PennantPark Investment Corporation Q3 FY2025 earnings call

• Discussed performance in the quarter ended June 30, including dividend coverage and market environment for private middle market credit.
• Noted resurgence in deal activity expected to increase loan originations and equity exits in the second half of 2025, with continued capital provision to existing portfolio companies for growth.
• Highlighted core middle market credit statistics and portfolio composition, emphasizing strength in 5 sectors (business services, consumer, government services/defense, healthcare, software/technology).
• Mentioned strong track record in equity co-investments, with over $583 million invested since inception, generating an IRR of 26% and multiple on invested capital of 2x.
• PSLF joint venture portfolio details, including size and recent investments, with capacity to increase to $1.6 billion.

For the quarter ended June 30, core net investment income was $0.18 per share. The portfolio totaled $1.2 billion, and during the quarter, $88 million was invested in 4 new and 28 existing portfolio companies at a weighted average yield of 10%. The PSLF joint venture portfolio totaled $1.3 billion, with $22 million invested at a weighted average yield of 9.8%. Dividend coverage was core net investment income $0.18 per share vs total distributions $0.24 per share; PNNT had $55 million or $0.84 per share of undistributed spillover income. The portfolio composition included 46% first lien secured debt, 2% second lien secured debt, 13% subordinated notes to PSLF, etc. Credit statistics for new portfolio company investments: weighted average debt-to-EBITDA was 3.8x, weighted average interest coverage was 2.6x, and yield to maturity was 10.2%.

• Anticipate increased loan originations and equity exits in the second half of 2025.
• Plan to rotate equity positions into interest-paying debt to boost core net investment income.
• JV portfolio expected to enhance earnings momentum with potential growth to $1.6 billion.
• Objective to deliver risk-adjusted returns through stable income generation and long-term capital preservation.

• Market uncertainty where actual results may differ materially from projections.
• Credit quality risks, including nonaccruals (2.8% of portfolio at cost, 0.7% at market value at June 30, improved post-quarter end).
• Competition in the middle market affecting pricing and deal flow.

Q: On the equity rotation opportunity, ideal timeline to sell equity portfolio and reinvest capital, and payout of gains.

A: Art Penn said 12-18 months horizon, plan to roll capital into yield to generate NII for shareholders.

Q: On balance sheet leverage, if equity rotated into first lien loans, would leverage target move higher.

A: Art Penn said a heavier first lien portfolio could handle a bit more leverage.

Q: On spillover income and evaluation of dividend, at what point to evaluate.

A: Art Penn said around 1-1.5 years when portfolio normalized to evaluate.

Q: On portfolio leverage, interest coverage, and market terms.

A: Art Penn explained new loans have lower leverage, portfolio balances out to 4.7x debt-to-EBITDA, generally averse to going above 5x.

Q: On equity rotation time frame, any material positions realizing this year.

A: Art Penn said starting to see some equity co-invests rotate, but bigger positions not yet, with M&A resuming.

Q: On specific company in portfolio (JF Intermediate), update on performance.

A: Art Penn said company generates substantial EBITDA, did debt refinancing, doing well.

Q: On competitive environment in middle market, pricing pressure, covenants.

A: Art Penn said competition exists, but more rational than upper market, relying on existing relationships and portfolio deal flow.

Q: On debt maturity, refinancing via Truist credit facility.

A: Art Penn said have attractive facility with Truist, use various tools to finance deal flow.

Q: On merging BDCs, equity percentage for merger to make sense.

A: Art Penn said long-term target for equity excluding JV equity is around 10%, similar to PFLT portfolio.

Q: On repayment in near term and M&A impact.

A: Art Penn said normal deal activity, some existing deals called out as M&A resumes, leading to equity co-invest liquidation.

Q: On competitive environment details.

A: Art Penn said competition is rational, more so than upper market, relying on existing portfolio relationships for deal flow.