Q4 2025 PennantPark Investment Corp Earnings Call

November 25, 2025

Speaker #1: Good afternoon and welcome to the

Operator: Good afternoon and welcome to the PennantPark Investment Corporation fourth quarter fiscal quarter 2025 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. If you'd like to ask a question at that time, simply press star one on your telephone keypad. If you'd like to withdraw your question, please 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 PennantPark Investment Corporation. Mr. Penn, you may begin your conference.

Speaker #1: PennantPark Investment Q4 fiscal quarter 2025 earnings conference call. Today's conference is being recorded. At this time, all participants have been placed in the listen-only mode.

Speaker #1: The call will be open for question and answer sessions following the speaker's remarks. If you'd like to ask a question at that time, simply press *1 on your telephone keypad.

Speaker #1: If you'd like to withdraw your question, please press *2 on your telephone keypad. It is now my pleasure to turn the call over to Mr. Arthur Penn, Chairman and Chief Executive Officer of PennantPark Investment Corp.

Speaker #1: Mr. Penn, you may begin your conference.

Speaker #2: Good afternoon, everyone, and thank you for joining PennantPark Investment Corp's Q4 fiscal quarter 2025 earnings call. I'm joined today by Rick Allorto, our Chief Financial Officer.

Art Penn: Good afternoon, everyone, and thank you for joining PennantPark Investment Corporation's fourth fiscal quarter 2025 earnings call. I'm joined today by Rick Allorto, our Chief Financial Officer. Rick, please start off by disclosing some general conference call information, and included discussion about forward-looking statements.

Speaker #2: Rick, please start off by disclosing some general conference call information and include a discussion about forward-looking statements.

Speaker #3: Thank you, Art. I'd like to remind everyone that today's call is being recorded and is the property of PennantPark Investment Corp. Any unauthorized broadcast of this call in any form is strictly prohibited.

Rick Allorto: Thank you, Art. I'd like to remind everyone that today's call is being recorded and is the property of PennantPark Investment Corporation. 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. Our remarks today may include forward-looking statements and projections. Please refer to our most recent SEC filings 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.

Speaker #3: 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.

Speaker #3: Today may include forward-looking statements, our remarks and projections. Please refer to our most recent SEC filings for important factors that could cause actual results to differ materially from these projections.

Speaker #3: 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.

Speaker #3: At this time, I'd like to turn the call back to our Chairman and Chief Executive Officer, Art.

Speaker #3: Penn. Thanks, Rick.

Art Penn: Thanks, Rick. I'll begin today's call with an overview of our fourth quarter results and discuss our ongoing strategy to rotate out of equity positions. I'll then share our perspective on the current market environment and how the portfolio is positioned for the quarters ahead. Rick will provide a detailed review of the financials, and we'll open up the call for Q&A. For the quarter ended 30 September 2023, core net investment income was $0.15 per share compared to total distributions of $0.24 per share. We've previously communicated our plan to rotate out of equity positions and redeploy that capital into interest-bearing debt investments, which will drive an increase in our core net investment income. For many positions, our ability to drive exits is limited.

Speaker #2: I'll begin today's call with an overview of our Q4 results and discuss our ongoing strategy to rotate out of equity positions. I'll then share our perspective on the current market environment and how the portfolio is positioned for the quarters ahead.

Speaker #2: Rick will provide a detailed review of the financials, and then we'll open up the call for Q&A. For the quarter ended September 30th, coordinated investment income was $0.15 per share, compared to total distributions of $0.24 per share.

Speaker #2: We’ve previously communicated our plan to rotate out of equity positions and redeploy that capital into interest-bearing debt investments, which will drive an increase in our core net investment income.

Speaker #2: For many positions, our ability to drive exits is limited. However, we remain focused on this strategy and are comfortable maintaining our current dividend level in the near term, as the company has a significant balance of spillover income, which we are required to distribute.

Art Penn: However, we remain focused on this strategy and are comfortable maintaining our current dividend level in the near term, as the company has a significant balance of spillover income, which we are required to distribute. PNNT has $48 million, or $0.73 per share, of undistributed spillover income, and we plan to use the spillover income to cover shortfalls in net investment income versus the dividend at this time. Regarding the current market environment for private middle-market lending, we are encouraged by a steady increase in transaction activity, which we expect will translate into higher loan origination volumes in the quarters ahead. Additionally, we continue to provide additional capital to many of our existing portfolio companies as they execute their respective growth initiatives, demonstrating the depth and resilience of our origination platform.

However, we remain focused on this strategy and are comfortable maintaining our current dividend level in the near term, as the company has a significant balance of spillover income, which we are required to distribute. PNNT has $48 million, or $0.73 per share, of undistributed spillover income, and we plan to use the spillover income to cover shortfalls in net investment income versus the dividend at this time. Regarding the current market environment for private middle-market lending, we are encouraged by a steady increase in transaction activity, which we expect will translate into higher loan origination volumes in the quarters ahead. Additionally, we continue to provide additional capital to many of our existing portfolio companies as they execute their respective growth initiatives, demonstrating the depth and resilience of our origination platform.

Speaker #2: P&NT has $48 million, or $0.73 per share, of undistributed spillover income, and we plan to use the spillover income to cover shortfalls in net investment income versus the dividend at this time.

Speaker #2: Regarding the current market environment for private middle market lending, we are encouraged by a steady increase in transaction activity, which we expect will translate into higher loan origination volumes in the quarters ahead.

Speaker #2: Additionally, we continue to provide additional capital to many of our existing portfolio companies as they execute their respective growth initiatives, demonstrating the depth and resilience of our origination platform.

Speaker #2: We are optimistic that the increase in transaction activity will also result in opportunities to execute our equity rotation plan and rotate capital into new income-producing investments.

Art Penn: We are optimistic that the increase in transaction activity will also result in opportunities to execute our equity rotation plan and rotate capital into new income-producing investments. We believe the current environment will favor lenders with strong private equity-sponsored relationships and disciplined underwriting, areas where PNNT has a clear advantage. We continue to see opportunities to deploy capital into core middle-market companies where leverage is lower and spreads are higher than in the upper middle market. In the core middle market, the pricing on high-quality first-lien loans is 0.75% to 5.25%. Leverage is reasonable, and we continue to get meaningful covenant protections, while the upper middle market is primarily characterized as covenant light. Turning to our portfolio performance, as of 30 September 2023, the median leverage ratio on our debt security was 4.5x, and the median interest coverage ratio was 2x.

We are optimistic that the increase in transaction activity will also result in opportunities to execute our equity rotation plan and rotate capital into new income-producing investments. We believe the current environment will favor lenders with strong private equity-sponsored relationships and disciplined underwriting, areas where PNNT has a clear advantage. We continue to see opportunities to deploy capital into core middle-market companies where leverage is lower and spreads are higher than in the upper middle market. In the core middle market, the pricing on high-quality first-lien loans is 0.75% to 5.25%. Leverage is reasonable, and we continue to get meaningful covenant protections, while the upper middle market is primarily characterized as covenant light. Turning to our portfolio performance, as of 30 September 2023, the median leverage ratio on our debt security was 4.5x, and the median interest coverage ratio was 2x.

Speaker #2: We believe the current environment will favor lenders with strong private equity sponsor relationships and disciplined underwriting, areas where P&NT has a clear advantage. We continue to see opportunities to deploy capital into core middle market companies, where leverage is lower and spreads are higher than in the upper middle market.

Speaker #2: In the core middle market, the pricing on high-quality first lien loans has suffered, ranging from +475 to +525. Leverage is reasonable, and we continue to get meaningful covenant protections, while the upper middle market is primarily characterized as covenant-light.

Speaker #2: Turning to our portfolio performance, as of September 30th, the median leverage ratio on our debt security was 4.5 times, and the median interest coverage ratio was 2 times.

Speaker #2: For new platform investments made during the quarter, the median debt to EBITDA was 4.3 times, and interest coverage was 2.5 times. The loan-to-value was 39%.

Art Penn: For new platform investments made during the quarter, the median debt to EBITDA was 4.3x, interest coverage was 2.5x, and the loan-to-value was 39%. Credit quality of the portfolio continues to perform well. We have four non-accrual investments, which represent 1.3% of the portfolio at cost and 0.1% at market value. Two new investments were added, and two prior investments were removed from the non-accrual list. These strong credit metrics reflect the rigor of our underwriting process, and the discipline of our investment approach. We continue to believe that our focus on the core middle market provides us with attractive investment opportunities, where we provide important strategic capital to our borrowers. The PennantPark platform has a demonstrated track record of value creation through successful financing of growing middle-market companies in five key sectors, enabling us to ask the right questions, and consistently deliver strong investment outcomes.

For new platform investments made during the quarter, the median debt to EBITDA was 4.3x, interest coverage was 2.5x, and the loan-to-value was 39%. Credit quality of the portfolio continues to perform well. We have four non-accrual investments, which represent 1.3% of the portfolio at cost and 0.1% at market value. Two new investments were added, and two prior investments were removed from the non-accrual list. These strong credit metrics reflect the rigor of our underwriting process, and the discipline of our investment approach. We continue to believe that our focus on the core middle market provides us with attractive investment opportunities, where we provide important strategic capital to our borrowers. The PennantPark platform has a demonstrated track record of value creation through successful financing of growing middle-market companies in five key sectors, enabling us to ask the right questions, and consistently deliver strong investment outcomes.

Speaker #2: Credit quality of the portfolio continues to perform well. We have four non-accrual investments, which represent 1.3% of the portfolio at cost and 0.1% at market value.

Speaker #2: Two new investments were added, and two prior investments were removed from the non-accrual list. The strong credit metrics reflect the rigor of our underwriting process and the discipline of our investment approach.

Speaker #2: We continue to believe that our focus on the core middle market provides us with attractive investment opportunities where we provide important strategic capital to our borrowers.

Speaker #2: The PennantPark platform has a demonstrated track record of value creation through the successful financing of growing middle-market companies in five key sectors. This enables us to ask the right questions and consistently deliver strong investment outcomes.

Speaker #2: They 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, with a limited direct impact from the recent tariff increases and uncertainty.

Art Penn: They are business services, consumer, government services and defense, healthcare, and software and technology. These sectors have also been recession-resilient, tend to generate strong free cash flow, and have a limited direct impact to the recent tariff increases and uncertainty. The core middle market, companies with $10 to 50 million of EBITDA, is below the threshold and does not compete with the broadly syndicated loan market or high-yield markets, unlike our peers in the upper middle market. In the core middle market, because we are an important strategic lending partner, the process and package of terms we receive is attractive. We have many weeks to do our diligence with care. We thoughtfully structure transactions with sensible credit statistics, meaningful covenants, substantial equity cushions to protect our capital, attractive spreads, and equity co-investment.

They are business services, consumer, government services and defense, healthcare, and software and technology. These sectors have also been recession-resilient, tend to generate strong free cash flow, and have a limited direct impact to the recent tariff increases and uncertainty. The core middle market, companies with $10 to 50 million of EBITDA, is below the threshold and does not compete with the broadly syndicated loan market or high-yield markets, unlike our peers in the upper middle market. In the core middle market, because we are an important strategic lending partner, the process and package of terms we receive is attractive. We have many weeks to do our diligence with care. We thoughtfully structure transactions with sensible credit statistics, meaningful covenants, substantial equity cushions to protect our capital, attractive spreads, and equity co-investment.

Speaker #2: The core middle market companies with $10 million to $50 million of EBITDA are below the threshold and do not compete with the broadly syndicated loan market or high-yield markets, unlike our peers in the upper middle market.

Speaker #2: 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; we thoughtfully structure transactions with sensible credit statistics, meaningful covenants, and substantial equity cushions to protect our capital.

Speaker #2: Attractive spreads and equity co-investment. Additionally, from a monitoring perspective, we receive monthly financial statements to help us stay on top of the companies. Our rigorous underwriting standards remain central to our investment philosophy.

Art Penn: Additionally, from a monitoring perspective, we receive monthly financial statements to help us stay on top of the companies. Our rigorous underwriting standards remain central to our investment philosophy. Nearly all of our originated first-lien loans include meaningful covenant protections, which is a key differentiator versus the upper middle market, where covenant light structures are more common. Since our inception nearly 18 years ago, PNNT has invested $9.1 billion at an average yield of 11.2% while maintaining a loss ratio on invested capital of roughly 20 basis points annually, a testament to our consistent and disciplined approach through multiple market cycles. As a provider of strategic capital, we fuel the growth of our portfolio companies. In many cases, we participate in the upside of the company by making an equity co-investment. Our returns on these equity co-investments have been excellent over time.

Additionally, from a monitoring perspective, we receive monthly financial statements to help us stay on top of the companies. Our rigorous underwriting standards remain central to our investment philosophy. Nearly all of our originated first-lien loans include meaningful covenant protections, which is a key differentiator versus the upper middle market, where covenant light structures are more common. Since our inception nearly 18 years ago, PNNT has invested $9.1 billion at an average yield of 11.2% while maintaining a loss ratio on invested capital of roughly 20 basis points annually, a testament to our consistent and disciplined approach through multiple market cycles. As a provider of strategic capital, we fuel the growth of our portfolio companies. In many cases, we participate in the upside of the company by making an equity co-investment. Our returns on these equity co-investments have been excellent over time.

Speaker #2: Nearly all of our originated first lien loans, including meaningful covenant protections, which is a key differentiator versus the upper middle market where covenant-like structures are more common.

Speaker #2: Since our inception nearly 18 years ago, P&NT has invested $9.1 billion at an average yield of 11.2%, while maintaining a loss ratio on invested capital of roughly 20 basis points annually.

Speaker #2: A testament to our consistent and disciplined approach through multiple market cycles. As a provider of strategic capital, we fuel the growth of our portfolio companies; in many cases, we participate in the upside of the company by making an equity co-investment.

Speaker #2: Our returns on these equity co-investments have been excellent over time. Overall, for our platform from inception through September 30th, we've invested over $596 million in equity co-investments and have generated an IRR of 25% at a multiple on invested capital of 2 times.

Art Penn: Overall, for our platform from inception through 30 September 2023, we've invested over $596 million in equity co-investments and have generated an IRR of 25% and a multiple on invested capital of 2x. As of 30 September 2023, our portfolio totaled $1.3 billion, and during the quarter, we continued to originate attractive investment opportunities and invested $186 million in nine new and 54 existing portfolio companies. Our PSLF joint venture portfolio continues to be a significant contributor to our core NII. As of 30 September 2023, the JV portfolio totaled $1.3 billion, and over the last 12 months, PNNT's average NII yield on invested capital in the JV was 17%. The JV has the capacity to increase its portfolio to $1.6 billion, and we expect that with this additional growth, the JV investment will enhance PNNT's earnings momentum in future quarters.

Overall, for our platform from inception through 30 September 2023, we've invested over $596 million in equity co-investments and have generated an IRR of 25% and a multiple on invested capital of 2x. As of 30 September 2023, our portfolio totaled $1.3 billion, and during the quarter, we continued to originate attractive investment opportunities and invested $186 million in nine new and 54 existing portfolio companies. Our PSLF joint venture portfolio continues to be a significant contributor to our core NII. As of 30 September 2023, the JV portfolio totaled $1.3 billion, and over the last 12 months, PNNT's average NII yield on invested capital in the JV was 17%. The JV has the capacity to increase its portfolio to $1.6 billion, and we expect that with this additional growth, the JV investment will enhance PNNT's earnings momentum in future quarters.

Speaker #2: As of September 30th, our portfolio totaled $1.3 billion. During the quarter, we continued to originate attractive investment opportunities and invested $186 million in nine new and 54 existing portfolio companies.

Speaker #2: Our PSLF joint venture portfolio continues to be a significant contributor to our core NII. As of September 30th, the JV portfolio totaled $1.3 billion, and over the last 12 months, P&NT's average NII yield on invested capital in the JV was 17%.

Speaker #2: The JV has the capacity to increase its portfolio to $1.6 billion, and we expect that with this additional growth, the JV investment will enhance P&NT's earnings momentum in future quarters.

Speaker #2: From an outlook perspective, our experienced and talented team, along with our wide origination funnel, is producing active deal flow. We remain steadfast in our commitment to capital preservation and a disciplined, patient capital investment approach.

Art Penn: From an outlook perspective, our experienced and talented team, and our wide origination funnel, are producing active deal flow. We remain steadfast in our commitment to capital preservation and a disciplined, patient capital investment approach. We reiterate our objectives to deliver compelling risk-adjusted returns through stable income generation, and long-term capital preservation. 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 investments, and we pay out those contractual cash flows in the form of dividends to our shareholders. With that overview, I'll turn the call over to Rick for a more detailed review of our financial results.

From an outlook perspective, our experienced and talented team, and our wide origination funnel, are producing active deal flow. We remain steadfast in our commitment to capital preservation and a disciplined, patient capital investment approach. We reiterate our objectives to deliver compelling risk-adjusted returns through stable income generation, and long-term capital preservation. 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 investments, and we pay out those contractual cash flows in the form of dividends to our shareholders. With that overview, I'll turn the call over to Rick for a more detailed review of our financial results.

Speaker #2: We reiterate our objectives to deliver compelling risk-adjusted returns through stable income generation and long-term capital preservation. We seek to find investment opportunities in growing middle-market companies that have high free cash flow conversion.

Speaker #2: We capture that free cash flow primarily through debt investments, and we pay out those contractual cash flows in the form of dividends to our shareholders.

Speaker #2: With that overview, I'll turn the call over to Rick for a more detailed review of our financial results. Thank you, Art. For the quarter ended September 30th, GAAP net investment income and core net investment income were both $0.15 per share.

Rick Allorto: Thank you, Art. For the quarter ended 30 September 2023, GAAP net investment income and core net investment income were both $0.15 per share. Operating expenses for the quarter were as follows: interest and credit facility expenses were $10 million, base management and incentive fees were $6.1 million, general and administrative expenses were $0.9 million, and provision for excise taxes were $0.7 million. For the quarter ended 30 September 2023, net realized and unrealized change on investments and debt, including provision for taxes, was a loss of $10.8 million. As of 30 September 2023, our NAV was $7.11 per share, which is down 3.4% from $7.36 per share in the prior quarter. As of 30 September 2023, our debt to equity ratio was 1.6x, and our capital structure is diversified across multiple funding sources, including both secured and unsecured debt.

Speaker #2: Operating expenses for the quarter were as follows: interest and credit facility expenses were $10 million, base management and incentive fees were $6.1 million, general and administrative expenses were $0.9 million, and provision for excise taxes was $0.7 million.

Speaker #2: For the quarter ended September 30th, net realized and unrealized changes on investments and debt, including provision for taxes, resulted in a loss of $10.8 million.

Speaker #2: As of September 30th, our NAV was $7.11 per share, which is down 3.4% from $7.36 per share in the prior quarter. As of September 30th, our debt to equity ratio was 1.6 times, and our capital structure is diversified across multiple funding sources, including both secured and unsecured debt.

Speaker #2: The PSLF JV is evaluating the purchase of $120 million to $140 million of assets from P&NT, which would allow P&NT to reduce its leverage ratio to 1.25 to 1.3 times. This is in line with its target ratio.

Rick Allorto: The PSLF joint venture is evaluating the purchase of $120 to 140 million of assets from PNNT, which would allow PNNT to reduce its leverage ratio to 1.25 to 1.3x, which is in line with its target ratio. As of 30 September 2023, our key portfolio statistics were as follows. Our portfolio remains highly diversified with 166 companies across 37 different industries. The weighted average yield on our debt investments was 11%. We had four non-accruals, which represent 1.3% of the portfolio at cost and 0.1% at market value. The portfolio is comprised of 50% first-lien secured debt, 2% second-lien secured debt, 12% subordinated notes to PSLF, 5% other subordinated debt, 6% equity in PSLF, and 25% in other preferred and common equity investments. 91% of the portfolio is floating rate. Debt to EBITDA on the portfolio is 4.5x, and interest coverage is 2x.

The PSLF joint venture is evaluating the purchase of $120 to 140 million of assets from PNNT, which would allow PNNT to reduce its leverage ratio to 1.25 to 1.3x, which is in line with its target ratio. As of 30 September 2023, our key portfolio statistics were as follows. Our portfolio remains highly diversified with 166 companies across 37 different industries. The weighted average yield on our debt investments was 11%. We had four non-accruals, which represent 1.3% of the portfolio at cost and 0.1% at market value. The portfolio is comprised of 50% first-lien secured debt, 2% second-lien secured debt, 12% subordinated notes to PSLF, 5% other subordinated debt, 6% equity in PSLF, and 25% in other preferred and common equity investments. 91% of the portfolio is floating rate. Debt to EBITDA on the portfolio is 4.5x, and interest coverage is 2x.

Speaker #2: As of September 30th, our key portfolio statistics were as follows: our portfolio remains highly diversified with 166 companies across 37 different industries. The weighted average yield on our debt investments was 11%. We had four non-accruals, which represent 1.3% of the portfolio at cost and 0.1% at market value.

Speaker #2: The portfolio is comprised of 50% first lien secured debt, 2% second lien secured debt, 12% subordinated notes to PSLF, 5% other subordinated debt, 6% equity in PSLF, and 25% in other preferred and common equity investments.

Speaker #2: 91% of the portfolio is floating rate. Debt to EBITDA on the portfolio is 4.5 times, and interest coverage is 2 times. Now, let me turn the call back to Art.

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

Now, let me turn the call back to Art.

Speaker #1: Thanks, Rick. In conclusion, we remain committed to delivering consistent performance, preserving capital, and creating long-term value for all stakeholders. Thank you to our team for their dedication and to our shareholders for their continued partnership and confidence in PennantPark.

Art Penn: Thanks, Rick. In conclusion, we remain committed to delivering consistent performance, preserving capital, and creating long-term value for all stakeholders. Thank you to our team for their dedication, and our shareholders for their continued partnership and confidence in PennantPark. That concludes our remarks. At this time, I would like to open up the call to questions.

Speaker #1: That concludes our remarks at this time. I would like to open up the call to questions.

Speaker #3: Thank you. If you'd like to ask a question, please signal by pressing star one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment.

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 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 take our first question from Brian McKenna with Citizens.

Speaker #3: Again, press star one to ask a question. We'll take our first question from Brian McKenna.

Speaker #3: Citizens. Great, thanks.

Brian McKenna: Great. Thanks. On the dividend, I appreciate the equity rotation opportunity. I know that's something you guys have talked about the last few quarters here. If you were to rotate $150 million of assets into income-producing loans at an incremental 10% yield today, that equates to about $0.20 per share of NII over the next year. At the current quarterly run rate of $0.15, that implies about $0.80 of annual NII before any changes in base rates and credit quality. That's still $0.15 below the current dividend. Why not right-size the dividend today so some of this incremental earnings from the equity rotation accretes NAV?

Speaker #4: So, on the dividend, I appreciate the equity rotation opportunity. I know that's something you guys have talked about the last few quarters here. But if you were to rotate $150 million of assets into income-producing loans at an incremental 10% yield today, that equates to about $0.20 per share of NII over the next year.

Speaker #4: So at the current quarterly run rate of $0.15, that implies about $0.80 of annual NII before any changes in base rates and credit quality.

Speaker #4: That's still 15 cents below the current dividend. So why not right-size the dividend today, so some of this incremental earnings from the equity rotation accretes NAV?

Speaker #1: Yeah, look, we're thanks, Brian. We're constantly evaluating the dividend. We do have substantial spillover that we need to pay out. It's really the question of how and when we do that.

Art Penn: Yeah. Look, thanks, Brian. We're constantly evaluating the dividend. We do have substantial spillover that we need to pay out. It's really the question of how and when we do that at the same time as we're working on the equity rotation to try to figure out what the long-term sustainable NII is. You've got two things going on. One's the equity rotation, and the paying out of the spillover. Our current plan is to work both of those processes for the next few quarters, see where we land, come up for air, and make some decisions.

Speaker #1: At the same time as we're working on the equity rotation to try to figure out what the long-term sustainable NII is. So, you've got two things going on.

Speaker #1: One's the equity rotation and the paying out of the spillover. Our current plan is to work both of those processes for the next few quarters, see where we land, come up for air, and make some decisions.

Speaker #4: Okay. That's helpful. And just in terms of timing around any realization events and some of these equity positions, I mean, has anything changed in the last quarter or two?

Brian McKenna: Okay, that's helpful. Just in terms of timing around any realization events in some of these equity positions, I mean, has anything changed the last quarter or two? It sounds like a more constructive backdrop should be better for monetizing some of those, but I'm just curious if there's any update relative to expectations over the last quarter or two.

Speaker #4: Sounds like a more constructive backdrop should be better for monetizing some of those. But I'm just curious if there's any update relative to expectations over the last quarter or two.

Speaker #1: Yeah, no, we're seeing more activity, as we said. We're hopeful that we're getting closer to some rotation opportunity. Nothing to announce here on this call today, but we're feeling and sensing that the M&A opportunity and the opportunity for some of these companies is closer at hand than it was before.

Art Penn: Yeah, no, we're seeing more activity. As we said, we're hopeful that we're getting closer to some rotation opportunity. Nothing to announce here on this call today, but we're feeling and sensing that the M&A opportunity, and the opportunity for some of these companies, is closer at hand than it was.

Speaker #1: was. All right,

Brian McKenna: All right, I'll leave it there. Thanks so much.

Speaker #4: I'll leave it there. Thanks so much.

Speaker #3: We'll take our next question from Robert Dodd with Raymond.

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

Speaker #3: James. Hi guys.

Robert Dodd: Hi, guys. Just on that topic with equity rotation, we look at something like FLOC, for example, and it's now marked above the original cost before you had to restructure it. A business like that seems to have had some stumbles but is performing extremely well now. Do you think those are the kind of businesses that are more likely to transact in terms of get a realization for you, which you're not in control of, or maybe a little bit more than FLOC, in the near term, or do you think it's other kinds of businesses, maybe the ones that are still struggling a little bit? Are those the ones that are more likely to turn over in the near term? What do you think?

Speaker #5: And just on that topic with equity rotation, we look at something like FOC, for example. And it's now marked above its original cost before you had to restructure it.

Speaker #5: So a business like that, which seems to have had some stumbles but is performing extremely well now, do you think those are the kind of businesses that are more likely to transact in terms of getting realization for you, which you're not in control of?

Speaker #5: Maybe you are a little bit more than FOC in the near term, or do you think it's other kinds of businesses, maybe the ones that are still struggling a little bit?

Speaker #5: Are those the ones that are more likely to turn over in the near term? What do you think?

Speaker #1: Yeah, there are some areas where we have more control, like FLOC. FLOC happens to be in the business of busted credit card and busted receivables, specifically consumer receivables.

Art Penn: Yeah. There are some that we have more control over, like FLOC. FLOC happens to be in the business of busted credit card and busted receivables, consumer receivables. We think that's a really interestingly placed company at this point in the economy with what's going on with the consumer. I don't want to diverge from the question, but there are controlled positions. FLOC is one. JF Acquisitions is another. AKW is a third, where we do have more control. The question there is timing and how do we optimize the exit. We have a variety of equity co-investments where we're not in control, but if there's a constructive M&A background, by definition, some of those equity co-investments will hopefully convert into cash. The answer is both. We're hopeful for both. One of the flavors we have a little bit more control over.

Speaker #1: So we think that's a really interestingly placed company at this point in the economy with what's going on with the consumer. That's just... I don't want to diverge from the question, but there are control positions; FLOC is one.

Speaker #1: JF Acquisitions is another. AKW is a third. Where we do have more control, and the question there is timing and how do we optimize the exit?

Speaker #1: And then we have a variety of equity co-investments where we're not in control, but if there's a constructive M&A background, by definition, some of those equity co-investments will hopefully convert into cash.

Speaker #1: So the answer is both. We're hopeful for both. One of the flavors we have a little bit more control over. It's really just a question of how we optimize the outcome.

Art Penn: It's really just a question of how we optimize the outcome.

It's really just a question of how we optimize the outcome.

Speaker #5: Got it. Got it. Thank you. On the other part, I mean, potentially transacting and selling some assets to people, I mean, what you said you're reviewing it, right?

Robert Dodd: Got it. Got it. Thank you. On the other part, I mean, potentially transacting and selling some assets to people, I mean, you said you're reviewing it, right? What are the hurdles that evaluating it? What are the hurdles that have to go through for you to feel comfortable with that? Also, from a regulatory perspective, do you think the SEC would actually approve that? Because I've seen some BDCs try to do that in the past, and the SEC just say no.

Speaker #5: What are the hurdles that are evaluating it? What are the hurdles that have to go through for you to feel comfortable with that? And also, from a regulatory perspective, do you think the SEC would actually approve that?

Speaker #5: Because I've seen some BDCs try to do that in the past, and the SEC just said,

Speaker #5: No. Yeah, no, I think you may have misheard.

Art Penn: Yeah, no, I think you may have misheard. We're evaluating selling assets to the joint venture.

Speaker #1: We're evaluating selling assets to the joint.

Speaker #1: We're evaluating selling assets to the joint venture. Yeah, yeah, I get it. So, what we said is, and we're aware that a 40 Act company is something that has a high degree of difficulty.

Robert Dodd: Oh, okay. Yeah. Yeah. I get it.

Art Penn: PSLF. What we said is, we're aware that 40 Act to 40 Act company is something that has a high degree of difficulty. This is just the normal rotation of assets from the BDC PNNT to the PSLF JV. Leverage was a little high at the PNNT level at quarter-end, 1.6x. We generally like to wait to quarter-end to get the freshest third-party valuation marks on the names. PSLF is evaluating the purchase of $120 to 140 million of those assets, which we move from PNNT to PSLF, bringing the PNNT leverage ratio back into line with our target of 1.25 to 1.3x debt to equity of PNNT.

Speaker #1: This is just the normal rotation of assets from the BDC, P&NT, to the PSLFJV. Leverage was a little high at the P&NT level at quarter-end, 1.6.

Speaker #1: We generally like to wait until quarter-end to get the freshest third-party valuation marks on the names. Then, PSLF is evaluating the purchase of $120 to $140 million of those assets, which we will move from P&NT to PSLF, bringing the P&NT leverage ratio back into line with our target of 1.25 to 1.3 times that equity.

Speaker #1: P&NT. Got it.

Speaker #5: Got it. Got it. Thank you. Yeah, I misheard the acronym there. To that point, right, I mean, your leverage is a little high right now.

Robert Dodd: Got it. Got it. Thank you. Yeah. I misheard the acronym there. To that point, right, I mean, your leverage is a little high right now. This is one of the initiatives to take it down, obviously. There's also the spillover, which you've got to distribute one way or the other. Keeping the dividend where it is takes care of it slowly. Other option would be a one-off, which would take care of it quickly. Any of those things which over-distribute earnings tend to drive leverage up. How comfortable are you that with the current dividend plan and the other initiatives, you can get down to that target leverage and stay there?

Speaker #5: This is one of the initiatives to take it down. Obviously, there's also the spillover, which you've got to distribute one way or the other.

Speaker #5: So keeping the dividend where it is takes care of it slowly. The other option would be a one-off, which would take care of it quickly. However, any of those things that over-distribute earnings tend to drive leverage up.

Speaker #5: So how comfortable are you that with the current dividend plan and the other initiatives, you can get down to that target leverage and stay there?

Speaker #1: Yeah, look, it’s really a question of how we work down our spillover. And when we work it down at the same time as we’re working on equity rotation, our target leverage long-term for P&NT is that 1.25 to 1.3 times.

Art Penn: Yeah. Look, it's really a question of how we work down our spillover and when we work it down at the same time as we're working on equity rotation. Our target leverage long-term for PNNT is that 1.25 to 1.3 times. We will temporarily consider going above it if we're confident that PSLF will want some more assets and we can grow PSLF, which has been highly accretive to PNNT. You've got multiple things going on. You've got the reduction of the spillover over time, you've got the equity rotation, and you've got the leverage ratio at PNNT. Those are the constraints. We're doing our best. Some of the stuff we control, some of it we can't. We're always evaluating dividend policy. That said, we still have substantial spillover that we need to pay out, and we also need to keep our leverage reasonable and comfortable.

Speaker #1: We will temporarily consider going above it if we're confident that PSLF will want some more assets, and we can grow PSLF, which has been highly accretive to P&NT.

Speaker #1: So you've got multiple things going on. You've got the reduction of the spillover over time, you've got the equity rotation, and you've got the leverage ratio at PennantPark Investment Corp.

Speaker #1: So, those are the constraints. We're doing our best. Some of the stuff we control, some of it we can't. We're always evaluating dividend policy.

Speaker #1: That said, we still have substantial spillover that we need to pay out. We also need to keep our leverage reasonable and comfortable. So, if you have suggestions, Robert, we're all ears, but these are the constraints we're working with.

Art Penn: If you have suggestions, Robert, we're all ears, but these are the constraints we're working with.

If you have suggestions, Robert, we're all ears, but these are the constraints we're working with.

Speaker #1: with. Yeah, got it.

Robert Dodd: Got it. Thank you. Thank you.

Speaker #5: Thank you. Thank

Speaker #5: you. We'll take our next

Operator: We'll take our next question from Melissa Wedel with JPMorgan.

Speaker #6: Melissa Waddell with JP.

Speaker #6: Morgan. Good afternoon.

Melissa Wedel: Good afternoon. Appreciate you taking my questions. Wanted to start on the NII this quarter. I'm wondering if there was anything maybe skewed in terms of timing during the quarter that may have been a headwind. For example, maybe paydowns came early and fundings came later. Was there anything like that we should be thinking about?

Speaker #7: I appreciate you taking my questions. I wanted to start on the NII this quarter. I'm wondering if there was anything maybe skewed in terms of timing during the quarter that may have been a headwind.

Speaker #7: For example, maybe paydowns came early and fundings came later? Was there anything like that we should be thinking about?

Speaker #1: I mean, not off the top of my head. Rick, any thoughts from you?

Art Penn: I mean, not off the top of my head. Rick, any thoughts from you?

Speaker #8: No, same. Nothing jumps out in terms of timing of repayments and.

Rick Allorto: No, same. Nothing jumps out in terms of timing of repayments and deployment.

Speaker #8: deployment. Okay.

Melissa Wedel: Okay. Okay. A follow-up question on how you're thinking about the spillover income. I mean, you've made it clear that you look at that as a way to supplement any shortfall versus the dividend. In terms of sort of banking any spillover income, do you look at that whole $0.73 per share as something that could be used, or are you looking to retain some level of spillover income?

Speaker #7: Okay. And then, a follow-up question on how you're thinking about the spillover income. I mean, you've made it clear that you look at that as a way to supplement any shortfall versus the dividend.

Speaker #7: In terms of banking any spillover income, do you look at that whole $0.73 per share as something that could be used, or are you looking to retain some level of spillover?

Speaker #7: income? Yeah.

Art Penn: Yeah. Look, there's certainly a level of spillover income that we certainly consider and should consider retaining. For instance, if you look at PFLT, the sister BDC, I think there's like $0.25 or $0.30 of ongoing spillover, that kind of thing. That might be a base level once you get down to that where you're comfortable that you're not required to pay it out, something like that.

Speaker #1: Look, there's certainly a level of spillover income that we should consider retaining. For instance, if you look at PFLT, the sister BDC, I think there's like $0.25 or $0.30 of ongoing spillover, that kind of thing.

Speaker #1: So that might be a base level. Once you get down to that where you're comfortable that you're not required to pay it out, something like that.

Speaker #7: Okay.

Melissa Wedel: Okay. Thanks.

Speaker #7: Thanks. We'll go next to Aaron.

Operator: We'll go next to Aaron Saigonovich with Truist Securities.

Speaker #6: Saigonovich with Truist

Speaker #6: Saigonovich with Truist Securities. Thanks.

Aaron Saigonovich: Thanks. With the investment activity picking up, can you provide a little color around what types of deals you're seeing? Are they more M&A-focused? Are these kind of follow-on acquisitions? Maybe just if there's any particular industries that you're seeing more activity in.

Speaker #8: With the investment activity picking up, can you provide a little color around what types of deals you're seeing? Are they more M&A-focused? Are these kind of follow-on acquisitions?

Speaker #8: And maybe just if there's any particular industries that you're seeing more activity in.

Speaker #1: Thanks, Aaron. It's a combination. A lot of it is a lot of it is add-on delayed raw term loans where we're already in an existing credit.

Art Penn: Thanks, Aaron. It's a combination. A lot of it is add-on delayed-draw term loans where we're already in existing credit, and the credit needs growth capital. A big part of what we do is start with that company when it might be $10 or $20 million of EBITDA, and they have plans to get to $30, $40, $50 million. We set up a plan with them to provide the debt capital to fuel the growth. Quite a bit of it, I'd say at least half of the activity, is with existing incumbent companies. The good news about that is we're on top of companies. We're not going to fund them unless they're doing very well. By definition, the credit quality is very strong. We know exactly what we're getting into, and we're financing additional capital into companies that are performing well.

Speaker #1: And the credit needs growth capital. A big part of what we do is start with that company when it might be $10 million or $20 million of EBITDA, and they have plans to get it to $30 million, $40 million, or $50 million.

Speaker #1: And we set up a plan with them to provide the debt capital to fuel the growth. So quite a bit of it, I'd say at least half of the activity is with existing incumbent companies. The good news about that is we're on top of the companies.

Speaker #1: We're not going to fund them unless they're doing very well. So, by definition, the credit quality is very strong. We know exactly what we're getting into, and we're financing additional capital into companies that are performing well.

Speaker #1: And then about the other half is kind of our typical new deal, new platform, mid-4s leverage, over two times interest coverage, 40% to 50% loan-to-value.

Art Penn: About half is kind of our typical new deal, new platform, mid-4x leverage, over 2x interest coverage, 40% to 50% loan-to-value. So, 4 plus 475 to 525 in this environment type of loan.

About half is kind of our typical new deal, new platform, mid-4x leverage, over 2x interest coverage, 40% to 50% loan-to-value. So, 4 plus 475 to 525 in this environment type of loan.

Speaker #1: So for plus 475 to 525 in this environment, yeah, type of loan.

Speaker #8: Okay. Thank you. Appreciate

Aaron Saigonovich: Okay, thank you. Appreciate it.

Speaker #8: it. Thank

Speaker #1: you. We'll go

Art Penn: Thank you.

Operator: We'll go next to Christopher Nolan with Ladenburg Thalman.

Speaker #6: Next to Christopher Nolan with Landenberg.

Speaker #6: Thalman. Hi.

Christopher Nolan: Hi. For the companies that you're funding, given that the EBITDA coverage is going down, the interest coverage is going up, is this the recipe for dividend recaps by the private equity sponsors, or do your covenants prevent that?

Speaker #9: For the companies that you're funding, given that the EBITDA coverage is going down, the interest coverage is going up. Is this the recipe for dividend recaps by these private equity sponsors, or?

Speaker #9: Do your covenants prevent that?

Speaker #1: Well, certainly, it's a great question. We had a dividend recap in PFLT. We talked about which was a nice realized gain where we were in the equity and the debt.

Art Penn: Well, certainly, it's a great question. We had a dividend recap in PFLT we talked about, which was a nice realized gain where we were in the equity and the debt, but we had a substantial equity position. Dividend recaps for us as a lender are something that have a high bar. As a new lender, we are always cautious around use of proceeds, having alignment of interest, and making sure there's substantial equity beneath us. That said, when companies do well, they look at their options, dividend recaps being one of them, sales, IPOs. The dividend recaps have helped us where we have had the equity co-invest. We are very cautious about participating in them as a lender. Sometimes it just happens. Someone comes, takes us out, they give an aggressive loan to a borrower.

Speaker #1: But we had a substantial equity position. So, dividend recaps for us as a lender are something that have a high bar. As a new lender, we are always cautious around use of proceeds and having alignment of interest, and making sure there's substantial equity beneath us.

Speaker #1: That said, when companies do well, they look at their options. Dividend recaps being one of them, sales, IPOs; so the dividend recaps have helped us where we have had the equity co-invest.

Speaker #1: We are very cautious about participating in them as a lender. So sometimes it just happens. Someone comes and takes us out to give an aggressive loan to a borrower.

Speaker #1: We get financed out of our debt, and our equity gets some sort of dividend. So you're seeing a bit more of that in this market more recently.

Art Penn: We get financed out of our debt, and our equity gets some sort of dividend. You're seeing a bit more of that in this market more recently. We certainly experienced that in our other BDC.

We get financed out of our debt, and our equity gets some sort of dividend. You're seeing a bit more of that in this market more recently. We certainly experienced that in our other BDC.

Speaker #1: And we certainly experienced that in our other BDC.

Speaker #9: And how would you characterize the trends in the private equity space that you operate in? Because the hold times for private equity, in general, have been quite extended.

Christopher Nolan: How would you characterize the trends in the private equity space that you operate in? Because the hold times for private equity in general have been quite extended. Are we starting to see a break in that log jam at all?

Speaker #9: And are we starting to see a break in that logjam at all?

Speaker #1: Yeah, so that's look, that's what we think about when we talk about equity rotation. Many of our equity co-invests are kind of experiencing that.

Art Penn: Yeah. Look, that's what we think about when we talk about equity rotation. Many of our equity co-invests are kind of experiencing that. We co-invested with a private equity sponsor. It was coming into 2025. It was feeling pretty good. 1 April came around, which was Liberation Day. The M&A market really slowed down after Liberation Day for at least three or four months. It's starting to pick back up again. This is kind of why we're a bit more optimistic today than we were last quarter about getting nearer to some equity rotation that's meaningful. Hopefully, the markets will permit some of this. Some of it is just kind of buyers and sellers finally coming together now that there's been some stability in the market to cut a deal. For a while, sellers were holding out for higher prices.

Speaker #1: We co-invested with the private equity sponsor and were coming into 2025. It was feeling pretty good. April 1st came around, which was Liberation Day.

Speaker #1: The M&A market really slowed down. After Liberation Day, for at least three or four months, it's starting to pick back up again. This is kind of why we're a bit more optimistic today than we were last quarter about getting nearer to some equity rotation that's meaningful.

Speaker #1: Hopefully, the markets will permit some of this. Some of it is just kind of buyers and sellers finally coming together now that there's been some stability in the market to cut a deal.

Speaker #1: For a while, there are sellers who were were holding out for higher prices. Buyers were trying to get lower prices. And the other thing you got to throw in here is what happens if, as interest rates come down, so forth comes down, borrowing costs come down, how that could catalyze more M&A, more refinancings, etc.

Art Penn: Buyers were trying to get lower prices. The other thing you got to throw in here is what happens if, as interest rates come down, so far comes down, borrowing costs come down, how that could catalyze more M&A, more refinancings, etc. It's been a murky world since Liberation Day. It seems to be clearing up today. As we speak, we'll see what the Fed does in early December. Without any major market turbulence, we're more optimistic that we'll get some reasonable rotation.

Buyers were trying to get lower prices. The other thing you got to throw in here is what happens if, as interest rates come down, so far comes down, borrowing costs come down, how that could catalyze more M&A, more refinancings, etc. It's been a murky world since Liberation Day. It seems to be clearing up today. As we speak, we'll see what the Fed does in early December. Without any major market turbulence, we're more optimistic that we'll get some reasonable rotation.

Speaker #1: So, it's been a murky world since Liberation Day. It seems to be clearing up today. As we speak, we'll see what the Fed does in early December.

Speaker #1: But with no major market turbulence, we're more optimistic that we'll get some.

Speaker #1: reasonable rotation. Got

Speaker #9: Got it. And one for Rick. Rick, just to rephrase Melissa's question earlier: given that revenue seemed to go down while investment assets went up, and there's a small decline in average yields, were there timing issues involved in terms of closing deals late in the quarter?

Christopher Nolan: Got it. One for Rick. Rick, just to rephrase, I think Melissa's question earlier, given that revenues seemed to go down while investment assets went up, and there's a small decline in average yields, were there timing issues involved in terms of closing deals late in the quarter?

Speaker #10: None that come to the top of mind. I think the biggest variance, kind of quarter over quarter on the top line, is you're going to see in the PSSL dividend.

Art Penn: None that come to the top of mind. I think the biggest variance kind of quarter over quarter on the top line you're going to see is in the PSLF dividend. That dividend did decrease in the current quarter. There were some expenses at the joint venture that were kind of one-time and reduced the dividend.

Rick Allorto: None that come to the top of mind. I think the biggest variance kind of quarter over quarter on the top line you're going to see is in the PSLF dividend. That dividend did decrease in the current quarter. There were some expenses at the joint venture that were kind of one-time and reduced the dividend.

Speaker #10: That dividend did decrease in the current quarter. There were some expenses at the joint venture that were kind of one-time and reduced the dividend.

Speaker #9: Great. That's it for me. Thanks.

Christopher Nolan: Great. That's it for me. Thanks, guys.

Speaker #9: guys. Yeah.

Art Penn: That's a good point. There's been some financing activity at the joint venture in the securitization side that kind of hit expenses to some extent during the quarter.

Speaker #1: That's a good point. There's been some financing activity at the joint venture in the securitization side that kind of hit expenses to some extent.

Speaker #1: During the quarter, so.

Speaker #6: We'll go next to Brian McKenna with Citizens.

Operator: We'll go next to Brian McKenna with Citizens.

Speaker #3: Great. Thanks for the follow-up. Just a bigger picture question for you. You've obviously been a leader in the space for some time now, and you've done a pretty good job managing parks through a number of operating and macro environments, including the GFC, COVID, etc.

Brian McKenna: Great. Thanks for the follow-up. Just a bigger picture question for you. You've obviously been a leader in this space for some time now, and you've done a pretty good job managing PennantPark through a number of operating and macro environments, including the GFC, COVID, etc. There's clearly a lot of noise in the market today around private credit. At least from my perspective, there continues to be a good amount of misinformation. It would be great just to get your thoughts on all the current events and what you think is still underappreciated or misunderstood about your business and even the industry more broadly.

Speaker #3: There's clearly a lot of noise in the market today around private credit. And, at least from my perspective, there continues to be a good amount of misinformation.

Speaker #3: So, it would be great just to get your thoughts on all the current events and what you think is still underappreciated or misunderstood about your business and even the industry more broadly.

Art Penn: Yeah. It's a great question. We get the investor questions as well, typically from investors who haven't been in the space very long. The average person hears the word default, and in some cases, they think that means a zero. In the lending business, a default just means that you're coming to the table and negotiating the correct capital structure for the company going forward. That could mean conversion of some debt to equity. It could mean more economics to the lender. It could mean both. Sometimes when you convert debt to equity, that equity can have long-term value over time. In our 18, 19 years in business, we've certainly seen that where those equity conversions can actually create value. You can make more money from converting from debt to equity. Kind of just understanding how loans work and what being a lender is.

Speaker #1: And we get the investor questions as well. Typically, from investors who haven't been in the space very long, the average person hears the word 'default,' and in some cases, they think that means a zero.

Speaker #1: And in the lending business, a default just means that you're coming to the table and negotiating the correct capital structure for the company going forward.

Speaker #1: And that could mean conversion of some debt to equity; it could mean more economics to the lender; it could mean both. Sometimes, when you convert debt to equity, that equity can have long-term value.

Speaker #1: Over time, and in our 18, 19 years in business, we've certainly seen that where those equity conversions can actually create value. You can make more money from converting from debt to equity.

Speaker #1: So, kind of just understanding how loans work and being a lender is... when you say you're lending to 40 or 50 percent loan-to-value, that really means 50 to 60 percent of the value of the company needs to disappear before we lose a dime.

Art Penn: When you say you're lending to 40% or 50% loan-to-value, that really means 50% to 60% of the value of the company needs to disappear before we lose a dime. It certainly can happen, and it has happened, but there's a lot of cushion that's built into these things given the substantial equity cushion. If you go back to COVID, as an example, going into COVID, we had about 120 companies that we lent money to going into COVID, and there the economy was shut down by the government. The fact that we had quarterly maintenance tests that every three months, companies had a certain debt to EBITDA or EBITDA to interest coverage to meet meant that they had to come to the table. We had very constructive conversations with our borrowers.

When you say you're lending to 40% or 50% loan-to-value, that really means 50% to 60% of the value of the company needs to disappear before we lose a dime. It certainly can happen, and it has happened, but there's a lot of cushion that's built into these things given the substantial equity cushion. If you go back to COVID, as an example, going into COVID, we had about 120 companies that we lent money to going into COVID, and there the economy was shut down by the government. The fact that we had quarterly maintenance tests that every three months, companies had a certain debt to EBITDA or EBITDA to interest coverage to meet meant that they had to come to the table. We had very constructive conversations with our borrowers.

Speaker #1: So it certainly can happen, and it has happened, but there's a lot of cushion that's built into these things given the substantial equity cushion.

Speaker #1: If you go back to COVID as an example, going into COVID, we had about 120 companies that we lent money to going into COVID.

Speaker #1: And there the economy was shut down by the government. The fact that we had quarterly maintenance tests, where every three months companies had a certain debt-to-EBITDA or EBITDA interest coverage to meet, meant that they had to come to the table.

Speaker #1: And we had very constructive conversations with our borrowers. Of the 120 companies, about 15 actually needed liquidity—they needed cash. In all 15 of those cases, the private equity sponsors offered to put money in to solve the liquidity problem.

Art Penn: Out of that 120 companies, about 15 actually needed liquidity. They needed cash. In all 15 of those cases, the private equity sponsors offered to put money in to solve the liquidity problem. That was in a scenario where the economy was shut down, a very severe environment. The only other observation I had going all the way back to the GFC is when people's fears get up where they're reading articles and people start to get fearful. The antidote to that for us was bring people in and go line by line through the portfolio. Here with the BDCs, the SOIs, the statements of investments are all public information.

Out of that 120 companies, about 15 actually needed liquidity. They needed cash. In all 15 of those cases, the private equity sponsors offered to put money in to solve the liquidity problem. That was in a scenario where the economy was shut down, a very severe environment. The only other observation I had going all the way back to the GFC is when people's fears get up where they're reading articles and people start to get fearful. The antidote to that for us was bring people in and go line by line through the portfolio. Here with the BDCs, the SOIs, the statements of investments are all public information.

Speaker #1: And that was in a scenario where the economy was shut down in a very severe environment. So the only other observation I had going all the way back to the GFC is when people's fears get up, where they're reading articles and people start to get fearful of what the antidote to that for us was: bring people in and go line by line through the portfolio.

Speaker #1: And here with the BDCs, these are the SOIs, the Statements of Investments, which are all public information. Let's walk people through the name by name: who the company is, what they do, what the industry is, to the extent you can share it, the credit statistics, the debt-to-equity ratio, loan-to-value, name by name by name.

Art Penn: Let's walk people through the name by name, who the company is, what they do, what the industry is, to the extent you can share it, the credit statistics, the debt to equity ratio, loan to value, name by name by name. I think if people went through these books name by name, they'd realize we give the stats on an overall portfolio basis. The overall portfolio has 4.5x debt to EBITDA, 40% to 50% loan to value, interest coverage over 2x. You go name by name, and after a period of time, you realize these are pretty solid loan books. It's not just ours, but others. The other thing you realize is we and our peers are all over these portfolios. We are all over these names.

Let's walk people through the name by name, who the company is, what they do, what the industry is, to the extent you can share it, the credit statistics, the debt to equity ratio, loan to value, name by name by name. I think if people went through these books name by name, they'd realize we give the stats on an overall portfolio basis. The overall portfolio has 4.5x debt to EBITDA, 40% to 50% loan to value, interest coverage over 2x. You go name by name, and after a period of time, you realize these are pretty solid loan books. It's not just ours, but others. The other thing you realize is we and our peers are all over these portfolios. We are all over these names.

Speaker #1: And I think if people went through these books name by name, they'd realize, and we give the stats on an overall portfolio basis. The overall portfolio has 4.5 times debt-to-EBITDA, 40 to 50 percent loan-to-value, and interest coverage over 2 times.

Speaker #1: You go name by name, and after a period of time, you realize these are pretty solid loan books. It's not just ours, but others.

Speaker #1: And the other thing you realize is we and our peers are all over these portfolios. We are all over these names. Every month, we get in the core middle market, and every month we get financial statements from our underlying portfolio companies.

Art Penn: Every month we get in the core middle market, every month we get financial statements from our underlying portfolio companies. If something starts to stumble, we are on top of it every month. Every quarter, they have a financial covenant to meet. I think the quality of these portfolios is high, and we're all over them. I think if investors actually had the time to dedicate, and we and our peers are willing to spend the time to go name by name, I think that would calm a lot of the issues that people seem to be having right now. I don't know if that's helpful.

Every month we get in the core middle market, every month we get financial statements from our underlying portfolio companies. If something starts to stumble, we are on top of it every month. Every quarter, they have a financial covenant to meet. I think the quality of these portfolios is high, and we're all over them. I think if investors actually had the time to dedicate, and we and our peers are willing to spend the time to go name by name, I think that would calm a lot of the issues that people seem to be having right now. I don't know if that's helpful.

Speaker #1: So if something starts to stumble, we are on top of it. Every month and every quarter, they have a financial covenant to meet. So I think the quality of these portfolios is high.

Speaker #1: And we're all over them. So, I think if investors actually had the time to dedicate, and we and our peers are willing to spend the time to go name by name, I think that'll calm a lot of the issues that people seem to be having right now.

Speaker #1: I don't know if that's helpful.

Speaker #3: That's terrific. Thanks so much,

Brian McKenna: That's terrific. Thanks so much, Art.

Speaker #6: At this time, there are no further questions. I will now turn the call back to Art for any additional or closing remarks.

Operator: At this time, there are no further questions. I will now turn the call back to Art for any additional or closing remarks.

Speaker #1: Look, I just really want to thank everybody for participating today in this season of Thanksgiving. We are certainly grateful for the support of our shareholders. We wish everyone a safe and happy Thanksgiving and holiday season.

Art Penn: Look, I just really want to thank everybody for participating today in this season of Thanksgiving. We are certainly grateful for the support of our shareholders. We wish everyone a safe and happy Thanksgiving, and holiday season, and we look forward to speaking to you in early February.

Speaker #1: And we look forward to speaking to you in early.

Speaker #1: February. This does conclude

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

Q4 2025 PennantPark Investment Corp Earnings Call

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