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, 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 31st, core net investment income was 14 cents per share.

Turning to the dividend, beginning with the dividend payable in April, the total dividend will remain 8 cents per share, but will be comprised of a 4 cent per share base dividend and a 4 cent 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 63 cents 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 4.5 times. Importantly, we continue to get meaningful covenant protections in contrast to the covenant-lite structures prevalent in the upper middle market.

Turning to our portfolio performance, as of December 31st, the median leverage across the portfolio was 4.5 times with median interest coverage of 2.1 times. During the quarter, we originated three new platform investments with a median debt-to-EBITDA of 4 times, interest coverage of 2.9 times, 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, healthcare, 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, 7, 8 times or more, or loans against revenue, not cash flow, with substantial PIK, covenant-lite, and long maturities. This story is a significant differentiator from our peers.

We ended the quarter with four non-accrual 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 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 structure transactions with sensible credit statistics, meaningful covenants, substantial equity cushions to protect our capital, attractive spreads, and equity co-investments.

Additionally, from a monitoring perspective, we receive 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, the key differentiator versus the upper middle market where covenant-lite 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 31st, we have invested over $650 million in equity co-investments and have generated an IRR of 25% and a multiple on invested capital of 1.9 times.

As of December 31st, 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 31st, the JV portfolio totaled $1.4 billion, and over the last 12 months, PNNT's average NII yield on invested capital in the JV was 16.4%. The JV has 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 a more detailed review of our financial results.

Thank you, Art. For the quarter ended December 31st, GAAP net investment income was 11 cents per share, and core net investment income was 14 cents 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 31st, net realized and unrealized change on investments and debt, including provision for taxes, was a loss of $2 million.

As of December 31st, our NAV was $7.00 per share, which is down 1.5% from $7.11 per share in the prior quarter. As of December 31st, our debt-to-equity ratio was 1.3 times, 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 31st, 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 was 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 4.5 times, and interest coverage is 2.1 times.

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 the continued partnership and confidence in PennantPark. That concludes our remarks.

At this time, I would like to open up the call to questions.

A couple of kind of semi-housekeeping first. Just for clarification, I think it's pretty clear, but on the dividend, like you said, the supplemental program will stay in place through December 2026.

Just to clarify, you mean the 4 cent specifically supplemental monthly will stay in place through '26, and beyond that, who knows, right? That's not just that there will be a supplemental, but it's the 4 cent level.

That's correct.

Correct. Got it.

Second one, there's just time again. Will there be any one-time 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?

Are there going to be anything one-time in Q1?

No, Robert. There won't be any one-time 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 one-time perspective on the revolving facility.

Got it. Got it.

Thank you. Then, I'm not going to ask you exactly the same question as I did earlier on software.

As you look at kind of the core niches that you've kind of really 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, 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?

It's a great question, and we debate this every time we go through an investment committee. Is it a help or a hindrance?

Is AI? Ultimately, we keep asking ourselves the same question all over again, which is, if this company goes away, who really cares?

If the company goes away, no one really cares, we shouldn't be investing in that company. Usually, if the answer is affirmative, people care, it means they've got really 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?

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. It feels like we're in one of those short-run moments where the whole market's kind of spinning on the concept of AI and software.

As we've discussed, and certainly for us, software is a very small percentage and manageable, and deeply embedded. Look, where things are going to be in 10 years?

Don't know. 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 PIK really in these portfolios. That's how we defend ourselves.

Then also, we have to find companies that people will care about and have resilience and you see it in the margins, you see it in how they gain share. Hopefully, we're selecting those companies well.

Of course, there's never a guarantee.

Got it. Thank you for that.

Thanks for taking my questions. In terms of 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.

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 any of the recent volatility at all backed up interest in doing M&A in any of those names at all?

Look, thanks, Paul. We still think, based on what we can tell, M&A hasn't slowed down.

Granted, we're not big in software, couldn't tell you about M&A in the software space. I would imagine it probably slowed down right now, but in the rest of the world, in the rest of the community, we're still seeing good M&A.

I will highlight that two of our bigger sectors are military, defense, and government services as well as healthcare, both of which seem to be performing well, and both of which, from what we can tell, represent some meaningful M&A activity and where we have some substantial equity co-invest. Those have been two of our bigger sectors, and they've performed very well for us.

There's not that many people as heavily focused on defense, government services. It's always been a big space.

The US government seems to be increasing its expenditures and there's some tailwinds there. Then on healthcare, we've had a better experience on healthcare than many of our peers.

I think it really just attributed to just kind of not leveraging up the companies as much. I think our peers tend to be willing to accept higher leverage.

When we do healthcare, we again tend to try to find companies that have a defensible moat, keep the leverage reasonable. Then in healthcare, 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 healthcare.

If we can find companies that are going to reduce costs 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 healthcare names have probably performed better than some of our peers.

Got it. Thank you.

That's very helpful. That's all for me.

Thanks, Art. Thank you.

Great. Thanks.

I'm curious, why not adjust the dividend to reflect the current outlook for core earnings and then repurchase stock with that capital, you're actually driving some NAV per share accretion versus diluting it by about 1% plus a quarter? 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?

No, an interesting question. We can dive into it.

We have this substantial spillover that we are obligated to pay out. 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 1.2 times, 1.3 times debt to equity area. Then the question becomes, okay, as you have incremental liquidity with rotation, whether it be equity or debt, what do you do with the capital?

We're obligated to pay out the supplemental dividends. We have to.

Then kind of, what do you do with your excess capital then? 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.

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.

That's helpful. 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. What past experiences are you leaning on today to properly manage the portfolios in the current environment and as that continues to evolve?

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 you don't do as much in software, but even 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?

Yeah. No, look, chaos does bring opportunity, and it's brought opportunity for us over times, 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?

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, are software losses going to work their way through and make certain managers more conservative and defensive?

Time will tell. We want to keep ourselves in a prudent position, and be well-balanced, and look opportunistically.

Then at the management company level, we're always looking for opportunities, both at our BDC levels and at more broadly. Again, chaos should bring opportunity.

We think how we've navigated software to date is a differentiator, for instance, and can show larger capital allocators the benefits of the core middle market where covenants are still prevalent, where leverage is reasonable, and where there is very limited PIK. Maybe that's what large allocators should be focused on versus chasing high-leverage, covenant-lite, PIK allocations.

We'll see. We're always trying to defend number one, and then try to judiciously figure out how to play offense number two.

That's great. Appreciate it, Art.

Thank you.

Hey, Art. It's been a while.

Hey, Rick.

Nice to hear your voice. 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. I think that one of the factors that you guys are facing is that 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? With that, if you could talk a little bit about the sizing of the debt deal that you guys just did, at $75 million bucks, represents about 25% of your pending maturities this year.

I'm curious how you think about sort of the next steps there.

Thanks, 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 a 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.

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.

The sale of JF was a big milestone for us and significantly reduced 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 air and 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 in first-lien, core middle market, senior secured debt where leverage is reasonable, 4.5 times is our average loan, where we have maintenance tests, where we get monthly financials, where we're not rushed to do due diligence. 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.

You see a good example of that over at PFLT more broadly. 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.

In essence, we are managing a larger pool of capital, not charging management fees, and on a blended basis, it's very attractive for shareholders. That's really the game plan: rotate the equity, manage the JV.

When we make a little bit more progress, and J&F was a nice event, come up for air and figure out what to do next.

Got it. Okay.

Really appreciate it, and great to hear your voice. Thank you.

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

Hi, Chris. Yes, it was related to PSLF, correct.

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

The expanded facility does give us the ability to really pick our spot on when to issue bonds. 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.

Final question. Are you finding that you're trading coupon for stronger covenants, or that's not really a dynamic which is available when you're negotiating?

In our part of the market, in the core middle market, covenants are a given. If our average or median borrower does $20 or $30 million of EBITDA, 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 means giving up a few basis points and you get a much higher-quality credit.

That's usually the right call.

Great. Final question.

The 3.6 I asked this on the last call. The $3.6 million in credit facility and debt issuance costs, was that related to the $75 million issuance in January?

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

Got it. That's it for me.

Thank you.

Thanks, Chris.

Hi. Good afternoon.

Thank you for taking my questions. Glad that you brought up the PSLF JV.

The leverage in the JV is 2.8 times, 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 them, Casey, and thanks for your question.

Just a level set, the broader PennantPark platform has a very large senior secured first-lien middle-market business. 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.

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 how human beings will react emotionally to market events. We've run securitizations through COVID.

We feel like we really understand them. In the CLO portion of our business, it's not unusual for middle-market CLOs to have 4 or 5 times leverage, right?

We've 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. Then you sit here, you move that over to the joint venture, and we have joint ventures, we now have three joint ventures.

The goal there is usually to run them at least at 2 times, and 2.8 times is on the higher end. I don't anticipate we're going to go any higher here.

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, etc.

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 is we have an equity co-investment program that, over time, has generated nearly 2.0 times 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. 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.

A 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.

Your points are right. We're aware of them, and feel comfortable with where we are at this point.

Thank you for taking my questions.

Thank you.

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