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spk01: and projections, and we ask that you refer to our most recent filings with the SEC for important factors that could cause actual results to differ materially from these projections. 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 At this time, I'd like to turn the call back to our Chairman and Chief Executive Officer, Art Penn.
spk00: Thanks, Rick. We're going to spend a few minutes and comment on the current market environment for private middle market credit, provide a summary of how we fared in the quarter ended March 31st, how the portfolio is positioned for the upcoming quarters, a detailed review of the financials, and then open it up for Q&A. For the quarter ended March 31st, our GAAP and coordinate investment income was 22 cents per share. We are pleased to announce that the Board of Directors has approved an increase in the monthly dividend to 8 cents per share. The increase will be effective beginning with the June monthly dividend, which will be payable on July 1st to shareholders of record as of June 14th. This represents a 14% increase in the monthly dividend. GAAP and adjusted NAV increased 0.5%, to $7.69 per share from $7.65. As of March 31st, our portfolio grew slightly to $1.2 billion or 2% from the prior quarter. During the quarter, we continued to originate attractive investment opportunities and invested $188 million in six new and 43 existing portfolio companies at a weighted average yield of 11.7%. For the investments in new portfolio companies, the weighted average debt to EBITDA was 4.3 times, The weighted average interest coverage was 2.1 times, and the weighted average loan-to-value was 40%. We added two new investments to non-accrual status and removed one investment. Non-accruals represent 3.7% of the portfolio at cost and 3% at market value. For the quarter ended March 31st, PIC income remained low at only 2.9% of total investment income, which we believe is among the lowest in the BDC sector. As of March 31st, the portfolio's weighted average leverage ratio through our debt security was 4.4 times, and the portfolio's weighted average interest coverage was 2.2 times. These attractive credit statistics are testament to our selectivity and conservative orientation, as well as our focus on the core middle market. On average, we have seen a 50 basis point tightening of first lien spreads over the last six months. However, we continue to believe that the current vintage of core middle market directly originated loans, is excellent. In the core middle market, leverage is lower, spreads and upfront OID are higher, and covenants are tighter than in the upper middle market. Despite covenant erosion in the upper middle market and the core middle market, we are still getting meaningful covenant protections. At March 31st, the JV portfolio equaled $924 million, and during the quarter, the JV invested $113 million. including $103 million of purchases from PNNT. With its current capital base, the JV portfolio can grow to $1.1 billion. Over the last 12 months, PNNT earned a 17.5% return on invested capital in the JV. We expect that with continued growth in the JV portfolio, the JV investment will enhance PNNT's earnings momentum in future quarters. Now let me turn to the current market environment. We are well positioned as a lender focused on capital preservation in the United States. We continue to believe that our focus on core middle market opportunities provides the company with attractive investments, where we provide important strategic capital to our borrowers. We have a long-term track record of generating value by successfully financing growing middle market companies in five key sectors. These are sectors where we have substantial domain expertise, know the right questions to ask, and have an excellent track record. There are business services, consumer, government services and defense, healthcare, and software and technology. These sectors have also been recession resilient and tend to generate strong free cash flow. In the core middle market, companies with 10 to 50 million of EBITDA, those companies are below the threshold and we do not compete with the broadly syndicated loan or high yield markets, unlike our peers in the upper 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 upfront OID, as well as an equity co-investment. Additionally, from a monitoring perspective, we receive monthly financial statements to help us stay on top of the companies. With regard to covenants, unlike the erosion in the upper middle market, virtually all of our originated first lien loans had meaningful covenants which helped protect our capital. This is a significant reason why we believe we are well positioned in this environment. Many of our peers who focus on the upper middle market state that those bigger companies are less risky. That is a perception and may make some intuitive sense, but the reality is different. According to S&P, loans with companies Loans to companies with less than $50 million of EBITDA have a lower default rate or higher recovery rate than loans to companies with higher EBITDA. We believe that the meaningful covenant protections of core middle market loans, more careful diligence, and tighter monitoring have been an important part of this differentiated performance. As a provider of strategic capital that fuels 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 March 31st, we've invested over $469 million in equity co-investments and have generated an IRR of 26% and a multiple on invested capital of 2.1 times. Since inception, nearly 17 years ago, PNNT has invested $8.1 billion at an average yield of 11.3% and has experienced a loss ratio on invested capital of approximately 19 basis points annually. This strong track record includes investments in primarily subordinated debt made prior to the global financial crisis, our legacy energy investments, and recently the pandemic. With regard to the outlook, new loans in our target market are attractive. Our experienced and talented team and our wide origination funnel is producing active deal flow. Our continued focus remains on capital preservation and being patient investors. We want to reiterate our goal to generate attractive risk-adjusted returns through income, coupled with long-term preservation of capital. We seek to find investment opportunities in growing middle market companies that have high free cash flow conversion. We capture that free cash flow primarily through debt instruments and pay out those contractual cash flows in the form of dividends to our shareholders. Let me now turn the call over to Rick, our CFO, to take us through the financial results. Thank you, Art.
spk01: For the quarter ended March 31st, GAAP and core net investment income was $0.22 per share. Operating expenses for the quarter were as follows. Interest and credit facility expenses were $11.9 million. Base management and incentive fees were $7.2 million. General and administrative expenses were $1.9 million. And provision for excise taxes were $0.8 million. For the quarter ended March 31st, net realized and unrealized change on our investments and debt, including provision for taxes, was a gain of $1.8 million, or $0.03 per share. As of March 31st, our gap and adjusted NAV was $7.69 per share, which is up 0.5% from $7.65 per share in the prior quarter. As of March 31st, Our debt to equity ratio was 1.4 times, and our capital structure is diversified across multiple funding sources, including both secured and unsecured debt. As of March 31st, our key portfolio statistics were as follows. Our portfolio remains highly diversified with 138 companies across 30 different industries. The weighted average yield on our debt investments was 12.5%. Pick income equaled only 2.9% of total investment income. We had two non-accruals, which represent 3.7% of the portfolio at cost and 3% at market value. The portfolio is comprised of 58% first lien secured debt, 5% second lien secured debt, 10% subordinated notes to PSLF, 4% other subordinated debt, 6% equity in PSLF, and 17% in other preferred and common equity. 97% of the debt portfolio is floating rate. Debt to EBITDA on the portfolio is 4.4 times and interest coverage is 2.2 times. Now let me turn the call back to Art.
spk00: Thanks, Rick. In closing, I'd like to thank our dedicated and talented team of professionals for their continued commitment to PNNT and its shareholders. Thank you all for your time today and for your continued investment and confidence in us. That concludes our remarks at this time. I would like to open up the call to questions.
spk03: Thank you. If you would 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. And we will go ahead and take our first question from Brian McKenna with Citizens JMP.
spk06: All right, thanks. I just had one question on the dividend and coverage. So great to see the 14% increase in the monthly distribution, but that equates to $0.24 on a quarterly basis. And so if I look at NII in the period, that came in at $0.22. So I'm curious, why set the new dividend above the 1Q NII run rate? Does that imply you expect some healthy growth in core earnings moving forward? And ultimately, where do you think you'll shake out on dividend coverage over the next several quarters?
spk00: Yeah, thanks, Brian. It's a good question. You know, first, it's important for everyone to know we have a lot of spillover, probably about a dollar a share of spillover that, you know, we're going to need to be able to pay out a significant portion of that, you know, anyway. Now, then you turn to what's our recurring ongoing NII activity. And we believe that based on the performance of the portfolio, based on continued growth of the joint venture, that that 24 cents is achievable on a recurring basis anyway. So that led us to those two factors are the key factors that led us to the dividend increase.
spk06: Got it. Makes sense. Thank you.
spk03: And our next question will come from Robert Dodd with Raymond James.
spk07: Hi, guys. Can you give us a rundown on Flock, obviously the new non-accrual, and what the situation is there and what your plans are? I mean, you know, what point does it make sense for a business like that that's a lending business to just keep it as a portfolio company, run it and operate it as a specialty finance niche business yourself?
spk00: Yeah, so the company's name is Flock Financial, and it's a specialty finance company involved in financing and purchasing busted consumer receivables. It's an area that, Robert, you focus on as well as BDCs. We think it's a really interesting vintage where we recapitalized the company, we converted some debt to equity, and we put some more capital in to fuel the growth of the company because we think it's a very good vintage company. for that space to be adding on assets and growing that company. So we're going to grow the company. We've added excellent management to that team. And you're right. Once you kind of get that company in a good position, it's a company that we could sell. It's a company that we could hold. It certainly generates a very attractive yield. So, you know, first things first, we've got to get the company on the right track. We've reconstituted management, brought some ex-managers in, back into the company, added some board oversight and put some capital into the company so that they can deploy, you know, into this attractive market. That was the biggest non-accrual. We also put Walker Edison, which is a much smaller position that's been marked down for a number of quarters. We proactively put that on non-accrual as well.
spk07: Understood. At what point do you think, one way or the other, whatever the path is, what point do you think that capital could become income-producing again?
spk00: Certainly, we think within the next year. That's our goal. We think it's kind of a – we're building in a one-year horizon to – to start, you know, clicking yield again. Again, we've added to the management. We just want to kind of get things stabilized and then also moving in the right direction with growth.
spk07: Got it. Appreciate that. On the JV, obviously does the same kind of assets as on balance sheet. You still want to grow that. It's extremely attractive maternal capital through that structure. Can you give us an update on how – Obviously, it depends on the market environment. But how large would you like that to be, say, a year from now?
spk00: Yeah. So, you know, as of March 31st, it was $924 million. Based on with the current capital, we can get that to $1.1 billion. And we are in discussions about potentially growing that joint venture. And we're open to doing other JVs. It's been a terrific structure recently. For P&NT, it's been a good structure. For PFLT, you know, when you're generating an upper team's return consistently, it's something that, you know, we like. It's very good for shareholders. You know, we're managing more assets. We're not increasing our base fees. So it's attractive, you know, yield and return for shareholders on a cost-efficient basis. So we're going to look to potentially upsize this JV, and who knows, maybe we'll do other JVs over time. Got it. Thank you.
spk03: And moving on to Mickey Schlein with Lattenberg.
spk04: Hi, Art and Rick. Art, just to follow up on the JV, you've already funded your commitments to the capital structure of the JV. Pantheon still has some unfunded commitment. This target of $1.1 billion, does that assume Pantheon finishes funding their commitment? And what's stopping that from occurring?
spk00: Yeah, you know, it's a good question, and I recommend it off the top. I think we've all funded. If we haven't funded, we're going to be all funding shortly. Right now it's a 60-40 split between PNNT and Pantheon. So we're a quarter or max two quarters away of capping out to that billion one. And then the question is, is that where we stand, or do we upsize, do we do another JV? So all options are on the table. Clearly, we like the structure. Pantheon's a terrific partner, by the way, and we're optimistic that we can do more over time.
spk04: So, Art, as that JV grows, how are you going to manage the non-qualified asset bucket, which is already at 22%? Yeah, so we're constantly watching the 30% bucket.
spk00: you may see that at quarter end, we've been purchasing T-bills on the balance sheet of P&NT, which is a qualifying assets, which can help expand the 30% bucket.
spk04: Okay. I appreciate that. And the leverage at the JV is running around two times. Is that where you want to see it? That's counting the notes to the members as debt. Is that about where you want it to be?
spk00: You know, notes to the members, it's all part of the junior capital. So we're kind of looking at two to one, $2 of external debt to $1 of junior capital, which would include the subordinated notes that we in Pantheon own along with the equity. So to us, that's junior capital. We leverage that, you know, two to one or so.
spk04: Two to one. Okay. That's it for me this afternoon. Thanks, Art.
spk02: Thanks, Mickey.
spk03: And the next question will come from Mark Hughes with Truist.
spk05: Yeah, thank you. I think you've addressed a lot of this. I was going to just ask about the sustainability of returns in the JV. You talked about high teens here recently. Is that something that's sustainable with that structure, just assuming kind of reasonable returns in the underlying investments?
spk00: Yeah, we believe it is. Obviously, if rates come down, you know, if and when rates come down, you know, yields will, these are floating rate assets, of course, yields will come down. We do finance the JV with floating rate liabilities, either credit facilities or floating rate securitization CLO financing. So it's matched, albeit, you know, when rates are higher, you get a higher ROE. And then, of course, it's about credit performance. And can we continue to have very strong credit performance? I think we can. You know, the portfolio as a senior portfolio that we do here is well-constructed, conservatively underwritten. You know, I think we've been sharing with you that the senior loans we're doing today are kind of, you know, 4.3 times debt to EBITDA was last quarter, interest coverage 2.1 times, and a loan to value of about 40%. So that's kind of what's populating that joint venture. And then we leverage that with the floating rate credit facilities and the floating rate securitization. So we're optimistic, although if rates come down, it may be hard to retain that. And, of course, we've got to keep underwriting credit well and try to minimize the non-accruals.
spk02: Appreciate it. Thank you. Thank you.
spk03: And we'll take a question from Casey Alexander with Compass Point. Hi, good afternoon. Thanks for taking my questions, Art. I'm just curious, in the schedule of investments, Block is listed as a sub-debt position. So I'm just kind of curious why you guys, who's ahead of you, and why would it be you guys who is making the decision to put management in?
spk00: Yeah, so great question. So this is a specialty finance company. Regions Bank is the senior lender. We are a mezzanine lender, subordinated debt. As part of the restructuring, we're converting some of the mezzanine debt to equity, and we're doing some additional mezzanine debt, which is junior to Regions Bank. So this was a non-sponsored deal. So it was a founder that was running the company. And when the company needed extra liquidity, We're the ones who provided the liquidity, and between the liquidity provided and the conversion of debt to equity, we're in a majority equity position.
spk03: Okay, great. That's excellent color. Thank you. Just as a matter of course, is there any FLOC or Walker Edison that is also in the JV?
spk00: I think, no, actually, no. There's no Walker Edison in the JV or FLOC.
spk03: Okay, great. And lastly, I think you mentioned it, but I think I whiffed it. What was the company that came off non-accrual in the quarter?
spk00: Yeah, the company historically was called MailSouth. Its name changed to MSpark. It's been marked at zero for the last few quarters. It got sold, and we realized that zero, unfortunately. But it's now off the SOIB because the company got sold.
spk03: All right, great. Well, sorry to hear that result, but thanks for taking my questions. I appreciate it. Thank you. And moving on to Kyle Joseph with Jefferies.
spk08: Hey, good morning. Thanks for taking my questions. Apologies if I missed this, but just wanted to make a defense for competition and spreads. It looks like your yields for the quarter were fairly stable. Just give us a sense of, you know, what – base rates versus spreads there, and it looked like the yields on new investments were a little lower, but just kind of been hearing kind of mixed messages about banks either exiting or entering the space and just kind of what you're seeing in terms of competition.
spk00: Yeah, it's a good question, Kyle, and we did not cover that earlier. Spreads have contracted about 50 basis points over the last six to nine months in the core middle market, which is where we focus under 50 of EBITDA and that's just what the market's been. The M&A flow has been a little light. We've been busy, as you can tell. A lot of our busyness comes from both new platforms and existing companies, but spreads have tightened a bit. Average 550 over the risk-free rate in our space. That along with what we think are attractive credit statistics like 4.3 times debt to EBITDA, interest coverage of 2.1 times, a loan to value of 40%. So we still think those credit stats along with a call it a 550 over risk-free rate averages is very attractive, you know, very attractive risk reward. Unclear what happens between now and your end. We are optimistic. We believe there's going to be, you know, a lot of activity between now and your end, a lot of deal flow. And there may be a scenario where supply demand widens, spreads again. No guarantees, but you can certainly see that if a lot of supply hits the market, which we think is a possibility, spreads may widen again. But either way, most important for us is we are credit-oriented. We're focused on credit, and we're okay taking a little lower yield if the credit is well underwritten.
spk02: Great. Thanks for taking my question. Thank you.
spk03: And that does conclude the question-answer session. I'll now turn the conference back over to Mr. Art Pinn.
spk00: Thanks, everybody, for participating. We really appreciate it. Next time, we'll be doing the call in early August for the June 30th quarter. In the meantime, wishing everybody a terrific spring and summer. Speak soon.
spk03: Thank you. That does conclude today's conference. We do thank you for your participation. Have an excellent day.
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