Welcome to the PennantPark Investment Corporation’s Third Fiscal Quarter 2020 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 a question-and-answer session following the speaker’s remarks. [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 morning, everyone. I would like to welcome you to PennantPark Investment Corporation’s third fiscal quarter 2020 earnings conference call. I am joined today by Aviv Efrat, our Chief Financial Officer. Aviv, please start off by disclosing some general conference call information and included discussion about forward-looking statements.

Thank you, Art. I would 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. 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 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 would like to turn the call back to our Chairman and Chief Executive Officer, Art Penn.

Thanks, Aviv. First, we hope that you, your families and those you work with are staying healthy. We are pleased to report that PennantPark continues to operate smoothly and effectively and remains committed to working diligently on behalf of our investors. We are going to spend a few minutes discussing how we fared in the quarter ended June 30, how the portfolio is positioned for upcoming quarters, our capital structure and liquidity, the value proposition of our stock, the financials and then open it up for Q&A. Despite the challenging economic conditions brought on by the pandemic, we are pleased that we accomplished several key goals this past quarter. We achieved a 7% increase in adjusted NAV as the market stabilized during the quarter. We also achieved our goals of reducing leverage and increasing liquidity. We are particularly pleased with our announcement of the formation of PennantPark Senior Loan Fund, PSLF, our joint venture with Pantheon, a leading global private markets investor. The initial $35 million equity investment made by Pantheon is in an existing portfolio of loans at an attractive price of $0.945 on the $1. They plan to invest an additional $30 million of equity over time into the JV at fair market value. Additionally, our leverage will decrease by about $245 million, which bolsters our balance sheet. The equity from Pantheon into our platform not only validates the value proposition of our existing portfolio, it also helps scale the PennantPark platform to continue to be a leading lending partner in the market and creates additional capital for future investment into the attractive new vintage of loans that we are seeing in the market. We believe that our rigorous underwriting process and disciplined approach has successfully positioned us to manage through the challenges ahead. We have an excellent…

Thank you, Art. For the quarter ended June 30, net investment income totaled $0.16 per share. Looking at some of the expense categories base fees, totaled $4.6 million taxes, general and administrative expenses totaled $1.5 million and interest expense totaled $8 million. Additionally, the incentive fee of $1.9 million was fully waived. Net unrealized gain on our investment was $29 million or $0.44 per share. Net unrealized depreciation on our credit facilities was $0.37 per share. Our net investment income exceeded our dividend by $0.04 per share. Consequently entity per share went from $7.71 to $7.82 per share. Adjusted NAV excluding the mark-to-market of our liabilities was $7.46 per share, up 7% from $6.97 per share, the increase in NAV was primarily due to our 2% valuation increase on our investment portfolio. Reminder, our entire portfolio credit facility and senior notes are mark-to-market by on our Board of Directors each quarter using the exit price provided by independent valuation firm’s securities and exchanges or independent broker-dealer quotes when active markets are available under ASC 820 and 825. In cases where broker dealer quotes are inactive we use independent valuation firms to value the investments, our overall debt portfolio has a weighted average yield of 8.7% on June 30, our portfolio consisted of 86 companies across 30 different industries. The portfolio was invested 59% in first-lien secured loans 18% in second lien secured debt 5% in subordinated debt and 18% in preferred and common equity 94% of the portfolio had a floating rate of which 92% has a LIBOR floor. The average LIBOR floor is 1%. Now, let me turn the call back to Art.

Thanks, Aviv. 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 and if 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 would 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 for questions.

Thank you. [Operator Instructions] And we will take our first question from Kyle Joseph with Jefferies. Please go ahead.

Hey, good afternoon guys. Thanks for having me on and taking my questions. I just wanted to get a sense, are you touched on this a bit here. Obviously investment activity was light in the quarter. But given what you guys done with your balance sheet in the increased investment capacity following the JV, how quickly can we expect the new deal environment to ramp. I know you mentioned that it should be an attractive vintage here you know how quickly should we expect a new rate new originations to recover?

Thanks Kyle, look we are only seeing green shoots right now in terms of kind of new flow, we are encouraged by the new flow that we are seeing it’s a very attractive risk-adjusted returns higher, higher yields lower leverage more equity tighter covenants so encouraged and it will be financed through a combination of our existing portfolio of getting refinance for sure our shipping portfolio is going to turn it over time, as well as Q2 careful growth. Yes, our leverage is, is at a nice level, you want to be careful and thoughtful about what we do. So, a combination of taking advantage of repayments that we will naturally have as well as some careful growth into the future.

Yes, sure. And then so balancing that we got a lot of moving parts in terms of the JV, the rate environment anticipated yield on new investments. So just balancing that, can you give us a sense for, for the outlook on yields for the portfolio kind of near-term, medium term and then longer term?

Sure. It’s a great question in of course seeing yields on new issues up maybe 100 to 150 in some case, up 200 basis points from where they were and just 5 or 6 months ago. Importantly with all of that is the credit and the underlying credit we think is, is more conservative and has better capital preservation attribute. So, a typical down the middle of the fairway deal today. We think it’s probably levered 4x to 4.5x debt to EBITDA and generating in our 600 or 700 kind of kind of LIBOR spread. 6 months ago there might have been 5x to 5.5x debt to EBITDA with a LIBOR spread of 5% to 5.5% over LIBOR. So the overall package is very attractive today, in addition to having even tighter covenant. Our book is always going to be below 5x we specifically wanted to keep it below 5x. But this vintage will be very attractive risk-adjusted returns.

Got it. Thanks very much for answering my questions.

Thanks, Kyle.

And we will take our next question from Robert Dodd with Raymond James. Please go ahead.

Hi, guys. So some questions that relates to the JV, and congratulations on that structure. I mean to the point in the prepared remarks, obviously everything in that JV is going to be first lien that does mean that the pro forma information that JV, the mix of by asset type no industry etcetera on balance sheet is going to skew much more towards much further away from first lien when you had that shifting. So can you give us any color on how you are going to view that approach to the market about whether when they you offsets on first lien are total growth as almost consolidating the JV portfolio in terms of how you think of the currency mix in the portfolio or is the intent to just look at the may be taking up the firstly mix on balance sheet come from where it’s going to stand pro forma to the JV format?

Yes, yes. So to a couple of a couple of comments and now, Robert, and thank you. First, we are only selling a minority position 28% of that first lien portfolio panting I wanted to invest more and that’s why we took $35 million today and they want to invest potentially up to $30 million in the future. So, we only wanted to sell a minority piece of that of that portfolio which we think is a really good portfolio in that portfolio in and of itself could and should grow over time and then you talk about what’s our balance sheet also has been mostly pivoting towards first lien in the last couple of years and that’s what we are going to continue to do by and large, not to say that if there is a fantastic second lien deal that’s compelling. We are always thinking about that, but generally we are looking for capital preservation. First and foremost, we do have equity has a chunk of our portfolio that over time, we want to exit kind of the pandemic probably push those plans back a year, but we still have some equity that we think is very promising and should happen here over the coming year or two and until we exit those equity investments. I think we are going to stay pretty cautious and conservative for the rest of PNNT and then as we exit goes over time we can assess and see where the market is and see what the pro forma mix of investments should be, but I think we are focused on capital preservation and over the next year or two exiting these equity investments. It’s good price as possible.

Got it. And on the topic, if that obviously you gave some color in the prepared remarks with them ETX suspended drilling, but obviously oil handsome rebounded somewhat stabilized at 40 I think 45 this week even what would the oil forward curve, how we were not going to need to look like. We use those to kind of reactivate drilling programs at Ram and ETX and what would the cap would they have sufficient capital if those will be activated obviously has from Macquarie. So, any color you can give all?

Yes on a quarter we are hunkered down there. I think it’s starting $55 or $60 then starts to be a more realistic debate. And I think to be quite frank, we would look to outside capital or look to exit those investments if and when oil gets back up to those to those levels. What we know. I think at this point, we are extending the option as long as we can and we think we can extend for quite a while and should oil hit those levels and we hope it doesn’t at some point that might be a good time to have those investments.

Got it. And if I can one more, I don’t know if you said, the vast majority companies have the liquidity to pay interest. Yes, going forward, etcetera obviously vast majority is in. So those why you have done an evaluation and in the not vast majority bucket, how are the discussions going with them. I mean them more or sponsors of what I mean what’s being done for those where the liquidity situation is still perhaps, there is a gap?

Yes, it’s really thankfully and kind of if you were to ask me rather 3 months ago, if we do every day talking about up NAV for the quarter and very minor non accruals I would have been Sharpton astounded and thrilled and we are here today. And quite frankly BNL or touch whether we are in really good shape. I mean certainly there are going to be some companies, mostly related to travel related things where there is going to be some issues and it’s kind of case by case with the sponsors, where they put equity in or not, you know how we amend things how we get paid to do that. Do we roll up our sleeves and take control in certain cases that may make the most sense, so case by case it’s name by name, and what the outlook for the particular name is what the sponsor is willing to do or willing to do, but it’s a very, very small thankfully very small piece of the portfolio at this point. Now the disclaimer is we are not out of the woods yet, right. So, we have to see how the fall goes and what the public health issues are and what the vaccine issues are and all that, those kind of, if you say we are kind of midway through the pandemic, or what do you think we are halfway through in a quarter. The way through mostly through it, we feel we are feeling pretty good about this portfolio.

I appreciate it. Thank you.

Thank you.

We will take our next question from Paul Johnson with Keefe, Bruyette & Woods. Please go ahead.

Hi, guys. Thanks for taking my questions. I had another question on the JV. I am just curious how do you plan on structuring the JV, do you intend on this being solely an equity investment or possibly bifurcating into debt investment along with the equity investment?

Yes, it is a similar to good question, Paul, similar to our joint venture over at PFLT with Kemper as JV will be split it will be about 70% subordinated debt L plus 800 and below 1% and the rest will be equity.

Okay, great. Thanks for that. And then I guess also on the JV, I realize it probably have definitely this went into your thought process, but just given the higher equity allocation in your portfolio on the balance sheet. I think it’s 18% or so fair value with the formation of the JV, do you expect to have any kind of issue with the limitation in your non-qualified asset bucket?

No, it’s a good question, where we have got plenty of dry powder in that 30% bucket, the amount of foreign investments has committed us so not really an issue and we look, we think the market will see through this JV likely feature all the other JVs and understand the underlying assets are first lien debt. But in terms of the qualifying asset issue few problems.

Okay. And then a little bit is on the loan modifications waivers you have been dealing with that the quarter. Just curious if that’s sort of activity has moderated quite a bit so far, or if you just kind of seeing kind of same level of requests coming in at this time.

Yes, that’s yes, we have seen less over time we in essence, it was more activity going on in that area kind of in April, we are still seeing some and we are still have some of the work or a process on, but the momentum or the pacing of those amendment request has certainly slowed down now as time has gone on

Thanks to that. And the last question, it has to do I mean you mentioned just the outlook for potential investments improving potentially entering into a time where there’s going to be some very attractive investments. I mean as far as how you evaluate the current portfolio. I am curious how do you balance or how do you consider an investment like Ram Energy if, even if the environment today just stayed static and nothing changed obviously still challenged. I mean do you ever consider the maybe possibly the opportunity cost of holding on to an investment that large versus what could be a pretty attractive areas for new capital to be deployed and I say that I also realize it’s much easier said than done to make a sale on some of these types of asset especially in this environment.

Yes, it’s a great question. We took you down all the time and we of course always weigh the existing portfolio against new loans and we look forward today where we can get an attractive exit opportunity, RAM.

Okay. Thanks for answering my questions. Thanks.

It’s time for the next questions.

We will take our next question from Rick Shane with JPMorgan. Please go ahead.

How are you?

Okay.

If you exited what we talked about on these calls?

I am going to talk about the JV I mean that’s the topic today. Yes, but you are right, I guess I will talk about it.

Yes. I appreciate that. All it’s actually a bit for me because I did want to talk about the JV a little bit. You have had a couple of questions on the JV. You had some questions on sort of reentering the origination market. I am assuming given where the leverage is on the overall portfolio right now, the incremental deployment of capital will be through the JV, is that likely to be in hand.

I think it’s going to be, it could be both, I mean the JV and it’s about on balance sheet PNNT both add-on investments. So, and then I think both the JV and the balance sheet will have repayments. We are starting to see some repayments happening and of course it is an opportunity to upscale yield on the portfolio.

Got it. And that actually leads to my final question, given the actual both market structure right now and physical structure in terms of being able to do things like due diligence. Do you think that your origination channels will change a little bit, would you do more clubs syndicated transactions, simply because there are advantages to collaborative due diligence?

You are putting a couple of different issues together which is a good question. I haven’t thought about it that way, you are putting in the challenge of due diligence question along with kind of diversification club type things, I mean, look, I think I hadn’t really thought about putting the two together, but it’s an interesting way to think about things, certainly due diligence is more challenging today certainly though if we want to get deals done we will figure it out. How much can we can do on desktop, how much we or our people who we work with can actually do physical due diligence, how much were relying on independent 3rd parties like the sponsor or consultants. You can do everything, almost everything without actually going kicking the tires. The question is what do you do ultimately to kick the tires and how best to do that. So I don’t think and I think we can get deals done. I think we can get your has done I think we will we are figuring out how to how to not physically send for people to a factory somewhere. And so I think deals will get done in terms of the bite sizes, you are kind of question is I think alluding to the fact that because you can do full due diligence everyone wants to be more diversified, because you just don’t want to take a big, big by the Thomson then have a big, big hiccup. I don’t know if that’s really what you are thinking about. But I think the market of at least on diversification right now. I mean some of the folks who we partner with have come to us and said, we really do want to just have more diversified portfolio. Just as a matter of risk management and managing our portfolios. I think that’s happened naturally you are regardless of the due diligence question. I don’t know if I answered your question. Rick, but if I haven’t please to drill in a little bit.

You absolutely did it. It is interesting and it’s fascinating. How every business is evolving at this point? So I appreciate you taking the question.

[Operator Instructions] We will take our next question from [indiscernible], Private Investor. Please go ahead.

Hi, can you hear me okay?

Yes.

Thanks for taking the question. So I have one question, one follow-up on the first is, I would assume that many of your portfolio companies had taken advantage of the payment protection program and other statements in the company.

Looks like, we lost him.

Can you hear me now?

Yes, I can hear you.

The question is just do you have a sense of how much of your portfolio has benefited from the PPP or other short-term stimulus plans and thus how will they manage through that should those should this program to roll off, which could be quite imminent in this fall or later this year.

Yes. Thank you. That’s a good question. We say a handful of our companies did participate Triple-T typically, there would be companies that already in an SBIC or they were already in an SBA program. So they were already kind of part of the SBA world based on what we have seen those funds. Certainly been accretive and helpful and enhance the liquidity. That said, since most of our companies have been our professional management teams are sponsorship looking through the Triple-T, they are looking at the long-term trends and they are doing what they need to do to bolster the liquidity, either through cost cuts or managing our working capital or capital expenditure programs – capital expenditure programs very tightly. So as I said in the prepared remarks, we are feeling pretty good about the liquidity of the underlying portfolio. Triple-T included in some portion of those names. So I just to use that as a segue, we haven’t yet seen any Fed Main Street if it means program I think is now up and running, we haven’t yet seen it impact our portfolio. But we are – our ears to the ground and we are going to see what happens with that program.

Great, thank you. A quick follow-up on your stock, as you talk about new purpose remarks, it’s a the one could argue that rather than investing in any new deal at maybe 8%, 9%, 10% will you could be investing stock purchase of stock in that capacity?

Yes. If you were to look at it here you are cutting out. I think you are asking about stock buyback. That’s my influence the you are asking about stock buyback at something that we look at all the time, we have done two stock buybacks in our history of PennantPark one we have completed about a year ago. So we bought back about 60 million of stock over the course of time today the market cap. That’s a relatively large amount of capital relative to these are market cap of the company. It’s something we think about all the time in a world where we are focused right now mostly on liquidity making sure that we can get through the pandemic. I think we have kind of put that on hold for a while or at least the next few quarters until we get through the pandemic and then we will pick it up again. We just want to make sure we have excess liquidity to deal with. Most importantly, our existing portfolio companies get through the pandemic and that’s why my comments about kind of new originations are somewhat muted. And we just really want to preserve capital at this point, preserve liquidity. Certainly, we do want to look at new deals, but we are very focused on getting through the pandemic in as good fashion as possible. So I don’t know if that answered your question, your question was a little unclear. It looks like you maybe on the cell phone, but Aaron anything else or did I answer your question?

No, thanks a lot. Sorry, sorry for the communication to come and I am on the cellphone, so appreciate your time. Thanks a lot.

Alright. Thank you.

It appears there are no further questions at this time. Mr. Penn, I’d like to turn the conference back to you for any additional or closing remarks.

I just want to thank everybody for being on the call today. Reminder that the next time we are doing a call is our 10-K. So will be a couple of weeks later than normal probably mid-November. Look forward to speaking to people then. If anybody wants chat between now and then we will be happy to – we are happy to talk to you. Thank you very much for your time today.

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