管理層發言
Good afternoon, and welcome to the PennantPark Investment Corporation's Third Fiscal Quarter 26 Earnings Conference Call. Today's conference is being recorded. The call will be open for a question and answer session following the speakers' remarks. If you would like to ask a question at that time, simply press *1 on your telephone keypad. If you would like to withdraw your question, press *2 on your telephone keypad. It is now my pleasure to turn the call over to Mr. Arthur Howard Penn, Chairman and Chief Executive Officer of PennantPark Investment Corporation. Mr. Penn, you may begin your conference.
Good afternoon, everyone, and thank you for joining PennantPark Investment Corporation's third fiscal quarter 26 earnings conference call. I am joined today by Richard Allorto, our Chief Financial Officer. Rick, please start off by disclosing some general conference call information and include a discussion about forward looking statements.
Thank you, Arthur. I would 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 would 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 would like to turn the call back to our Chairman and Chief Executive Officer, Arthur Howard Penn.
Thanks, Rick. I will begin with an overview of our third quarter results and a review of the portfolio. I will then discuss the current market environment and how we believe PNNT is positioned going forward. Rick will follow up with a detailed review of our financial results after which we will open up the call for questions. For the quarter ended June 30, our core NII, net investment income, was $0.14 per share. This exceeded our base dividend of $0.04 per share per month, or $0.12 per share for the quarter. As of June 30, our NAV per share was $6.56, which is down 2.5% from the prior quarter. As we have previously communicated, PNNT has a considerable balance of undistributed taxable income which we are required to distribute to shareholders. PNNT is utilizing the supplemental dividends to make such distributions, and the decline in NAV was primarily attributable to the supplemental dividend payments. Our portfolio remains highly diversified and conservatively positioned. Median debt to EBITDA was 4.7x, median interest coverage of 2.1x, and median loan to value was 45%. We ended the quarter with four nonaccrual investments, representing 2.5% of the portfolio cost and 0.8% at market value. As of June 30, our portfolio totaled $1.2 billion. During the quarter, we continued to originate attractive investment opportunities and invested a total of $77 million at a weighted average yield of 8.9%, including $13 million invested in five new platform investments with a median debt to EBITDA of 2.3x, interest coverage of 4.2x, and loan to value of 30%. Our PSLF joint venture portfolio continues to be a significant contributor to our core NII. Over the last 12 months, PNNT's average cash yield on invested capital in the JV was 15.1%. As of June 30, the JV portfolio totaled $1.3 billion and has the capacity to increase its portfolio to approximately $1.5 billion. In June, the JV amended its revolving credit facility and reduced the interest rate to SOFR plus 2.1% from SOFR plus 2.25%. Additionally, in July, the JV partially refinanced its $300 million debt securitization. The JV refinanced the AAA tranches and decreased the securitization's weighted average spread by 97 basis points to 1.69% from 2.66%. We expect additional growth in the JV portfolio and the decrease in its cost of capital will enhance PNNT's earnings momentum in future quarters. During the quarter, we generated a meaningful realization from our equity co-investment in a leading defense technology company. We received approximately $15 million in total proceeds on our original $1.1 million investment, representing nearly a 14x multiple on invested capital. Government services and defense continues to be one of our highest conviction investment sectors and has consistently been among our best performing verticals since inception. We have invested approximately $3 billion across the sector, including roughly $780 million through PNNT. For these investments, 92% were first lien senior secured and generated an overall IRR of 12.2%, demonstrating our ability to identify businesses operating in strategically important markets. We remain highly constructive on the long-term outlook for government services and defense because the sector possesses several characteristics that align well with our investment philosophy. Demand has historically been supported by durable federal funding priorities and long-term contracts that provide meaningful revenue visibility and stability. Many of these businesses exhibit resilient cash flow profiles, variable cost structures, and are generally less sensitive to broader economic cycles than many commercial industries. In addition, the sector continues to benefit from active M&A markets and strong valuation support, thereby providing multiple avenues for value creation. Our portfolio is concentrated in businesses supporting the Department of Defense and other mission-critical government agencies. We focus on companies addressing high priority national security initiatives, including modernization of defense systems and digital infrastructure, cyber and electronic warfare capabilities, modeling and simulation, counter-drone technologies, and next-generation autonomous systems. We believe these priorities will remain central to US defense spending for years to come, creating a favorable backdrop for continued investment opportunities. On a combined basis, including the joint venture portfolio, Government Services and Defense represents approximately 11% of total investments. Given our experience, sourcing capabilities, and the attractive opportunity set, we intend to increase that exposure over time. Software remains an area of focus for market participants. Our exposure is limited to approximately 4.6% of the portfolio and is structured consistently with our core middle market strategy. These investments are primarily cash-pay, covenant-protected loans with moderate leverage and relatively short durations. They are concentrated in mission-critical enterprise software businesses serving regulated end markets, including defense, health care, and financial services. Let me now turn to the broader market environment. M&A activity has increased over the past six to nine months although overall conditions remain uneven. Private equity sponsors remain active and we are seeing a growing pipeline of attractive opportunities across both new originations and add-on investments. We are optimistic that activity levels will remain elevated throughout the back half of this year. We expect increased transaction activity to drive repayments across the portfolio, including opportunities to monetize equity co-investments and redeploy that capital into income-generating investments. In the core middle market, the pricing for high-quality first lien term loans remains attractive, typically ranging from 500 to 550 basis points with leverage of approximately 4.5x EBITDA. Importantly, these structures continue to include meaningful covenant protections in contrast to the covenant-light structures prevalent in the upper middle market. We believe the current environment favors lenders with established private equity sponsor relationships, consistent access to deal flow, and disciplined underwriting — and these are long-standing strengths of our PennantPark platform. We continue to believe that the core middle market offers an attractive risk-adjusted opportunity. Companies in this segment generally have EBITDA of $10 million to $50 million and often operate below the practical threshold of the broadly syndicated loan and high-yield markets. As a result, lenders can typically conduct extensive diligence, negotiate meaningful financial covenants, structure transactions with appropriate leverage and equity cushions, and maintain regular access to company financial information. Since our inception nearly 19 years ago, PNNT has invested $9.4 billion at an average yield of 11.1% 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, we fuel the growth of our portfolio companies. In many cases, we have participated 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 June 30, we have invested over $629 million in equity co-investments and have generated an IRR of 25% at a multiple on invested capital of 2x. Looking ahead, our experienced team and broad origination platform position us well to generate attractive deal flow. We remain steadfast in our commitment to capital preservation and maintaining a disciplined, patient investment approach. We continue to focus on investing in high-quality middle market companies with strong free cash flow generation, capturing that valuation through senior secured loans, and paying out those contractual cash flows in the form of dividends to our shareholders. With that overview, I will turn the call over to Rick for a more detailed review of our financial results.
Thank you, Arthur. For the quarter ending June 30, GAAP and core net investment income were $0.14 per share. Investment income was comprised of $20.0 million in interest income, $4.5 million in dividend income, and $0.3 million in other income. Operating expenses for the quarter were as follows: interest and credit facility expenses were $8.8 million, management and incentive fees were $5.4 million, general and administrative expenses were $1.5 million, and provision for excise taxes was $0.2 million. Net realized and unrealized change on investments and debt, including provision for taxes, was a loss of $4.4 million. As of June 30, our NAV was $6.56 per share compared to $6.73 per share last quarter. At quarter end, our debt to equity ratio was 1.29x and our capital structure is diversified across multiple funding sources, including both secured and unsecured debt. As of June 30, our key portfolio statistics were as follows. Our portfolio remains highly diversified with 159 companies across 37 different industries. The weighted average yield on our debt investments was 11%. The portfolio is comprised of 46% first lien senior secured debt, 2% second lien secured debt, 15% subordinated notes to PSLF, 7% other subordinated debt, 6% equity in PSLF, and 24% in other preferred and common equity co-investments. Eighty-seven percent of the debt portfolio is floating rate. With that, I will turn the call back to Arthur for closing remarks.
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.
分析師問答
Thank you. And if you would like to ask the question, please signal by pressing *1 on your telephone keypad. If you are using a speakerphone, please make sure that your mute function is turned off to allow your signal to reach our equipment. Again, you can press *1 to ask a question, and we will pause for just a moment to allow everyone an opportunity to signal for questions. We will now take your first question coming from the line of Christopher Mueller with Citizens Capital Markets.
Hey, guys. Thanks for taking the questions. I wanted to touch on originations. It looked like they were outpaced by repayments in the quarter. How are you thinking about net deployment in the coming quarters? Should we expect that dynamic to continue, or could we see some net portfolio growth ahead?
Thanks, Christopher. We are balancing a number of different factors. We are targeting a leverage ratio of about 1.3x debt to equity, which is where we are today. We plan to grow the JV over time and manage debt to equity at PNNT. For now, we are looking to keep the overall position relatively flat. A key goal is to rotate the equity and get that equity rotation going so we can redeploy into cash-paying, yield-bearing instruments.
It was nice to see the subsequent refinance — a meaningful 100-basis-point reduction. I believe you said the facility size was $300 million. What will the cost savings per share be from that combined with the revolver refinancing?
That refinancing was in our JV. I'll let Rick provide the specifics on how the roughly 100-basis-point savings from the JV flows through to PNNT. Rick, do you want to answer that?
Sure. The two refinancings within the JV, the revolver and the securitization, will flow through to PNNT at about $0.005 per share per quarter, which is approximately $0.02 per share on an annual basis.
Got it. That is very helpful. Appreciate you taking the questions today.
Thank you.
Your next question will come from the line of Alex Brewer with Truist Securities.
Hey. This is Alex Brewer on behalf of Arren. I was curious if you could add any color on spreads on new deals and how they are holding up, given new commitments this quarter of $77 million and a weighted average yield of 8.9%.
Spreads have been relatively stable quarter to quarter, generally in the 500 to 550 basis point range on average. We'll have to see how things develop toward year end based on supply and demand — how much supply of new deals there is and how active M&A is. On the demand side, investor flows into the space continue, although certain channels like retail and wealth have been more challenged. We believe we can maintain spreads in the 500 to 550 basis point range for a period of time.
Thank you.
Your next question will come from the line of Christopher Nolan with Ladenburg Thalmann.
Rick, what is the spillover income in the quarter, please?
The spillover balance is $0.56 per share.
The total dividend really exceeds net NII per share. Do you wait until spillover goes near zero, or how far should we expect the spillover to be distributed?
So, Rick?
We have communicated the supplemental dividend through the end of this calendar year, at which point we expect the spillover to decline to about $0.40 per share. We will reevaluate at that time, but we believe that remaining spillover will be manageable. To put it in context, we had a starting point of a little over $1.00 per share not that long ago, so getting down to $0.40 is significant progress.
Thank you. Thanks, Christopher.
Your next question will come from the line of Jason Stewart with Compass Point.
Hey. Thanks. Follow-up on Christopher's question. You've made meaningful progress rotating out of equity, and if you continue to reduce the equity position we might see some top-line compression on yields offset by improvement in cost of funds. Have you thought about how those dynamics land in terms of ROE at the end of this year when the dividend discussion has to come up again, or is it too soon to be thinking that far out?
That's an important question and top of mind for us. We have a mix of equity co-investments — many smaller 'singles and doubles' that we expect to rotate as M&A activity increases. There are two larger control positions, AKW and Flock Financial, which will take longer to monetize. Both are performing well, but to realize the right value and rotate those positions meaningfully will likely take some time — perhaps a year or two. In the near term, we'll chip away at smaller co-investments while working on those larger names.
Shifting gears to credit: nonaccruals are relatively low on an absolute basis. Are there any underlying trends or movements underneath the surface we should keep an eye on or that you are monitoring closely?
Thankfully, we do not have much exposure to software. Like much of the industry, we have some post-COVID vintage deals that were originated in a very low-rate environment. One meaningful NAV decline this quarter was a company called Kinetic Systems, a consumer-facing shoe company. The combination of reversion-to-the-mean consumer demand and tariffs about 1.5 years ago created difficult dynamics for that business. That is indicative of our limited credit stress: it's concentrated in a handful of post-COVID, consumer-oriented situations. Overall, we do not have significant nonaccruals.
Thanks.
Your next question will come from the line of Hong Zhang with JPMorgan.
Hi — calling in for Rick. You discussed adding capacity to grow the JV portfolio over time. Could you provide some color on how much the JV portfolio could grow over the next 12 to 16 months and what the biggest near-term constraints are?
We believe the JV portfolio can probably grow another couple hundred million over the next year to year and a half. The main constraints are deal flow available to the JV and alignment with our partner, Pantheon — we need to see eye to eye on opportunities. Capital allocation and maintaining PNNT's target leverage of roughly 1.3x are also considerations. So we expect gradual growth rather than a rapid expansion.
Thanks.
Thanks, Hong.
It appears there are no further questions at this time. I will turn it back to Mr. Arthur Howard Penn for any additional or closing remarks.
I want to thank everybody for participating on the call today. We look forward to speaking to you next in November for our annual 10-K filing. We will be a little behind many others in the industry, but we look forward to speaking with you then, right around Thanksgiving. In the meantime, wishing everybody a great summer. Thank you very much.
This concludes today's call. Thank you for your participation. You may now disconnect.