PennantPark Investment (PNNT) 26 Nov 242024 Q4 Earnings call transcript

Good afternoon, and welcome to the PennantPark Investment Corporation's Fourth Fiscal Quarter 2024 Earnings Conference Call. Today's conference is being recorded. [Operator Instructions] It is now my pleasure to turn the call over to Mr. Art Penn, Chairman and Chief Executive Officer of PennantPark Investment Corporation. Mr. your begin may you conference. Penn,

Allorto, I'd Good include by PennantPark I'm disclosing welcome Officer. a Rick to some general information about to Corporation's afternoon, joined please Fourth and off by Call. discussion everyone. Investment Conference Fiscal you Earnings forward-looking Financial call like Quarter start Chief our conference today Rick, XXXX statements.

form note Corporation information. the harbor property I'd website. to safe is available broadcast call attention strictly call I'd prohibited. will that recorded. our customary forward-looking Please today's An of unauthorized the disclosure audio in remind your is replay the on is call to Investment that Thank call that everyone like of our also of call press you, to in and like Art. any regarding any be release PennantPark this being this

call also that and you with Today's forward-looking factors important refer We update conference visit actual unless To materially at our our from law. and that the by our forward-looking copies projections. pennantpark.com do most to XXX-XXXX. to include call recent of required at or SEC filings website results to could we (XXX) obtain filings, for not our ask latest please statements differ may these us undertake statements cause SEC projections,

Chief I'd to and Penn. time, Officer, Executive call Chairman call like our Art this back At -- turn to the

up upcoming on we XX, quarters, environment the the Q&A. of Thanks, Rick. fared market comment September is quarter We're credit, going open the financials, ended then review portfolio detailed how positioned current and a to private it the minutes in middle for spend a for the few for market how

share per investment adjusted GAAP valuation September was from adjustments the ended quarter $X.XX. net portfolio. in GAAP in for primarily increase per X.X% the XX, net was NAV and quarter share. core NAV to to income and $X.XX due positive to the The For our investment increased $X.XX

$X.X and XX companies totaled a continued investment existing quarter, XX, billion. in we And attractive during our and to weighted of As new portfolio portfolio originate XX XX.X%. million of September opportunities $XXX yield the average at invested

an continue market. middle We attractive the see core vintage in to

X.Xx. For the interest weighted investments XX%. X.Xx, average debt-to-EBITDA was coverage average was in portfolio the weighted and loan-to-value weighted The average companies, was new

September of average As our was leverage through average interest the portfolio's ratio focus weighted was XX, debt X.Xx to core ratio the market. orientation X.Xx. statistics security credit weighted These our and middle portfolio's our on conservative a selectivity, attractive testament coverage are and the

points. market to loans XXXX, has lien yield XX on term XX During the tightened first basis

middle As the is credit market of In market, originated are in lower, covenant upper statistics still just middle in spreads middle middle higher are loans that vintage tighter market. Despite excellent. the the highlighted the indicate, in and core meaningful erosion getting believe we middle the market, directly covenants leverage we upper are is core than continue the market, core to protections. covenant current

committed from $XX JV venture, During PSLF, committed $XX.X partner partner. the and and $XXX PNNT's million of PNNT PNNT million. commitments joint additional capital the quarter, its JV million accepted

$XXX In $XXX investment over purchases PNNT. JV's the to during senior investment additional billion, addition, increase portfolio nearly million $XXX of the million its will from including And capacity. a the $X.X capital XX, credit JV quarter, $XXX million representing the in equaled its million, portfolio to JV to billion. million. increased from scale the invested $X September facility the $XXX JV At secured JV allow This

XX.X% PNNT months, XX return on the invested Over earned capital JV. the in a last

at of represented quarters. earnings X.X% PNNT's had nonaccruals September cost of credit expect Nonaccruals will the strong. at only quality The momentum in remains with the We portfolio continued X investment that portfolio in growth market XX. JV investment JV We as PNNT's and portfolio, future the value. X.X% enhance of

me let the current turn Now environment. market to

lender We United a positioned preservation focused in States. well the as capital on are

our focus important middle the our to core capital attractive believe borrowers. We on market strategic continue the investment that to where opportunities provides company we provide with

unlike flow. broadly not market, below track does growing the with companies X middle loan financing million is with million substantial of EBITDA, the or The We domain long-term companies generating high-yield These to value have important have sectors. sectors strategic in middle generate and by because also is record consumer, an software key terms sectors markets, cash They expertise, strong and we and questions record. been a have right middle successfully process upper tend core market free in where are know are market. we care the the our ask syndicated the lending services, recession market, In receive These services compete of we attractive. health and and of middle threshold $XX to peers the an resilient package business have partner, the technology. excellent are track core and government and $XX defense, to market

many weeks do diligence our with have care. We to

We sensible and thoughtfully capital, cushions transactions equity protect spreads with structure our to statistics, co-investment. equity meaningful substantial covenants, attractive credit

monthly which virtually capital. Additionally, to in significant different. environment. less that the originated state a first are the we positioned is we those our in make middle upper help bigger covenants, on of financial are and meaningful of this a middle of well who reason believe to a from is This market risky. protect That but reality the may loans the sense, With companies. on companies monitoring focus us some all our intuitive why perception is erosion upper Many peers the stay top covenants, unlike lien market, have perspective, statements help regard we receive our

this that $XX of more of part According monitoring rate performance. EBITDA to an tighter and to differentiated million lower of recovery believe than meaningful a to We EBITDA. with middle the default covenant companies careful loans core diligence been have less loans S&P, protections with the than higher market, higher have rate important and companies

many in the fuels participate provider the As strategic upside our companies, capital in company the we co-investment. of equity portfolio making an a of who by cases, of growth

invested invested pandemic. made basis investments a global of record $X.X debt billion investments of strong on at from years financial for generated through an September a and Our track XX XX% inception of IRR been XX, annually. invested average excellent these PNNT yield has million an on of crisis, have ago, to ratio and invested platform multiple Since time. returns Xx. approximately legacy This subordinated equity includes recently, the and the loss nearly inception co-investments primarily investments capital we over prior XX and equity has more in XX.X% energy on over $XXX experienced co-investments have of our capital Overall, points

With in attractive. target to loans the new market outlook, regard are our

Our experienced funnel attractive deal are and flow. talented team and our wide origination producing

to We investors. risk-adjusted Our continued on capital focus generate attractive and reiterate long-term being to goal through our capital. preservation remains of income, coupled returns patient want preservation with

free opportunities growing cash We flow have find out companies dividends and those we form flow debt high cash seek We that market investment capture shareholders. flows to free in cash the contractual pay middle of in that to conversion. primarily through instruments, our

to financial me us Let Rick, turn over now through the the our CFO, results. take to call

Thank you, Art.

$XX.X expenses as fees $X.XX were $X.X base excise XX, share. provision net follows: Operating September ended per were $X.X million, incentive quarter investment million million. were for million. for management and facility $X.XX was expenses the quarter the taxes interest expenses core and and income and administrative were were credit and GAAP For General

net ended September taxes, realized $X For and was the unrealized change including quarter a debt, of and provision investments XX, on gain for million.

in per is of share share, X.X% per September XX, our which NAV and up from adjusted As quarter. GAAP the $X.XX was $X.XX prior

across As funding XX, X.XXx, secured multiple debt-to-equity diversified and and sources, was is including both of unsecured September debt. capital our structure ratio our

lien interest debt common XX% X% portfolio XX% rate. other at to As subordinated portfolio The debt, XX, X% of debt, X% debt weighted and diversified across lien XXX investments and average market equity the value. The other and key industries. coverage the is XX.X%. is floating X.X% and of at cost debt, the PSLF, X.X% had X% September of nonaccruals, as debt-to-EBITDA highly preferred XX is with PSLF on which X.Xx different equity. first yield notes XX% Xx. on statistics portfolio portfolio in was our We is in companies subordinated the and follows: portfolio comprised represent of X were the secured remains our portfolio second secured

me turn back call to Now Art. the let

of Thanks, time our the us. to your investment Rick. In for to closing, their this its dedicated team commitment At would remarks. like our questions. for professionals for call continued shareholders. up concludes to your confidence I'd and PNNT and talented time, like in and to That all thank open you today I Thank continued and

Instructions] [Operator

Truist. the first from question Hughes Mark will with And come

far? so any gave activity not investment that, sure but what so I'm far The you the fourth have seen you in specifics on quarter, if

active PNNT at Mark. kind pretty levered Thanks, X.Xx. about PNNT's is Yes. of current with We've of been situation, fully kind

X.XX Our long-term targeting is leverage to target about X.Xx.

basically then seasons buys and So them the purchase point, what PNNT deals is does and deals. at will JV those then some it

growth the really in this the is of portfolio So to come point. going PNNT the JV at through

when and are a the shifted PNNT more JV leverage opportunities kind appropriate. of new of over steady been at the new the it's state the So and to deals be going given to

very ins are repayments. getting of outs also been and monitored kind but closely, we're and we've So active,

Yes.

market sort Is factors that teens for of JV. you there of high that Okay. sustainable? that? structurally influence And the then described maybe that Are visibility Is influence should there on returns? Anything of those any kind returns kind that? decent

of first risk Sure. BDC lower credit up use It's across little the the And those debt-to-equity And ratio kind facilities the lower of lot balance bit get go X:X than technology they we more that lien JV, as our deals into they on to loans. type a finance were we kind levered deals. leverage, platform, a we CLO sheet, they originate use that then range. of

thing down, down. on come interest will as balance BDC rates same certainly, a that come sheet. the If JV So returns

had all loans, key but down. down of well. watch of the are virtually credit then excellent liabilities will a JV. credit that Hopefully, cost combination floating areas continue performance, would have be interest or These the for XX% as that We've granted coming return performance you'd excellent come mostly performance we credit And performance. in the and to credit rates rate

What the then this then it debt good. those compression. seems in I spread a bit getting and also At bit? those move you sustainable or of time, X.X% X.Xx They to attractive. of you pretty you're might are up about good. pretty Is thinking a seem that stats And Very EBITDA the seeing or quarter, numbers? think terms leverage little credit loan-to-value a just same like see the

standpoint, Look, that's platform a Yes. end for we'll good being long-run from the mid-Xs start say, an basis. a or we over growth And up really company a typically, we as overall with they're in out acquisition.

XX, little a a smaller, $XX a company might or we'll as So million keep [ tighter EBITDA million company. leverage we the ] XX, it's gets acquisitions add-on to facilities. does little EBITDA, the bit $XX grows finance maybe $XX million the XX a or draw down On leverage of little will it and up delayed draws little bigger, bit a as go

smaller then gets growth. bigger, to ends X, And upper middle one out the them tight, greater, typical to in of that's off deals. grow, XX EBITDA, gets life as equity So it or The XX DDTL at start in company keep We'll to co-invest leverage up our market. that EBITDA it the to cycle or moves X.Xx of of a the participate give leverage.

And Robert with Raymond the from next James. question Dodd will come

services, adds when terms or mentioned I mostly On then mean I of cetera. in maybe into change XXXX, mean, care, were quarter, the of to I taking this administration going appealing obviously sectors, are do outlook you think into remain the X with them obviously, X I health et What attractive? you and you I key the to business X look look that at in government/defense. only sectors. mean, areas which one forward coming, ones account, expect

our X cover, care bit business sector us. might, some biggest you good more defense. those health been look of think and has a as I be the government under sectors Look, or for a little Look, Yes. services services

have little of bit peers in Some our space. stumbled that a

leverage keep tighter risk may with keep the I lower. leverage tailwinds continue peers. than care financing selected just at to of in importantly, going some lower Maybe be of And health lower. where care think our smaller is areas to health companies our demographically, And we to a us, the reimbursement lower know. But I tend we little generally we're big we've portion are don't a be economy. leverage behind covenants,

of population. avoid almost You can't it, the our aging

defense keep continue going the leverage the we're do Government and very low. about care. part in then to of So continue going services to a to bunch health which to We're and be important industry pieces be selective of an economy.

Doge look taking remains we'll -- in coming all [ and geopolitical how out. see expenses, a uncertain. plays The that's at that government outlook with ] certainly,

and efficiently. services, our As where the non-heavy want service will typically, beings dollars risk sit an of behind market. kind taxpayers, But asset areas given really of building we're continue the defense we, to course, spent businesses computers, whether financing be walk in be think tax intelligence, office to that human that's in other into that cybersecurity, geopolitical we important and government be

the debt But that it's think what the mid-Xs in a keep kind we of mid-Xs don't a handicap don't many is has to I know effort EBITDA. and very kind really portfolio hard again, there's going leverage peers I have Doge And many. new low. in of to the to of to how just debt-to-EBITDA our -- try has loans mean.

been keeping lower yield. accepting that's or tactic for okay we're leverage strategy. a So us, And and our lower

charge And fee managing balance on be the either management for a We able a shareholder a upper where manage or to to with out for teens in and model we loans PNNT. able that's a more, and mid- can more little on of return. of efficiently and leverage JV optimized punch those can assets to sheet think a good assets very bit behalf being advent finance the of the BDC not the those be

On mean, come question, -- have that they Got spread it. the I down.

has you kind even you in given lien a first think attractive. mean, leveled right the spreads mean, you prepared think on they that of returns or compression -- now. double-digit mentioned still -- I is do really with bottom out your spread where You there's first where -- at lien yields are it's remarks. do on do I really,

this there? there's for is come thoughts So them bottom or Or you down room do I mean, further? to think the

here. Great question. Yes. they've plateaued We think

plateaued typically in the side, gets little a It that seems middle heavy perhaps supply rate. we right to spread on even bit. chance heavier, to to to an increase so the if now deals or Our X.XX bad. won't be as supply, If spread senior have are risk-free the industry X over a be have core able there's deal market

most Again, credit, be will can important. credit, credit, that's it itself. mistakes, care we If take got of rest to of the reduce

the be the kind you if right any And So now, we we're of [ think not ] relative BSL spread. modeling on market, in BSL is spread. don't XXX an a And increase tightening. value, there'll market look at

relative So XXX attractive. is if we're we value [ XXX it's ], BSL standpoint, think [ ] -- from a still

to on Johnson moving And with KBW. Paul

JV, distribution any interest and just JV? even kind So of happen of great income yield JV XX% the quarter. BDC, close the sustainability current rate? It's around some with you on of give returns rates around distribution of strong what annualized net XX% -- I Can in interest sort the from thoughts inside that the quarter. of sensitivity would your a Portfolio in mean, sort very this the for asset the been rate JV. a to

great our the of nonaccruals. to track very to in certainly, let's JV question. that. cushion in build kind minimal really And had is some date good. It's in a say, We've you Look, record Yes. have

and hope If we in. have you it? JV, -- certainly can of X long those say, kind we I should we over okay, run, nonaccruals, to years certainly, sustain time, But were that into so. model we're can maybe

XX come annualized. lien that. been point to to JV down, PFLT PNNT as interest PFLT be little For many XX bit years, a is a of the to the it's returns to basis basis over portfolio Certainly, rates going been it's The and nonaccruals. has due sensitive portfolio first points diminution annualized closer

the are things in. So you'd those model X

quite XX% capital. to how senior still teens that. but It's CLO But hard investing leverage, hard hope XX% debt we in be Is pound that, sustainable including get at to and XX% we we've guarantee on absolutely certainly It's leverage some then I been come to using or going on table level, forever. point? mean upper at it's securitization, possible. XX% been that the to say able the it's the we've to I return way an really and achieve JV should certainly, can

last decline? around the continue Is was that What's is that idea around of idea kind of it increase the in think X.Xx what as quarter Is the or its leverage? sort And JV. to leverage? to target so I rates the idea? near max

Yes.

Again, middle we same exact think assets CLO to coming in the very across middle these probably We're are market the at assets market very note so And quarter assets. gets at that I levered is relevant going of underlying CLO is and market zone far price you its shortly to third-party XX I quarter same in performance. assets top It's strong JVs, good good, gets after first CLOs. business this think those point. that a It's same one look structures. X:X, on of CLOs, are been the days. PennantPark X our have use are because -- X of CLO platform, our in a equity where these the our thankfully, JV in PFLT. these and and X:X. the PFLT in lien that and the X.XX:X the business, third-party terms assets performance in CLOs, if or important we are research middle has the And so

be JV right [ assets X we're So or X.XX these the X to safely on in ]. levered now, could focused X:X

the quarter maybe the what in, was made It of potentially to ask opportunity of to sell looks bring sort idea purpose you What's in some amendment? create their just the somehow or potentially parties Or to that future with new that stakes? Is to I that? about partners can then like allows that And redeem amendment this amendment an JV? the the in interest.

That just were the Yes. in partner. line JV of agreement updated with we bringing was more kind have with in. They capital our

wanted exit clarify and mechanics. that, of As part entry they to just

there's to vehicle potential continue to this in can a and orderly that and want come be So they basis just an vehicle. on exit an evergreen really be in limited their could partners this if

the And there's then on the nonaccrual. it filing, on nonaccruals, X companies says in

number reason I ask few this on on I versus specific a more. full there's would there up company placed be situations why partial companies partial nonaccrual Was nonaccruals, quarter the just if or Can just However, of any pull nonaccrual? for that. a

Rick, one? handle do that to you want

There's that's the nonaccrual. called it is upon Based XXs, which Paul. Pragmatic on paying the one currently it's Thanks, interest. valuation, is partial company in low PIK

So of we're basically mark the of the at XXX% XX accruing because value is to value. enterprise loan not -- to that company it's

for exceeds value and portion reserving enterprise we're So that the therefore, that collectibility. then

And few may. that. Appreciate you if more, then a just

kind portfolio, would refinancing what Within the of would portfolio activity being the what like obviously balance of mean derived is I point? kind -- in the that's the versus the between out see maxed that leverage opportunity activity to book guess, be this that as the left at you within kind can still getting new of BDC. you given I close how from existing is say,

We're getting Yes. repayments. is again. Middle market active M&A getting

think to that. getting part as we're co-invest of environment M&A. of as our on portfolio market Certainly, to for We we an loans be that. hope were realizations some it's I on active part on earlier, call repayments going PFLT get the middle equity

wheels that realizations piece tightly. manage an are that the and piece equity to smaller it portfolio again. picking get a us and commerce the of optimize to and hopefully, equity the of some is provide of optimize book. make of sensibly JV ability But will book the M&A and the up And And idea the portfolio, the wheels

exit are you of that next do a that co-investments to any see point would year? activity material M&A we I your of if larger mean closer in getting pickup any say equity

too And Sure. lot I a cost, right? future. is mean review distant realizations a cost. equity value higher and the at fair it's time, matter co-investor value to some if not private -- just co-investment typically, we're the equity it's -- simple a can you of fair of with in get market a and hoping we're look sponsor, relative there's than market So a the typically, to nice

from And come next with question Wedel our will JPMorgan. Melissa

in Most asked, been of up mine follow already on I the have but I'd particular. JV thought

It -- about the talk recent both mentioned to growth you equity come in portfolio portfolio there JV. how context? sub the investment the that investment, the in the do would that be that is sizing As that the is of upsize. you likely be also comfortable of you terms portfolio? certainly targeting JV, makes size through think with Do debt, of the not the in When or sense JV in but position investment think think you exceeding constraint about total you in some within -- position you the

question. great a That's Yes.

just the So say, billion bucket, for should JV that average $X.X about itself with availability of particular be position let's X%.

$XX in to to up $XX take loan, new think $XX there million in position and million. And of be $XX average that's a will do about were I the million. to If would reality, So million we JV that itself.

big for that diversified getting very what's question the Look, in too full. So we're is then JV. of its terms position And in in JV? PNNT the pretty portfolio

Just bucket, to we're is pretty full. getting full. our getting pretty which XX% honest, quite is of It part be

we're we We more. upside. we partner -- a of position. did going this you this investment, be that So XX% took JV, We saw of took less. not to we're XX%. to it's there, the pretty -- And getting prior take not owned on but XX% full there, say They to our PNNT

now. think we're probably I XX% XX%, about So

said, we portfolio, is look That something evaluate. So you at very, portfolio, diversified. the underlying underlying when obviously, the very

will Casey question Alexander with Compass come from Point. next the And

appear an equity your J&F marked was really producing, if stuff got quarter-over-quarter positions that of we could got a sudden when is may I've monetization markup of really terms that monetized, it to some like mark-to-market in large enough that, large few -- equity quarter-over-quarter the one your particular, to in a particular, that current? One Yes. because because position, something of that up mean have it a in usually, towards one that position is pretty quarter. more income income. was this switching it few. $X see generating equity income does all help million extreme a of generate on path That sort that Does it a

That's we it's underdeliver. said never we when matter just score, -- just big a Casey. it's a of to the want occasionally, -- just of and there's we've And underdelivered Yes. overpromise although equity, on markup hey, hopefully, that, time, that

So do performing not underdeliver, want but marked has to that up and the deal is overpromise and company well. been

All secondly, JV, you say, are XX% you're the -- the right? right. you in But and as

this we're In last iteration, about but overall -- XX%... today, no, overall,

is PNNT XX%.

it well for Okay. company I've balance payable balance Pennant's be on seen Because the could is that be has But first sheet ever the ask let sheet investment sheet million going sheet. purchase. also balance larger debt has it to where JV $XXX as the than as on me the balance the

would And the X.Xx. so around make that leverage effective

to your the to how shifting much to that is on warehousing in JV accretion leverage JV, income a balance you out that? some you're where just income investments that balance over so you're of target squeeze and it JV going those of the bit because back the ratio, able have if to going -- get you earnings a sheet. XX% out XXX% down, for accretive additional Is obviously, it sheet when be appropriate is earnings to from little little to off the bring want So to the that leverage I'm and to struggling leverage the to you figure your you move to to ratio bring be when down

Yes.

bit dollar earning terrific is great question. [ XX Every invest accretive the is which to little at a it's we it's JV, less, NII. a in So something or ]%, whether obviously

settles, JV look you, its in, the can incremental do that work back what we're through we along helpful. with on like, some optimized question way. Casey, the putting income the And when incremental is and how $X.X and capital way is So fully JV capital this model the we're hey, works to putting billion dust earning PNNT. the we're and that's like, to But very the that those economics once that in

And think optimizing then in the And looking equity sleepy. NII revived to couple those years are to that the yes, forward being rotation the a world for equity we this rotation. are is drivers have I of some M&A finally after of X JV and seems

Okay. were portfolio. which of to XXX is you did is imagine My over XX% companies, this portfolio, your over hard XX% It's are to companies, companies which new legacy that have the bolt-on the requiring you getting that which add-on XXX investments in means next portfolio growth capital. of question XX of XX quarter, and was portfolio. you feels be ones some pay of maintenance really their there to coupon like that many the already It is helping these that's income XX% capital? them kind XX how PIK are debt. the companies of may capital on And capital total of are bolt-on Can talk additional those maintenance growth and versus

revolver a draws. in I'll of this minute be just over Rick might some to kick it because

I $XX $XX grow greater. revolver. you taking of million, to a very a real do portfolio. million most million much of Again, that's game deals or the $XX we're plan active million We and Rick, $XX it a EBITDA million or and you're how don't know, $XX So to have company -- there's doing,

of those loans So are the Rick, -- important revolvers are add-on revolver the piece numbers DDTLs in the referring an making. some included we're to? Casey of was

Yes, Art. to probably and... related And XX guesstimate does as XX% draws acquisitions add-on add-on I that's to is include about revolver revolver draws. that, ] would The [ opposed

does to the back turn Art That question-and-answer conference conclude over Mr. Penn. I'll the now session.

in a season in Wishing being everybody of you for holiday February. I and thank who's to want in call express the Thanksgiving. your thankfulness to to today terrific on everybody the to want season, everybody interest talk PNNT. we'll on gratefulness and Just the and call

participation. We an Thank you. That day. thank you excellent does conference. Have conclude your do for today's