PennantPark Investment Corporation Stock

Good afternoon and welcome to the PennantPark Investment Corporation's third fiscal Quarter 2026 earnings conference call. Today's conference is being recorded. [Operator Instructions]

It is now my pleasure to turn the call over to Mr. Art Penn, Chairman and Chief Executive Officer of PennantPark Investment Corporation. Mr. Penn, you may begin your conference.

Good afternoon, everyone, and thank you for joining PennantPark Investment Corporation's third fiscal quarter 2026 earnings conference call. I'm joined today by Rick Allorto, our Chief Financial Officer. Rick, please start off by disclosing some general conference call information and include a discussion about forward-looking statements.

Thank you, Art. I'd like to remind everyone that today's call is being recorded and is the property of PennantPark Investment Corporation. Any unauthorized broadcast of this call in any form is strictly prohibited. An audio replay of the call will be available on our website.

I'd also like to call your attention to the customary safe harbor disclosure in our press release regarding forward-looking information. Our remarks today may include forward-looking statements and projections. Please refer to our most recent SEC filings for important factors that could cause actual results to differ materially from these projections. We do not undertake to update our forward-looking statements unless required by law. To obtain copies of our latest SEC filings, please visit our website at pennantpark.com or call us at 212-905-1000.

At this time, I'd like to turn the call back to our Chairman and Chief Executive Officer, Art Penn.

Thanks, Rick. I'll begin with an overview of our third quarter results and a review of the portfolio. I'll then discuss the current market environment and how we believe PNNT is positioned going forward. Rick will follow up with a detailed review of our financial results, after which we will open up the call for questions.

For the quarter ended June 30, our core NII, net investment income, was $0.14 per share. This exceeded our base dividend of $0.04 per share per month, or $0.12 per share for the quarter. As of June 30, our NAV per share was $6.56, which is down 2.5% from the prior quarter. As we've previously communicated PNNT has a considerable balance of undistributed taxable income, which we are required to distribute to shareholders. PNNT is utilizing the supplemental dividends to make such distributions, and the decline in NAV was primarily attributable to the supplemental dividend payments.

Our portfolio remains highly diversified and conservatively positioned. Median debt-to-EBITDA was 4.7x, median interest coverage of 2.1x, and median loan-to-value was 45%. We ended the quarter with 4 non-accrual investments, representing 2.5% of the portfolio cost and 0.8% at market value. As of June 30, our portfolio totaled $1.2 billion. And during the quarter, we continued to originate attractive investment opportunities and invested a total of $77 million at a weighted average yield of 8.9%, including $13 million invested in 5 new platform investments with a median debt-to-EBITDA of 2.3x, interest coverage of 4.2x, and loan-to-value of 30%.

Our PSLF joint venture portfolio continues to be a significant contributor to our core NII. Over the last 12 months, PNNT's average cash yield on invested capital in the JV was 15.1%. As of June 30, the JV portfolio totaled $1.3 billion, and has the capacity to increase its portfolio to approximately $1.5 billion. In June, the JV amended its revolving credit facility and reduced the interest rate to SOFR plus 2.1% from SOFR plus 2.25%. Additionally, in July, the JV partially refinanced its $300 million debt securitization. The JV refinanced the AAA tranches and decreased the securitization's weighted average spread by 97 basis points to 1.69% from 2.66%. We expect additional growth in the JV portfolio, and the decrease in its cost of capital will enhance PNNT's earnings momentum in future quarters.

During the quarter, we generated a meaningful realization from our equity co-investment in a leading defense technology company. We received approximately $15 million in total proceeds on our original $1.1 million investment, representing nearly a 14x multiple on invested capital. Government services and defense continues to be one of our highest conviction investment sectors and has consistently been among our best-performing verticals. Since inception, we've invested approximately $3 billion across the sector, including roughly $780 million through PNNT. For these investments, they were 92% first lien senior secured and generated an overall IRR of 12.2%, demonstrating our ability to identify businesses operating in strategically important markets.

We remain highly constructive on the long-term outlook for government services and defense because the sector possesses several characteristics that align well with our investment philosophy. Demand has historically been supported by durable federal funding priorities and long-term contracts that provide meaningful revenue visibility and stability. Many of these businesses exhibit resilient cash flow profiles, variable cost structures, and are generally less sensitive to broader economic cycles than many commercial industries. In addition, the sector continues to benefit from active M&A markets and strong valuation support, thereby providing multiple avenues for value creation.

Our portfolio is concentrated in businesses supporting the Department of War and other mission-critical government agencies. We focus on companies addressing high-priority national security initiatives, including modernization of defense systems and digital infrastructure, cyber and electronic warfare capabilities, modeling and simulation, counter-drone technologies, and next-generation autonomous systems. We believe these priorities will remain central to U.S. defense spending for years to come, creating a favorable backdrop for continued investment opportunities. On a combined basis, including the joint venture portfolio, government services and defense represents approximately 11% of total investments. And given our experience, sourcing capabilities, and the attractive opportunity set, we intend to increase that exposure over time.

Software remains an area of focus for market participants. Our exposure is limited to approximately 4.6% of the portfolio and is structured consistently with our core middle market strategy. These investments are primarily cash pay, covenant-protected loans with moderate leverage and relatively short durations. They're concentrated in mission-critical enterprise software businesses serving regulated end markets including defense, healthcare, and financial services.

Let me now turn to the broader market environment. M&A activity has increased over the past 6 to 9 months, although overall conditions remain uneven. Private equity sponsors remain active, and we are seeing a growing pipeline of attractive opportunities across both new originations and add-on investments. We are optimistic that activity levels will remain elevated throughout the back half of this year.

We expect increased transaction activity to drive repayments across the portfolio, including opportunities to monetize equity co-investments and redeploy that capital into income-generating investments. In the core middle market, the pricing for high-quality first lien term loans remains attractive, ranging from SOFR plus 500 to 550 basis points with leverage of approximately 4.5x EBITDA. Importantly, these structures continue to include meaningful covenant protections in contrast to the covenant-lite structures prevalent in the upper middle market. We believe the current environment favors lenders with established private equity sponsor relationships, consistent access to deal flow, and disciplined underwriting. And these are long-standing strengths of our PennantPark platform.

We continue to believe that the core middle market offers an attractive risk-adjusted opportunity. Companies in this segment generally have EBITDA of $10 million to $50 million and often operate below the practical threshold of the broadly syndicated loan and high-yield markets. As a result, lenders can typically conduct extensive diligence, negotiate meaningful financial covenants, structure transactions with appropriate leverage and equity cushions, and maintain regular access to company financial information. Since our inception nearly 19 years ago, PNNT has invested $9.4 billion at an average yield of 11.1%, while maintaining a loss ratio on invested capital of roughly 20 basis points annually, a testament to our consistent and disciplined approach through multiple market cycles.

As a provider of strategic capital, we fuel the growth of our portfolio companies. In many cases, we participate in the upside of the company by making an equity co-investment. Our returns on these equity co-investments have been excellent over time. Overall for our platform from inception through June 30, we've invested over $629 million in equity co-investments and have generated an IRR of 25% at a multiple on invested capital of 2x. Looking ahead, our experienced team and broad origination platform position us well to generate attractive deal flow. We remain steadfast in our commitment to capital preservation and maintaining a disciplined, patient investment approach. We continue to focus on investing in high-quality middle-market companies with strong free cash flow generation. We capture that valuation through senior secured loans, and we pay out those contractual cash flows in the form of dividends to our shareholders.

With that overview, I'll turn the call over to Rick for a more detailed review of our financial results.

Thank you, Art. For the quarter ending June 30, GAAP and core net investment income were $0.14 per share. Investment income was comprised of $20 million in interest income, $4.5 million in dividend income, and $0.3 million in other income.

Operating expenses for the quarter were as follows. Interest and credit facility expenses were $8.8 million. Base management and incentive fees were $5.4 million. General and administrative expenses were $1.5 million. And provision for excise taxes was $0.2 million. Net realized and unrealized change on investments and debt, including provision for taxes, was a loss of $4.4 million. As of June 30, our NAV was $6.56 per share compared to $6.73 per share last quarter. At quarter end, our debt-to-equity ratio was 1.29x, and our capital structure is diversified across multiple funding sources, including both secured and unsecured debt.

As of June 30, our key portfolio statistics were as follows. Our portfolio remains highly diversified with 159 companies across 37 different industries. The weighted average yield on our debt investments was 11%. The portfolio is comprised of 46% first lien senior secured debt, 2% second lien secured debt, 15% subordinated notes to PSLF, 7% other subordinated debt, 6% equity in PSLF, and 24% in other preferred and common equity co-investments. 87% of the debt portfolio is floating rate.

With that, I'll turn the call back to Art for closing remarks.

Thanks, Rick. In conclusion, we remain committed to delivering consistent performance, preserving capital, and creating long-term value for all stakeholders. Thank you to our team for their dedication and our shareholders for their continued partnership and confidence in PennantPark.

That concludes our remarks. At this time, I would like to open up the call to questions.

[Operator Instructions] We'll now take your first question coming from the line of Chris Muller with Citizens JMP.

So I wanted to touch on originations. It looked like they were outpaced by repayments in the quarter, but I guess, how are you guys thinking about net deployment in the coming quarters? Should we expect that dynamic to continue, or can we see some net portfolio growth ahead?

Yes, thanks, Chris. You know, I think we're balancing a bunch of different factors. You know, we're looking at a target leverage ratio here of about 1.3x debt to equity, which is kind of where we are. So, you know, we're looking to grow the JV over time. We're looking to manage debt to equity here at PNNT. So kind of, you know, I think right now we're looking to keep it flat. And obviously a big goal here is to rotate the equity. And, you know, get that equity rotation going and redeploy that into cash pay yield instruments.

Got it. And then it was nice to see the subsequent refinance. 100 basis points is a meaningful reduction there. And I think I heard you guys say it was a $300 million facility size. I guess, what will the cost savings per share be from that combined with the revolver refi?

Yes, so this was in our JV. I'm going to look to Rick. I think I know, but I think Rick knows for sure kind of how the about 100 basis points savings from the JV flows through to PNNT. Rick, do you want to answer that one?

Yes, sure. So the 2 refinancings within the JV that revolve around the JV and the securitization are going to be about $0.005 per share flow through to PNNT per quarter. So, about $0.02 on an annual basis.

Your next question will come from the line of Alex Breuer with Truist Securities.

Hey, this is Alex Breuer on behalf of Arren. I was just curious if you could add any color on spreads on new deals and how they're holding up with new commitments this quarter at $77 million at, I think you said weighted average yield at 8.9%.

Yes, so I think spreads are relatively consistent quarter to quarter. They've kind of been flat here, kind of in the 500 to 550 zone on average. And then we'll just have to see where we go year-end. You know, supply-demand, how much of supply of new deals are there, how much is M&A going to be active and then demand side, you know, kind of the cash flows into the space. Certainly institutional investors continue to deploy to the space. Retail, the wealth channels, as you know, and as everyone knows, have been a bit more challenged. So we'll see where the supply-demand curve goes, but we certainly think we can maintain the 500 to 550 spread, you know, for a period of time.

Your next question will come from the line of Christopher Nolan with Ladenburg Thalmann.

Hey, Rick, what's the spillover income in the quarter, please?

So the spillover balance is $0.56 per share.

Okay, and then, I mean, the total dividend really exceeds net NII per share. Do you wait until spillover goes near zero, or how far should we expect the spillover to be distributed?

Yes. So, we've communicated the supplemental dividend through the end of this calendar year. At which point we think the spillover will decline down to about $0.40 per share. You know, we'll reevaluate obviously at that point in time, but, you know, we think at that point that remaining spillover is manageable. To put it back in context, again, we had a starting point of a little over $1 per share not that long ago. So, you know, at that $0.40 level, I think, again, it's manageable.

Your next question will come from the line of Jason Stewart with Compass Point.

Follow up on Chris' question. I guess, you know, you've made some meaningful progress rotating out of equity. And if we continue to reduce the equity position, we see a little bit of top line compression on yields, offset by some improvement in cost of funds. Have you thought about how those dynamics land in terms of ROE at the end of this year when the dividend discussion has to come up again, or are we just too soon to be thinking that far out?

Yes, it's a good question, Jason. Obviously, it's at the top of our mind. On the equity rotation, we have a wide variety of different equity co-invests, which are, I'll call them singles and doubles, which is, they're important. And hopefully we see more M&A in the economy, which will rotate a bunch of those. There's 2 control positions that are sizable. One is AKW, the other is Flock Financial. Those are going to take a little while to work through.

They're both doing well, but to get the right value and to rotate that equity in a meaningful way, it's going to be a little while before we're able to rotate those at least a year, maybe 2 years out. So we're going to chip away at the smaller equity co-invests and then work hard to make sizable inroads on those 2 big names.

Okay. Shifting gears a little bit to the credit, I mean, non-accruals are relatively low on just an absolute basis. Anything underlying trends or movements underneath the surface we should keep an eye on or that you're keeping an eye on closely?

Yes, so look, thankfully we don't have much in software, which we talked about. We and most of the industry have a little bit of what we'll call this kind of post-COVID vintage deals where you had a zero interest rate environment, you know, consumers were flush with capital. People thought, you know, online buying would, you know, go to the moon. So the one meaningful NAV deal that was down this quarter was one of those. It was a company called Kinetic Systems, KNS, and it was a shoe company that was with a consumer orientation, which was doing very well post-COVID.

The combination of reversion to the mean in terms of consumer purchases along with tariffs about a year and a half ago, were really a series of unfortunateness for this particular company. So, that's indicative of a little bit, we don't have much going on in terms of non-accruals, thankfully, but, you know, kind of if you look at where it has been, it's kind of been in that post-COVID, zero interest rate environment deals.

Your next question will come from the line of Hong Zhang with JPMorgan.

I guess you talked about having capacity to grow the JV portfolio over time. Could you provide some color on how much you could grow that portfolio, say, in the next 12 to 16 months, and what do you think are the biggest constraints in that?

Yes, look, I think the portfolio and the JV can probably grow another couple hundred million over the next year, year and a half. Constraints are, you know, kind of deal flow to get to the JV there. Obviously it's a joint venture. So we and our partner Pantheon need to see eye to eye, and we see no reason we're not, but, you know, we need to see eye to eye on the opportunity. So deal opportunity, then capital. How do we balance capital? We want to kind of stay in this rough leverage zone for PNNT of roughly 1.3x area. So balancing all those things out means that we would hope and expect it to grow over time. It'll probably be a gradual move, though.

And it appears there are no further questions at this time. I'll turn it back to Mr. Art Penn at this time for any additional or closing remarks.

I want to thank everybody for participating on the call today. We look forward to speaking to you next in November. That's our annual 10-K filing, so we'll be a little behind a lot of the others in the industry, but we look forward to speaking to you then right around Thanksgiving. In the meantime, wishing everybody a great summer. Thank you very much.

This concludes today's call. Thank you for your participation. You may now disconnect.

Good afternoon, and welcome to the PennantPark Investment Corporation's Second Fiscal Quarter 2026 Earnings Conference Call. Today's conference is being recorded. [Operator Instructions]

It is now my pleasure to turn the call over to Mr. Art Penn, Chairman and Chief Executive Officer of PennantPark Investment Corporation. Mr. Penn, you may begin your conference.

Good afternoon, everyone, and thank you for joining PennantPark Investment Corporation's Second Fiscal Quarter 2026 Earnings Call. I'm joined today by Jose Briones, Senior Partner at PennantPark. Rick Allorto, our CFO, is unable to be with us today due to a prior commitment.

Jose, please start off by disclosing some general conference call information include a discussion about forward-looking statements.

Thank you, Art. I'd like to remind everyone that today's call is being recorded and is the property of PennantPark Investment Corporation. Any unauthorized broadcast of this call in any form is strictly prohibited. An audio replay of the call will be available on our website. I'd also like to call your attention to the customary safe harbor disclosure in our press release regarding forward-looking information.

Our remarks today may include forward-looking statements and projections. Please refer to our most recent SEC filings for important factors that could cause actual results to differ materially from these projections. We do not undertake to update our forward-looking statements unless required by law. To obtain copies of our latest SEC filings, please visit our website at pennantpark.com or call us at 212-905-1000. At this time, I'd like to turn the call back to our Chairman and Chief Executive Officer, Art Penn.

Thanks, Jose. I'll begin with an overview of our second quarter results, including a review of the portfolio. I'll then share our perspective on the current market environment and how we believe PNNT is positioned going forward. Jose will follow up with a detailed review of our financial results, after which we will open up the call for questions.

For the quarter ended March 31, core NII was $0.14 per share. As of March 31, our portfolio totaled $1.2 billion. And during the quarter, we continue to originate attractive investment opportunities and invested a total of $108 million, including 6 new platform investments with a median debt-to-EBITDA of 3x, interest coverage of 3.4x and loan-to-value of only 28%. Our portfolio remains conservatively positioned with median leverage of 4.7x, median interest coverage of 2x and median loan-to-value of 45%.

We ended the quarter with 4 nonaccrual investments, representing 2.7% of the portfolio at cost and 1.3% at market value. Our PSLF joint venture portfolio continues to be a significant contributor to our core NII. At March 31, the JV portfolio totaled $1.3 billion. And over the last 12 months, PNNT's average NII yield on invested capital in the JV was 15.8%. The JV has the capacity to increase its portfolio to $1.5 billion, and we expect that with this additional growth, the JV investment will enhance PNNT's earnings momentum into the future.

Turning to software exposure, which has been an area of recent market focus. Our exposure remains limited at approximately 4.6% of the portfolio and is structured consistently with our core middle market strategy. These investments are primarily cash pay, covenant protected loans with moderate leverage and shorter durations. Importantly, they are concentrated in mission-critical enterprise software serving regulated industries such as defense, health care and financial institutions. We believe this represents a meaningful point of differentiation relative to our peers.

Turning to the market environment. We believe that the current environment favors lenders with strong private equity sponsor relationships and disciplined underwriting; areas where we have a clear competitive advantage. In the core middle market, the pricing on high-quality first lien term loans remains attractive, typically ranging from SOFR plus 500 to 550 basis points with leverage of approximately 4.5x EBITDA.

Importantly, we continue to get meaningful covenant protections in contrast to the covenant-light structures prevalent in the upper middle market. M&A activity has increased over the past 6 to 9 months, although overall conditions remain uneven. Private equity sponsors remain active and we're seeing a growing pipeline of attractive opportunities across both the new originations and add-on investments. However, activity levels remain below the unusually strong levels observed in 2024 as the market transitions towards a more normalized backdrop.

We expect increased transaction activity to drive repayments across the portfolio, including opportunities to monetize equity co-investments and we'll redeploy that capital into income-generating investments. Notably, we expect a meaningful realization from our equity co-investment in Echelon this quarter. Echelon is a leading defense technology company sponsored by Sage Wind Capital, our long-term sponsor relationship. Echelon announced that it is agreed to be acquired by Shield AI, another cutting-edge defense technology company. Upon closing, we expect our $1.1 million equity co-investment to generate approximately $16 million in total proceeds.

Proceeds will consist of $14 million of cash and $2 million of value in Shield AI stock. This represents nearly 15x multiple on invested capital and demonstrates the value of our equity co-investment program. Given the current geopolitical environment and the Echelon news, it's important to highlight that approximately 12% of our portfolio is exposed to government services and defense.

Now I'd like to speak about why we believe that our folks on the core middle market provides us with attractive investment opportunities where we provide important strategic capital to our borrowers. The core middle market, companies with $10 million to $50 million of EBITDA is below the threshold and does not compete with a broadly syndicated loan or high-yield markets, unlike our peers in the upper middle market. In the core middle market, because we are an important strategic lending partner, the process and package of terms we receive is attractive. We have many weeks to do our diligence with care. We thoughtfully structured transactions with sensible credit statistics, meaningful covenants, substantial equity cushions to protect our capital, attractive spreads and equity co-investment.

Additionally, from a monitoring perspective, we received monthly financial statements to help us stay on top of the companies. Our rigorous underwriting standards remain central to our investment philosophy. Nearly all of our originated first lien loans include meaningful covenant protections; a key differentiator versus the upper middle market or covenant-light structures are more common. Since our inception nearly 19 years ago, PNNT has invested $9.3 billion at an average yield of 11.2%, while maintaining a loss ratio on invested capital of roughly 20 basis points annually; a testament to our consistent and disciplined approach through multiple market cycles.

As a provider of strategic capital, we fuels the growth of our portfolio companies. In many cases, we participate in the upside of the company by making an equity co-investment. Our returns on these equity co-investments have been excellent over time. Overall for our platform from inception through March 31, we've invested over $618 million in equity co-investments and have generated an IRR of 25% and a multiple on invested capital of 2x.

Looking ahead, our experienced team and broad origination platform position us well to generate attractive deal flow. We remain steadfast in our commitment to capital preservation and maintaining a disciplined patient investment approach. We continue to focus on investing in high-quality, middle-market companies with strong free cash flow generation. We capture that value through first lien senior secured loans, and we pay out those contractual cash flows in the form of dividends to our shareholders.

With that overview, I'll turn the call over to Jose for a more detailed review of our financial results.

Thank you, Art. For the quarter ended March 31, both GAAP net investment income and core net investment income were $0.14 per share. Operating expenses for the quarter were as follows. Interest and credit facility expenses were $8.1 million, base management incentive fees were $5.6 million. General and administrative expenses were $1.5 million, and provision for excise taxes were $0.5 million. For the quarter ended March 31, net realized and unrealized change on investments and debt, including provision for taxes was a loss of $11.7 million. As of March 31, our NAV was $6.73 per share, which is down 3.9% from $7 per share in the prior quarter. .

At March 31, our debt-to-equity ratio was 1.35x, and our capital structure was diversified across multiple funding sources including both secured and unsecured debt. In January, we raised $75 million of new unsecured debt, which was used to repay our unsecured debt that matured on May 1. As of March 31, our key portfolio statistics were as follows. Our portfolio remains highly diversified with 160 companies across 38 different industries. The weighted average yield on our debt investment was 10.9%. The portfolio is comprised of 48% first lien senior secured debt, 2% second lien secured debt, 14% supported notes to PSLF, 7% of other subordinate debt, 5% equity in PSLF, and 24% in other preferred and common equity co-investments. 88% of our debt portfolio is floating rate, debt-to-EBITDA in the portfolio is 4.7x and interest coverage is 2-point times.

With that, I'll turn the call back to Art for closing remarks.

Thank you, Jose. In conclusion, we remain committed to delivering consistent performance, preserving capital and creating long-term value for all stakeholders. Thank you to our team for their dedication and our shareholders for their continued partnership and confidence in PennantPark.

That concludes our remarks. At this time, I'd like to open up the call to questions.

[Operator Instructions] We'll take our first question from Robert Dodd with Raymond James.

On just a question about the market outlook, if I could, in kind of sort of 3 segments. Overall, you gave some color, obviously, conditions are still below what they were last year, et cetera. I mean is there any mainly some false scenario where that really meaningfully accelerates as we go through the year given the level of uncertainty? And then within two subsectors there, like what are your thoughts on software right now because spreads are widening, but it's not an area you've typically done a lot of? On the other hand, an area where you have done a lot is government in contracting, et cetera, which you've just got a really nice gain lining up. Do you expect the competitive dynamics to change in that segment of the market, given how stable and budget talk for defense, except is looking going forward? I mean that's a lot of a question there, sorry.

Thanks, Robert. I'll try to cover the market outlook and software, and I'll kick it over to Jose to talk about Government Services. Look, on M&A flows, we're certainly hopeful. We're seeing some green shoots or more than green shoots. It's just not as robust as it was. Certainly, it takes a real -- kind of a more stable market we think, to see more volume. We hope there is. Last year, we had Liberation Day kind of spike the punch bowl this year, whether it's the war or some of the other issues. We're certainly hopeful that we'll see a more normalized environment. We're hearing that it will be, but we've heard that before. So the proof will be in the pudding. Echelon and some other deals we're seeing are good indications that there is still deal flow.

With regard to software, we never really did much in software, primarily because the leverage multiples were higher than we were comfortable with. So the software that we do have, which is relatively small, it's kind of 4x, 5x leverage. It's certainly not levered 6x, 7x, 8x are levered against ARR. So even though the -- so we're just still not seeing a market. And certainly, with AI coming on, there's just probably too much secular risk on the system.

We're open-minded. We always want to learn, and maybe there will be opportunities in this reassessment of the technology stack. So we're open to it. But as always, we want to make sure leverage is reasonable that we can get comfortable that the company's have a strong moat and that the companies have a real reason to exist long term.

So with that, Jose, do you want to comment on Government Services defense?

Sure. Robert, great to hear from you. Look, Government Services is a sector that we've been involved for quite some time. It's a very nuanced space that we like, where we have very long relationship with private equity sponsors that know that space really well. We think that's an area of growth in an area of opportunity for us. Acquisition of Echelon by Shield is a great example of that. to the market in general, the first quarter is seasonally slow for our business and then usually picks up. With regards to the government services and government contracting clearly given the confident in the Middle East, there's a lot of emphasis on that, and we're still seeing interesting opportunities in that part of the market.

Another area that we do spend a lot of time with is health care and health care services, as you know. And that's an area that we do like and we do see interesting opportunities. Pricing for the market generally has been in that $500 million to $550 million. We haven't seen much change in that in the past couple of quarters. So our expectation, to Art's point earlier, is to continue to focus on the areas where we like in the areas where we have expertise in.

Got it. One more if I can. I mean, it seems like every quarter we're asking like, oh, what's your exposure to or the risk from this, it was software a year ago to your point, it was tariffs, a lot of things. Now I've got to ask about oil and commodity prices. I mean, the uncertainty in the oil markets and the supply there. I don't think you have a ton of exposure anymore. But what's kind of the portfolio exposure if oil were to go meaningfully higher for a sustained period or supply issues for that matter, right?

Yes. So it's a good question. And as you know, in our history, we did oil and gas, and that was not -- that's why we don't do it today, enough said there. I guess you could think of kind of other areas could impact -- could it impact the American consumer if gas prices are higher? For sure. And consumer is a sector of ours. Now in most cases, we're doing consumer services that we think are a little less discretionary like HVAC. When your air conditioning breaks, other services around the home. Consumer is a piece of the portfolio, it's not an overweight piece of the portfolio, but it is. So you can certainly think about all the -- we don't do much in manufacturing, so kind of none of that plastics kind of manufacturing paper packaging, we don't really have any exposure there.

So I'd say it's really the American consumer, which -- by the way, the American consumer is a big, big chunk. The overall economy of the American consumer is weaker that has a lot of other impacts that may happen. But I would say that's the closest thing we have to oil exposure.

We'll go next to Arren Cyganovich with Truist Securities. .

So the Echelon transaction that's going to close in the second quarter, I think, is that what you said? And then what -- is the sale price consistent with where it was marked at 3/31?

Yes, we think it will close in the next 60 days, and it's marked at fair value at the good price. .

Okay. I just wanted to clarify that. Any other equity positions that are in talks or anything you can identify that might potentially move over the next quarter or two?

Yes. No, these are less impactful. There's a company called Guild Garage, which was marked at fair value at 3/31, which has since exited. So there's an equity co-invest there which is a few million dollars. And we have others that are kind of in the wings. Nothing as impactful as Echelon, but getting some singles and doubles here and there should be helpful. .

We'll take our next question from Rick Shane with JPMorgan.

Guess I'm glad that we're not revisiting the whole oil and gas thing. It seems like the last time we were talking, that was a big issue years ago. The question we've been asking everybody this quarter, and I'm curious, given your focus is sort of where in the continuum we are in terms of pricing and more importantly, deal structure? And I took your comments to mean that you just don't ever see the sort of variance that we might see in the BSL market. And should we sort of -- how should we think about this?

Well, we should -- look, I mean you have the upper market where many of our -- many of the large peers play above [ 50 EBITDA ]. And that's been covenant life for a while because those borrowers have options in the broadly syndicated loan market. So that market also similarly as the companies there only report to those lenders every 3 months. So -- and then they don't get co-invest even if they wanted it, they may or may not want it, they don't get co-invest. And just kind of the deal decision-making is much tighter. Our prototypical deal is we're working on a company where a fund or a family or an entrepreneur is selling to the middle market private equity sponsor and the company does $10 million or $20 million of EBITDA. And the game plan is to take that company and grow it and buy add-on acquisitions and get it to $30 million, $40 million, $50 million, $60 million, so that it can then be sold or then financed in the upper market.

So as a result, in our world and our capital is strategic capital. It's there usually with the lay draw term loan to help fuel the growth. So we've become very much a strategic partner of that company. We've become the strategic partner of that management team, a strategic partner of the sponsor. And our loan is the fuel. So because we're the strategic partner, we have plenty of time to do our diligence. We really understand and we need to understand what we're lending to. We, of course, get maintenance covenants, quarterly tests that need to be met contractually. We get monthly financial statements. We have the option and make cases, we take the option to co-invest in the equity because, of course, if we're helping to create the equity value with our loan, why wouldn't we help participate in -- participating in an upside and you see the benefit of that.

Echelon is an excellent example. You can see the benefit of having something in this portfolio or these portfolios that's got some lift that can offset. And the inevitable nonaccruals you have. We all have nonaccruals. There's no private credit manager that's perfect. You try to develop a diversified book, minimize nonaccruals, but you're going to have nonaccruals. So having some equity co-invest in these portfolios we found helpful to help fill in for some of those gaps.

So we're operating in an entirely different world than the upper market. And it just doesn't make sense for the business model of those folks in the upper market to come down and spend their time on companies of this size given the size of check. If you're managing $100 billion or $200 billion or whatever you're managing in private credit, it just doesn't make sense to be focused on this end of the world. And therefore, that's why there's only a handful of real competitors that we have in this kind of below $50 million of EBITDA. It's a long-winded answer, Rick, I don't know if I answered your question. But please continue to ask if I didn't get to.

No, you did. And again, I think that helps on the asset side. Curious on the funding side, if there's anything that we should be thinking about here banks have been very reliable partners in the space, but you always do wonder about sort of selectivity of credit. And curious if you're seeing any opportunity or any risk on the financing side.

Yes. No, we having -- it's a great question because having started our business right before the global financial crisis. We learned very early that lender transparency, relationship with lenders is so key, and they become our partners. So we are always reaching out to our lenders and offering to bring them in and transparently go name by name. Interesting, a month or 2 or 3 ago when the headlines about private credit started to to come out, we proactively reached out to every one of our lenders that we said, come on in. We'd be happy to walk through loan by loan, what's going on with our portfolio. We feel really good about it and feel like we've underwritten a very solid book.

And the vast majority of the lenders said to us, "You know what, you don't have much software exposure. Your way down on our list of who we're going to come visit. We've got plenty of other people to go visit." So we're always doing that. We're always out with our lenders, developing relationships. As you know, in PNNT, we have different types of debt capital. We have good old credit facilities, we have bonds, and we have securitizations that we use. They're all useful tools, and we have a diversified strategy of using.

Got it. Well, if there is any credit contraction on that side, you remain at the bottom of their list in terms of visits as well.

Yes.

We'll go next to Christopher Nolan with Ladenburg Thalmann.

Do you know the reason for the drop in total interest income quarter-over-quarter?

Let me come back to you on that.

No problem at all.

I'm sorry, Eric Leeds is here from our finance. But Eric, do you have anything you'd like to add on that?

Basically, the smaller average portfolio over the quarter, I believe.

Great. I mean we ended up generating $0.14. I think consensus was $0.15, but we were certainly happy to go into the detail with you, Chris, if you'd like.

No, no, that's okay. And in general, are you seeing a migration of portfolio companies from high tax states to lower tax states at all?

Yes. No, we aren't. We do have a very diversified portfolio geographically around the United States. Certainly, we tend to lend the companies that are growing companies wherever they may be, but we haven't yet seen movement of headquarters given what's going on. .

At this time, there are no further questions. I'll now turn the call back to Art for any additional or closing remarks.

Thank you, everybody. Really appreciate everyone's participation today. Wishing everyone a Happy Mother's Day. And we look forward to speaking to you next in early August at our next earnings report. Thank you very much.

This does conclude today's conference. We thank you for your participation.

Good afternoon, and welcome to the PennantPark Investment Corporation's First Fiscal Quarter 2026 Earnings Conference Call. Today's conference is being recorded. [Operator Instructions] It is now my pleasure to turn the call over to Mr. Art Penn, Chairman and Chief Executive Officer of PennantPark Investment Corporation.

Mr. Penn, you may begin -- go ahead and begin your conference.

Good afternoon, everyone, and thank you for joining PennantPark Investment Corporation's First Fiscal Quarter 2026 Earnings Call. I'm joined today by Rick Allorto, our Chief Financial Officer. Rick, please start off by disclosing some general conference call information and include a discussion about forward-looking statements.

Thank you, Art. I'd like to remind everyone that today's call is being recorded and is the property of PennantPark Investment Corporation. Any unauthorized broadcast of this call in any form is strictly prohibited. An audio replay of the call will be available on our website. I'd also like to call your attention to the customary safe harbor disclosure in our press release regarding forward-looking information.

Our remarks today may include forward-looking statements and projections. Please refer to our most recent SEC filings for important factors that could cause actual results to differ materially from these projections. We do not undertake to update our forward-looking statements unless required by law. To obtain copies of our latest SEC filings, please visit our website at pennantpark.com or call us at 212-905-1000.

At this time, I'd like to turn the call back to our Chairman and Chief Executive Officer, Art Penn.

Thanks, Rick. I'll begin with an overview of our first quarter results and discuss our forward dividend strategy. I will then discuss the exit of our investment in JF Holdings and our ongoing strategy to reduce the portfolio's equity exposure.

Lastly, I will then share our perspective on the current market environment and how the portfolio is positioned for the quarters ahead. Rick will follow with a detailed review of the financials, and then we'll open up the call for questions.

For the quarter ended December 31, core net investment income was $0.14 per share. Turning to the dividend, beginning with the dividend payable in April. The total dividend will remain $0.08 per share, but will be comprised of a $0.04 per share base dividend and a $0.04 per share supplemental dividend. The base dividend is expected to be fully supported by current core net investment income and the supplemental dividend will be supported by our $41 million or $0.63 per share of undistributed spillover income. We anticipate maintaining the supplemental dividend payment through December 2026.

During the quarter, we fully exited our equity investment in JF Holdings and received total proceeds of $68 million and generated a realized gain of $63 million. With the exit, we monetized 20% of the fair value of our equity portfolio. While we are pleased with the outcome for JF, we remain focused on reducing the total equity exposure of the fund.

Turning to the market environment. We are seeing an increase in M&A transaction activity across the private middle market. This trend is expanding our pipeline of new investment opportunities. We also expect that this increase in M&A activity will drive repayments of existing portfolio investments, including opportunities to exit some of our equity co-investments and rotate that capital into new current income-producing investments.

We believe the current environment favors lenders with strong private equity sponsor relationships and disciplined underwriting, areas where we have a clear competitive advantage. In the core middle market, the pricing on high-quality first lien term loans remains attractive, typically ranging from SOFR plus 475 to 525 basis points with leverage of approximately 4.5x. Importantly, we continue to get meaningful covenant protections in contrast to the covenant-light structures prevalent in the upper middle market.

Turning to our portfolio performance. As of December 31, the median leverage across the portfolio was 4.5x with median interest coverage of 2.1x. During the quarter, we originated 3 new platform investments with a median debt-to-EBITDA of 4x, interest coverage of 2.9x and a loan-to-value ratio of 49%. With regard to the software risk that has been a recent market focus, we have stuck to our knitting. Only 4.4% of the overall portfolio is software and that 4.4% is structured consistently with how we invest. They are primarily all cash pay loans with covenants with reasonable leverage and an average maturity of 2.2 years on average. It's enterprise software that is integral to their customers' businesses and the vast majority of which is focused on heavily regulated industries such as defense, health care and financial institutions where safety, security and data privacy are paramount and where change will be slower.

Peers typically invested much larger percentages of their portfolios in software, 20% to 30% with much higher leverage, 7x, 8x or more or loans against revenue, not cash flow with substantial PIK, covenant light and long maturities. This story is a significant differentiator from our peers. We ended the quarter with 4 nonaccrual investments, representing 2.2% of the portfolio at cost and 1.1% at market value. These strong credit metrics reflect the rigor of our underwriting process and the discipline of our investment approach.

We continue to believe that our focus on core middle market provides us with attractive investment opportunities where we provide important strategic capital to our borrowers. The core middle market, companies with $10 million to $50 million of EBITDA is below the threshold and does not compete with the broadly syndicated loan or high-yield markets, unlike our peers in the upper middle market. In the core middle market because we are an important strategic lending partner, the process and package of terms we receive is attractive. We have many weeks to do our diligence with care. We thoughtfully structured transactions with sensible credit statistics, meaningful covenants, substantial equity cushions to protect our capital, attractive spreads and equity co-investment.

Additionally, from a monitoring perspective, we received monthly financial statements to help us stay on top of the companies. Our rigorous underwriting standards remain central to our investment philosophy. Nearly all of our originated first lien loans include meaningful covenant protections, a key differentiator versus the upper middle market where covenant-light structures are common. Since inception nearly 19 years ago, PNNT has invested $9.2 billion at an average yield of 11.2%, while maintaining a loss ratio on invested capital of roughly 20 basis points annually, a testament to our consistent and disciplined approach through multiple market cycles.

As a provider of strategic capital, it fuels the growth of our portfolio companies. In many cases, we participate in the upside of the company by making an equity co-investment. Our returns on these equity co-investments have been excellent over time. Overall, for our platform from inception through December 31, we have invested over $615 million in equity co-investments and have generated an IRR of 25% and a multiple on invested capital of 1.9x.

As of December 31, our portfolio totaled $1.2 billion. And during the quarter, we continued to originate attractive investment opportunities and invested $115 million in 3 new and 51 existing portfolio companies. Our PSLF joint venture portfolio continues to be a significant contributor to our core NII. At December 31, the JV portfolio totaled $1.4 billion. And over the last 12 months, PNNT's average NII yield on invested capital and the JV was 16.4%. The JV has the capacity to increase its portfolio to $1.5 billion, and we expect that this additional growth, the JV will enhance our earnings momentum in future quarters.

From an outlook perspective, our experienced and talented team and our wide origination funnel is producing active deal flow. We remain steadfast in our commitment to capital preservation and disciplined patient investment approach. We reiterate our objective to deliver compelling risk-adjusted returns through stable income generation and long-term capital preservation. We seek to find investment opportunities in growing middle market companies that have high free cash flow conversion. We capture that free cash flow primarily through debt instruments, and we pay out those contractual cash flows in the form of dividends to our shareholders.

With that overview, I'll turn the call over to Rick for more detailed review of our financial results.

Thank you, Art. For the quarter ended December 31, GAAP net investment income was $0.11 per share and core net investment income was $0.14 per share. Operating expenses for the quarter were as follows. Interest and credit facility expenses were $10.5 million, base management and incentive fees were $3.9 million. General and administrative expenses were $1.3 million and provision for excise taxes were $0.7 million.

For the quarter ended December 31, net realized and unrealized change on investments and debt, including provision for taxes, was a loss of $2 million. As of December 31, our NAV was $7 per share, which is down 1.5% from $7.11 per share in the prior quarter. As of December 31, our debt-to-equity ratio was 1.3x, and our capital structure is diversified across multiple funding sources, including both secured and unsecured debt.

In January, we raised $75 million of new unsecured debt, which will be used to partially repay our existing unsecured debt that is maturing in May. As of December 31, our key portfolio statistics were as follows. Our portfolio remains highly diversified with 158 companies across 37 different industries. The weighted average yield on our debt investment was 10.9%. The portfolio is comprised of 48% first lien secured debt, 3% second lien secured debt, 14% subordinated notes to PSLF, 6% other subordinated debt, 6% equity in PSLF and 23% in other preferred and common equity co-investments. 89% of the debt portfolio is floating rate. The debt-to-EBITDA on the portfolio is 4.5x, and interest coverage is 2.1x.

With that, I'll turn the call back to Art for closing remarks.

Thanks, Rick. In conclusion, we remain committed to delivering consistent performance, preserving capital and creating long-term value for all stakeholders. Thank you to our team for their dedication and our shareholders for their continued partnership and confidence in PennantPark. That concludes our remarks. At this time, I would like to open up the call to questions.

[Operator Instructions] Our first question, Robert Dodd from Raymond James.

A couple of kind of semi-housekeeping first. On the -- just for clarification, I think it's pretty clear. But on the dividend, you said the supplemental program will stay in place through December 2026. Just to clarify, you mean the $0.04 specifically supplemental monthly will stay in place through '26 and beyond that, who knows, right? But that's not just that there will be a supplemental, but it's the $0.04 level.

That's correct.

Got it. Second one, will there be any onetime expenses in calendar Q1 related to the new bond or the partial paydown of the May? Or are you just going to hold the cash until then? I mean, is there going to be anything onetime in Q1?

No, Robert. There won't be any onetime expenses related to that. For that facility, the fees associated with issuing that new debt will be capitalized and amortized and no real impact from a onetime perspective on the revolving facility.

Got it. Got it. Then I'm not going to ask you exactly the same question as I did earlier on software. But I mean, as you look at kind of the core niches that you've kind of really focused on at PNNT and obviously a combination of the size of businesses, but the type of borrowers that you have typically focused on. I mean, where would you rank -- I mean, do you think AI represents more of a risk or an opportunity for the typical borrowers that you lend to in the industries between size and industry?

Yes, it's a great question, and we debate this every time we go through a company and investment committee. Is it a help or a hindrance is as AI? And ultimately, we keep asking ourselves the same question all over again, which is if this company goes away, who really cares? And if the company goes away, no one really cares, we shouldn't be investing in that company. And usually, if the answer is affirmative, people care. It means they've got really great customer relationships or they've got a high market share or a niche that's defensible. And usually, AI could be a help and present some upside to companies that are well positioned and have a moat, although there's no assurance, right?

I mean one of the quotes that someone shared with me, it's a famous quote, which is people tend to overestimate the impact of technological change in the short run, and they tend to underestimate the impact of technological change in the long run. And it feels like we're in one of the short-run moments where the whole market is kind of spinning on the concept of AI and software.

And as we've discussed and certainly for us, software is a very small percentage manageable and deeply embedded. But look, where things are going to be in 10 years, don't know. But look, it's nice to have a credit portfolio with short maturities. Our average software maturity might be around 3 years. Our average maturities are 3 to 5 years. It's nice to have covenants. It's nice to get cash flow. We don't have any pick really in these portfolios. So that's how we defend ourselves. And then also, we have to find companies that people will care about and have resilience and people -- and you see it in the margins, you see it in how they gain share. So hopefully, we're selecting those companies well. Of course, there's never a guarantee.

Our next question, Paul Johnson with KBW.

In terms of like the equity rotation, I guess, that's kind of left in the portfolio, there's still quite a bit even after the JF Intermediate exit. But do you still think that there's potential this year for additional meaningful exits at this point? Or it sounds like you're fairly optimistic about M&A coming in this year, but has like any of the recent volatility at all backed up interest in doing M&A in any of those names at all?

Yes. Look, we still -- thanks, Paul. We still think there's -- based on what we can tell, M&A hasn't slowed down. Granted we're not big in software. So I couldn't tell you about M&A in the software space. I would imagine we probably slowed down right now. But like in the rest of the world and the rest of the community, we're still seeing good M&A. I will highlight that 2 of our bigger sectors are military, defense and government services as well as health care, both of which seem to be performing well and both of which from what we could tell, represent some meaningful M&A activity and where we have some substantial equity co-invest.

So those have been 2 of our bigger sectors. And they've performed very well for us. There's not that many people are heavily focused on defense and government services, [indiscernible]. It's been a big space. The U.S. government seems to be increasing its expenditures and there's some tailwinds there. And then on health care, we've had a better experience on health care than many of our peers. I think it really is just attributed to just kind of not leveraging up the company as much. I think our peers tend to be willing to accept higher leverage.

So when we do health care, we, again, tend to try to find companies that have a defensible moat, keep the leverage reasonable. And then in health care, our motto really is try to find companies that are providing high-quality service at a reasonable or low cost, given that government reimbursement is always a risk in health care. But if we can find companies that are going to reduce cost and still provide good service, it's going to be hard to be hurt. And I think that's kind of one of the reasons our health care names have probably performed better than some of our peers.

Our next question is from Brian Mckenna from Citizens.

I'm curious, why not adjust the dividend to reflect the current outlook for core earnings and then repurchase stock with that capital. So you're actually driving some NAV per share accretion versus diluting it by about 1% plus a quarter? And then should we expect to see some insider buying post earnings here with the stock trading at 77% of book and an 18% dividend yield?

Yes. No, on the -- I'm missing your question, we can dive into it. We have the substantial spillover that we are obligated to pay out. So there's been some debate, do you pay it all out at once? Do you pay it out over time? Given we want to maintain good credit ratings, given that we'd like to have a smooth glide path for our shareholders, we've elected to pay it out over time and we also want to keep our leverage reasonable. We kind of want to keep it kind of in the 1.2x, 1.3x debt-to-equity area.

So then the question becomes like, okay, as you have incremental liquidity with rotation, whether it be equity or debt, what do you do with the capital? I mean we're obligated to pay out the supplemental dividends. We have to. So then kind of how do you -- what do you do with your excess capital then? And that's something we're always thinking about and talking about, again, we're cognizant of our credit ratings. We're cognizant of our debt-to-equity ratio. Buying back equity, albeit cheap, does impact your debt-to-equity ratio. But something we always consider. We've done buybacks in the past in PNNT, and we always consider that. Same thing with insider buying. We've had substantial insider buying over time. It's something that's always on the table, and we are always evaluating our options there as well.

Okay. That's helpful. And then, Art, you've clearly had a great tenure in the industry. You've managed the business in a number of different operating environments and also through periods of time when the industry kind of has come in and out of vogue. So what past experiences are you leaning on today to prudently manage the portfolios in the current environment and as that continues to evolve?

And then is there also an opportunity here to maybe lean into some of the dislocation we've seen in the market, either from an origination perspective, maybe don't do as much in software, but even like strategically, and again, it's maybe not a PNNT question, but are there any incremental opportunities on the strategic acquisition front at the broader manager level?

Yes. No, look, chaos does bring opportunity and it's brought opportunity for us over time and whether it was through the global financial crisis, whether it was through the energy downturn or more recently COVID, obviously, you have to defend first and make sure you're building resilience in the vehicles. And then you can look around and say, how can we take advantage of a little bit of the chaos. And that's what we're doing.

Now within that, we kind of stick to our guns. And when we see reasonable leverage with covenants and good risk-adjusted return, we're going to lean in and try to take advantage of that. We're not seeing that yet. We'll see what happens with cash flows into the industry, whether it be through the high net worth channels, whether it be through the insurance channels. Are those cash flows going to hold up? Are they going to soften a little bit? Or software loss is going to work their way through and make certain managers more conservative and defensive? Time will tell, but we want to keep ourselves in a prudent position and be well balanced and look opportunistically.

And then at the management company level, we're always looking for opportunities both at our BDC levels and more broadly. And again, chaos should bring opportunity. We think how we've navigated software to date is a differentiator, for instance, and can show in the larger capital allocators, the benefits of the core middle market where covenants are still prevalent, where leverage is reasonable and where there's very limited pick. And maybe that's what large allocators should be focused on versus chasing high leverage covenant-light PIK allocations. So we'll see, but we're always trying to defend number one and then try to judiciously figure out how to play offense number two.

Our next question comes from Rick Shane with JPMorgan.

It's been a while. I think I was there 19 years ago, actually. Look, it's interesting looking at this with fresh eyes after all this time. And I think one of the things that has changed pretty dramatically is the competitive landscape. And I think that one of the factors that you guys are facing is you have a lot of peers out there who effectively have a different cost of capital. They can raise capital essentially at par. You guys are trading at a pretty significant discount at this point.

How do you close that gap? And can you really continue to compete if you're in a universe where your primary competitors at this point essentially have a lower cost of goods sold in terms of funding. And with that, if you could talk a little bit about the sizing of the debt deal that you guys just did. It's $75 million [ box ], represents about 25% of your pending maturities this year. I'm curious how you think about sort of the next steps there.

Yes. I'll take the second, Rick. Good to hear your voice, and welcome back to covering us and BDCs. First, I'll take the second question first, which is we do have some debt maturities. That was the first step, the $75 million, we just did. We're going to over the coming 3, 6, 9 months, chip away at them judiciously over that period of time and look at various different ways to raise debt capital that is available to us.

On the competitive framework, look, we've been very open that PNNT is a work in process, you remember, you covered it, took some stumbles during the energy crisis, and it's been a challenging work since then. We're working hard and the main thing is really to reduce this equity exposure to the JF, the sale of JF was a big milestone for us and significantly reduce the equity exposure. We still have more to do. And that's really the focus, reduce the equity exposure of the portfolio, rotate that, clean up the portfolio, and then we'll come up for figure out what the next steps are for PNNT.

In the meantime, to the cost of capital question, we have a very robust and strong track record of first lien core middle market senior secured debt where leverage is reasonable, 4.5x is our average loan, where we have maintenance tests, where we get monthly financials, where we're not rushed to do due diligence. And that track record is very strong, and it can be financed and captured very well for PNNT in the JV format where we use both credit facilities and securitization facilities to efficiently finance that and therefore, generate a very strong risk-adjusted return for PNNT shareholders. And you see a good example of that over at PFLT more broadly.

So while we're working really hard to reduce the equity exposure in PNNT, we're also working hard to manage the JV, which is a large percentage of the pie. We understand, but it's a very well financed and very kind of strongly structured and efficiently managed from a cost standpoint to your kind of cost of capital comment. No management fees are charged on the JV. It's -- in essence, we are managing a larger pool of capital, not charging management fees and on a blended basis, is very attractive for shareholders. So that's really the game plan, rotate the equity, manage the JV, when we make a little bit more progress in J&F was a nice event, come up for it and figure out what to do next.

Our next question comes from Christopher Nolan with Ladenburg Thalmann.

The decline in dividend income quarter-over-quarter, is that related to the senior loan fund?

Chris, yes, it was related to PSLF, correct.

Great. And then should we expect use of the expanded facility for some of the refis going forward?

Yes. I mean the expanded facility does give us the ability to really pick our spot on, when to issue bonds. So just more liquidity, more dry powder in our system. We think in times of market turbulence, it's good to have excess liquidity and dry powder, both for defensive and offensive purposes.

And final question. Given that -- are you finding that you're trading coupon for stronger covenants or that's not really a dynamic which is available in your negotiations?

Yes. In our part of the market in the core middle market covenants are given. So if our average or median borrower does $20 million or $30 million of EBITDA, that's -- we're always getting covenants. We will trade off yield for credit quality. There's no question that the way we operate and the lesson we continually learn is don't skimp on credit quality if it's -- if it means giving up a few basis points and you get a much higher quality credit, that's usually the right call.

Great. Final question. I asked this on the last call. The $36 million in credit facility and debt issuance costs, was that relating to the $75 million issuance in January?

No, that was related to the amend and extend of the revolving facility in the fourth quarter.

Our next question comes from Casey Alexander with Compass Point.

I'm glad that you brought up the PSLF, JV. The leverage in the JV is 2.8x, which is the highest that I've heard of any JV in a BDC. At the same point in time, your fair value of your equity in the JV has been marked down $22 million. And so that's a contributing factor to that high leverage ratio. At what point in time are you either going to be forced to add more equity to the JV or shrink the JV in order to temper the leverage ratio?

These are good points. Thanks for raising, Casey, and thanks for your question. Just to level set, the broader PennantPark platform has a very large senior secured first lien middle market business. So when a first lien loan comes into the platform, it gets allocated across the platform, including the JVs where it makes sense, the private funds, the BDCs. And we also have a CLO platform in the middle market. And we've come to appreciate the benefits of securitization technology where you don't need to worry about a credit officer in a corner office having a bad hair day or human beings will react emotionally to market events. So we've run securitizations through COVID. We feel like we really understand them.

And then the CLO portion of our business, it's not unusual for middle market CLOs to have 4x or 5x leverage, right? So -- and we run them well. We know how to operate. We know how to reduce risk. And if you run the securitization correctly, you're actually reducing risk because you understand the boxes. So then you sit here, you move that over to the joint venture. And we have joint ventures. We have -- we now have 3 joint ventures. They're all -- the goal there is usually to run them at least to 2x and 2.8x is on the higher end. I don't anticipate we're going to go any higher here. But just as background, we still think it's a very prudent structure to have against very low levered senior secured covenanted cash pay debt. There's no software in these things. There are covenants, et cetera.

Now you raised a good point about equity diminution. And you know this and investors should know this. When you have a book of 100% debt, odds are you're going to have some losses and odds are your equity is going to diminish, right? What we do at PennantPark, as you know, is we have an equity co-invest program that over time has generated nearly a 2x MOIC and 25% IRR. And the reason we have that program is to help fill in the gaps that inevitably you're going to have with debt.

So the JV specifically is a debt JV. Our JV partner does not want equity in there. We create equity and have equity kind of ready to go if need be to shore things up. The reason why we have excess liquidity, why we do bonds. The JF sale was a big milestone, and we used that equity to deleverage the balance sheet in PNNT, again, trying to create some dry powder and some excess prudent cushion in the overall platform. But your points are right. We're aware of them and feel comfortable with where we are at this point.

That will conclude our question-and-answer session. I'd like to turn the call back over to Art Penn for closing remarks.

I want to thank everybody for participating on today's call. We look forward to speaking with you next in early May.

And this concludes today's call. Thank you for your participation. You may now disconnect.

Good afternoon, and welcome to the PennantPark Investment Corporation's Fourth Fiscal Quarter 2025 Earnings Conference Call. Today's conference is being recorded. [Operator Instructions]

It is now my pleasure to turn the call over to Mr. Art Penn, Chairman and Chief Executive Officer of PennantPark Investment Corporation. Mr. Penn, you may begin your conference.

Good afternoon, everyone, and thank you for joining PennantPark Investment Corporation's Fourth Fiscal Quarter 2025 Earnings Call. I'm joined today by Rick Allorto, our Chief Financial Officer. Rick, please start off by disclosing some general conference call information and include a discussion about forward-looking statements.

Thank you, Art. I'd like to remind everyone that today's call is being recorded and is the property of PennantPark Investment Corporation. Any unauthorized broadcast of this call in any form is strictly prohibited. An audio replay of the call will be available on our website.

I'd also like to call your attention to the customary safe harbor disclosure in our press release regarding forward-looking information. Our remarks today may include forward-looking statements and projections. Please refer to our most recent SEC filings for important factors that could cause actual results to differ materially from these projections. We do not undertake to update our forward-looking statements unless required by law. To obtain copies of our latest SEC filings, please visit our website at pennantpark.com or call us at (212) 905-1000.

At this time, I'd like to turn the call back to our Chairman and Chief Executive Officer, Art Penn.

Thanks, Rick. I'll begin today's call with an overview of our fourth quarter results and discuss our ongoing strategy to rotate out of equity positions. I'll then share our perspective on the current market environment and how the portfolio is positioned for the quarters ahead. Rick will provide a detailed review of the financials, and then we'll open up the call for Q&A.

For the quarter ended September 30, core net investment income was $0.15 per share compared to total distributions of $0.24 per share. We've previously communicated our plan to rotate out of equity positions and redeploy that capital into interest-bearing debt investments, which will drive an increase in our core net investment income. For many positions, our ability to drive exits is limited. However, we remain focused on this strategy and are comfortable maintaining our current dividend level in the near term as the company has a significant balance of spillover income, which we are required to distribute.

PNNT has $48 million or $0.73 per share of undistributed spillover income, and we plan to use the spillover income to cover shortfalls in net investment income versus the dividend at this time. Regarding the current market environment for private middle market lending, we are encouraged by a steady increase in transaction activity, which we expect will translate into higher loan origination volumes in the quarters ahead. Additionally, we continue to provide additional capital to many of our existing portfolio companies as they execute their respective growth initiatives, demonstrating the depth and resilience of our origination platform.

We are optimistic that the increase in transaction activity will also result in opportunities to execute our equity rotation plan and rotate capital into new income-producing investments. We believe the current environment will favor lenders with strong private equity sponsor relationships and disciplined underwriting, areas where PNNT has a clear advantage.

We continue to see opportunities to deploy capital into core middle market companies where leverage is lower and spreads are higher than in the upper middle market. In the core middle market, the pricing on high-quality first lien loans is SOFR plus 4.75% to 5.25%. Leverage is reasonable, and we continue to get meaningful covenant protections while the upper middle market is primarily characterized as covenant light.

Turning to our portfolio performance. As of September 30, the median leverage ratio on our debt security was 4.5x and the median interest coverage ratio was 2x. For new platform investments made during the quarter, the median debt-to-EBITDA was 4.3x, interest coverage was 2.5x and the loan-to-value was 39%.

Credit quality of the portfolio continues to perform well. We have 4 nonaccrual investments, which represent 1.3% of the portfolio at cost and 0.1% at market value. Two new investments were added and 2 prior investments were removed from the nonaccrual list. These strong credit metrics reflect the rigor of our underwriting process and the discipline of our investment approach.

We continue to believe that our focus on the core middle market provides us with attractive investment opportunities where we provide important strategic capital to our borrowers. The PennantPark platform has a demonstrated track record of value creation through successful financing of growing middle market companies in 5 key sectors, enabling us to ask the right questions and consistently deliver strong investment outcomes. They are business services, consumer, government services and defense, health care and software and technology. These sectors have also been recession resilient and tend to generate strong free cash flow and have a limited direct impact to the recent tariff increases and uncertainty.

The core middle market, companies with $10 million to $50 million of EBITDA is below the threshold and does not compete with the broadly syndicated loan market or high-yield markets, unlike our peers in the upper middle market. In the core middle market, because we are an important strategic lending partner, the process and package of terms we receive is attractive. We have many weeks to do our diligence with care. We thoughtfully structured transactions with sensible credit statistics, meaningful covenants and substantial equity cushions to protect our capital, attractive spreads and equity co-investment.

Additionally, from a monitoring perspective, we received monthly financial statements to help us stay on top of the companies. Our rigorous underwriting standards remain central to our investment philosophy. Nearly all of our originated first lien loans include meaningful covenant protections, which is a key differentiator versus the upper middle market where covenant-light structures are more common.

Since our inception nearly 18 years ago, PNNT has invested $9.1 billion at an average yield of 11.2%, while maintaining a loss ratio on invested capital of roughly 20 basis points annually, a testament to our consistent and disciplined approach through multiple market cycles. As a provider of strategic capital, it fuels the growth of our portfolio companies. In many cases, we participate in the upside of the company by making an equity co-investment. Our returns on these equity co-investments have been excellent over time.

Overall for our platform from inception through September 30, we've invested over $596 million in equity co-investments and have generated an IRR of 25% and a multiple on invested capital of 2x. As of September 30, our portfolio totaled $1.3 billion. And during the quarter, we continued to originate attractive investment opportunities and invested $186 million in 9 new and 54 existing portfolio companies.

Our PSLF joint venture portfolio continues to be a significant contributor to our core NII. As of September 30, the JV portfolio totaled $1.3 billion. And over the last 12 months, PNNT's average NII yield on invested capital in the JV was 17%. The JV has the capacity to increase its portfolio to $1.6 billion, and we expect that with this additional growth, the JV investment will enhance PNNT's earnings momentum in future quarters.

From an outlook perspective, our experienced and talented team and our wide origination funnel is producing active deal flow. We remain steadfast in our commitment to capital preservation and disciplined, patient capital investment approach. We reiterate our objectives to deliver compelling risk-adjusted returns through stable income generation and long-term capital preservation. We seek to find investment opportunities in growing middle market companies that have high free cash flow conversion. We capture that free cash flow primarily through debt investments, and we pay out those contractual cash flows in the form of dividends to our shareholders.

With that overview, I'll turn the call over to Rick for a more detailed review of our financial results.

Thank you, Art. For the quarter ended September 30, GAAP net investment income and core net investment income were both $0.15 per share. Operating expenses for the quarter were as follows: interest and credit facility expenses were $10 million, base management and incentive fees were $6.1 million. General and administrative expenses were $0.9 million and provision for excise taxes were $0.7 million.

For the quarter ended September 30, net realized and unrealized change on investments and debt, including provision for taxes, was a loss of $10.8 million. As of September 30, our NAV was $7.11 per share, which is down 3.4% from $7.36 per share in the prior quarter. As of September 30, our debt-to-equity ratio was 1.6x, and our capital structure is diversified across multiple funding sources, including both secured and unsecured debt.

The PSLF JV is evaluating the purchase of $120 million to $140 million of assets from PNNT, which would allow PNNT to reduce its leverage ratio to 1.25 to 1.3x, which is in line with its target ratio.

As of September 30, our key portfolio statistics were as follows: our portfolio remains highly diversified with 166 companies across 37 different industries. The weighted average yield on our debt investments was 11%. We had 4 nonaccruals, which represent 1.3% of the portfolio at cost and 0.1% at market value. The portfolio is comprised of 50% first lien secured debt, 2% second lien secured debt, 12% subordinated notes to PSLF, 5% other subordinated debt, 6% equity in PSLF and 25% in other preferred and common equity investments, 91% of the portfolio is floating rate, debt-to-EBITDA on the portfolio is 4.5x and interest coverage is 2x.

Now let me turn the call back to Art.

Thanks, Rick. In conclusion, we remain committed to delivering consistent performance, preserving capital and creating long-term value for all stakeholders. Thank you to our team for their dedication and our shareholders for their continued partnership and confidence in PennantPark.

That concludes our remarks. At this time, I would like to open up the call to questions.

[Operator Instructions] We'll take our first question from Brian Mckenna with Citizens.

So on the dividend, I appreciate the equity rotation opportunity. I know that's something you guys have talked about the last few quarters here. But if you were to rotate $150 million of assets into income-producing loans at an incremental 10% yield today, that equates to about $0.20 per share of NII over the next year. So at the current quarterly run rate of $0.15, that implies about $0.80 of annual NII before any changes in base rates and credit quality, that's still $0.15 below the current dividend. So why not rightsize the dividend today so some of this incremental earnings from the equity rotation accretes NAV?

Yes. Look, we're -- thanks, Brian. We're constantly evaluating the dividend. We do have substantial spillover that we need to pay out. It's really the question of how and when we do that at the same time as we're working on the equity rotation to try to figure out what the long-term sustainable NII is. So you've got 2 things going on. One is the equity rotation and the paying out of the spillover. And our current plan is to work both of those processes for the next few quarters, see where we land, come up for air and make some decisions.

Okay. That's helpful. And just in terms of timing around any realization events in some of these equity positions, I mean, has anything changed in the last quarter or 2? It sounds like a more constructive backdrop should be better for monetizing some of those. But I'm just curious if there's any update relative to expectations over the last quarter or 2.

Yes. No, we're seeing more activity. As we said, we're hopeful that we're getting closer to some rotation opportunity. Nothing to announce here on this call today, but we're feeling and sensing that the M&A opportunity and the opportunity for some of these companies is closer at hand than it was.

We'll take our next question from Robert Dodd with Raymond James.

And just on that topic with equity rotation, we look at something like Flock, for example, it's now above -- it's marked above the original cost before you had to restructure. So a business like that, that seems to have had some stumbles that is performing extremely well. Do you think those are the kind of businesses that are more likely to transact in terms of get a realization for you, which you're not in control of or maybe a little bit more than Flock in the near term? Or do you think it's other kinds of businesses, maybe the ones that are still struggling a little bit, are those the ones that are more likely to turn over in the near term? What do you think?

Yes. It's -- there's some that we have more control over like Flock. Flock happens to be in the business of busted credit card and busted receivables, consumer receivables. So we think that's a really interestingly placed company at this point in the economy with what's going on with the consumer. That's just -- I don't want to diverge from the question, but there are control positions. Flock is one, JF acquisitions is another, AKW is a third, where we do have more control.

And the question there is timing and how do we optimize the exit. And then we have a variety of equity co-investments where we're not in control. But if there's a constructive M&A background, by definition, some of those equity co-investments will hopefully convert into cash. So the answer is both. We're hopeful for both. One of the flavors we have a little bit more control over. It's really just a question of how we optimize the outcome.

Got it. Got it. On the other part, I mean, potentially transacting and selling some assets to, I mean, what it -- you said you're reviewing it, right? What are the hurdles that -- evaluating it? What are the hurdles that have to go through for you to feel comfortable with that? And also from a regulatory perspective, do you think the SEC would actually approve that? Because I've seen some BDCs try to do that in the past and the SEC just say no?

Yes. No, I think you may have misheard. We're evaluating selling assets to the joint venture. So there, what we said is -- and we're aware that 40 Act to 40 Act company is something that has a high degree of difficulty. This is just the normal rotation of assets from the BDC, PNNT to the PSLF JV. Leverage was a little high at the PNNT level at quarter end, 1.6x. We generally like to wait to quarter end to get the freshest third-party valuation marks on the names and then PSLF is evaluating the purchase of $120 million to $140 million of those assets, which will move from PNNT to PSLF, bringing the PNNT leverage ratio back into line of our target of 1.25 to 1.3x debt to equity at PNNT.

Got it. Got it. Yes, I misheard the -- on that -- I mean, to that point, right, I mean, your leverage is a little high right now. This is one of the initiatives to take it down, obviously, the others. But there's also the spillover, which you've got to distribute one way or the other. So keeping the dividend where it is takes care of it slowly. Other option would be a one-off, which would take care of it quickly. But any of those things which over distribute earnings tend to drive leverage up. So how comfortable are you that with the current dividend plan and the other initiatives, you can get down to that target leverage and stay there?

Yes. Look, it's really a question of how we work down our spillover and when we work it down at the same time as we're working on equity rotation. Our target leverage long term for PNNT is that 1.25 to 1.3x. We will temporarily consider going above it if we're confident that PSLF will want some more assets and we can grow PSLF, which has been highly accretive to PNNT. So you've got multiple things going on. You've got the reduction of the spillover over time. You've got the equity rotation and you've got the leverage ratio at PNNT. So those are the constraints. We're doing our best. Some of the stuff we control, some of it we can't. We're always evaluating dividend policy. That said, we still have substantial spillover that we need to pay out, and we also need to keep our leverage reasonable and comfortable. So if you have suggestions, Robert, we're all ears, but these are the constraints we're working with.

We'll take our next question from Melissa Wedel with JPMorgan.

I wanted to start on the NII this quarter. I'm wondering if there was anything maybe skewed in terms of timing during the quarter that may have been a headwind. For example, maybe paydowns came early and fundings came later. Was there anything like that we should be thinking about?

I mean not off the top of my head. Rick, any thoughts from you?

No, same, nothing jumps out in terms of timing of repayments.

Okay. Okay. And then a follow-up question on how you're thinking about the spillover income. I mean you've made it clear that you look at that as a way to supplement any shortfall versus the dividend. In terms of sort of banking any spillover income, do you look at that full $0.73 per share as something that could be used? Or are you looking to retain some level of spillover income?

Yes. Look, there's certainly a level of spillover income that we certainly would consider and should consider retaining. For instance, if you look at PFLT, the sister BDC, I think there's like $0.25 or $0.30 of ongoing spillover, that kind of thing. So that might be a base level once you get down to that where you're comfortable that you're not required to pay it out, something like that.

We'll go next to Arren Cyganovich with Truist Securities.

With the investment activity picking up, can you provide a little color around what types of deals you're seeing? Are they more M&A focused? Are these kind of follow-on acquisitions? And maybe just if there's any particular industries that you're seeing more activity in?

Thanks, Arren. It's a combination. A lot of it is add-on delayed draw term loans where we're already in existing credit and the credit needs growth capital. It's a big part of what we do is start with that company when it might be $10 million or $20 million of EBITDA, and they have plans to get to $30 million, $40 million, $50 million, and we set up a plan with them to provide the debt capital to fuel the growth. So quite a bit of it, I'd say at least half of the activity is with existing incumbent companies.

Good news about that is we're on top of companies. We're not going to fund them unless they're doing very well. So by definition, the credit quality is very strong. We know exactly what we're getting into, and we're financing additional capital into companies that are performing well. And then about the other half is kind of our typical new deal, new platform, mid-4s leverage, over 2x interest coverage, 40%, 50% loan-to-value, SOFR plus 4.75% to 5.25% in this environment type of loan.

We'll go next to Christopher Nolan with Ladenburg Thalmann.

For the companies that you're funding, given that the EBITDA coverage is going down, the interest coverage is going up, is this a recipe to -- for dividend recaps by the private equity sponsors? Or do your covenants prevent that?

Well, certainly, it's a great question. We had a dividend recap in PFLT, we talked about, which was a nice, realized gain where we were in the equity and the debt, but we have a substantial equity position. So dividend recaps for us as a lender are something that have a high bar. As a new lender, we are always cautious around use of proceeds and having alignment of interest and making sure there's substantial equity beneath us.

That said, when companies do well, they look at their options, dividend recaps being one of them, sales, IPOs. So the dividend recaps have helped us where we have had the equity co-invest. We are very cautious about participating them as a lender. So sometimes it just happens. Someone comes takes us out to give an aggressive loan to a borrower, we get financed out of our debt and our equity gets some sort of dividend. So you're seeing a bit more of that in this market more recently, and we certainly experienced that in our other BDC.

And Art, how would you characterize the trends in the private equity space that you operate in because the hold times for the private equity in general has been quite extended. And are we starting to see a break in that log jam at all?

Yes. So that's -- look, that's what we think about when we talk about equity rotation, many of our equity co-invests are kind of experiencing that. We co-invested with the private equity sponsor. It was coming into 2025, it was feeling pretty good. April 1 came around, which was Liberation Day, the M&A market really slowed down after Liberation Day for at least 3, 4 months. It's starting to pick back up again. This is kind of why we're a bit more optimistic today than we were last quarter about getting nearer to some equity rotation that's meaningful. Hopefully, the markets will permit some of this. Some of it is just kind of buyers and sellers kind of finally coming together now that there's been some stability in the market to cut a deal for a while, their sellers were holding out for higher prices, buyers were trying to get lower prices.

And the other thing you got to throw in here is what happens if as interest rates come down, SOFR comes down, borrowing costs come down, how that could catalyze more M&A, more refinancings, et cetera. So it's been a murky world since Liberation Day. It seems to be clearing up today. As we speak, we'll see what the Fed does in early December. But we're -- without any major market turbulence, we're more optimistic that we'll get some reasonable rotation.

Got it. And one for Rick. Rick, just to rephrase, I think, Melissa's question earlier, given that revenues seem to go down while investment assets went up and there's a small decline in average yield. Were there timing issues involved in terms of closing deals late in the quarter?

None that comes to top of mind. I think the biggest variance kind of quarter-over-quarter on the top line is you're going to see is in the PSLF dividend. That dividend did decrease in the current quarter. There were some expenses at the joint venture that were kind of onetime and reduced the dividend.

I'd say, that's a good point. There's been some financing activity at the joint venture in the securitization side that kind of hit expenses to some extent during the quarter.

We'll go next to Brian Mckenna with Citizens.

Art, just a bigger picture question for you. You've obviously been a leader in the space for some time now, and you've done a pretty good job managing PennantPark through a number of operating and macro environments, including the GFC, COVID, et cetera. There's clearly a lot of noise in the market today around private credit. And at least from my perspective, there continues to be a good amount of misinformation. So it would be great just to get your thoughts on all the current events and what you think is still underappreciated or misunderstood about your business and even the industry more broadly.

Yes. It's a great question, and we get the investor questions as well, typically from investors who haven't been in the space very long. The average person hears the word default. And in some cases, they think that means a 0. And in the lending business, the default just means that you're coming to the table and negotiating the correct capital structure for the company going forward. And that could mean conversion of some debt to equity. It could mean more economics to the lender. It could mean both. Sometimes when you convert debt to equity, that equity can have long-term value over time. And in our 18, 19 years in business, we've certainly seen that where those equity conversions can actually create value. You can make more money from converting from debt to equity.

So kind of just understanding how loans work and what being a lender is and when you say you're lending to 40% or 50% loan to value, that really means 50% to 60% of the value of the company needs to disappear before we lose a dime. So it certainly can happen, and it has happened, but there's a lot of cushion that's built into these things given the substantial equity cushion. If you go back to COVID, as an example, going into COVID, we had about 120 companies that we lend money to going into COVID. And there, the economy was shut down by the government.

And the fact that we had quarterly maintenance tests that every 3 months, companies had a certain debt-to-EBITDA or EBITDA to interest coverage to meet meant that they had to come to the table, and we had very constructive conversations with our borrowers. And of that 120 companies, about 15 actually needed liquidity. They needed cash. And in all 15 of those cases, the private equity sponsors offered to put money in to solve the liquidity problem. And that was in a scenario where the economy was shut down, a very severe environment.

So the only other observation I had going all the way back to the GFC is when people's fears get up where they're reading articles and people starting to get fearful, what the antidote to that for us was bring people in and go line by line through the portfolio. And here with the BDCs, these are -- the SOIs, the statements of investments are all public information. Let's walk people through the name by name, what -- who the company is, what they do, what the industry is, to the extent you can share it, the credit statistics, the debt-to-equity ratio, loan-to-value, name by name by name. And I think if people went through these books name by name, they realize and we give the stats on an overall portfolio basis.

The overall portfolio has 4.5x debt to EBITDA, 40% to 50% loan-to-value, interest coverage over 2x. you go name by name and after a period of time, you realize these are pretty solid loan books, not just ours, but others. And the other thing you realize is we and our peers are all over these portfolios. We are all over these names. Every month, we get in the core middle market, every month, we get financial statements from our underlying portfolio companies.

So if something starts to stumble, we are on top of it every month. And every quarter, they have a financial covenant to meet. So I think the quality of these portfolios is high, and we're all over them. So I think if investors actually had the time to dedicate and the -- we and our peers are willing to spend the time to go name by name, I think that would calm a lot of the issues that people seem to be having right now. I don't know if that's helpful.

At this time, there are no further questions. I will now turn the call back to Art for any additional or closing remarks.

Look, I just really want to thank everybody for participating today in this season of Thanksgiving. We are certainly grateful for the support of our shareholders. We wish everyone a safe and happy Thanksgiving and holiday season, and we look forward to speaking to you in early February.

This does conclude today's conference. We thank you for your participation.