PennantPark Investment's CEO Discusses F3Q12 Results - Earnings Call Transcript

PennantPark Investment Corporation (PNNT)

F3Q12 Earnings Call

August 9, 2012, 10:00 a.m. ET

Executives

Arthur H. Penn – Founder, CEO, Chairman of the Board of Directors

Aviv Efrat – CFO, Treasurer

Analysts

Troy Ward – Stifel Nicolaus

Mickey M. Schleien – Ladenburg Thalmann Financial Services, Inc.

Justin Baker – Sidoti & Co.

Richard Shane – JP Morgan

Arren Cyganovich – Evercore Partners

Jason Freuchtel – Suntrust

John Heck - Stevens

Presentation

Operator

Good morning, and welcome to today’s PennantPark Investment Corporation third quarter, fiscal quarter 2012 earnings conference call. Today’s call is being recorded. At this time, all participants have been placed in a listen-only mode. The call will be opened for a question-and-answer session following the speakers’ remarks. (Operator Instructions).

It is now my please to turn the conference over to Mr. Art Penn, Chairman and Chief Executive Office of PennantPark Investment Corporation. Mr. Penn, you may begin.

Arthur Penn

Thank you, and good morning, everyone. I’d like to welcome you to our third fiscal quarter 2012 earnings conference call. I’m joined today by Aviv Efrat, our Chief Financial Officer. Aviv, please start off by disclosing some general conference call information and included discussion about forward-looking statements.

Aviv Efrat

Thank you, Art. I’d like to remind everyone that today’s call is being recorded. Please note that this call is the property of PennantPark Investment Corporation and that any unauthorized broadcast of this call in any form is strictly prohibited. Also, a replay of the call will be available by using the telephone numbers and PIN provided in our earnings press release.

I’d also like to call your attention to our customary Safe Harbor disclosure in our press release regarding forward-looking information. Today’s conference call may also include forward-looking statements and projections and we ask that you refer to our most recent filing with the SEC for important factors that could cause actual results to differ materially from these projections. We do not undertake to update our forward-looking statements unless required by law. To obtain copies of our SEC filings, please visit our website at www.pennantpark.com or call us at 212-905-1000.

At this time, I’d like to turn the call back to our Chairman and Chief Executive Officer, Art Penn.

Arthur Penn

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

As you all know, the economic signals have continued to be mixed with many economists expecting a flat-to-slightly-growing economy going forward. With regard to the more liquid capital markets, and in particular the leveraged loan and high-yield markets, those markets have rallied this year so far as cash flows in the high-yield funds, leveraged loan funds and CLOs have been strong.

Risk reward in the middle market has generally remained attractive as the overall supply of middle-market companies who need some financing exceeds the relative demand of applicable lending capacity.

As debt investors and lenders, a flat economy is fine as long as we’ve underwritten capital structures prudently. A healthy current coupon with deleveraging from free cash flow over time is a favorable outcome. That said, as the more liquid markets have rallied, that overall tone has impacted the middle market. Pricing has started to compress and purchase price multiples and leveraged multiples have increased. As a result, we have become increasingly selective about which investments we make in this environment. Given our strong origination network and the size of our company, we can continue to prudently grow.

We mean focused on long-term value and making investments that perform well over several years. We continue to set a high bar in terms of our investment parameters and remain cautious and selective about which investments we add to the portfolio. Our focus continues to be on companies or structures that are more defensive, have low leverage, strong conveyance and high returns. With plenty of dry powder, we are well positioned to take advantage of investments opportunities as they arise.

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

We are first call for middle-market financial sponsors, management teams and intermediaries who want consistent credible capital. As an independent provider, free of conflicts or affiliations, we’ve become a trusted financing partner for our clients. Since its inception, PennantPark entities have financed companies backed by about 100 different financial sponsors. We have been active and are well positioned.

For the quarter ended June 30 th, 2012, we invested about $90 million. The average yield on new debt investments was 13%. Expected IIRs generally range from 13 to 18%. Net investment income was $0.28 per share. We have met our goal of a steady, stable and growing dividend stream since our IPO over five years ago despite the overall economic and market turmoil throughout that time period. We are the only debt-oriented BDC to not cut its dividend during this time period.

As a result of our focus on high-quality new investments, solid performance of existing investments and continuing diversification, our portfolio is constructed to withstand market and economic volitility. The cash interest coverage ratio, the amount by which EBITDA, our cash flow exceeds cash interest expense continue to be a health 2.8 times. This provides significant cushion to support stable investment income.

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