PennantPark Investment Corporation

Good afternoon and welcome to the Penn Up Park Investment Corporation's second 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'd 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 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 Pennant Park Investment Corporation. Mr. Penn, you may begin your conference.

Good afternoon, everyone, and thank you for joining Pennant Park Investment Corporation's second fiscal quarter 2026 earnings call. I'm joined today by Jose Briones, Senior Partner at Pennant Park. Rick Elordo, our CFO, is unable to be with us today due to a prior commitment. Jose, 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. And 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 pennantpark.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, Jose. I'll begin with an overview of our second quarter results, including a review of the portfolio. I'll then share our perspective on the current market environment and how we believe PNNT is positioned going forward. Jose 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 March 31st, core NII was 14 cents per share. As of March 31st, our portfolio totaled $1.2 billion, and during the quarter, we continued to originate attractive investment opportunities and invested a total of $108 million, including six new platform investments with a median debt to EBITDA of three times, interest coverage of 3.4 times, and loan to value of only 28 percent. Our portfolio remains conservatively positioned with median leverage of 4.7 times, median interest coverage of two times, and median loan-to-value of 45%. We ended the quarter with four non-accrual investments, representing 2.7% of the portfolio at cost and 1.3% at market value. Our PSLF joint venture portfolio continues to be a significant contributor to our core NII. At March 31st, the JV portfolio totaled $1.3 billion, and over the last 12 months, P&NT's average NII yield on invested capital in the JV was 15.8 percent. The JV has the capacity to increase its portfolio to $1.5 billion, and we expect that with this additional growth, the JV investment will enhance P&NT's earnings momentum into the future. Turning to software exposure, which has been an area of recent market focus, our exposure remains limited. at approximately 4.6% of the portfolio and is structured consistently with our core middle market strategy. These investments are primarily cash pay, covenant protected loans with moderate leverage and shorter durations. Importantly, they are concentrated in mission critical enterprise software serving regulated industries such as defense, healthcare, and financial institutions. We believe this represents a meaningful point of differentiation relative to our peers. Turning to the market environment, we believe that the current environment favors lenders with strong private equity sponsor relationships and disciplined underwriting, areas where we have a clear competitive advantage. In the core middle market, the pricing on high-quality first lien term loans remains attractive, typically ranging from SOFR plus 500 to 550 basis points with leverage of approximately 4.5 times EBITDA. Importantly, we continue to get meaningful covenant protections in contrast to the covenant light structures prevalent in the upper middle market. M&A activity has increased over the past six to nine months, although overall conditions remain uneven. Private equity sponsors remain active, and we're seeing a growing pipeline of attractive opportunities across both new originations and add-on investments. However, activity levels remain below the unusually strong levels observed in 2024 as the market transitions toward a more normalized backdrop. We expect increased transaction activity to drive repayments across the portfolio, including opportunities to monetize equity co-investments, and we'll redeploy that capital into income generating investments. Notably, we expect a meaningful realization from our equity co-investment in Echelon this quarter. Echelon is a leading defense technology company sponsored by Sage Wind Capital, our long-term sponsor relationship. Echelon announced that it is agreed to be acquired by Shield AI, another cutting-edge defense technology company. Upon closing, we expect our $1.1 million equity co-investment to generate approximately $16 million in total proceeds. Proceeds will consist of $14 million of cash and $2 million of value in Shield AI stock. This represents nearly 15 times multiple on invested capital and demonstrates the value of our equity co-investment program. Given the current geopolitical environment and the echelon news, it's important to highlight that approximately 12% of our portfolio is exposed to government services and defense. Now I'd like to speak about why we 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 core middle market, companies with 10 to 50 million of 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 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. A key differentiator versus the upper middle market where covenant light structures are more common. Since our inception nearly 19 years ago, PNNT has invested $9.3 billion at an average yield of 11.2%, 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 who 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 $618 million in equity co-investments and have generated an IRR of 25% and 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 value through first lien senior secured loans, 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 Jose for a more detailed review of our financial results.

Thank you, Art. For the quarter ended March 31st, both GAAP net investment income and core net investment income were 14 cents per share. Operating expenses for the quarter were as follows. Interest and credit facility expenses were 8.1 million. Base management and incentive fees were 5.6 million. General administrative expenses were 1.5 million. And provision for excise taxes were 0.5 million. For the quarter ended March 31st, net realized and unrealized change on investments and debt including provision for taxes with a loss of $11.7 million. As of March 31st, our NAV was $6.73 per share, which is down 3.9% from $7 per share in the prior quarter. At March 31st, our debt-to-equity ratio was 1.35 times, and our capital structure was diversified across multiple funding sources, including both secured and unsecured debt. In January, we raised $75 million of new unsecured debt which was used to repay our unsecured debt that matured on May 1st. As of March 31st, our key portfolio statistics were as follows. Our portfolio remains highly diversified with 160 companies across 38 different industries. The weighted average yield on our debt investment was 10.9%. The portfolio is comprised of 48% first lien senior secured debt, 2% second lien secured debt, 14% supported notes to PSLF, 7% of other subordinate debt, 5% equity in PSLF, and 24% in other preferred and common equity co-investments. 88% of our debt portfolio's floating rate. Debt to EBITDA on the portfolio is 4.7 times, and interest coverage is 2.0 times. With that, I'll turn the call back to Art for closing remarks.

Thanks, Jose. 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'd 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 one to ask a question. We'll take our first question from Robert Dodd with Raymond James.

Hi, guys. A question about the market outlook, if I could, in kind of three segments. Overall... You know, you gave some color, obviously, you know, conditions are still below what they were last year, et cetera. I mean, is there any, you know, meaningful scenario where that really meaningfully accelerates as we go through the year, given the level of uncertainty? And then within two subsectors there, like what are your thoughts on software right now? Because spreads are widening, but it's not an area you've typically done a lot of. On the other hand, an area where you have done a lot is government and contracting, et cetera, which you've just got a really nice game lining up. Do you expect the competitive dynamics to change in that segment of the market, given how stable and budget talk for defense, et cetera, is looking going forward? I mean, that's a lot of a question there. Sorry.

Thanks, Robert. I'll try to cover the market outlook in software, and I'll kick it over to Isaiah to talk about government services. Look, on M&A flows, we're certainly hopeful. We're seeing some green shoots or more than green shoots. It's just not as robust as it was. Certainly, you know, it takes a real kind of a more stable market to, we think, to see more volume. We hope there is. Last year, we had Liberation Day kind of. spike the punch bowl this year, you know, whether it's the war or, you know, some of the other issues. We're certainly hopeful that we'll see a more normalized environment. We're hearing that it will be, but we've heard that before. So the proof will be in the pudding, you know, Echelon and some other deals we're seeing, you know, are good indications that there is still deal flow. With regard to software, you know, we never really did much in software primarily because the leverage multiples were higher than we were comfortable with. You know, so the software that we do have, which is relatively small, it's kind of four or five times leverage. It's certainly not levered six, seven, eight times or levered against ARR. So even though, you know, so we're just still not seeing, you know, a market. And certainly with AI coming on, there's just probably too much. secular risk on the system. We're open-minded. We always want to learn, and maybe there will be opportunities in this reassessment of the technology stack. So we're open to it, but as always, we want to make sure leverage is reasonable, that we can get comfortable, that the companies have a strong moat, and that the companies have a real reason to exist long-term. So with that, Jose, you want to comment on government services defense?

Sure. Hey, Robert, great to hear from you. Look, government services is a sector that we've been involved for quite some time. It's a very nuanced space that we like where we have very long relationships with private equity sponsors that know that space really well. We think that's an area of growth and an area of opportunity for us. Shield AI's acquisition of Echelon by Shield AI is a great example of that. You know, to the market in general, the first quarter is just seasonally slow for our business, and then it usually picks up. With regards to the government services and government contracting, clearly, you know, given the conflict in the Middle East, you know, there's a lot of emphasis on that, and we're still seeing, you know, interesting opportunities in that part of the market. Another area that we do spend a lot of time with is healthcare and healthcare services, as you know, and that's an area that we do like, and we do see interesting opportunities. Pricing for the market generally has been in that silver 500 to 550. We haven't seen much change in that in the past couple of quarters. So our expectation, to Art's point earlier, is to continue to focus on the areas where we like and the areas where we have expertise in.

Got it. Thank you. One more, if I can. I mean, it seems like every quarter we're asking, like, oh, what's your exposure to or the risk from this? Is it with software? A year ago, to your point, it was tariffs, a lot of things. Now, I got to ask about oil and commodity prices. I mean, the uncertainty in the oil markets and the supply there, I don't think you have a ton of exposure anymore. But what's kind of the portfolio exposure if oil were to go meaningfully higher for a sustained period or supply issues for that matter. Right.

Yeah. So it's a good question. As you know, in our history, we did oil and gas and that was not that's why we don't do it today. Enough said there. I guess you could think of kind of, you know, other other areas that could impact. Could it impact the American consumer if gas prices are higher? For sure. And consumer is a sector of ours. Now, in most cases, we're doing consumer services. that we think are a little less discretionary, like HVAC, when your air conditioning breaks, you know, other services around the home. The consumer is a piece of the portfolio. It's not an overweight piece of the portfolio, but it is. So you can certainly, you know, think about all the, you know, all the, we don't do much in manufacturing, so kind of none of that plastics kind of manufacturing, paper packaging, we don't really have any exposure there. So I'd say it's really the American consumer, which, By the way, the American consumer is a big, big chunk of the overall economy. So the American consumer is weaker. That has a lot of, you know, other impacts that may happen. But I would say that's the closest thing we have to oil exposure.

Got it. Got it. Thank you. Thank you.

We'll go next to Aaron Syconovich with Truist Securities.

Thanks. So the echelon transaction, that's going to close in the second quarter, I think. Is that what you said? And then is the sale price consistent with where it was marked at 331?

Yes. We think it'll close in the next 60 days, and it's marked as fair value at the deal price.

Okay, I just wanted to clarify that. Any other equity positions that are in talks or anything you can identify that might potentially move over the next quarter or two?

Yeah, no, and these are less impactful. There's a company called Guild Garage, which was marked a fair value at 331, which has since exited. So there's an equity co-invest there. um which is which is uh you know a few million dollars um and we have others that are kind of in the wings nothing as impactful as echelon but you know getting some singles and doubles here and there uh you know should be should be helpful great thank you thank you we'll take our next question from rick shane with jp morgan

Hey guys, thanks for taking my question. Guess I'm glad that we're not revisiting the whole oil and gas thing. It seems like the last time we were talking, that was a big issue years ago. The question we've been asking everybody this quarter, and I'm curious, given your focus, is sort of where in the continuum we are in terms of pricing and more importantly, deal structure. And I took your comments to mean that you just don't ever see the sort of variance that we might see in the BSL market. And how should we think about this?

Well, look, I mean, you have the upper market where many of the large peers play above 50 of EBITDA. And that's been covenant-like for a while because those borrowers you know, have options in the broadly syndicated loan market. So that market also similarly as, you know, the companies there only report to those lenders every three months. So, and then they don't get co-invest, even if they wanted it and they may or may not want it, they don't get co-invest. And just kind of the deal decision-making is much tighter. You know, our prototypical deal is we're working on a company where a founder, a family, or an entrepreneur is selling to the middle market private equity sponsor, and the company does 10 or 20 million of EBITDA, and the game plan is to take that company and grow it and do add-on acquisitions and get it to 30, 40, 50, 60, so that it can then be sold or then financed in the upper market. So as a result, In our world, and our capital is strategic capital. It's there usually with the late draw term loan to help fuel the growth. So we become very much a strategic partner of that company. We become the strategic partner of that management team, strategic partner of the sponsor. And our loan is the fuel. So because we're the strategic partner, we have plenty of time to do our diligence. We really understand and we need to understand what we're lending to. We, of course, get maintenance covenants, quarterly tests that need to be met contractually. We get monthly financial statements. We have the option, in many cases, we take the option to co-invest in the equity because, of course, if we're helping to create the equity value with our loan, why wouldn't we help participate in an upside? And you see the benefit of that. The echelon's a excellent example you can see the benefit of having something in this portfolio or these portfolios that's got some lift that can that can offset um in the inevitable non-accruals you have we all have non-accruals there's no private credit manager that's perfect you try to develop a diversified book minimize non-accruals but you're going to have non-accruals so having some equity co-invest in these portfolios we found helpful to help fill in for some of those gaps. So we're operating in an entirely different world than the upper market. And, you know, it just doesn't make sense for the business model of those folks in the upper market to come down and spend their time on companies of this size, given the size of check. If you're managing 100 billion or 200 billion or whatever you're managing in private credit, it just doesn't make sense to be focused on this end of the world. And therefore, that's why you know, there's only a handful of real competitors that we have in this kind of below 50 million of EBITDA. It's a long-winded answer, Rick. I don't know if I answered your question, but please continue to ask if I didn't get to.

No, you did. And again, I think that helps on the asset side. Curious on the funding side, if there's anything that we should be thinking about here. You know, banks have been very reliable partners in the space, but you always do wonder about sort of selectivity of credit and curious if you're seeing any opportunity or any risk on the financing side.

Yeah, no, we having, having, it's a great question because having started our business right before the global financial crisis, we learned very early that, you know, lender transparency relationship with lenders, you know, is so key and they become our partners. So, We are always reaching out to our lenders and offering to bring them in and transparently go name by name. Interesting, you know, a month or two or three ago when the headlines about private credit started to come out, we proactively reached out to every one of our lenders. We said, come on in. We'd be happy to walk through, you know, loan by loan, what's going on with our portfolio. We feel, you know, really good about it. And I feel like we've underwritten a very solid book. And the vast majority of the lenders said to us, you know what? You don't have much software exposure. You're way down on our list of who we're going to come visit. We've got plenty of other people to go visit. So we're always doing that. We're always out with our lenders developing relationships. As you know, in PNNT, we have different types of debt capital. We have good old credit facilities. We have bonds. and we have securitizations that we use. They're all useful tools, and we have a diversified strategy of using all three.

Got it. Well, if there's any credit contraction on that side, you remain at the bottom of their list in terms of visits as well.

Yeah. Thanks, guys. Thanks, Rick.

We'll go next to Christopher Nolan with Leibenberg Thalmann.

Hey, Jose, do you know the reason for the drop in total interest income quarter over quarter?

Let me come back to you on that.

Let me come back to you on that.

No problem at all.

I'm sorry, Eric Leeds is here from our finance department. Eric, do you have anything you'd like to add on that?

Basically, the smaller average portfolio over the quarter, I believe, is close.

I mean, we ended up generating 14 cents.

I think consensus was 15 cents. But we're certainly happy to, you know, go into the detail with you, Chris, if you'd like.

No, no, that's okay. And in general, are you seeing a migration of portfolio companies from high-tax states to lower-tax states at all? You know, any thoughts?

Yeah. Yeah, no, no. We aren't, you know, we do have a very diversified portfolio geographically around the United States. Certainly, we tend to lend to companies that are growing companies wherever they may be, but we haven't yet seen movement of headquarters, you know, given what's going on.

Okay, thanks.

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

Thank you, everybody. Really appreciate everyone's participation today. Wishing everyone a happy Mother's Day. And we look forward to speaking to you next in early August at our next earnings report. Thank you very much.

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