PennantPark Investment Corporation

Good afternoon and welcome to the Pennup Park 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 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 1 on your telephone keypad. If you'd like to withdraw your question, press star 2 on your telephone keypad. It is now my pleasure to turn the call over to Mr. Art Penn, Chairman and Chief Executive Officer of Pennup Park Investment Corporation. Mr. Penn, you may begin your conference.

Good afternoon, everyone. I'd like to

welcome you to Pennup Park Investment Corporation's second fiscal quarter 2025 earnings conference call. I'm joined today by Rick Alordo, 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. Please note that this call is the property of Pennup Park Investment Corporation and that 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. Today's conference call may also include forward-looking statements and projections, and we ask that you refer to our most recent filings with the SEC for important factors that could cause actual results to differ materially from these projections. 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 pennuppark.com or call us at -905-1000. At this time, I'd like to turn the call back to our Chairman and Chief of Sec. of Officer Art Penn.

Thanks, Rick. I'm going to spend a few minutes and comment on the current market environment for private middle market credit, how we fared in the quarter ended March 31st, our dividend coverage and spillover income balance, and how the portfolio is positioned for upcoming quarters. Rick will provide a detailed review of the financials and then we'll open it up for Q&A. With regard to the current market environment, despite continued volatility in the broader markets, we had a solid quarter, particularly given the seasonally slower start to the fiscal year. Our platform continues to prove its strength, enabling us to support our existing portfolio companies and private equity borrowers with strategic capital solutions to help grow their businesses. Approximately 80% of our originations came from existing borrowers, while 20% were new platform investments, each underwritten with attractive credit statistics and yields. Our ability to remain active and disciplined during uncertain periods reinforces the value of our longstanding relationships and the breadth of our origination capabilities. Looking ahead, we expect originations to remain concentrated among existing portfolio companies with select opportunities from high quality new platforms. In this evolving environment, pricing will likely increase and leverage will moderate as buyers and lenders adjust to a new risk framework. We believe the strongest assets, those with demonstrated growth and tariff resilience, will still command premium valuations and attract sponsor interest. As always, we will remain rigorous in our underwriting and highly selective in pursuing new investments. Throughout the past year, we have reduced leverage and strengthened our balance sheet. PNNT is positioned to take advantage of current market opportunities. As is typically the case, market volatility creates opportunities, and this upcoming vintage of loans is shaping up to be particularly attractive. We continue to see solid investments in the core middle market. During the quarter, for investments in new portfolio companies, the weighted average debt to EBITDA was 3.9 times, the weighted average interest coverage was 2.3 times, and the yield to maturity was 11.6%. In the core middle market, the market yield on first-lean term loans appears to have stabilized in the SOFR Plus 500 to 550 range for high-quality assets. As the credit statistics just highlighted indicate, we continue to believe that the current vintage of core middle market directly originated loans is excellent, and the core middle market leverages lower and spreads are higher than in the upper middle market. We continue to get meaningful covenant protection while the upper middle market is primarily characterized as covenant light. With regard to how the current portfolio is positioned, over the past several weeks, our team has been closely evaluating the potential impact of tariffs across the portfolio, and we're pleased to report that exposure is limited. As of March 31st, the portfolio's weighted average leverage ratio through our debt security was 4.7 times, and the portfolio's weighted average interest coverage ratio was 2.1 times. These attractive credit statistics are a testament to our selectivity, conservative orientation, and our focus on the core middle market. We continue to believe that our focus on this core middle market provides the company with attractive investment opportunities where we provide important strategic capital to our borrowers. 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. They are business services, consumer, government services and defense, health care, and software technology. These sectors have been recession resilient, tend to generate strong free cash flow, and have limited direct impact to the recent tariff increases and uncertainty. The core middle market, companies with 10 to 50 million EBITDA, is below the threshold and does not compete with the broadly syndicated loan 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 and 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. Credit quality of the portfolios remains strong. We have three non-accruals as of March 31st, which represented .6% of the portfolio at cost and .4% at market value. Two new investments were added and one prior investment was removed as a return to accrual status. Subsequent quarter end, one non-accrual investment was put back on accrual and pro forma for this subsequent event, PNNT's non-accruals represent only .4% of the portfolio at cost and .3% at market value. Since inception nearly 18 years ago, PNNT has invested $8.8 billion at an average yield of .3% and has experienced a loss ratio and invested capital of approximately 20 basis points annually. This strong track record includes investments of primarily subordinated debt instruments made prior to the global financial crisis, legacy energy investments, and recently the pandemic. As a provider of strategic capital who fuels the growth of our portfolio companies, in many cases we participated in the upside of the company by making an equity call investment. Our returns on these equity call investments have been excellent over time. Overall for our platform from inception through March 31st, we have invested over $566 million in equity call investments and have generated an IRR of 26% and a multiple uninvested capital of two times. Moving on to how we fared in the quarter ended March 31st, coordinate investment income was 18 cents per share compared to total distributions of 24 cents per share. We've previously communicated our plan to rotate out of our larger equity positions and redeploy that capital into interest paying debt investments which will drive an increase in our coordinate investment income. Unfortunately, the current market environment has delayed that program. As we continue to pursue our equity rotation plan, in the near term we are comfortable maintaining our current dividend level as the company has a significant balance of spillover income which the fund is required to distribute. PNNT has $58 million or 88 cents per share of distributed spillover income and we will use the spillover income to cover any shortfall and coordinate investment income versus the dividend while we position ourselves for equity rotation in the future. As of March 31st, our portfolio totaled $1.2 billion and during the quarter we continued to originate attractive investment opportunities and invested $177 million and three new and 52 existing portfolio companies at a weighted average yield of 10.7%. Our PSLF joint venture portfolio continues to grow and be a significant contributor to our core NII. At March 31st, the JV portfolio grew to $1.4 billion and during the quarter the JV invested $170 million at a weighted average yield of .1% including $154 million of purchases from PNNT. Over the last 12 months, PNNT's average NII return on invested capital in the JV was 18.3%. Our JV has the capacity to increase its portfolio to $1.6 billion and we expect that with additional growth in the JV portfolio, the JV investment will enhance PNNT's earnings momentum in future quarters. From an outlook perspective, our experienced and talented team and our wide origination fund was producing active deal flow. Our continued focus remains on capital preservation and on 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 we 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. For the quarter ended March 31st, GAAP and Core Net Investment Income was 18 cents per share. Operating expenses for the quarter were as follows. Interest and credit facility expenses were $10.6 million. Base management and incentive fees were $6.4 million. General and administrative expenses were $1.6 million. And provision for excise taxes were $0.6 million. For the quarter ended March 31st, net realized and unrealized change on investments and debt including provision for taxes was a loss of $2 million. As of March 31st, our GAAP and adjusted NAV were $7.48 per share which is down .2% from $7.57 per share in the prior quarter. As of March 31st, our debt to equity ratio was 1.28 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 158 companies across 37 different industries. The weighted average yield on our debt investments was 12%. We had three non-accruals which represent .6% of the portfolio at cost and .4% at market value. Subsequent quarter end, one non-accrual investment was put back on accrual and pro forma for this subsequent event, our non-accruals represented only .4% of the portfolio at cost and .3% at market value. The portfolio is comprised of 46% first lien secured debt, 2% second lien secured debt, 13% subordinated notes to PSLF, 7% other subordinated debt, 7% equity in PSLF, and 25% in other preferred and common equity. 91% of the debt portfolio is floating rate. The debt EBITDA on the portfolio is 4.7 times and interest coverage is 2.1 times. Now let me turn the call back to Art.

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.

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 builtry to our equipment. Again, press star 1 to ask a question. We'll take our first question from Maxwell Fritzscher with Truist.

Good morning. Thank you. I'm on for more cues. How would you characterize the current pipeline for new investments? And then did you see any deals that were in last quarter's pipeline that got scrapped or possibly pushed out?

Thanks Maxwell. It's a good question. Certainly, if you had M&A deals in process prior to Liberation Day, in some cases those deals got delayed. If they were impacted directly by tariffs, they certainly got delayed and more kind of delayed further. If they were non-tariff related, they got somewhat delayed. If it was tariff related, it probably got put on ice for a while. Since Liberation Day, April 1st, we've seen modest activity, but in the last week or two, as things seemed to be calming down, we seemed to be getting more of a pipeline of activity for the rest of the year. And you would imagine that M&A flows, which are kind of the lifeblood of at least new platforms, those will be tied to the ratio of certainty or uncertainty that you see in the market. As we said, with over 100 names in our existing portfolio, 190 names across our platform, there's about 160 names here in P&NT, about 80% of what we're doing is putting money to work behind existing portfolio companies where they have an out on acquisition, delayed to raw term loan. They have kind of, you know, their normal activities in terms of beefing up their existing operations. So we are somewhat active with the existing portfolio. That's the benefit of incumbency and the 158 names we have today in P&NT. And we're starting to see with the uncertainty level coming down, we're starting to see some new platforms come into our platform.

Understood. Thank you. And then, the lower level of new deals in the quarter versus the level of incumbency, how much of that was due to stricter underwriting versus just less deals coming across your desk?

Well, it's almost like it's a binary, which is if it's tariff impacted, you just don't touch it at this point until you kind of see what's going on. The good news for us is the vast majority of what we do, as we said, it's not tariff impacted, it's limited, whether it be healthcare or government services or business services, you know, the types of investments, the types of industries that we are focused on where we have real domain expectations and expertise is really not related to much tariff risk at all. So there you're just talking about M&A levels and in a world of general uncertainty, you know, how much M&A gets done, can buyers and sellers agree to a multiple if, you know, there's a greater recession risk, you know, out there, you know, can people agree? So hopefully things kind of get more certain, things calm down and hopefully, you know, we'll see M&A flows resume. We came into 2025 thinking it would be very active 2025, you know, was set up to be a really, you know, we're very active in 2024 was getting set up to be even a more active 2025. That got delayed and we're hopeful that as the overall market settles down, we can start to see more M&A.

Very good. Thank you.

Another reminder to ask a question on today's call, that is star one on your telephone keypad. We'll go next to Melissa Waddell with JP Morgan.

Thanks for taking my question today. I wanted to touch first on sort of run rate earnings. As we think about the delayed typically delayed impact of base rate changes in the in the BBC's panel, should we think about the March quarter as reflecting like the full amount of decrease in base rate? Of course, plus or minus what was happening with non accrual.

Yeah, look, I think, you know, the way you've seen you have base rates, and then of course, you have spread, right, we've we've seen since Liberation Day, spread reduction has gone away. In fact, we've seen spread increase, call it 25 to 50 basis points on average, you've seen spread increase since the beginning of April. Base rates, you know, you know, a lot smarter people who focus on that all day long are, you know, making their assessments about, you know, base rates and what the Fed's going to do when the Fed's going to do something, but spread has thankfully started to widen. So, look, the important thing for us here is getting the M&A flow going that will also hopefully help us rotate some some equity investment that we currently have that should be on the launchpad to exit in terms of what can really move the needle here at PNNT. It's that it's kind of M&A flowing and using that to drive equity rotation, which we've been waiting very long for too long. This was the year 2025 was the year we were going to finally get it until kind of the events of the last month or two, but we're hopeful that, you know, and you could see it in some of the fair market values, we're hopeful that some of these equity positions, you know, can get can get rotated out as we as we march forward here in 2025.

Yep, noted. Follow-up question, you mentioned pretty limited tariff exposure across the portfolio, but given some of the industry sector concentrations and industry concentrations, can you tell us how you're thinking about sort of doge exposure or government reimbursement exposure, given some of the cuts that have been proposed? Thank you.

Yeah, it's a good question. Government contracting and defense is a big sector for us. You know, we've had both internal and external experts take a look at our portfolio and line it up against the priorities. First, on a macro basis, the defense budget proposal coming through Congress shows a substantial increase to about $2 trillion of defense spending overall, so that's increased, you know, and as taxpayers, we of course all want our tax dollars to be used efficiently. If you look at the key priorities of investment within the Defense Department and government contracting, they've, the government's laid out things that they really want to focus on, like cybersecurity, like satellites, like information technology upgrades. That's all in the public domain, and if you line up our portfolio, we are very, thankfully, and maybe smartly, I think smartly, very well aligned to those areas of increased focus of where spending is. If you look at it to date, it's been mostly the civilian areas of government, like the Department of Education, like USAID, and other civilian areas that have been the primary focus on DOGE. And we, of course, need to look at defense as well and say, are we backing companies that are adding a lot of value? Are we backing companies where the focus of the Defense Department Administration is leaning in? And thankfully, we've done a lot of internal and external work with third parties, we're very well positioned with where government is leaning in and in areas of mostly technology-related investments to upgrade military technology drones, as an example, we're very well aligned to that.

I appreciate that, Art. Thanks for the detail there. Follow-up question, same thing, but health care, is there any exposure there? Thank you.

Yeah, health care is a big focus of ours, and I know some of our peers also have big exposure to health care, and some of our peers have had some stumbles in health care, not that we're perfect, but generally, when we look at our health care portfolio versus our peers, I think the biggest difference is we just don't put as much leverage on these companies, right? So, you know, there's always challenges, there's always reimbursement risk, it's a people business, so, and how, what's going on with the doctors, etc. We just have a lower levered portfolio, so we've, you know, we've taken less risk, and it's played out, health care so far has performed me very well for us, and, you know, when you have a portfolio that's leveraged it, you know, four times going in, and maybe four and a half times over its life, by definition, you're taking less risk than those that would lever these assets five times, six times, whatever. So, to date, we've had very good experience with health care, it's because we're focused on taking less risk.

Thank you. We'll go back to the lead sheet with Raymond James.

Hi, thanks for the question. With all the current macro uncertainty, is there any shift in terms of the mix of the current pipeline since April between incumbent and new borrowers?

It's a great question, you know, look, our five sectors are generally not really tariff impacted, and since the majority, 80 percent, of what we're doing is existing borrowers, it's going to be the same sectors. Certainly, anything that comes in the door that's tariff impacted is going to be, you know, probably not going to be looked at very strenuously at this point until we we get more certainty on the tariff side of it. So, it's going to be the health care, the government services, technology, business services, and areas that are not really tariff impacted. And I'd say, to take it one step further, clearly the recession risk has gone up, you know, we think. We don't know if we're not predicting a recession, we don't know if there's going to be a recession back the year, but as lenders, we always have to assume there's a recession sometime in the life of these loans. These loans are five to seven year maturities. It will be prudent for us to model in our underwriting memos a recession at some point during the life of the loan. In times like this, we certainly run the downside cases of a recession sometime in year one, just to see how these companies might perform in a downside case. You know, what kind of, what are their cash flows? What tools do they have between CapEx and working capital? What's their fixed cost versus their variable costs? How would they maneuver in a recessionary case? And again, typically, we're underwriting these companies at four times cash flow or so going in at a 40, 50 percent loan value. So generally, they're structured to be able to weather a recession early in the life of the loan. If you look at, go roll the tape back to COVID, for instance, as a shock. COVID wasn't really a recession, it was more of a shock, but just to kind of take a look at that, you know, we have the benefit of these quarterly maintenance tests that you get in the core middle market. Most of the upper market is covenant light because it has to compete with the broadly syndicated loan market. We've got quarterly maintenance tests. If you go back to COVID, remember that the economy was shut down in March of 2020, which meant sometime in the next three months, our borrowers needed to meet a covenant. So some had covenants in April, some had covenants in May, some had covenants in June. And with an economy that was shut down, there was a lot of intense discussions going on during that time period. And we had 150 companies, 115 companies in our platform at that point in time. 15 of those companies actually needed liquidity. There was a need sometime in the three months after the shutdown of COVID. And in all 15 of those cases, the sponsors offered to inject additional liquidity into these companies to solve the problem, which we thought was a really good testament to the benefit of covenants that were maintenance tests, also having monthly financial statements where they have to give us a financial statement every month. And really a testament to the underwriting going in and a testament to the covenants and information rights we get in the core middle market. So that was a nice test for us. We came through it in really good shape. We never assume we know perfectly if there's a recession coming, but we assume there will be one in the life of most of our loans and in the new Just for a downside case, we're modeling in a recession in year one, and we wouldn't do a deal today unless we felt it was structured in such a strong way and had such good cash flow that we felt it could weather a recession early on. We hope there's not a recession. We hope the economy flies through. We hope our companies pay us back and more. But as lenders, we have to prepare for that downside. I know that was a long-winded answer, Haley, but I thought it was worthwhile.

No, that was helpful. Thanks for the caller.

And

at this time, there are no

further questions. I'll turn the call back to Art for any additional or closing remarks.

Thank you everybody for participating in the PNNC call today. We look forward to speaking to you next in early August after our next quarterly earnings release. Have a good day.

This concludes today's conference. We thank you for your participation.