•]`
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2023
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 814-00736
PENNANTPARK INVESTMENT CORPORATION
(Exact name of registrant as specified in its charter)
MARYLAND
20-8250744
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
1691 Michigan Avenue,
Miami Beach, Florida
33139
(Address of principal executive offices)
(Zip Code)
(786) 297-9500
(Registrant’s Telephone Number, Including Area Code)
None
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Trading Symbol(s)
Name of Each Exchange on Which Registered
Common Stock, par value $0.001 per share
PNNT
The New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
☑
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☐
The number of shares of the registrant’s common stock, $0.001 par value per share, outstanding as of February 7, 2024 was 65,224,500.
FORM 10-Q FOR THE QUARTER ENDED DECEMBER 31, 2023
TABLE OF CONTENTS
PART I. CONSOLIDATED FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Statements of Assets and Liabilities as of December 31, 2023 (unaudited) and September 30, 2023
4
Consolidated Statements of Operations for the three months ended December 31, 2023 and 2022 (unaudited)
5
Consolidated Statements of Changes in Net Assets for the three months ended December 31, 2023 and 2022 (unaudited)
6
Consolidated Statements of Cash Flows for the three months ended December 31, 2023 and 2022 (unaudited)
7
Consolidated Schedules of Investments as of December 31, 2023 (unaudited) and September 30, 2023
8
Notes to Consolidated Financial Statements (unaudited)
21
Report of Independent Registered Public Accounting Firm (PCAOB ID 49)
38
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
40
Item 3. Quantitative and Qualitative Disclosures About Market Risk
53
Item 4. Controls and Procedures
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
54
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
55
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
56
SIGNATURES
57
2
PART I—CONSOLIDATED FINANCIAL INFORMATION
We are filing this Quarterly Report on Form 10-Q, or the Report, in compliance with Rule 13a-13 as promulgated by the Securities and Exchange Commission, or the SEC, under the Securities Exchange Act of 1934, as amended, or the Exchange Act. In this Report, except where context suggest otherwise, the terms “Company,” “we,” “our” or “us” refers to PennantPark Investment Corporation and its consolidated subsidiaries; “PennantPark Investment” refers to only PennantPark Investment Corporation; “our SBIC Fund” refers collectively to our consolidated subsidiaries, PennantPark SBIC II LP, or SBIC II, and its general partner, PennantPark SBIC GP II, LLC; “Funding I” refers to PennantPark Investment Funding I, LLC, a wholly-owned subsidiary prior to deconsolidation on July 31, 2020; “Taxable Subsidiary” refers to PNNT Investment Holdings, LLC; “PSLF” refers to PennantPark Senior Loan Fund, LLC, an unconsolidated joint venture; “PTSF II” refers to PennantPark-TSO Senior Loan Fund II, LP, an unconsolidated limited partnership; “PennantPark Investment Advisers” or “Investment Adviser” refers to PennantPark Investment Advisers, LLC; “PennantPark Investment Administration” or “Administrator” refers to PennantPark Investment Administration, LLC; “SBA” refers to the Small Business Administration; “SBIC” refers to a small business investment company under the Small Business Investment Act of 1958, as amended; “BNP Credit Facility” refers to our revolving credit facility with BNP Paribas prior to deconsolidation of Funding I; “Truist Credit Facility” refers to our multi-currency, senior secured revolving credit facility with Truist Bank, as amended and restated; “2026 Notes” refers to our 4.50% Notes due May 2026; “2026 Notes-2” refers to our 4.00% Notes due November 2026; “BDC” refers to a business development company under the Investment Company Act of 1940, as amended, or the “1940 Act”; “SBCAA” refers to the Small Business Credit Availability Act; “Code” refers to the Internal Revenue Code of 1986, as amended; and “RIC” refers to a regulated investment company under the Code. References to our portfolio, our investments and our business include investments we make through SBIC II and other consolidated subsidiaries.
3
PENNANTPARK INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES
(In thousands, except share and per share data)
December 31, 2023
September 30, 2023
(unaudited)
Assets
Investments at fair value
Non-controlled, non-affiliated investments (amortized cost—$877,517 and $816,754, respectively)
$
879,245
830,808
Non-controlled, affiliated investments (amortized cost—$54,736 and $55,787, respectively)
40,829
54,771
Controlled, affiliated investments (amortized cost—$299,787 and $245,386, respectively)
290,684
216,068
Total investments (amortized cost—$1,232,040 and $1,117,927, respectively)
1,210,758
1,101,647
Cash and cash equivalents (cost—$36,850 and $38,784, respectively)
36,893
38,775
Interest receivable
9,884
6,820
Distribution receivable
5,381
5,079
Due from affiliates
181
—
Prepaid expenses and other assets
4,141
4,656
Total assets
1,267,238
1,156,977
Liabilities
Truist Credit Facility payable, at fair value (cost—$388,456 and $212,420, respectively)
385,016
206,940
2026 Notes payable, net (par— $150,000)
147,894
147,669
2026 Notes-2 payable, net (par— $165,000)
162,440
162,226
Payable for investment purchased
51,850
99,949
Distributions payable
4,566
13,697
Accounts payable and accrued expenses
4,323
6,754
Base management fee payable
4,004
3,915
Incentive fee payable
3,321
3,310
Interest payable on debt
3,125
6,231
Due to affiliates
1,557
4,099
Total liabilities
768,096
654,790
Commitments and contingencies (See Note 11)
Net assets
Common stock, 65,224,500 shares issued and outstanding Par value $0.001 per share and 100,000,000 shares authorized
65
Paid-in capital in excess of par value
746,466
Accumulated deficit
(247,389
)
(244,344
Total net assets
499,142
502,187
Total liabilities and net assets
Net asset value per share
7.65
7.70
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In thousands, except per share data)
Three Months Ended December 31,
2023
2022
Investment income:
From non-controlled, non-affiliated investments:
Interest
21,068
22,231
Payment-in-kind
Dividend income
692
Other income
1,425
487
From non-controlled, affiliated investments:
347
From controlled, affiliated investments:
5,481
2,858
632
1,131
4,689
3,256
Total investment income
34,336
29,963
Expenses:
Interest and expenses on debt
9,557
9,729
Base management fee
4,602
Incentive fee
2,192
General and administrative expenses
1,214
841
Administrative services expenses
189
266
Expenses before provision for taxes
18,285
17,630
Provision for taxes on net investment income
393
2,000
Net expenses
18,678
19,630
Net investment income
15,658
10,333
Realized and unrealized gain (loss) on investments and debt:
Net realized gain (loss) on investments and debt:
Non-controlled, non-affiliated investments
2,581
4,064
Non-controlled and controlled, affiliated investments
(750
Net realized gain (loss) on investments and debt
1,831
Net change in unrealized appreciation (depreciation) on:
(12,270
(50,517
7,324
(41,048
Provision for taxes on unrealized appreciation (depreciation) on investments
150
896
Debt appreciation (depreciation)
(2,040
4,378
Net change in unrealized appreciation (depreciation) on investments and debt
(6,836
(86,291
Net realized and unrealized gain (loss) from investments and debt
(5,005
(82,227
Net increase (decrease) in net assets resulting from operations
10,653
(71,894
Net increase (decrease) in net assets resulting from operations per common share
0.16
(1.10
Net investment income per common share
0.24
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS (Unaudited)
(In thousands)
Net increase (decrease) in net assets resulting from operations:
Net change in unrealized appreciation (depreciation) on investments
(4,946
(91,565
Net change in provision for taxes on unrealized appreciation (depreciation) on investments
Net change in unrealized (appreciation) depreciation on debt
Distributions to stockholders:
Distribution of net investment income
(13,698
(10,762
Total distributios to stockholders
Net increase (decrease) in net assets
(3,045
(82,656
Net assets:
Beginning of period
585,565
End of period
502,909
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Cash flows from operating activities:
Adjustments to reconcile net increase (decrease) in net assets resulting from operations to net cash provided by (used in) operating activities:
Net change in net unrealized (appreciation) depreciation on investments
4,946
91,565
Net change in unrealized appreciation (depreciation) on debt
2,040
(4,378
Net realized (gain) loss on investments and cash equivalents
(1,831
(4,064
Net accretion of discount and amortization of premium
(281
(822
Purchases of investments
(281,000
(86,182
Payment-in-kind income
(980
(1,131
Proceeds from dispositions of investments
170,753
30,620
Amortization of deferred financing costs
439
454
(Increase) decrease in:
(3,064
(531
Receivables from investments sold
29,494
(302
(836
Due from affiliate
(181
(235
Increase (decrease) in:
Due to affiliate
(2,542
43
Payable for investments purchased
(48,099
8,325
(3,106
(2,973
Base management fee payable, net
89
(247
11
Deferred tax liability
5,287
(2,431
(4,485
Net cash provided by (used in) operating activities
(155,121
(9,563
Cash flows from financing activities:
Distributions paid to stockholders
(22,828
(9,784
Borrowings under Truist Credit Facility
228,036
44,000
Repayments under Truist Credit Facility
(52,000
(49,000
Net cash provided by (used in) financing activities
153,208
(14,784
Net increase (decrease) in cash equivalents
(1,913
(24,347
Effect of exchange rate changes on cash
31
280
Cash and cash equivalents, beginning of period
54,775
Cash and cash equivalents, end of period
30,708
Supplemental disclosure of cash flow information:
Interest paid
12,224
12,248
Taxes paid
3,357
299
CONSOLIDATED SCHEDULE OF INVESTMENTS (Unaudited)
DECEMBER 31, 2023
(In thousands, except share data)
Issuer Name
Maturity / Expiration
Industry
Current Coupon
Basis Point Spread Above Index (4)
Par / Shares
Cost
Fair Value (3)
Investments in Non-Controlled, Non-Affiliated Portfolio Companies—176.2% of Net Assets (1), (2)
First Lien Secured Debt—113.2% of Net Assets
A1 Garage Merger Sub, LLC
12/22/2028
Personal, Food and Miscellaneous Services
11.97
%
3M SOFR+660
5,131
5,065
5,106
A1 Garage Merger Sub, LLC - Unfunded Term Loan
12/21/2024
1,788
18
A1 Garage Merger Sub, LLC - Revolver (7)
2,532
(13
ACP Avenu Buyer, LLC
10/02/2029
Business Services
11.64
3M SOFR+625
6,500
6,381
6,338
ACP Avenu Buyer, LLC - Unfunded Term Loan (7)
3,045
(34
ACP Avenu Buyer, LLC - Revolver (7)
1,218
(30
ACP Falcon Buyer, Inc. - Revolver (7)
08/01/2029
2,533
(28
Ad.net Acquisition, LLC - Revolver
05/07/2026
Media
11.61
3M SOFR+626
222
221
Ad.net Acquisition, LLC - Revolver (7)
(1
Aeronix, Inc.
12/12/2028
Aerospace and Defense
10.88
3M SOFR+550
20,000
19,702
19,700
Aeronix, Inc. - Revolver (7)
2,489
AFC Dell Holding Corp.
04/09/2027
Distribution
11.72
3M SOFR+640
2,294
2,263
AFC Dell Holding Corp. - Unfunded Term Loan
13,353
Anteriad, LLC (f/k/a MeritDirect, LLC)
05/23/2024
12.00
3M SOFR+665
1,221
1,212
1,215
Anteriad, LLC (f/k/a MeritDirect, LLC) - Revolver (7)
1,612
(16
Any Hour Services
07/21/2027
3M SOFR+585
3,015
3,011
2,985
Any Hour Services - Revolver (7)
1,147
(11
Applied Technical Services, LLC
12/29/2026
Environmental Services
11.25
813
807
797
Applied Technical Services, LLC - Revolver
13.25
3M SOFR+475
575
563
Applied Technical Services, LLC - Revolver (7)
425
(9
Arcfield Acquisition Corp. - Revolver (7)
08/04/2028
3,521
(35
Berwick Industrial Park
05/02/2024
Buildings and Real Estate
11.50
4,000
4,033
3,956
Beta Plus Technologies, Inc.
07/01/2029
11.10
3M SOFR+575
4,938
4,860
4,740
BioDerm, Inc. - Revolver
01/31/2028
Healthcare, Education and Childcare
11.84
3M SOFR+650
268
265
BioDerm, Inc. - Revolver (7)
804
(8
Blackhawk Industrial Distribution, Inc.
09/17/2026
11.70
5,699
5,657
5,627
Blackhawk Industrial Distribution, Inc.(7)
2,996
Blackhawk Industrial Distribution, Inc. - Revolver
13.75
3M SOFR+525
1,030
1,017
Blackhawk Industrial Distribution, Inc. - Revolver (7)
2,402
BlueHalo Financing Holdings, LLC
10/31/2025
12.04
1,118
1,097
1,095
Broder Bros., Co.
12/04/2025
Consumer Products
9,773
Carisk Buyer, Inc.
12/01/2029
5,500
5,418
Carisk Buyer, Inc. - Unfunded Term Loan (7)
4,813
(24
Carisk Buyer, Inc. - Revolver (7)
1,750
(26
Cartessa Aesthetics, LLC
06/14/2028
33,970
33,435
Cartessa Aesthetics, LLC - Revolver
1,265
Cartessa Aesthetics, LLC - Revolver (7)
2,297
CF512, Inc.
08/20/2026
11.56
3M SOFR+619
6,575
6,512
6,444
CF512, Inc. - Revolver (7)
909
(18
Compex Legal Services, Inc.
02/09/2026
10.90
3M SOFR+555
946
938
Compex Legal Services, Inc. - Revolver
02/07/2025
197
Compex Legal Services, Inc. - Revolver (7)
459
Confluent Health, LLC
11/30/2028
12.86
3M SOFR+750
1,985
1,855
Connatix Buyer, Inc. - Revolver (7)
07/13/2027
1,875
(84
Crane 1 Services, Inc. - Revolver
08/16/2027
10.36
3M SOFR+501
117
116
Crane 1 Services, Inc. - Revolver (7)
175
Dr. Squatch, LLC
08/31/2027
Personal and Non-Durable Consumer Products
11.22
6,189
6,136
Dr. Squatch, LLC (7)
08/27/2026
20
Dr. Squatch, LLC - Revolver (7)
2,326
DRS Holdings III, Inc.
11/03/2025
11.75
DRS Holdings III, Inc. - Revolver (7)
1,783
(20
EDS Buyer, LLC
11.62
6,203
6,121
6,141
EDS Buyer, LLC - Unfunded Term Loan
5,625
14
EDS Buyer, LLC - Revolver (7)
1,688
(17
ETE Intermediate II, LLC - Revolver (7)
05/25/2029
1,656
Exigo Intermediate II, LLC
03/15/2027
11.46
3M SOFR+610
24,313
24,051
23,948
Exigo Intermediate II, LLC - Revolver (7)
1,856
Five Star Buyer, Inc.
02/23/2028
Leisure, Amusement, Motion Pictures, Entertainment
12.46
3M SOFR+710
196
193
Five Star Buyer, Inc. - Unfunded Term Loan (7)
837
Five Star Buyer, Inc. - Revolver (7)
741
Gauge ETE Blocker, LLC - Promissory Note
05/19/2029
12.56
215
CONSOLIDATED SCHEDULE OF INVESTMENTS (Unaudited) —(Continued)
Graffiti Buyer, Inc.
08/10/2027
10.98
3M SOFR+560
890
882
881
Graffiti Buyer, Inc. - Revolver
262
Graffiti Buyer, Inc. - Revolver (7)
504
(5
Hancock Roofing and Construction L.L.C.
12/31/2026
Insurance
10.96
1M SOFR+560
335
322
Hancock Roofing and Construction L.L.C. - Revolver (7)
415
Holdco Sands Intermediate, LLC
11/23/2028
3M SOFR+600
10,617
10,439
10,555
Holdco Sands Intermediate, LLC - Revolver (7)
11/23/2027
3,941
(39
HV Watterson Holdings, LLC
12/17/2026
1M SOFR+615
278
276
HV Watterson Holdings, LLC (7)
2,219
17
HV Watterson Holdings, LLC - Revolver
3M SOFR+615
1,000
HV Watterson Holdings, LLC - Revolver (7)
250
HW Holdco, LLC
12/10/2024
11.81
11,237
11,182
11,069
HW Holdco, LLC - Revolver
11.79
271
267
HW Holdco, LLC - Revolver (7)
3,116
(47
IG Investments Holdings, LLC - Revolver (7)
09/22/2027
477
(7
Imagine Acquisitionco, LLC (7)
11/15/2027
2,341
(12
Imagine Acquisitionco, LLC - Revolver (7)
1,685
(25
Inception Fertility Ventures, LLC
12/07/2024
12.64
3M SOFR+725
21,249
21,077
Infinity Home Services Holdco, Inc.
12/28/2028
12.22
3M SOFR+685
2,084
Infinity Home Services Holdco, Inc. (10)
CAD 2,223
1,599
Infinity Home Services Holdco, Inc. - Unfunded Term Loan
02/15/2024
1,135
Infinity Home Services Holdco, Inc. - 1st Amendment Unfunded Term Loan (7)
11/17/2025
9,384
Infinity Home Services Holdco, Inc. - Revolver (7)
1,292
Infolinks Media Buyco, LLC
11/01/2026
11.21
1,416
1,402
Integrity Marketing Acquisition, LLC
11.54
9,940
9,902
9,840
Integrity Marketing Acquisition, LLC - Unfunded Term Loan
08/31/2025
2,325
Integrity Marketing Acquisition, LLC - Revolver (7)
160
Inventus Power, Inc. - Revolver (7)
06/30/2025
Electronics
1,729
ITI Holdings, Inc.
03/03/2028
11.02
3M SOFR+565
8,815
8,701
8,551
ITI Holdings, Inc. - Revolver
12.07
1,121
1,087
ITI Holdings, Inc. - Revolver (7)
370
K2 Pure Solutions NoCal, L.P.
01/31/2024
Chemicals, Plastics and Rubber
15.46
3M SOFR+1010
8,859
8,856
K2 Pure Solutions NoCal, L.P. - Revolver (7)
1,938
Kinetic Purchaser, LLC
11/10/2027
9,150
8,947
9,104
Kinetic Purchaser, LLC - Revolver (7)
11/10/2026
4,854
Lash OpCo, LLC
02/18/2027
12.48
1M SOFR+700
2,799
2,760
2,785
Lash OpCo, LLC - Revolver
08/16/2026
12.53
1,977
1,967
Lash OpCo, LLC - Revolver (7)
935
LAV Gear Holdings, Inc.
1M SOFR+640
2,047
2,002
(PIK 5.50%)
Ledge Lounger, Inc.
11/09/2026
9,062
8,950
8,971
Ledge Lounger, Inc. - Revolver
1,449
1,435
Ledge Lounger, Inc. - Revolver (7)
483
Lightspeed Buyer Inc.
02/03/2026
10.71
1M SOFR+535
2,182
Lightspeed Buyer Inc. - Revolver (7)
1,166
(6
LJ Avalon Holdings, LLC
02/01/2030
11.86
572
565
560
LJ Avalon Holdings, LLC - Unfunded Term Loan
07/31/2024
894
(4
LJ Avalon Holdings, LLC - Revolver (7)
01/31/2030
587
LSF9 Atlantis Holdings, LLC
03/31/2029
Retail
12.60
5,550
5,370
5,404
Loving Tan Intermediate II, Inc.
05/31/2028
12.35
3M SOFR+700
4,975
4,883
4,925
Loving Tan Intermediate II, Inc. - Revolver
344
Loving Tan Intermediate II, Inc. - Revolver (7)
284
(3
Mars Acquisition Holdings Corp.
05/14/2026
11.00
1,805
Mars Acquisition Holdings Corp. - Revolver (7)
1,209
MBS Holdings, Inc. - Revolver
04/16/2027
Telecommunications
417
410
MBS Holdings, Inc. - Revolver (7)
MDI Buyer, Inc.
07/25/2028
20,084
19,796
19,585
MDI Buyer, Inc. - Revolver
11.38
787
767
MDI Buyer, Inc. - Revolver (7)
1,440
-
(22
Meadowlark Acquirer, LLC
12/10/2027
10.66
1,937
1,920
1,879
Meadowlark Acquirer, LLC Term Loan II
8,922
(178
Meadowlark Acquirer, LLC - Revolver (7)
(51
Medina Health, LLC
10/20/2028
11.60
19,949
19,608
19,550
Medina Health, LLC - Revolver
416
408
Medina Health, LLC - Revolver (7)
2,358
9
CONSOLIDATED SCHEDULE OF INVESTMENTS (Unaudited)—(Continued)
Municipal Emergency Services, Inc.
09/28/2027
10.52
3M SOFR+515
Municipal Emergency Services, Inc. - Unfunded Term Loan A
12/16/2024
769
Municipal Emergency Services, Inc. - Unfunded Term Loan B
2,510
Municipal Emergency Services, Inc. - Revolver (7)
1,880
(2
NBH Group LLC - Revolver (7)
08/19/2026
1,163
(70
Neptune Flood Incorporated - Revolver (7)
05/09/2029
541
NORA Acquisition, LLC
08/31/2029
3M SOFR+635
5,486
NORA Acquisition, LLC - Revolver (7)
2,707
(41
Omnia Exterior Solutions, LLC
12/29/2029
Diversified Conglomerate Service
10.85
3,500
3,448
Omnia Exterior Solutions, LLC - Unfunded Term Loan (7)
03/28/2024
2,800
Omnia Exterior Solutions, LLC - Unfunded Term Loan 2 (7)
12/29/2025
4,900
Omnia Exterior Solutions, LLC - Revolver (7)
1,400
ORL Acquisition, Inc.
09/03/2027
12.75
3M SOFR+740
4,397
4,339
3,738
ORL Acquisition, Inc. - Revolver (7)
597
(90
OSP Embedded Purchaser, LLC
12/15/2029
6,386
OSP Embedded Purchaser, LLC - Revolver (7)
1,477
Ox Two, LLC
05/18/2026
Building Materials
12.90
1M SOFR+751
13,578
13,457
13,408
Ox Two, LLC - Revolver (7)
2,419
Pacific Purchaser, LLC
09/30/2028
11.43
13,000
12,747
12,805
Pacific Purchaser, LLC - Unfunded Term Loan (7)
2,747
Pacific Purchaser, LLC - Revolver (7)
1,373
(21
Pequod Merger Sub, Inc. - Unfunded Term Loan
12/02/2026
Financial Services
2,847
(57
Pequod Merger Sub, Inc. - Revolver (7)
757
(15
PL Acquisitionco, LLC - Revolver (7)
11/09/2027
3,236
(372
Pragmatic Institute, LLC
07/06/2028
11.14
34,898
34,478
32,630
Pragmatic Institute, LLC Unfunded Term Loan
7,193
(396
Pragmatic Institute, LLC - Revolver
4,795
4,483
Quantic Electronics, LLC
11/19/2026
1,480
1,471
1,450
Quantic Electronics, LLC - Revolver
528
518
Questex, LLC
09/09/2024
9.77
3M SOFR+440
20,193
20,135
Questex, LLC - Revolver (7)
3,590
Radius Aerospace, Inc. - Revolver
03/31/2025
11.24
594
588
Radius Aerospace, Inc. - Revolver (7)
1,633
Rancho Health MSO, Inc. (7)
12/18/2025
79
Rancho Health MSO, Inc. - Unfunded Term Loan
494
Rancho Health MSO, Inc. - Revolver
11.20
210
Rancho Health MSO, Inc. - Revolver (7)
315
Reception Purchaser, LLC
02/28/2028
Transportation
5,848
5,780
5,672
Recteq, LLC - Revolver (7)
01/29/2026
1,127
Research Now Group, Inc. and Dynata, LLC
12/20/2024
3M SOFR+576
124
109
Riverpoint Medical, LLC - Revolver
06/20/2025
10.46
3M SOFR+510
91
90
Riverpoint Medical, LLC - Revolver (7)
273
Riverside Assessments, LLC
03/10/2025
Education
11.28
3M SOFR+590
11,640
11,544
11,524
Rural Sourcing Holdings, Inc. - Unfunded Term Loan
06/15/2029
1,146
Rural Sourcing Holdings, Inc. - Revolver (7)
860
S101 Holdings, Inc. - Unfunded Term Loan (7)
06/15/2024
2,277
S101 Holdings, Inc. - Unfunded Term Loan 2 (7)
12/15/2024
5,313
Sales Benchmark Index LLC - Revolver (7)
01/03/2025
732
Sargent & Greenleaf Inc. - Revolver
11.92
338
336
Sargent & Greenleaf Inc. - Revolver (7)
274
Schlesinger Global, Inc.
07/14/2025
13.16
3M SOFR+715
4,635
4,604
4,485
Schlesinger Global, Inc. - Revolver
30
29
(PIK 0.5%)
Schlesinger Global, Inc. - Revolver (7)
Seaway Buyer, LLC - Revolver
06/13/2029
11.52
4,681
4,574
Seaway Buyer, LLC
313
302
Seaway Buyer, LLC - Revolver (7)
2,814
(98
Shiftkey, LLC
06/21/2027
11.36
3M SOFR+601
17,730
17,598
17,234
Sigma Defense Systems, LLC
12/18/2027
12.50
1M SOFR+715
26,138
25,532
25,877
Sigma Defense Systems, LLC - Revolver
1,786
1,768
Sigma Defense Systems, LLC - Revolver (7)
1,190
Signature Systems Holding Company - Revolver (7)
05/03/2024
2,016
Solutionreach, Inc. - Revolver (7)
07/17/2025
Communications
833
Spendmend Holdings LLC
03/01/2028
99
98
Spendmend Holdings LLC - Revolver
561
554
Spendmend Holdings LLC (7)
2,684
Cas
10
Spendmend Holdings LLC - Revolver (7)
System Planning and Analysis, Inc. - Revolver (7) (f/k/a Management Consulting & Research, LLC)
2,925
The Bluebird Group LLC
07/27/2026
2,549
2,515
2,521
The Bluebird Group LLC - Revolver (7)
734
The Plimpton & Hills Corporation
11/08/2029
11.37
14,400
14,186
14,184
The Plimpton & Hills Corporation - Unfunded Term Loan (7)
11/07/2025
9,144
(46
The Vertex Companies, LLC
08/30/2027
11.71
185
182
186
The Vertex Companies, LLC - Revolver
248
247
The Vertex Companies, LLC - Revolver (7)
492
TransGo, LLC
12/29/2028
Machinery
11.35
25,000
24,626
24,625
TransGo, LLC - Revolver (7)
3,323
TWS Acquisition Corporation - Revolver (7)
06/16/2025
1,644
Tyto Athene, LLC (New Issue) - Revolver
04/01/2026
101
Tyto Athene, LLC - Revolver (7)
255
(19
Urology Management Holdings, Inc.
06/15/2026
4,189
4,102
Urology Management Holdings, Inc. - Unfunded Term Loan
02/01/2024
3,033
(63
Watchtower Intermediate, LLC
19,250
18,941
18,865
Watchtower Intermediate, LLC. - Unfunded Term Loan (7)
12/01/2025
4,200
(37
Watchtower Intermediate, LLC. - Revolver
1,260
1,235
Watchtower Intermediate, LLC. - Revolver (7)
5,040
(101
Wildcat Buyerco, Inc.
02/27/2027
11.11
4,620
4,573
4,551
Wildcat Buyerco, Inc. - Unfunded Term Loan (7)
2,737
(14
Wildcat Buyerco, Inc. - Revolver (7)
551
Zips Car Wash, LLC
03/01/2024
Auto Sector
12.71
3M SOFR+735
2,589
2,582
2,531
Total First Lien Secured Debt
571,058
565,170
Second Lien Secured Debt—15.7% of Net Assets
Ascensus Holdings, Inc.
08/02/2028
12.18
3M SOFR+676
3,000
2,728
2,876
Atlas Purchaser, Inc
05/07/2029
14.64
3M SOFR+900
17,000
16,613
11,509
Best Practice Associates LLC
06/29/2027
14.52
3M SOFR+915
17,825
17,573
17,469
Burgess Point Purchaser Corporation
07/28/2030
14.46
3M SOFR+910
8,000
7,680
7,920
ENC Parent Corporation
08/19/2029
13.11
3M SOFR+776
7,500
7,441
6,900
Halo Buyer, Inc.
07/06/2026
13.71
1M SOFR+835
32,500
32,248
31,606
QuantiTech LLC
02/04/2027
15.47
148
Total Second Lien Secured Debt
84,431
78,430
Subordinated Debt/Corporate Notes—9.8% of Net Assets
Express Wash Acquisition Company, LLC
01/15/2029
15.11
3M SOFR+976
22,219
21,588
21,552
Flock Financial, LLC
05/26/2027
14.50
34,000
33,385
27,200
Total Subordinated Debt/Corporate Notes
54,973
48,752
Preferred Equity/Partnership Interests—3.1% of Net Assets (6)
Ad.net Holdings, Inc.
2,400
240
AH Newco Equityholdings, LLC
6.00
211
500
994
Anteriad Holdings, LP (f/k/a MeritDirect Holdings, LP) (9)
1,158
Cartessa Aesthetics, LLC (9)
3,562,500
3,563
Gauge Lash Coinvest, LLC - Preferred Equity
64,967
351
1,103
Gauge Schlesinger Coinvest, LLC - Class A-2 Preferred Equity
1
Imagine Topco, LP Preferred
8.00
743,826
744
Mars Intermediate Holdings II, Inc (9)
414
568
Magnolia Topco LP - Class A Preferred Equity (9)
1,545
1,598
Magnolia Topco LP - Class B Preferred Equity (9)
1,018
643
546
NXOF Holdings, Inc. (Tyto Athene, LLC)
163
ORL Holdco, Inc.
PL Acquisitionco, LLC - Preferred Equity
37
42
Signature CR Intermediate Holdco, Inc.
1,527
2,564
TPC Holding Company, LP (8),(11)
Food
219
329
TWD Parent Holdings, LLC Preferred
(The Vertex Companies, LLC)
Total Preferred Equity/Partnership Interests
11,166
15,427
Common Equity/Partnership Interests/Warrants—24.4% of Net Assets (6)
A1 Garage Equity, LLC (9)
2,193,038
2,193
2,430
2,667
27
AFC Acquisitions, Inc. (9)
749,163
749
Affinion Group Holdings, Inc. (Warrants)
04/10/24
77,190
2,126
Aftermarket Drivetrain Products Holdings, LLC
1,645
AG Investco LP (9)
805,164
805
1,125
AG Investco LP (7), (9)
194,836
Altamira Intermediate Company II, Inc.
125,000
125
126
AMCSI Crash Co-Invest, LP
2,489,777
2,490
3,318
AMCSI Crash Co-Invest, LP (7)
510,223
Athletico Holdings, LLC (9)
9,357
10,000
9,676
Atlas Investment Aggregator, LLC
1,700,000
1,613
BioDerm, Inc.
1,312
1,448
Burgess Point Holdings, LP
680
650
Carisk Parent, L.P. - Common Equity
169,231
169
Connatix Parent, LLC
57,416
253
Consello Pacific Aggregator, LLC (9)
782,891
783
799
Cowboy Parent LLC
27,778
5,410
(Blackhawk Industrial Distribution, Inc.)
Crane 1 Acquisition Parent Holdings, L.P.
113
104
Delta InvestCo LP
863,299
848
1,350
(Sigma Defense Systems, LLC) (9)
Delta InvestCo LP (7)
277,745
(Sigma Defense Systems, LLC) (7), (9)
eCommission Holding Corporation (11)
80
1,005
2,144
EDS Topco, LP
937,500
971
Exigo, LLC
1,458,333
1,458
1,681
FedHC InvestCo LP (9)
14,578
489
1,596
FedHC InvestCo LP (7),(9)
5,150
FedHC InvestCo II LP (9)
20,882
2,175
2,392
Five Star Parent Holdings, LLC
655,714
656
675
Gauge ETE Blocker, LLC - Common Equity
374,444
374
371
Gauge Lash Coinvest LLC
889,376
136
4,311
Gauge Loving Tan, LP - Common Equity
462,827
463
394
Gauge Schlesinger Coinvest, LLC
(TVC Enterprises, LLC)
GCOM InvestCo LP
2,434
1,003
542
GMP Hills, LP - Common Equity
3,747,470
3,747
Go Dawgs Capital III, LP
675,325
1,621
(American Insulated Glass, LLC) (9)
Hancock Claims Consultants Investors, LLC (9)
450,000
450
207
HPA SPQ Aggregator LP- Common Equity
750,399
750
1,600,000
1,600
1,635
Icon Partners V C, L.P.
1,122,549
1,123
1,060
Icon Partners V C, L.P. (7)
377,451
IHS Parent Holdngs, L.P.
1,218,045
1,759
Imagine Topco, LP
Infogroup Parent Holdings, Inc.
Other Media
181,495
(Data Axle, Inc.)
Ironclad Holdco, LLC
654
(Applied Technical Services, LLC) (9)
ITC Infusion Co-invest, LP(9)
162,445
1,927
ITC Rumba, LLC
375,675
(Cano Health, LLC) (9)
Kentucky Racing Holdco, LLC (Warrants)(9)
Hotels, Motels, Inns and Gaming
161,252
1,735
1,308,814
1,309
1,641
KL Stockton Co-Invest LP
382,353
385
861
(Any Hour Services) (9)
Lariat ecoserv Co-Invest Holdings, LLC (9)
363,656
25
LEP Pequod Holdings, LP
350
865
Lightspeed Investment Holdco LLC
273,143
721
LJ Avalon, LP
851,087
851
868
Lorient Peregrine Investments, LP
335,590
4,530
4,453
Magnolia Topco LP - Class A (9)
1,545,460
Magnolia Topco LP - Class B (9)
1,017,840
Mars Intermidiate Holdings II, Inc. (9)
MDI Aggregator, LP
30,993
3,103
2,752
Meadowlark Title, LLC (9)
815,385
802
3,920,145
3,984
5,096
NEPRT Parent Holdings, LLC
1,299
1,250
66
(Recteq, LLC) (9)
New Medina Health, LLC (9)
1,429,480
1,429
NORA Parent Holdings, LLC (9)
1,257
1,262
North Haven Saints Equity Holdings, LP(9)
351,553
352
369
NXOF Holdings, Inc.
3,261
(Tyto Athene, LLC)
OceanSound Discovery Equity, LP
98,286
899
2,595
(Holdco Sands Intermediate, LLC) (9)
OHCP V BC COI, L.P.
691,666
581
OHCP V BC COI, L.P. (7)
58,334
638
OSP Embedded Aggregator, LP
870,536
871
PennantPark-TSO Senior Loan Fund II, LP
12,269,640
12,270
12,644
Pink Lily Holdco, LLC (9)
1,044
12
1,918,047
1,918
Quad (U.S.) Co-Invest, L.P.
2,958,706
2,959
3,469
QuantiTech InvestCo LP (9)
712
68
451
QuantiTech InvestCo LP (7),(9)
955
QuantiTech InvestCo II LP (9)
24
26
RFMG Parent, LP
1,050,000
1,050
(Rancho Health MSO, Inc.)
SBI Holdings Investments LLC
36,585
366
294
(Sales Benchmark Index LLC)
Seaway Topco, LP
2,981
2,117
2,120
SP L2 Holdings, LLC
881,966
SSC Dominion Holdings, LLC
71
2,455
Class B (US Dominion, Inc.)
StellPen Holdings, LLC
153,846
154
152
(CF512, Inc.)
SV Aero Holdings, LLC (9)
TAC LifePort Holdings, LLC (9)
254,206
465
Tower Arch Infolinks Media, LP (9)
539,282
506
952
Tower Arch Infolinks Media, LP (7), (9)
356,162
TPC Holding Company, LP (8). (11)
11,527
194
TWD Parent Holdings, LLC
608
UniVista Insurance (9)
400
357
613
Urology Partners Co., L.P.
1,111,111
1,111
933
Watchtower Holdings, LLC (9)
1,241,935
1,242
1,261
WCP Ivyrehab QP CF Feeder, LP (9)
3,715,012
3,754
4,071
WCP Ivyrehab QP CF Feeder, LP - Unfunded (7), (9)
284,988
Wildcat Parent, LP
2,314
753
(Wildcat Buyerco, Inc.)
Total Common Equity/Partnership Interests/Warrants
106,034
121,620
US Government Securities—10.0% of Net Assets
U.S. Treasury Bill (5)
01/23/2024
Short-Term U.S. Government Securities
5.23
50,000
49,855
49,846
Total Cash and Cash Equivalents
Total Investments in Non-Controlled, Non-Affiliated Portfolio Companies
877,517
Investments in Non-Controlled, Affiliated Portfolio Companies—8.2% of Net Assets (1), (2)
First Lien Secured Debt—2.2% of Net Assets
Walker Edison Furniture Company LLC
03/01/2029
Home and Office Furnishings
12.21
8,055
7,894
Walker Edison Furniture Company, LLC - Unfunded Term Loan
2,083
(42
Walker Edison Furniture Company LLC - Junior Revolver
3,333
11,388
11,185
Preferred Equity/Partnership Interests—5.9% of Net Assets(6)
Cascade Environmental Holdings, LLC
5,887,236
32,791
28,519
Cascade Environmental Holdings, LLC - Series B
918
33,709
29,644
Common Equity/Partnership Interests/Warrants—0% of Net Assets (6)
7,444,347
2,853
Walker Edison Furniture
72,917
6,786
9,639
Total Investments in Non-Controlled, Affiliated Portfolio Companies
54,736
13
Investments in Controlled, Affiliated Portfolio Companies—58.2% of Net Assets (1), (2)
First Lien Secured Debt—20.3% of Net Assets
AKW Holdings Limited (8), (10), (11)
12.31
£
40,867
56,020
52,097
MidOcean JF Holdings Corp.
07/31/2026
3M SOFR+605
49,281
49,250
105,301
101,347
Second Lien Secured Debt—0.0% of Net Assets
Mailsouth Inc. (6)
04/23/2025
Printing and Publishing
15,453
12,384
Subordinated Debt—20.5% of Net Assets
PennantPark Senior Loan Fund, LLC
07/31/2027
13.38
3M SOFR+800
102,325
Total Subordinated Debt
Common Equity—17.4% of Net Assets (6)
950
130
2,974
JF Intermediate, LLC
43,918
4,488
21,234
MSpark, LLC
51,151
16,516
PennantPark Senior Loan Fund, LLC (11)
58,580,060
58,643
62,804
Total Common Equity
79,777
87,012
Total Investments in Controlled, Affiliated Portfolio Companies
299,787
Total Investments—242.6% of Net Assets
1,232,040
Cash and Cash Equivalents—7.4% of Net Assets
BlackRock Federal FD Institutional 30
25,998
Non-Money Market Cash
10,852
10,895
36,850
Total Investments and Cash Equivalents—250% of Net Assets
1,268,890
1,247,651
Liabilities in Excess of Other Assets—(150.0%) of Net Assets
(748,509
Net Assets—100.0%
CONSOLIDATED SCHEDULE OF INVESTMENTS
Investments in Non-Controlled, Non-Affiliated Portfolio Companies—165.4% of Net Assets (1), (2)
First Lien Secured Debt—93.2% of Net Assets
11.99
5,144
5,073
5,119
A1 Garage Merger Sub, LLC (Revolver) (7)
Ad.net Acquisition, LLC (Revolver)
11.65
Ad.net Acquisition, LLC (Revolver) (7)
1,237
1,223
Anteriad, LLC (f/k/a MeritDirect, LLC) (Revolver) (7)
3,023
3,014
2,962
Any Hour Services (Revolver) (7)
(23
Apex Service Partners, LLC
07/31/2025
10.77
1,330
1,327
Apex Service Partners, LLC Term Loan C
10.79
1,863
1,850
1,859
Apex Service Partners, LLC (Revolver)
582
583
Apex Service Partners, LLC (Revolver) (7)
824
818
808
Applied Technical Services, LLC (Revolver)
392
Applied Technical Services, LLC (Revolver) (7)
600
Arcfield Acquisition Corp. (Revolver)
08/03/2029
8,090
7,970
8,009
Arcfield Acquisition Corp. (Revolver) (7)
11/02/2023
4,030
3,924
4,950
4,869
BioDerm, Inc. (Revolver)
1M SOFR+650
107
BioDerm, Inc. (Revolver) (7)
964
1,851
1,833
1,823
3,354
343
Blackhawk Industrial Distribution, Inc. (Revolver) (7)
3,089
9,838
11.39
34,056
33,496
Cartessa Aesthetics, LLC - (Revolver)
Cartessa Aesthetics, LLC - (Revolver) (7)
11.59
6,592
6,524
6,460
CF512, Inc.(Revolver) (7)
10.94
949
939
Compex Legal Services, Inc. (Revolver)
Compex Legal Services, Inc. (Revolver) (7)
590
Connatix Buyer, Inc. (Revolver) (7)
(66
12.82
1,990
Crane 1 Services, Inc. (Revolver)
3M SOFR+551
Crane 1 Services, Inc. (Revolver) (7)
11.23
8,276
8,190
Dr. Squatch, LLC (Revolver) (7)
DRS Holdings III, Inc. (Revolver) (7)
6,219
6,133
6,125
EDS Buyer, LLC - (Revolver) (7)
ETE Intermediate II, LLC (Revolver) (7)
11.17
24,375
24,097
23,888
Exigo Intermediate II, LLC (Revolver) (7)
15
CONSOLIDATED SCHEDULE OF INVESTMENTS – (Continued)
12.42
Five Star Buyer, Inc. - Unfunded Term Loan
Five Star Buyer, Inc. (Revolver) (7)
607
Graffiti Buyer, Inc. (7)
12/08/2023
Graffiti Buyer, Inc. (Revolver)
11.77
239
237
Graffiti Buyer, Inc. (Revolver) (7)
529
10.92
327
Hancock Roofing and Construction L.L.C. (Revolver) (7)
(10
11.32
6M SOFR+585
1,898
1,868
Holdco Sands Intermediate, LLC (Revolver) (7)
1M SOFR+625
279
HV Watterson Holdings, LLC - (Revolver)
1,200
1,198
HV Watterson Holdings, LLC - (Revolver)(7)
50
11,167
HW Holdco, LLC (Revolver)
11.82
HW Holdco, LLC (Revolver) (7)
IG Investments Holdings, LLC (Revolver) (7)
Imagine Acquisitionco, LLC (Revolver) (7)
12/07/2023
12.49
20,300
20,100
12.24
2,089
12/28/2023
Infinity Home Services Holdco, Inc.(Revolver) (7)
1M SOFR+585
1,420
Infolinks Media Buyco, LLC (7)
11/01/2023
Integrated Data Services - Term Loan
11.87
15,467
15,161
15,106
Integrated Data Services - (Revolver)
(59
11.41
9,880
9,839
9,781
2,500
Integrity Marketing Acquisition, LLC (Revolver) (7)
Inventus Power, Inc.
12.93
1M SOFR+761
13,234
12,998
12,969
Inventus Power, Inc. (Revolver) (7)
11.06
8,838
8,718
8,661
ITI Holdings, Inc. (Revolver)
10.70
1,098
ITI Holdings, Inc. (Revolver) (7)
12/20/2023
13.42
1M SOFR+810
9,409
9,402
K2 Pure Solutions NoCal, L.P. (Revolver) (7)
9,173
8,957
9,035
Kinetic Purchaser, LLC (Revolver) (7)
(73
11.88
2,807
2,764
2,779
Lash OpCo, LLC (Revolver)
12.15
1,957
Lash OpCo, LLC (Revolver) (7)
10/31/2024
51
9,085
8,964
Ledge Lounger, Inc. (Revolver) (7)
1,933
10.67
2,198
2,187
2,176
Lightspeed Buyer Inc. (Revolver) (7)
208
205
204
LJ Avalon Holdings, LLC (Revolver)(7)
5,436
12.39
4,988
4,892
4,913
Loving Tan Intermediate II, Inc. (Revolver)
342
Loving Tan Intermediate II, Inc. (Revolver)(7)
11.04
1,835
1,807
1,817
Mars Acquisition Holdings Corp. (Revolver)(7)
MBS Holdings, Inc. (Revolver)
111
MBS Holdings, Inc. (Revolver) (7)
11.27
19,835
19,685
MDI Buyer, Inc. (Revolver)
1,039
1,016
MDI Buyer, Inc. (Revolver) (7)
1,188
1,919
1,888
Meadowlark Acquirer, LLC Term Loan I
1,038
(134
Meadowlark Acquirer, LLC (Revolver) (7)
(43
16
11.05
484
474
06/16/2023
(55
Municipal Emergency Services, Inc. (Revolver)
752
736
Municipal Emergency Services, Inc. (Revolver) (7)
1,128
NBH Group LLC (Revolver) (7)
Neptune Flood Incorporated (Revolver) (7)
11.74
20,500
20,092
20,090
NORA Acquisition, LLC (Revolver) (7)
(54
12.84
4,409
4,347
4,012
ORL Acquisition, Inc. (Revolver) (7)
1M SOFR+725
13,445
13,340
Ox Two, LLC (Revolver) (7)
Pequod Merger Sub, Inc. (Revolver) (7)
PL Acquisitionco, LLC (Revolver) (7)
(324
34,987
34,547
33,412
(252
Pragmatic Institute, LL (Revolver)
4,579
1,484
1,474
1,461
Quantic Electronics, LLC (Revolver)
521
9.81
3M SOFR+425
20,115
Questex, LLC (Revolver) (7)
Radius Aerospace, Inc. (Revolver)
11.29
668
661
Radius Aerospace, Inc. (Revolver) (7)
1,559
Rancho Health MSO, Inc. (Revolver)
Rancho Health MSO, Inc. (Revolver) (7)
5,863
5,791
5,628
Recteq, LLC (Revolver) (7)
11.13
108
Riverpoint Medical, LLC (Revolver)
10.42
45
Riverpoint Medical, LLC (Revolver) (7)
318
11,699
11,588
11,582
Rural Sourcing Holdings, Inc. (Revolver) (7)
Sales Benchmark Index LLC (Revolver) (7)
Sargent & Greenleaf Inc. (Revolver)
12.92
158
157
Sargent & Greenleaf Inc. (Revolver) (7)
453
13.15
3M SOFR+775
4,647
4,611
4,496
Schlesinger Global, Inc. (Revolver)
12.52
Schlesinger Global, Inc. (Revolver)(7)
4,752
4,691
4,609
Seaway Buyer, LLC (Revolver)
729
708
Seaway Buyer, LLC (Revolver)(7)
2,397
(72
11.40
17,775
17,636
17,331
14.04
3M SOFR+865
29,681
29,190
29,236
Sigma Defense Systems, LLC (Revolver)
2,052
Sigma Defense Systems, LLC (Revolver) (7)
893
Signature Systems Holding Company (Revolver) (7)
Solutionreach, Inc. (Revolver) (7)
1,665
1M SOFR+565
97
Spendmend Holdings LLC - Funded Revolver
548
Spendmend Holdings LLC - (Revolver) (7)
System Planning and Analysis, Inc. - (Revolver) (7) (f/k/a Management Consulting & Research, LLC)
(32
The Aegis Technologies Group, LLC
11.66
1,104
12.79
2,271
2,239
2,262
The Bluebird Group LLC (Revolver) (7)
11.93
1M SOFR+635
The Vertex Companies, LLC (Revolver)
11.67
246
The Vertex Companies, LLC (Revolver) (7)
TWS Acquisition Corporation (Revolver) (7)
Tyto Athene, LLC (Revolver) (7)
364
7,222
(150
02/27/2026
10.57
3,805
3,762
3,767
Wildcat Buyerco, Inc. (Revolver)
10.17
88
87
Wildcat Buyerco, Inc. (Revolver) (7)
486
12.67
1M SOFR+735
2,583
2,504
472,975
468,007
U.S. Government Securities—19.9% of Net Assets
10/19/2023
5.31
100,000
99,768
99,751
Total U.S. Government Securities
Second Lien Secured Debt—16.0% of Net Assets
12.03
2,717
2,837
14.66
16,600
13,821
14.54
17,559
14.42
1M SOFR+910
7,440
6,675
13.67
32,232
31,525
149
84,376
80,396
Subordinated Debt/Corporate Notes—10.7% of Net Assets
15.15
21,568
21,597
33,329
32,300
54,897
53,897
Preferred Equity/Partnership Interests—2.6% of Net Assets (6)
1,066
789
172
929
794
Mars Intermediate Holdings II, Inc
39
320
9,701
13,280
Common Equity/Partnership Interests/Warrants—23.0% of Net Assets (6)
2,340
04/10/2024
1,074
127
9,032
293
1,513
740
333
5,451
173
1,542
1,854
885
1,648
2,060
2,951
800
4,076
389
Gauge TVC Coinvest, LLC
810,645
2,390
401
1,479
751
1,778
1,118,318
1,002
381,682
(40
1,642
2,327
663
1,624
1,775
1,630
1,892
382
775
22
1,006
902
4,452
Magnolia Topco LP - Class A Common Equity (9)
169,230
Magnolia Topco LP - Class B Common Equity (9)
929,200
Mars Intermidiate Holdings II, Inc.
232
3,326
4,430
1,259
NORA Parent Holdings, LLC
913
2,133
446,250
446
390
303,750
(38
PennantPark-TSO Senior Loan Fund II, LP (11)
12,485
33
747
3,461
1,052
291
2,372
2,059
604
3,294
405
536,514
951
358,931
19
362
555
WCP Ivyrehab (QP) CF Feeder, LP (9)
4,319
WCP Ivyrehab QP CF Feeder, LP - Unfunded (7)
231
820
95,037
115,477
816,754
Investments in Non-Controlled, Affiliated Portfolio Companies—10.9% of Net Assets (1), (2)
First Lien Secured Debt—2.1% of Net Assets
03/31/2027
1M SOFR+685
7,042
7,043
667
11.68
10,375
10,376
Preferred Equity/Partnership Interests—6.4% of Net Assets(6)
31,032
1,073
32,105
Common Equity/Partnership Interests/Warrants—2.4% of Net Assets (6)
2,852
19,687
2,065
8,759
3,531
11,703
12,290
55,787
Investments in Controlled, Affiliated Portfolio Companies—43.0% of Net Assets (1), (2)
First Lien Secured Debt—9.8% of Net Assets
3M SONIA+700
40,371
55,388
49,275
14,896
12,383
Subordinated Debt—20.4% of Net Assets
13.37
Common Equity—12.8% of Net Assets (6)
131
2,385
62,083
75,290
64,468
245,386
Total Investments—219.4% of Net Assets
1,117,927
Cash and Cash Equivalents—7.7% of Net Assets
24,683
14,101
14,092
38,784
Total Investments and Cash Equivalents—227.1% of Net Assets
1,156,711
1,140,422
Liabilities in Excess of Other Assets—(127.1%) of Net Assets
(638,235
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. ORGANIZATION
PennantPark Investment Corporation was organized as a Maryland corporation in January 2007. We are a closed-end, externally managed, non-diversified investment company that has elected to be treated as a BDC under the 1940 Act. Our investment objective is to generate both current income and capital appreciation while seeking to preserve capital through debt and equity investments. We invest primarily in U.S. middle-market companies in the form of first lien secured debt, second lien secured debt, subordinated debt and, to a lesser extent, equity investments. On April 24, 2007, we closed our initial public offering. On April 14, 2022, trading of the Company's common stock commenced on the New York Stock Exchange after the Company voluntarily withdrew the principal listing of its common stock from the Nasdaq Stock Market LLC effective at market close on April 13, 2022. Our common stock trades on the New York Stock Exchange under the symbol “PNNT.”
We have entered into an investment management agreement, (the "Investment Management Agreement"), with PennantPark Investment Advisors, LLC (the "Investment Adviser"), an external adviser that manages our day-to-day operations. We have also entered into an administration agreement, (the "Administration Agreement"), with PennantPark Investment Administrator LLC (the "Administrator"), which provides the administrative services necessary for us to operate. PennantPark Investment, through the Administrator, also provides similar services to SBIC II under a separate administration agreement.
On July 31, 2020, we and certain entities and managed accounts of the private credit investment manager of Pantheon Ventures (UK) LLP, or Pantheon, entered into a limited liability company agreement to co-manage PSLF, a newly-formed unconsolidated joint venture. In connection with this transaction, we contributed in-kind our formerly wholly-owned subsidiary, Funding I. As a result of this transaction, Funding I became a wholly-owned subsidiary of PSLF and was deconsolidated from our financial statements. PSLF invests primarily in middle-market and other corporate debt securities consistent with our strategy. PSLF was formed as a Delaware limited liability company. See Note 4.
In April 2021, we issued $150.0 million in aggregate principal amount of our 2026 Notes at a public offering price per note of 99.4%. Interest on the 2026 Notes is
paid semi-annually on May 1 and November 1 of each year, at a rate of 4.50% per year, commencing November 1, 2021. The 2026 Notes mature on May 1, 2026 and may
be redeemed in whole or in part at our option subject to a make-whole premium if redeemed more than three months prior to maturity. The 2026 Notes are general,
unsecured obligations and rank equal in right of payment with all of our existing and future senior unsecured indebtedness. The 2026 Notes are effectively subordinated to all of our existing and future secured indebtedness to the extent of the value of the assets securing such indebtedness and structurally subordinated to all existing and future indebtedness and other obligations of any of our subsidiaries, financing vehicles, or similar facilities. We do not intend to list the 2026 Notes on any securities exchange or automated dealer quotation system.
In October 2021, we issued $165.0 million in aggregate principal amount of our 2026 Notes-2 at a public offering price per note of 99.436%. Interest on the 2026
Notes is paid semi-annually on May 1 and November 1 of each year, at a rate of 4.00% per year, commencing May 1, 2022. The 2026 Notes-2 mature on November 1, 2026 and may be redeemed in whole or in part at our option subject to a make-whole premium if redeemed more than three months prior to maturity. The 2026 Notes-2 are
general, unsecured obligations and rank equal in right of payment with all of our existing and future senior unsecured indebtedness. The 2026 Notes-2 are effectively
subordinated to all of our existing and future secured indebtedness to the extent of the value of the assets securing such indebtedness and structurally subordinated to all existing and future indebtedness and other obligations of any of our subsidiaries, financing vehicles, or similar facilities. We do not intend to list the 2026 Notes-2 on any securities exchange or automated dealer quotation system.
We have formed the Taxable Subsidiary, which is subject to tax as a corporation. The Taxable Subsidiary allows us to hold equity securities of certain portfolio companies treated as pass-through entities for federal income tax purposes while facilitating our ability to qualify as a RIC under the Code.
In January 2022, we formed PennantPark-TSO Senior Loan Fund II LP, ("PTSF II"), an unconsolidated limited partnership, organized as a Delaware limited partnership. We sold $82.3 million in investments to a wholly-owned subsidiary of PTSF II in exchange for cash in the amount of $75.7 million and an $6.6 million equity interest in PTSF II representing 23.1% of the total outstanding Class A Units of PTSF II. We recognized $0.2 million of realized gain upon the formation of PTSF II. As of December 31, 2023, our capital commitment of $15.0 million is 100% funded and we hold 23.1% of the total outstanding Class A Units of PTSF II and a 4.99% voting interest in the general partner which manages PTSF II.
We are operated by a person who has claimed an exclusion from the definition of the term “commodity pool operator” under the Commodity Exchange Act of 1936, as amended, or the Commodity Exchange Act, and therefore, is not subject to registration or regulation as a commodity pool operator under the Commodity Exchange Act.
2. SIGNIFICANT ACCOUNTING POLICIES
The preparation of our consolidated financial statements, in conformity with U.S. generally accepted accounting principles, or GAAP requires management to make estimates and assumptions that affect the reported amount of our assets and liabilities at the date of the consolidated financial statements and the reported amounts of income and expenses during the reported periods. In the opinion of management, all adjustments, which are of a normal recurring nature, considered necessary for the fair presentation of financial statements have been included. Changes in the economic and regulatory environment, financial markets, the credit worthiness of our portfolio companies and any other parameters used in determining these estimates and assumptions could cause actual results to differ from such estimates and assumptions. We may reclassify certain prior period amounts to conform to the current period presentation. We have eliminated all intercompany balances and transactions in consolidation. References to the Financial Accounting Standards Board’s, or FASB’s, Accounting Standards Codification, as amended, or ASC, serve as a single source of accounting literature. Subsequent events are evaluated and disclosed as appropriate for events occurring through the date the consolidated financial statements are issued.
Our consolidated financial statements are prepared in accordance with GAAP, consistent with ASC Topic 946, Financial Services – Investment Companies, and pursuant to the requirements for reporting on Form 10-K/Q and Articles 6, 10 and 12 of Regulation S-X, as appropriate. In accordance with Article 6-09 of Regulation S-X, we have provided a consolidated statement of changes in net assets in lieu of a consolidated statement of changes in stockholders’ equity.
Restatement of Previously Issued Financial Statement
As noted in the Annual Report on Form 10-K for the year ended September 30, 2023, during the preparation of the financial statements as of and for the year ended September 30, 2023, Management identified an error in the classification and presentation of cash pertaining to the Company’s affiliates – PSLF and PTSF II in the September 30, 2022 financial statements. The Company recorded cash activity and due to affiliates pertaining to their investments as a reduction of the cash account instead of presenting the related cash and cash equivalents as an asset and a due to affiliates as a liability. This misclassification also existed at December 31, 2022, and the impact of the error correction is reflected on the consolidated statement of cash flows for the three months ended December 31, 2022 as an increase to cash and cash equivalents, beginning of period totaling $2.1 million, an increase to cash and cash equivalents, end of period totaling $2.2 million, and increase in due to affiliates of $0.04 million.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued)
There was no impact from the error correction to total net assets and net asset value per share as reported on the consolidated statement of assets and liabilities as of December 31, 2022. In addition, there was no impact from the error correction on net investment income or net increase (decrease) in net assets resulting from operations in total or on a per common share basis as reported on the consolidated statements of operations for the three months ended December 31, 2022. The corrections related to the prior year comparative cash flow statement amounts were reported in the quarter ended December 31, 2023.
Our significant accounting policies consistently applied are as follows:
We expect that there may not be readily available market values for many of the investments which are or will be in our portfolio, and we value such investments at fair value as determined in good faith by or under the direction of our board of directors using a documented valuation policy and a consistently applied valuation process, as described in this Report. With respect to investments for which there is no readily available market value, the factors that our board of directors may take into account in pricing our investments at fair value include, as relevant, the nature and realizable value of any collateral, the portfolio company’s ability to make payments and its earnings and discounted cash flow, the markets in which the portfolio company does business, comparison to publicly traded securities and other relevant factors. When an external event such as a purchase transaction, public offering or subsequent equity sale occurs, we consider the pricing indicated by the external event to corroborate or revise our valuation. Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the price used in an actual transaction may be different than our valuation and the difference may be material. See Note 5.
Our portfolio generally consists of illiquid securities, including debt and equity investments. With respect to investments for which market quotations are not readily available, or for which market quotations are deemed not reflective of the fair value, our board of directors undertakes a multi-step valuation process each quarter, as described below:
Our board of directors generally uses market quotations to assess the value of our investments for which market quotations are readily available. We obtain these market values from independent pricing services or at the bid prices obtained from at least two brokers or dealers, if available, or otherwise from a principal market maker or a primary market dealer. The Investment Adviser assesses the source and reliability of bids from brokers or dealers. If our board of directors has a bona fide reason to believe any such market quote does not reflect the fair value of an investment, it may independently value such investments by using the valuation procedure that it uses with respect to assets for which market quotations are not readily available.
Security transactions are recorded on a trade-date basis. We measure realized gains or losses by the difference between the net proceeds from the repayment or sale and the amortized cost basis of the investment, using the specific identification method, without regard to unrealized appreciation or depreciation previously recognized, but considering prepayment penalties. Net change in unrealized appreciation or depreciation reflects, as applicable, the change in the fair values of our portfolio investments and the Credit Facility during the reporting period, including the reversal of previously recorded unrealized appreciation or depreciation, when gains or losses are realized.
We record interest income on an accrual basis to the extent that we expect to collect such amounts. For loans and debt investments with contractual PIK interest, which represents interest accrued and added to the loan balance that generally becomes due at maturity, we will generally not accrue PIK interest when the portfolio company valuation indicates that such PIK interest is not collectable. We do not accrue as a receivable interest on loans and debt investments if we have reason to doubt our ability to collect such interest. Loan origination fees, original issue discount, or OID, market discount or premium and deferred financing costs on liabilities, which we do not fair value, are capitalized and then accreted or amortized using the effective interest method as interest income or, in the case of deferred financing costs, as interest expense. We record prepayment penalties earned on loans and debt investments as income. Dividend income, if any, is recognized on an accrual basis on the ex-dividend date to the extent that we expect to collect such amounts. From time to time, the Company receives certain fees from portfolio companies, which may or may not be recurring in nature. Such fees include loan prepayment penalties, structuring fees, amendment fees, and agency fees and are recorded as other investment income when earned.
Loans are placed on non-accrual status when principal or interest payments are past due 30 days or more and/or if there is reasonable doubt that principal or interest will be collected. Accrued interest is generally reversed when a loan is placed on non-accrual status. Interest payments received on non-accrual loans may be recognized as income or applied to principal depending upon management’s judgment. Non-accrual loans are restored to accrual status when past due principal and interest is paid and, in management’s judgment, are likely to remain current. As of December 31, 2023, we had one portfolio companies on non-accrual, representing 1.0% and zero percent of overall portfolio on a cost and fair value basis, respectively. As of September 30, 2023, we had one portfolio company on non-accrual, representing 1.2% and zero percent of our overall portfolio on a cost and fair value basis, respectively.
We have complied with the requirements of Subchapter M of the Code and have qualified to be treated as a RIC for federal income tax purposes. In this regard, we account for income taxes using the asset and liability method prescribed by ASC Topic 740, Income Taxes, or ASC 740. Under this method, income taxes are provided for amounts currently payable and for amounts deferred as tax assets and liabilities based on differences between the financial statement carrying amounts and the tax basis of
existing assets and liabilities. Based upon our qualification and election to be treated as a RIC for U.S. federal income tax purposes, we typically do not incur material federal income taxes. However, we may choose to retain a portion of our calendar year income, which may result in the imposition of an excise tax. Additionally, certain of the Company’s consolidated subsidiaries are subject to federal, state and local income taxes. For the three months ended December 31, 2023 and 2022, we recorded a provision for taxes on net investment income of $0.4 million and $2.0 million respectively, which pertains to U.S. federal excise tax.
We recognize the effect of a tax position in our Consolidated Financial Statements in accordance with ASC 740 when it is more likely than not, based on the technical merits, that the position will be sustained upon examination by the applicable tax authority. Tax positions not considered to satisfy the “more-likely-than-not” threshold would be recorded as a tax expense or benefit. Penalties or interest, if applicable, that may be assessed relating to income taxes would be classified as other operating expenses in the financial statements. There were no tax accruals relating to uncertain tax positions and no amounts accrued for any related interest or penalties with respect to the periods presented herein. The Company’s determinations regarding ASC 740 may be subject to review and adjustment at a later date based upon factors including, but not limited to, an on-going analysis of tax laws, regulations and interpretations thereof. Although the Company files both federal and state income tax returns, the Company’s major tax jurisdiction is federal.
The Taxable Subsidiary (PNNT Investment Holdings, LLC, a wholly-owned subsidiary of the Company) is subject to U.S. federal, state and local corporate income taxes. The income tax expense and related tax liabilities of the Taxable Subsidiary are reflected in the Company’s consolidated financial statements.
For the three months ended December 31, 2023 and 2022, the Company recognized a provision for taxes of zero, respectively, on net realized gain (loss) on investments by the Taxable Subsidiary. For the three months ended December 31, 2023 and 2022, the Company recognized a provision for taxes of $(0.2) million and $(0.9) million, respectively, on net unrealized gain (loss) on investments by the Taxable Subsidiary. The provision for taxes on net realized and unrealized gains on investments is the result of netting (i) the expected tax liability on the gains from the sales of investments which is likely to be realized and unrealized during fiscal year ending September 30, 2024 and (ii) the expected tax benefit resulting from the use of loss carryforwards to offset such gains. As of December 31, 2023 and September 30, 2023, the Company recognized a provision for taxes of $0.2 million and $3.4 million, respectively, on net realized and unrealized gains on investments by the Taxable Subsidiary.
During the three months ended December 31, 2023 and 2022, the Company paid zero, respectively, in federal taxes on realized gains on the sale of investments held by the Taxable Subsidiary. The state and local tax liability is zero as of December 31, 2023 is included under accrued other expenses in the consolidated statement of assets and liabilities.
We operate in a manner to maintain our election to be subject to tax as a RIC and to eliminate corporate-level U.S. federal income tax (other than the 4% excise tax) by distributing sufficient investment company taxable income and capital gain net income (if any). As a result, we will have an effective tax rate equal to 0% before the excise tax and income taxes incurred by the Taxable Subsidiary. As such, a reconciliation of the differences between our reported income tax expense and its tax expense at the federal statutory rate of 21% is not meaningful.
Because federal income tax regulations differ from GAAP, distributions characterized in accordance with tax regulations may differ from net investment income and net realized gains recognized for financial reporting purposes. Differences between tax regulations and GAAP may be permanent or temporary. Permanent differences are reclassified among capital accounts in the Consolidated Financial Statements to reflect their tax character. Temporary differences arise when certain items of income, expense, gain or loss are recognized at some time in the future.
Distributions to common stockholders are recorded on the ex-dividend date. The amount to be paid, if any, as a distribution is determined by our board of directors each quarter and is generally based upon the earnings estimated by management. Net realized capital gains, if any, are distributed at least annually. The tax attributes for distributions will generally include ordinary income and capital gains but may also include certain tax-qualified dividends and/or a return of capital.
Capital transactions, in connection with our dividend reinvestment plan or through offerings of our common stock, are recorded when issued and offering costs are charged as a reduction of capital upon issuance of our common stock.
Our books and records are maintained in U.S. dollars. Any foreign currency amounts are translated into U.S. dollars on the following basis:
Although net assets and fair values are presented based on the applicable foreign exchange rates described above, we do not isolate that portion of the results of operations due to changes in foreign exchange rates on investments, other assets and debt from the fluctuations arising from changes in fair values of investments and liabilities held. Such fluctuations are included with the net realized and unrealized gain or loss from investments and liabilities.
Foreign security and currency translations may involve certain considerations and risks not typically associated with investing in U.S. companies and U.S. government securities. These risks include, but are not limited to, currency fluctuations and revaluations and future adverse political, social and economic developments, which could cause investments in foreign markets to be less liquid and prices to be more volatile than those of comparable U.S. companies or U.S. government securities.
As permitted under Regulation S-X and as explained by ASC paragraph 946-810-45-3, PennantPark Investment will generally not consolidate its investment in a company other than an investment company subsidiary or a controlled operating company whose business consists of providing services to us. Accordingly, we have consolidated the results of our SBIC Funds and our Taxable Subsidiary in our Consolidated Financial Statements. We do not consolidate our non-controlling interests in PSLF or PTSF II. See further description of our investment in PSLF in Note 4.
23
Asset transfers that do not meet ASC Topic 860, Transfers and Servicing, requirements for sale accounting treatment are reflected in the Consolidated Statements of Assets and Liabilities and the Consolidated Schedules of Investments as investments.
(h) Recent Accounting Pronouncements
In March 2020, the FASB issued Accounting Standards Update, or ASU, No. 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” The guidance provides optional expedients and exceptions for applying GAAP to contract modifications, hedging relationships and other transactions, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued because of the reference rate reform. ASU 2020-04 is effective for all entities as of March 12, 2020 through June 30, 2023. The FASB approved an (optional) two year extension to December 31, 2024, for transitioning away from LIBOR. The Company utilized the optional expedients and exceptions provided by ASU 2020-04 during the three months ended December 31, 2023, the effect of which was not material to the consolidated financial statements and the notes thereto.
In March 2022, the FASB issued ASU 2022-02, “Financial Instruments - Credit Losses (Topic 326)”, which is intended to address issues identified during the post-implementation review of ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The amendment, among other things, eliminates the accounting guidance for troubled debt restructurings by creditors in Subtopic 310-40, “Receivables - Troubled Debt Restructurings by Creditors”, while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. The new guidance is effective for interim and annual periods beginning after December 15, 2022. The Company has adopted the new accounting standard implementing appropriate controls and procedures, the effect of which was not material to the consolidated financial statements and the notes thereto.
In June 2022, the FASB issued ASU 2022-03, Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions, or ASU 2022-03, which changed the fair value measurement disclosure requirements of ASC Topic 820, Fair Value Measurements and Disclosures, or ASC 820. The amendments clarify that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value. The amendments also clarify that an entity cannot, as a separate unit of account, recognize and measure a contractual sale restriction. The new guidance is effective for fiscal years beginning after December 15, 2023, including interim periods therein. Early application is permitted. The Company is currently evaluating the impact the adoption of this new accounting standard will have on its consolidated financial statements, but the impact of the adoption is not expected to be material.
3. AGREEMENTS AND RELATED PARTY TRANSACTIONS
(a) Investment Management Agreement
The Investment Management Agreement with the Investment Adviser was reapproved by our board of directors, including a majority of our directors who are not interested persons of us or the Investment Adviser, in February 2024. Under the Investment Management Agreement, the Investment Adviser, subject to the overall supervision of our board of directors, manages the day-to-day operations of and provides investment advisory services to, us. The Investment Adviser serves as the servicer to Funding I and has irrevocably directed that the management fee owed to it with respect to such services be paid to the Company so long as the Investment Adviser remains the servicer. SBIC II’s investment management agreement does not affect the management or incentive fees that we pay to the Investment Adviser on a consolidated basis. For providing these services, the Investment Adviser receives a fee from us, consisting of two components— a base management fee and an incentive fee or, collectively, Management Fees.
Base Management Fee
The base management fee is calculated at an annual rate of 1.50% of our “average adjusted gross assets,” which equals our gross assets (exclusive of U.S. Treasury Bills, temporary draws under any credit facility, cash and cash equivalents, repurchase agreements or other balance sheet transactions undertaken at the end of a fiscal quarter for purposes of preserving investment flexibility for the next quarter and unfunded commitments, if any) and is payable quarterly in arrears. In addition, on November 13, 2018, in connection with our board of directors’ approval of the application of the modified asset coverage requirements under the 1940 Act to the Company, our board of directors also approved an amendment to the Investment Management Agreement reducing the Investment Adviser’s annual base management fee from 1.50% to 1.00% on gross assets that exceed 200% of the Company’s total net assets as of the immediately preceding quarter-end. This amendment became effective on February 5, 2019 with the amendment and restatement of the Investment Management Agreement on April 12, 2019. The base management fee is calculated based on the average adjusted gross assets at the end of the two most recently completed calendar quarters, and appropriately adjusted for any share issuances or repurchases during the current calendar quarter. For example, if we sold shares on the 45th day of a quarter and did not use the proceeds from the sale to repay outstanding indebtedness, our gross assets for such quarter would give effect to the net proceeds of the issuance for only 45 days of the quarter during which the additional shares were outstanding. For the three months ended December 31, 2023 and 2022, the Investment Adviser earned base management fees of $4.0 million and $4.6 million, respectively, from us.
Incentive Fee
The incentive fee has two parts, as follows:
One part is calculated and payable quarterly in arrears based on our Pre-Incentive Fee Net Investment Income for the immediately preceding calendar quarter. For this purpose, Pre-Incentive Fee Net Investment Income means interest income, dividend income and any other income, including any other fees (other than fees for providing managerial assistance), such as amendment, commitment, origination, prepayment penalties, structuring, diligence and consulting fees or other fees received from portfolio companies, accrued during the calendar quarter, minus our operating expenses for the quarter (including the base management fee, any expenses payable under the Administration Agreement and any interest expense or amendment fees under any credit facility and distribution paid on any issued and outstanding preferred stock, but excluding the incentive fee). Pre-Incentive Fee Net Investment Income includes, in the case of investments with a deferred interest feature (such as OID, debt instruments with PIK interest and zero-coupon securities), accrued income not yet received in cash. Pre-Incentive Fee Net Investment Income does not include any realized capital gains, computed net of all realized capital losses or unrealized capital appreciation or depreciation. Pre-Incentive Fee Net Investment Income, expressed as a percentage of the value of our net assets at the end of the immediately preceding calendar quarter, is compared to the hurdle rate of 1.75% per quarter (7.00% annualized). We pay the Investment Adviser an incentive fee with respect to our Pre- Incentive Fee Net Investment Income in each calendar quarter as follows: (1) no incentive fee in any calendar quarter in which our Pre-Incentive Fee Net Investment Income does not exceed the hurdle rate of 1.75%, (2) 100% of our Pre-Incentive Fee Net Investment Income with respect to that portion of such Pre-Incentive Fee Net Investment Income, if any, that exceeds the hurdle rate but is less than 2.1212% in any calendar quarter (8.4848% annualized), and (3) 17.5% of the amount of our Pre-Incentive Fee Net Investment Income, if any, that exceeds 2.1212% in any calendar quarter. These calculations are pro-rated for any share issuances or repurchases during the relevant quarter, if applicable.
For the three months ended December 31, 2023 and 2022, the Investment Adviser earned $3.3 million and $2.2 million, respectively, in incentive fees on net investment income from us.
The second part of the incentive fee is determined and payable in arrears as of the end of each calendar year (or upon termination of the Investment Management Agreement, as of the termination date) and, effective January 1, 2018, equals 17.5% of our realized capital gains, (20.0% for periods prior to January 1, 2018), if any, on a cumulative basis from inception through the end of each calendar year, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis, less the aggregate amount of any previously paid capital gain incentive fees. For each of the three months ended December 31, 2023 and 2022, the Investment Adviser did not accrue an incentive fee on capital gains as calculated under the Investment Management Agreement (as described above).
Under GAAP, we are required to accrue a capital gains incentive fee based upon net realized capital gains and net unrealized capital appreciation and depreciation on investments held at the end of each period. In calculating the capital gains incentive fee accrual, we considered the cumulative aggregate unrealized capital appreciation in the calculation, as a capital gains incentive fee would be payable if such unrealized capital appreciation were realized, even though such unrealized capital appreciation is not permitted to be considered in calculating the fee actually payable under the Investment Management Agreement. This accrual is calculated using the aggregate cumulative realized capital gains and losses and cumulative unrealized capital appreciation or depreciation. If such amount is positive at the end of a period, then we record a capital gains incentive fee equal to 17.5% of such amount, less the aggregate amount of actual capital gains related to incentive fees paid in all prior years, if any. If such amount is negative, then there is no accrual for such year. There can be no assurance that such unrealized capital appreciation will be realized in the future. For each of the three months ended December 31, 2023, and 2022, the Investment Adviser did not accrue an incentive fee on capital gains as calculated under GAAP.
(b) Administration Agreement
The Administration Agreement with the Administrator was reapproved by our board of directors, including a majority of our directors who are not interested persons of us, in February 2023. Under the Administration Agreement, the Administrator provides administrative services and office facilities to us. For providing these services, facilities and personnel, we have agreed to reimburse the Administrator for our allocable portion of overhead and other expenses incurred by the Administrator in performing its obligations under the Administration Agreement, including rent and our allocable portion of the costs of compensation and related expenses of our Chief Financial Officer, Chief Compliance Officer, Corporate Counsel and their respective staffs. The amount billed by the Administrator may include credits related to its administrative agreement with PSLF. The Administrator also offers, on our behalf, significant managerial assistance to portfolio companies to which we are required to offer such assistance. Reimbursement for certain of these costs is included in administrative services expenses in the Consolidated Statements of Operations. For the three months ended December 31, 2023 and 2022, we recorded $0.1 million and $0.1 million, respectively, for the services described above.
On July 1, 2022, the Administration Agreement with the Administrator was amended to clarify that the Administrator may be reimbursed by the Company for certain (i) tax and general legal advice and/or services provided to the Company by in-house professionals of the Administrator related to ongoing operations of the Company; and (ii) transactional legal advice and/or services provided to the Company or portfolio companies by in-house professionals of the Administrator or its affiliates on matters related to potential or actual investments and transactions, including tax structuring and/or due diligence.
(c) Other Related Party Transactions
There were no transactions subject to Rule 17a-7 under the 1940 Act during each of the three months ended December 31, 2023 and 2022.
For the three months ended December 31, 2023 and 2022 we sold $50.8 million and zero in investments to PSLF at fair value, respectively, and recognized zero of net realized gains, respectively.
For the three months ended December 31, 2023 and 2022, we sold zero in investments to PTSF II at fair value, respectively, and recognized zero of net realized gains, respectively.
As of December 31, 2023 and September 30, 2023, PNNT had a payable to PSLF and PTSF II of $1.6 million and $4.1 million, respectively, presented as a due to affiliates on the consolidated statement of assets and liabilities. These amounts are related to cash owed to PSLF and PTSF II from PNNT in connection with trades between the funds.
As of December 31, 2023 and September 30, 2023, PNNT had a receivable from Administrator of $0.2 million and zero, respectively, presented as a due from affiliates on the consolidated statement of assets and liabilities. These amounts are related to agency fees collected on behalf of the Company.
4. INVESTMENTS
Purchases of investments, including PIK interest, for the three months ended December 31, 2023 and 2022 totaled $282.0 million and $86.2 million, respectively. Sales and repayments of investments for the three months ended December 31, 2023 and 2022 totaled $170.8 million and $30.6 million, respectively.
Investments and cash and cash equivalents consisted of the following:
Investment Classification ($ in thousands)
Fair Value
First lien
687,747
677,702
538,737
527,657
U.S. Government Securities
Second lien
96,815
96,759
Subordinated debt / corporate notes
Subordinated notes in PSLF
Equity
181,682
190,899
166,798
175,538
Equity in PSLF
Total investments
Cash and cash equivalents
Total investments and cash and cash equivalents
The table below describes investments by industry classification and enumerates the percentage, by fair value, of the total portfolio assets (excluding cash and cash equivalents) in such industries as of:
Industry Classification
December 31, 2023 (1)
September 30, 2023 (1)
Other
Total
100
In July 2020, we and Pantheon formed PSLF, an unconsolidated joint venture. PSLF invests primarily in middle-market and other corporate debt securities consistent with its strategy. PSLF was formed as a Delaware limited liability company. As of December 31, 2023 and September 30, 2023, PSLF had total assets of $920.7 million and $872.8 million, respectively and its investment portfolio consisted of debt investments in 93 and 90 portfolio companies, respectively. As of the same dates, we and Pantheon had remaining commitments to fund first lien secured debt of $22.4 million and $22.4 million, respectively, and equity interest of $14.5 million and $14.5 million, respectively, in PSLF. As of December 31, 2023, at fair value, the largest investment in a single portfolio company in PSLF was $21.5 million and the five largest investments totaled $99.7 million. As of September 30, 2023, at fair value, the largest investment in a single portfolio company in PSLF was $19.7 million and the five largest investments totaled $97.5 million. PSLF invests in portfolio companies in the same industries in which we may directly invest.
We provide capital to PSLF in the form of subordinated notes and equity interests. As of December 31, 2023 and September 30, 2023, we and Pantheon owned 60.5% and 39.5%, respectively, of each of the outstanding subordinated notes and equity interests of PSLF. As of December 31, 2023 and September 30, 2023, our investment in PSLF consisted of subordinated notes of $102.3 million and $102.3 million, respectively, and equity interests of $58.6 million and $58.6 million, respectively.
We and Pantheon each appointed two members to PSLF’s four-person Member Designees’ Committee, or the Member Designees’ Committee. All material decisions with respect to PSLF, including those involving its investment portfolio, require unanimous approval of a quorum of the Member Designees’ Committee. Quorum is defined as (i) the presence of two members of the Member Designees’ Committee; provided that at least one individual is present that was elected, designated or appointed by each of us and Pantheon; (ii) the presence of three members of the Member Designees’ Committee, provided that the individual that was elected, designated or appointed by each of us or Pantheon, as the case may be, with only one individual present shall be entitled to cast two votes on each matter; and (iii) the presence of four members of the Member Designees’ Committee shall constitute a quorum, provided that two individuals are present that were elected, designated or appointed by each of us and Pantheon.
Additionally, PSLF, through its wholly-owned subsidiary, or PSLF Subsidiary, has entered into a $325.0 million (increased from $225.0 million on September 2, 2022) senior secured revolving credit facility, or the PSLF Credit Facility, with BNP Paribas, which bears interest at SOFR (or an alternative risk-free interest rate index) plus 260 basis points during the investment period and is subject to leverage and borrowing base restrictions.
In March 2022, PSLF completed a $304.0 million debt securitization in the form of a collateralized loan obligation, or the “2034 Asset-Backed Debt”. The 2034 Asset-Backed Debt is secured by a diversified portfolio of PennantPark CLO IV, LLC., a wholly-owned and consolidated subsidiary of PSLF, consisting primarily of middle market loans and participation interests in middle market loans. The 2034 Asset-Backed Debt is scheduled to mature in April 2034. On the closing date of the transaction, in consideration of PSLF’s transfer to PennantPark CLO IV, LLC. of the initial closing date loan portfolio, which included loans distributed to PSLF by certain of its wholly owned subsidiaries and us, PennantPark CLO IV, LLC. transferred to PSLF 100% of the Preferred Shares of PennantPark CLO IV, LLC. and 100% of the Subordinated Notes issued by PennantPark CLO IV, LLC.
On July 26, 2023, CLO VII , LLC ("CLO VII") completed a $300 million debt securitization in the form of a collateralized loan obligation (the "2035 Debt Securitization" or "2035 Asset-Backed Debt"). The 2035 Asset-Backed Debt is secured by a diversified portfolio consisting primarily of middle market loans. The 2035 Debt Securitization was executed through a private placement of: (i) $151.0 million Class A-1a Notes maturing 2035, which bear interest at the three-month SOFR plus 2.7%, (ii) $20.0 million Class A-1b Loans 2035, which bear interest at 6.5%, (iii) $12.0 million Class A-2 Senior Secured Floating Rate Notes due 2035, which bear interest at the three-month SOFR plus 3.2%, (iv) $21.0 million Class B Senior Secured Floating Rate Notes due 2035, which bear interest at the three-month SOFR plus 4.1%, (v) $24.0 million Class C Secured Deferrable Floating Rate Notes due 2035, which bear interest at the three-month SOFR plus 4.7%, (vi) $18.0 million Class D Secured Deferrable Floating Rate Notes due 2035, which bear interest at the three-month SOFR plus 7.0%. As of December 31, 2023 there was $246.0 million of external 2035 Asset-Backed Debt.
Below is a summary of PSLF’s portfolio at fair value:
($ in thousands)
December 31, 2023 (Unaudited)
857,885
804,187
Weighted average cost yield on income producing investments
12.1
Number of portfolio companies in PSLF
93
Largest portfolio company investment at fair value
21,491
19,737
Total of five largest portfolio company investments at fair value
99,724
97,526
Below is a listing of PSLF’s individual investments as of December 31, 2023 ($ in thousands)
Maturity
Basis PointSpread AboveIndex (1)
Par
Fair Value (2)
First Lien Secured Debt - 826.4%
12/22/28
11.96
SOFR+660
14,888
14,636
14,813
ACP Falcon Buyer, Inc.
08/01/29
11.85
SOFR+650
15,151
15,297
Ad.net Acquisition, LLC
05/07/26
SOFR+600
4,875
4,851
Alpine Acquisition Corp II
11/30/26
Containers, Packaging and Glass
11.45
SOFR+610
14,800
14,509
14,208
Amsive Holding Corporation (f/k/a Vision Purchaser Corporation)
06/10/25
SOFR+640
13,922
13,846
13,713
05/23/24
SOFR+565
14,151
14,125
14,009
07/21/27
SOFR+575
10,854
10,821
10,746
12/29/26
11.42
SOFR+615
11,876
11,758
11,639
Arcfield Acquisition Corp.
08/03/29
SOFR+635
21,708
21,389
07/01/29
14,572
14,220
Bioderm, Inc.
01/31/28
8,955
8,851
8,865
09/17/26
19,748
19,484
19,501
10/31/25
SOFR+665
11,067
10,988
10,845
12/04/25
9,619
09/26/29
SOFR+535
891
835
838
06/14/28
17,238
16,978
08/20/26
11.57
SOFR+619
2,913
2,895
2,855
Connatix Buyer, Inc.
07/13/27
SOFR+576
8,785
8,768
8,390
Crane 1 Services, Inc.
08/16/27
SOFR+501
2,568
2,545
2,556
08/31/27
10,671
10,628
DRI Holding Inc.
12/21/28
SOFR+525
4,371
3,962
3,977
11/03/25
14,157
14,115
14,002
Duraco Specialty Tapes LLC
06/30/24
Manufacturing / Basic Industries
8,613
8,561
8,475
01/10/29
SOFR+625
6,135
ETE Intermediate II, LLC
05/29/29
11.89
12,342
12,122
03/15/27
9,725
9,616
9,579
Fairbanks Morse Defense
06/17/28
10.54
SOFR+551
3,514
3,429
3,511
02/23/28
SOFR+700
4,340
4,261
4,275
Global Holdings InterCo LLC
03/16/26
Banking, Finance, Insurance & Real Estate
7,008
6,990
6,658
08/10/27
10.95
1,949
1,921
1,930
12/31/26
SOFR+550
6,423
6,166
11/23/28
19,666
19,348
19,470
12/17/26
15,064
14,910
12/10/24
11.83
14,250
14,036
IG Investments Holdings, LLC
09/22/28
4,417
4,346
4,350
Imagine Acquisitionco, LLC
11/15/27
10.74
5,551
5,471
5,468
12/31/24
SOFR+715
19,420
12/28/28
12.20
SOFR+685
11,025
10,847
11/01/26
SOFR+585
5,785
08/27/26
19,651
19,596
19,455
06/30/25
12.97
SOFR+761
13,201
12,970
12,937
01/31/24
SOFR+1010
10,952
10,951
11/10/27
16,877
16,611
16,793
11.80
4,626
4,545
02/18/27
19,673
19,525
19,575
02/03/26
12,187
12,039
12,126
01/31/30
6,302
6,192
6,176
MAG DS Corp.
04/01/27
7,581
7,158
7,239
Magenta Buyer, LLC
07/31/28
Software
10.64
SOFR+526
3,775
3,550
2,652
05/14/26
10,857
10,788
MBS Holdings, Inc.
04/16/27
8,395
8,307
8,282
12/10/27
2,945
2,900
2,857
10/01/27
10.50
SOFR+515
5,958
5,850
5,952
NBH Group LLC
08/19/26
11.19
7,410
7,353
6,966
Neptune Flood Incorporated
05/09/29
7,845
7,740
08/31/29
14,963
14,681
14,738
One Stop Mailing, LLC
05/07/27
SOFR+636
8,447
8,296
Owl Acquisition, LLC
02/04/28
10.75
3,893
3,798
3,834
Ox Two, LLC (New Issue)
05/18/26
SOFR+751
4,333
Pequod Merger Sub, Inc.
12/02/26
11,445
11,253
11,216
PL Acquisitionco, LLC
11/09/27
SOFR+710
7,892
7,080
PlayPower, Inc.
05/08/26
2,544
2,479
2,467
11/19/26
3,305
3,239
Radius Aerospace, Inc.
03/31/25
12,669
12,614
12,542
Rancho Health MSO, Inc.
12/18/25
5,589
04/28/28
4,987
4,928
4,838
Recteq, LLC
01/29/26
9,638
9,385
Research Now Group, LLC and Dynata, LLC
12/20/24
14,351
14,305
12,701
Riverpoint Medical, LLC
06/20/25
SOFR+500
3,168
3,156
3,142
03/09/25
10,867
10,816
10,758
Rural Sourcing Holdings, Inc. (HPA SPQ Merger Sub, Inc.)
06/16/29
Professional Services
3,739
3,672
3,683
S101 Holdings Inc.
4,239
4,176
Sales Benchmark Index LLC
01/03/25
11.55
SOFR+620
6,676
6,641
6,643
Sargent & Greenleaf Inc.
12.96
SOFR+750
4,830
4,806
06/13/29
14,603
14,294
12/18/27
6,434
6,395
6,370
Signature Systems Holding Company
05/03/24
9,401
9,386
Skopima Consilio Parent, LLC
05/17/28
9.97
SOFR+450
1,300
1,275
1,290
Solutionreach, Inc.
07/17/25
9,239
9,206
9,211
SpendMend Holdings, LLC
03/01/28
11.01
9,583
9,340
9,477
STV Group Incorporated
12/11/26
12,099
12,047
11,978
Summit Behavioral Healthcare, LLC
11/24/28
10.40
SOFR+475
3,387
3,554
System Planning and Analysis, Inc. (f/k/a Management Consulting & Research, LLC)
11.33
15,925
15,669
15,829
Team Services Group, LLC
2,681
2,656
Teneo Holdings LLC
07/18/25
2,928
2,920
2,921
07/27/26
11,924
11,846
11.49
7,673
7,583
7,658
TPC Canada Parent, Inc. and TPC US Parent, LLC
11/24/25
5,465
5,373
TWS Acquisition Corporation
06/06/25
11.78
6,208
Tyto Athene, LLC
04/03/28
11,393
11,290
10,527
06/15/26
3,850
3,788
3,770
02/27/27
11.12
19,404
19,230
19,113
03/01/24
12.70
SOFR+725
19,682
19,636
19,239
863,478
Total Investments - 826.4%
Cash and Cash Equivalents - 53.0%
54,996
Total Investments and Cash Equivalents - 879.4%
918,474
912,881
Liabilities in Excess of Other Assets — (779.4)%
(809,072
Members' Equity—100.0%
103,809
28
Below is a listing of PSLF’s individual investments as of September 30, 2023 ($ in thousands):
First Lien Secured Debt - 783.7%
14,925
14,668
14,850
4,888
4,863
11.26
14,837
14,528
14,244
SOFR+675
13,958
13,869
13,749
14,354
14,319
14,103
10,882
10,665
07/31/25
6,424
6,380
6,408
Apex Service Partners, LLC Term Loan B
3,316
3,299
3,308
Apex Service Partners, LLC - Term Loan C
10.76
7,531
7,512
11.51
11,394
11,271
Applied Technical Services, LLC - Unfunded Term Loan (3)
513
11,820
11,642
11,702
14,604
13,811
8,978
8,874
8,933
09/17/24
17,823
17,588
17,556
9,683
836
17,281
17,013
2,901
2,862
11.16
8,808
8,792
8,500
2,575
2,550
2,562
10,834
4,382
3,959
3,993
14,395
14,345
14,222
8,635
8,505
6,148
Electro Rent Corporation
01/17/24
10.93
3,712
3,665
3,632
12,404
12,171
12,193
9,750
9,637
9,555
1,518
1,470
1,506
12.43
4,373
4,291
4,307
7,027
10.99
1,954
1,925
1,935
6,262
19,717
19,388
15,140
14,974
15,110
14,171
4,428
4,355
4,362
10.72
5,565
5,482
19,410
11,053
6,364
19,701
19,639
19,504
12/20/23
SOFR+800
12,061
12,040
16,920
16,641
16,666
10/31/24
4,658
4,631
4,603
12.13
19,723
19,565
19,526
12,218
12,056
12,096
6,318
6,206
7,601
7,153
7,202
10.63
3,785
2,805
10,885
10,811
10,776
7,859
7,780
7,749
10.58
2,958
2,911
2,884
5,975
5,860
5,843
7,429
7,369
7,280
8,020
7,910
8,470
8,311
10.80
3,794
4,343
4,301
11,474
11,267
11,244
7,930
7,818
7,137
2,551
2,481
2,436
3,314
3,267
3,264
12,703
12,641
12,576
5,603
4/28/2028
5,000
4,937
4,800
1/29/2026
12.54
9,655
9,458
14,389
14,332
12,591
6/20/2025
3,176
3,162
3,131
3/10/2025
10,786
6/16/2029
3,749
3,678
3,692
1/3/2025
6,859
6,815
6,825
4,872
4,823
6/13/2029
SOFR+605
14,633
14,405
5/3/2024
11,201
11,173
5/17/2028
9.93
1,274
1,272
7/17/2025
12.37
9,202
3/1/2028
9,607
9,352
9,396
12/11/2026
12,045
11,857
11/24/2028
10.43
3,572
3,389
3,559
8/16/2027
15,966
15,695
15,790
2,688
2,584
2,627
7/18/2025
2,936
2,927
2,931
11,095
11,008
10,929
7/27/2026
7,855
7,872
7,823
8/31/2027
7,690
7,596
7,628
11/24/2025
10.68
5,479
5,378
6/6/2025
7,177
7,161
4/3/2028
11,285
10,391
6/15/2026
3,860
3,792
3,780
2/27/2026
11,386
11,323
11,272
3/1/2024
19,582
19,042
810,737
Total Investments - 783.7%
Cash and Cash Equivalents - 57.6%
59,096
Total Investments and Cash Equivalents - 841.3%
869,833
863,283
Liabilities in Excess of Other Assets — (741.3)%
(760,665
102,618
Below are the consolidated statements of assets and liabilities for PSLF ($ in thousands):
Investments at fair value (amortized cost—$863,478 and $810,737, respectively)
Cash and cash equivalents (cost—$54,996 and $59,096, respectively)
5,738
5,248
1,358
3,296
710
936
920,687
872,763
2034 Asset-backed debt, net (par—$246,000)
244,381
244,284
2035 Asset-backed debt, net (par—$246,000)
243,825
243,727
Notes payable to members
169,131
Credit facility payable
131,600
88,600
Interest payable on credit facility and asset backed debt
15,495
10,421
Distribution payable to members
7,750
7,250
Interest payable on notes to members
3,895
737
816,878
770,145
Commitments and contingencies
Members' equity
Total liabilities and members' equity
———————————
Below are the consolidated statements of operations for PSLF ($ in thousands):
27,107
18,845
140
27,247
18,942
Expenses: (1)
Interest expense on credit facility and asset-backed debt
12,640
7,815
Interest expense on notes to members
5,844
4,723
Administration fees
727
114
Total expenses
19,249
13,379
7,998
5,563
Realized and unrealized gain (loss) on investments:
Net realized gain (loss) on investments
(33
943
(3,922
Net realized and unrealized gain (loss) on investments
(3,955
Net increase (decrease) in members' equity resulting from operations
8,941
1,608
(1) No management or incentive fees are payable by PSLF.
5. FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value, as defined under ASC 820, is the price that we would receive upon selling an investment or pay to transfer a liability in an orderly transaction to a market participant in the principal or most advantageous market for the investment or liability. ASC 820 emphasizes that valuation techniques maximize the use of observable market inputs and minimize the use of unobservable inputs. Inputs refer broadly to the assumptions that market participants would use in pricing an asset or liability, including assumptions about risk. Inputs may be observable or unobservable. Observable inputs reflect the assumptions market participants would use in pricing an asset or liability based on market data obtained from sources independent of us. Unobservable inputs reflect the assumptions market participants would use in pricing an asset or liability based on the best information available to us on the reporting period date.
ASC 820 classifies the inputs used to measure these fair values into the following hierarchies:
Level 1:
Inputs that are quoted prices (unadjusted) in active markets for identical assets or liabilities, accessible by us at the measurement date.
Level 2:
Inputs that are quoted prices for similar assets or liabilities in active markets, or that are quoted prices for identical or similar assets or liabilities in markets that are not active and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term, if applicable, of the financial instrument.
Level 3:
Inputs that are unobservable for an asset or liability because they are based on our own assumptions about how market participants would price the asset or liability.
A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Generally, most of our investments and our Truist Credit Facility are classified as Level 3. Our 2026 Notes and 2026 Notes-2 are classified as Level 2, as they are financial instruments with readily observable market inputs. Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the price used in an actual transaction may be different than our valuation and those differences may be material.
The inputs into the determination of fair value may require significant management judgment or estimation. Even if observable market data is available, such information may be the result of consensus pricing information, disorderly transactions or broker quotes which include a disclaimer that the broker would not be held to such a price in an actual transaction. The non-binding nature of consensus pricing and/or quotes accompanied by disclaimer would result in classification as Level 3 information, assuming no additional corroborating evidence were available. Corroborating evidence that would result in classifying these non-binding broker/dealer bids as a Level 2 asset includes observable orderly market-based transactions for the same or similar assets or other relevant observable market-based inputs that may be used in pricing an asset.
Our investments are generally structured as debt and equity investments in the form of first lien secured debt, second lien secured debt, subordinated debt and equity investments. The transaction price, excluding transaction costs, is typically the best estimate of fair value at inception. Ongoing reviews by our Investment Adviser and independent valuation firms are based on an assessment of each underlying investment, incorporating valuations that consider the evaluation of financing and sale transactions with third parties, expected cash flows and market-based information including comparable transactions, performance multiples and yields, among other factors. These non-public investments valued using unobservable inputs are included in Level 3 of the fair value hierarchy.
A review of fair value hierarchy classifications is conducted on a quarterly basis. Changes in our ability to observe valuation inputs may result in a reclassification for certain financial assets or liabilities.
In addition to using the above inputs to value cash equivalents, investments, our 2026 Notes, our 2026 Notes -2 and our Truist Credit Facility, we employ the valuation policy approved by our board of directors that is consistent with ASC 820. Consistent with our valuation policy, we evaluate the source of inputs, including any markets in which our investments are trading, in determining fair value. See Note 2.
As outlined in the table below, some of our Level 3 investments using a market approach valuation technique are valued using the average of the bids from brokers or dealers. The bids include a disclaimer, may not have corroborating evidence, may be the result of a disorderly transaction and may be the result of consensus pricing. The Investment Adviser assesses the source and reliability of bids from brokers or dealers. If the board of directors has a bona fide reason to believe any such bids do not reflect the fair value of an investment, it may independently value such investment by using the valuation procedure that it uses with respect to assets for which market quotations are not readily available. In accordance with ASC 820, we do not categorize any investments for which fair value is measured using the net asset value per share within the fair value hierarchy.
The remainder of our investment portfolio and our long-term Truist Credit Facility are valued using a market comparable or an enterprise market value technique. With respect to investments for which there is no readily available market value, the factors that our board of directors may take into account in pricing our investments at fair value include, as relevant, the nature and realizable value of any collateral, the portfolio company’s ability to make payments, its earnings and discounted cash flow, the markets in which the portfolio company does business, comparison to publicly traded securities and other relevant factors. When an external event such as a purchase transaction, public offering or subsequent equity sale occurs, the pricing indicated by the external event, excluding transaction costs, is used to corroborate the valuation. When using earnings multiples to value a portfolio company, the multiple used requires the use of judgment and estimates in determining how a market participant would price such an asset. These non-public investments using unobservable inputs are included in Level 3 of the fair value hierarchy. Generally, the sensitivity of unobservable inputs or combination of inputs such as industry comparable companies, market outlook, consistency, discount rates and reliability of earnings and prospects for growth, or lack thereof, affects the multiple used in pricing an investment. As a result, any change in any one of those factors may have a significant impact on the valuation of an investment. Generally, an increase in a market yield will result in a decrease in the valuation of a debt investment, while a decrease in a market yield will have the opposite effect. Generally, an increase in an earnings before interest, taxes, depreciation and amortization, or EBITDA, multiple will result in an increase in the valuation of an investment, while a decrease in an EBITDA multiple will have the opposite effect.
Our Level 3 valuation techniques, unobservable inputs and ranges were categorized as follows for ASC 820 purposes:
Asset Category ($ in thousands)
Fair value at December 31, 2023
Valuation Technique
Unobservable Input
Range of Input(Weighted Average) (1)
13,996
Market Comparable
Broker/Dealer bids or quotes
N/A
663,707
Market yield
7.0% - 27.1% (11.0%)
Enterprise Market Value
EBITDA multiple
6.3x - 7.0x (7.0x)
64,045
14.0% - 15.4% (14.3%)
151,077
13.4% - 17.7% (14.5%)
177,987
0.5x - 17.5x (10.6x)
DLOM(2)
14.3%
Total Level 3 investments
1,085,464
Debt Category ($ in thousands)
Truist Credit Facility
2.2%
Fair value at September 30, 2023
15,090
512,567
7.0% – 25.0% (11.4%)
9,512
70,884
14.2% - 20.8% (15.9%)
156,222
13.4% - 18.8% (14.3%)
161,895
0.5x - 17.7x (10.9x)
27.9%
927,328
2.4%
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Our investments, cash and cash equivalents, Truist Credit Facility, 2026 Notes and 2026 Notes-2 were categorized as follows in the fair value hierarchy:
Description ($ in thousands)
Level 1
Level 2
Level 3
Measured at Net Asset Value (1)
Debt investments
907,208
U.S. Government Securities(3)
Equity investments
253,704
178,256
75,448
2026 Notes(2)
2026 Notes-2(2)
Total debt
695,350
310,334
Fair Value at September 30, 2023
764,275
237,621
163,053
74,568
516,835
309,895
The tables below show a reconciliation of the beginning and ending balances for investments measured at fair value using significant unobservable inputs (Level 3):
Three Months Ended December 31, 2023
Totals
Beginning balance
Net realized gain (loss)
2,563
2,558
Net change in unrealized appreciation (depreciation)
(6,208
(5,890
Purchases, PIK interest, net discount accretion and non-cash exchanges
217,360
15,046
232,406
Sales, repayments and non-cash exchanges
(68,214
(2,724
(70,938
Transfers in/out of Level 3
Ending balance
Net change in unrealized appreciation reported within the net change in unrealized appreciation on investments in our consolidated statements of operations attributable to our Level 3 assets still held at the reporting date
(6,333
2,708
(3,625
Three Months Ended December 31, 2022
902,165
257,162
1,159,327
4,024
4,066
(5,885
(83,427
(89,312
68,890
14,379
83,269
(24,590
(6,030
(30,620
940,622
186,108
1,126,730
(5,667
(83,580
(89,247
The table below shows a reconciliation of the beginning and ending balances for liabilities measured at fair value using significant unobservable inputs (Level 3):
Three months ended December 31,
Long-Term Credit Facility
Beginning balance (cost – $212,420 and $385,920, respectively)
376,687
Net change in unrealized appreciation (depreciation) included in earnings
(4,379
Borrowings (1)
Repayments (1)
Transfers in and/or out of Level 3
Ending balance (cost – $388,456 and $380,920, respectively)
367,308
Temporary draws outstanding, at cost
As of December 31, 2023, we had outstanding non-U.S. dollar borrowings on our Credit Facility. Net change in fair value on foreign currency translation on outstanding borrowings is listed below ($ in thousands):
Foreign Currency
Amount Borrowed
Borrowing Cost
Current Value
Reset Date
Change in Fair Value
British Pound
36,000
49,420
45,893
March 27, 2024
(3,527
Canadian dollar
2,036
2,123
January 16, 2024
As of September 30, 2023, we had outstanding non-U.S. dollar borrowings on our Truist Credit Facility. Net change in fair value on foreign currency translation on outstanding borrowings is listed below ($ in thousands):
43,940
December 28, 2023
(5,480
Generally, the carrying value of our consolidated financial liabilities approximates fair value. We have adopted the principles under ASC Subtopic 825-10, Financial Instruments, or ASC 825-10, which provides companies with an option to report selected financial assets and liabilities at fair value, and made an irrevocable election to apply ASC 825-10 to our Truist Credit Facility. We elected to use the fair value option for the Truist Credit Facility to align the measurement attributes of both our assets and liabilities while mitigating volatility in earnings from using different measurement attributes. Due to that election and in accordance with GAAP, we did not incur any expenses relating to amendment costs on the Truist Credit Facility during the three months ended December 31, 2023 and 2022. ASC 825-10 establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities and to more easily understand the effect on earnings of a company’s choice to use fair value. ASC 825-10 also requires us to display the fair value of the selected assets and liabilities on the face of the Consolidated Statements of Assets and Liabilities and changes in fair value of the Truist Credit Facility is reported in our Consolidated Statements of Operations. We did not elect to apply ASC 825-10 to any other financial assets or liabilities, including the, 2026 Notes, and 2026 Notes-2.
For the three months ended December 31, 2023 and 2022, the Truist Credit Facility had a net change in unrealized (appreciation) depreciation of $(2.0) million and $4.4 million, respectively. As of December 31, 2023 and September 30, 2023, the net unrealized depreciation on the Truist Credit Facility totaled $3.4 million and $5.5 million, respectively. We use an independent valuation service to measure the fair value of our Truist Credit Facility in a manner consistent with the valuation process that our board of directors uses to value our investments.
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6. TRANSACTIONS WITH AFFILIATED COMPANIES
An affiliated portfolio company is a company in which we have ownership of 5% or more of its voting securities. A portfolio company is generally presumed to be a non-controlled affiliate when we own at least 5% but 25% or less of its voting securities and a controlled affiliate when we own more than 25% of its voting securities. Transactions related to our funded investments with both controlled and non-controlled affiliates for the three months ended December 31, 2023 were as follows ($ in thousands):
Name of Investment
Fair Value atSeptember 30, 2023
GrossAdditions(1)
GrossReductions
Net Change inAppreciation /(Depreciation)
Fair Value at December 31, 2023
InterestIncome
PIKIncome
Dividend Income
Net RealizedGains(Losses)
Controlled Affiliates
AKW Holdings Limited
51,660
2,780
55,072
967
JF Intermediate, LLC (MidOcean JF Holdings Corp.) (2)
51,705
10,020
70,484
Mailsouth Inc.
PennantPark Senior Loan Fund, LLC (3)
164,408
720
165,128
3,498
RAM Energy LLC (4)
Total Controlled Affiliates
224,827
52,337
13,520
Non-Controlled Affiliates
(2,462
29,643
13,907
1,013
(3,734
11,186
Total Non-Controlled Affiliates
46,012
(6,196
Total Controlled and Non-Controlled Affiliates
270,839
53,350
331,513
979
7. CHANGE IN NET ASSETS FROM OPERATIONS PER COMMON SHARE
The following information sets forth the computation of basic and diluted per share net increase in net assets resulting from operations ($ in thousands, except per share data):
Numerator for net increase (decrease) in net assets resulting from operations
Denominator for basic and diluted weighted average shares
65,224,500
Basic and diluted net increase (decrease) in net assets per share resulting from operations
8. CASH AND CASH EQUIVALENTS
Cash equivalents represent cash in money market funds pending investment in longer-term portfolio holdings and for other general corporate purposes. Our portfolio may consist of temporary investments in U.S. Treasury Bills (of varying maturities), repurchase agreements, money market funds or repurchase agreement-like treasury securities. These temporary investments with original maturities of 90 days or less are deemed cash equivalents and are included in the Consolidated Schedule of Investments. At the end of each fiscal quarter, we may take proactive steps to preserve investment flexibility for the next quarter by investing in cash equivalents, which is dependent upon the composition of our total assets at quarter-end. We may accomplish this in several ways, including purchasing U.S. Treasury Bills and closing out positions on a net cash basis after quarter-end, temporarily drawing down on the Credit Facility, or utilizing repurchase agreements or other balance sheet transactions as are deemed appropriate for this purpose. These amounts are excluded from average adjusted gross assets for purposes of computing the Investment Adviser’s management fee. U.S. Treasury Bills with maturities greater than 60 days from the time of purchase are valued consistent with our valuation policy. As of December 31, 2023 and September 30, 2023, cash and cash equivalents consisted of money market funds, and non-money market in the amounts of $36.9 million and $38.8 million at fair value, respectively.
35
9. FINANCIAL HIGHLIGHTS
Below are the financial highlights ($ in thousands, except share and per share data):
Per Share Data:
Net asset value, beginning of period
8.98
Net investment income (1)
Net change in realized and unrealized gain (loss) (1)
(0.08
(1.26
Net increase (decrease) in net assets resulting from operations (1)
Distributions to stockholders (1), (2)
(0.21
(0.17
Repurchase of common stock (1)
Net asset value, end of period
7.71
Per share market value, end of period
6.91
5.75
Total return* (3)
8.44
8.34
Shares outstanding at end of period
Ratios** / Supplemental Data:
Ratio of operating expenses to average net assets (4)
7.28
7.13
Ratio of debt related expenses to average net assets (5)
7.63
7.01
Ratio of total expenses to average net assets (5)
14.91
14.14
Ratio of net investment income to average net assets (5)
7.44
Net assets at end of period
Weighted average debt outstanding
597,756
694,152
Weighted average debt per share (1)
9.16
Asset coverage per unit (6)
1,706
1,709
Portfolio turnover ratio* (7)
5.34
1.90
* Not annualized for periods less than one year.
**Re-occurring investment income and expenses included in these ratios are annualized for periods less than one year.
***The expense and investment income ratios do not reflect the Company's proportionate share of income and expenses of PSLF and PTSF II.
10. DEBT
The annualized weighted average cost of debt for the three months ended December 31, 2023 and 2022, inclusive of the fee on the undrawn commitment and amendment costs on the Truist Credit Facility and amortized upfront fees on SBA debentures, 2026 Notes and 2026 Notes-2, was 6.4% and 5.5%, respectively. As of December 31, 2023, in accordance with the 1940 Act, with certain limited exceptions, we are only allowed to borrow amounts such that we are in compliance with a 150% asset coverage ratio after such borrowing.
On February 5, 2019, our stockholders approved the application of the modified asset coverage requirements set forth in Section 61(a)(2) of the 1940 Act, as amended by the Consolidated Appropriations Act of 2018 (which includes the Small Business Credit Availability Act, or SBCAA) as approved by our board of directors on November 13, 2018. As a result, the asset coverage requirement applicable to us for senior securities was reduced from 200% (i.e., $1 of debt outstanding for each $1 of equity) to 150% (i.e., $2 of debt outstanding for each $1 of equity), subject to compliance with certain disclosure requirements. As of December 31, 2023 and September 30, 2023, our asset coverage ratio, as computed in accordance with the 1940 Act, was 171% and 195%, respectively.
As of December 31, 2023, we had the multi-currency Truist Credit Facility for up to $475.0 million (decreased from $500.0 million in September 2023), which may be further increased up to $750.0 million in borrowings with certain lenders and Truist Bank, acting as administrative agent, Regions Bank, acting as an additional multicurrency lender, and JPMorgan Chase Bank, N.A., acting as syndication agent for the lenders. As of December 31, 2023 and September 30, 2023, we had $388.5 million and $212.4 million, respectively, in outstanding borrowings under the Truist Credit Facility. The Truist Credit Facility had a weighted average interest rate of 7.7% and 7.7%, respectively, exclusive of the fee on undrawn commitment, as of December 31, 2023 and September 30, 2023. The Truist Credit Facility is a revolving facility with a stated maturity date of July 29, 2027 and the related obligations maturing on September 4, 2024) and pricing set at 235 basis points over SOFR (or an alternative risk-free floating interest rate index). As of December 31, 2023 and September 30, 2023, we had $86.5 million and $262.6 million of unused borrowing capacity under the Truist Credit Facility, respectively, subject to leverage and borrowing base restrictions. The Truist Credit Facility is secured by substantially all of our assets. As of December 31, 2023, we were in compliance with the terms of the Truist Credit Facility.
36
SBA Debentures
SBIC II was historically able to borrow funds from the SBA against regulatory capital (which approximates equity capital) that is paid-in and is subject to customary regulatory requirements including an examination by the SBA. We previously funded SBIC II with $75.0 million of equity capital and it had SBA debentures outstanding of zero as of December 31, 2023 and September 30, 2023, respectively. SBA debentures are non-recourse to us and may be prepaid at any time without penalty. The interest rate of SBA debentures is fixed at the time of issuance, often referred to as pooling, at a market-driven spread over 10-year U.S. Treasury Notes. Under current SBA regulations, a SBIC may individually borrow up to a maximum of $175.0 million, which is up to twice its potential regulatory capital, and as part of a group of SBICs under common control may borrow a maximum of $350 million in the aggregate. As of both December 31, 2023 and September 30, 2023, SBIC II had zero in debt commitments, all of which was drawn as of September 30, 2022. We repaid the remaining SBA debentures during the year ended September 30, 2023.
2026 Notes
In April 2021, we issued $150.0 million in aggregate principal amount of our 2026 Notes at a public offering price per note of 99.4%. Interest on the 2026 Notes is paid semi-annually on May 1 and November 1 of each year, at a rate of 4.50% per year, commencing November 1, 2021. The 2026 Notes mature on May 1, 2026 and may be redeemed in whole or in part at our option subject to a make-whole premium if redeemed more than three months prior to maturity. The 2026 Notes are general, unsecured obligations and rank equal in right of payment with all of our existing and future senior unsecured indebtedness. The 2026 Notes are effectively subordinated to all of our existing and future secured indebtedness to the extent of the value of the assets securing such indebtedness and structurally subordinated to all existing and future indebtedness and other obligations of any of our subsidiaries, financing vehicles, or similar facilities. We do not intend to list the 2026 Notes on any securities exchange or automated dealer quotation system.
2026 Notes-2
In October 2021, we issued $165.0 million in aggregate principal amount of our 2026 Notes-2 at a public offering price per note of 99.4%. Interest on the 2026 Notes-2 is paid semi-annually on May 1 and November 1 of each year, at a rate of 4.00% per year, commencing May 1, 2022. The 2026 Notes-2 mature on November 1, 2026 and may be redeemed in whole or in part at our option subject to a make-whole premium if redeemed more than three months prior to maturity. The 2026 Notes-2 are general, unsecured obligations and rank equal in right of payment with all of our existing and future senior unsecured indebtedness. The 2026 Notes-2 are effectively subordinated to all of our existing and future secured indebtedness to the extent of the value of the assets securing such indebtedness and structurally subordinated to all existing and future indebtedness and other obligations of any of our subsidiaries, financing vehicles, or similar facilities. We do not intend to list the 2026 Notes-2 on any securities exchange or automated dealer quotation system.
11. COMMITMENTS AND CONTINGENCIES
From time to time, we, may be a party to legal proceedings, including proceedings relating to the enforcement of our rights under contracts with our portfolio companies. While the outcome of these legal proceedings cannot be predicted with certainty, we do not expect that these proceedings will have a material effect upon our financial condition or results of operations.
Unfunded debt and equity investments, if any, are disclosed in the Consolidated Schedules of Investments. Under these arrangements, we may be required to supply a letter of credit to a third party if the portfolio company were to request a letter of credit. As of December 31, 2023 and September 30, 2023, we had $236.9 million and $160.8 million, respectively, in commitments to fund investments. Additionally, the Company had unfunded commitments of up to $22.4 million to PSLF as of December 31, 2023 and September 30, 2023, respectively, that may be contributed primarily for the purpose of funding new investments approved by PSLF board of directors or investment committee.
12. UNCONSOLIDATED SIGNIFICANT SUBSIDIARIES
We must determine which, if any, of our unconsolidated controlled portfolio companies is a "significant subsidiary" within the meaning of Regulation S-X. We have determined that, as of September 30, 2023, PennantPark Senior Loan Fund, LLC triggered at least one of the significance tests. As a result and in accordance with Rule 3-09 of Regulation S-X, separate audited financial statements of PSLF, LLC for the years ended September 30, 2023, 2022, and 2021 were filed as exhibits to our Annual Report on Form 10-K for the fiscal year ended September 30, 2023.
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of PennantPark Investment Corporation and its Subsidiaries
Results of Review of Interim Financial Statements
We have reviewed the accompanying consolidated statement of assets and liabilities of PennantPark Investment Corporation and its subsidiaries (the Company), including the consolidated schedules of investments, as of December 31, 2023, the related consolidated statements of operations and changes in net assets for the three-month periods ended December 31, 2023 and 2022, and cash flows for the three-month periods ended December 31, 2023 and 2022, and the related notes to the consolidated financial statements (collectively, the interim financial information or financial statements). Based on our reviews, we are not aware of any material modifications that should be made to the accompanying interim financial information for them to be in conformity with accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated statement of assets and liabilities of the Company, including the consolidated schedule of investments, as of September 30, 2023, and the related consolidated statements of operations, changes in net assets, and cash flows for the year then ended (not presented herein); and in our report dated December 7, 2023, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated statement of assets and liabilities, including the consolidated schedule of investments, as of September 30, 2023, is fairly stated, in all material respects, in relation to the consolidated statement of assets and liabilities, including the consolidated schedule of investments, from which it has been derived.
Emphasis of Matter
As discussed in Note 2 of the consolidated financial statements, the consolidated statement of cash flows for the three months ended December 31, 2022 has been restated to reclassify certain amounts presented within.
Basis for Review Results
These interim financial statements are the responsibility of the Company’s management. We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
/s/ RSM US LLP
New York, New York
February 7, 2024
Awareness Letter of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of PennantPark Investment Corporation and its Subsidiaries
We have reviewed, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the unaudited interim financial information of PennantPark Investment Corporation for the periods ended December 31, 2023 and 2022, as indicated in our report dated February 7, 2024; because we did not perform an audit, we expressed no opinion on that information.
We are aware that our report referred to above, which is included in your Quarterly Report on Form 10-Q for the quarter ended December 31, 2023, is incorporated by reference in Registration Statement No. 333-263564 on Form N-2.
We are also aware that the aforementioned report, pursuant to Rule 436(c) under the Securities Act of 1933, is not considered a part of the Registration Statement prepared or certified by an accountant or a report prepared or certified by an accountant within the meaning of Sections 7 and 11 of that Act.
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This Report, including Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains statements that constitute forward-looking statements, which relate to us and our consolidated subsidiaries regarding future events or our future performance or future financial condition. These forward-looking statements are not historical facts, but rather are based on current expectations, estimates and projections about our Company, our industry, our beliefs and our assumptions. The forward-looking statements contained in this Report involve risks and uncertainties, including statements as to:
We use words such as “anticipates,” “believes,” “expects,” “intends,” “seeks,” “plans,” “estimates” and similar expressions to identify forward-looking statements. You should not place undue influence on the forward-looking statements as our actual results could differ materially from those projected in the forward-looking statements for any reason, including the factors in “Risk Factors” and elsewhere in this Report.
Although we believe that the assumptions on which these forward-looking statements are based are reasonable, any of those assumptions could prove to be inaccurate, and, as a result, the forward-looking statements based on those assumptions also could be inaccurate. Important assumptions include our ability to originate new loans and investments, certain margins and levels of profitability and the availability of additional capital. In light of these and other uncertainties, the inclusion of a projection or forward-looking statement in this Report should not be regarded as a representation by us that our plans and objectives will be achieved.
We have based the forward-looking statements included in this Report on information available to us on the date of this Report, and we assume no obligation to update any such forward-looking statements. Although we undertake no obligation to revise or update any forward-looking statements in this Report, whether as a result of new information, future events or otherwise, you are advised to consult any additional disclosures that we may make directly to you or through reports that we in the future may file with the SEC, including reports on Form 10-Q/K and current reports on Form 8-K.
You should understand that under Section 27A(b)(2)(B) of the Securities Act and Section 21E(b)(2)(B) of the Exchange Act, the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995 do not apply to forward-looking statements made in periodic reports we file under the Exchange Act.
The following analysis of our financial condition and results of operations should be read in conjunction with our Consolidated Financial Statements and the related notes thereto contained elsewhere in this Report.
Overview
PennantPark Investment Corporation is a BDC whose objectives are to generate both current income and capital appreciation while seeking to preserve capital through debt and equity investments primarily made to U.S. middle-market companies in the form of first lien secured debt, second lien secured debt, subordinated debt and equity investments.
We believe middle-market companies offer attractive risk-reward to investors due to a limited amount of capital available for such companies. We seek to create a diversified portfolio that includes first lien secured debt, second lien secured debt, subordinated debt and equity investments by investing approximately $10 million to $50 million of capital, on average, in the securities of middle-market companies. We expect this investment size to vary proportionately with the size of our capital base. We use the term “middle-market” to refer to companies with annual revenues between $50 million and $1 billion. The companies in which we invest are typically highly leveraged, and, in most cases, are not rated by national rating agencies. If such companies were rated, we believe that they would typically receive a rating below investment grade (between BB and CCC under the Standard & Poor’s system) from the national rating agencies. Securities rated below investment grade are often referred to as “leveraged loans” or “high yield” securities or “junk bonds” and are often higher risk compared to debt instruments that are rated above investment grade and have speculative characteristics. Our debt investments may generally range in maturity from three to ten years and are made to U.S. and, to a limited extent, non-U.S. corporations, partnerships and other business entities which operate in various industries and geographical regions.
Our investment activity depends on many factors, including the amount of debt and equity capital available to middle-market companies, the level of merger and acquisition activity for such companies, the general economic environment and the competitive environment for the types of investments we make. We have used, and expect to continue to use, our debt capital, proceeds from the rotation of our portfolio and proceeds from public and private offerings of securities to finance our investment objectives.
Organization and Structure of PennantPark Investment Corporation
PennantPark Investment Corporation, a Maryland corporation organized in January 2007, is a closed-end, externally managed, non-diversified investment company that has elected to be treated as a BDC under the 1940 Act. In addition, for federal income tax purposes we have elected to be treated, and intend to qualify annually, as a RIC under the Code.
Our investment activities are managed by the Investment Adviser. Under our Investment Management Agreement, we have agreed to pay our Investment Adviser an annual base management fee based on our average adjusted gross assets as well as an incentive fee based on our investment performance. PennantPark Investment, through the Investment Adviser, provides similar services to SBIC II under its investment management agreement. SBIC II’s investment management agreement does not affect the management and incentive fees on a consolidated basis. We have also entered into an Administration Agreement with the Administrator. Under our Administration Agreement, we have agreed to reimburse the Administrator for our allocable portion of overhead and other expenses incurred by the Administrator in performing its obligations under our Administration Agreement, including rent and our allocable portion of the costs of compensation and related expenses of our Chief Financial Officer, Chief Compliance Officer, Corporate Counsel and their respective staffs. PennantPark Investment, through the Administrator, provides similar services to SBIC II under its administration agreement with us. Our board of directors, a majority of whom are independent of us, provides overall supervision of our activities, and the Investment Adviser supervises our day-to-day activities.
Revenues
We generate revenue in the form of interest income on the debt securities we hold and capital gains and dividends, if any, on investment securities that we may acquire in portfolio companies. Our debt investments, whether in the form of first lien secured debt, second lien secured debt or subordinated debt, typically have a term of three to ten years and bear interest at a fixed or a floating rate. Interest on debt securities is generally payable quarterly or semiannually. In some cases, our investments provide for deferred interest payments and PIK interest. The principal amount of the debt securities and any accrued but unpaid interest generally becomes due at the maturity date. In addition, we may generate revenue in the form of amendment, commitment, origination, structuring or diligence fees, fees for providing significant managerial assistance and possibly consulting fees. Loan origination fees, OID and market discount or premium and deferred financing costs on liabilities, which we do not fair value, are capitalized and accreted or amortized using the effective interest method as interest income or, in the case of deferred financing costs, as interest expense. Dividend income, if any, is recognized on an accrual basis on the ex-dividend date to the extent that we expect to collect such amounts. From time to time, the Company receives certain fees from portfolio companies, which may or may not be non-recurring in nature. Such fees include loan prepayment penalties, structuring fees, amendment fees, and agency fees and are recorded as other investment income when earned.
Expenses
Our primary operating expenses include interest expense on the outstanding debt and unused commitment fees on undrawn amounts, under our various debt facilities, the payment of a management fee and the payment of an incentive fee to our Investment Adviser, if any, our allocable portion of overhead under our Administration Agreement and other operating costs as detailed below. Our management fee compensates our Investment Adviser for its work in identifying, evaluating, negotiating, consummating and monitoring our investments. We bear all other direct or indirect costs and expenses of our operations and transactions, including:
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Generally, during periods of asset growth, we expect our general and administrative expenses to be relatively stable or to decline as a percentage of total assets and increase during periods of asset declines. Incentive fees, interest expense and costs relating to future offerings of securities would be additive to the expenses described above.
As a result of the error in the classification and presentation of cash described above, we conducted an analysis to determine whether incentive-based compensation was erroneously awarded, thereby necessitating recovery under the Clawback Policy we adopted effective December 1, 2023. Because we do not pay or otherwise award incentive-based compensation to the Company’s executives, we concluded that the error did not result in erroneously-awarded incentive-based compensation, and therefore no compensation recovery is required.
PORTFOLIO AND INVESTMENT ACTIVITY
As of December 31, 2023, our portfolio totaled $1,210.8 million and consisted of $677.7 million or 56% of first lien secured debt, $49.8 million or 4% of U.S. Government Securities, $78.4 million or 7% of second lien secured debt, $151.1 million or12% of subordinated debt (including $102.3 million or 8% in PSLF) and $253.7 million or 21% of preferred and common equity (including $62.8 million or 5% in PSLF). Our interest bearing debt portfolio consisted of 96% variable-rate investments and 4% fixed-rate investments. As of December 31, 2023, we had one portfolio company on non-accrual, representing 1.0% and zero percent of our overall portfolio on a cost and fair value basis, respectively. Overall, the portfolio had net unrealized depreciation of $(21.3) million as of December 31, 2023. Our overall portfolio consisted of 139 companies with an average investment size of $8.4 million, had a weighted average yield on interest bearing debt investments of 12.6%.
As of September 30, 2023, our portfolio totaled $1,101.7 million and consisted of $527.7 million or 48% of first lien secured debt, $99.8 million or 9% of U.S. Government Securities, $80.4 million or 7% of second lien secured debt, $156.2 million or 14% of subordinated debt (including $102.3 million or 9% in PSLF) and $237.6 million or 22% of preferred and common equity (including $62.1 million or 6% in PSLF). Our interest bearing debt portfolio consisted of 95% variable-rate investments and 5% fixed-rate investments. As of September 30, 2023, we had one portfolio company on non-accrual, representing 1.2% and zero percent of our overall portfolio on a cost and fair value basis, respectively. Overall, the portfolio had net unrealized depreciation of $(16.3) million as of September 30, 2023. Our overall portfolio consisted of 129 companies with an average investment size of $7.8 million, had a weighted average yield on interest bearing debt investments of 13.0%.
For the three months ended December 31, 2023, we invested $231.1 million in 12 new and 32 existing portfolio companies with a weighted average yield on debt investments of 11.9% (excluding U.S. Government Securities). For the three months ended December 31, 2023, sales and repayments of investments totaled $71.0 million (excluding U.S. Government Securities).
For the three months ended December 31, 2022, we invested $86.2 million in six new and 29 existing portfolio companies with a weighted average yield on debt investments of 11.2%. For the three months ended December 31, 2022, sales and repayments of investments totaled $30.6 million
As of December 31, 2023, PSLF’s portfolio totaled $857.9 million, consisted of 93 companies with an average investment size of $9.2 million and had a weighted average yield interest bearing debt investments of 12.1 %.
As of September 30, 2023, PSLF’s portfolio totaled $804.2 million, consisted of 90 companies with an average investment size of $8.9 million and had a weighted average yield interest bearing debt investments of 12.1 %.
For the three months ended December 31, 2023, PSLF invested $81.0 million (including $50.8 million were purchased from the Company) in five new and seven existing portfolio companies at weighted average yield interest bearing debt investments of 12.7%. PSLF’s sales and repayments of investments for the same period totaled $29.1 million.
For the three months ended December 31, 2022, PSLF invested $16.8 million (of which none was purchased from the Company) in four new and four existing portfolio companies at weighted average yield on interest bearing debt investments of 11.4%. PSLF’s sales and repayments of investments for the same period totaled $9.0 million.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of our Consolidated Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amount of our assets and liabilities at the date of the Consolidated Financial Statements and the reported amounts of income and expenses during the reported periods In the opinion of management, all adjustments, which are of a normal recurring nature, considered necessary for the fair presentation of financial statements have been included. Actual results could differ from these estimates due to changes in the economic and regulatory environment, financial markets and any other parameters used in determining such estimates and assumptions, including the credit worthiness of our portfolio companies. We may reclassify certain prior period amounts to conform to the current period presentation. We have eliminated all intercompany balances and transactions. References to ASC serve as a single source of accounting literature. Subsequent events are evaluated and disclosed as appropriate for events occurring through the date the Consolidated Financial Statements are issued. In addition to the discussion below, wedescribe our critical accounting policies in the notes to our Consolidated Financial Statements. We discuss our critical accounting estimates in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2022 Annual Report on Form 10-K. There have been no significant changes in our critical accounting estimates during the nine months from those disclosed in our 2022 Annual Report on Form 10-K.
Investment Valuations
We expect that there may not be readily available market values for many of the investments which are or will be in our portfolio, and we value such investments at fair value as determined in good faith by or under the direction of our board of directors using a documented valuation policy and a consistently applied valuation process, as described in this Report. With respect to investments for which there is no readily available market value, the factors that our board of directors may take into account in pricing our investments at fair value include, as relevant, the nature and realizable value of any collateral, the portfolio company’s ability to make payments and its earnings and discounted cash flow, the markets in which the portfolio company does business, comparison to publicly traded securities and other relevant factors. When an external event such as a purchase transaction, public offering or subsequent equity sale occurs, we consider the pricing indicated by the external event to corroborate or revise our valuation. Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the price used in an actual transaction may be different than our valuation and the difference may be material.
A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Generally, most of our investments, and our are classified as Level 3. Our 2026 Notes and 2026 Notes-2 are classified as Level 2, as they are financial instruments with readily observable market inputs. Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the price used in an actual transaction may be different than our valuation and those differences may be material.
On December 3, 2020, the SEC adopted Rule 2a-5 under the 1940 Act, which establishes an updated regulatory framework for determining fair value in good faith for purposes of the 1940 Act. The new rule clarifies how fund boards of directors can satisfy their valuation obligations and requires, among other things, the board of directors to periodically assess material valuation risks and take steps to manage those risks. The rule also permits boards of directors, subject to board oversight and certain other conditions, to designate the fund’s investment adviser to perform fair value determinations. The new rule went into effect on March 8, 2021 and had a compliance date of September 8, 2022. We came into compliance with Rule 2a-5 under the 1940 Act before the compliance date. While our board of directors has not elected to designate the Investment Adviser as the valuation designee at this time, we have adopted certain revisions to our valuation policies and procedures in order comply with the applicable requirements of Rule 2a-5 under the 1940 Act.
In addition to using the above inputs to value cash equivalents, investments, our 2026 Notes, 2026 Notes-2 and our Truist Credit Facility valuations, we employ the valuation policy approved by our board of directors that is consistent with ASC 820. Consistent with our valuation policy, we evaluate the source of inputs, including any markets in which our investments are trading, in determining fair value.
Generally, the carrying value of our consolidated financial liabilities approximates fair value. We have adopted the principles under ASC Subtopic 825-10, Financial Instruments, or ASC 825-10, which provides companies with an option to report selected financial assets and liabilities at fair value, and made an irrevocable election to apply ASC 825-10 to our Truist Credit Facility. We elected to use the fair value option for the Truist Credit Facility to align the measurement attributes of both our assets and liabilities while mitigating volatility in earnings from using different measurement attributes. Due to that election and in accordance with GAAP, we did not incur any expenses relating to amendment costs on the Truist Credit Facility for both the three months ended December 31, 2023. ASC 825-10 establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities and to more easily understand the effect on earnings of a company’s choice to use fair value. ASC 825-10 also requires entities to display the fair value of the selected assets and liabilities on the face of the Consolidated Statements of Assets and Liabilities and changes in fair value of the Truist Credit Facility is reported in our Consolidated Statements of Operations. We elect not to apply ASC 825-10 to any other financial assets or liabilities, including the 2026 Notes, and 2026 Notes-2.
For the three months ended December 31, 2023 and 2022, the Truist Credit Facility had a net change in unrealized (appreciation) depreciation of $(2.0) million and $4.4 million, respectively. As of December 31, 2023 and September 30, 2023, the net unrealized depreciation on the Truist Credit Facility totaled $3.4 million and $5.5 million, respectively. We use a nationally recognized independent valuation service to measure the fair value of our Truist Credit Facility in a manner consistent with the valuation process that the board of directors uses to value our investments.
Revenue Recognition
We record interest income on an accrual basis to the extent that we expect to collect such amounts. For loans and debt investments with contractual PIK interest, which represents interest accrued and added to the loan balance that generally becomes due at maturity, we will generally not accrue PIK interest when the portfolio company valuation indicates that such PIK interest is not collectable. We do not accrue as a receivable interest on loans and debt investments if we have reason to doubt our ability to collect such interest. Loan origination fees, OID, market discount or premium and deferred financing costs on liabilities, which we do not fair value, are capitalized and then accreted or amortized using the effective interest method as interest income or, in the case of deferred financing costs, as interest expense. We record prepayment penalties on loans and debt investments as income. Dividend income, if any, is recognized on an accrual basis on the ex-dividend date to the extent that we expect to collect such amounts. From time to time, the Company receives certain fees from portfolio companies, which may or may not be non-recurring in nature. Such fees include loan prepayment penalties, structuring fees, amendment fees, and agency fees and are recorded as other investment income when earned.
Net Realized Gains or Losses and Net Change in Unrealized Appreciation or Depreciation
We measure realized gains or losses by the difference between the net proceeds from the repayment or sale and the amortized cost basis of the investment, using the specific identification method, without regard to unrealized appreciation or depreciation previously recognized, but considering unamortized upfront fees and prepayment penalties. Net change in unrealized appreciation or depreciation reflects the change in fair values of our portfolio investments and our Truist Credit Facility, including any reversal of previously recorded unrealized appreciation or depreciation, when gains or losses are realized.
Foreign Currency Translation
Payment-in-Kind, or PIK Interest
We have investments in our portfolio which contain a PIK interest provision. PIK interest is added to the principal balance of the investment and is recorded as income. In order for us to maintain our ability to be subject to tax as a RIC, substantially all of this income must be paid out to stockholders in the form of dividends for U.S. federal income tax purposes, even though we may not have collected any cash with respect to interest on PIK securities.
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Federal Income Taxes
We have elected to be treated, and intend to qualify annually to maintain our election to be treated, as a RIC under Subchapter M of the Code. To maintain our RIC tax election, we must, among other requirements, meet certain annual source-of-income and quarterly asset diversification requirements. We also must annually distribute dividends for U.S. federal income tax purposes to our stockholders out of the assets legally available for distribution of an amount generally at least equal to 90% of the sum of our net ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, or investment company taxable income, determined without regard to any deduction for dividends paid.
Although not required for us to maintain our RIC tax status, in order to preclude the imposition of a 4% nondeductible U.S. federal excise tax imposed on RICs, we must distribute dividends for federal income tax purposes to our stockholders in respect of each calendar year of an amount at least equal to the sum of (1) 98% of our net ordinary income (subject to certain deferrals and elections) for the calendar year, (2) 98.2% of the excess, if any, of our capital gains over our capital losses, or capital gain net income (adjusted for certain ordinary losses) for the one-year period ending on October 31 of the calendar year plus (3) the sum of any net ordinary income plus capital gain net income for preceding years that was realized but not distributed during such years and on which we did not incur any U.S. federal income tax, or the Excise Tax Avoidance Requirement. In addition, although we may distribute realized net capital gains (i.e., net long-term capital gains in excess of net short-term capital losses), if any, at least annually, out of the assets legally available for such distributions in the manner described above, we have retained and may continue to retain such net capital gains or investment company taxable income, contingent on maintaining our ability to be subject to tax as a RIC, in order to provide us with additional liquidity.
Because federal income tax regulations differ from GAAP, distributions in accordance with tax regulations may differ from net investment income and net realized gain recognized for financial reporting purposes. Differences between tax regulations and GAAP may be permanent or temporary. Permanent differences are reclassified among capital accounts in the Consolidated Financial Statements to reflect their appropriate tax character. Temporary differences arise when certain items of income, expense, gain or loss are recognized at some time in the future.
For the three months ended December 31, 2023 and 2022 we recorded a provision for taxes on net investment income of $0.4 million and $2.0 million respectively, pertaining to federal excise tax.
The Taxable Subsidiary (PNNT Investment Holdings, LLC, wholly-owned subsidiary of the Company,) is subject to U.S. federal, state and local corporate income taxes. The income tax expense and related tax liabilities of the Taxable Subsidiary are reflected in the Company’s consolidated financial statements.
The Taxable Subsidiary, which is subject to tax as a corporation, allows us to hold equity securities of certain portfolio companies treated as pass-through entities for U.S. federal income tax purposes while facilitating our ability to qualify as a RIC under the Code.
RESULTS OF OPERATIONS
Set forth below are the results of operations for the three months ended December 31, 2023 and 2022
Investment Income
For the three months ended December 31, 2023, investment income was $34.3 million, which was attributable to $25.1 million from first lien secured debt, $2.6 million from second lien secured debt, $1.3 million from subordinated debt and $5.3 million from preferred and common equity, respectively. For the three months ended December 31, 2022, investment income was $30.0 million, which was attributable to $21.8 million from first lien secured debt, $3.8 million from second lien secured debt, $1.1 million from subordinated debt and $3.3 million from preferred and common equity, respectively. The increase in investment income compared to the same period in the prior year was primarily due to the increase in the cost of yield of our debt portfolio.
For the three months ended December 31, 2023, expenses totaled $18.7 million and were comprised of; $9.6 million of debt related interest and expenses, $4.0 million of base management fees, $3.3 million of performance based $1.4 million of general and administrative expenses and $0.4 million of provision for excise taxes. For the three months ended December 31, 2022, expenses totaled $19.6 million and were comprised of; $9.7 million of debt-related interest and expenses, $4.6 million of base management fees, $2.2 million of performance based, incentive fees, $1.1 million of general and administrative expenses and $2.0 million of provision for excise taxes, respectively. The decrease in net expense was primarily due to the provision for excise taxes compared to the same period in the prior year.
Net Investment Income
For the three months ended December 31, 2023 and 2022, net investment income totaled $15.7 million, or $0.24 per share, and $10.3 million, or $0.16 per share, respectively. The increase in net investment income compared to the same period in the prior year was primarily due to an increase in the cost of yield our debt portfolio.
Net Realized Gains or Losses
For the three months ended December 31, 2023 and 2022, net realized gains (losses) totaled $1.8 million and $4.1 million, respectively. The change in realized gains (losses) was primarily due to changes in the market conditions of our investments and the values at which they were realized.
Unrealized Appreciation or Depreciation on Investments and Debt
For the three months ended December 31, 2023 and 2022, we reported net change in unrealized appreciation (depreciation) on investments of $(5.0) million and $(91.6) million, respectively. As of December 31, 2023 and September 30, 2023, the net unrealized appreciation (depreciation) on investments totaled $(21.3) million and $(16.3) million, respectively. The net change in unrealized depreciation on our investments compared to the same period in the prior year was primarily due to changes in the capital market conditions of our investments and the values at which they were realized.
For the three months ended December 31, 2023 and 2022, the Truist Credit Facility had a net change in unrealized (appreciation) depreciation of $(2.0) million and $4.4 million, respectively. As of December 31, 2023 and September 30, 2023, the net unrealized depreciation on the Truist Credit Facility totaled $3.4 million and $5.5 million, respectively. Net change in unrealized appreciation compared to the same periods in the prior period was primarily due to changes in the capital markets.
Net Change in Net Assets Resulting from Operations
For the three months ended December 31, 2023 and 2022, net increase (decrease) in net assets resulting from operations totaled $10.7 million, or $0.16 per share and $(71.9) million, or $(1.10) per share, respectively. The increase in net assets from operations for the three months ended December 31, 2023 compared to prior year was primarily due to a decrease in the net unrealized depreciation in the portfolio primarily driven by changes in market conditions.
LIQUIDITY AND CAPITAL RESOURCES
Our liquidity and capital resources are derived primarily from cash flows from operations, including investment sales and repayments, and income earned, proceeds of securities offerings and debt financings. Our primary use of funds from operations includes investments in portfolio companies and payments of interest expense, fees and other operating expenses we incur. We have used, and expect to continue to use, our debt capital, proceeds from the rotation of our portfolio and proceeds from public and private offerings of securities to finance our investment objectives and operations. As of December 31, 2023, in accordance with the 1940 Act, with certain limited exceptions, we are only allowed to borrow amounts such that we are in compliance with a 150% asset coverage ratio requirement after such borrowing, excluding SBA debentures pursuant to exemptive relief from the SEC received in June 2011. This “Liquidity and Capital Resources” section should be read in conjunction with the "Forward-Looking Statements" section above.
On February 5, 2019, our stockholders approved the application of the modified asset coverage requirements set forth in Section 61(a)(2) of the 1940 Act, as amended by the Consolidated Appropriations Act of 2018 (which includes the SBCAA) as approved by our board of directors on November 13, 2018. As a result, the asset coverage requirement applicable to us for senior securities was reduced from 200% (i.e., $1 of debt outstanding for each $1 of equity) to 150% (i.e., $2 of debt outstanding for each $1 of equity), subject to compliance with certain disclosure requirements.
As of December 31, 2023 and September 30, 2023, our asset coverage ratio, as computed in accordance with the 1940 Act was 171%% and 195%, respectively.
For the three months ended December 31, 2023 and 2022, the annualized weighted average cost of debt inclusive of the fee on the undrawn commitment and amendment costs on the Truist Credit Facility, and amortized upfront fees on SBA debentures, 2026 Notes and 2026 Notes-2, was 6.4% and 5.5%, respectively.
As of December 31, 2023, we had the multi-currency Truist Credit Facility for up to $475.0 million (decreased from $500.0 million in September 2023), which may be further increased up to $750.0 million in borrowings with certain lenders and Truist Bank, acting as administrative agent, Regions Bank, acting as an additional multicurrency lender, and JPMorgan Chase Bank, N.A., acting as syndication agent for the lenders. As of December 31, 2023 and September 30, 2023, we had $388.5 million and $212.4 million, respectively, in outstanding borrowings under the Truist Credit Facility. The Truist Credit Facility had a weighted average interest rate of 7.7% and 7.7%, respectively, exclusive of the fee on undrawn commitment, as of December 31, 2023 and September 30, 2023. The Truist Credit Facility is a revolving facility with a stated maturity date of July 29, 2027 and pricing set at 235 basis points over SOFR (or an alternative risk-free floating interest rate index). As of December 31, 2023 and September 30, 2023, we had $86.5 million and $262.6 million of unused borrowing capacity under the Truist Credit Facility, respectively, subject to leverage and borrowing base restrictions. The Truist Credit Facility is secured by substantially all of our assets. As of December 31, 2023, we were in compliance with the terms of the Truist Credit Facility.
As of December 31, 2023, we had $150.0 million in aggregate principal amount of 2026 Notes outstanding. Interest on the 2026 Notes is paid semi-annually on May 1 and November 1, at a rate of 4.50% per year, commencing November 1, 2021. The 2026 Notes mature on May 1, 2026, and may be redeemed in whole or in part at our option subject to a make-whole premium if redeemed more than three months prior to maturity. The 2026 Notes are direct unsecured obligations and rank pari passu in right of payment with future unsecured unsubordinated indebtedness. The 2026 Notes are structurally subordinated to all existing and future indebtedness and other obligations of any of our subsidiaries, financing vehicles, or similar facilities.
As of December 31, 2023, we had $165.0 million in aggregate principal amount of 2026 Notes-2 outstanding. Interest on the 2026 Notes-2 is paid semi-annually on May 1 and November 1, at a rate of 4.0% per year, commencing May 1, 2022. The 2026 Notes-2 mature on November 1, 2026, and may be redeemed in whole or in part at our option subject to a make-whole premium if redeemed more than three months prior to maturity. The 2026 Notes-2 are direct unsecured obligations and rank pari passu in right of payment with future unsecured unsubordinated indebtedness. The 2026 Notes-2 are structurally subordinated to all existing and future indebtedness and other obligations of any of our subsidiaries, financing vehicles, or similar facilities.
We may raise additional equity or debt capital through both registered offerings off our shelf registration statement and private offerings of securities, by securitizing a portion of our investments, among other sources. Any future additional debt capital we incur, to the extent it is available, may be issued at a higher cost and on less favorable terms and conditions than the Truist Credit Facility, 2026 Notes, 2026 Notes-2 and SBA debentures. Furthermore, the Truist Credit Facility availability depends on various covenants and restrictions. The primary use of existing funds and any funds raised in the future is expected to be for repayment of indebtedness, investments in portfolio companies, cash distributions to our stockholders or for other general corporate or strategic purposes such as a stock repurchase program.
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We have entered into certain contracts under which we have material future commitments. Under our Investment Management Agreement, which was reapproved by our board of directors (including a majority of our directors who are not interested persons of us or the Investment Adviser) in February 2023 PennantPark Investment Advisers serves as our investment adviser. Payments under our Investment Management Agreement in each reporting period are equal to (1) a management fee equal to a percentage of the value of our average adjusted gross assets and (2) an incentive fee based on our performance.
Under our Administration Agreement, which was most recently reapproved by our board of directors, including a majority of our directors who are not interested persons of us, in February 2024 the Administrator furnishes us with office facilities and administrative services necessary to conduct our day-to-day operations. The Administration Agreement was amended on July 1, 2022. If requested to provide significant managerial assistance to our portfolio companies, we or the Administrator will be paid an additional amount based on the services provided. Payment under our Administration Agreement is based upon our allocable portion of the Administrator’s overhead in performing its obligations under our Administration Agreement, including rent and our allocable portion of the costs of our Chief Compliance Officer, Chief Financial Officer, Corporate Counsel and their respective staffs.
If any of our contractual obligations discussed above are terminated, our costs under new agreements that we enter into may increase. In addition, we will likely incur significant time and expense in locating alternative parties to provide the services we expect to receive under our Investment Management Agreement and our Administration Agreement. Any new investment management agreement would also be subject to approval by our stockholders.
In accordance with the 1940 Act, with certain limited exceptions, PennantPark Investment is only allowed to borrow amounts such that our required 150% asset coverage ratio is met after such borrowing. As of December 31, 2023 and September 30, 2023, we excluded the principal amounts of our SBA debentures from our asset coverage ratio pursuant to SEC exemptive relief. In 2011, we received exemptive relief from the SEC allowing us to modify the asset coverage ratio requirement to exclude the SBA debentures from the calculation. Accordingly, our ratio of total assets on a consolidated basis to outstanding indebtedness may be less than 150% which, while providing increased investment flexibility, also increases our exposure to risks associated with leverage.
As of December 31, 2023 and September 30, 2023, we had cash and cash equivalents of $36.9 million and $38.8 million, respectively, available for investing and general corporate purposes. We believe our liquidity and capital resources are sufficient to allows us to effectively operate our business.
For the three months ended December 31, 2023, our operating activities used cash of $155.1 million and our financing activities provided cash of $153.2 million. Our operating activities used cash primarily due to our investment activities and our financing activities provided cash primarily from borrowings under the Truist Credit Facility.
For the three months ended December 31, 2022, our operating activities used cash of $9.6 million and our financing activities used cash of $14.8 million. Our operating activities used cash primarily due to our investment activities and our financing activities used cash primarily due to repayments under the Truist Credit Facility.PennantPark Senior Loan Fund, LLC
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Below is a listing of PSLF’s individual investments as of December 31, 2023 ($ in thousands):
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Below are the consolidated statements of assets and liabilities for PSLF,($ in thousands):
Below are the consolidated statements of operations for PSLF, ($ in thousands):
Distributions
In order to be treated as a RIC for federal income tax purposes and to not be subject to corporate-level tax on undistributed income or gains, we are required, under Subchapter M of the Code, to annually distribute dividends for U.S. federal income tax purposes to our stockholders out of the assets legally available for distribution of an amount generally at least equal to 90% of our investment company taxable income, determined without regard to any deduction for dividends paid.
Although not required for us to maintain our RIC tax status, in order to preclude the imposition of a 4% nondeductible federal excise tax imposed on RICs, we must distribute dividends for U.S. federal income tax purposes to our stockholders in respect of each calendar year of an amount at least equal to the Excise Tax Avoidance Requirement. In addition, although we may distribute realized net capital gains (i.e., net long-term capital gains in excess of net short-term capital losses), if any, at least annually, out of the assets legally available for such distributions in the manner described above, we have retained and may continue to retain such net capital gains or investment company taxable income, contingent on our ability to be subject to tax as a RIC, in order to provide us with additional liquidity.
During the three months ended December 31, 2023, we declared distributions of $0.21 per share, for total distributions of $13.7 million. For the same periods in the prior year, we declared distributions of $0.17 per share, for total distributions of $10.8 million. We monitor available net investment income to determine if a return of capital for tax purposes may occur for the fiscal year. To the extent our taxable earnings fall below the total amount of our distributions for any given fiscal year, stockholders will be notified of the portion of those distributions deemed to be a tax return of capital. Tax characteristics of all distributions will be reported to stockholders subject to information reporting on Form 1099-DIV after the end of each calendar year and in our periodic reports filed with the SEC.
Effective October 2023, we changed from a quarterly distribution to a monthly distribution. We intend to continue to make monthly distributions to our stockholders. Our monthly distributions, if any, are determined by our board of directors.
We maintain an “opt out” dividend reinvestment plan for our common stockholders. As a result, if we declare a distribution, then stockholders’ cash distributions will be automatically reinvested in additional shares of our common stock, unless they specifically “opt out” of the dividend reinvestment plan so as to receive cash distributions.
We may not be able to achieve operating results that will allow us to make distributions at a specific level or to increase the amount of these distributions from time to time. In addition, we may be limited in our ability to make distributions due to the asset coverage ratio for borrowings applicable to us as a BDC under the 1940 Act and/or due to provisions in future credit facilities. If we do not distribute at least a certain percentage of our income annually, we could suffer adverse tax consequences, including possible loss of our ability to be subject to tax as a RIC. We cannot assure stockholders that they will receive any distributions at a particular level.
Recent Accounting Pronouncements
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Share Repurchase Program
On February 9, 2022, we announced a share repurchase program which allows us to repurchase up to $25 million of our outstanding common shares in the open market at prices below our net asset value as reported in our then most recently published consolidated financial statements. During the three months ended December 31, 2022, we did not make any repurchases of our common shares. The program expired on March 31, 2023.
We are subject to financial market risks, including changes in interest rates. As of December 31, 2023, our debt portfolio consisted of 96% variable-rate investments and 4% fixed rate investments. The variable-rate loans are usually based on a SOFR (or an alternative risk-free floating interest rate index) rate and typically have durations of three months after which they reset to current market interest rates. Variable-rate investments subject to a floor generally reset by reference to the current market index after one to nine months only if the index exceeds the floor. In regards to variable-rate instruments with a floor, we do not benefit from increases in interest rates until such rates exceed the floor and thereafter benefit from market rates above any such floor. In contrast, our cost of funds, to the extent it is not fixed, will fluctuate with changes in interest rates since it has no floor.
Assuming that the most recent Consolidated Statements of Assets and Liabilities was to remain constant, and no actions were taken to alter the interest rate sensitivity, the following table shows the annualized impact of hypothetical base rate changes in interest rates:
Change in Interest Rates
Change in Interest Income, Net of Interest Expense (in thousands)
Change in Interest Income, Net of Interest Expense Per Share
Down 1%
(5,112
Up 1%
5,112
0.08
Up 2%
10,225
Up 3%
15,337
Up 4%
20,465
0.31
Although management believes that this measure is indicative of our sensitivity to interest rate changes, it does not adjust for potential changes in the credit market, credit quality, size and composition of the assets on the Consolidated Statements of Assets and Liabilities and other business developments that could affect net increase in net assets resulting from operations, or net investment income. Accordingly, no assurances can be given that actual results would not differ materially from those shown above.
Because we borrow money to make investments, our net investment income is dependent upon the difference between the rate at which we borrow funds and the rate at which we invest these funds as well as our level of leverage. As a result, there can be no assurance that a significant change in market interest rates will not have a material adverse effect on our net investment income or net assets.
We may hedge against interest rate and foreign currency fluctuations by using standard hedging instruments such as futures, options and forward contracts or our Truist Credit Facility subject to the requirements of the 1940 Act and applicable commodities laws. While hedging activities may insulate us against adverse changes in interest rates and foreign currencies, they may also limit our ability to participate in the benefits of lower interest rates or higher exchange rates with respect to our portfolio of investments with fixed interest rates or investments denominated in foreign currencies. During the periods covered by this Report, we did not engage in interest rate hedging activities or foreign currency derivatives hedging activities.
As of the quarter ended December 31, 2023, we, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act). As disclosed in our Annual Report on Form 10-K for the fiscal year ended September 30, 2023, a material weakness was previously identified in connection with our internal control over financial reporting relating to the review of quarterly cash and investment reconciliations. Additionally, a material weakness was identified in the operation of our internal controls over financial reporting relating to our review of interest income and non-accrual classification of investments. We have taken steps to remediate these material weaknesses, which steps have included (i) enhancing existing controls to ensure the appropriate review of the quarterly cash and investment reconciliation and that it is adequately documented so as to provide evidence that the controls are operating effectively (ii) enhancing existing controls to ensure that our internal controls over financial reporting relating to our analysis of interest income and assessment of investments for classification as non-accrual investments are operating effectively and (iii) enhancing policies and procedures to demonstrate a commitment to improving our overall control environment.
Taking the above efforts into consideration, our management, including the Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures for the quarter ended December 31, 2023 were effective and provided reasonable assurance that information required to be disclosed in our periodic filings with the SEC is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. However, in evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of such possible controls and procedures.
Other than disclosed in this Item 4, there have been no changes in our internal control over financial reporting that occurred during the quarter ended December 31, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II – OTHER INFORMATION
None of us, our Investment Adviser or our Administrator, is currently subject to any material legal proceedings, nor, to our knowledge, is any material legal proceeding threatened against us, or against our Investment Adviser or Administrator. From time to time, we, our Investment Adviser or Administrator may be a party to certain legal proceedings, including proceedings relating to the enforcement of our rights under contracts with our portfolio companies. While the outcome of these legal proceedings cannot be predicted with certainty, we do not expect that these proceedings will have a material effect upon our financial condition or results of operations.
In addition to the other information set forth in this Report, you should consider carefully the factors discussed below, as well as in Part I “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended September 30, 2023, filed on December 8, 2023, which could materially affect our business, financial condition and/or operating results. The risks as in our Annual Report on Form 10-K, are not the only risks facing PennantPark Investment Corp. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition and/or operating results.
No unregistered securities were sold in the quarter ended December 31, 2023.
Issuer Purchases of Equity Securities
Repurchases of our common stock under our share repurchase program are as follows:
Period
Total Number of Shares Purchased
Average Price per Share
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1)
Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (in thousands)
January 1, 2022 through March 31, 2022
913,454
7.72
17,944
April 1, 2022 through June 30, 2022
717,709
1,631,163
12,986
July 1, 2022 through September 30, 2022
189,442
6.52
1,820,605
11,751
October 1, 2022 through December 31, 2022
January 1, 2023 through March 31, 2023
—————————
(1)
The program expired on March 31, 2023 and we purchased $1.8 million shares of our common stock in open market transaction while the program was in effect for an aggregate cost (including transaction costs) of $13.2
million.
None.
Not applicable.
10b5-1 Disclosure
None of the officers or directors of the Company have adopted or terminated any Rule 10b5-1 trading arrangements applicable to them (if any) or the Company.
Unless specifically indicated otherwise, the following exhibits are incorporated by reference to exhibits previously filed with the SEC:
3.1
Articles of Incorporation (Incorporated by reference to Exhibit 99(a) to the Registrant’s Pre-Effective Amendment No. 3 to the Registration Statement on Form N-2/A (File No. 333-140092), filed on April 5, 2007).
3.2
Second Amended and Restated Bylaws of the Registrant (Incorporated by reference to Exhibit 3.2 to the Registrant's Quarterly Report on Form 10-Q (File No. 814-00736), filed on May 11, 2020).
4.1
Form of Share Certificate (Incorporated by reference to Exhibit 99(d)(1) to the Registrant’s Registration Statement on Form N-2 (File No. 333-150033), filed on April 2, 2008).
31.1*
Certification of Chief Executive Officer pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended.
31.2*
Certification of Chief Financial Officer pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended.
32.1*
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2*
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.1
Privacy Policy of the Registrant (Incorporated by reference to Exhibit 99.1 to the Registrant’s Annual Report on Form 10-K (File No. 814-00736), filed on November 16, 2011).
101.INS*
Inline XBRL Instance Document-the instance document does not appear in the Interactive Data File as its XBRL tags are embedded within the Inline XBRL document
101.SCH*
Inline XBRL Taxonomy Extension Schema With Embedded Linkbase Documents
101.CAL*
Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*
Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*
Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE*
Inline XBRL Taxonomy Extension Presentation Linkbase Document
Cover Page formatted as Inline XBRL and contained in Exhibit 101
* Filed herewith.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report on Form 10-Q to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: February 7, 2024
By:
/s/ Arthur H. Penn
Arthur H. Penn
Chief Executive Officer and Chairman of the Board of Directors
(Principal Executive Officer)
/s/ Richard T. Allorto, Jr.
Richard T. Allorto, Jr.
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)