PennantPark Investment: 12% Yielding BDC (NYSE:PNNT)

Looking for a way to play high interest rates?

The Fed seems to be digging in its heels on waiting to lower interest rates until later in 2024, contrary to what many Wall Street pundits had been predicting.

One sub-sector that has benefited greatly from higher interest rates is the BDC industry due to the fact that most of these companies lend money at floating rates but peg their borrowings at fixed rates.

This article examines PennantPark Investment Corporation (NYSE:PNNT), a BDC based in Miami, which specializes in direct and mezzanine investments in middle market companies.

Holdings:

As of 12/31/23, PNNT’s portfolio totaled $1.2B, and consisted of $678M or 56% of 1st lien secured debt, $49.8M or 4% of U.S. Government Securities, $78.4M or 7% of second lien secured debt, $151M or 12% of subordinated debt (including $102.3 million or 8% in PSLF) and $254M or 21% of preferred and common equity (including $62.8 million or 5% in PSLF).

PNNT’s interest bearing debt portfolio consisted of 96% variable-rate investments and 4% fixed-rate investments.

The portfolio consisted of 139 companies with an average investment size of $8.4 million, and a weighted average yield on interest bearing debt investments of 12.6%.

JV: PNNT has an unconsolidated joint venture with Pantheon Ventures, PSLF, which is a Senior Loan Fund. This portfolio totaled $857.9M, consisting of 93 companies, with an average investment size of $9.2M. Its weighted average yield on interest bearing debt investments was 12.1 %, as of Dec. 31, 2023.

Business Services and Healthcare/Education/Childcare were PNNT’s biggest industry exposures, as of 9/30/23, at 17.7% and 14.3% respectively.

Ratings:

Like other BDC’s, PNNT’s management rates its invested companies each quarter. As of Dec. 31, 2023, PNNT had one portfolio company on non-accrual, representing 1.0% of its overall portfolio on a cost basis.

Earnings:

PNNT’s fiscal year ends on Sept. 30. It just reported earnings for fiscal Q1 2024, (period ending 12/31/23) this week.

As we’ve seen with other BDCs, PNNT’s earnings have been upbeat over the past year-plus due to rising interest rates. Fiscal Q1 ’24 was no exception, with NII and NII/Share both surging over 50%. Revenue growth was over 14%, while Interest expense actually decreased slightly – that’s a surprise we’ve not seen too often recently. NAV/Share ended the quarter at $7.65, roughly flat vs. a year ago.

Fiscal Year 2023: PNNT had very strong total investment income growth of 38.5%, with NII jumping 49% and NII/Share rising 51.5%. Interest expense rose 37%. NAV/Share dropped 14.25%, partially due to $157M in realized losses.

New Business:

For the three months ended Dec. 31, 2023, PNNT invested $231.1M in 12 new and 32 existing portfolio companies, with a weighted average yield on debt investments of 11.9% (excluding U.S. Government Securities).

Sales and repayments of investments during this quarter totaled $71M (excluding U.S. Government Securities).

PSLF invested $81M in 7 new and 7 existing portfolio companies, at a weighted average yield interest bearing debt investments of 12.7%. PSLF’s sales and repayments of investments of $29.1M during the quarter.

Dividends:

PNNT pays $.07 monthly. At its 2/7/24 price of $6.84, PNNT yielded 12.28%. It goes ex-dividend this week, on 2/14/24, with a 3/1/24 pay date. It has a five-year dividend growth rate of 5.37%, which is above average for the BDC industry.

NII/share was $.24 in the latest quarter, which covered the $.21 in dividends by a healthy 1.24X factor. Fiscal year 2023, (period ending 9/30/23) had very strong dividend coverage of 1.32X:

Insiders:

Director Briones bought 4,647 shares in late November-early December, at prices ranging from $6.38 – $6.46.

Profitability and Leverage:

ROA and ROE both improved in 2023, remaining above BDC industry averages. EBIT margin also was up and is in line with the BDC industry.

PNNT’s asset/debt ratio was stable in 2023, whereas its EBIT/Interest coverage was lower – a trend we’ve seen frequently among BDC’s, due to rapidly rising rates.

Debt and Liquidity:

As of Dec. 31, 2023, PNNT had a multi-currency Truist Credit Facility for up to $475M (decreased from $500.0 million in September 2023), which may be further increased up to $750M. It’s a revolving facility with a stated maturity date of July 29, 2027, and pricing set at 235 basis points over SOFR.

There was $388M outstanding on this facility, as of 12/31/23. The Truist Credit Facility has a weighted average interest rate of 7.7%.

PNNT also had $315M in aggregate principal amount of 2026 Notes outstanding, as of 12/31/23.

PNNT had $86.5M of unused borrowing capacity, and $134.5M in cash, as of 12/31/23.

Performance:

PNNT has outperformed the BDC by a wide margin over the past year on a price and total return basis. It also outperformed the S&P 500 on a total return basis.

So far in 2024, both PNNT and the BDC industry are lagging the market, most likely due to the uncertainty about the direction of interest rates.

Wall Street Analyst Price Targets:

At $6.64, PNNT is just 4.2% below street analysts’ average price target of $7.14; and 14.5% below their highest target of $8.00.

Valuations:

At $6.84, PNNT is selling at a 10.6% discount to its 12/31/23 NAV/share of $7.65, a much deeper discount than the BDC industry’s 1% average. PNNT’s P/Sales is also much lower than average.

Looking back further though, shows that PNNT has a long history of selling at a discount to NAV over the past five years, with P/Book values ranging from ~22% in the 2020 COVID Crash, to ~60 – 70% in 2022, and ~70 to 90% in 2023.

While PNNT’s trailing Price/NII of 6.84X is cheaper than the BDC industry’s 8.34X average, its Forward P/E is roughly in line with the industry. Its EV/EBIT valuation is much lower than average. It has a higher than average 12%-plus dividend yield.

Parting Thoughts:

How cheap is cheap for PNNT?

While 2020-2021 saw many BDC’s selling at bargain basement prices, PNNT continued to sell at deep discounts in 2022-2023. It looks like buyers who got in at a P/Book of ~.70 or less have done OK, which is a daunting thought. We’re going to pass for now.

At $6.84, PNNT was ~7% below its 52-week high.

All tables furnished by Hidden Dividend Stocks Plus, unless otherwise noted.