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DATE

Friday, May 8, 2026 at 12 p.m. ET

CALL PARTICIPANTS

  • Chairman and Chief Executive Officer — Arthur Penn
  • Senior Partner — Jose Briones
  • [Unspecified Finance Department Representative]

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TAKEAWAYS

  • Core Net Investment Income -- $0.14 per share for the quarter, matching GAAP net investment income.
  • Portfolio Size -- $1.2 billion, with $108 million invested in new opportunities, including six new platform investments.
  • Portfolio Leverage & Coverage -- Median portfolio debt-to-EBITDA was 4.7x, median interest coverage 2.0x, and median loan-to-value 45%.
  • Nonaccrual Investments -- Four positions on nonaccrual, representing 2.7% of the portfolio at cost and 1.3% at market value.
  • PSLF Joint Venture Metrics -- The joint venture portfolio held $1.3 billion, contributed a 15.8% NII yield on invested capital over 12 months, and has the capacity to reach $1.5 billion.
  • Software Sector Exposure -- 4.6% of portfolio, primarily cash-pay, covenant-protected loans concentrated in regulated industries, with leverage of 4x-5x.
  • M&A and Market Activity -- M&A activity increased but remains below 2024 levels; management expects repayments and equity monetizations to accelerate with normalization.
  • Echelon Equity Realization -- Anticipated $16 million in proceeds from Echelon co-investment, consisting of $14 million in cash and $2 million in Shield AI stock, representing nearly a 15x multiple on $1.1 million invested.
  • Government Services / Defense Exposure -- Approximately 12% of portfolio focused on this sector, highlighted by recent Echelon transaction and ongoing opportunities.
  • Historical Equity Co-Investment Performance -- Over $618 million invested since inception, yielding a 25% IRR and a 2.0x multiple.
  • Net Realized and Unrealized Loss -- $11.7 million net loss on investments and debt, including tax provision, for the quarter.
  • Net Asset Value (NAV) -- $6.73 per share, down 3.9% from $7.00 at prior quarter end.
  • Debt-to-Equity Ratio -- 1.35x at quarter-end, with capital diversified across multiple secured and unsecured funding channels.
  • Capital Raise and Usage -- $75 million of new unsecured debt raised in January, deployed to refinance maturing unsecured debt in May.
  • Portfolio Composition -- 48% first lien senior secured debt, 2% second lien, 14% PSLF subordinated notes, 7% other subordinated debt, 5% PSLF equity, and 24% other equity co-investments; 88% of debt portfolio is floating rate.
  • Weighted Average Yield -- Debt investments yielded 10.9% on a weighted basis.

SUMMARY

PennantPark Investment Corporation (PNNT 3.13%) highlighted an anticipated near-term liquidity event from its Echelon equity co-investment, expected to yield $16 million on a $1.1 million investment and comprised of $14 million cash and $2 million in equity consideration. Management emphasized the PSLF joint venture’s ongoing contribution to NII yield and its scalable growth potential, with further expansion positioned as an earnings catalyst. The quarter featured net realized and unrealized investment losses that reduced NAV by 3.9%, following a period of consistent capital deployment in core middle market opportunities with a substantial majority in floating-rate, covenant-heavy structures.

  • Management confirmed software loan exposure remains modest and "primarily cash-pay, covenant-protected loans," with leverage well below aggressive industry norms.
  • Middle market focus is reinforced by an underwriting approach yielding an average historical loss ratio of just 20 basis points annually on $9.3 billion invested since inception.
  • Recent capital markets activity included issuance of $75 million in unsecured notes and broad diversification of funding sources, indicating ongoing balance sheet management.
  • Exposure to government services and defense, currently at 12%, is highlighted as a strategic differentiator, with management citing long-term sponsor relationships and specific sector expertise.

INDUSTRY GLOSSARY

  • Nonaccrual: A loan on which interest income is no longer recognized because of borrower financial difficulties, indicating elevated credit risk.
  • PSLF: PennantPark Senior Loan Fund—a joint venture between PennantPark and Kemper that invests primarily in middle-market senior secured loans.
  • First Lien Senior Secured Debt: Debt secured by a lien with priority over other claims on specified collateral in the event of borrower default.
  • Debt-to-EBITDA: A leverage metric calculated as total debt divided by earnings before interest, taxes, depreciation, and amortization, used to assess credit risk and underwriting discipline.
  • Interest Coverage: A measure of a borrower's ability to meet interest payments from operating income.
  • Loan-to-Value (LTV): The ratio expressing the value of a loan relative to the value of the collateral securing it.

Full Conference Call Transcript

Arthur Penn: Good afternoon, everyone, and thank you for joining PennantPark Investment Corporation's second fiscal quarter 2026 earnings call. I am joined today by Jose Briones, Senior Partner at PennantPark. Rick Alordo, our CFO, is unable to be with us today due to a prior commitment. Jose, please start off by disclosing some general conference call information and include a discussion about forward-looking statements.

Jose Briones: Thank you, Art. I would like to remind everyone that today's call is being recorded and is the property of PennantPark Investment Corporation. Any unauthorized broadcast of this call in any form is strictly prohibited. An audio replay of the call will be available on our website. I would also like to call your attention to the customary safe harbor disclosure in our press release regarding forward-looking information. Our remarks today may include forward-looking statements and projections. Please refer to our most recent SEC filings for important factors that could cause actual results to differ materially from these projections. We do not undertake to update our forward-looking statements unless required by law.

To obtain copies of our latest SEC filings, please visit our website at pennantpark.com or call us at (212) 905-1000. At this time, I would like to turn the call back to our Chairman and Chief Executive Officer, Arthur Penn.

Arthur Penn: Thanks, Jose. I will begin with an overview of our second quarter results including a review of the portfolio. I will then share our perspective on the current market environment and how we believe PNNT is positioned going forward. Jose will follow up with a detailed review of our financial results after which we will open up the call for questions. For the quarter ended March 31, core NII was $0.14 per share. As of March 31, our portfolio totaled $1.2 billion. During the quarter, we continued to originate attractive investment opportunities and invested a total of $108 million, including six new platform investments, at a median debt-to-EBITDA of 3.0x, interest coverage of 3.4x, and loan-to-value of only 28%.

Our portfolio remains conservatively positioned, with median leverage of 4.7x, median interest coverage of 2.0x, and median loan-to-value of 45%. We ended the quarter with four nonaccrual investments representing 2.7% of the portfolio at cost and 1.3% at market value. Our PSLF joint venture portfolio continues to be a significant contributor to our core NII. At March 31, the JV portfolio totaled $1.3 billion, and over the last 12 months, PNNT's average NII yield on invested capital in the JV was 15.8%. The JV has the capacity to increase its portfolio to $1.5 billion. We expect that with this additional growth, the JV investment will enhance PNNT's earnings momentum into the future.

Turning to software exposure, which has been an area of recent market focus, our exposure remains limited at approximately 4.6% of the portfolio and is structured consistently with our core middle market strategy. These investments are primarily cash-pay, covenant-protected loans with moderate leverage and shorter durations. Importantly, they are concentrated in mission-critical enterprise software serving regulated industries such as defense, health care, and financial institutions. We believe this represents a meaningful point of differentiation relative to our peers. Turning to the market environment, we believe that the current environment favors lenders with strong private equity sponsor relationships and disciplined underwriting, areas where we have a clear competitive advantage.

In the core middle market, the pricing on high-quality first lien term loans remains attractive, typically ranging from SOFR plus 500 to 550 basis points with leverage of approximately 4.5x EBITDA. Importantly, we continue to get meaningful covenant protections in contrast to the covenant-light structures prevalent in the upper middle market. M&A activity has increased over the past six to nine months, although overall conditions remain uneven. Private equity sponsors remain active, and we are seeing a growing pipeline of attractive opportunities across both new originations and add-on investments. However, activity levels remain below the unusually strong levels observed in 2024 as the market transitions toward a more normalized backdrop.

We expect increased transaction activity to drive repayments across the portfolio, including opportunities to monetize equity co-investments, and we will redeploy that capital into income-generating investments. Notably, we expect a meaningful realization from our equity co-investment in Echelon this quarter. Echelon is a leading defense technology company sponsored by Sagewind Capital, our long-term sponsor relationship. Echelon announced that it has agreed to be acquired by Shield AI, another cutting-edge defense technology company. Upon closing, we expect our $1.1 million equity co-investment to generate approximately $16 million in total proceeds. Proceeds will consist of $14 million of cash and $2 million of value in Shield AI stock.

This represents nearly a 15x multiple on invested capital and demonstrates the value of our equity co-investment program. Given the current geopolitical environment and the Echelon news, it is important to highlight that approximately 12% of our portfolio is exposed to government services and defense. I would now like to speak about why we believe that our focus on the core middle market provides us with attractive investment opportunities where we provide important strategic capital to our borrowers. The core middle market, companies with $10 million to $50 million of EBITDA, is below the threshold and does not compete with the broadly syndicated loan or high yield markets, unlike our peers in the upper middle market.

In the core middle market, because we are an important strategic lending partner, the process and package of terms we receive is attractive. We have many weeks to do our diligence with care. We thoughtfully structure transactions with sensible credit statistics, meaningful covenants, substantial equity cushions to protect our capital, attractive spreads, and equity co-investments. Additionally, from a monitoring perspective, we receive monthly financial statements to help us stay on top of the companies. Our rigorous underwriting standards remain central to our investment philosophy. Nearly all of our originated first lien loans include meaningful covenant protections, a key differentiator versus the upper middle market where covenant-light structures are more common.

Since our inception nearly 19 years ago, PNNT has invested $9.3 billion at an average yield of 11.2%, maintaining a loss ratio on invested capital of roughly 20 basis points annually, a testament to our consistent and disciplined approach through multiple market cycles. As a provider of strategic capital, we fuel the growth of our portfolio companies. In many cases, we participate in the upside of the company by making an equity co-investment. Our returns on these equity co-investments have been excellent over time. Overall, for our platform from inception through March 31, we have invested over $618 million in equity co-investments and have generated an IRR of 25% at a multiple on invested capital of 2.0x.

Looking ahead, our experienced team and broad origination platform position us well to generate attractive deal flow. We remain steadfast in our commitment to capital preservation and maintaining a disciplined, patient investment approach. We continue to focus on investing in high-quality middle market companies with strong free cash flow generation. We capture that value through first lien senior secured loans, and we pay out those contractual cash flows in the form of dividends to our shareholders. With that overview, I will turn the call over to Jose for a more detailed review of our financial results.

Jose Briones: Thank you, Art. For the quarter ended March 31, both GAAP net investment income and core net investment income were $0.14 per share. Operating expenses for the quarter were as follows: interest and credit facility expenses were $8.1 million, base management and incentive fees were $5.6 million, general and administrative expenses were $1.5 million, and provision for excise taxes was $0.5 million. For the quarter ended March 31, net realized and unrealized change on investments and debt, including provision for taxes, was a loss of $11.7 million. As of March 31, our NAV was $6.73 per share, which is down 3.9% from $7.00 per share in the prior quarter.

At March 31, our debt-to-equity ratio was 1.35x, and our capital structure was diversified across multiple funding sources, including both secured and unsecured debt. In January, we raised $75 million of new unsecured debt, which was used to repay our unsecured debt that matured on May 1. As of March 31, our key portfolio statistics were as follows. Our portfolio remains highly diversified with 162 companies across 38 different industries. The weighted average yield on our debt investments was 10.9%. The portfolio is comprised of 48% first lien senior secured debt, 2% second lien secured debt, 14% subordinated notes to PSLF, 7% other subordinated debt, 5% equity in PSLF, and 24% in other preferred and common equity co-investments.

Eighty-eight percent of our debt portfolio is floating rate. Debt-to-EBITDA on the portfolio is 4.7x, and interest coverage is 2.0x. With that, I will turn the call back to Art for closing remarks.

Arthur Penn: Jose, in conclusion, we remain committed to delivering consistent performance, preserving capital, and creating long-term value for all stakeholders. Thank you to our team for their dedication and our shareholders for their continued partnership and confidence in PennantPark Investment Corporation. That concludes our remarks. We will now open the call for questions.

Operator: Thank you. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star 1 to ask a question. We will take our first question from Robert James Dodd with Raymond James.

Robert James Dodd: Hi, guys. A question about the market outlook, if I could, in three segments overall. You gave some color; conditions are still below what they were last year, etc. Is there any meaningful scenario where activity really accelerates as we go through the year given the level of uncertainty? And then within two subsectors: what are your thoughts on software right now? Spreads are widening, but it is not an area you have typically done a lot of. On the other hand, an area where you have done a lot is government and contracting, where you have a really nice gain lining up.

Do you expect the competitive dynamics to change in that segment of the market given how stable and budget talk for defense is looking going forward? That is a lot of the question there.

Arthur Penn: Thanks, Robert. I will try to cover the market outlook and software, and I will kick it over to Jose to talk about government services. On M&A flows, we are certainly hopeful. We are seeing some green shoots or more than green shoots; it is just not as robust as it was. It takes a more stable market, we think, to see more volume. We hope there is. Last year, we had a “Liberation Day” kind of spike the punch bowl. This year, whether it is the war or some of the other issues, we are certainly hopeful that we will see a more normalized environment.

We are hearing that it will be, but we have heard that before, so proof will be in the pudding. Echelon and some other deals we are seeing are good indications that there is still deal flow. With regard to software, we never really did much primarily because leverage multiples were higher than we were comfortable with. The software that we do have, which is relatively small, is around 4x to 5x leverage. It is certainly not levered 6x, 7x, 8x, or levered against ARR. We are just still not seeing a market that fits our approach, and with AI coming on, there is probably too much secular risk in the system. We are open-minded; we always want to learn.

Maybe there will be opportunities in this reassessment of the technology stack. We are open to it, but as always, we want to make sure leverage is reasonable, we can get comfortable that the companies have a strong moat, and that the companies have a real reason to exist long term. Jose, would you comment on government services?

Jose Briones: Sure, Robert. Great to hear from you. Government services is a space that we have been involved in for quite some time. It is very nuanced and one we like, where we have long relationships with private equity sponsors that know that space really well. We think it is an area of growth and an area of opportunity for us. The acquisition of Echelon by Shield AI is a great example of that. To the market in general, the first quarter is seasonally slow for our business, and then it usually picks up.

With regards to government services and government contracting, clearly given the conflict in the Middle East, there is a lot of emphasis there, and we are still seeing interest and opportunities in that part of the market. Another area that we spend a lot of time with is health care and health care services, as you know, and that is an area that we like and where we see interesting opportunities. Pricing for the market generally has been in that SOFR plus 500 to 550 range. We have not seen much change in that in the past couple of quarters.

Our expectation, to Art’s point earlier, is to continue to focus on the areas we like and where we have expertise.

Robert James Dodd: Got it. Thank you. One more if I can. It seems like every quarter we are asking, “What is your exposure to or the risk from this?” It was software a year ago; before that, tariffs; now I have to ask about oil and commodity prices. With the uncertainty in the oil markets and supply, I do not think you have a ton of exposure anymore, but what is the portfolio exposure if oil were to go meaningfully higher for a sustained period, or supply issues for that matter?

Arthur Penn: It is a good question. As you know, in our history we did oil and gas and that was not a good outcome; that is why we do not do it today—enough said there. You could think of other areas it could impact. Could it impact the American consumer if gas prices are higher? For sure, and consumer is a sector of ours. In most cases, we are doing consumer services that we think are a little less discretionary, like HVAC when your air conditioning breaks and other services around the home. Consumer is a piece of the portfolio; it is not an overweight piece, but it is there.

We do not do much in manufacturing—so none of that plastics kind of manufacturing. Paper packaging—we do not really have any exposure there. I would say it is really the American consumer, which is a big chunk of the overall economy. If the American consumer is weaker, that has a lot of other impacts that may happen. That is the closest thing we have to oil exposure.

Operator: We will go next to Arren Saul Cyganovich with Truist Securities.

Arren Saul Cyganovich: Thanks. On the Echelon transaction, is that going to close in the second quarter? And is the sale price consistent with where it was marked at 3/31? Also, are there any other equity positions that are in talks that might potentially move over the next quarter or two?

Arthur Penn: Yes. We think it will close in the next 60 days, and it is marked at fair value at the deal price. On other equity positions, there are a few, although they are less impactful. There is a company called Garage, which was marked at fair value as of 3/31 and has since exited, and there is an equity co-invest there of a few million dollars. We have others that are in the wings. Nothing as meaningful as Echelon, but getting some singles and doubles here and there should be helpful.

Operator: We will take our next question from Richard Shane with JPMorgan.

Richard Shane: Hey, guys. Thanks for taking my question. I am glad we are not revisiting the whole oil and gas thing; it seems like the last time we were talking, that was a big issue years ago. The question we have been asking everybody this quarter, and I am curious given your focus, is where in the continuum we are in terms of pricing and, more importantly, deal structure. Do your comments mean that you just do not ever see the sort of variance that we might see in the BSL market, and how should we think about this?

Arthur Penn: You have the market where many of the large peers play—above $50 million of EBITDA—and that has been covenant-light for a while because those borrowers have options in the broadly syndicated loan market. In that market, those companies only report to lenders every three months. They do not get co-invest, even if they wanted it; and the deal decision-making is much tighter. Our prototypical deal is a company where a founder, family, or entrepreneur is selling to a middle market private equity sponsor, and the company does $10 million or $20 million of EBITDA.

The game plan is to take that company, grow it, and do add-on acquisitions to get it to $30, $40, $50, $60 million so that it can then be sold or financed in the upper market. As a result, in our world, our capital is strategic capital. It is usually there with a delayed draw term loan to help fuel growth. We become a strategic partner of the company, management team, and sponsor. Because we are a strategic partner, we have plenty of time to do our diligence. We really understand what we are lending to. We get maintenance covenants—quarterly tests that need to be met contractually. We get monthly financial statements.

We have the option, and in many cases we take the option, to co-invest in the equity because if we are helping to create the equity value with our loan, why would we not participate in the upside? Echelon is an excellent example. You can see the benefit of having something in the portfolio with some lift that can offset the inevitable nonaccruals you have. We all have nonaccruals—there is no private credit manager that is perfect. You try to develop a diversified book and minimize nonaccruals, but you are going to have them. Having some equity co-invests in these portfolios is helpful to fill in those gaps. We are operating in an entirely different world than the upper market.

It does not make sense for the business model of those folks to come down and spend their time on companies of this size given their check sizes. If you are managing $100 billion or $200 billion in private credit, it just does not make sense to be focused on this end of the market. Therefore, there are only a handful of real competitors we have below $50 million of EBITDA.

Richard Shane: That helps on the asset side. Curious on the funding side if there is anything we should be thinking about. Banks have been very reliable partners in the space, but you always do wonder about selectivity of credit. Are you seeing any opportunity or any risk on the financing side?

Arthur Penn: Having started our business right before the global financial crisis, we learned very early that lender transparency and relationships are key, and they become our partners. We are always reaching out to our lenders and offering to bring them in and transparently go name by name. When headlines about private credit started to come out a month or two or three ago, we proactively reached out to every one of our lenders and said, “Come on in. We will walk through, loan by loan, what is going on in our portfolio.” We feel really good about it and believe we have underwritten a very solid book.

The vast majority of the lenders said to us, “You do not have much software exposure; you are way down on our list of who we are going to visit. We have plenty of other people to see.” We are always doing that—out with our lenders, developing relationships. As you know, at PNNT we have different types of debt capital. We have traditional credit facilities, we have bonds, and we have securitizations that we use. They are all useful tools, and we have a diversified strategy of using all three.

Operator: We will go next to Christopher Nolan with Ladenburg Thalmann.

Christopher Nolan: Jose, do you know the reason for the drop in total interest income quarter over quarter?

Jose Briones: Let me come back to you on that. We can follow up. No problem at all.

Arthur Penn: I heard the question. Eric Leeds is here from our finance department. Eric, do you have anything you would like to add on that?

Unknown Speaker: Basically, the smaller average portfolio over the quarter, I believe.

Arthur Penn: Great. We ended up generating $0.14, and I think consensus was $0.15, but we are certainly happy to go into the detail with you, Chris, if you would like.

Christopher Nolan: In general, are you seeing a migration of portfolio companies from high tax states to lower tax states at all, and any thoughts?

Arthur Penn: No. We have a very diversified portfolio geographically around the United States. We tend to lend to companies that are growing, wherever they may be, but we have not seen movement of headquarters given what is going on.

Christopher Nolan: Got it. Thanks.

Operator: At this time, there are no further questions. I will now turn the call back to Art for any additional or closing remarks.

Arthur Penn: Thank you, everybody. We really appreciate everyone's participation today. Wishing everyone a happy Mother's Day, and we look forward to speaking to you next in early August at our next earnings report. Thank you very much.

Operator: This does conclude today's conference. We thank you for your participation.