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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. Thanks, Rick. I'm going to spend a few minutes and comment on current market environment for private middle market credit, how we fared in the quarter ended March 31, our dividend coverage and spillover income balance and how the portfolio is positioned for upcoming quarters. Rick will provide a detailed review of the financials and then we'll open it up for Q and A. With regard to the current market environment, despite continued volatility in the broader markets, we had a solid quarter. Particularly given the seasonally slower start to the fiscal year. Our platform continues to prove its strength enabling us to support our existing portfolio companies and private equity borrowers with strategic capital solutions to help grow their businesses. Approximately 80% of our originations came from existing borrowers while 20% were new platform investments. Each underwritten with attractive credit statistics and yields. Our ability to remain active and disciplined during uncertain periods reinforces the value of our long standing relationships, and the breadth of our origination capabilities.
7m 34s
Looking ahead, we expect originations to remain concentrated among existing portfolio companies with select opportunities from high quality new platforms. In this evolving environment, pricing will likely increase and leverage will moderate as buyers and lenders adjust to a new risk framework. We believe the strongest assets those with demonstrated growth and tariff resilience will still command premium valuations and attract sponsor interest. As always, we will remain rigorous in our underwriting and highly selective in pursuing new investments. Throughout the past year, we have reduced leverage and strengthened our balance sheet. PNNT is positioned to take advantage of current market opportunities As is typically the case, market volatility creates opportunities and this upcoming vintage of loans is shaping up to be particularly attractive. We continue to see solid investments in the core middle market During the quarter for investments in new portfolio companies, the weighted average debt to EBITDA was 3.9 times the weighted average interest coverage was 2.3 times and the yield to maturity was 11.6%. In the core middle market, the market yield on first lien term loans appears to have stabilized in the silver plus 500 to five fifty range, for high quality assets. As the credit statistics just highlighted indicate, we continue to believe that the current vintage of core middle market directly originated loans is excellent and the core middle market leverage is lower and spreads are higher than in the upper middle market.
9m 1s
We continue to get meaningful covenant protection the upper middle market is primarily characterized as covenant light. With regard to how the current portfolio is positioned, over the past several weeks our team has been closely evaluating the potential impact of tariffs across the portfolio and we're pleased to report that exposure is limited. As of March 31, the portfolio's weighted average leverage ratio through our debt security was 4.7 times and the portfolio's weighted average interest coverage ratio was 2.1x. These attractive credit statistics are testament to our selectivity conservative orientation our focus on the core middle market. We continue to believe that our focus on this core middle market provides the company with attractive investment opportunities where we provide important strategic capital to our borrowers. We have a long term track record of generating value by successfully financing growing middle market companies in five key sectors. These are sectors where we have substantial domain expertise, know the right questions to ask and have an excellent track record. They are business services, consumer, government services and defense, healthcare and software technology. These sectors have been recession resilient tend to generate strong free cash flow and have limited direct impact to the recent tariff increases and uncertainty.
10m 21s
The core middle market companies with 10,000,000 to $50,000,000 of EBITDA is below the threshold and does not compete with the broadly syndicated loan or high yield markets unlike our peers in the upper middle market. And the core middle market because we are an important strategic lending partner the process and package of terms we receive is attractive. Have many weeks to do our diligence with care. We thoughtfully structured transactions with Sense sensible credit statistics, meaningful covenants, substantial equity cushions to protect our capital, attractive spreads equity and co investment. Additionally, from a monitoring perspective, we receive monthly financial statements to help us stay on top of the companies. With regard to covenants, unlike the erosion in the upper middle market, virtually all of our originated first lien loans have meaningful covenants which help protect our capital. Credit quality of the portfolio has remained strong. We have three non accruals as of March 31, which represented 1.6% of the portfolio at cost and 0.4% at market value. Two new investments were added and one prior investment was removed as a return to accrual status. Subsequent to quarter end, one non accrual investment was put back on accrual and pro form a for this subsequent event PNNT's non accruals represent only 1.4% of the portfolio at cost and 0.3% at market value.
11m 43s
Since inception nearly eighteen years ago, PNNT has invested $8,800,000,000 at an average yield of 11.3% and has experienced a loss ratio on invested capital of approximately 20 basis points annually. The strong track record includes investments of primarily subordinated debt instruments, made prior to the global financial crisis, legacy energy investments and recently the pandemic. As a provider of strategic capital, who 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 March 31, have invested over $566,000,000 in equity co investments and have generated an IRR of 26% and a multiple on invested capital of 2x. Moving on to how we faired in the quarter ended March 31, core net investment income was $0.18 per share, compared to total distributions of $0.24 per share. We've previously communicated our plan to rotate out of our larger equity positions and redeploy that capital into interest paying debt investments, which will drive an increase in our core net investment income. Unfortunately, the current market environment has delayed that program.
13m 1s
As we continue to pursue our equity rotation plan, in the near term we are comfortable maintaining our current dividend level as the company has a significant balance of spillover income which the fund is required to distribute PNNT has $58,000,000 or $0.88 per share of undistributed spillover income and we will use the spillover income to cover any shortfall core net investment income versus the dividend while we position ourselves for equity rotation in the future. As of March 31, our portfolio totaled $1,200,000,000 during the quarter, we continued to originate attractive investment opportunities and invested $177,000,000 in three new and 52 existing portfolio companies at a weighted average yield of 10.7%. Our PSLF joint venture portfolio continues to grow and be a significant contributor to our core NII. At March 31, the JV portfolio grew to $1,400,000,000 during the quarter, the JV invested $170,000,000 at a weighted average yield of 10.1% including $154,000,000 of purchases from PNNT. Over the last twelve months PNNT's average NII return on invested capital in the JV was 18.3%. Our JV has the capacity to increase its portfolio to $1,600,000,000 we expect that with additional growth in the JV portfolio the JV investment will enhance PNNT's earnings momentum in future quarters.
14m 29s
From an outlook perspective, our experienced and talented team and our wide origination funnels producing active deal flow, Our continued focus remains on capital preservation and on being patient investors. We want to reiterate our goal to generate attractive risk adjusted returns through income coupled with long term preservation of capital. 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 instruments we pay out those contractual cash flows in the form of dividends to our shareholders. Let me now turn the call over to Rick, our CFO, to take us through the financial results. Thank you, Art. For the quarter ended March 31, GAAP and core net investment income was $0.18 per share. Operating expenses for the quarter were as follows: interest and credit facility expenses 10,600,000.0 Base management and incentive fees 6,400,000.0 general and administrative expenses were 1,600,000.0 and provision for excise taxes were 600,000.0 For the quarter ended March 31, net realized and unrealized change on investments and debt, including provision for taxes, was a loss of 2,000,000 As of March 31, our GAAP and adjusted NAV were $7.48 per share which is down 1.2% from $7.57 per share in the prior quarter.
15m 59s
As of March 31, our debt to equity ratio was 1.28x and our capital structure is diversified across multiple funding sources including both secured and unsecured debt. As of March 31, our key portfolio statistics were as follows. Our portfolio remains highly diversified 158 companies, across 37 different industries. The weighted average yield on our debt investments was 12%. We had three non accruals, which represent 1.6% of the portfolio at cost and 0.4% at market value, Subsequent to quarter end, one nonaccrual investment was put back on accrual and pro form a for this subsequent event, our non accruals represented only 1.4% of the portfolio at cost and 0.3% at market value. The portfolio is comprised of forty six percent first lien secured debt two percent second lien secured debt 13% subordinated notes to PSLF, 7% other subordinated debt 7% equity in PSLF, and 25% in other preferred and common equity. 91% of the debt portfolio is floating rate The debt to EBITDA on the portfolio is 4.7 times. And interest coverage is 2.1x. Now let me turn the call back to Art. Thanks, Rick. In closing, I'd like to thank our dedicated and talented team of professionals for their continued commitment to PNNT and its shareholders.
17m 48s
Thank you all for your time today and for your continued investment and confidence in us. That concludes our remarks at this time. I would like to open up the call to questions.
17m 58s
Thank you. Is turned off to allow us to go to our equipment. We'll take our first question from Maxwell Fritzscheer with Truist.
18m 23s
Good morning. Thank you. I'm on for Mark Hughes. So how would you characterize the current pipeline for new investments And then did you see any deals that were in last quarter's pipeline that got scrapped or possibly pushed out? Thanks, Maxwell. It's a good question. Certainly, if you had M and A deals in process prior to Liberation Day, In some cases, those deals got delayed. If they were impacted directly by tariffs, they certainly got delayed and more kind of delayed further if they were non tariff related they got somewhat delayed. If it was tariff related, it probably got put on ice for a while. Since Liberation Day, April 1, we've seen modest activity, but in the last week or two as things seem to be calming down, we seem to be getting more of a pipeline of activity for the rest of the year? And you would imagine that M and A flows, which are kind of the lifeblood of at least a new new platforms, those will be tied to to the ratio of certainty or uncertainty that you see in the market. As we said, with over 100 names in our existing portfolio, 190 names across our platform, there's about 160 names here in PNNT.
19m 55s
About 80% of what we're doing is putting money to work behind existing portfolio companies where they have an add on acquisition delayed term [indiscernible] They have kind of they're in their normal activities in terms of beefing up their existing operations. So we are we somewhat active with the existing portfolio. That's the benefit of incumbency. And 158 names we have today in PNNT. And we're starting to see with the uncertainty level coming down, we're starting to see some some new platforms come into the come into our platform. Understood. And then the lower level of new deals in the quarter versus the level of incumbency, how much of that was due to stricter underwriting versus just less deals coming coming across your desk? Well, it's it's almost like it's a binary, which is if it's tariff impacted, you just don't touch it at this point until you kind of see what's going on. The good news for us is the vast majority of what we do as we said, it's not tariff impacted. It's limited, whether it be health care, or government services or business services. The types of investments, types of industries that we are focused on where we have real domain expertise is really not related to much tariff risk at all.
21m 29s
So there, you're just talking about M and A levels And in a world of general uncertainty, how much much M and A gets done? Can buyers and sellers agree to a multiple? If there's a greater recession risk out there can people agree? So hopefully, things things kind of get more certain, things calm down. And hopefully, we'll see M and A flows resume. We came into 2025 thinking it would be very active twenty twenty twenty five was set up to be a really we're very active in 'twenty April getting set up to be even a more 2025. That got delayed, and we're hopeful that as the overall market settles down, we can start to see more more M and A. Go next to Melissa Wedel with JPMorgan. Thanks for taking my question today. Wanted to touch first on sort of run rate earnings. As we think about the delayed typically delayed impact of base rate changes in the BDC's panel, Should we think about the March as reflecting like the full amount of decrease in base rate.
23m 6s
Of course, plus or minus what was happening with non accruals.
23m 11s
Yeah, look, think the way seen, you have base rates and then of course you have spread, right? And we've seen since Liberation Day spread reduction has gone away. In fact, we've seen spread increase call it, 25 to 50 basis points on average. You've seen spread increase since the April. Base rates, lot smarter people are focused on that all day long or making their assessments about base rates and where they've put Fed's going to do, when the Fed's going to do something. But spread has thankfully started to widen So look, the important thing for us here is getting the M and A flow going. That will also hopefully help us rotate some some equity investment that we currently have that should be on the launch pad to exit. In terms of what can really move the needle here at PNNT, it's that. It's kind of M and A flowing and using that to drive equity rotation, which we've been waiting very long for too long. This was the year 2025 was the year we were going to finally get until kind of the events of the last month or two. But we're hopeful that when you could see it in some of the fair market values, we're hopeful that some of these equity positions can get get rotated out as we march forward here in 2025.
24m 38s
Yes. Noted. Follow-up question, you mentioned pretty limited tariff exposure across the portfolio. But given some of the industry sector concentrations and industry concentrations, Can you tell us how you're thinking about sort of Doge exposure or government reimbursement exposure given some of the cuts that have been proposed.
25m 2s
Thank you. Yeah, a good Government contracting and defense is is a big sector for us. We've had both internal and external experts take a look at our portfolio and line it up against the priorities. I First, on a macro basis, the defense budget proposal coming through Congress shows substantial increase to about $1,000,000,000,000 of defense spending overall. So that's increased. And as taxpayers, we, of course, all want our tax dollars to be used efficiently. If you look at the key priorities of investment within the defense Department and government contracting. The government's laid out things that they really wanna focus on, like cybersecurity. Like satellites, like information technology upgrades, that's all in the public domain. And if you line up our portfolio, we are very thankfully and maybe smartly, I think smartly, very well aligned to those areas of increased focus of where spending is. If you look at it to date, it's been mostly the civilian areas of government like the Department of Education, like USAID, and other civilian areas that have been the primary focus on Doge. We, of course, need to look at defense as well and say, we companies that are adding a lot of value?
26m 32s
Are we backing companies where the focus of the Defense Department Administration is leaning in And thankfully, we've done a lot of internal and external work with third parties We're very well positioned with where government is leaning in and in areas of mostly technology related investments to upgrade military technology, drones as an example, we're very well aligned to that. I appreciate that. Thanks for the detail there. Follow-up question. Same thing, but healthcare is there any exposure there? Thank you.
27m 9s
Yeah. Healthcare is a big focus of ours. And I know some of our peers also have big exposure to healthcare and some of our peers have had some stumbles in healthcare, not that we're perfect. But generally, when we look at our healthcare portfolio versus our peers, I think the biggest difference is we just don't put as much leverage on these companies. Right? So there's always challenges. There's always reimbursement It's a people business. So how what's going on with the doctors, etcetera. We just have a lower levered portfolio. So we've we've taken less risk and it's played out healthcare so far performing very well for us. And when you have a portfolio that's leveraged 4x going in and maybe 4.5x over its life, By definition, you're taking less risk than those that would lever these assets five times, six times, whatever. So to date, we've had very good experience with health care. It's because we're focused on taking less risk. Thanks, Art. Thank you.
28m 19s
We'll go next to Hallease Sheath with Raymond James.
28m 24s
Hi, thanks for the question.
28m 26s
With all the current macro uncertainty, is there any shift in terms of the mix of the current pipeline since April between incumbent and new borrowers?
28m 38s
It's a great question. Look, our five secondtors are generally not really tariff impacted. And since the majority, 80% of what we're doing is borrowers, it's going to be the same sectors. Certainly anything that comes in the door that's tariff impacted. Is going to be you know, probably not gonna be looked at very strenuously at this point until we get more certainty on the tariff side of it. So it's going to be the health care, the government services, technology, business services in areas that are not really tariff impacted. And I'd say to take it one step further, clearly, the recession risk has gone up. We think. We don't know if not predicting a recession. We don't we we don't, you know, know if there's gonna be a recession in the back half of the year. But as lenders, we always have to assume there's a recession sometime in the life of these loans. These loans are five to seven year maturities. It will be prudent for us to model in our in our underwriting memos a recession at some point during the life of the loan. In times like this, we certainly run the downside cases of a recession sometime in year one.
30m 1s
Just to see how these companies might perform in a downside case? What kind of what are their cash flows? What tools do they have between CapEx and working capital? What's their fixed cost versus their variable cost? How how would they maneuver in a recessionary case? And again, typically, we're underwriting these companies at 4x cash flow or so going in. At a 40%, 50% loan to value. So generally, they're structured to be able to weather a recession early in the life of the loan. If you look at go go roll the tape back to COVID, for instance, as a as a shock. COVID wasn't really a recession. It was more of a shock, but just to kind of take a look at that, you know, we have the benefit of these quarterly maintenance tests that you get in the core middle market. Most of the upper market is covenant light, because it has to compete with the broadly syndicated loan market. We've got quarterly quarterly maintenance tests If you go back to COVID, remember that the was shut down in March of twenty twenty, which meant sometime in the next three months, our borrowers needed to meet a covenant.
31m 23s
So some had covenants in April, some had covenants in May, some had covenants in June. And with an economy that was shut down, there was a lot of intense discussions. Going on during that time period. And we had a 50 company a and 15 companies in our platform at that point in time. 15 of those companies actually needed liquidity. There was a cash need sometime in the three months after the shutdown of COVID. And in all 15 of those cases, the sponsors offered to inject additional liquidity into these companies. To solve the problem. Which we thought was a really good testament to the benefit of covenants that were maintenance tests, also having financial statements where they have to give us a financial statement every month, and really a testament to the underwriting going in and a testament to the covenants and information rights we get in the core middle market. So that was a nice test for us. We came through it in really good shape. We don't we never assume we know perfectly if there's a recession coming, but we assume there will be one. In the life of most of our loans. And the new loans, just for downside case, we're modeling in a recession in year one.
32m 46s
And we wouldn't do a deal today unless we felt it was structured in such a strong way and had such good cash flow that we felt it could weather a recession early on. We hope there's not a recession. We hope the economy flies through. We hope our companies pay us back and more But as lenders, we have to prepare for that downside. I know that was a long winded answer, Kelly, but I thought it was worthwhile.
33m 10s
No, that was helpful. Thanks for the color.
33m 18s
And at this time, there are no further I'll turn the call back to Art for any additional or closing remarks.
33m 25s
Thank you everybody for participating in the PennantPark call today. We look forward to speaking to you next in early August. After our next quarterly earnings release. Release. Have a good day.
33m 38s
This does conclude today's conference. We thank you for your participation.
Key Insights
PNNT reported core net investment income of $0.18 per share for the quarter ended March 31, compared to total distributions of $0.24 per share; the company plans to use $58 million ($0.88 per share) of spillover income to cover any shortfall while awaiting equity rotation.
The portfolio remains highly diversified with 158 companies across 37 industries, a weighted average yield on debt investments of 12%, and a focus on core middle market sectors such as business services, consumer, government services/defense, healthcare, and software technology.
Credit quality remains strong with only three non-accruals (1.6% of portfolio at cost, 0.4% at market value as of March 31), and pro forma for a subsequent event, non-accruals dropped to 1.4% at cost and 0.3% at market value.
The company continues to prioritize investments in existing portfolio companies (80% of originations), with new investments underwritten at attractive credit statistics: weighted average debt to EBITDA of 3.9x, interest coverage of 2.3x, and yield to maturity of 11.6%.
Management expects origination activity to remain concentrated among existing borrowers, with select new opportunities; spreads have started to widen (25-50 bps increase since April), and the company is modeling recession scenarios in new underwriting to ensure resilience in a potentially uncertain macro environment.
