- GAAP and Core Net Investment Income: $0.20 per share.
- Undistributed Spillover Income: $65 million or $0.99 per share.
- GAAP and Adjusted NAV: Increased to $7.57 per share from $7.56.
- Portfolio Total: $1.3 billion as of December 31.
- Investments: $296 million in 12 new and 61 existing portfolio companies.
- Weighted Average Yield: 10.6% on new investments.
- Weighted Average Debt-to-EBITDA: 4 times for new portfolio companies.
- Weighted Average Interest Coverage: 2.2 times for new portfolio companies.
- Portfolio's Weighted Average Leverage Ratio: 4.9 times.
- Portfolio's Weighted Average Interest Coverage: 1.9 times.
- JV Portfolio: Grew to $1.3 billion, with $354 million invested during the quarter.
- Return on Invested Capital in JV: 18.4% over the last 12 months.
- Nonaccruals: 4.3% of portfolio cost and 1.5% of market value.
- Operating Expenses: Interest and credit facility expenses were $11.7 million; base management and incentive fees were $7 million; general and administrative expenses were $1.75 million; provision for excise taxes was $0.7 million.
- Net Realized and Unrealized Gain: $3.1 million on investments and debt.
- Debt-to-Equity Ratio: 1.57 times.
- Portfolio Diversification: 158 companies across 35 industries.
- Weighted Average Yield on Debt Investments: 12%.
- Debt 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.
- Floating Rate Debt: 94% of the debt portfolio.
Release Date: February 11, 2025
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Pennant Park Investment Corp (PNNT, Financial) reported a GAAP and core net investment income of $0.20 per share for the quarter.
- The company's portfolio totaled $1.3 billion, with $296 million invested in 12 new and 61 existing portfolio companies at a weighted average yield of 10.6%.
- The JV portfolio grew to $1.3 billion, contributing significantly to PNNT's net investment income with an 18.4% return on invested capital.
- The portfolio's credit quality remains strong with only two nonaccruals representing 4.3% of the portfolio cost and 1.5% of market value.
- PNNT has a long-term track record of generating value, with an IRR of 26% on equity co-investments and a loss ratio of approximately 20 basis points annually.
Negative Points
- The GAAP and core net investment income of $0.20 per share was $0.04 below the quarterly dividend, indicating a shortfall in covering the dividend.
- PNNT's leverage ratio is currently higher than the long-term target, with a debt-to-equity ratio of 1.57 times.
- The company has $0.99 per share of undistributed spillover income, which could take over 24 quarters to fully distribute if core NII remains at current levels.
- The investment in Pragmatic Institute was placed on full nonaccrual, negatively impacting net investment income by $0.012 per share.
- The portfolio includes a significant portion of equity investments, which the company aims to reduce, but progress has been slower than desired.
Q & A Highlights
Q: Can you comment on the level of competition in the core middle market and whether you've seen more players pursuing these types of loans?
A: We have not seen new players entering this space. Larger players have exited and moved upmarket, leaving only a handful of peers. We are one of the few willing to finance growth from $10 million to $50 million EBITDA companies. Spreads have stabilized at 500-550 basis points, making it a favorable environment for lenders. - Arthur Penn, CEO
Q: What is your approach to equity co-investments, and is it a stable part of your portfolio strategy?
A: Equity co-investments are evaluated individually. We first ensure a safe loan can be made, then assess the equity co-investment. In growth financing, we often participate in the upside through equity co-investments, which have historically yielded a 26% IRR and 2x MOIC, helping to solidify NAV over time. - Arthur Penn, CEO
Q: How do you plan to manage the spillover income, and do you have a target level for it?
A: We don't have a specific target for spillover income. Our focus is on maintaining a steady dividend stream. We aim to rotate equity and convert some marked-up names into cash. The goal is to manage spillover income while keeping dividends stable. - Arthur Penn, CEO
Q: What are the prospects for restructuring the investment in Pragmatic Institute, which is on full nonaccrual?
A: We anticipate some form of restructuring during the current quarter, which may involve converting some debt into a yield instrument. - Arthur Penn, CEO
Q: Could you provide insights into your exposure to government services and defense, and any potential reimbursement risks?
A: We focus on service companies in government services and defense, such as cybersecurity and technology updates, which are aligned with cost containment. In healthcare, we target companies driving lower costs with reasonable quality, maintaining leverage at 4 times debt-to-EBITDA to mitigate risks. - Arthur Penn, CEO
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
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