PennantPark Investment Corporation (PNNT)

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PennantPark Investment Corporation (PNNT)

F4Q12 Earnings Call

November 15, 2012 10:00 am ET


Arthur H. Penn – Chairman, Founder and Chief Executive Officer

Aviv Efrat – Chief Financial Officer and Treasurer


Greg Mason – Stifel Nicolaus

Mickey M. Schleien – Ladenburg Thalmann Financial Services Inc.

John Stilmar – JMP Securities

Jonathan G. Bock – Wells Fargo Securities LLC

Douglas Harter – Credit Suisse Group

John Hecht – Stephens Inc.

Richard B. Shane – JPMorgan Chase & Co.



Good morning, and welcome to the PennantPark Investment Corporation Fourth Fiscal Quarter, 2012 Earnings Conference Call. At this time, all participants have been placed on a listen-only mode. The call will be opened for question-and-answer session, following the speakers’ remarks. (Operator Instructions)

It’s 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.

Arthur H. Penn

Thank you and good morning everyone. I’d like to welcome you to our fourth fiscal quarter 2012 earnings conference call. I’m 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.

Aviv Efrat

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 PennantPart 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.

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 fillings 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, 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.

Arthur H. Penn

Thank you, Aviv. I'm going to spend a few minutes discussing current market conditions, followed by discussion of investment activity, the portfolio, our overall strategy, and then open it up for Q&A.

As you all know, the economic signals have continued to be mixed with many economists expecting a flat to slowly growing economy going forward. With regard to the more liquid capital markets and in particularly the leveraged loan in high yield markets, those markets have continued to rally this year as cash flows into high yield funds, leveraged loan funds, and CLO's have been strong.

Risk reward in the middle market has generally remained attractive as the overall supply of middle market companies who need financing exceeds the relative demand of applicable lending capacity. As debt investors and lenders, our flat economy is fine as long as we have underwriting capital structures prudently. A healthy current coupon with deleveraging from free cash flow over time is a favorable outcome.

That said, as the more liquid markets have rally, that overall turn has impacted the middle market. Pricing has continued to compressed and purchase price multiples and leverage multiples have increased.

As a result, we have continued to be increasingly selective about which investments we make in this environment. Given our strong origination network and size of our company, we can continue to prudently grow. In fact, for the upcoming quarter ended December 31, it looks as though, we may be busier than normal due to deal flow resulting from potential year-end tax law changes.

We remain focused on long term value and making investments that will perform well over several years.

We continue to set a high bar in terms of our investment parameters and remained cautious and selective about which investments we add to our portfolio. Our focus continues to be on companies or structures that are more defensive and at low leverage, strong covenants and high returns. With plenty of dry powder, we are well positioned to take advantage of the investment opportunities as they arise.

As credit investors, one of our primary goals is preservation of capital. If we preserve capital, usually the upside takes care of itself. As a business, one of our primary goals is building long-term trust. Our focus is on building long-term trust with our portfolio companies, management teams, financial sponsors, intermediaries, our lenders and of course our shareholders.

We are first called for middle market financial sponsors, management teams and intermediaries who want consistent credible capital. As an independent provider, free of conflicts or affiliations, we’ve become a trusted financing partner for our clients.

Since inception, PennantPark entities as finance companies backed by over 100 different financial sponsors. We have been active and are well positioned. for the quarter ended September 30, 2012, we invested about $84 million. the average yield on new debt investments was 12.2%, expected IRRs generally range from 13% to 18%.

Net investment income was $0.30 per share. we have met our goal of a steady, stable and growing dividend stream since our IPO over five years ago despite the overall, economic and market turmoil throughout that time period. we are the only debt oriented BDC to not cut its dividend during this time period. As a result of our focus on high quality new investments, solid performance of existing investments and continuing diversification, our portfolio is constructed to withstand market and economic volatility. the cash interest coverage ratio, the amount by which EBITDA or cash flow exceeds cash interest expense continued to be a healthy 2.8 times. This provides significant cushion to support stable investment income. Additional add cost, the ratio of debt-to-EBITDA on the overall portfolio was 4.6 times, another indication of prudent risk.

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