PNNT - PennantPark

[no_free_lunch]

PennantPark is a BDC (they loan money to small companies) that is currently selling for 75% of last quarter NAV and over 15% yield.  The company has been around since 2007 and weathered the 2008/2009 downturn without ever having to reduce their dividend.  Oil and Gas exposure is quite limited (I believe it is less than 10%).  Company has a history of minimal bad loans and is very good at recouping losses when the loans do go bad.  In the past PNNT generally trades at single digit discounts to NAV and ocassionally small premiums.

 

Probably best starting point is VIC, where there have been numerous write-ups.  Here is the most recent writeup.  Stock is down 20% since write up.

 

Art Penn has established a strong credit culture at PNNT that is reflected in comments he made on the most recent earnings call:

 

Our focus continues to be on companies or structures that are more defensive, have low leverage, strong covenants and high returns….As credit investors, one of our primary goals is preservation of capital.  If we preserve capital, usually the upside takes care of itself….We have met our goal of a steady, stable and consistent dividend stream since our IPO nearly 8 years ago, despite the overall economic and market turmoil throughout that time period…Our overall portfolio is constructed to withstand market and economic volatility.

 

PNNT’s current portfolio consists of $1.3 billion invested in 66 companies across 29 industries with 32% in first lien senior secured loans, 44% in second lien secured debt, 16% in subordinated debt and the balance of 8% in preferred and common stock, typically in companies in which PNNT is invested in anjpther portion of the capital structure.  The weighted average debt/EBITDA through PNNT’s security is 4.8x while on average its borrowers have a cash interest coverage ratio of 2.5x.  The weighted average yield on PNNT’s portfolio is 12.5% with approximately 70% of assets floating rate, typically with a LIBOR floor.  Having completed equity ($100mm) and debt ($250mm) offerings just six months ago, PNNT has over $500 million of available liquidity.

 

Evidencing their strong credit underwriting performance, PNNT has only had 9 of its 350 investments become non-accrual, and the realization on even these 9 has been 94% to date (including positions still held and marked at market).  Currently, PNNT has only two investments that are non-accrual, one of which was added in the most recent quarter and together with the carnage in the leveraged energy sector, has created this buying opportunity in PNNT shares.

 

http://www.valueinvestorsclub.com/idea/PENNANTPARK_INVESTMENT_CORP/136496/messages/98285

 

I am 5% invested in PNNT at recent prices.

[DTEJD1997]

There are several interesting things going on with this company....

 

Management appears to be buying back stock.  At a yield of over 15% why originate new loans?  The best investment is their own shares.

 

I also like that they managed to keep the dividend through the 2008 melt down.

 

I'll definitely be taking a closer look at this.

 

 

[no_free_lunch]

Couple of other random tidbits:

 

1) Since inception (2007) to end of the most recent quarter, the company has grown it's NAV + dividends by 74%.  In that same period, the S&P500 with dividends reinvested grew by 66%.  So it's not a rocket to the moon but it did beat the S&P full cycle.

 

2) It's NAV was $11 per share in late 2014.  The author of the VIC article is of the opinion that the NAV (currently $10.04) could move back to that previous level as investments are marked up.

 

As of June 30, 2015 and September 30, 2014, our net unrealized depreciation on investments totaled $109.0 million and $0.9 million, respectively. The decrease in value compared with the same periods in the prior year was the result of the overall variation in the leveraged finance markets and specifically, for energy related companies.

 

    If it regains it's previous NAV level and the stock moves with it, that would be a 49% increase.    If it took 2 years to get there, that's a 39% per year return if you include the divvy.  I wouldn't count on this kind of outcome but you could do very well on this if growth in the US continues to recover.

 

3) Most of their investments are US based. 

 

4) I can't find the reference but I read that there is something like $400M in available credit.  So room for share buybacks and room to reinvest.

 

5) They are reasonably diversified across sectors.  I can't find a way to link it in but you can see some of the details in their investor presentation.

 

http://pennantparkinvestment.mwnewsroom.com/getattachment/2fc1e692-4bc5-4ceb-bc15-34a5d79151c8/PennantPark-Investor-Presentation-December-31,-201

 

6) Company's debt is 71% variable, 39% fixed.  Similar ratio's for their investments.

 

7) Yep, share buybacks are on the table.  It looks like they repurchased about 1% at some point over the last year.  Hopefully they will step it up.

 

On May 6, 2015, we announced a share repurchase plan which allows us to repurchase up to $35 million of our outstanding common stock in the open market at prices below our net asset value as reported in our then most recently published consolidated financial statements.

[supertutti]

Intrigued by this one. Just starting digging in to it, but thanks for bringing it to our a attention!

[sampr01]

Thanks for the idea, and do you know their max exposure to Energy sector.

 

Thanks :)

[no_free_lunch]

sampr,

 

In their June 30,2015 presentation, they list Oil & Gas at 7%.  There is also 6% under "Energy and Utilities".

[thepupil]

first thing i look a w/ respect to an externally managed yieldpig vehicle is the fees.  i'm surprised no one has mentioned them yet. They are pretty hefty, but certainly not out of line with the externally managed BDC universe. I'm not saying it won't work and I own some similar stuff, just pointing them out.

 

2% of assets management fee which amounts to 3.7% of equity.

 

Incentive fee

Part 1) 0% from 0-7% of pre-fee NII, 100% from 7-8.75%, and 20% above 8.75%

Part 2) 20% of realized capital gains

 

 

[no_free_lunch]

For those in the financial industry I would certainly like to know the bear case on this.  I have a suspicion this is more complicated than I am thinking.

 

As a starting point, I will just try to list off some of the bear arguments that I am aware of:

 

1) Concern that company will issue shares at heavy discount to NAV.  So far I have no evidence that the company will do this and they have share buybacks in place but it gets floated around on some message boards.  They did buyback about 1% of shares in most recent quarter.

 

2) Rising interest rates will reduce profitability.  I think given the high dividend yield this isn't a scenario to be scared of.  Rising interest rates should be coupled with improving economy so at some point we should move closer to NAV in this scenario.

 

3) Management is overstating book value of loans.  There were a couple of comments on the most recent conference call where analysts identified loans that were also owned by other firms.  The other firms had discounted the loan by a greater margin than PNNT.  This is something to be aware of but I rely on the fact they have an 8 year history, made it through the GFC whole and we still have the same management.  I also believe that there is quite a healthy discount allowing for more mark-downs.  Still, it's a red flag and something to watch.

 

4) Dividend cut.  Always a real possibility.  Again didn't happen in 09 but sure, could happen.  It's really just a restatement of point 3 that it is possible investments might not work out.

 

That is all I am aware of.  I guess it is probably simple in that it just comes down to how their investments do.  However, if anyone is aware of any more sophisticated arguments I am all ears.

 

[no_free_lunch]

pupil,

 

Yes, fees do seem high.  I guess it is good to know they are-line with peers.  I kind of fall back on my standard, but they have done well since 07 line on this.  I think the main thing is they have resisted the urge to cut equity at bad valuations (to the best of my knowledge), so have not been overly aggressive with the fees. 

 

I am curious how you think they compare valuation wise with peers?

[Picasso]

When you have a lot of BDC's trading under NAV, I think you need to have an idea of why the portfolio will perform in the current economic situation.

 

I also show a large share increase without a dividend/earnings increase.  Why are they issuing shares if they aren't getting enough of a return to increase the dividend?  Besides bringing up the fee base.

 

I would love to buy a BDC that buys stocks at 80% discounts to NAV, issues shares above 110%, and increases their EPS over time.  Is that so hard to find in this world of fee hogs?

[no_free_lunch]

As a comparison ARCC, a larger competitor, currently trades at .88x NAV.  However, it is almost 7x larger and one of the more successful BDC's. 

 

"ARCC is currently trading at 0.93x book value which we view as an attractive entry point. Since 2010 ARCC has historically traded at 1.08x book value or a 15% premium to its current valuation. Additionally, ARCC has consistently generated one of the highest ROEs (using bottom-line, net income) of the BDC sector for those BDCs around before the great recession. Additionally, in our opinion ARCC has one of the best management teams in the sector"

 

http://blogs.barrons.com/incomeinvesting/2015/08/21/ares-capital-deemed-august-opportunity/?mod=yahoobarrons&ru=yahoo

[Libs]

first thing i look a w/ respect to an externally managed yieldpig vehicle is the fees.  i'm surprised no one has mentioned them yet. They are pretty hefty, but certainly not out of line with the externally managed BDC universe. I'm not saying it won't work and I own some similar stuff, just pointing them out.

 

2% of assets management fee which amounts to 3.7% of equity.

 

Incentive fee

Part 1) 0% from 0-7% of pre-fee NII, 100% from 7-8.75%, and 20% above 8.75%

Part 2) 20% of realized capital gains

 

Pupil,

 

Do you know of / own any similar vehicles with lower fees? They would be interesting. Thanks.

[thepupil]

sorry, not an expert in the space. I own ACAS and TFG. ACAS is internally managed (no management fees) BUT plenty of  corporate overhead; trades for 70% of NAV, BUT NAV includes the asset manager. TFG trades for 60% of NAV, fees are 1.5% and 20% over libor+250 with no highwater mark; like ACAS, TFG has a large asset management component. Both have different asset compositions than Pennant.

 

here's a slide from ACAS presentations showing the fees!!!

[DTEJD1997]

Very volatile day today!  Investors worried about the interest rate hike and the dividend.

 

Wish I was quicker and got some more under $7/share.

 

Looks like it is severely mis-priced especially since an interest rate hike is postponed.

[Libs]

6.39 now, with a 16.55% yield.

 

With all due allowances for the high fees problem, their portfolio is not undergoing any reported stress, and as noted they survived the 08/09 environment quite well.

 

Sister company PFLT is higher quality, just raised money cheap, and yields 9.3% as an alternative. I've bought both.

 

I hate this feeling of not understanding WHY they drop every day, though. I don't think it's company - specific; maybe they are getting washed out with the high- yield market.

 

Strange.

[no_free_lunch]

PNNT reported earnings last night.  Nothing fantastic but the sky isn't falling either.  Small dip in BVPS and earnings more or less in line with dividend.  NAV per share is now $9.82.  Still think it's severely undervalued.  Company repurchased about 3.5% of shares during year in total, would like to see more but it's a positive sign.

 

http://pennantparkinvestment.mwnewsroom.com/press-releases/pennantpark-investment-corporation-announces-financial-results-for-the-fourth-qu-nasdaq-pnnt-1227308

 

 

[DTEJD1997]

PNNT reported earnings last night.  Nothing fantastic but the sky isn't falling either.  Small dip in BVPS and earnings more or less in line with dividend.  NAV per share is now $9.82.  Still think it's severely undervalued.  Company repurchased about 3.5% of shares during year in total, would like to see more but it's a positive sign.

 

http://pennantparkinvestment.mwnewsroom.com/press-releases/pennantpark-investment-corporation-announces-financial-results-for-the-fourth-qu-nasdaq-pnnt-1227308

The only thing I would slightly disagree with is that an alarmingly large percent of their loans are now non-accrual, I think something like 9%.  Previously, it was something like 1%?

 

Additionally, NAV went down just a bit more than I would have liked.  It is $9.82/share.  Fortunately, I've got about a $3 margin of safety...

 

Other than that, I think it was a good quarter.  Assuming things don't get substantially worse, I think there is a good chance the dividend is maintained.

[supertutti]

Agreed, big spike in non-accrual investments has me a bit worried. Any word on what sector those were from, and a breakdown of investments by sector currently?

 

PNNT reported earnings last night.  Nothing fantastic but the sky isn't falling either.  Small dip in BVPS and earnings more or less in line with dividend.  NAV per share is now $9.82.  Still think it's severely undervalued.  Company repurchased about 3.5% of shares during year in total, would like to see more but it's a positive sign.

 

http://pennantparkinvestment.mwnewsroom.com/press-releases/pennantpark-investment-corporation-announces-financial-results-for-the-fourth-qu-nasdaq-pnnt-1227308

The only thing I would slightly disagree with is that an alarmingly large percent of their loans are now non-accrual, I think something like 9%.  Previously, it was something like 1%?

 

Additionally, NAV went down just a bit more than I would have liked.  It is $9.82/share.  Fortunately, I've got about a $3 margin of safety...

 

Other than that, I think it was a good quarter.  Assuming things don't get substantially worse, I think there is a good chance the dividend is maintained.

[no_free_lunch]

Agreed, big spike in non-accrual investments has me a bit worried. Any word on what sector those were from, and a breakdown of investments by sector currently?

 

This is from the Seeking Alpha transcript.

 

Doug Mewhirter - SunTrust Robinson Humphrey

 

Okay. Just last one just to clarify because there is a lot of ins and out of non-accruals what is four, you said there is four investor, what exact ones are they, are currently on non-accrual as of end of the quarter?

 

Art Penn - Chairman and CEO

 

So the four and the four names currently on non-accrual are Affinion, New Gulf, Direct by and Great Wide which sometimes goes only in transportation 100.

 

 

[eclecticvalue]

Good time to buy, added more today. The div yield is 17.3% the spread to the 10 year treasuries is ridiculous. Imagine if you bought this stock in the 2008 financial crisis the div yield would have been 30%, unheard of. I would like to meet someone who bought this in 08 and see their statements. I hope the company is doing their buybacks right now.

[DTEJD1997]

Hey all:

 

Anybody considering getting some more of PNNT?

 

I know I am!

 

The latest earnings report was generally decent....I am concerned that the company saw fit to loan money to "Direct Buy".  This loan is now "non-accrual" of course.

 

S&P also downgraded the stock based on their energy exposure.  Not all energy is directly related to O&G exploration and production.  I think they have loaned money to a gas pump manufacturer and a heating oil company if I remember correctly.

 

S&P postulates that their portfolio is about 17% energy related....

 

so

 

The stock is selling for a 35% discount.

 

Further, just because a loan is non-accrual does not mean it is totally worthless.  Is it impaired?  Almost certainly....but it likely will have some residual value.  This is where the quality of management will come out.  In the previous down cycle, management was made whole on some non-accrual loans, and did pretty good on most of the others.

 

Finally, another dividend is being paid in full...barring armageddon, it looks to continue for the foreseeable future.

 

Any thoughts?

[Libs]

<Any thoughts?>

 

Here are mine. Would like to know what I'm missing..

 

Under the assumption that the stock price will eventually converge near NAV,  I attempted a rough NAV burn-down scenario, far worse than actually happened in 08/09, to see how low NAV could go.

 

What would happen if we wrote off 50% of 1) O & G and nat. resource assets, 2) the assets in arrears, and 3) Assumed another 10% of what's left went into arrears?

 

1) All O & G and natural resource assets: $163MM X .50 = $81.5MM

 

2) Assets currently in arrears: $71MM X .5 = $35.5 MM

 

( Note the 163MM and 71MM are ALREADY carried at ~12% and ~50% off of cost, respectively. Also, I found little overlap between the 2 categories so I'm not double-counting)

 

3) Then take the other $1B in assets, put 10% into arrears, and reduce that by 50%; so 100MM X .50 = 50MM.

 

So in this grim scenario, we reduce NAV by 81+35+50 = 161MM.

 

Divide by 73MM shares = NAV reduction of $2.20 per share. NAV drops to $7.62.

 

Assuming net interest income drops proportionately, it would be .87 a year, or 11% on NAV of $7.62; and on a the current share price of $6.55, the yield would be 13%.

 

In other words, there's quite a cushion here. Even under this scenario, at today's price there should be buyers.

 

What am I missing?

 

Positives:

 

1) Plenty of liquidity;

2) Marks independently verified;

3) Dividend cushion of .53 a share is in the bank for potential shortfalls;

4) They've only had 11 non-accruals in 8+ years, and recovery has been 80%+;

5) Buying back stock, as noted by others.

6) Current credit markets offer some good opportunities;

 

Risks / problems:

 

1) Portfolio turns over every 3 years; need to constantly fill the leaky bucket;

2) Last Q, net interest income was .06 short of the payout, need to keep tabs on this;

3) If economy truly tanks, who knows how bad this could get;

4) They did write down $123MM last year, or 8.7% of assets;

5) We get our faces ripped off in fees, ~36% of interest income this year.

 

Given all that, $6.55 current price looks like a good risk / reward scenario. So, yes, DTEJD, I'm buying more...

 

[DTEJD1997]

Libs:

 

One thing that I keep forgetting is that there is probable tax loss selling going on now.  It is going to get worse in the next 10 days or so.

 

PNNT is going to be susceptible to that.

 

The other thing that I forgot about is that sellers can/will get silly.  Back in 08, PNNT went quite a bit lower than where it is at now.  If O&G & the economy as a whole starts slowing down, we could be looking at even lower prices.  Perhaps significantly so.

 

This tempers my proclivity to pick up even more shares at this low price.  I think that I will wait a week or so and see what happens.

 

The other problem I've got is that this is not the only stock I'm down in. 

 

I'm also nervous about a general slowdown.  We've got problems  in China, the Middle East, an election coming up, rising interest rates....and on and on.

 

I'll be watching this closely and maybe get some more shares just before the end of the year...

[Libs]

DJ

 

Agree with what you wrote, but I'm slowly scaling in more $$ with every 3-4% drop. It's down to $6.02 as we speak.

 

Here's an interesting parallel- triple CC's are yielding 17% according to this - same as PNNT. We've hit 2009 lows.

 

 

http://davidstockmanscontracorner.com/junk-market-craters-triple-hook-yields-spike-to-17highest-since-2009/?utm_source=ReviveOldPost&utm_medium=social&utm_campaign=ReviveOldPost

[DTEJD1997]

DJ

 

Agree with what you wrote, but I'm slowly scaling in more $$ with every 3-4% drop. It's down to $6.02 as we speak.

 

Here's an interesting parallel- triple CC's are yielding 17% according to this - same as PNNT. We've hit 2009 lows.

 

 

http://davidstockmanscontracorner.com/junk-market-craters-triple-hook-yields-spike-to-17highest-since-2009/?utm_source=ReviveOldPost&utm_medium=social&utm_campaign=ReviveOldPost

 

I am unsure how big the CCC market is...but assuming it has not contracted substantially in recent years...that could be indication of economic problems coming down the pike.

 

Look at the Baltic Dry Index, price of coal, silver, gold, copper, steel, and of course oil.  China is contracting substantially too.

 

Maybe we are seeing the beginnings of a much bigger economic slowdown & market correction.

 

Heck, real estate prices are way up in Detroit.  If that isn't a sign of a market top, I don't know what is!