PennantPark Investment Corporation Q4 FY2025 earnings call

• Plan to rotate out of equity positions and redeploy capital into interest-bearing debt to increase core net investment income. • Current market environment for private middle market lending has steady transaction activity, expecting higher loan origination volumes. • Portfolio performance: median leverage ratio on debt security was 4.5x, median interest coverage ratio was 2x; new platform investments had median debt-to-EBITDA 4.3x, interest coverage 2.5x, loan-to-value 39%. • Focus on core middle market with 5 key sectors (business services, consumer, government services and defense, health care, software and technology), recession resilient, strong free cash flow. • PSLF JV portfolio has capacity to increase to $1.6 billion, expected to enhance PNNT's earnings momentum in future quarters.

For the quarter ended September 30, core net investment income was $0.15 per share. The portfolio totaled $1.3 billion as of September 30. The PSLF joint venture portfolio totaled $1.3 billion and has the capacity to increase to $1.6 billion. The weighted average yield on debt investments was 11%. There were 4 nonaccrual investments, representing 1.3% of the portfolio at cost and 0.1% at market value. The portfolio was highly diversified with 166 companies across 37 industries, 50% first lien secured debt, 2% second lien secured debt, etc.

• Plan to rotate equity positions to drive increase in core net investment income. • Current dividend level maintained near term using spillover income ($48 million or $0.73 per share of undistributed spillover). • PSLF JV evaluating purchase of $120 million to $140 million of assets from PNNT to reduce PNNT's leverage ratio to 1.25 to 1.3x. • Experienced team and wide origination funnel producing active deal flow; aim to deliver compelling risk-adjusted returns through stable income generation and long-term capital preservation.

• Uncertainty around timing of realization events for equity positions. • Dependence on market conditions for M&A and monetizing equity investments. • Leverage ratio management challenges as need to balance spillover payout, equity rotation, and maintaining reasonable leverage.

Q: Brian Mckenna asked about rightsizing the dividend given incremental earnings from equity rotation not reaching dividend level.

A: Arthur Penn said they're constantly evaluating the dividend, working on equity rotation and spillover payout, plan to work through next few quarters to decide.

Q: Robert Dodd asked about equity rotation and businesses like Flock.

A: Arthur Penn said seeing more activity, hopeful for rotation opportunities, some businesses have more control for realization.

Q: Melissa Wedel asked about NII timing headwinds.

A: Arthur Penn and Rick Allorto said no obvious timing issues with repayments.

Q: Arren Cyganovich asked about investment activity types.

A: Arthur Penn said activity includes add-on delayed draw term loans for existing companies and new platform deals in core middle market.

Q: Christopher Nolan asked about private equity trends and spillover income.

A: Arthur Penn talked about M&A activity picking up post-Liberation Day, and Arthur Penn discussed considering retaining some spillover income.