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PennantPark Investment Corporation reported its first-quarter 2025 earnings, revealing an earnings per share (EPS) of $0.18, slightly below the forecasted $0.19. Despite this minor miss, the company’s stock saw a 2.86% increase, closing at $6.64. Revenue for the quarter was $30.66 million, falling short of the expected $33.13 million. The company maintains an attractive P/E ratio of 8.31 and offers a substantial dividend yield of 14.46%, making it one of the highest-yielding stocks in its sector. Investors seemed encouraged by these aspects of the company’s performance, as reflected in the stock’s positive movement.
InvestingPro analysis reveals several promising indicators for PennantPark, including a 19-year track record of consistent dividend payments. Subscribers can access 5 additional exclusive ProTips and comprehensive valuation metrics.
Key Takeaways
- PennantPark’s EPS of $0.18 missed the forecast by $0.01.
- Revenue of $30.66 million was below the $33.13 million forecast.
- Stock price increased by 2.86% post-earnings announcement.
- The company invested $177 million in new and existing portfolio companies.
- The debt to equity ratio stands at 1.28 times, indicating moderate leverage.
Company Performance
PennantPark Investment Corporation demonstrated resilience in Q1 2025 despite missing earnings forecasts. The company maintained a strong investment portfolio valued at $1.2 billion and invested $177 million across new and existing portfolio companies. According to InvestingPro’s Financial Health assessment, the company maintains a GOOD overall score of 2.68, with particularly strong marks in profit and price momentum. While the EPS and revenue fell short of expectations, the stock’s rise suggests investor confidence in the company’s strategic direction and operational performance.
Financial Highlights
- Revenue: $30.66 million, below the $33.13 million forecast
- Earnings per share: $0.18, missing the $0.19 forecast
- Total portfolio value: $1.2 billion
- Weighted average investment yield: 10.7%
- GAAP and adjusted NAV: $7.48 per share, down 1.2% from the previous quarter
- Debt to equity ratio: 1.28 times
Earnings vs. Forecast
PennantPark reported an EPS of $0.18, missing the forecast by $0.01, or approximately 5.3%. Revenue also fell short, coming in at $30.66 million against a forecast of $33.13 million, marking a 7.5% miss. These results reflect a minor deviation from expectations, yet the company’s strategic investments and portfolio management seem to have mitigated potential investor concerns.
Market Reaction
Despite missing earnings forecasts, PennantPark’s stock rose by 2.86% to $6.64. This increase may reflect investor optimism regarding the company’s strategic moves and its ability to navigate challenging market conditions. With a beta of 1.06, the stock shows moderate market correlation, while maintaining strong momentum with a 3.94% total return over the past year. The stock remains within its 52-week range, with a high of $8.04 and a low of $5.72, indicating room for growth.
Outlook & Guidance
Looking forward, PennantPark plans to rotate out of larger equity positions and anticipates increased M&A activity in 2025. The company continues to focus on capital preservation while monitoring potential recession risks. This strategic focus aims to position PennantPark advantageously in a volatile market environment.
Executive Commentary
CEO Art Penn emphasized the company’s investment strategy, stating, "We seek to find investment opportunities in growing middle market companies that have high free cash flow conversion." He also highlighted the importance of preparing for economic downturns, noting, "As lenders, we always have to assume there’s a recession sometime in the life of these loans."
Risks and Challenges
- Economic downturn: The potential for a recession could impact loan performance.
- Market volatility: Fluctuations could affect investment opportunities and portfolio value.
- Interest rate changes: A significant portion of the debt portfolio is floating rate, which could be impacted by rate hikes.
- Sector concentration: Focus on specific sectors may expose the company to industry-specific risks.
- Nonaccrual loans: Currently at 1.6% of the portfolio, these could increase if economic conditions worsen.
PennantPark’s Q1 2025 earnings report reflects a company navigating challenges with a strategic focus on investment and capital preservation, despite minor earnings misses.
Full transcript - PennantPark Investment Corporation (PNNT) Q2 2025:
Conference Operator: Good afternoon, and welcome to the PennantPark Investment Corporation’s Second Fiscal Quarter twenty twenty five Earnings Conference Call. Today’s conference is being recorded. At this time, all participants have been placed in a 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 one on your telephone keypad.
If you would like to withdraw your question, press star two 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. I’d like to welcome you to PennantPark Investment Corporation’s second fiscal quarter twenty twenty five earnings conference call. I’m joined today by Rick Alordo, 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, Art.
I’d like to remind everyone that today’s call is being recorded. Please note that this call is the property of PennantPark Investment Corporation and that 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. Today’s conference call may also include forward looking statements and projections, and we ask that you refer to our most recent filings with the SEC 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. Thanks, Rick. I’m going to spend a few minutes and comment on the 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.
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 the 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 several 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. We continue to get meaningful covenant protection while 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 to our debt security was 4.7 times, and the portfolio’s weighted average interest coverage ratio was 2.1 times.
These attractive credit statistics are a testament to our selectivity, conservative orientation, and 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. There are business services, consumer, government services and defense, health care, 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. 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. We have many weeks to do our diligence with care. We thoughtfully structured transactions with sensible credit statistics, meaningful covenants, 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. With regard to covenants, unlike the erosion in the upper middle market, virtually all of our originated first lien loans had meaningful covenants, which help protect our capital. Credit quality of the portfolio has remained strong. We have three nonaccruals 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 nonaccrual investment was put back on accrual and pro form a for this subsequent event, PNNT’s nonaccruals represent only 1.4% of the portfolio at cost and 0.3% at market value. 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. This 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, we fuels the growth of our portfolio companies. In many cases, we 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 to March 31, we have invested over $566,000,000 in equity co investments and have generated an IRR of 26 and a multiple on invested capital of two times. Moving on to how we fared in the quarter ended March 31, core net investment income was 18¢ per share compared to total distributions of 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.
As we continue to pursue our equity rotation plan, 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 88¢ per share of undistributed spillover income, and we will use the spillover income to cover any shortfall and 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, And during the quarter, we continue to originate attractive investment opportunities and invested a hundred and $77,000,000 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.
And during the quarter, the JV invested a hundred and $70,000,000 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 and we expect that with additional growth in the JV portfolio, 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. 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, and 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 18¢ per share. Operating expenses for the quarter were as follows. Interest and credit facility expenses were 10,600,000.0. Base management and incentive fees were 6,400,000.0. General and administrative expenses were $1,600,000 and provision for excise taxes were $600,000 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.
As of March 31, our debt to equity ratio was 1.28 times, 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 with 158 companies across 37 different industries. The weighted average yield on our debt investments was 12%. We had three nonaccruals, which represent 1.6% of the portfolio at cost and point 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 nonaccruals represented only 1.4% of the portfolio at cost and point 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, seven percent 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 2.1 times. 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. 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.
Conference Operator: We’ll take our first question from Maxwell Fritzser with Truist.
Art Penn, Chairman and Chief Executive Officer, PennantPark Investment Corporation: I’m on for Mark Hughes. So how would you characterize the current pipeline for new investments? And then did you see 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 if they were impacted directly by tariffs, they certainly got delayed and more kind of delayed further. If they were nontariff related, they they got somewhat delayed. If it was tariff related, it probably got put on ice for a while. You know, since Liberation Day, April first, you know, we’ve seen modest activity, but in the last week or two as things seem to be coming down, we seem to be getting more of a pipeline of of activity, you know, for the rest of the year.
And and and you would imagine that m and a flows, which are kind of lifeblood of at least the new platforms, those will those will be tied to to the ratio of certainty or uncertainty that you see in the market. As we said, you know, with, you know, over a hundred names in our existing portfolio, a 90 names across our platform. There’s about a 60 names here in PNNT. 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, delayed to long term loan. They have kind of, you know, their their normal activities in terms of beefing up their existing operations.
So we are we are somewhat active with the existing portfolio. That’s the benefit of of incumbency and the 58 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. Thank you.
And then, you know, the lower level of new deals in the quarter versus the level of of incumbency, How much of that was due to stricter underwriting versus, you know, 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 kinda see what’s going on. The good news for us is the vast majority of what we do, as we said, is it’s it’s not tariff impacted. It’s limited, whether it be health care or government services or business services. You know, the the the the types of investments, types of industries that we are focused on where we have real domain expertise is is really not related to much tariff risk at all.
So there there, you’re just talking about m and a levels and in a world of general uncertainty, you know, how much how much m and a gets done, can buyers and sellers agree to a multiple if, you know, there’s a greater recession risk, you know, out there, you know, can can people agree? So, hopefully, things things kind of get more more certain, things calm down, and, hopefully, you know, we’ll see, m and a flows, resume. We came into 2025 thinking it’d be very active. 2025, you know, we’re set up to be a really you know, we’re very active in ’24. It was getting set up to be even a more active 2025.
Back out delayed, and we’re hopeful that as the overall market settles down, we can we can start to see more more m and a.
Conference Operator: We’ll We’ll go next to Melissa Wedel with JPMorgan.
Rick Alordo, Chief Financial Officer, PennantPark Investment Corporation: 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 channel, should we think about the March as reflecting, the full amount of of decrease in base rate, of course, plus or minus what was happening with non accrual?
Art Penn, Chairman and Chief Executive Officer, PennantPark Investment Corporation: Yeah. Look. I I think, you know, the way you’ve seen, you have base rates and then, of course, you have spread. Right? We’ve 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 since the April. Base rates, you know, you know, a lot smarter people are focused on that all day longer or, you know, making their assessments about, you know, base rates and what the what the Fed’s gonna do, when the Fed’s gonna 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 it’s that. It’s kind of m and a flowing and and using that to drive equity rotation, which we’ve been waiting very long for too long. This was the year 2025 with you. We’re gonna finally get it until kind of the events of the last month or two. But we’re hopeful that, you know, you could see it in some of the the the fair market values.
We’re hopeful that some of these equity positions, you know, can get can get rotated out as we as we march forward here in 2025.
Rick Alordo, Chief Financial Officer, PennantPark Investment Corporation: Yep. Noted. Follow-up question. You mentioned pretty limited tariff exposure across the portfolio. But given some of the industry contact or concentrations and industry concentrations, can you tell us how you’re thinking about sort of diligent exposure or government reimbursement exposure given some of the cuts that have been proposed?
Thank you.
Art Penn, Chairman and Chief Executive Officer, PennantPark Investment Corporation: Yeah. It’s a good yeah. It’s a good question. Government contracting and defense is is a big sector for us. You know, we’ve we’ve had both internal and external experts take a look at our portfolio and line it up against the priorities.
First, on a macro basis, the the defense budget proposal coming through congress shows a substantial increase to about a trillion dollars of defense spending overall. So that’s increased. You know? And 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, 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, USAID, and other civilian areas that have been the primary focus on Doge. And we, of course, need to look at defense as well and say, are we backing companies that are adding a lot of value? Are we backing companies where the focus of the defense department administration is leaning in? And 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.
Rick Alordo, Chief Financial Officer, PennantPark Investment Corporation: I appreciate that. Thanks for the the detail there. Follow-up question. Same thing, but health care. Is there any exposure there?
Thank you.
Art Penn, Chairman and Chief Executive Officer, PennantPark Investment Corporation: Yeah. Yeah. Health care is a big focus of ours. And I know some of our peers also have big exposure to health care, and some of our peers have had some stumbles in health care. Not not that we’re perfect.
But but, generally, when I when we look at our health care portfolio versus our peers, I think the biggest difference is we’re just we just don’t put as much leverage on these companies. Right? So, you know, there’s always challenges. There’s always reimbursement risk. Well, it’s a people business.
So, you know, how what’s going on with the doctors, etcetera. We just have a lower levered portfolio. So we’ve, you know, we’ve taken less risk, and it’s it’s played out. Healthcare so far is performing very well for us. And, you know, when you have a portfolio that’s leveraged it, you know, four times going in and maybe four and a half times 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 because we’re we’re focused on taking less risk.
Rick Alordo, Chief Financial Officer, PennantPark Investment Corporation: Same, sir.
Art Penn, Chairman and Chief Executive Officer, PennantPark Investment Corporation: Thank you.
Conference Operator: We’ll go back to Lacey with Raymond James.
Melissa Wedel, Analyst, JPMorgan: Hi. Thanks for the question. With all
Rick Alordo, Chief Financial Officer, PennantPark Investment Corporation: the current macro uncertainty, is there any shift in terms of the mix of the current pipeline since April between incumbent and new borrowers?
Art Penn, Chairman and Chief Executive Officer, PennantPark Investment Corporation: It’s a great question. You know, look, our five sectors are generally not really tariff impacted. And since the majority, 80% of what we’re doing is existing borrowers, It’s gonna be the same sectors. Certainly, anything that comes in the door that’s tariff impacted is gonna be, you know, probably not gonna be looked at very strenuously at this point until we we get more certainty on on the tariff side of it. So it’s going 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 we’re not predicting recession. We don’t know if there’s going be a recession in the back half of 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 just to see how these companies might perform in a downside case. You know, 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%, fifty % 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 mark. We’ve got quarterly quarterly maintenance tests. If you go back to COVID, remember that the economy was shut down in March of twenty twenty, which meant sometime in the next three months, our borrowers needed to meet a covenant.
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 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 monthly 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 rates we get in the core middle market. So, you know, that that was a that was a nice test for us. We came through it in 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 and and in in the new loans, just for downside case, we’re we’re we’re modeling in a in a recession in year one.
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 as lenders, we have to prepare for that downside.
I know that was a long winded answer, Hailey, but, you know, I thought it was worthwhile.
Melissa Wedel, Analyst, JPMorgan: No. That was helpful. Thanks for the color.
Conference Operator: And at this time, there are no further questions. I’ll turn the call back to Art for any additional or closing remarks.
Art Penn, Chairman and Chief Executive Officer, PennantPark Investment Corporation: Thank you, everybody, for participating in the PNC call today. We look forward to speaking to you next in early August after our next quarterly earnings release. Have a good day.
Conference Operator: This does conclude today’s conference. We thank you for your participation.
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