Good morning, and welcome to the PennantPark Investment Corporation’s Fourth 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. 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’d like to welcome you to PennantPark Investment Corporation’s fourth fiscal quarter 2020 earnings conference call.

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. 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’d 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. I’m going to spend a few minutes discussing how we fared in the quarter ended September 30th, how the portfolio is positioned for the upcoming quarters, our capital structure and liquidity, the financials, and then open it up for Q&A. Despite the challenging economic conditions brought on by the pandemic, we are pleased with our performance this past quarter. We achieved a 1.7% increase in adjusted NAV as the portfolio continued to improve during the quarter. We have several portfolio companies in which we have substantial equity positions that are benefiting from the K-shaped recovery. This is solidifying and bolstering NAV. We will highlight those companies in a few minutes. Additionally, we are pleased with the formation of PennantPark Senior Loan Fund, PSLF, our joint venture with Pantheon, a leading global private markets investor. On October 30th, Pantheon upsized their commitment to PSLF by another $27.5 million, bringing their total contribution to $62.5 million. Pantheon’s additional investment came into PSLF at NAV. The equity from Pantheon into our platform not only validates the value proposition of the existing portfolio but 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 today.

Thank you, Art. For the quarter ended September 30th, core net investment income totaled $0.14 per share. GAAP net investment income was $c per share due to $0.03 per share onetime cost related to the creation of PSLF. Looking at some of the expense categories, base fee totaled $4.4 million; taxes, general and administrative expense has totaled $1.4 million; and interest expense totaled $8 million, including a $2.1 million one-time cost. Net unrealized gain on our investment was $21 million or $0.32 per share. Net unrealized depreciation on our credit facilities was $c per share, almost all of which was due to the deconsolidation of PSLF. Net realized loss on investment was $0.15 per share, again, almost all of which was due to the deconsolidation of PSLF. Our dividend exceeded our net income by $0.01 per share. Consequently, NAV per share went from $7.82 to $7.84 per share. Adjusted NAV, excluding the mark-to-market of our liabilities, was $7.59 per share, up 1.7% from $7.46 per share prior quarter. The increase in NAV was primarily due to almost 3% valuation increase on the investment portfolio. As a reminder, our entire portfolio, credit facility and senior notes are mark-to-market by our Board of Directors each quarter using the exit price provided by independent valuations firms, 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 spillover as of September 30th was $0.33 per share. Our debt-to-equity ratio decreased substantially over the quarter due to the formation of PSLF. Our GAAP debt-to-equity ratio, net of cash, was 1 times, down from 1.5 times, last quarter. Regulatory debt-to-equity ratio, net of cash, which excludes SBIC debt was 0.9 times, down from 1.4 times last quarter. With regard to NAV, our GAAP NAV was $7.84 as of September 30th, up approximately 0.3% from the prior quarter, which reflects both, the markup of assets offset by the markup of certain liabilities. Assuming liabilities were not mark-to-market, adjusted NAV is $7.59, up approximately 1.7% from the prior quarter. We had ample liquidity to fund revolver draws and were in compliance with all of our facilities at September 30th. We have readily available borrowing capacity and cash liquidity to support our commitments. We have a strong capital structure with diversified funding sources and no near-term maturities. We have $475 million on revolver credit facility maturing in 2024 with a syndicate of banks, $119 million of SBA debentures maturing in 2026 and $86 million of unsecured notes maturing in 2024. We have been in consistent dialogue with our lenders and are thankful for their support.

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 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’d like to open up the call to questions.

And our first question today comes from Robert Dodd of Raymond James.

Hi, guys. A few questions, if I can. On the JV, first. I mean, it looks like, obviously, no -- a technical question first, I guess. No dividend paid this quarter. Obviously, it had earnings. Is it going to be the intent that it’s going to pay the dividend on kind of a lagging basis, or was it just a timing function as to why there was no distribution from it this quarter because I’m missing performance this quarter.

Yes. Hi. Thanks, Robert. Yes. It was just because we had just closed and we were getting squared away with everything. But going forward, it will be paying dividends each quarter. This first quarter was just kind of a quarter getting set up.

Understood. Just on that as well. I mean, with Pantheon putting more money in, what was the discussion there? Obviously, after selling the assets into -- off your balance sheet into the JV, you have capital as well. Was there any discussion about whether you would put in more capital than you did to match Pantheon kind of maintain the ownership percentage, or was it a deliberate strategy for you to let them grow their percentage ratio?

Yes. You may remember from last quarter from even the press release we put out, they had always intended to upside, it was just their LPs and when their LPs were able to kind of come into the vehicle. So, we closed on the first piece earlier on. And then, we did this second piece, which was always anticipated from the get-go.

Okay. Got it. Thank you. On some of the other portfolio companies, on the OpCo obviously, they just did a dividend recap. On your equity, I mean, should we be expecting a dividend from that piece, given they just priced the recap, I guess, like this month? So, any color you can give us there?

Yes. So, I think, for PNNT, I think, it’s going to be something like $3 million or $3.5 million of cash. We don’t yet know whether that will be characterized as a return of capital or a dividend. So, we’re waiting for their estimate of their -- how they’re going to characterize that. But, that will be cash that’s coming to PNNT.

Okay. Got it. Thank you. And then, just in general terms, you went through obviously Cano, Wheel Pros et cetera. Any more color you can give us about the time line of realizing some of these things? Obviously, Cano, there’s going to be a lockup, et cetera. Any idea about how fast some of this -- the equity could be monetized, given it does seem the M&A environment is picking up, that might be an environment where some of these assets do potentially get sold. So, any balance there?

Yes. So, I think, we’re getting taken out of our debt in the next week or two. So, that will be a liquidity event. And I think, we’re getting a little bit of the cash on the equity also at that same time, either before or at closing of the total value that we’re talking about, 12% will be cash, either in the next couple of weeks or at closing. And then, the other 88% will be stock in this limited partnership that’s controlled by the sponsor that owns the Jaws Acquisition stock. There will be at least a six-month lockup on that stock. And this kind of the sponsor and management will own about 65% of Cano, which is obviously a lot of value. So, it’s not like we’re going to be able to flip a switch and punch out of the stock. You could take that in one of two ways. Way number one is it would be nice to punch you out and flip a switch, A; or B, and I encourage you and others to take a look at the public information on the Jaws Acquisition website about Cano, itself about the marketplace they’re in, about their comparable, which is a great company called Oak Street Health, which trades at about an $11 billion valuation. And if you were to line up Cano side-by-side with Oak Street Health, it lines up very favorably in terms of revenues, in terms of EBITDA, in terms of members, in terms of medical loss ratios. So, there is a case, and I think we believe this case that Cano should be a very attractive stock and has the ability to double or even triple potentially from here. So, we’ll see. But yes, we are locked up for a while, and that might actually be a good thing.

Got it. I appreciate that. The one equity position, I guess, you do I think control since you have a large stake in the restructuring with PT Networks. Any interest in potentially monetizing that, or is it still too early with the new management team and getting that back on track?

Yes. So, we do control that particular company. We brought in a new management team, we’ve done a great job through COVID. I think, we need another 12 to 18 months to kind of get that in a good position, get beyond COVID. And there’s a myriad of other physical therapy companies in the public domain or privately in our value at 12 to 15 times EBITDA. So, I think we want to kind of enhance that. We might do some small tuck-in acquisitions and try to get that EBITDA up a little bit, so that we can then exit at an attractive multiple.

And our next question comes from Casey Alexander with Compass Point.

Yes. Good morning. I have a couple of questions. You’ve got room to invest now. I mean, your regulatory debt-to-equity ratio is 0.88 times. Can you talk about what the origination pipeline looks like coming into the end of the year here, and what sort of opportunities that you’re seeing to enhance your earnings power?

Yes. Look, in terms of the vintage, we think it’s an attractive vintage where the machine is operating and we’re looking at a lot of deals and we are looking at ways to enhance the earnings power, to your point. Right now, the last six to eight months, we’ve been focused, obviously on the portfolio, COVID, getting the right positioning. But, I do think we are in a timeframe now when we can look at opportunities in the market as well. And we’re going to look now to -- as the NAV feels like it’s coming into a kind of a nice position, it feels a lot better than it has in a while, I think, it is time for us to turn to earnings generation as an additional focus. Obviously, as we rotate these equity positions, that will in and of itself be a great opportunity. But, we are starting to look at ways to power the earnings to a better place.

Yes. And on that, I believe you also control RAM. And looking at the RAM website, it certainly appears from the press releases or the updates on the RAM website that it’s a better picture and in some ways a considerably better picture than what we had looked at over the last several quarters that there -- can you discuss and give some more color there, wells that are operating, how sustainable is it, the impact of the Main Street Lending Program, and how that extends your runway? I’m really curious to hear, because it true seems by looking at it that things have changed a bit for the better there.

Yes. No, the company is generating cash flow. And the Main Street Lending facility took out our former lender Macquarie and put more cash on the balance sheet. So, the wells are operating. It’s a cash flow generative, cash flow positive company. We would hope that we could pay down that debt, a portion of that debt over the next two, three years. It’s very low cost debt. There’s a pick option for it, so we can benefit from being an issuer of that pick. It’s kind of like LIBOR plus 300. So, it’s very, very cheap. The Macquarie facility is more like a 10% yielding facility. So, the idea there is to generate free cash flow, pay down the debt to the extent we can and position the company as best we can for sale should -- or if and when there’s a good opportunity to maximize that sale. But the Main Street Lending Program, certainly for RAM is transformational. And the company’s wells are doing what they are, doing actually very well in this environment. So, we’re hopeful. It’s been a long ride, but we think we’ve positioned RAM as well as can be positioned at this point.

All right. Well, thank you for taking my questions. And I guess, you have almost a 20 bagger on Cano Health. Congratulations are certainly in order for that one.

It’s nice when it works. Thank you.

And our next question comes from Mickey Schleien of Ladenburg.

Good morning, Art and Aviv, hope you’re well. Just a few housekeeping sort of questions. I noticed the other income line was up pretty meaningfully quarter-to-quarter, and repayments and exits were actually down. Can you give us some insight into what drove that increase?

I’m looking at my notes. Aviv, if you have any color...

Yes. We do have some prepayment penalties that we have recorded that are large this quarter. So, you’re right, about $0.04 per share that we have recorded is fairly large. Usually, you should look at it on a pro forma basis, maybe $0.01 or $0.02 is kind of a normal. So, extraordinary or large -- fairly large onetime income that we have booked, again, hard to handicap what it’s going to be next quarter. But, it’s primarily prepayment penalties on exits?

Thank you for that, Aviv. That’s what I suspected. Art, can you remind us sort of what’s your target blended return on investment on PSSL?

Yes. PSSL, we’re targeting -- is PSSL is over in PFLT. You mean PSLF?

I’m sorry. Yes, PSLF.

There’s a lot of Ps and a lot Ss and a lot of Ls. So, I get it. PSLF, the joint venture with Pantheon. We’re targeting kind of the same 12ish-percent ROE on PSLF as we are on PSSL is the similar, senior portfolio, similar kind of leverage ratios. So, we think it’s a very nice adjunct to the mix for PNNT.

And are you including the sub-debt investment in that calculation?

That’s right. All of the capital that we’re putting to work, yes. Correct.

And lastly, in the past, you gave us a target leverage on your balance sheet of regulatory leverage of if I recall correctly, 1.1 to 1.5, but now you’ve announced you even unwind the SBA -- I’m sorry, the SBIC subsidiaries. Can you give us a sense with the current conditions of the market, what your target leverage is on a go-forward basis?

Yes. So, I think, right now, particularly with the portfolio that’s equity heavy, which is what it is, and many of these equities are because of value creation. We said 1.1 to 1.5. I think we’re going to be -- we already are at the lower end. We’re below the low end. We would stick to the lower end of that range.

And that’s regulatory, correct?

That’s regulatory.

We’ll take our next question from Ryan Lynch with KBW.

I just have one question. You mentioned kind of the prospects for Cano Health. And by the way, congrats on that. That’s really great, great news. You also talked about PT Networks, which you guys are the controlling equity position. The other two though, Walker Edison and Wheel Pros, I believe that you guys are in the minority equity position. But just given the strength of both of those businesses over the last several years, as well as the increase in the M&A market, at least that we’ve heard with pipelines increasing, private equity getting more active. As a general commentary, what do you think about the prospects of being able to exit those over the next 6 to 12 months?

Yes. It’s a great question. We’re not in control of those two, but the companies are doing very well. So, certainly, we would think within the next 12 months, 6 months is a possibility, but kind of hard to put a pin in it. But, I’d say 6 to 12 months is a fine timeframe to be thinking about.

And we’ll go next to Kyle Joseph with Jefferies.

Good morning, Art and Aviv. Thanks for taking my questions. Most have been answered. I just wanted to get a sense for yields. Obviously, there were some moving parts in the quarter. With the JV, given your pipeline, interest rates, floors in your portfolio. Can you give us a sense for where you would expect yields to trend from here?

Look, we think yields will be roughly steady. I think, it’s a question of starting to put money to work to drive income and then also equity rotation. So, I’d probably model steady yields form here.

We’ll go next to Rick Shane with JP Morgan.

Hey, guys. Thanks for taking my questions this morning. One of the things we noticed is that your upcoming portfolio maturities in 2021 are very low and very manageable. It looks like one of the factors that’s dampened that is it appears cascade was restructured or sort of rolled forward I’m curious how we should look at this transaction. That was a transaction that was a large deal with 100% PIK. It looks now that it’s been bifurcated into pref and a PIK. I’m curious how the crude PIK works on that transaction. If there’s a reversal of any income associated with that and whether or not the pref will be cash pay.

Thank you, Rick. The pref is not cash pay. On that particular investment, we’re accruing, the company is doing well. This was a situation where the can was kicked down the road because of the timing of COVID. But, we believe that company will be sold in the next 12 to 18 months. And it’s actually doing very well through COVID and seeing a little bit of a lift. So, we’re accruing income.

Got it. And so, when the -- so I guess, what I’m trying to understand is that if I look at the notionals of both the pref and the PIK, historically, it looks like your basis is roughly the same. Is that the case? And so, effectively, you’re accruing PIK now and your cash exit would be essentially where you thought it was going to be before, or is there a change?

So, there’ll be PIK accrual, and then we hope that when we exit, we get the principal amount, the entire principal amount paid back. I think so. I mean, we can circle back after the call and I can drill down into the specifics with you. But I believe, off-the-cuff here that we are PIKing those amounts. Company has had a balance here with the goal of company being sold here in the not-too-distant future.

Got it. And so, the idea is that in terms of giving an additional time with the maturity, I think, the maturity was supposed to be August of ‘21, give them additional time to work through the transaction. But, it did look like the coupon on the PIK was lower. The net coupon to you guys is actually lower between the preff and the PIK. What’s the benefit that you received from this transaction?

Rick, honestly, I have to go back and take a look at it. I don’t remember the exact facts and circumstances on this. This was probably six months ago, right around when COVID was hitting. But, we believe that our -- in general, our ball of risk reward is roughly the same and continuing to grow, but I can certainly after the call circle back with you with details.

Okay, great. Thank you. And did a sponsor put in any additional capital? Again, I don’t know if you know that off the top of your head.

Yes. I mean, I do remember that the sponsor did put additional capital in. So, in general, this is a -- this was a sponsor putting money in, restructuring of the balance sheet to kick the can down the road, to put the company in a better position for exit kind of post-COVID. And I think, it’s a general theme. The specifics of exactly the coupon, I don’t remember off-the-cuff here, but we can certainly get into that after the call.

We’ll go next to Devin Ryan with JMP Securities.

Hi. Good morning. This is Kevin Fultz on for Devin. You’ve talked about focusing on portfolio management over the past two quarters, while at the same time, this vintage is particularly attractive. I’m just curious how do you evaluate making the investments versus preserving equity for a potential second lockdown?

That’s a great question. And perhaps that’s the reason we’ve been a little -- particularly with this company, a little bit more careful about deploying a lot of capital. So, we’ve been focused on the existing portfolio, getting it as best of shape as possible, positioning the existing portfolio as well as possible. Now, we’re looking up, and we’re seeing what’s going on. Now to the extent we deploy capital, it would only be in companies or industries that we think are going to be very COVID-resilient. And we do have -- most of the industries we’ve invested in with a couple of exceptions, have been COVID-resilient industry. So, they’d be situations that in companies or industries where the companies are doing well, where it’s a sensible amount of leverage where the return is attractive, and we feel high degree of conviction around the investment.

Okay. Thank you. That’s helpful. And then lastly, can you provide the weighted average LIBOR floor for the portfolio? And then, also the percent of floating rate investments that are currently out there for?

Yes. So, 93% of the portfolio is a floating rate, 90% of which -- 90% of the 93% of the LIBOR floor, and the average floor is 1%.

That concludes the question-and-answer session. I’d like to turn the call back over to Mr. Art Penn for any additional or closing remarks.

Thanks everybody for being on the call today. Wishing everyone health and safety, a great Thanksgiving. And early February is a short time around from here, at the end of November, since its decay, but we look forward to speaking to you in early February. Thank you very much.

And again, this does conclude today’s call. We appreciate everyone’s participation today. And you may now disconnect.