PennantPark Investment Corporation Q4 2025 Earnings Call - Progress on Equity Rotation Amid Market Optimism

Conference Operator: Good afternoon and welcome to the PennantPark Investment Corporation’s Fourth Fiscal Quarter 2025 earnings conference call. Today’s conference is being recorded. At this time, all participants have been placed in listen-only mode. The call will be open for a question-and-answer session following the speaker’s remarks. If you’d like to ask a question at that time, simply press Star 1 on your telephone keypad. If you’d like to withdraw your question, please press Star 2 on your telephone keypad. It is now my pleasure to turn the call over to Mr. Art Penn, Chairman and Chief Executive Officer of PennantPark Investment Corporation. Mr. Penn, you may begin your conference.

Art Penn, Chairman and Chief Executive Officer, PennantPark Investment Corporation: Good afternoon, everyone, and thank you for joining PennantPark Investment Corporation’s fourth fiscal quarter 2025 earnings call. I’m joined today by Rick Allorto, our Chief Financial Officer. Rick, please start off by disclosing some general conference call information and included discussion about forward-looking statements.

Rick Allorto, Chief Financial Officer, PennantPark Investment Corporation: Thank you, Art. I’d like to remind everyone that today’s call is being recorded and is the property of PennantPark Investment Corporation. Any unauthorized broadcast of this call in any form is strictly prohibited. An audio replay of the call will be available on our website. I’d also like to call your attention to the customary safe harbor disclosure in our press release regarding forward-looking information. Our remarks today may include forward-looking statements and projections. Please refer to our most recent SEC filings for important factors that could cause actual results to differ materially from these projections. We do not undertake to update our forward-looking statements unless required by law. To obtain copies of our latest SEC filings, please visit our website at pennantpark.com or call us at 212-905-1000. At this time, I’d like to turn the call back to our Chairman and Chief Executive Officer, Art Penn.

Art Penn, Chairman and Chief Executive Officer, PennantPark Investment Corporation: Thanks, Rick. I’ll begin today’s call with an overview of our fourth quarter results and discuss our ongoing strategy to rotate out of equity positions. I’ll then share our perspective on the current market environment and how the portfolio is positioned for the quarters ahead. Rick will provide a detailed review of the financials, and then we’ll open up the call for Q&A. For the quarter ended September 30, core net investment income was $0.15 per share compared to total distributions of $0.24 per share. We’ve previously communicated our plan to rotate out of equity positions and redeploy that capital into interest-bearing debt investments, which will drive an increase in our core net investment income. For many positions, our ability to drive exits is limited.

However, we remain focused on this strategy and are comfortable maintaining our current dividend level in the near term as the company has a significant balance of spillover income, which we are required to distribute. PNNT has $48 million or $0.73 per share of undistributed spillover income, and we plan to use the spillover income to cover shortfalls in net investment income versus the dividend at this time. Regarding the current market environment for private middle market lending, we are encouraged by a steady increase in transaction activity, which we expect will translate into higher loan origination volumes in the quarters ahead. Additionally, we continue to provide additional capital to many of our existing portfolio companies as they execute their respective growth initiatives, demonstrating the depth and resilience of our origination platform.

We are optimistic that the increase in transaction activity will also result in opportunities to execute our equity rotation plan and rotate capital into new income-producing investments. We believe the current environment will favor lenders with strong private equity sponsor relationships and disciplined underwriting, areas where PNNT has a clear advantage. We continue to see opportunities to deploy capital into core middle market companies where leverage is lower and spreads are higher than in the upper middle market. In the core middle market, the pricing on high-quality first lien loans is several plus $475-$525. Leverage is reasonable, and we continue to get meaningful covenant protections while the upper middle market is primarily characterized as covenant light. Turning to our portfolio performance, as of September 30, the median leverage ratio on our debt security was 4.5 times, and the median interest coverage ratio was 2 times.

For new platform investments made during the quarter, the median debt to EBITDA was 4.3 times, interest coverage was 2.5 times, and the loan-to-value was 39%. Credit quality of the portfolio continues to perform well. We have four non-accrual investments, which represent 1.3% of the portfolio at cost and 0.1% at market value. Two new investments were added, and two prior investments were removed from the non-accrual list. These strong credit metrics reflect the rigor of our underwriting process and the discipline of our investment approach. We continue to believe that our focus on the core middle market provides us with attractive investment opportunities where we provide important strategic capital to our borrowers. The PennantPark platform has a demonstrated track record of value creation through successful financing of growing middle market companies in five key sectors, enabling us to ask the right questions and consistently deliver strong investment outcomes.

They are business services, consumer, government services and defense, healthcare, and software and technology. These sectors have also been recession-resilient and tend to generate strong free cash flow and have a limited direct impact to the recent tariff increases and uncertainty. The core middle market, companies with $10 million to $50 million of EBITDA, is below the threshold and does not compete with the broadly syndicated loan market or high-yield markets, unlike our peers in the upper middle market. In the core middle market, because we are an important strategic lending partner, the process and package of terms we receive is attractive. We have many weeks to do our diligence with care. We thoughtfully structure transactions with sensible credit statistics, meaningful covenants, and substantial equity cushions to protect our capital, attractive spreads, and equity co-investment.

Additionally, from a monitoring perspective, we receive monthly financial statements to help us stay on top of the companies. Our rigorous underwriting standards remain central to our investment philosophy. Nearly all of our originated first lien loans include meaningful covenant protections, which is a key differentiator versus the upper middle market, where covenant light structures are more common. Since our inception nearly 18 years ago, PNNT has invested $9.1 billion at an average yield of 11.2% while maintaining a loss ratio on invested capital of roughly 20 basis points annually, a testament to our consistent and disciplined approach through multiple market cycles. As a provider of strategic capital, it fuels the growth of our portfolio companies. In many cases, we participate in the upside of the company by making an equity co-investment. Our returns on these equity co-investments have been excellent over time.

Overall, for our platform from inception through September 30, we have invested over $596 million in equity co-investments and have generated an IRR of 25% and a multiple on invested capital of two times. As of September 30, our portfolio totaled $1.3 billion, and during the quarter, we continued to originate attractive investment opportunities and invested $186 million in nine new and 54 existing portfolio companies. Our PSLF joint venture portfolio continues to be a significant contributor to our core NII. As of September 30, the JV portfolio totaled $1.3 billion, and over the last 12 months, PNNT’s average NII yield on invested capital in the JV was 17%. The JV has the capacity to increase its portfolio to $1.6 billion, and we expect that with this additional growth, the JV investment will enhance PNNT’s earnings momentum in future quarters.

From an outlook perspective, our experienced and talented team and our wide origination funnel is producing active deal flow. We remain steadfast in our commitment to capital preservation and a disciplined, patient capital investment approach. We reiterate our objectives to deliver compelling risk-adjusted returns through stable income generation and long-term capital preservation. We seek to find investment opportunities in growing middle market companies that have high free cash flow conversion. We capture that free cash flow primarily through debt investments, and we pay out those contractual cash flows in the form of dividends to our shareholders. With that overview, I’ll turn the call over to Rick for a more detailed review of our financial results.

Rick Allorto, Chief Financial Officer, PennantPark Investment Corporation: Thank you, Art. For the quarter ended September 30th, GAAP net investment income and core net investment income were both $0.15 per share. Operating expenses for the quarter were as follows. Interest and credit facility expenses were $10 million. Base management and incentive fees were $6.1 million. General and administrative expenses were $0.9 million, and provision for excise taxes were $0.7 million. For the quarter ended September 30th, net realized and unrealized change on investments and debt, including provision for taxes, was a loss of $10.8 million. As of September 30th, our NAV was $7.11 per share, which is down 3.4% from $7.36 per share in the prior quarter. As of September 30th, our debt to equity ratio was 1.6 times, and our capital structure is diversified across multiple funding sources, including both secured and unsecured debt.

The PSLF JV is evaluating the purchase of $120-$140 million of assets from PNNT, which would allow PNNT to reduce its leverage ratio to 1.25-1.3 times, which is in line with its target ratio. As of September 30th, our key portfolio statistics were as follows. Our portfolio remains highly diversified with 166 companies across 37 different industries. The weighted average yield on our debt investments was 11%. We had four non-accruals, which represent 1.3% of the portfolio at cost and 0.1% at market value. The portfolio is comprised of 50% first lien secured debt, 2% second lien secured debt, 12% subordinated notes to PSLF, 5% other subordinated debt, 6% equity in PSLF, and 25% in other preferred and common equity investments. 91% of the portfolio is floating rate. Debt to EBITDA on the portfolio is 4.5 times, and interest coverage is 2 times.

Now, let me turn the call back to Art.

Art Penn, Chairman and Chief Executive Officer, PennantPark Investment Corporation: Thanks, Rick. In conclusion, we remain committed to delivering consistent performance, preserving capital, and creating long-term value for all stakeholders. Thank you to our team for their dedication and our shareholders for their continued partnership and confidence in PennantPark. That concludes our remarks. At this time, I would like to open up the call to questions.

Conference Operator: Thank you. If you’d like to ask a question, please signal by pressing Star 1 on your telephone keypad. If you’re using a speakerphone, please make sure your mute function is turned off to lie or signal to reach our equipment. Again, press Star 1 to ask a question. We’ll take our first question from Brian McKenna with Citizens.

Brian McKenna, Analyst, Citizens: Great. Thanks. On the dividend, I appreciate the equity rotation opportunity. I know that’s something you guys have talked about the last few quarters here. If you were to rotate $150 million of assets into income-producing loans at an incremental 10% yield today, that equates to about $0.20 per share of NII over the next year. At the current quarterly run rate of $0.15, that implies about $0.80 of annual NII before any changes in base rates and credit quality. That’s still $0.15 below the current dividend. Why not right-size the dividend today so some of this incremental earnings from the equity rotation accretes NAV?

Art Penn, Chairman and Chief Executive Officer, PennantPark Investment Corporation: Yeah. Look, thanks, Brian. We’re constantly evaluating the dividend. We do have substantial spillover that we need to pay out. It’s really the question of how and when we do that at the same time as we’re working on the equity rotation to try to figure out what the long-term sustainable NII is. You have two things going on. One’s the equity rotation and the paying out of the spillover. Our current plan is to work both of those processes for the next few quarters, see where we land, come up for air, and make some decisions.

Brian McKenna, Analyst, Citizens: Okay. That’s helpful. Just in terms of timing around any realization events in some of these equity positions, I mean, has anything changed the last quarter or two? Sounds like a more constructive backdrop should be better for monetizing some of those, but I’m just curious if there’s any update relative to expectations over the last quarter or two.

Art Penn, Chairman and Chief Executive Officer, PennantPark Investment Corporation: Yeah. No, we’re seeing more activity. As we said, we’re hopeful that we’re getting closer to some rotation opportunity. Nothing to announce here on this call today, but we’re feeling and sensing that the M&A opportunity and the opportunity for some of these companies is closer at hand than it was.

Brian McKenna, Analyst, Citizens: All right. I’ll leave it there. Thanks so much.

Conference Operator: We’ll take our next question from Robert Dodd with Raymond James.

Robert Dodd, Analyst, Raymond James: Hi, guys. Just on that topic with equity rotation, we look at something like FLOC, for example, and it’s now marked above the original cost before you had to restructure it. So a business like that that seems to have had some stumbles but is performing extremely well now, do you think those are the kind of businesses that are more likely to transact in terms of get a realization for you, which you’re not in control of, or maybe are a little bit more than FLOC? In the near term, or do you think it’s other kinds of businesses, maybe the ones that are still struggling a little bit? Are those the ones that are more likely to turn over in the near term? What do you think?

Art Penn, Chairman and Chief Executive Officer, PennantPark Investment Corporation: Yeah. There’s some that we have more control over, like FLOC. FLOC happens to be in the business of busted credit card and busted receivables, consumer receivables. We think that’s a really interestingly placed company at this point in the economy with what’s going on with the consumer. I don’t want to diverge from the question, but there are control positions. FLOC is one. JF Acquisitions is another. AKW is a third, where we do have more control. The question there is timing and how do we optimize the exit. We have a variety of equity co-investments where we’re not in control, but if there’s a constructive M&A background, by definition, some of those equity co-investments will hopefully convert into cash. The answer is both. We’re hopeful for both. One of the flavors we have a little bit more control over.

It’s really just a question of how we optimize the outcome.

Robert Dodd, Analyst, Raymond James: Got it. Got it. Thank you. On the other part, I mean, potentially transacting and selling some assets to people, I mean, you said you’re reviewing it, right? What are the hurdles that evaluating it? What are the hurdles that have to go through for you to feel comfortable with that? Also, from a regulatory perspective, do you think the SEC would actually approve that? Because I’ve seen some BDCs try to do that in the past, and the SEC just say no.

Art Penn, Chairman and Chief Executive Officer, PennantPark Investment Corporation: Yeah. No, I think you may have misheard. We’re evaluating selling assets to the joint venture.

Robert Dodd, Analyst, Raymond James: Oh, okay. Yeah. Yeah. I get it.

Art Penn, Chairman and Chief Executive Officer, PennantPark Investment Corporation: PSLF, so what we said is, and we’re aware that 40 Act to 40 Act company is something that has a high degree of difficulty. This is just the normal rotation of assets from the BDC, PNNT to the PSLF JV. Leverage was a little high at the PNNT level at quarter end, 1.6. We generally like to wait to quarter end to get the freshest third-party valuation marks on the names. PSLF is evaluating the purchase of $120 million-$140 million of those assets, which we moved from PNNT to PSLF, bringing the PNNT leverage ratio back into line of our target of 1.25-1.3 times debt to equity of PNNT.

Robert Dodd, Analyst, Raymond James: Got it. Got it. Thank you. Yeah. I misheard the outcome down there. On that, I mean, to that point, right, I mean, your leverage is a little high right now. This is one of the initiatives to take it down, obviously. There is also the spillover, which you’ve got to distribute one way or the other. Keeping the dividend where it is takes care of it slowly. Other option would be a one-off, which would take care of it quickly. Any of those things which over-distribute earnings tend to drive leverage up. How comfortable are you that with the current dividend plan and the other initiatives, you can get down to that target leverage and stay there?

Art Penn, Chairman and Chief Executive Officer, PennantPark Investment Corporation: Yeah. Look, it’s really a question of how we work down our spillover and when we work it down at the same time as we’re working on equity rotation. Our target leverage long-term for PNNT is that 1.25-1.3 times. We will temporarily consider going above it if we’re confident that PSLF will want some more assets so we can grow PSLF, which has been highly accretive to PNNT. You have multiple things going on. You have the reduction of the spillover over time. You have the equity rotation, and you have the leverage ratio at PNNT. Those are the constraints. We’re doing our best. Some of the stuff we control, some of it we can’t. We’re always evaluating dividend policy. That said, we still have substantial spillover that we need to pay out, and we also need to keep our leverage reasonable and comfortable.

If you have suggestions, Robert, we’re all ears, but these are the constraints we’re working with.

Robert Dodd, Analyst, Raymond James: Yeah. Got it. Thank you. Thank you.

Conference Operator: We’ll take our next question from Melissa Waddell with JP Morgan.

Melissa Waddell, Analyst, JP Morgan: Good afternoon. Appreciate you taking my questions. Wanted to start on the NII this quarter. I’m wondering if there was anything maybe skewed in terms of timing during the quarter that may have been a headwind. For example, maybe paydowns came early and fundings came later. Was there anything like that we should be thinking about?

Art Penn, Chairman and Chief Executive Officer, PennantPark Investment Corporation: I mean, not off the top of my head. Rick, any thoughts from you?

Rick Allorto, Chief Financial Officer, PennantPark Investment Corporation: No. Same. Nothing jumps out in terms of timing of repayments and deployment.

Melissa Waddell, Analyst, JP Morgan: Okay. Okay. A follow-up question on how you’re thinking about the spillover income. I mean, you’ve made it clear that you look at that as a way to supplement any shortfall versus the dividend. In terms of sort of banking any spillover income, do you look at that whole $0.73 per share as something that could be used, or are you looking to retain some level of spillover income?

Art Penn, Chairman and Chief Executive Officer, PennantPark Investment Corporation: Yeah. Look, there’s certainly a level of spillover income that we certainly consider and should consider retaining. For instance, if you look at PFLT, the sister BDC, I think there’s like $0.25 or $0.30 of ongoing spillover, that kind of thing. So that might be a base level once you get down to that where you’re comfortable that you’re not required to pay it out, something like that.

Melissa Waddell, Analyst, JP Morgan: Okay. Thanks.

Conference Operator: We’ll go next to Aaron Saigonovich with Truist Securities.

Aaron Saigonovich, Analyst, Truist Securities: Thanks. With the investment activity picking up, can you provide a little color around what types of deals you’re seeing? Are they more M&A-focused? Are these kind of follow-on acquisitions? Maybe just if there’s any particular industries that you’re seeing more activity in.

Art Penn, Chairman and Chief Executive Officer, PennantPark Investment Corporation: Thanks, Aaron. It’s a combination. A lot of it is add-on delayed draw term loans where we’re already in existing credit, and the credit needs growth capital. It’s a big part of what we do is start with that company when it might be $10 million or $20 million EBITDA, and they have plans to get it to $30 million, $40 million, $50 million. We set up a plan with them to provide the debt capital to fuel the growth. Quite a bit of it, I’d say at least half of the activity is with existing incumbent companies. The good news about that is we’re on top of the companies. We’re not going to fund them unless they’re doing very well. By definition, the credit quality is very strong.

We know exactly what we’re getting into, and we’re financing additional capital into companies that are performing well. About the other half is kind of our typical new deal, new platform, mid-fours leverage, over two times interest coverage, 40-50% loan-to-value, so for plus 475-525 in this environment type of loan.

Aaron Saigonovich, Analyst, Truist Securities: Okay. Thank you. Appreciate it.

Art Penn, Chairman and Chief Executive Officer, PennantPark Investment Corporation: Thank you.

Conference Operator: We’ll go next to Christopher Nolan with Ladenburg Thalmann.

Christopher Nolan, Analyst, Ladenburg Thalmann: Hi. For the companies that you’re funding, given that the EBITDA coverage is going down, the interest coverage is going up, is this the recipe for dividend recaps by the private equity sponsors, or do your covenants prevent that?

Art Penn, Chairman and Chief Executive Officer, PennantPark Investment Corporation: Certainly, it’s a great question. We had a dividend recap in PFLT we talked about, which was a nice realized gain where we were in the equity and the debt, but we had a substantial equity position. Dividend recaps for us as a lender are something that have a high bar. As a new lender, we are always cautious around use of proceeds and having alignment of interest and making sure there’s substantial equity beneath us. That said, when companies do well, they look at their options, dividend recaps being one of them, sales, IPOs. The dividend recaps have helped us where we have had the equity co-invest. We are very cautious about participating in them as a lender. Sometimes it just happens. Someone comes, takes us out, they give an aggressive loan to a borrower.

We get financed out of our debt, and our equity gets some sort of dividend. You’re seeing a bit more of that in this market more recently, and we certainly experienced that in our other BDC.

Christopher Nolan, Analyst, Ladenburg Thalmann: Art, how would you characterize the trends in the private equity space that you operate in? Because the hold times for the private equity in general have been quite extended. Are we starting to see a break in that log jam at all?

Art Penn, Chairman and Chief Executive Officer, PennantPark Investment Corporation: Yeah. Look, that’s what we think about when we talk about equity rotation. Many of our equity co-invests are kind of experiencing that. We co-invested with a private equity sponsor. It was coming into 2025. It was feeling pretty good. April 1 came around, which was Liberation Day. The M&A market really slowed down after Liberation Day for at least three or four months. It’s starting to pick back up again. This is kind of why we’re a bit more optimistic today than we were last quarter about getting nearer to some equity rotation that’s meaningful. Hopefully, the markets will permit some of this. Some of it is just kind of buyers and sellers finally coming together now that there’s been some stability in the market to cut a deal. For a while, sellers were holding out for higher prices.

Buyers were trying to get lower prices. The other thing you got to throw in here is what happens if, as interest rates come down, server comes down, borrowing costs come down, how that could catalyze more M&A, more refinancings, etc. It has been a murky world since Liberation Day. It seems to be clearing up today. As we speak, we’ll see what the Fed does in early December. Without any major market turbulence, we’re more optimistic that we’ll get some reasonable rotation.

Christopher Nolan, Analyst, Ladenburg Thalmann: Got it. One for Rick. Rick, just to rephrase, I think Melissa’s question earlier, given that revenues seemed to go down while investment assets went up and there’s a small decline in average yields, were there timing issues involved in terms of closing deals late in the quarter?

Rick Allorto, Chief Financial Officer, PennantPark Investment Corporation: None that come to the top of mind. I think the biggest variance kind of quarter over quarter on the top line is you’re going to see is in the PSLF dividend. That dividend did decrease in the current quarter. There were some expenses at the joint venture that were kind of one-time and reduced the dividend.

Christopher Nolan, Analyst, Ladenburg Thalmann: Great. That’s it for me. Thanks, guys.

Art Penn, Chairman and Chief Executive Officer, PennantPark Investment Corporation: Yeah. That’s a good point. There’s been some financing activity at the joint venture in the securitization side that kind of hit expenses to some extent during the quarter.

Conference Operator: We’ll go next to Brian McKenna with Citizens.

Brian McKenna, Analyst, Citizens: Great. Thanks for the follow-up. Art, just a bigger picture question for you. You’ve obviously been a leader in this space for some time now, and you’ve done a pretty good job managing kind of Park through a number of operating and macro environments, including the GFC, COVID, etc. There’s clearly a lot of noise in the market today around private credit. At least from my perspective, there continues to be a good amount of misinformation. It would be great just to get your thoughts on all the current events and what you think is still underappreciated or misunderstood about your business and even the industry more broadly.

Art Penn, Chairman and Chief Executive Officer, PennantPark Investment Corporation: Yeah. It’s a great question. We get the investor questions as well, typically from investors who haven’t been in the space very long. The average person hears the word default, and in some cases, they think that means a zero. In the lending business, a default just means that you’re coming to the table and negotiating the correct capital structure for the company going forward. That could mean conversion of some debt to equity. It could mean more economics to the lender. It could mean both. Sometimes when you convert debt to equity, that equity can have long-term value over time. In our 18, 19 years in business, we’ve certainly seen that where those equity conversions can actually create value. You can make more money from converting from debt to equity. Kind of just understanding how loans work and what being a lender is.

When you say you’re lending to 40% or 50% loan-to-value, that really means 50%-60% of the value of the company needs to disappear before we lose a dime. It certainly can happen, and it has happened, but there’s a lot of cushion that’s built into these things given the substantial equity cushion. If you go back to COVID, as an example, going into COVID, we had about 120 companies that we lent money to going into COVID, and there the economy was shut down by the government. The fact that we had quarterly maintenance tests that every three months companies had a certain debt to EBITDA or EBITDA to interest coverage to meet meant that they had to come to the table. We had very constructive conversations with our borrowers.

Out of that 120 companies, about 15 actually needed liquidity. They needed cash. In all 15 of those cases, the private equity sponsors offered to put money in to solve the liquidity problem. That was in a scenario where the economy was shut down, a very severe environment. The only other observation I had going all the way back to the GFC is when people’s fears get up where they’re reading articles and people start to get fearful. The antidote to that for us was bring people in and go line by line through the portfolio. Here with the BDCs, the SOIs, the statements of investments are all public information.

Let’s walk people through the name by name, who the company is, what they do, what the industry is, to the extent you can share it, the credit statistics, the debt to equity ratio, loan to value, name by name by name. I think if people went through these books name by name, they’d realize we give the stats on an overall portfolio basis. The overall portfolio has 4.5 times debt to EBITDA, 40-50% loan to value, interest coverage over two times. You go name by name, and after a period of time, you realize these are pretty solid loan books. It’s not just ours, but others. The other thing you realize is we and our peers are all over these portfolios. We are all over these names.

Every month we get in the core middle market, every month we get financial statements from our underlying portfolio companies. If something starts to stumble, we are on top of it every month. Every quarter, they have a financial covenant to meet. I think the quality of these portfolios is high, and we’re all over them. I think if investors actually had the time to dedicate and we and our peers are willing to spend the time to go name by name, I think that would calm a lot of the issues that people seem to be having right now. I don’t know if that’s helpful.

Brian McKenna, Analyst, Citizens: That’s terrific. Thanks so much, Art.

Conference Operator: At this time, there are no further questions. I will now turn the call back to Art for any additional or closing remarks.

Art Penn, Chairman and Chief Executive Officer, PennantPark Investment Corporation: Look, I just really want to thank everybody for participating today in this season of Thanksgiving. We are certainly grateful for the support of our shareholders. We wish everyone a safe and happy Thanksgiving and holiday season, and we look forward to speaking to you in early February.

Conference Operator: This does conclude today’s conference. We thank you for your participation.