Good afternoon, and welcome to the PennantPark Investment Corporation's First Fiscal Quarter 2022 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. I'd like to welcome you to PennantPark Investment Corporation's first fiscal quarter 2022 earnings conference call. I'm joined today by Richard Cheung, our Chief Financial Officer. Richard, please start off by disclosing some general conference call information and include a discussion of our forward-looking statements.

Thank you, Art. I'd like to remind everyone that today's call is being recorded. Please note that this call is the property of PennantPark Investment Corporation, and any unauthorized broadcast of this call in any form is strictly prohibited. Audio replay of the call will be available by using the telephone numbers and PIN provided in our earnings press release as well as 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. Today's conference call may also include forward-looking statements and projections, so we ask that you refer to our most recent filings with the SEC for 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, Richard. I'm going to spend a few minutes discussing how we fared in the quarter ended December 31, how the portfolio is positioned for the upcoming quarters, our capital structure and liquidity, the financials and then open it up for Q&A. We are pleased with our performance this past quarter. Due to this performance and the successful execution of our equity rotation program, we are pleased to announce the three-part plan to increase long-term shareholder value: number one, an increase in our quarterly dividend by 17% to $0.14 per share per quarter, up from $0.12 starting this quarter ended March 31. We anticipate using up to $25 million of the proceeds from the exit of Pivot to engage in the stock buyback program over the next 12 months; and number three, an increase in our investment in our PSLF JV with Pantheon, which will enhance NII over time. Now to review the results which support this plan? For the quarter ended December 31, net investment income was $0.19 per share, including $0.02 per share of other income. We achieved a 2.7% increase in NAV. NAV went up $0.27 per share from $9.85 to $10.11 per share. We are particularly pleased that our NAV as of December 31, 2021, was up 15% from what it was pre COVID on December 31, 2019. As part of the filing of our 10-Q, you will see a substantial increase in the value of our investment in Pivot Physical Therapy, or PT Network. It's been in the press that Pivot is being sold to Athletico Physical Therapy. This transaction is expected to close in the next few weeks. We will generate approximately $160 million of cash proceeds on our $18 million common and preferred stock investments in Pivot. We will also receive $73 million…

Thank you, Art. For the quarter ended December 31, net investment income totaled $0.19 per share, including $0.02 per share of other income. Looking at some of the expense categories, base management and performance-based incentive fees totaled $7.8 million. Taxes, general and administrative expenses totaled $1.2 million. And interest expense totaled $6.9 million. Net realized losses on investments were $26.1 million or $0.39 per share. We redeemed our 2024 notes in full, which resulted in a realized loss from debt extinguishment of $1.7 million or $0.02 per share. Unrealized gains on our investments, net of any associated tax provision, were $41.7 million or $0.62 per share. Change in the value of our credit facility decreased our NAV by $0.01 per share. Our net investment income was in excess of our dividend by $0.07 per share. Consequently, NAV per share went from $9.85 per share to $10.11 per share, up 2.7% from the prior quarter. As a reminder, our entire portfolio, credit facility and senior notes are marked to market by our Board of Directors each quarter using the exit price provided by independent valuation firms, securities exchanges, independent broker-dealer quotes when active markets are available on the ASC 820 and 825. In cases where broker-dealer quotes are inactive, we use independent valuation firms to value the investments. Our GAAP debt-to-equity ratio, net of cash, was 1.1 times. We have a strong capital structure with diversified funding sources and no near-term maturities. We have a $465 million revolving credit facility maturing in 2024 with the syndicate of banks. $64 million of SBA debentures maturing in 2027 and 2028, $350 million of unsecured notes maturing in 2026, which includes the issuance of $165 million of unsecured notes with interest rate of 4% during the quarter ended December 31. Our overall debt portfolio has a weighted average yield of 8.8%. On December 31, our portfolio consisted of 107 companies across 30 different industries. The portfolio was invested in 47% in first-lien secured debt, 15% in second-lien secured debt, 8% in subordinated debt, including 4% in PSLF and 30% in preferred and common equity, including 3% in PSLF, 93% of the debt portfolio has a floating rate, all of which has a LIBOR floor. The average LIBOR floor is 1%. Now let me turn the call back to Art.

Thanks, Richard. To conclude, we want to reiterate our mission. Our goal is to generate attractive risk-adjusted returns through income, coupled with long-term preservation of capital. Everything we do is aligned to that goal. We try to find less risky middle market companies that have high free cash flow conversion. We capture that free cash flow primarily in debt instruments, and we pay out those contractual cash flows in the form of dividends to our shareholders. In closing, I'd like to thank our extremely talented team of professionals for their commitment and dedication. Thank you all for your time today and for your continued investment and confidence in us. 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 Casey Alexander with Compass Point.

Hi good afternoon and Art, I think you and your team are entitled to a victory lap on PT Networks' outcome. Truly, congratulations on that and holding to your goal of reducing equity as a percentage of the portfolio. Congratulations on that.

Thank you. Appreciate it.

Yes, I would like to kind of better understand the sort of overall RAM strategy, in that it's a business that we've been trying to exit and yet at the same point in time, you're investing more capital into the business. And I understand that for instance, with PT Network, it was the same thing. It was a business you were trying to exit. You invested more capital to buy more stores and ultimately did exit it with great success. And so I really want to understand the RAM strategy that in a business that we're trying to exit, we're investing more. Does having more wells not only improve the valuation because it increases the barrels of oil per day that you're producing, but does a larger field get a better multiple somehow? I'm really curious to understand the overall strategy that hopefully results in an exit of this business.

Yes. Thanks, Casey. So there are some similarities, obviously, a big difference between physical therapy and oil and gas. But the similarity is to optimize exits, sometimes; you have to put more money in. And we did – we did a bunch of tuck-in acquisitions and invested in de novos and that created incremental EBITDA and ultimately more very accretive exit because we knew that for every dollar of EBITDA we could create, we get a very high multiple on it on the exit, that's what we thought and that played through. In RAM, the situation is somewhat similar. First, the wells in and of themselves are accretive. At today's prices, you can put $1 in the ground, and you can get a really good return on that dollar, so really good expected IRRs on the money that we're using to drill new wells. So in and of themselves, that creates better cash flow, better economics for the company. And then yes, because you're proving the worth of the field, you're expanding the worth of the field and you're playing offense to some extent, perhaps it makes you more attractive on the exit to potential buyers. So the wells on their own two feet, irregardless of any exit, it makes sense. They're accretive. And then, yes, we hope it leads to a better exit for us.

Would – I mean, I was looking at the press releases from RAM and noted that RAM had a record year in 2021. Would you characterize still no change in the M&A market or is there beginning to be indications of interest? How would you characterize the market for M&A in oil and gas in Austin Chalk?

We think it's getting a little bit better. We think it's falling a little bit, so it's moving in the right direction. Obviously, if oil continues to stay at a either at connected place today, it's over $90, it should continue to fall and set up the M&A market, the middle market M&A market for oil and gas to be more active, hopefully, as we get into 2022.

All right. Then my last question is, to a certain extent, playing devil's advocate, let's say that you're not getting a price that you want. You complete these wells, you bring them online, they're producing in line with the rest of the field. At what point in time do you build enough cash that, say, for instance, you could pay off the Main Street loan and start dividending cash to the BDC? Not that that's the outcome that we want, but perhaps it's the outcome that we end up with at some point in time. How does that play itself out and what sort of timeline might that be?

It's a good question. I think it's to try to put a pin in and timing on that. Look, if we continue, if the prices continue to be good and every dollar you put in the ground, you can make $2 or something like that, you just keep doing that. And at some point, you say, "Gee, this loan that we got through the Fed Main Street program is attractive as it is, we could pay off and just continue to generate good cash flow." And of course, at that point also, send cash flow up to PNNT. So it depends on how long this good market continues. And if we can continue to get excellent returns, then yes, you look at it, I don't know when that will be, is it 6 or 12 months down the road and depending on where the M&A market is, we could theoretically say that the cash flows are really attractive, just keep drilling wells, and we'll send back chunks of cash to pay off the debt and then out to the BDC.

Well, again, congratulations on the PT Network's outcome. And thank you for taking my questions.

Thanks Casey.

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

Hi guys, congratulations on the quarter and the Pivot exit. A couple of several housekeeping ones, if I can, first, and then I've got a couple of more detailed ones. I mean first, on Pivot, with the exit, is there going to be any, in addition, obviously the cash proceeds and repayments, but is there going to be any onetime income? I mean, are you getting any success fee, any last-minute dividend up to PNNT or anything like that, that's going to flow through NII? Or is all of it going to come in, in terms of just below the line?

Yes. It's virtually all, and Richard, correct me if I'm wrong, virtually all of it is coming in below the line.

That is correct, yes.

Got it. And then what's the target leverage within the JV? I know it's 1.25 times at the parent but what about within the JV?

That's a great question. Look, I think if you said we're taking our commitments up to us in Pantheon to $235 million and we would expect over time to have that JV be $750 million, I guess that looks something like 2:1, yes, something like 2:1.

Got it, okay. Moving on to two assets that did get marked down, Cascade and MailSouth. The equity got marked down. Based on what you know right now and the trends of those businesses, should we have any concerns more on the debt front? Obviously, they're both high-paying PIK coupon loans. So is there any concern that there could be an issue on the loan side, which are both marked pretty well still?

Yes. No, I think the marks would indicate on the debt that there's still money good, there's still cushion there to pay them and pay them in cash. And the markdowns were really on the junior capital, the preferred and common stocks for various reasons, and I can go through them, how we want to go through them. But we feel like they were fairly marked, both the debt and the equity, obviously, through third parties and are accurate in terms of how they're being valued.

Got it, got it. Thank you. And then last one for me. On the equity co-invest side, I mean; you laid out some numbers there. You do have, I mean, a 29% IRR over time is really attractive. So in the market today, are the terms you're seeing or the availability even as equity co-invest, do you think there's still –multiples are up in the business, and I'm sure you're not getting a discount when you do an equity, you can co-invest – you're in the special multiples as a PE firm, right? So I mean, is that 29% sustainable, do you think? Or do you think in the environment today, not necessarily in IRR, obviously, right, is that 29% sustainable or should we expect that to come down? I mean, I realize it's a bit question.

Yes. Look, it is a great question and time will tell. As I said, I think, in most cases, we are part of the first institutional capital in a company that's owned by a founder or an entrepreneur or a family. That founder, entrepreneur, or family are selling to a private equity firm in large part because there's a game plan for taking that $10 million or $20 million EBITDA company and taking it to $30 million, $40 million, $50 million, $70 million, $100 million of EBITDA. And you're right, in some cases, the multiples are pretty high today. There's a lot of private equity. Multiples are high on one hand. On the other hand, where you're taking the company from $15 million to $50 million of EBITDA, irregardless of paying a high multiple, you're going to get a very good return on that equity capital. How our debt is helping to fuel that growth? I mean, that's part of the – part of the social contract with the private equity firm who is permitting us to co-invest in the equity is that we are helping to drive that growth through our debt investments as a partner. And then we're participating in the ups through the co-invest. So is 29% sustainable? I mean, we're thrilled and excited that it's been 29% at MOIC at 2.9 times. Sure. I mean, we're skeptical people, we're debt people. We're always saying, we should always kind of cushion and kind of think about it as a 20% IRR type of thing and maybe it's not 2.9 times, it's 2.4 times or something like that. And that would be us as credit people and skeptics, that's probably how we'd model it, something like that. But we've gone through an extraordinary time period. And I'd say kind of the one thing that's newer, I highlighted this on the call, and we've been in business at PennantPark now, we're in our 15th year, we've really honed in, in the last handful of years on where we add the most value, where we bring the most knowledge, where we can avoid the most mistakes, where we can get the best package of risk-adjusted return, including covenants. And it seems to be kind of below this radar, a lot of press about the upper middle market and the mega unit-tranches and all this other stuff, but where we add this most value is kind of in this $10 million to $30 million of EBITDA, where we're partnering as part of the first institutional capital of the company. So it's been working, it's been working better. I feel like we're continuously improving and getting better in that vein. But time will tell.

Thank you. And congrats on the quarter, the NAV, the dividend and the buyback. Thanks.

Our next question is from Ryan Lynch with KBW.

Hey, good afternoon. I'll just join everybody else by saying congrats on the nice quarter, and probably more importantly, the successful exit of PT Network. It's really great to the kind of long-term strategy of equity monetizations. So kind of on that point, though, obviously, super successful exit or monetization of that investment. But that's going to throw a lot of cash coming back at you, $225 million. A lot of that is non-yielding equity, but you also have some – also a chunky higher-yielding debt and preferred piece. So just wanted to get your thoughts and outlook on capital deployment. Obviously, fourth quarter was incredibly busy, kind of capped off a very strong 2021. How is early in 2022 shaping up as far as redeploying some of that capital and portfolio growth from here? And I would assume that you expect, based on the big repayment of – or exit of PT Network in calendar Q1, I would assume you would expect a net repayment in that quarter.

Sure. Yes, I know it's as we see in our business when someone pays you back and when you get a big one like this, you say thank you and you shouldn't complain about it because obviously, we do have to – one of our main goals is a predictable NII. And we're not complaining, right? We'll take it back and we'll take the cash. And yes, it's a GC second-lien that we're getting paid off on, that was too expensive for Athletico to take. So we're going to put our heads down and try to find good deals. We're not going to rush it. We're not the type to kind of rush deployment. We've seen how that can – on long-term interest. So in a methodical, careful way we're going to deploy the capital over the coming quarters. Part of it will be deployed in the JV with Pantheon, part of it will be deployed in the stock buyback. Part of it, we're going to roll into the Athletico deal for $10 million in equity. But yes, we've got to put our head down and invest, at the same time, being very careful and selective about what comes into the portfolio. In terms of kind of activity levels, 2021 was, my God, what a blizzard of deals, particularly at the end of the year. I think everyone in here is just probably still recovering, whether it's those of us who are lenders or the accounting firms, law firms, other people or providers, just a record level year-end. And right now, and you probably heard it from our peers, we're kind of going through a typical year seasonality-wise where it's a little slow in January and February because of the busy deals that were done in December. We still feel like 2022 will be an active year. I don't know how active that will be. If you had to kind of pick a base case to model, maybe looks a lot like 2019 pre-COVID. It may not. I mean, we're still early, but talking to our deal teams, they feel like there's good dialogue, there's going to be nice activity levels and we'll have an active year in 2022.

Okay, that makes sense. And then on kind of the point of capital deployment, you guys announced the $25 million share repurchase program. That's one form of capital deployment. How do you guys view – how you guys plan on deploying the capital part of that program? Is that going to be kind of pretty consistent deployment over the next four quarters? Or will that kind of have ebbs and flows depending on where your guys' stock price trades and the relative attractiveness you guys view and the share repurchases?

Yes. It's a good question. At this point, we think of it as kind of equivalent pieces over the course of the next four quarters. It's certainly what we've done historically. But I'm also looking at the stock here and saying it still remains really, really cheap relative to NAV and where we think it's going. So I think we think about it right now is equivalent bites over the course of the four quarters, but you never know.

Okay, fair enough. And then just one last question, following up on Robert's question regarding MailSouth and Cascade. Would you be willing to provide an update? I mean, obviously there was the equity for both of those investments got marked down to zero, so there obviously was something there either fundamentally, or from a valuation standpoint that changed pretty materially. Could you just provide an update on what kind of drove those marks?

Sure. So Cascade is in the soil testing business, environmental soil testing. Omicron certainly in late 2021 took a – really slowed it down. The testing slowed down as the crews could not really operate in particularly the jurisdictions that we're in, in California and New Jersey, which were restricted in terms of the operations. So we hope that's – that bounces back here as Omicron has plowed through the population, but it certainly the company kind of in late 2021. MSpark is a direct to mail business. Unfortunately, a big part of its market is restaurants and retail, which got hurt during COVID are still soft. We've executed a management change there and brought in a new CEO, who we think very highly of and who we think will take this company to higher heights and help it rebound. But we thought that made sense in late 2021 to execute that management change.

Okay. That's helpful update. Thanks again Art for taking my questions and again, congrats on the very successful exit.

Thanks, Ryan.

Our next question from Mickey Schleien with Ladenburg.

Yes. Good afternoon, Art. Just a couple of questions. Your unfunded commitments at PNNT have about tripled over the last few quarters. How much of that is for delayed draw? And what are your expectations for the timing to fund those commitments when we consider how active the M&A markets are currently?

Yes, it's a good question. I don't have related answer or revolver in my fingertips. Richard, I don't know if you do. If not, we can certainly get back to you after the call. My sense is a lot of it is linked drill as we work with these companies and we had these growth plans to take it from $15 million to $50 million, a lot of what we're doing is on the delay draw to fuel that growth. But Richard, any particular color you have in your fingertips, call there.

Yes. No, we'd call you back. It's about 50/50 between delay draw and revolver, but I'd give you precise breakdown after the call.

That's fine, Richard. I understand. My other question, Art, your debt investment in PRA Events is marked nicely. Does that reflect an expectation for prepayment or is it from something else like the company's performance or market multiples?

Yes. So this is an events company, it's called PRA Events. Obviously, during COVID it was kind of shut down. Companies bounced back very nicely here, thankfully, mostly corporate events. And companies are booking those corporate events again, and we're optimistic that we'll have to have a nice bounce here in 2022.

Terrific. That's it for me. And I'd like to also congratulate you on the patience of your portfolio management in this quarter's results. Thanks a lot. That's it for me.

Thank you, Mickey.

We'll go to our next question from Kyle Joseph with Jeffries.

Hey, thanks for having me on, taking my questions. Let me echo the sentiment and congrats on the positive developments we've seen. Most of my questions have been asked. I just wanted to follow up and just kind of get a sense from a high level in terms of portfolio performance and what sort of trends you're seeing in terms of EBITDA growth and specifically margins, given the inflationary environment we find ourselves in?

Yes. Look, we've seen nice EBITDA growth. Went large in the quarter, it's a year-over-year in just around 10%. And most of the companies had a good situation in terms of being able to raise their prices. By definition, we're always asking ourselves a question, "Does this company have a real reason to exist?" they go away which means the EBITDA margins are typically in excess of 20%, which means when there's inflationary pressures, their cost of goods are going up and labor is going up. The supply chain issues, they have a better shot of increasing their prices because they're so important to their customers. In addition, in this environment, you have additional fact pattern of it's in the news, everywhere sees – everyone sees inflation once these costs going up. So it has not been hard for our portfolio companies to raise prices to protect themselves, somewhat earlier than others, but ones who did earlier have performed better, but others are catching up, and we'll have – we'll catch up ultimately. So like anything, sometimes quick action in these environments is helpful. And most of our companies are relatively quick in making that call, that price increase.

Got it. Very helpful Thanks for answering my question.

Thank you, Kyle. perator: Our next question from Melissa Wedel with J.P. Morgan.

Good morning. Appreciate you taking my questions today. A couple of things I wanted to circle back on. First, on the dividend when we think about the portfolio rotation that's sort of occurring real time, increasing the dividend to a $0.14 per share level, should we think about that as reflecting maybe a little bit of the margin in terms of sort of ongoing NII earnings power of the portfolio? So maybe a steady-state earnings power somewhere a little bit above that?

Yes. I mean, it's a good question, Melissa. We feel very comfortable going to the $0.14. We think it's, almost in any scenario you run, comfortably covered with NII and we'll see where we go. We'll see how – what the earnings power of PNNT and then the JV is. We'll see about the equity rotation. We'll see the LIBOR going up and what kind of impact that's going to have on the NII. So lots of different things going on, but for us this was the first move and hopefully not the last move over time as we hopefully continue to grow NII.

Okay, got it. That's very helpful. I appreciate that. And then on – in thinking about further equity rotation, we've talked about a couple of names today. There are some equity positions in the portfolio that, while maybe had a volatile mark in the December quarter versus the September quarter preceding it, you still have a large unrealized gain in the position even if the mark came down sequentially. So given the size of the exit that's about to occur and the cash that, that will generate, does this impact how you're thinking about the pace of rotation on other names?

It's a good question. Most of the time, yes, most of the time we don't really have control, right? So PT, we had control, right? We had control, had control. And have control, hopefully, in the near future. Like Cana which is a big name. That's been – the stock has been up and it's been down. It kind of hurt because it was kind of related to specs, but now it's been bouncing back in like week or two. So we don't have control. They are not so public stock, and it just gets value in every [indiscernible] in the stock market. So, at the right time, at the right place, of course we would love to convert that to cash and invest in yield instruments. So that's a big name that we don't have control over. There's J&F, Johnson Frank. That's a big name. Again, we're partners with co-equity fund there. We're the minority shareholder, we don't have control of that one. We can rattle off the names, but it's clearly identified in the SOI where we have control and where we don't. And when we do have control of brand, of course, we do control [indiscernible] we've touched on that. So it's a mixed bag, and we're going to do everything in our power to have the balancing act of getting to our long-term goal of exiting the equity positions, while at the same time trying to optimize that is a great example of that. And we've talked about that for a long time and trying to find the balance of optimizing proceeds at the same time we have the goal of exiting is a challenge, but it's kind of, I guess, what we're supposed to be doing.

Thanks, Art.

That concludes today's question-and-answer session. Mr. Penn, at this time, I'll turn the call back to you for any additional or closing remarks.

I just want to thank everybody for being on the call today. Our next call will be in early May [Call Ends Abruptly].