PennantPark Investment (US:PNNT)2021-02-09 21:13PART I. CONSOLIDATED FINANCIAL INFORMATION Item 1. Consolidated Financial Statements This section presents the unaudited consolidated financial statements for PennantPark Investment Corporation for the quarter ended December 31, 2020 Consolidated Statements of Assets and Liabilities Total assets increased to $1.15 billion, liabilities decreased, boosting net assets to $588.8 million and NAV per share to $8.78 Consolidated Assets and Liabilities (unaudited) | Financial Metric | Dec 31, 2020 ($) | Sep 30, 2020 ($) | | :--- | :--- | :--- | | Total Investments (at fair value) | 1,127,091,065 | 1,081,771,418 | | Total Assets | 1,153,835,369 | 1,114,352,881 | | Total Liabilities | 565,038,179 | 588,644,029 | | Total Net Assets | 588,797,190 | 525,708,852 | | Net Asset Value (NAV) per share | 8.78 | 7.84 | Consolidated Statements of Operations Investment income decreased to $18.7 million, but a $62.8 million gain led to a $71.1 million net increase in net assets from operations Consolidated Operations Highlights (unaudited) | Metric | Three Months Ended Dec 31, 2020 ($) | Three Months Ended Dec 31, 2019 ($) | | :--- | :--- | :--- | | Total Investment Income | 18,732,460 | 26,003,765 | | Net Expenses | 10,417,062 | 15,818,605 | | Net Investment Income | 8,315,398 | 10,185,160 | | Net Realized and Unrealized Gain | 62,818,353 | 9,017,350 | | Net Increase in Net Assets from Operations | 71,133,751 | 19,202,510 | | Net Increase in Net Assets per Share | 1.06 | 0.29 | Consolidated Statements of Changes in Net Assets Net assets increased by $63.1 million, driven by a $71.1 million net increase from operations, offset by $8.0 million in distributions Changes in Net Assets (unaudited) | Metric | Three Months Ended Dec 31, 2020 ($) | Three Months Ended Dec 31, 2019 ($) | | :--- | :--- | :--- | | Net Assets, Beginning of Period | 525,708,852 | 581,905,668 | | Net Increase from Operations | 71,133,751 | 19,202,510 | | Distributions to Stockholders | (8,045,413) | (12,068,119) | | Net Increase in Net Assets | 63,088,338 | 7,134,391 | | Net Assets, End of Period | 588,797,190 | 589,040,059 | Consolidated Statements of Cash Flows Net cash from operating activities was $35.0 million, reversing a prior-year outflow, resulting in a $5.7 million net decrease in cash Cash Flow Summary (unaudited) | Cash Flow Activity | Three Months Ended Dec 31, 2020 ($) | Three Months Ended Dec 31, 2019 ($) | | :--- | :--- | :--- | | Net Cash from Operating Activities | 35,038,357 | (71,322,809) | | Net Cash from Financing Activities | (40,752,513) | 43,844,381 | | Net Decrease in Cash | (5,714,156) | (27,478,428) | | Cash, End of Period | 20,157,299 | 32,107,649 | Consolidated Schedules of Investments The $1.127 billion portfolio was primarily in First Lien Secured Debt (65.4%) and Common Equity (27.2%), with top concentrations in Healthcare, Education, and Childcare Portfolio Composition by Fair Value (Dec 31, 2020) | Investment Type | Percentage of Portfolio | | :--- | :--- | | First Lien Secured Debt | 65.4% | | Second Lien Secured Debt | 22.3% | | Subordinated Debt/Corporate Notes | 8.9% | | Preferred Equity/Partnership Interests | 3.6% | | Common Equity/Partnership Interests/Warrants | 27.2% | Top Industry Concentrations by Fair Value (Dec 31, 2020) | Industry Classification | Percentage of Portfolio | | :--- | :--- | | Healthcare, Education and Childcare | 23% | | Energy and Utilities | 7% | | Environmental Services | 7% | | Consumer Products | 6% | | Distribution | 5% | Notes to Consolidated Financial Statements Notes detail BDC organization, accounting policies, the PSLF joint venture, fee waivers, debt facilities, and a 232% asset coverage ratio - The company is a closed-end, externally managed BDC investing primarily in U.S. middle-market companies and operates a licensed SBIC subsidiary, SBIC II4041 - On July 31, 2020, the company formed PennantPark Senior Loan Fund, LLC (PSLF), an unconsolidated joint venture with Pantheon, to invest in middle-market corporate debt securities43 - The Investment Adviser has voluntarily agreed to waive performance-based incentive fees for the period of April 1, 2020, to March 31, 202168 - The company's asset coverage ratio was 232% as of December 31, 2020, well above the required 150% minimum131 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial condition, portfolio activity, and operations, noting portfolio value growth, COVID-19 impacts, and strong liquidity Overview The company is a BDC investing $10 million to $50 million in U.S. middle-market companies for income and capital appreciation - The company's primary investment objective is to generate both current income and capital appreciation by investing in U.S. middle-market companies156 - Investment targets are typically companies with annual revenues between $50 million and $1 billion, with average investment sizes of $10 million to $50 million157 COVID-19 Developments The pandemic creates material uncertainty, adversely affecting portfolio companies and reducing variable-rate interest income, despite operational stability - The COVID-19 pandemic has caused financial distress for some portfolio companies, which may reduce interest and dividend income and require follow-on investments or restructuring165166167 - Reduced interest rates, such as LIBOR, have decreased gross investment income from the 92% of the debt portfolio that is variable-rate169 Portfolio and Investment Activity The portfolio grew to $1.127 billion across 81 companies with a 9.3% debt yield, with $68.2 million invested and $102.6 million received Portfolio Summary | Metric | Dec 31, 2020 | Sep 30, 2020 | | :--- | :--- | :--- | | Total Portfolio Value (million $) | 1,127.1 | 1,081.8 | | Number of Portfolio Companies | 81 | 80 | | Weighted Avg. Yield on Debt | 9.3% | 8.9% | | % Variable-Rate Debt | 92% | 93% | | Companies on Non-Accrual | 0 | 2 | - For the three months ended Dec 31, 2020, the company invested $68.2 million and received $102.6 million from sales and repayments176 Results of Operations Investment income fell to $18.7 million, but net assets from operations significantly increased to $71.1 million due to $93.5 million in unrealized appreciation Quarterly Results of Operations Comparison | Metric | Q4 2020 (million $) | Q4 2019 (million $) | | :--- | :--- | :--- | | Investment Income | 18.7 | 26.0 | | Net Expenses | 10.4 | 15.8 | | Net Investment Income | 8.3 | 10.2 | | Net Realized Loss | (17.6) | (12.0) | | Net Unrealized Appreciation | 93.5 | 23.6 | | Net Change in Net Assets | 71.1 | 19.2 | - The increase in net assets was primarily due to unrealized gains in the equity co-investment program, including ITC Rumba, LLC (Cano Health, LLC)204205 Liquidity and Capital Resources Liquidity is strong with $355.5 million outstanding on the Truist Credit Facility, $118.5 million in SBA debentures, and a 232% asset coverage ratio - The company's asset coverage ratio was 232% as of Dec 31, 2020, exceeding the 150% minimum requirement207 Debt Outstanding as of Dec 31, 2020 | Debt Instrument | Principal Amount (million $) | | :--- | :--- | | Truist Credit Facility | 355.5 | | SBA Debentures | 118.5 | | 5.50% Notes due 2024 | 86.3 | | Total Debt | 560.3 | - As of December 31, 2020, the company had $119.5 million of unused borrowing capacity under the Truist Credit Facility and $20.2 million in cash and cash equivalents210218 Item 3. Quantitative and Qualitative Disclosures About Market Risk The company faces interest rate risk, with 92% variable-rate debt; a 1% rate increase would decrease net interest income by $2.5 million annually - The company is subject to interest rate risk, with 92% of its debt portfolio being variable-rate, typically based on LIBOR246 Annualized Impact of Hypothetical Interest Rate Changes | Change In Interest Rates | Change In Net Interest Income (thousand $) | Change In Net Interest Income Per Share ($) | | :--- | :--- | :--- | | Down 1% | 580 | 0.01 | | Up 1% | (2,459) | (0.04) | | Up 2% | 879 | 0.01 | | Up 3% | 4,217 | 0.06 | Item 4. Controls and Procedures Management concluded disclosure controls were effective as of December 31, 2020, with no material changes to internal financial reporting controls - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of December 31, 2020250252 - No material changes were made to internal controls over financial reporting during the quarter253 PART II. OTHER INFORMATION Item 1. Legal Proceedings The company, its Investment Adviser, and Administrator are not subject to any material legal proceedings, nor are any threatened - There are no material legal proceedings against the company, its Investment Adviser, or its Administrator254 Item 1A. Risk Factors Increased leverage due to a reduced 150% asset coverage ratio magnifies potential gains and losses, requiring capital for growth - A key risk is the increased leverage permitted since February 2019, when the minimum asset coverage ratio was reduced from 200% to 150% This allows the company to potentially increase its debt-to-equity ratio from 1-to-1 to 2-to-1256258 - Increased leverage magnifies the potential for both loss and gain, and if asset values decline, the impact on net asset value will be greater260 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds No unregistered sales of equity securities occurred during the three months ended December 31, 2020 - No unregistered sales of equity securities occurred during the quarter262 Item 3. Defaults Upon Senior Securities There were no defaults upon senior securities during the reporting period - None263 Item 6. Exhibits Exhibits filed include CEO and CFO certifications pursuant to the Sarbanes-Oxley Act of 2002 - Exhibits filed include CEO and CFO certifications under Rule 13a-14 and Section 906 of the Sarbanes-Oxley Act266