PENNANTPARK INVESTMENT CORP Q1 FY2025 earnings call

• Current market environment for private middle market credit: focused on capital preservation in US, core middle market provides attractive opportunities with sectors like business services, consumer, etc. being recession resilient.
• Quarter ended December 31: GAAP and core net investment income $0.20 per share, $0.04 below quarterly dividend; undistributed spillover income $65 million or $0.99 per share.
• Portfolio: Totaled $1.3 billion, invested $296 million in new and existing portfolio companies at 10.6% yield; core middle market loans vintage excellent with lower leverage, higher spreads, tighter covenants.
• JV: Portfolio grew to $1.3 billion, invested $354 million including $286 million from PNNT; 18.4% return on invested capital over 12 months, capacity to increase portfolio to $1.6 billion.
• Credit quality: Strong with 2 nonaccruals representing 4.3% of portfolio cost and 1.5% of market value.
• Equity co-investments: Generated excellent returns, IRR 26%, MOIC 2x since inception.

For the quarter ended December 31, GAAP and core net investment income was $0.20 per share. PNNT has $65 million or $0.99 per share of undistributed spillover income. As of December 31, the portfolio totaled $1.3 billion. During the quarter, $296 million was invested in 12 new and 61 existing portfolio companies at a weighted average yield of 10.6%. The portfolio is highly diversified with 158 companies across 35 industries. Weighted average yield on debt investments was 12%. Portfolio composition: 50% first lien secured debt, 4% second lien secured debt, 11% subordinated notes to PSLF, 6% other subordinated debt, 6% equity in PSLF, 23% other preferred and common equity. 94% of the debt portfolio is floating rate. Debt to EBITDA on the portfolio is 4.9x, interest coverage is 1.9x. The JV portfolio grew to $1.3 billion during the quarter, with $354 million invested including $286 million from PNNT. Over 12 months, PNNT earned an 18.4% return on invested capital in the JV.

• Believes core NII can be $0.21 to $0.22 per share.
• JV has capacity to increase portfolio to $1.6 billion, expected to enhance PNNT's earnings momentum.
• Goal to generate attractive risk-adjusted returns through income and capital preservation, seeking investment opportunities in growing middle market companies with high free cash flow conversion.

• Actual results may differ materially from projections due to important factors as per SEC filings.
• Credit event: Zips Car Wash filed prepackaged bankruptcy, impact on portfolio potentially $0.05 per share.

Q: I take your point on looking hoping for some equity rotation in the coming quarters, is treasuries a source of funds to deploy into higher yielding until equity rotation?

A: Arthur Penn said treasuries are balance sheet management at quarter end to optimize 30% bucket for JV and other assets, temporary technique.

Q: Base rates have gone down 100 basis points, what percentage has flowed through?

A: Richard Allorto said majority of borrowers electing 3-month LIBOR contracts, 50% to 75% already flowed through.

Q: Have you considered switching to year-end special distribution to clear spillover and rightsize dividend?

A: Arthur Penn said they have considered it, happy to discuss dividend policy to optimize stock valuation, will talk to Board about options.

Q: Any notable credit events since end of quarter?

A: Arthur Penn said Zips Car Wash filed prepackaged bankruptcy, not material, appropriately marked as of 12/31.