PennantPark Investment (PNNT) - 2019 Q2 - Earnings Call Transcript

Financial Data and Key Metrics Changes - For the quarter ended March 31, 2019, the company invested $184 million primarily in first lien secured debt at an average yield of 9.1% [7] - Core net investment income totaled $0.19 per share, including $0.01 per share of other income, while GAAP net investment income was $0.16 per share [19] - The net asset value (NAV) decreased from $9.5 per share to $8.83 per share [20] Business Line Data and Key Metrics Changes - The overall debt portfolio has a weighted average yield of 10.6%, with 55% invested in first lien secured debt, 28% in second lien secured debts, 4% in subordinated debt, and 13% in preferred and common equity [21] - The company has managed relationships with about 400 private equity sponsors and has done business with approximately 180 sponsors [10] Market Data and Key Metrics Changes - The company noted that the small business credit availability has improved since the law was signed in March 2018, and the asset coverage test was reduced from 200% to 250% [9] - The overall market for middle market M&A activity has been lighter in 2019 compared to 2018, with increased skepticism among buyers and financers regarding pro forma adjustments [31] Company Strategy and Development Direction - The company aims to generate attractive risk-adjusted returns through income while preserving capital, focusing on less risky middle market companies with high free cash flow conversion [23] - The strategic direction includes a more diversified portfolio with smaller bite sizes and a focus on higher positions in the capital stack [16][49] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the underlying portfolio, indicating a strong U.S. economy with no signs of recession [12] - The company anticipates being active in the remainder of 2019 due to growth and M&A-driven financings, supported by a strong sourcing network and client relationships [17] Other Important Information - The company has completed a stock repurchase program, purchasing $29.5 million of stock, which is accretive to both NAV and income per share [8] - The company prepaid $250 million of its notes and closed on a new $250 million credit facility with BNP [10] Q&A Session Summary Question: Thoughts on yields going forward - Management noted that yields for first lien secured debt have remained stable, ranging from L plus 475 to L plus 700 [27] Question: Competitive changes in the industry - Management indicated that there have not been significant changes in competition, with rational competitors in the market [28] Question: Details on the non-accrual Hollander - Management explained that the non-accrual was due to integration issues following multiple acquisitions, leading to operational challenges [33] Question: Concerns about other assets in the portfolio - Management stated that they do not see similar issues in the rest of the portfolio, emphasizing the importance of thorough due diligence [35] Question: Managing downside risk to portfolio yield - Management acknowledged the need to consider LIBOR trends and the potential for fixed-rate deals in the current market environment [40] Question: Breakdown of realized gains and unrealized appreciation - Management provided details on the key downward movers and upward movers in the portfolio, highlighting specific investments [43] Question: Update on RAM's focus on Austin Chalk assets - Management explained that RAM is concentrating on its Austin Chalk position due to its attractiveness and potential for future acquisitions [47] Question: Evolution of investment strategy - Management discussed a shift towards smaller, more diversified investments at the top of the capital stack, moving away from concentrated positions [49]