PennantPark Investment Corporation (NYSE: PNNT) — FY2022 Form 10-K
Reporting period: Fiscal year ended September 30, 2022; filed November 17, 2022. The request metadata says “2021 Q4,” but the filing is for FY2022. PennantPark is an externally managed business development company (BDC) investing primarily in debt and equity of U.S. middle-market companies.
Financial performance and portfolio
| Metric | FY2022 / Sept. 30, 2022 | FY2021 / Sept. 30, 2021 |
|---|---|---|
| Investment income | $105.0 million | $81.6 million |
| Net expenses | $61.0 million | $45.1 million |
| Net investment income | $43.9 million; $0.66 per share | $36.5 million; $0.54 per share |
| Net realized gains | $34.8 million | $30.0 million |
| Net change in unrealized value of investments and debt | $(103.4) million | $100.1 million |
| Change in net assets from operations | $(24.7) million; $(0.37) per share | $166.6 million; $2.49 per share |
| Net assets / NAV per share | $585.6 million / $8.98 | $660.1 million / $9.85 |
| Investments at fair value | $1,226.3 million | $1,255.3 million |
| Cash and cash equivalents | $52.7 million | $20.4 million |
- Investment income increased about 29%, primarily from higher LIBOR/SOFR base rates and a larger interest-bearing portfolio. Net investment income rose about 21%.
- Portfolio fair value declined about 2%, while unrealized investment depreciation was the principal driver of the year’s operating loss. Portfolio net unrealized depreciation was reported at approximately $71 million in the MD&A; the balance sheet shows investments below cost by approximately $75.7 million. These measures reflect different presentations and should be reconciled to the detailed schedules.
- The portfolio comprised 123 companies, with a $10.1 million average investment size and a 10.8% weighted-average yield on interest-bearing debt investments. One company was on non-accrual, representing 1% of portfolio cost and zero fair value.
- Investments were 51% first lien debt, 11% second lien debt, 12% subordinated debt and 26% equity, including investments through PSLF. Business services was the largest reported industry exposure at 18%.
- Purchases were $933.8 million and sales and repayments were $911.6 million. Cash used in operating activities was $19.4 million; financing activities provided $52.0 million.
Debt, liquidity and distributions
- At September 30, 2022, face-value debt totaled approximately $720.9 million: $385.9 million under the Truist revolving facility, $20.0 million of SBA debentures, $150.0 million of 4.50% 2026 Notes and $165.0 million of 4.00% 2026 Notes-2. The reported weighted-average annual borrowing rate was 4.8%.
- The Truist facility had $500 million of commitments, $114.1 million of reported unused capacity subject to borrowing-base and leverage limits, and pricing of 235 basis points over SOFR. Most commitments mature in July 2027; a $25 million tranche has an earlier revolving-period expiry and maturity. The company reported compliance with facility terms.
- Asset coverage was 186%, compared with 221% a year earlier; the BDC’s applicable minimum is 150%. The company reported leverage, including SBA debentures, at 119% of net assets. SBA debentures are excluded from the statutory coverage calculation under SEC exemptive relief.
- Cash distributions declared were $0.56 per share, or $36.6 million, versus $0.48 per share, or $32.2 million, in FY2021. Management intends to continue quarterly distributions but gives no assurance about future amounts.
- The company repurchased 1.82 million shares for approximately $13.2 million under a $25 million program authorized in February 2022. Its common stock closed at $5.46 versus NAV of $8.98, a substantial discount.
Material changes, outlook and risks
- Investment income and net investment income improved, but higher expenses—including $5.1 million of credit-facility amendment and debt-issuance costs—and a sharp reversal to unrealized depreciation drove a net operating loss. The 2024 Notes were redeemed in November 2021; the company issued $165 million of 2026 Notes-2 in October 2021.
- Management states that liquidity and capital resources are sufficient for operations. The filing provides no specific earnings, NAV, portfolio-growth or distribution guidance. Future results depend on deal origination, portfolio credit performance, interest rates, financing availability and market conditions.
- Interest-rate sensitivity estimates show that a 1% increase in base rates would increase annual net interest income by about $5.35 million ($0.08 per share), while a 1% decrease would reduce it by about $4.92 million ($0.08 per share). These are estimates based on a static balance sheet, not forecasts. The filing’s disclosures differ on the proportion of variable-rate debt investments (96% in one portfolio discussion versus 94% in the market-risk section).
- Key risks include borrower defaults, inflation and rising rates, illiquid investments and uncertain Level 3 valuations, leverage and refinancing risk, LIBOR transition, and compliance with Truist, BDC, RIC and SBA requirements. The company also cites geopolitical uncertainty, including Russia’s invasion of Ukraine, and continuing public-health and market-disruption risks.
- Control weakness: Management concluded internal control over financial reporting and disclosure controls were not effective because procedures did not ensure timely delivery of portfolio-company financial information to independent valuation providers. Management reported no material financial-statement misstatement, described remediation efforts, and said remediation still required execution. The auditor gave an unqualified opinion on the financial statements but did not opine on internal-control effectiveness; Level 3 fair value measurements were a critical audit matter.
- Fair value estimates rely substantially on unobservable inputs. The company identified about $1.16 billion of Level 3 investments at year-end; actual sale proceeds may differ materially from reported values. No material legal proceedings were reported.
Important facts for investors to verify
- Reconcile portfolio depreciation and valuation disclosures, including the reported $71.0 million net unrealized depreciation and the $75.7 million balance-sheet difference between investment cost and fair value.
- Review the largest markdowns, controlled and affiliated holdings, non-accrual exposure and the assumptions used in Level 3 valuations.
- Track asset coverage, borrowing-base availability, Truist facility maturities and refinancing needs, and the effect of further rate increases on both borrowers and funding costs.
- Assess whether recurring cash income supports distributions, including the effects of PIK income, realized gains, taxes and any return of capital.
- Monitor remediation of the material weakness and confirm the variable-rate portfolio percentage and interest-rate sensitivity using subsequent filings.