PennantPark Investment Corporation (NYSE: PNNT) — Form 10-K
Reporting period: Fiscal year ended September 30, 2023; filed December 7, 2023. Although the request labels the period “2022 Q4,” this filing reports fiscal 2023 annual results, with fiscal 2022 comparisons.
Business context
PNNT is an externally managed business development company (BDC) that invests mainly in debt and equity of U.S. middle-market companies. Its stated objectives are current income and capital appreciation while seeking to preserve capital. It also holds investments through PSLF, an unconsolidated joint venture with Pantheon.
Financial performance and condition
| Metric | FY2023 / September 30, 2023 | FY2022 / September 30, 2022 |
|---|---|---|
| Investment income | $145.4 million | $105.0 million |
| Net investment income | $65.5 million; $1.00 per share | $43.9 million; $0.66 per share |
| Net realized gain (loss) on investments and debt | $(156.8) million | $34.8 million |
| Net change in unrealized appreciation (depreciation) on investments and debt | $57.4 million appreciation | $(103.4) million depreciation |
| Net change in net assets from operations | $(33.8) million; $(0.52) per share | $(24.7) million; $(0.37) per share |
| Total assets / total net assets | $1,157.0 million / $502.2 million | $1,320.6 million / $585.6 million |
| NAV per share | $7.70 | $8.98 |
| Cash and cash equivalents | $38.8 million | $54.8 million |
Higher SOFR rates were the principal reason investment income and net investment income increased. Expenses rose to $79.8 million from $61.0 million, including $39.4 million of debt interest and financing expense and $13.9 million of income incentive fees. FY2023 distributions were $0.76 per share ($49.6 million), versus $0.56 per share ($36.6 million) in FY2022; no long-term capital-gain distributions were reported.
The portfolio’s fair value was $1,101.6 million, down from $1,226.3 million. It included $527.7 million of first-lien debt, $80.4 million of second-lien debt, $156.2 million of subordinated debt and $237.6 million of preferred and common equity; the 2023 total also included $99.8 million of U.S. government securities. Interest-bearing debt investments were 95% floating-rate, and their weighted-average yield was 13.0%, compared with 10.8% a year earlier. One portfolio company was on non-accrual, representing 1.2% of portfolio cost and zero fair value. Portfolio net unrealized depreciation was $16.3 million, versus $75.7 million in 2022.
Debt, liquidity and cash flow
- Consolidated debt outstanding at par was approximately $527.4 million: $212.4 million under the Truist revolving credit facility, $150.0 million of 4.50% notes due May 2026, and $165.0 million of 4.00% notes due November 2026. The reported weighted-average borrowing rate was 6.0%.
- The Truist facility’s weighted-average rate was 7.7% at year-end, versus 5.3% in 2022. Reported unused capacity was $262.6 million, subject to leverage and borrowing-base restrictions. PNNT said it was in compliance with the facility’s terms.
- Asset coverage was 195%, above the applicable 150% statutory minimum. The remaining $20.0 million of SBIC debentures was repaid in the first nine months of FY2023; the SBA license was surrendered.
- Operating activities provided $222.9 million of cash, while financing activities used $239.2 million, principally reflecting repayments under the Truist facility. These cash-flow totals include substantial investment purchases, repayments and other portfolio-related movements; they should not be read as operating earnings.
- PNNT said liquidity and capital resources were sufficient for effective operations. The facility is secured by substantially all PNNT assets, while the unsecured notes are effectively subordinated to secured debt and structurally subordinated to subsidiary liabilities.
Changes, outlook and notable matters
- Compared with FY2022, investment income rose about 39% and net investment income rose about 49%, while NAV per share declined from $8.98 to $7.70. The net realized loss included a $133.1 million loss related to RAM Energy; PNNT sold its RAM Energy investment in February 2023. Stronger unrealized valuation movements partly offset realized losses.
- PNNT invested $275.4 million during FY2023 and reported $418.6 million of sales and repayments, excluding U.S. government securities; the prior-year figures were $933.8 million and $911.6 million. The portfolio had 129 companies, compared with 123, and a smaller average investment size of $7.8 million versus $10.0 million.
- Restatement: PNNT corrected the presentation of affiliate-related cash in the September 30, 2022 statements, increasing both cash and “due to affiliates” by $2.1 million. The correction did not affect net assets, NAV per share, net investment income or operating results.
- Controls: Management and the auditor identified material weaknesses involving quarterly cash and investment reconciliations, interest-income review and non-accrual classification. Management concluded internal control over financial reporting was ineffective as of September 30, 2023, and disclosure controls were also ineffective. Remediation is underway, with no completion date stated. The financial-statement audit opinion was unqualified; the auditor separately issued an adverse opinion on internal control effectiveness.
- Outlook and risks: The filing provides no specific numeric earnings, portfolio or distribution guidance. Management highlights risks from borrower defaults, rising funding costs and rates, leverage and facility covenants, illiquid Level 3 valuations, economic conditions, and access to refinancing and capital. A 1% rate decline was estimated to reduce annual net interest income by $5.4 million ($0.08 per share), while a 1% increase was estimated to add the same amount, assuming the balance sheet remained unchanged.
Important facts for investors to verify
- Review the RAM Energy realization and the composition of the $156.8 million FY2023 net realized loss, including the effects of affiliated investments and taxes.
- Track remediation and independent testing of the material weaknesses, especially cash/investment reconciliations, interest income and non-accrual determinations.
- Assess portfolio credit quality, non-accruals, PIK income and valuation assumptions; $927.3 million of investments were Level 3 fair value measurements.
- Confirm current Truist facility availability, borrowing-base and covenant headroom, asset coverage, and refinancing plans for the 2026 notes and facility obligations.
- Compare future net investment income and cash generation with distributions; the filing does not guarantee the current distribution level or provide numeric forward guidance.