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Operator: Good afternoon, and welcome to the PennantPark Investment Corporation’s First Fiscal Quarter 2026 Earnings Conference Call. Today’s conference is being recorded. [Operator Instructions] It is now my pleasure to turn the call over to Mr. Art Penn, Chairman and Chief Executive Officer of PennantPark Investment Corporation. Mr. Penn, you may begin — go ahead and begin your conference.

Arthur Penn: Good afternoon, everyone, and thank you for joining PennantPark Investment Corporation’s First Fiscal Quarter 2026 Earnings Call. I’m joined today by Rick Allorto, our Chief Financial Officer. Rick, please start off by disclosing some general conference call information and include a discussion about forward-looking statements.

Richard Allorto: Thank you, Art. I’d 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’d 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’d like to turn the call back to our Chairman and Chief Executive Officer, Art Penn.

Arthur Penn: Thanks, Rick. I’ll begin with an overview of our first quarter results and discuss our forward dividend strategy. I will then discuss the exit of our investment in JF Holdings and our ongoing strategy to reduce the portfolio’s equity exposure. Lastly, I will then share our perspective on the current market environment and how the portfolio is positioned for the quarters ahead. Rick will follow with a detailed review of the financials, and then we’ll open up the call for questions. For the quarter ended December 31, core net investment income was $0.14 per share. Turning to the dividend, beginning with the dividend payable in April. The total dividend will remain $0.08 per share, but will be comprised of a $0.04 per share base dividend and a $0.04 per share supplemental dividend.

The base dividend is expected to be fully supported by current core net investment income and the supplemental dividend will be supported by our $41 million or $0.63 per share of undistributed spillover income. We anticipate maintaining the supplemental dividend payment through December 2026. During the quarter, we fully exited our equity investment in JF Holdings and received total proceeds of $68 million and generated a realized gain of $63 million. With the exit, we monetized 20% of the fair value of our equity portfolio. While we are pleased with the outcome for JF, we remain focused on reducing the total equity exposure of the fund. Turning to the market environment. We are seeing an increase in M&A transaction activity across the private middle market.

This trend is expanding our pipeline of new investment opportunities. We also expect that this increase in M&A activity will drive repayments of existing portfolio investments, including opportunities to exit some of our equity co-investments and rotate that capital into new current income-producing investments. We believe 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 475 to 525 basis points with leverage of approximately 4.5x. Importantly, we continue to get meaningful covenant protections in contrast to the covenant-light structures prevalent in the upper middle market.

Turning to our portfolio performance. As of December 31, the median leverage across the portfolio was 4.5x with median interest coverage of 2.1x. During the quarter, we originated 3 new platform investments with a median debt-to-EBITDA of 4x, interest coverage of 2.9x and a loan-to-value ratio of 49%. With regard to the software risk that has been a recent market focus, we have stuck to our knitting. Only 4.4% of the overall portfolio is software and that 4.4% is structured consistently with how we invest. They are primarily all cash pay loans with covenants with reasonable leverage and an average maturity of 2.2 years on average. It’s enterprise software that is integral to their customers’ businesses and the vast majority of which is focused on heavily regulated industries such as defense, health care and financial institutions where safety, security and data privacy are paramount and where change will be slower.

Peers typically invested much larger percentages of their portfolios in software, 20% to 30% with much higher leverage, 7x, 8x or more or loans against revenue, not cash flow with substantial PIK, covenant light and long maturities. This story is a significant differentiator from our peers. We ended the quarter with 4 nonaccrual investments, representing 2.2% of the portfolio at cost and 1.1% at market value. These strong credit metrics reflect the rigor of our underwriting process and the discipline of our investment approach. We continue to believe that our focus on 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 structured transactions with sensible credit statistics, meaningful covenants, substantial equity cushions to protect our capital, attractive spreads and equity co-investment. Additionally, from a monitoring perspective, we received 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 common.

Since inception nearly 19 years ago, PNNT has invested $9.2 billion at an average yield of 11.2%, while 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, it fuels 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 December 31, we have invested over $615 million in equity co-investments and have generated an IRR of 25% and a multiple on invested capital of 1.9x. As of December 31, our portfolio totaled $1.2 billion.

And during the quarter, we continued to originate attractive investment opportunities and invested $115 million in 3 new and 51 existing portfolio companies. Our PSLF joint venture portfolio continues to be a significant contributor to our core NII. At December 31, the JV portfolio totaled $1.4 billion. And over the last 12 months, PNNT’s average NII yield on invested capital and the JV was 16.4%. The JV has the capacity to increase its portfolio to $1.5 billion, and we expect that this additional growth, the JV will enhance our earnings momentum in future quarters. From an outlook perspective, our experienced and talented team and our wide origination funnel is producing active deal flow. We remain steadfast in our commitment to capital preservation and disciplined patient investment approach.

We reiterate our objective to deliver compelling risk-adjusted returns through stable income generation and long-term capital preservation. We seek to find investment opportunities in growing middle market companies that have high free cash flow conversion. We capture that free cash flow primarily through debt instruments, and we pay out those contractual cash flows in the form of dividends to our shareholders. With that overview, I’ll turn the call over to Rick for more detailed review of our financial results.

Richard Allorto: Thank you, Art. For the quarter ended December 31, GAAP net investment income was $0.11 per share and core net investment income was $0.14 per share. Operating expenses for the quarter were as follows. Interest and credit facility expenses were $10.5 million, base management and incentive fees were $3.9 million. General and administrative expenses were $1.3 million and provision for excise taxes were $0.7 million. For the quarter ended December 31, net realized and unrealized change on investments and debt, including provision for taxes, was a loss of $2 million. As of December 31, our NAV was $7 per share, which is down 1.5% from $7.11 per share in the prior quarter. As of December 31, our debt-to-equity ratio was 1.3x, and our capital structure is diversified across multiple funding sources, including both secured and unsecured debt.

In January, we raised $75 million of new unsecured debt, which will be used to partially repay our existing unsecured debt that is maturing in May. As of December 31, our key portfolio statistics were as follows. Our portfolio remains highly diversified with 158 companies across 37 different industries. The weighted average yield on our debt investment was 10.9%. The portfolio is comprised of 48% first lien secured debt, 3% second lien secured debt, 14% subordinated notes to PSLF, 6% other subordinated debt, 6% equity in PSLF and 23% in other preferred and common equity co-investments. 89% of the debt portfolio is floating rate. The debt-to-EBITDA on the portfolio is 4.5x, and interest coverage is 2.1x. With that, I’ll turn the call back to Art for closing remarks.

Arthur Penn: Thanks, Rick. 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. That concludes our remarks. At this time, I would like to open up the call to questions.

Operator: [Operator Instructions] Our first question, Robert Dodd from Raymond James.

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Robert Dodd: A couple of kind of semi-housekeeping first. On the — just for clarification, I think it’s pretty clear. But on the dividend, you said the supplemental program will stay in place through December 2026. Just to clarify, you mean the $0.04 specifically supplemental monthly will stay in place through ’26 and beyond that, who knows, right? But that’s not just that there will be a supplemental, but it’s the $0.04 level.

Arthur Penn: That’s correct.

Robert Dodd: Got it. Second one, will there be any onetime expenses in calendar Q1 related to the new bond or the partial paydown of the May? Or are you just going to hold the cash until then? I mean, is there going to be anything onetime in Q1?

Unknown Executive: No, Robert. There won’t be any onetime expenses related to that. For that facility, the fees associated with issuing that new debt will be capitalized and amortized and no real impact from a onetime perspective on the revolving facility.

Robert Dodd: Got it. Got it. Then I’m not going to ask you exactly the same question as I did earlier on software. But I mean, as you look at kind of the core niches that you’ve kind of really focused on at PNNT and obviously a combination of the size of businesses, but the type of borrowers that you have typically focused on. I mean, where would you rank — I mean, do you think AI represents more of a risk or an opportunity for the typical borrowers that you lend to in the industries between size and industry?

Arthur Penn: Yes, it’s a great question, and we debate this every time we go through a company and investment committee. Is it a help or a hindrance is as AI? And ultimately, we keep asking ourselves the same question all over again, which is if this company goes away, who really cares? And if the company goes away, no one really cares, we shouldn’t be investing in that company. And usually, if the answer is affirmative, people care. It means they’ve got really great customer relationships or they’ve got a high market share or a niche that’s defensible. And usually, AI could be a help and present some upside to companies that are well positioned and have a moat, although there’s no assurance, right? I mean one of the quotes that someone shared with me, it’s a famous quote, which is people tend to overestimate the impact of technological change in the short run, and they tend to underestimate the impact of technological change in the long run.

And it feels like we’re in one of the short-run moments where the whole market is kind of spinning on the concept of AI and software. And as we’ve discussed and certainly for us, software is a very small percentage manageable and deeply embedded. But look, where things are going to be in 10 years, don’t know. But look, it’s nice to have a credit portfolio with short maturities. Our average software maturity might be around 3 years. Our average maturities are 3 to 5 years. It’s nice to have covenants. It’s nice to get cash flow. We don’t have any pick really in these portfolios. So that’s how we defend ourselves. And then also, we have to find companies that people will care about and have resilience and people — and you see it in the margins, you see it in how they gain share.

So hopefully, we’re selecting those companies well. Of course, there’s never a guarantee.

Operator: Our next question, Paul Johnson with KBW.

Paul Johnson: In terms of like the equity rotation, I guess, that’s kind of left in the portfolio, there’s still quite a bit even after the JF Intermediate exit. But do you still think that there’s potential this year for additional meaningful exits at this point? Or it sounds like you’re fairly optimistic about M&A coming in this year, but has like any of the recent volatility at all backed up interest in doing M&A in any of those names at all?

Arthur Penn: Yes. Look, we still — thanks, Paul. We still think there’s — based on what we can tell, M&A hasn’t slowed down. Granted we’re not big in software. So I couldn’t tell you about M&A in the software space. I would imagine we probably slowed down right now. But like in the rest of the world and the rest of the community, we’re still seeing good M&A. I will highlight that 2 of our bigger sectors are military, defense and government services as well as health care, both of which seem to be performing well and both of which from what we could tell, represent some meaningful M&A activity and where we have some substantial equity co-invest. So those have been 2 of our bigger sectors. And they’ve performed very well for us.

There’s not that many people are heavily focused on defense and government services, [indiscernible]. It’s been a big space. The U.S. government seems to be increasing its expenditures and there’s some tailwinds there. And then on health care, we’ve had a better experience on health care than many of our peers. I think it really is just attributed to just kind of not leveraging up the company as much. I think our peers tend to be willing to accept higher leverage. So when we do health care, we, again, tend to try to find companies that have a defensible moat, keep the leverage reasonable. And then in health care, our motto really is try to find companies that are providing high-quality service at a reasonable or low cost, given that government reimbursement is always a risk in health care.

But if we can find companies that are going to reduce cost and still provide good service, it’s going to be hard to be hurt. And I think that’s kind of one of the reasons our health care names have probably performed better than some of our peers.

Operator: Our next question is from Brian Mckenna from Citizens.

Brian Mckenna: I’m curious, why not adjust the dividend to reflect the current outlook for core earnings and then repurchase stock with that capital. So you’re actually driving some NAV per share accretion versus diluting it by about 1% plus a quarter? And then should we expect to see some insider buying post earnings here with the stock trading at 77% of book and an 18% dividend yield?

Arthur Penn: Yes. No, on the — I’m missing your question, we can dive into it. We have the substantial spillover that we are obligated to pay out. So there’s been some debate, do you pay it all out at once? Do you pay it out over time? Given we want to maintain good credit ratings, given that we’d like to have a smooth glide path for our shareholders, we’ve elected to pay it out over time and we also want to keep our leverage reasonable. We kind of want to keep it kind of in the 1.2x, 1.3x debt-to-equity area. So then the question becomes like, okay, as you have incremental liquidity with rotation, whether it be equity or debt, what do you do with the capital? I mean we’re obligated to pay out the supplemental dividends. We have to.

So then kind of how do you — what do you do with your excess capital then? And that’s something we’re always thinking about and talking about, again, we’re cognizant of our credit ratings. We’re cognizant of our debt-to-equity ratio. Buying back equity, albeit cheap, does impact your debt-to-equity ratio. But something we always consider. We’ve done buybacks in the past in PNNT, and we always consider that. Same thing with insider buying. We’ve had substantial insider buying over time. It’s something that’s always on the table, and we are always evaluating our options there as well.

Brian Mckenna: Okay. That’s helpful. And then, Art, you’ve clearly had a great tenure in the industry. You’ve managed the business in a number of different operating environments and also through periods of time when the industry kind of has come in and out of vogue. So what past experiences are you leaning on today to prudently manage the portfolios in the current environment and as that continues to evolve? And then is there also an opportunity here to maybe lean into some of the dislocation we’ve seen in the market, either from an origination perspective, maybe don’t do as much in software, but even like strategically, and again, it’s maybe not a PNNT question, but are there any incremental opportunities on the strategic acquisition front at the broader manager level?

Arthur Penn: Yes. No, look, chaos does bring opportunity and it’s brought opportunity for us over time and whether it was through the global financial crisis, whether it was through the energy downturn or more recently COVID, obviously, you have to defend first and make sure you’re building resilience in the vehicles. And then you can look around and say, how can we take advantage of a little bit of the chaos. And that’s what we’re doing. Now within that, we kind of stick to our guns. And when we see reasonable leverage with covenants and good risk-adjusted return, we’re going to lean in and try to take advantage of that. We’re not seeing that yet. We’ll see what happens with cash flows into the industry, whether it be through the high net worth channels, whether it be through the insurance channels.

Are those cash flows going to hold up? Are they going to soften a little bit? Or software loss is going to work their way through and make certain managers more conservative and defensive? Time will tell, but we want to keep ourselves in a prudent position and be well balanced and look opportunistically. And then at the management company level, we’re always looking for opportunities both at our BDC levels and more broadly. And again, chaos should bring opportunity. We think how we’ve navigated software to date is a differentiator, for instance, and can show in the larger capital allocators, the benefits of the core middle market where covenants are still prevalent, where leverage is reasonable and where there’s very limited pick. And maybe that’s what large allocators should be focused on versus chasing high leverage covenant-light PIK allocations.

So we’ll see, but we’re always trying to defend number one and then try to judiciously figure out how to play offense number two.

Operator: Our next question comes from Rick Shane with JPMorgan.

Richard Shane: It’s been a while. I think I was there 19 years ago, actually. Look, it’s interesting looking at this with fresh eyes after all this time. And I think one of the things that has changed pretty dramatically is the competitive landscape. And I think that one of the factors that you guys are facing is you have a lot of peers out there who effectively have a different cost of capital. They can raise capital essentially at par. You guys are trading at a pretty significant discount at this point. How do you close that gap? And can you really continue to compete if you’re in a universe where your primary competitors at this point essentially have a lower cost of goods sold in terms of funding. And with that, if you could talk a little bit about the sizing of the debt deal that you guys just did. It’s $75 million [ box ], represents about 25% of your pending maturities this year. I’m curious how you think about sort of the next steps there.

Arthur Penn: Yes. I’ll take the second, Rick. Good to hear your voice, and welcome back to covering us and BDCs. First, I’ll take the second question first, which is we do have some debt maturities. That was the first step, the $75 million, we just did. We’re going to over the coming 3, 6, 9 months, chip away at them judiciously over that period of time and look at various different ways to raise debt capital that is available to us. On the competitive framework, look, we’ve been very open that PNNT is a work in process, you remember, you covered it, took some stumbles during the energy crisis, and it’s been a challenging work since then. We’re working hard and the main thing is really to reduce this equity exposure to the JF, the sale of JF was a big milestone for us and significantly reduce the equity exposure.

We still have more to do. And that’s really the focus, reduce the equity exposure of the portfolio, rotate that, clean up the portfolio, and then we’ll come up for figure out what the next steps are for PNNT. In the meantime, to the cost of capital question, we have a very robust and strong track record of first lien core middle market senior secured debt where leverage is reasonable, 4.5x is our average loan, where we have maintenance tests, where we get monthly financials, where we’re not rushed to do due diligence. And that track record is very strong, and it can be financed and captured very well for PNNT in the JV format where we use both credit facilities and securitization facilities to efficiently finance that and therefore, generate a very strong risk-adjusted return for PNNT shareholders.

And you see a good example of that over at PFLT more broadly. So while we’re working really hard to reduce the equity exposure in PNNT, we’re also working hard to manage the JV, which is a large percentage of the pie. We understand, but it’s a very well financed and very kind of strongly structured and efficiently managed from a cost standpoint to your kind of cost of capital comment. No management fees are charged on the JV. It’s — in essence, we are managing a larger pool of capital, not charging management fees and on a blended basis, is very attractive for shareholders. So that’s really the game plan, rotate the equity, manage the JV, when we make a little bit more progress in J&F was a nice event, come up for it and figure out what to do next.

Operator: Our next question comes from Christopher Nolan with Ladenburg Thalmann.

Christopher Nolan: The decline in dividend income quarter-over-quarter, is that related to the senior loan fund?

Unknown Executive: Chris, yes, it was related to PSLF, correct.

Christopher Nolan: Great. And then should we expect use of the expanded facility for some of the refis going forward?

Arthur Penn: Yes. I mean the expanded facility does give us the ability to really pick our spot on, when to issue bonds. So just more liquidity, more dry powder in our system. We think in times of market turbulence, it’s good to have excess liquidity and dry powder, both for defensive and offensive purposes.

Christopher Nolan: And final question. Given that — are you finding that you’re trading coupon for stronger covenants or that’s not really a dynamic which is available in your negotiations?

Arthur Penn: Yes. In our part of the market in the core middle market covenants are given. So if our average or median borrower does $20 million or $30 million of EBITDA, that’s — we’re always getting covenants. We will trade off yield for credit quality. There’s no question that the way we operate and the lesson we continually learn is don’t skimp on credit quality if it’s — if it means giving up a few basis points and you get a much higher quality credit, that’s usually the right call.

Christopher Nolan: Great. Final question. I asked this on the last call. The $36 million in credit facility and debt issuance costs, was that relating to the $75 million issuance in January?

Unknown Executive: No, that was related to the amend and extend of the revolving facility in the fourth quarter.

Operator: Our next question comes from Casey Alexander with Compass Point.

Casey Alexander: I’m glad that you brought up the PSLF, JV. The leverage in the JV is 2.8x, which is the highest that I’ve heard of any JV in a BDC. At the same point in time, your fair value of your equity in the JV has been marked down $22 million. And so that’s a contributing factor to that high leverage ratio. At what point in time are you either going to be forced to add more equity to the JV or shrink the JV in order to temper the leverage ratio?

Arthur Penn: These are good points. Thanks for raising, Casey, and thanks for your question. Just to level set, the broader PennantPark platform has a very large senior secured first lien middle market business. So when a first lien loan comes into the platform, it gets allocated across the platform, including the JVs where it makes sense, the private funds, the BDCs. And we also have a CLO platform in the middle market. And we’ve come to appreciate the benefits of securitization technology where you don’t need to worry about a credit officer in a corner office having a bad hair day or human beings will react emotionally to market events. So we’ve run securitizations through COVID. We feel like we really understand them. And then the CLO portion of our business, it’s not unusual for middle market CLOs to have 4x or 5x leverage, right?

So — and we run them well. We know how to operate. We know how to reduce risk. And if you run the securitization correctly, you’re actually reducing risk because you understand the boxes. So then you sit here, you move that over to the joint venture. And we have joint ventures. We have — we now have 3 joint ventures. They’re all — the goal there is usually to run them at least to 2x and 2.8x is on the higher end. I don’t anticipate we’re going to go any higher here. But just as background, we still think it’s a very prudent structure to have against very low levered senior secured covenanted cash pay debt. There’s no software in these things. There are covenants, et cetera. Now you raised a good point about equity diminution. And you know this and investors should know this.

When you have a book of 100% debt, odds are you’re going to have some losses and odds are your equity is going to diminish, right? What we do at PennantPark, as you know, is we have an equity co-invest program that over time has generated nearly a 2x MOIC and 25% IRR. And the reason we have that program is to help fill in the gaps that inevitably you’re going to have with debt. So the JV specifically is a debt JV. Our JV partner does not want equity in there. We create equity and have equity kind of ready to go if need be to shore things up. The reason why we have excess liquidity, why we do bonds. The JF sale was a big milestone, and we used that equity to deleverage the balance sheet in PNNT, again, trying to create some dry powder and some excess prudent cushion in the overall platform.

But your points are right. We’re aware of them and feel comfortable with where we are at this point.

Operator: That will conclude our question-and-answer session. I’d like to turn the call back over to Art Penn for closing remarks.

Arthur Penn: I want to thank everybody for participating on today’s call. We look forward to speaking with you next in early May.

Operator: And this concludes today’s call. Thank you for your participation. You may now disconnect.

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