PENNANTPARK INVESTMENT CORP Q3 FY2024 earnings call

• Focused on core middle market for attractive investment opportunities, with sectors including business services, consumer, government services and defense, health care, and software and technology, which are recession-resilient and generate strong free cash flow.
• Portfolio stats: weighted average yield on debt investments was 12.7%, debt-to-EBITDA on the portfolio was 4.3x, and interest coverage ratio was 2.0x.
• JV performance: earned a 19.5% return on invested capital in the last 12 months, with potential to grow the JV portfolio to $1.1 billion.
• Equity co-investments: over $511 million invested since inception, generating an IRR of 26% and a multiple of un-invested capital of 2x.

For the quarter ended June 30, GAAP net investment income was $0.24 per share and core net investment income was $0.21 per share. GAAP and adjusted NAV decreased 2.2% to $7.52 per share from $7.69 per share. The portfolio totaled $1.2 billion. During the quarter, $163 million was invested in 11 new and 42 existing portfolio companies at a weighted average yield of 12%. The JV portfolio equaled $926 million, with $56 million invested including $38 million from PNNT, and a special dividend of $4.2 million with PNNT's share at $2.5 million. The portfolio was diversified across 144 companies, with 56% first lien secured debt, 5% second lien secured debt, 10% subordinated notes to PSLF, 4% other subordinated debt, 6% equity in PSLF, and 19% in other preferred and common equity. Non-accruals were 3, representing 4.2% of portfolio cost and 2.5% at market value.

• Potential to upsize the JV, which could be accretive to PNNT's earnings.
• Dividend trajectory tied to JV net investment income, with special dividend paid to potentially upsize the JV.
• Expect equity rotation as M&A activity picks up, creating dry powder for cash-paying debt securities.

• Market volatility could impact JV returns and dividend sustainability.
• Uncertainty in the timeline for resolving non-accrual loans, such as with Pragmatic.
• Covenant erosion in the upper middle market could indirectly affect the core middle market positions.

Q: The return potential in the JV and its sustainability?

A: Returns are high currently, but could decrease if interest rates come down; attractive returns expected if the JV is upsized.

Q: Dividend trajectory and usual pacing?

A: Regular JV dividend is about $4.8 million per quarter, with the special dividend paid to upsize the JV.

Q: Equity co-investment pacing?

A: Focus on micro analysis of companies, with equity co-investments typically making up 5-15% of the portfolio.

Q: Market outlook and impact on demand?

A: Market shocks take up to 6 months to impact the core middle market, and the team will wait for favorable investment opportunities.

Q: Non-accrual loans timeline?

A: Pragmatic nonaccrual is different, with the sponsor injecting equity, a low valuation in the low 60s, and a PIK instrument.

Q: Leverage and investment capacity?

A: Currently at full leverage, using the JV to deleverage, with expectation of equity rotation creating dry powder.

Q: Spread compression in JV and special dividends?

A: Spread compression possible, but liability side also seeing compression.

Q: Equity rotation and timing?

A: Deal activity expected to pick up, but hard to estimate amount and timing of equity rotation.

Q: Dividend coverage and earnings power?

A: Balancing JV earnings, upsizing, and equity rotation, with $1 a share spillover to be paid judiciously.