PennantPark Investment Corporation (NYSE:PNNT) Q1 2025 Earnings Conference Call May 13, 2025 12:00 PM ET Company Participants Art Penn - Chairman & CEO Rick Allorto - CFO Conference Call Participants Maxwell Fritscher - Truist Melissa Wedel - JPMorgan Operator Good afternoon and welcome to the PennantPark Investment Corporation's Second Fiscal Quarter 2025 Earnings Conference Call. Today's conference is being recorded. At this time, all participants have been placed in a listen-only mode. The call will be o ...

Financial Data and Key Metrics Changes - For the quarter ended March 31, GAAP and core net investment income was 18¢ per share, with total distributions of 24¢ per share [14][18] - As of March 31, the adjusted NAV was $7.48 per share, down 1.2% from $7.57 per share in the prior quarter [18] - The debt to equity ratio was 1.28 times, indicating a diversified capital structure across multiple funding sources [19] Business Line Data and Key Metrics Changes - During the quarter, the company invested $177 million in three new and 52 existing portfolio companies at a weighted average yield of 10.7% [15] - The joint venture (JV) portfolio grew to $1.4 billion, with the JV investing $170 million at a weighted average yield of 10.1% [15][16] - The portfolio consisted of 46% first lien secured debt, 2% second lien secured debt, 13% subordinated notes, 7% other subordinated debt, 7% equity in PSLF, and 25% in other preferred and common equity [20] Market Data and Key Metrics Changes - Approximately 80% of originations came from existing borrowers, with 20% from new platform investments [6] - The weighted average debt to EBITDA for new portfolio company investments was 3.9 times, with a weighted average interest coverage of 2.3 times [8] - The market yield on first lien term loans stabilized in the range of plus 500 to 550 basis points for high-quality assets [8] Company Strategy and Development Direction - The company aims to generate attractive risk-adjusted returns through income while preserving capital, focusing on growing middle market companies with high free cash flow conversion [17] - The strategy includes rotating out of larger equity positions and redeploying that capital into interest-paying debt investments to increase core net investment income [14] - The company remains selective in pursuing new investments, emphasizing rigorous underwriting and maintaining a conservative orientation [10][11] Management's Comments on Operating Environment and Future Outlook - Management noted that despite market volatility, the company had a solid quarter and expects originations to remain concentrated among existing portfolio companies [6][7] - The management expressed optimism about the upcoming vintage of loans, indicating that market volatility creates opportunities [8] - The company is closely monitoring the potential impact of tariffs across the portfolio, reporting limited exposure [9] Other Important Information - The company has a significant balance of spillover income, amounting to $58 million or 88¢ per share, which will be used to cover any shortfall in core net investment income versus dividends [15] - The credit quality of the portfolio remains strong, with three nonaccruals representing 1.6% of the portfolio at cost and 0.4% at market value as of March 31 [19] Q&A Session Summary Question: How would you characterize the current pipeline for new investments? - Management indicated that M&A deals impacted by tariffs were delayed, but there has been modest activity since April, with a growing pipeline expected for the rest of the year [24][25] Question: How much of the lower level of new deals was due to stricter underwriting? - Management stated that tariff-impacted deals are not being pursued, while the majority of their focus remains on existing borrowers in sectors not significantly affected by tariffs [28][50] Question: Can you discuss the exposure to government reimbursement and health care? - Management highlighted that the defense budget is expected to increase significantly, aligning well with their portfolio, and noted that their health care investments are performing well due to lower leverage compared to peers [39][44]

Core Insights - PennantPark (PNNT) reported revenue of $30.66 million for the quarter ended March 2025, marking a year-over-year decline of 14.8% and a surprise of -8.26% compared to the Zacks Consensus Estimate of $33.43 million [1] - The earnings per share (EPS) for the same period was $0.18, down from $0.22 a year ago, with an EPS surprise of -5.26% against the consensus estimate of $0.19 [1] Financial Performance Metrics - Investment income from non-controlled, non-affiliated investments was $0.12 million, significantly lower than the average estimate of $0.69 million based on three analysts [4] - Dividend income from controlled, affiliated investments was reported at $5.58 million, exceeding the average estimate of $5.12 million based on two analysts [4] - Dividend income from non-controlled, non-affiliated investments was $0.50 million, slightly below the estimated $0.55 million by two analysts [4] Stock Performance - Over the past month, shares of PennantPark have returned +5.3%, outperforming the Zacks S&P 500 composite's +3.8% change [3] - The stock currently holds a Zacks Rank 2 (Buy), suggesting potential for outperformance in the near term [3]

PennantPark (PNNT) came out with quarterly earnings of $0.18 per share, missing the Zacks Consensus Estimate of $0.19 per share. This compares to earnings of $0.22 per share a year ago. These figures are adjusted for non-recurring items.This quarterly report represents an earnings surprise of -5.26%. A quarter ago, it was expected that this business development company would post earnings of $0.20 per share when it actually produced earnings of $0.20, delivering no surprise.Over the last four quarters, the ...

Portfolio Overview - As of March 31, 2025, the portfolio totaled $1,213.6 million, with 41% in first lien secured debt and a weighted average yield on interest-bearing debt investments of 12.0%[234] - As of September 30, 2024, the portfolio totaled $1,328.1 million, with 50% in first lien secured debt and a weighted average yield on interest-bearing debt investments of 12.3%[235] - The average investment size in the overall portfolio was $6.9 million as of March 31, 2025[234] - PSLF's portfolio as of March 31, 2025, totaled $1,392.9 million, with a weighted average yield on interest-bearing debt investments of 10.4%[239] - As of March 31, 2025, the PennantPark Senior Loan Fund (PSLF) had total assets of $1,463.5 million, an increase from $1,073.4 million as of September 30, 2024[293] - The investment portfolio of PSLF consisted of debt investments in 119 portfolio companies as of March 31, 2025, compared to 102 companies as of September 30, 2024[293] Investment Activity - For the three months ended March 31, 2025, the company invested $176.8 million in three new and 52 existing portfolio companies, with a weighted average yield on debt investments of 10.7%[236] - For the three months ended March 31, 2024, the company invested $188.5 million in six new and 43 existing portfolio companies, with a weighted average yield of 11.7%[237] - For the six months ended March 31, 2025, PSLF invested $523.7 million in 23 new and 57 existing portfolio companies[240] - For the six months ended March 31, 2024, PSLF's total investments amounted to $194.2 million, with a weighted average yield of 12.2%[241] Financial Performance - For the three and six months ended March 31, 2025, investment income was $30.7 million and $64.9 million, respectively, a decrease from $36.0 million and $70.3 million for the same periods in 2024[270] - For the three and six months ended March 31, 2025, expenses totaled $19.2 million and $40.4 million, respectively, down from $21.7 million and $40.4 million in 2024[271] - Net investment income for the three and six months ended March 31, 2025, was $11.4 million and $24.4 million, or $0.18 and $0.37 per share, compared to $14.3 million and $29.9 million, or $0.22 and $0.46 per share in 2024[272] - For the three and six months ended March 31, 2025, net realized losses totaled $(27.7) million and $(30.3) million, compared to $(31.0) million and $(29.2) million in 2024[273] - The net change in unrealized appreciation on investments for the three and six months ended March 31, 2025, was $27.1 million and $29.5 million, respectively, down from $33.2 million and $28.3 million in 2024[274] Debt and Financing - The company expects to continue using debt capital and proceeds from public and private offerings to finance investment objectives[228] - The Truist Credit Facility had outstanding borrowings of $314.5 million as of March 31, 2025, with a weighted average interest rate of 6.7%[280] - PSLF entered into a $400.0 million senior secured revolving credit facility, increased from $325.0 million in August 2024[296] - The company has not engaged in interest rate hedging activities during the reporting periods, which may expose it to risks associated with interest rate fluctuations[326] Cash and Liquidity - As of March 31, 2025, the company had cash and cash equivalents of $32.6 million, down from $49.9 million as of September 30, 2024[289] - For the six months ended March 31, 2025, operating activities provided cash of $161.1 million, while financing activities used cash of $178.3 million, primarily for credit facility repayments and stockholder distributions[290] - Cash and cash equivalents increased to $62,201,000 as of March 31, 2025, from $36,595,000 as of September 30, 2024, reflecting a growth of 70%[309] Distributions - The company must distribute dividends equal to at least 90% of its net ordinary income and realized net short-term capital gains to maintain its RIC tax election[259] - The company declared distributions of $0.24 per share for the three months ended March 31, 2025, compared to $0.21 per share in the same period of 2024, reflecting a 14.3% increase[314] - The company transitioned from quarterly to monthly distributions effective October 2023, with future monthly distributions determined by the board of directors[315] Valuation and Accounting - PSLF's portfolio generally consists of illiquid securities, and the board of directors undertakes a multi-step valuation process each quarter for investments without readily available market quotations[246] - The company has adopted ASC 825-10 for the Truist Credit Facility, incurring $0.3 million in expenses related to amendment costs for the three and six months ended March 31, 2025[252] - The company has adopted ASU 2022-03, which clarifies fair value measurement disclosures, with no material impact on consolidated financial statements[320] - The FASB issued ASU 2023-07, effective for fiscal years beginning after December 15, 2023, which will enhance segment disclosure requirements, currently under evaluation by the company[321] Market and Sector Analysis - The average coupon rates for various sectors include 11.55% for software and 10.69% for transportation, indicating a diverse interest rate environment across industries[303] - The healthcare, education, and childcare sector shows a notable interest rate of 10.65% for NORA Acquisition, LLC, highlighting the sector's investment attractiveness[303] - The company has a diverse portfolio with investments across various sectors, including aerospace and defense, healthcare, and business services, indicating a strategic approach to market expansion[303]

Financial Performance - For the quarter ended March 31, 2025, the investment portfolio totaled $1,213.6 million, with net assets of $488.1 million and a GAAP net asset value per share of $7.48, reflecting a quarterly change of (1.2)%[2] - Net investment income for the quarter was $11.4 million, or $0.18 per share, down from $14.3 million or $0.22 per share in the same quarter of 2024[16] - The company reported net realized losses of $(27.7) million for the quarter, compared to $(31.0) million in the same quarter of 2024[17] - Total investment income for the six months ended March 31, 2025, was $64.9 million, compared to $70.3 million for the same period in 2024[32] - The net increase in net assets resulting from operations was $9,456 million, down from $16,085 million, indicating a decline of about 41.1%[33] - Net investment income per common share decreased to $0.18 from $0.22, representing a decline of 18.2%[33] - The provision for taxes on net investment was $550 million, down from $775 million, reflecting a decrease of approximately 29.0%[33] Portfolio and Investments - The portfolio had net unrealized appreciation of $40.7 million as of March 31, 2025, with a net change in unrealized appreciation of $27.1 million for the quarter[18] - The company invested $176.8 million in the quarter across three new and 52 existing portfolio companies, with a weighted average yield on debt investments of 10.7%[7] - The weighted average yield on debt investments across the portfolio was 12.0% as of March 31, 2025[5] - As of March 31, 2025, the company had three portfolio companies on non-accrual, representing 1.6% of the overall portfolio on a cost basis[5] - The net change in unrealized appreciation on investments and debt was $25,790 million, compared to $32,863 million in the previous period, showing a decrease of about 21.5%[33] - The net increase in unrealized appreciation on non-controlled, non-affiliated investments was $17,918 million, compared to a loss of $1,528 million previously[33] Expenses and Distributions - Total expenses for the quarter were $19.2 million, a decrease from $21.7 million in the same quarter of 2024, primarily due to lower interest and incentive fees[15] - The company declared distributions of $0.24 per share for the quarter, supported by substantial spillover income[5] - Total distributions declared during the three and six months ended March 31, 2025, were $15.7 million and $31.3 million, respectively, compared to $13.7 million and $27.4 million for the same periods in 2024[26] Assets and Liabilities - The company's total assets decreased from $1,389.1 million as of September 30, 2024, to $1,257.8 million as of March 31, 2025[29] - The net asset value per share decreased from $7.56 as of September 30, 2024, to $7.48 as of March 31, 2025[30] - As of March 31, 2025, the company had outstanding borrowings of $314.5 million under the Truist Credit Facility, with a weighted average interest rate of 6.7%[22] - Unused borrowing capacity under the Truist Credit Facility was $185.5 million as of March 31, 2025, compared to $13.5 million as of September 30, 2024[22] - The company had cash and cash equivalents of $32.6 million as of March 31, 2025, down from $49.9 million as of September 30, 2024[23] Strategic Focus - The company plans to rotate equity investments over time to support its dividend stream[5] - The company anticipates continued focus on middle-market companies for investment opportunities, leveraging its established credit platform[34] - The company has no plans to update forward-looking statements made in periodic reports, emphasizing the inherent risks and uncertainties involved[37]

Core Viewpoint - PennantPark Investment Corporation reported its financial results for the second quarter ended March 31, 2025, highlighting a decrease in net investment income and net asset value per share, alongside significant portfolio activity and investment performance metrics [1][2][4]. Financial Highlights - Investment portfolio totaled $1,213.6 million with net assets of $488.1 million as of March 31, 2025 [2]. - GAAP net asset value per share was $7.48, reflecting a quarterly change of -1.2% [2]. - Net investment income for the quarter was $11.4 million, or $0.18 per share, down from $14.3 million or $0.22 per share in the same quarter of the previous year [15]. - Total investment income for the quarter was $30.7 million, compared to $36.0 million in the prior year [13]. Portfolio Activity - The company made purchases of investments totaling $176.8 million and sales and repayments of investments amounting to $263.1 million during the quarter [2][6]. - The portfolio consisted of 158 companies with an average investment size of $6.9 million, and a weighted average yield on debt investments of 12.0% [4]. - As of March 31, 2025, the portfolio included 41% first lien secured debt and 29% preferred and common equity [4]. Investment Income and Expenses - Investment income for the three months ended March 31, 2025, was primarily derived from first lien secured debt, totaling $22.1 million [13]. - Total expenses for the quarter were $19.2 million, a decrease from $21.7 million in the same quarter of the previous year [14]. - The decrease in expenses was attributed to lower interest and debt-related expenses [14]. Realized and Unrealized Gains - Net realized losses for the quarter were $(27.7) million, compared to $(31.0) million in the same quarter of the previous year [17]. - The net change in unrealized appreciation on investments was $27.1 million for the quarter [18]. Liquidity and Capital Resources - As of March 31, 2025, the company had $314.5 million in outstanding borrowings under the Truist Credit Facility, with a weighted average interest rate of 6.7% [22]. - Cash and cash equivalents available for investing and corporate purposes were $32.6 million [23]. Distributions - The company declared distributions of $0.24 per share for the quarter, totaling $15.7 million, compared to $0.21 per share in the same quarter of the previous year [27].

Company Overview - PennantPark Investment Corporation is a business development company that primarily invests in U.S. middle-market private companies through various forms of debt and equity investments [3] - The company is managed by PennantPark Investment Advisers, LLC, which has been operational since 2007 and manages $9.8 billion of investable capital [4] Upcoming Financial Reporting - The company will report its financial results for the second fiscal quarter ended March 31, 2025, on May 12, 2025, after the close of financial markets [1] - A conference call to discuss these results will be held on May 13, 2025, at 12:00 p.m. Eastern Time, with access details provided for interested parties [2]

Group 1 - PennantPark Investment (NYSE: PNNT) operates as a business development company focused on generating attractive total returns through a diverse portfolio of debt investments [1] - PNNT distinguishes itself from other business development companies (BDCs) by its unique investment strategies [1] Group 2 - The company aims to create a hybrid investment system that combines growth and income, allowing for total returns comparable to traditional index funds like the S&P [1]

Financial Data and Key Metrics Changes - For the quarter ended December 31, GAAP and core net investment income was $0.20 per share, which is $0.04 below the quarterly dividend [7][25] - GAAP and adjusted NAV increased by 0.1% to $7.57 per share from $7.56 per share [9][27] - The company has $65 million or $0.99 per share of undistributed spillover income [8] Business Line Data and Key Metrics Changes - The portfolio totaled $1.3 billion, with $296 million invested in 12 new and 61 existing portfolio companies at a weighted average yield of 10.6% [9][10] - The weighted average debt-to-EBITDA for new portfolio companies was 4x, and the weighted average interest coverage was 2.2x [10] - The joint venture (JV) portfolio grew to $1.3 billion, with an 18.4% return on invested capital over the last 12 months [12][13] Market Data and Key Metrics Changes - The market yield on first lien term loans appears to have stabilized in the SOFR plus 500 to 550 range [11] - The credit quality of the investment portfolio remains strong, with 2 nonaccruals representing 4.3% of the portfolio cost and 1.5% of market value [14][28] Company Strategy and Development Direction - The company focuses on capital preservation in the U.S. and believes that the core middle market provides attractive investment opportunities [15] - The company has a long-term track record of financing growing middle market companies in five key sectors: business services, consumer, government services and defense, health care, and software technology [16] - The company aims to generate attractive risk-adjusted returns through income while preserving capital [23] Management's Comments on Operating Environment and Future Outlook - Management believes that the current vintage of core middle market loans is excellent, with lower leverage, higher spreads, and tighter covenants compared to the upper middle market [11][20] - The company anticipates that 2025 will provide opportunities for equity rotation and monetization of investments [47][64] - Management is optimistic about the growth of the JV and its contribution to future earnings momentum [13][24] Other Important Information - The company has invested over $563 million in equity co-investments since inception, generating an IRR of 26% [21] - The company has a diversified portfolio with 158 companies across 35 different industries [27] Q&A Session Summary Question: Any commentary about the level of capacity or competition in the core middle market? - Management noted that larger players have exited the core middle market, leaving only a handful of peers, which stabilizes spreads [34][35] Question: What is the appetite for equity co-investments? - Management stated that equity co-investments are evaluated on a case-by-case basis, aiming to capture growth while maintaining a safe loan structure [38][40] Question: How will net investment activity trend in the first half of the year? - Management indicated that PNNT is currently optimized and expects to return to a debt-to-equity ratio of 1.25% to 1.3% in the long term [42] Question: What is the target level for spillover income? - Management emphasized the importance of market opportunities and equity rotation, stating that they aim to maintain a steady dividend stream [46][50] Question: What are the prospects for restructuring the investment in Pragmatic Institute? - Management anticipates some form of restructuring during the current quarter, with potential debt conversion [52] Question: What areas does the company want to ramp up exposure in the portfolio? - Management highlighted health care and government services as key areas, focusing on companies that drive cost containment [56][58] Question: What is the timing and magnitude of monetizing equity investments? - Management aims to reduce equity investments by half over time, with hopes for increased M&A activity in 2025 [64] Question: Are there any notable credit events since the end of the quarter? - Management mentioned that Zips Car Wash filed for prepackaged bankruptcy, which is not material to the portfolio [128]