PennantPark Investment Corporation (NASDAQ:PNNT) Q1 2019 Earnings Conference Call Transcript

Feb 08, 2019 • 10:00 am ET

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PennantPark Investment Corporation (NASDAQ:PNNT) Q1 2019 Earnings Conference Call Transcript

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Presentation
Executive
Arthur Penn

provide investors with an attractive dividend stream, along with potential upside, as our equity investments mature.

As you all know the Small Business Credit Availability Act was signed into law in late March 2018. Our shareholders have just approved the reduction of the asset coverage test from 200% to 150%. In connection with this reduction, we have reduced our base fee from 1.5% to 1% on gross assets that exceed 200% of PNNT's NAV at the beginning of each quarter.

Over time, we're targeting a debt-to-equity ratio of 1.1 to 1.5 times. We will not reach this target overnight. We will continue to carefully invest and it may take us several quarters to reach the new target.

Since our $250 million notes mature in less than a year, we announced that on March 4, 2019, we will prepay the notes at 100% of principal amount, plus accrued in unpaid interest as well as a make-whole premium.

To enhance our liquidity we are in advanced discussions on an additional $250 million credit facility to complement our existing $445 million credit facility and our $150 million of SBIC II financing. We have paid off the remaining $30 million loan from the SBA on our SBIC I. In addition, our SBIC III application is still pending approval with the SBA.

Our primary business of financing middle market sponsors has remained robust. We manage relationships with about 400 private equity sponsors across the country, from our offices in New York, Los Angeles, Chicago, Houston and London, and we have done business with about 180 sponsors. Due to the wide funnel of deal flow that we receive, relative to the size of our vehicles, we can be extremely selective with our investments. In this environment, we have not only been extremely selective, but we have generally moved up the capital structure to more secure investments.

A reminder about our long-term track record, PNNT was in business in 2007, then as now, focused on financing middle market financial sponsors. Our performance through the global financial crisis and recession was solid. Prior to the global financial crisis in September 2008, we initiated investments which ultimately aggregated $480 million.

Average EBITDA on the underlying portfolio companies was down about 7% to the bottom of the recession. According to the Bloomberg North American High Yield Index, the average high yield company EBITDA was down about 40% during that timeframe. As a result, we had few defaults and attractive recoveries on that portfolio. The IRR of those underlying investments was 8%, even though they were done prior to the financial crisis and recession. We are proud of this downside track record.

We've had only 12 companies go non-accrual out of 214 investments since inception, over 11 years ago. Further, we are proud that even when we have had those non-accruals, we've been able to preserve capital for our shareholders. Based on values as of December 31st, today we have recovered about 76% of capital invested on the 12 companies that