealized change on investments and debt, including provision for taxes, was a loss of 2 million.
Rick Allorto: As of March 31st, our Gap and Adjusted NAV for $7.48 per share, which is down 1.2% from $7.57 per share in the prior quarter.
Rick Allorto: As of March 31, our debt equity ratio was 1.28 times, and our capital structure is diversified across multiple funding sources, including both secured and secure debt.
Rick Allorto: As of March 31st, our key portfolio statistics were as follows.
Rick Allorto: Our portfolio remains highly diversified with 158 companies across 37 different industries.
Rick Allorto: We have three non-accruals which represent 1.6% of the portfolio at cost and 0.4% at market value.
Rick Allorto: Sub-screen to quarter-end one-on-a-cruel investment was put back on a cruel and pro-forma for this subsequent event. Our non-a-cruel is represented only 1.4% of the portfolio at cost and 0.3% at market value.
The portfolio is comprised of 46% first lean secured debt.
2% Second Lean Secured Dept
13% subordinated notes to PSLF
7% other subordinated debt
7% equity in PSLF
and 25% in other preferred and common equity.
91% of the debt portfolio is floating rate.
Art Penn: The debt to EBITDA on the portfolio is 4.7 times, and interest coverage is 2.1 times. Now let me turn the call back to R.
Art Penn: Thanks, Rick. In closing, I'd like to thank our dedicated and talented team professionals for their continued commitment to PNNT and its shareholders. Thank you all for your time today, for your continued investment and confidence in us. That concludes our remarks of this time, I would like to open up the call to questions.
Speaker Change: Thank you. If you'd like to ask a question, please signal by pressing star 1 under telephone keypad. If you're using a speaker phone, please make sure your mute function is turned off to Liars' adultery chart equipment. Again, press star 1 to last cake question.
We'll take our first question from Maxwell Fritzchert with Truist.
Maxwell Fritscher: Good morning. Thank you. I'm on for Mark Hughes. How would you characterize the current pipeline from the investments? Did you see any deals that were in the last quarter's pipeline that got scrapped or possibly pushed out?
Thanks, Maxwell. It's a good question. Certainly, if you had M&A deals in process.
Prior to Liberation Day, in some cases, those...
Deal's got delayed
Maxwell Fritscher: If they were impacted directly by tariffs, they certainly got delayed.
Maxwell Fritscher: and more kind of to the late further if they were non-tariff related.
Maxwell Fritscher: They got somewhat delayed. If it was tariff-related, it probably got put on ice for a while since Liberation Day April 1st.
Maxwell Fritscher: You know, we've seen modest activity but in the last week or two as things seem to be calming down we seem to be getting more of a pipeline of
of Activity.
Maxwell Fritscher: You know, for the rest of the year. And you would imagine that M&A flows, which are kind of the lifeblood of the least a new.
Maxwell Fritscher: New Platforms, those will be tied to the ratio of certainty or uncertainty that you see in the market. As we said, you know, with, you know, over 100 names in our existing portfolio, 190 names across our platform, there's about 116 names here in PNNT.
Maxwell Fritscher: About 80% of what we're doing is putting money to work behind.
Existing Portfolio Companies where they have been out on acquisition of acquisition.
Maxwell Fritscher: Delay Term, Delay Toural Term Lone, they have kind of, you know, they're normal activities in terms of beefing up.
Maxwell Fritscher: They're existing operations. So we are somewhat active with the existing portfolio. That's the benefit of Incompancy and the 158 names we have today in PNNT and we're starting to see with
Maxwell Fritscher: The uncertainty level coming down, we're starting to see some new platforms come into our platform.
Understood. Thank you. And then.
Maxwell Fritscher: You know, the lower level of new deals in the quarter versus the level of income and fee, how much of that would do to a stricter underwriting versus, you know, just less deals coming?
Coming across your desk
Maxwell Fritscher: Well, it's almost like it's a binary, which is if it's tariff impacted.
Maxwell Fritscher: You just don't touch it at this point until you kind of see what's going on. The good news for us is the vast majority of what we do. As we said, it's not tariff impacted. It's limited, whether it be health care. It's not tariff.
Maxwell Fritscher: The types of investments, the types of industries that we are focused on where we have real domain expertise is really not related to much tariff risk at all. So there you are just talking about M&A levels and in a world of general uncertainty.
Maxwell Fritscher: in how much M&A gets done, con buyers and sellers agree to a multiple if there's a greater recession risk.
Maxwell Fritscher: You know, out there, you know, can people agree? So hopefully things kind of get more certain things calm down and hopefully, you know, we'll see M&A flows.
Maxwell Fritscher: Resume, we came into 2025 thinking it would be very active, 2025. It was set up to be a really, you know, we were very active in 24, it was getting set up to be even a more active 2025.
Maxwell Fritscher: back out the lead and we're hopeful that as the overall market settles down we can start to see more more M&A.
Speaker Change: Another reminder to ask a question on today's call that is star 1 on your telephone keypad.
We'll be next to Melissa Wedel with J.P. Morgan again.
Speaker Change: in the BBC's panel. Should we think about the March quarter as reflecting the full amount of decrease in base rate? Of course, plus or minus what was happening with non-accruals?
Speaker Change: Yeah, look, I think, you know, the way you've seen, you have base rates and then, of course, you have spread, right? We've seen...
Speaker Change: Since Liberation Day, spread reduction has gone away. In fact, we've seen spread increase, call it 25 to 50 basis points on average. You've seen spread increase since the beginning of April .
Speaker Change: Base rates, a lot of smarter people who focus on that all day long are making their assessments about base rates and what the Fed's going to do, when the Fed's going to do something. But spread has thankfully started to widen.
Speaker Change: So, the important thing for us here is getting the M&A flow going that will also hopefully help us rotate some equity investment that we currently have that should be on the launch pad to exit.
Speaker Change: M&A flowing and using that to drive equity rotation, which we've been waiting very long for too long. This was the year 2025, we were finally going to get it until the events of the last month or two.
Speaker Change: But we're hopeful that, you know, and you can see it in some of the the fair market values, we're hopeful that some of these equity positions, you know, can get can get rotated out as we as we march forward here in 2025.
Speaker Change: Yep, noted. Paul, a question. You mentioned pretty limited tariff exposure across the portfolio, but given some of the industry reconceptor concentrations and industry concentrations, can you?
Speaker Change: Tell us how you're thinking about sort of DOJ exposure or government reimbursement exposure given some of the cuts that have been proposed.
Speaker Change: Thank you. Yeah, it's a good question. Government contracting and defense is a big sector for us.
Speaker Change: The defense budget proposal coming through Congress shows a substantial increase to about a trillion dollars of defense spending overall.
so that's increased.
Speaker Change: You know, and as taxpayers we of course all want our tax dollars to be used efficiently if you look at the key priorities of investment
Speaker Change: within the Defense Department and government contracting. The government laid out things that they really want to focus on like cyber security, like satellites, like information technology upgrades.
Speaker Change: That's all in the public domain. And if you line up our portfolio, we are very thankfully and maybe smartly, I think smartly, very well aligned to those areas of increased focus.
Speaker Change: of where spending is. If you look at it to date, it's been mostly the civilian.
Speaker Change: Aries of Government, like the Department of Education, like USAID, and other civilian areas that have been
the primary focus on DOJ.
Speaker Change: and we of course need to look at defense as well and say are we backing companies that are adding a lot of value or are we backing companies?
Speaker Change: where the focus of the Defense Department of Administration is leaning in.
Speaker Change: and thankfully we've done a lot of internal and external work with third parties or very well positioned with where government is leaning in and in areas of mostly technology related investments to upgrade military technology drones as an example or very well aligned to that.
Speaker Change: I appreciate that, or thanks for the detail there. Follow a question.
Same thing, but health care. Is there an exposure there?
Speaker Change: Thank you. Yeah, health care is a big focus of ours.
Speaker Change: And I know some of our peers also have big exposure healthcare and some of our peers have had some stumbles in healthcare, not that we're perfect.
Speaker Change: But generally when we look at our health care portfolio versus our peers
Speaker Change: I think the biggest difference is we just don't put as much leverage on these companies, right? So, you know, there's always challenges, there's always a reimbursement risk, you're always talking about people business, so what's going on with the doctors, etc.
Speaker Change: We just have a lower-leverd portfolio, so we've taken less risk and it's played out health care so far. It's performing very well for us. And when you have a portfolio that's leveraged it in a four times going in and maybe four and a half times over its life.
Speaker Change: By definition, you're taking less risk than those that would leverage these assets five times, six times, whatever. So to date, we've had very good experience with healthcare because we're focused on taking less risk.
Thanks, Arthur.
Thank you.
Pull the neck to the leash, sheat with Raymond James James.
Speaker Change: Hi, thanks for the question. With all the current macro uncertainty, is there any shift in terms of the mix of the current pipeline since April between incumbent and new borrower?
Speaker Change: It's a great question, you know, look, our five sectors are generally...
Speaker Change: not really tariff impacted and since the majority 80% of what we're doing is existing borrowers it's going to be the same sectors certainly anything that comes in the door that's tariff impacted.
Speaker Change: is going to be probably not going to be looked at very strenuously at this point until we get more certainty on the tariff side of it, so it's going to be the healthcare of the government services technology.
Speaker Change: are not really tariff-impacted and I'd say to take a one-step further
Clearly.
The recession risk has gone up.
Speaker Change: You know, we think, we don't know, we're not predicting a recession, we don't, we don't, you know, know if there's going to be a recession in the back half of the year, but as the lenders...
Speaker Change: We always have to assume there's a recession some time in the life of these loans. These loans are five to seven year maturities it will be prudent for us to model in our in our underwriting memos a Recession at some point during the life of the loan
Speaker Change: In times like this, we certainly run the downside cases of a recession sometime in year one, just to see how these companies might perform in a downside case.
Speaker Change: What tools do they have between CapEx and working capital? What's their fixed cost versus their variable cost?
How would they maneuver in a recessionary case?
Speaker Change: and again, typically, we're underwriting these companies of four times cash flow or so going in at a 40-50% low in the value.
Speaker Change: So, generally, they're structured to be able to weather a recession early in the life of the loan.
Speaker Change: If you look at, go roll the tape back to COVID for instance, as a shock, COVID wasn't really a recession, it was more of a shock but just to kind of
Speaker Change: Take a look at that. You know, we have the benefit of these quarterly maintenance tests that you get in the core middle market Most of the upper market is covenant light because it has to compete with the broadly syndicated alumni Mark. We've got quarterly
Speaker Change: Quarterly maintenance tests. If you go back to COVID, remember that the economy was shut down in March of 2020.
Speaker Change: which meant sometime in the next three months our borrowers needed to meet a covenant.
Speaker Change: So, some had covenants in April , some had covenants in May, some had covenants in June , and with an economy that was shut down, there was a lot of intense discussions going on during that time period.
Speaker Change: and we had 150 companies, 115 companies in our platform at that point in time.
Speaker Change: 15 of those companies actually needed liquidity. There was a cash need sometime in the three months after the shutdown of COVID.
Speaker Change: and in all 15 of those cases the sponsors offered to inject additional liquidity into these companies to solve the problem.
Speaker Change: which we thought was a really good testament to the benefit of covenants that remain in tests also having monthly financial statements where they have to give us a financial statement every month and really a testament to the underwriting going in and the testament to the covenants and information rights we get in the core middle market. So
Speaker Change: You know, that was a nice test for us. We came through it in really good shape.
Speaker Change: in the life of most of our loans and in the new loans just for a downside case we're modeling in a recession in year one and we wouldn't do a deal today unless we felt it was structured in such a strong way.
Speaker Change: and have such good cash flow that we felt that could weather a recession early on.
Speaker Change: We hope there's not a recession, we hope the economy flies through, we hope our companies pay us back and more, but as lenders we have to prepare for that downside. I know that was a long-winded answer, heavily, but I thought it was worthwhile.
No, but that was helpful. Thanks for the color.
Art Penn: And at the time, they're no further questions. I'll turn the call back to Art for any additional or closing remarks.
Art Penn: Thank you everybody for participating in the PNAT call today. We look forward to speaking to you next in early August after our next quarterly earnings release. Release. Have a good day.
Art Penn: This does conclude today's conference. We thank you for your participation.
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