PennantPark Investment Corporation

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

Good afternoon, everyone, and thank you for joining Penn and Park Investment Corporation's fourth fiscal quarter 2025 earnings 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. 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 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 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 then we'll open up the call for Q&A. For the quarter ended September 30th, Core net investment income was 15 cents per share compared to total distributions of 24 cents 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. 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. P&NT has $48 million or 73 cents 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. 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 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. In the core middle market, the pricing on high quality first lien loans is several plus 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. 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. For new platform investments made during the quarter, the median debt to EBITDA was 4.3 times, interest coverage was 2.5 times, 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 percent of the portfolio at cost and 0.1 percent 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 Pennapark 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. 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 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 a broadly syndicated low 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, and substantial equity cushions to protect our capital, 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. 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 and an average yield of 11.2% while maintaining a loss ratio and 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, he 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 September 30th, we've invested over $596 million in equity co-investments and have generated an IRR of 25% and a multiple on invested capital of two times. As of September 30th, 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 September 30th, the JV portfolio totaled $1.3 billion, and over the last 12 months, P&NT's average NII yield on invested capital and 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 P&NT's earnings momentum in future quarters. From an outlook perspective, our experienced and talented team and our wide origination funnel is producing active deal flow. We remain steadfast in our commitment to capital preservation and 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.

Thank you, Art. For the quarter ended September 30th, gap net investment income and core net investment income were both 15 cents 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 September 30th, net realized and unrealized change on investments and debt, including provision for taxes, was a loss of $10.8 million. As of September 30th, our NAB 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. The PSLF JV 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 1.3 times, which is in line with its target ratio. 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. 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 4.5 times and interest coverage is two times. Now let me turn the call back to Art.

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 Penn and Park. 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 signal to reach our equipment.

Again, press star 1 to ask a question.

We'll take our first question from Brian McKenna with Citizens.

Great, thanks. 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. So At the current quarterly run rate of 15 cents, you know, that implies about 80 cents of annual NII before any changes in base rates and credit quality. 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?

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. So you've got two things going on. One's the equity rotation and the paying out of the spillover. And 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.

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 the last quarter or two? 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.

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 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.

All right. I'll leave it there. Thanks so much.

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

Hi, guys. Just on that topic with equity rotation, we look at something like Flock, for example. It's now... marked above the original cost before you had to restructure it. So a business like that 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 you are a little bit more in front. In the near term, or do you think it's Are there kinds of businesses, maybe the ones that are still, you know, struggling a little bit, are those the ones that are more likely to turn over in the near term? What do you think?

Yeah, it's, you know, there's some that we have more control over, like Flock. You know, Flock happens to be in the business of busted credit card and busted receivables, consumer receivables. So we think that's a really interesting area. 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, you know, there are, you know, control positions. Flock is one. 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? 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. So the answer is both. You know, 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.

Got it. Thank you. On the other part, I mean, potentially, um transacting and selling some assets to um people i mean what what it it's you know you said you're reviewing it right what what are the hurdles that that uh 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 fcc would actually approve that because i've seen some bdcs try to do that in the past and the sec just say no

Yeah, no, I think you may have misheard. We're evaluating selling assets to the joint venture. Yeah, yeah. So there, you know, what we said is, and we're aware that 40 Act to 40 Act company is something that, you know, has a high degree of difficulty. This is just the normal rotation of assets from the BDC P&NT to the PSLFJV. Leverage was a little high at the PNNT level at quarter end, 1.6. We generally like to wait the quarter end to get the freshest third-party valuation marks on the names, and then PSLF is evaluating the purchase of 120 to 140 million of those assets, which would move from PNNT to PSLF, bringing the PNNT leverage ratio back into line of our target of 1.25 to 1.3 times that equity of P&NT.

Got it, got it, got it. Thank you. Yeah, I missed the, yeah. On that, I mean, 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. But there's also, you know, the spillover, which you've got to just view one way or the other. So 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. But any of those things which overdistribute earnings tend to drive leverage up. So how comfortable are you with the current dividend plan and the other initiatives? You can get down to that target leverage and stay there.

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 go with PSLF, which has been highly accretive to PNNT. So you've got multiple things going on. You've got the reduction of the spillover You know, over time, you've got the equity rotation and you've got the leverage ratio at P&NT. So those are the constraints. You know, we're doing our best. Some of the stuff we control, some of it we can't. You know, 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, you know, reasonable and comfortable. If you have suggestions, Robert, we're all ears, but these are the constraints we're working with.

Yeah, got it.

Thank you. Thank you.

We'll take our next question from Melissa Waddell with JP Morgan.

Good afternoon. 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. For example, maybe paydowns came early and fundings came later. Was there anything like that we should be thinking about?

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

No, same. Nothing jumps out in terms of timing of Okay.

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. In terms of sort of banking any spillover income, do you look at that whole 73 cents per share as something that could be used, or are you looking to retain some level of spillover income?

Yeah. Look, there's certainly a level of spillover income that, you know, we certainly consider and should consider retaining. For instance, if you look at PFLT, the sister BDC, I think there's like 25 or 30 cents of ongoing spillover, that kind of thing. So that might be a base level once you get down to that where, you know, you're comfortable that you're not required to pay it out, something like that.

Okay, thanks. We'll go next to Aaron Saigonovich with Truist Securities.

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? And Maybe just if there's any particular industries that you're seeing more activity in.

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. It's 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. 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. Good news about that is we're on top of companies. 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 you know, financing additional capital into companies that are performing well. And then about the other half is kind of our typical, you know, new deal, new platform, mid-fours leverage, over two times interest coverage, 40%, 50% loan-to-value, so for plus 475 to 525 in this environment type of loan.

Okay. Thank you. Appreciate it. Thank you. We'll go next to Christopher Nolan with Landenberg Thalman.

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?

Well, certainly, it's a great question. You know, 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. So dividend recaps for us as a lender are something that have a high bar. You know, as a new lender, we are always – you know, cautious around use of proceeds and 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. So 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. you know, sometimes it just happens. You know, someone comes, takes us out to give an aggressive loan to a borrower. 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. And we certainly experienced that in our other BDC.

And Art, how would you characterize the trends in the private equity space that you operate in? Because, you know, the whole time's for the private equity in general has been quite extended. And, you know, are we starting to see a break in that logjam at all?

Yeah. So that's, look, that's what we think about when we talk about equity rotation. Many of our equity co-investors are, you know, kind of, you know, experiencing that. We co-invested with a private equity sponsor. It was coming into 2025. It was feeling pretty good. April 1st 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 kind of you know, finally coming together now that there's been some stability in the market to cut a deal. For a while, their sellers 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, you know, if as interest rates come down, SOFR comes down, borrowing costs come down, you know, how that could catalyze more M&A, more refinancings, et cetera. 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. But without any major market turbulence, we're more optimistic that we'll get some reasonable rotation.

Got it. And one for Rick. Rick, just to rephrase, I think, Melissa's question earlier, given that revenues seem to go down while investment assets went up and there's a small decline in average yield. Were there timing issues involved in terms of closing deals late in the quarter?

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

Great. That's it for me.

Thanks, guys. That's a good point.

You know, there's been some financing activity at the joint venture in the securitization side that kind of, you know, hit expenses to some extent, you know, during the quarter.

So.

We'll go next to Brian McKenna with Citizens.

Great. Thanks for the follow-up. Art, 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 Pennant Park through a number of operating and macro environments, including the GFC, COVID, et cetera. 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. 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?

It's a great question, 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. And in the lending business, the default just means that you're coming to the table and negotiating the correct capital structure for the company going forward. 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 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. So you know, kind of just understanding how loans work and what being a lender is. And, you know, 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. So it certainly can happen and it has happened, but, you know, there's a lot of cushion that's, you know, 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. And 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. And we had very constructive conversations with our borrowers. And out of that 120 companies, about 15 actually needed liquidity. They needed cash. And in all 15 of those cases, the private equity sponsors offered to put money in to solve the liquidity problem. And that was in a scenario where the economy was shut down, you know, a very severe environment. So, you know, the only other observation I had going all the way back to the GFC is, you know, when, you know, people's fears get up where they're reading articles and, You know, people are starting to get fearful. The antidote to that for us was bring people in and go line by line through the portfolio. And here with the BDCs, these are the SOIs, the statements of investments, are all public information. Let's, you know, 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, you know, the debt to equity ratio, loan to value. name by name by name. 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 is four and a half times debt to EBITDA, 40 to 50% loan to value, interest coverage over two times. You go name by name, and after a period of time, you realize these are pretty solid loan books, not just ours, but others. And the other thing you realize is, you know, we and our peers are all over these portfolios. You know, we're, you know, we are all over these names. Every month we get in the core middle market, every month we get financial statements from our underlying portfolio companies. So if something starts to stumble, we are on top of it, you know, every month and every quarter they have a financial covenant to meet. So You know, I think the quality of these portfolios is high, 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 would calm a lot of the issues that people seem to be having right now. I don't know if that's helpful.

That's terrific. Thanks so much, Art.

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

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.

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