Good afternoon, and welcome to the PennantPark Investment Corporation's fourth fiscal quarter 2022 earnings conference call. Today's conference is being recorded. At this time, all participants have been placed in a listen-only mode. The call will be open for questions and answers session following the speaker's remarks. If you would like to ask a question at that time, simply press star one on your telephone keypad. If you'd like to withdraw your question, please press star two on your telephone keypad. Thank you. 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 fourth fiscal quarter 2022 earnings conference call. I'm joined today by Richard T. Allorto, Jr., our Chief Financial Officer. Richard T. Allorto, Jr., 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. Please note that this call is the property of PennantPark Investment Corporation, and that 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. Today's conference call may also include forward-looking statements and projections, and we ask that you refer to our most recent filings with the SEC 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, Richard. We're going to spend a few minutes and comment on our target market environment, provide a summary of how we fared in the quarter ended September 30th, how the portfolio is positioned for the upcoming quarters, our capital structure and liquidity, a detailed review of the financials, then open up for Q&A. From an overall perspective, in this market environment of inflation, rising interest rates, geopolitical risk, and a potentially weakening economy, we are well-positioned as a lender focused on capital preservation in the United States, where the floating interest rates on our loans can protect against rising interest rates and inflation. We continue to believe that our focus on the core middle-market provides important, attractive investment opportunities where we are important strategic capital to our borrowers. In times of market volatility, our opportunistic credit strategy focuses on creating value from the dislocation in the markets.
Specifically, we've been active buying first lien loans in the secondary market at discounts in companies where we have differentiated institutional knowledge. It could be a company that we use to finance in a sector where we have domain expertise or a direct relationship with the management team or financial sponsor. We've been buying loans where we think we can generate double-digit or low teens IRRs as the loans return to par in three years. We employed a similar strategy during the global financial crisis and generated excellent returns. In prior quarters, we outlined a game plan for growth of net investment income and dividends.
We continue to execute on our plan to increase long-term shareholder value, and I'm pleased to announce that the Board of Directors has approved another increase of our quarterly dividend to $0.165 per share, payable on January 3rd to shareholders of record as of December 19th. Additionally, during the September quarter-end, we continued buying shares under our stock buyback program and purchased approximately 189,000 shares during the quarter for $1.2 million. In total, we have bought back $13.2 million of shares or 1.8 million shares. Some highlights for the quarter ended September 30th were as follows. Our debt portfolio continues to benefit from rising base rates. Our weighted average yield to maturity increased to 10.8% from 9.3% last quarter.
Approximately 96% of our assets are floating rate compared to 47% of our liabilities that are fixed rate. Holding everything else constant, every 100 basis point increase in base rates translates into approximately $0.02 per share of NII. Another highlight was that our portfolio performed well during the quarter, and we did not put any new investments on non-accrual. As of September 30th, we have one non-accrual, which represents 1% of the portfolio cost and 0% at market value. Thirdly, during the quarter, we completed the amendment, extension, and expansion of the Truist credit facility. The size increased from $465 million-$500 million, and the maturity was extended three years until 2027. Thank you to our lending partners for their confidence and support of the company. Fourth, we continue to grow our PSLF joint venture.
The joint venture grew from six hundred and eight million dollars to seven hundred and thirty million dollars during the quarter and continues to generate an attractive double-digit ROE for PNNT. We are targeting a one billion dollar vehicle over time where we can drive substantial growth in NII at PNNT. We believe that this late twenty twenty-two and twenty twenty-three vintage of middle-market directly originated loans should be excellent. Leverage is lower, spreads and upfront fees and OID are higher, covenants are tighter, and loan to value continue to be attractive. Our capital, which we believe is always value-added, is adding even more value in this environment.For the quarter ended September thirtieth, we invested a hundred and thirty-four million dollars in new and existing portfolio companies and had sales and repayments of a hundred and seventy-six million dollars. Now to review the operating results.
For the quarter ended September 30th, core net investment income was $0.18 per share, including $0.01 per share in other income. This excludes one-time upfront financing costs from the amendment and extension of our credit facility. Our NAV was down due primarily to unrealized mark-to-market adjustments in our portfolio tied to the overall market and not due to fundamental credit factors. As you might expect, most of the mark-to-market volatility came from our equity portfolio. Overall, GAAP NAV decreased by 6.9%, comprised a 3.6% decrease due to the fair value adjustments on our equity holdings, and a 2.5% decrease due to the fair value adjustments on our debt holdings. The remaining 1% was attributed to fair value adjustments on our credit facilities.
With regard to increasing net investment income, our strategy remains focused on, number one, optimizing the portfolio and balance sheet of PNNT as we move towards our target leverage ratio of 1.25x debt-to-equity. Number two, growing our PSLF JV with Pantheon to $1 billion of assets from approximately $730 million of assets at quarter-end. Number three, rotating out of our equity investments over time and redeploying the capital into cash-pay yield instruments. We have a long-term track record of generating value by successfully financing high-growth middle-market companies in five key sectors. These are sectors where we have substantial domain expertise, know the right questions to ask, and have an excellent track record. They are business services, consumer, government services and defense, healthcare, and software technology.
These sectors have also been resilient and tend to generate strong free cash flow. It's important to note that we do not have any crypto exposure in our software and technology investments. In many cases, we are typically part of the first institutional capital into a company where a founder, entrepreneur, or family is selling their company to a middle-market private equity firm. In these situations, there's typically a defined game plan in place with substantial equity support from the private equity firm to significantly grow the company through add-on acquisitions or organic growth. The loans that we provide are important strategic capital that fuel the growth and help that 10-20 million-dollar EBITDA company grow to $30, $40, $50 million of EBITDA or more. We typically participate in the upside by making an equity co-investment. Our returns on these equity and co-investments have been excellent over time.
Overall, for our platform from inception through September 30th, our $355 million of equity co-investments have generated an IRR of 28% and a multiple on invested capital of 2.5x. With the current volatility in the broadly syndicated market, we have seen more private equity sponsors tap the private credit markets. We are selectively looking at these new opportunities and believe the vintage for these loans will yield compelling returns. Because we're 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 structure transactions with sensible credit statistics, meaningful covenants, substantial equity cushions to protect our capital, attractive upfront fees and spreads, and an equity co-investment. Additionally, from a monitoring perspective, we receive monthly financial statements to help us stay on top of the companies.
With regard to covenants, virtually all of our originated proprietary loans have meaningful covenants which help protect our capital. This is one reason why our default rate and performance during COVID was so strong and why we believe we're well-positioned in this environment. This sector of the market, companies with $10 million-$50 million of EBITDA, is the core middle market. The core middle market is below the threshold and does not compete with the broadly syndicated loan or high-yield markets. Many of our peers who focus on the upper middle market state that those bigger companies are less risky. That is a perception. It may make some intuitive sense, but the reality is different. According to S&P, loans to companies with less than $50 million of EBITDA have a lower default and higher recovery rate than loans to companies with higher EBITDA.
We believe that the meaningful covenant protections of core middle market loans, more careful diligence, and tighter monitoring have been an important part of this differentiated performance. The borrowers in our investment portfolio are performing well, and we believe we're well-positioned for future quarters. As of September 30th, the weighted average debt to EBITDA on the portfolio was 4.6x, and the average interest coverage ratio, the amount by which cash interest exceeds cash interest expense, was 3.6x. This provides significant cushion to support stable investment income even when interest rates rise. Based on this substantial cushion, even with a 200 basis point rise in base rates and flat EBITDA, our portfolio companies will cover their interest 2.3x on average. Since inception, PNNT has invested $7.3 billion in an average yield of 11%.
This compares to a loss ratio of approximately 9 basis points annually. This strong track record includes our energy investments, our primarily subordinated debt investments made prior to the financial crisis, and recently, the pandemic. With regard to the outlook, our new loans and our target market are attractive, and this vintage should be particularly attractive. Our experienced and talented team and our wide origination funnel is producing active deal flow. Our continued focus remains on capital preservation and being patient investors. 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 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. Let me now turn the call over to Richard , our CFO, to take us through the financial results.
Thank you, Art. For the quarter ended September 30th, net investment income totaled $0.14 per share, including $0.01 per share of other income. Operating expenses for the quarter were as follows. Base management fees was $4.9 million, interest and credit facility expenses were $13.7 million, general and administrative expenses were $1 million, and provision for taxes was $200,000. During the quarter, we expensed $5.1 million of credit facility expenses related to the amendment and extension of our revolving credit facility. Excluding the $5.1 million of credit facility expenses, core NII was $0.18 per share. For the quarter ended September 30, net realized and unrealized change on investments and debt, including provision for taxes, was a loss of $44.1 million or $0.68 per share.
The reversal of the provision for taxes of $7.2 million or $0.11 per share was due primarily to the decrease in the value of RAM Energy. Change in the value of our credit facility decreased our NAV by $0.08 per share. Core net investment income exceeded the dividend by $0.015 per share. As of September 30th, our NAV per share was $8.98, which is down 6.9% from $9.65 per share from the prior quarter. Our GAAP debt-to-equity ratio, net of cash, was 1.2x. As of September 30th, our key portfolio statistics were as follows. Our portfolio remains highly diversified with 123 companies across 32 different industries.
The portfolio was invested in 51% in first lien secured debt, 11% in second lien secured debt, 12% in subordinated debt, including 7% in PSLF, and 26% in preferred and common equity, including 4% in PSLF. The weighted average yield on debt investments was 10.8%. 96% of the debt portfolio is floating rate with an average LIBOR floor of 1%. As base interest rates rise, we are well positioned to participate on the upside. Holding everything else constant in the portfolio, a 1% increase in base rates translates into approximately $0.02 per share of NII upside per quarter. As of September 30th, 2022, the company had approximately $0.71 per share of spillover taxable income. Now, let me turn the call back to Art.
Thanks, Richard . In closing, I'd like to thank our dedicated and talented team of professionals for their continued commitment to PNNT and its shareholders. Thank you all for your time today and for your continued investment and confidence in us. That concludes our remarks. At this time, I'd like to open up the call to questions.
Thank you. Ladies and gentlemen, if you'd like to ask a question, please signal by pressing star one on your telephone keypad. Please make sure the mute function on your phone is turned off so the signal can be read by our equipment. Again, please press star one to ask a question. We'll pause just a moment to give everyone an opportunity to signal for questions. We'll take our first question from Casey Alexander with Compass Point. Please go ahead.
Yeah. Hi, can you hear me?
Yes, we can. Thanks, Casey.
Yeah. Okay. My first question is, I'm intrigued by your ability to buy first lien loans in the secondary market. Would these be new relationships or would you be picking up some pieces of loans that you already have? Is there some sort of breakdown? What % of your new originations in this quarter were as a result of buying first lien loans in the secondary market as opposed to direct origination?
Thanks, Casey. These are typically loans where we feel like we have a differentiated viewpoint where we're not buying the market. It's typically a company we might have financed when it was a little smaller in the core middle market and maybe it graduated to the broadly syndicated loan market. It's in industries where we think we have domain expertise, we know the management, we know the sponsor, and where we think we're buying a dollar for between $0.85 and $0.95. We think there'll be a potential pull to par over a two or three-year time period, which gets you kind of the low to mid-teens kind of IRR. All first liens here are secured, all credits that we feel are strong credits with good cash flow.
They just happen to be a little bit of the babies thrown out with the bathwater in the choppy market environment that we've had. In terms of timing, it's been primarily more recently. I mean, I think we did a little bit in the quarter ended 9/30. It's certainly a big piece of what we're doing in the quarter that we're in today.
Would you characterize these as broadly syndicated loans or are these private debt loans that are put out by private debt lenders?
No, these are loans where we can access in the broadly syndicated loan market. They trade with the big broker-dealers and given the market environment, they're at a discount. In virtually all cases.
Yeah, I got it.
We think we have a differentiated info edge. They're BSL that in many cases graduated from middle market over time.
Right. Okay. Thank you for that. Secondly, can you explain why PennantPark takes the $5 million amend-and-extend fee up front when most platforms amortize that over the life of the credit facility? If you'd like to make a case why that's better for investors, love to hear it.
That upfront fee, there's a couple of ways you can do it accounting-wise. We are obligated under the way we account for our credit facility to take it up front as a one-time versus amortizing that over the life of the loan. We are taking our pain today. We don't have to take, you know, the residual expense over the life of the loan. Also, from a shareholder standpoint, it obviously this quarter meant that we as a management company earn no incentive fee. Again, that's a shareholder-friendly way to do this. Going back in time in history, back to the global financial crisis, we elected to mark our liabilities to market. To us, that was a very good matching mechanism for dealing with the SEC asset coverage ratio.
We're still dealing with the residual of that. The SEC would prefer that we don't do that, and we prefer we don't do that. You've seen these credit facilities now are marked closer to par, but we're obligated to do the one-time fee because this credit facility that we keep amending and extending is essentially the same from the accounting standpoint, credit facility that we've had for many years. It's the same lenders, it's the same lead lender. The terms aren't really changing other than the extension. We're obligated to take the fee as a one-time, you know, hit in this quarter. We do differentiate between core and non-core in our NII disclosure.
Okay. Thank you for that. Lastly.
I don't know if that's clear.
More clear to me than most, probably. I actually think it's a very good answer. That was very helpful.
Okay.
Lastly, on Walker Edison, you marked that similar to where you actually have a partner in that loan that also marked it. Walker Edison has been a company that has given PennantPark substantial benefits in the past. Do you wanna kinda go through the history of that, where you stand with that loan today, what you think is gonna happen? You know, there's also another big private equity shop that is actually behind you on that, you know, that might be helping you drive a positive outcome there. I would love to hear your thoughts on that one.
Yeah. Walker Edison was a company that we financed, I'm gonna say five, six years ago. It's a company that is in the furniture business, and their distribution channel is Wayfair, Amazon. It's an e-commerce distribution channel. We did a loan to the company, and we took an equity co-invest five, six years ago. It did very, very, very well. COVID accelerated things. I think our equity co-investment, we had a 4x MOIC on in cash to date. About a year and a half ago, a division of a large private equity sponsor, Blackstone, put $250 million of junior capital into the company. We rolled into a new debt piece with other partners in the direct lending industry.
You know, we felt it was a safe loan, obviously, at that point in time, you know, otherwise we wouldn't have done it. You know, kind of enhanced by the equity cushion by the large private equity sponsor. Company's massively underperformed since then. The post-COVID world is different, and this company, in and of their own right, did not manage that well. They did pay us cash interest as of 9/30. We for the 9/30 quarter, kept it on a hold. Obviously, all bets are off for the 12/31 quarter, and we'll see what happens between now and then. There are restructuring conversations going on as we speak, and I think that's probably all I can report at this point in time.
All right. Great. Thank you very much for that answer, and that's all my questions. I appreciate it. Thanks, Art.
Thanks, Casey.
As a reminder, for questions or comments, star one, please. Star one. We'll take our next question from Paul Johnson with KBW. Please go ahead.
Yeah, good afternoon, guys. Thanks for taking my questions. First one, I just was hoping to understand the mark on RAM Energy a little bit more this quarter and kind of what drove that mark down. You know, I understand you guys have taken a very patient approach to moving pieces that potentially go into the valuation here as you guys are evaluating strategic alternatives. One of the things, you know, I look at, I mean, I'm looking just in the public market comps, you know, for E&P companies, you know, the XOP, you know, up 6.5% in the quarter. I know oil prices were down in the quarter and, you know, about 25% or so.
RAM Energy, I think, you know, this quarter you guys marked at about 32% lower. You know, a lot of the public comps for energy companies, specifically the E&P sector, is obviously up. I'm wondering, is it anything that's going on fundamentally, you know, with the operations of the company that would cause you guys to mark the investment down? Is it, you know, related to, you know, the strategic alternative, you know, exploration process where potentially maybe you've seen, you know, lower offers than the valuation in 2Q? Anything that you can say would be helpful.
Thanks, Paul. We do have to be very careful. The company is exploring strategic options, so I'm somewhat limited in really answering the question, Paul, other than to say many factors go into valuation. The price of oil and gas between June 30th and September 30th was down quite substantially, and that was one of the factors that went into the valuation.
Got it. I understand. I understand you can't say a lot. Taking, I guess, a little bit of a step back from the mark on the investment, I'm just wondering, you know, again, I think you guys have had some, you know, successful turnarounds in the past. I certainly don't wanna take away from that. I think you guys have had, you know, the patient approach in the past that's worked.
At any point, you know, does this become essentially like a drain on resources where, you know, you have, you know, faculty, you have, you know, employees and, you know, important people, I guess, at the firm that are obviously dedicating time and resources into turning this around? You know, does that begin to, you know, I guess disrupt, I think, the normal course of, you know, your just investment process?
Yeah. Paul, just a clarification on your prior question, just to be clear, RAM is performing well. There's no operational issues. There's nothing new or different on RAM. It's a performing company that's doing well and is healthy. On the time resource question, look, we may have a different attitude than some of our peers. We get paid to maximize value, and that's what we do. If it takes time and resources, you know, and we'll do what it needs. Whatever is the best interest of the shareholder, that's what we get paid to do, and to try to get the best outcome possible. Sometimes that means full-blown restructurings. You know, Pivot was a recent example where there was a conversion of debt to equity. We took control.
We became the sponsor. We changed management. We dealt with all the various tranches of loans. We worked with the company to turn around the operations, and we were fortunate enough to exit at a very high price at a really good time in hindsight. RAM is another one. RAM, we've been in longer than Pivot, obviously. You know, our view is, you know, this is what we do. If it takes time and resources, it takes time and resources. You know, that's our job.
Thanks, Art, appreciate it. Just on the secondary purchases you guys made this quarter, I'm just curious, you know, obviously you saw good value and you're using your informational and expertise advantage there to potentially make some par trades. I'm just curious, you know, how you evaluate, I guess, those trades. I mean, are these secondary purchases kind of more or less supplementing, you know, potentially depressed deal flow or deal value, you know, in the third and fourth quarter of this year? Are these just, you know, very advantageous trades that happen to, you know, become available that, you know, you felt were good investments for the BDC?
Yeah. I mean, each investment needs to stand on its own two feet. We do, though, compare and contrast and say, "Okay, we can put a dollar to work at $0.90 on the dollar, or we can do this new loan, or we can do both." You know, how do we look at it? We look at it through the lens of, we do not have infinite capital. We have plenty of capital, but we do not have infinite capital. We do compare and contrast and debate and really try to, through our investment committee, find the best risk-adjusted returns we can, whether they be in the primary market or the secondary market, and do our best to synthesize all that and allocate capital as best we can.
Thanks. I mean, would you consider those investments to be hold-to-maturity type investments that you're planning on holding to, you know, maturity? Are these kind of more held for trading where if there's, you know, any kind of recovery to par, you'd be looking to exit?
Sure. You know, when you're dealing with more liquid investments like those, if they were to kind of trade from 90 to par, we could say, "Okay, we can sell this loan at par. We have a new primary middle-market loan we can do." Same question, what's the best risk-adjusted return? In most cases, if these loans get pulled to par, which we hope they do, we would trade out of them and reallocate the money into core middle-market originations.
Got it. Thanks. That makes sense. Last question, just on your equity co-investment strategy. I'm just curious, you know, I mean, that's obviously been a big part of your strategy, you know, since you guys have been in business, taking equity co-investments. I'm just curious. When you go into a deal, you know, are you essentially given the option of, you know, equity co-investment where you can get it versus like, you know, fees or OID, you know, essentially do you have the option of one or the other, perhaps exit fees or OID? If there is an option, I guess, between the two when you're evaluating it, do you have, you know, really a preference for either one?
You know, I'm just kind of thinking of a time like now where you're actually actively looking to reduce your equity exposure in the portfolio. I mean, is that something you've pulled away from or is it, you know, still a pretty normal part of the investment process thesis?
Yeah. In general, you know, since many of our deals are kind of buy and builds, and our debt capital is strategic capital to make that buy and build happen, we feel as though, in general, if we believe in the growth of the company, having some form of equity participation makes sense for the debt because after all, we're helping drive that value. We should or why wouldn't we have some participation in that upside? By and large it is, you know, something we do. It may be a differentiator versus some of our peers. We think it's particularly important in the buy and build growth, growthier types of deals, which is, you know, primarily what we're doing these days, right? It is important. Rarely is it a trade-off.
Hey, you can get the co-invest if you take less yield or you take less OID. Usually, it's just kind of baked in and part of the understanding that we have with the private equity sponsor that this is how we do business and it's not a trade-off situation. Certain cases they wanna limit us or not let us have it, in which case we sometimes we're like, "Okay, the debt is so good, we don't need the equity." In some cases, we're kinda like, "Okay, the equity's not that attractive, that's fine." In other cases, it may be a situation where we walk from a deal because we think the equity is a really important part of our package. We try to look at each deal and each part of the capital structure on their own two feet such that some cases the debt's really good.
We, we may not be so excited about the equity and that's fine. In other cases, when we may be really excited about the equity and try to, try to get, you know, more. So case by case, uh, each piece of the capital structure needs to stand on its own two feet. But rarely is it, rarely is it kind of a trade-off scenario.
Got it. Appreciate it. Very interesting, and that's all for me.
Ladies and gentlemen, this concludes today's question and answer session. At this time, I'd like to turn the conference back to Mr. Art Penn for closing remarks.
Thank you, everybody. Wishing everybody a terrific Thanksgiving full of gratitude, a terrific holiday season. We'll be talking to you next in early February for our December 31st earnings. Thank you very much.
Ladies and gentlemen, this concludes today's conference. We appreciate your participation. You may now disconnect.