The second BDC to report earnings for the quarter ended December 31, 2009 was Pennant Park Investment Corporation (PNNT), a BDC which focuses principally on mezzanine debt in the lower middle market. We use this data to read the tea leaves as best we can about the prospects for maintenance or increase of the distribution. Here the news looks encouraging. PNNT yesterday announced a second increase in as many quarters to $0.26 (for the IQ of 2010) from $0.25 and $0.24 for the quarter ended September 30, 2010.
Certainly, PNNT’s Investment Income and Net Investment Income increased sharply in the period from 3 months ago: 15% and 20% respectively. However, when earnings are spread over an increased share count from its recent September 2009 offering, Net Investment Income Per Share was unchanged at $0.28 a share.
We didn’t hear much about the bad debt situation (better left to the Conference Call and 10-Q). We do note,though, that PNNT wrote off a boat load of bad debt in the quarter: nearly $17mn. That brings Realized Losses to a not insignificant $67mn , or a whopping 20% of equity at cost. That does not reflect well on the Company’s underwriting proficiency. Still, if you believe that PNNT’s investment assets are worth only $3.5mn less than cost, most of the damage has been done.
Going forward we expect only a slight uptick in earnings, even if bad debt is muted. Portfolio yields have topped out just over 11%, interest expense is about as low as they can go (PNNT has a very inexpensive Line of Credit which does not get re-priced until 2012). We don’t expect much in the way of incremental assets added as the Company is borrowing heavily already. PNNT has $245mn in debt outstanding versus equity at cost and undistributed net investment income, less Realized Losses, of $266mn. Regardless of what the covenants the Company might operate under, that’s nearly a 1:1 debt to equity. PNNT may be able to turn some lower yielding assets into higher yielding loans but that won’t shift the earnings by much.
In conclusion and without benefit of the 10-Q/Conference Call data, PNNT’s earnings appear to be levelling off, and the dividend seems secure for the short term. We may even get another 1 cent increase next quarter. However, we remain concerned that PNNT’s liquidity could be rocked should the economy “double dip” due to its high leverage. At the least, earnings could be impacted if more bad debts appear in the portfolio. We’re still a buyer, but we’re cautious.
Disclosure: Author holds a long position in PNNT