PennantPark Investment Corporation (PNNT) Earnings Call Transcript

Thank you.

Good afternoon and welcome to the Pennant Park Investment Corporation's third fiscal quarter 2026 earnings conference call. Today's conference is being recorded. At this time, all participants have been placed in a listen-only mode. The call will be open for a question and answer session following the speaker's remarks. If you would like to ask a question at that time, simply press star 1 on your telephone keypad. If you would like to withdraw your question, press star 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 Pennant Park Investment Corporation. Mr. Penn, you may begin your conference.

Good afternoon, everyone, and thank you for joining Penn and Park Investment Corporation's third fiscal quarter 2026 earnings conference call. I'm joined today by Rick Olordo, our Chief Financial Officer. Rick, please start off by disclosing some general conference call information and include a discussion about forward-looking statements.

Thank you, Art. I'd like to remind everyone that today's call is being recorded and is the property of Penn and Park 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. Do not undertake to update our forward-looking statements unless required by law. To obtain copies of our latest SEC filings, please visit our website at pennandpark.com or call us at 212-905-1000. At this time, I'd like to turn the call back to our Chairman and Chief Executive Officer, Art Penn.

Thanks, Rick. I'll begin with an overview of our third quarter results and a review of the portfolio. I'll then discuss the current market environment and how we believe PNNT is positioned going forward. Rick will follow up with a detailed review of our financial results, after which we will open up the call for questions. For the quarter ended June 30th, our core NII net investment income was 14 cents per share. This exceeded our base dividend of 4 cents per share per month, or 12 cents per share for the quarter. As of June 30th, our NAV per share was $6.56, which is down 2.5% from the prior quarter. We've previously communicated P&NT as a considerable balance of undistributed taxable income, which we are required to distribute to shareholders. P&NT is utilizing the supplemental dividends to make such distributions, and the decline in NAV was primarily attributable to the supplemental dividend payments. Our portfolio remains highly diversified and conservatively positioned. Median debt to EBITDA was 4.7 times, median interest coverage of 2.1 times, and median loan-to-value was 45%. We ended the quarter with four non-accrual investments, representing 2.5% of the portfolio cost and 0.8% at market value. As of June 30th, our portfolio totaled $1.2 billion. During the quarter, we continued to originate attractive investment opportunities and invested a total of $77 million at a weighted average yield of 8.9%, including $13 million invested in five new platform investments with a median debt EBITDA of 2.3 times, interest coverage of 4.2 times, and loan-to-value of 30%. Our PSLF joint venture portfolio continues to be a significant contributor to our core NII. Over the last 12 months, P&NT's average cash yield on invested capital in the JV was 15.1%. As of June 30th, the JV portfolio totaled $1.3 billion, and has the capacity to increase its portfolio to approximately $1.5 billion. In June, the JV amended its revolving credit facility Reduce the interest rate to SOFR plus 2.1% from SOFR plus 2.25%. Additionally, in July, the JV partially refinanced its $300 million debt securitization. The JV refinanced the AAA tranches and decreased the securitization's weighted average spread by 97 basis points to 1.69% from 2.66%. We expect additional growth in the JV portfolio, and the decrease in its cost of capital will enhance P&NT's earnings momentum in future quarters. During the quarter, we generated a meaningful realization from our equity co-investment in a leading defense technology company. We received approximately $15 million in total proceeds on our original $1.1 million investment, representing nearly 14 times multiple uninvested capital. Government services and defense continues to be one of our highest conviction investment sectors and has consistently been among our best performing verticals. Since inception, we've invested approximately $3 billion across the sector, including including roughly $780 million through P&NT. For these investments, they were 92% first lien senior secured and generated an overall IRR of 12.2%, demonstrating our ability to identify businesses operating in strategically important markets. We remain highly constructive on the long-term outlook for government services and defense because the sector possesses several characteristics that well with our investment philosophy. Demand has been historically been supported by durable federal funding priorities and long term contracts that provide meaningful revenue visibility and stability. Many of these businesses exhibit resilient cash flow profiles, variable cost structures, and are generally less sensitive to broader economic cycles than many commercial industries. In addition, the sector continues to benefit from active M&A markets and strong valuation support, thereby providing multiple avenues for value creation. Our portfolio is concentrated in businesses supporting the Department of War and other mission-critical government agencies. We focus on companies addressing high-priority national security initiatives, including modernization of defense systems and digital infrastructure, cyber and electronic warfare capabilities, modeling and simulation, counter drone technologies, and next generation autonomous systems. We believe these priorities will remain central to U.S. defense spending for years to come, creating a favorable backdrop for continued investment opportunities. On a combined basis, including the joint venture portfolio, government services and defense represents approximately 11% of total investments. Given our experience, sourcing capabilities, and the attractive opportunity set, we intend to increase that exposure over time. Software remains an area of focus for market participants. Our exposure is limited to approximately 4.6% of the portfolio and is structured consistently with our core middle market strategy. investments are primarily cash pay, covenant protected loans with moderate leverage and relatively short durations. They're concentrated in mission-critical enterprise software businesses serving regulated end markets including defense, healthcare, and financial services. Let me now turn to the broader market environment. M&A activity has increased over the past six to nine months, although overall conditions remain uneven. Private equity sponsors remain active, and we are seeing a growing pipeline of attractive opportunities across both new originations and add-on investments. We are optimistic that activity levels will remain elevated throughout the back half of this year. We expect increased transaction activity to drive repayments across the portfolio, including opportunities to monetize equity co-investments and redeploy that capital into income-generating investments. In the core middle market, the pricing for high-quality first lien term loans remains attractive. ranging from SOFR plus 500 to 550 basis points with leverage of approximately 4.5 times EBITDA. Importantly, these structures continue to include meaningful covenant protections in contrast to the covenant-like structures prevalent in the upper middle market. We believe the current environment favors lenders with established private equity-sponsored relationships. consistent access to deal flow, and disciplined underwriting. And these are long-standing strengths of our Penn and Park platform. We continue to believe that the core middle market offers an attractive risk-adjusted opportunity. Companies in this segment generally have EBITDA of $10 to $50 million and often operate below the practical threshold of the broadly syndicated loan and high yield markets. As a result, lenders can typically conduct extensive diligence, negotiate meaningful financial covenants, structure transactions with appropriate leverage and equity cushions, and maintain regular access to company financial information. Since our inception nearly 19 years ago, P&NT has invested $9.4 billion and an average yield of 11.1%, 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. Overall for our platform from inception through June 30th, we've invested over $629 million in equity co-investments and have generated an IRR of 25% at a multiple uninvested capital of two times. Looking ahead, our experienced team and broad origination platform position us well to generate attractive deal flow. We remain steadfast in our commitment to capital preservation and maintaining a disciplined, patient investment approach. We continue to focus on investing in high-quality middle-market companies with strong free cash flow generation. We capture that valuation through senior secured loans, and we pay out those contractual cash flows in the form of business loans. dividends to our shareholders. 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 ending June 30th, gap and core net investment income were $0.14 per share. Investment income was comprised of $20 million in interest income, $4.5 million in dividend income, and $0.3 million in other income. Operating expenses for the quarter were as follows. Interest and credit facility expenses were 8.8 million. Base management and incentive fees were 5.4 million. General and administrative expenses were 1.5 million. And provision for excise taxes was 0.2 million. Net realized and unrealized change on investments and debt, including provision for taxes, was a loss of $4.4 million. As of June 30th, our NAV was $6.56 per share compared to $6.73 per share last quarter. At quarter end, our debt to equity ratio was 1.29 times, and our capital structure is diversified across multiple funding sources, including both secured and unsecured debt. As of June 30th, our key portfolio statistics were as follows. Our portfolio remains highly diversified with 159 companies across 37 different industries. The weighted average yield on our debt investments was 11%. The portfolio is comprised of 46% first lien senior secured debt, 2% second lien secured debt, 15% subordinated notes to PSLF, 7% other subordinated debt, 6% equity in PSLF, and 24% in other preferred and common equity co-investments. 87% of the debt portfolio is floating rate. With that, I'll turn the call back to Art for closing remarks. 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 Pennant Park. Concluding our remarks at this time, I would like to open up the call to questions.

Thank you. And if you would like to ask the question, please signal by pressing star 1 on your telephone keypad. If you are using a speakerphone, please press star 1. Please make sure that your mute function is turned off to allow your signal to reach our equipment. Again, you can press star 1 to ask a question, and we'll pause for just a moment to allow everyone an opportunity to signal for questions. We'll now take your first question coming from the line of Chris Muller with Citizens Capital Market.

Hey, guys. Thanks for taking the questions. So I wanted to touch on originations. It looked like they were outpaced by repayments in the quarter, but I guess, how are you guys thinking about net deployment in the coming quarters? Should we expect that dynamic to continue, or can we see some net portfolio growth ahead?.

Yes, thanks, Chris. You know, I think we're balancing a bunch of different factors. You know, we're looking at a target leverage ratio here of about 1.3 times debt to equity, which is kind of where we are. So, you know, we're looking to grow the G2. JV over time. We're looking to manage debt equity here at PNNT. So kind of, you know, I think right now we're looking to keep it flat. And obviously a big goal here is to rotate the equity. And, um, you know get that equity rotation going and redeploy that into cash pin yield instruments.

Got it. And then it was nice to see the subsequent refinance. 100 basis points is a meaningful reduction there. And I think I heard you guys say it was $300 million facility size. I guess, what will the cost savings per share be from that combined with the revolver refi?.

Yes, so this was in our JV. I'm going to look to Rick. I think I know, but I think Rick knows for sure kind of how the about 100 basis points savings from the JV flows through to P&T. Rick, do you want to answer that one? Yes, sure. So the two refinancings within the JV that revolve around the JV, the JV and the JV, the JV and the JV, the JV and the JV, the JV and the JV, the JV and the JV.

and the securitization are going to be about a half a penny per share flow through to P and NT per quarter. So, about two cents on an annual basis. Got it. That's very helpful. I appreciate you guys taking the questions today.

Thank you. Your next question will come from the line of Alex Brewer with Truist Securities.

Hey, this is Alex Brewer on behalf of Aaron. I was just curious if you could add any color on spreads on new deals and how they're holding up with new commitments this quarter at 77 million at, I think you said weighted average yield at 8.9%. Thank you.

Yes, so I think spreads are relatively consistent quarter to quarter. They've kind of been flat here, kind of in the 500 to 550 zone on average. And then we'll just have to see where we go year-end. You know, supply-demand, how much of supply of new deals are there, how much is M&A. they're going to be active and then demand side, you know, kind of the cash flows into the space certainly institutional investors continue to deploy to the space retail uh the well channels, as you know, and as everyone knows, have been a bit more challenged. So we'll see where the supply-demand curve goes, but we certainly think we can maintain the 500 to 550 spread, you know, for a period of time.

That's great. Thank you. Thank you. Your next question will come from the line of Christopher Nolan with Lattenberg-Dalman.