PNNT - PennantPark

[no_free_lunch]

I still think it's a good risk/reward, obviously better at this price than when I bought.  :)  However, I am not adding more.  There is real risk of capital loss with this one if we go into a protracted downturn so you need to size accordingly.

[eclecticvalue]

Their exposure to Oil and Gas is around 6% and metals/mining is at 2%. The stock is taking a huge hit from that 8% exposure. It is being priced as if the investments are going bad. Going forward, if oil prices rise the investments in those sectors should be ok. Here is the sensitivity analysis http://www.fool.com/investing/general/2015/09/27/how-low-can-pennantpark-investment-corp-go.aspx

[DTEJD1997]

Hey all:

 

There is a good chance that I will be purchasing some more shares of PNNT if I can get in below $6.

 

At $6, the dividend yield is 18.7%.  Even with distress in the energy sector, I think there is a high likelihood that the dividend will be maintained.

 

I also very much doubt that the distressed loans are donuts.  I have little doubt that they will take a hit on them...but how much of a hit?  25%  50%  75%?  With prior distressed loans, management eventually managed to recover close to $.80 on the dollar.  This is where quality of management will come through.

 

Even in the depths of the 2008, PNNT maintained the dividend! 

 

Even if the dividend does get cut, the yield should still be well over 10%.

 

Finally, management has been BOTH buying back shares AND personally purchasing shares.

 

The only thing I can think that will derail this is if we go back into another depression....

 

What am I missing here?

[FCharlie]

You are correct. Management/Directors have made seven separate purchases in the past six weeks buying over 72,500 shares at prices higher than today's price.

 

There have been zero sales.

 

Meanwhile, the company has repurchased over 2.1 million shares this year at prices higher than today's.

 

Considering the insider purchases & share repurchases, and considering the fact that the company appears able to continue paying the dividend, and considering the history of paying this dividend even in 2009, I think this is a great opportunity here.

[Libs]

You are correct. Management/Directors have made seven separate purchases in the past six weeks buying over 72,500 shares at prices higher than today's price.

 

There have been zero sales.

 

Meanwhile, the company has repurchased over 2.1 million shares this year at prices higher than today's.

 

Considering the insider purchases & share repurchases, and considering the fact that the company appears able to continue paying the dividend, and considering the history of paying this dividend even in 2009, I think this is a great opportunity here.

 

Their performance in '09 may not be as good as it looks on the surface. Their first batch of loans were made / bought in 2007, which was actually a good time as credit markets were tanking.

 

One could argue their current assets were gathered under worse circumstances ( a time of credit expansion and weakening standards).

 

I like this bet, but I agree with the comment about a recession / depression; if it happens, the Fed is out of bullets and things could get really bad. In which case I would expect the portfolio to under perform the '08 - '09 era.

 

 

 

 

 

 

[DTEJD1997]

 

Their performance in '09 may not be as good as it looks on the surface. Their first batch of loans were made / bought in 2007, which was actually a good time as credit markets were tanking.

 

One could argue their current assets were gathered under worse circumstances ( a time of credit expansion and weakening standards).

 

I like this bet, but I agree with the comment about a recession / depression; if it happens, the Fed is out of bullets and things could get really bad. In which case I would expect the portfolio to under perform the '08 - '09 era.

 

Libs:

 

You bring up a good point.  I had not even thought about when the prior loans were issued.  You may very well be right that this current batch is not quite as good. 

 

The only thing I would add to your comments is that if management is truly above average, this current batch of loans should still have some value AND that management will work intelligently to work out the problem loans. 

 

I too am worried about another big pull back.  IF that happens, a LOT of things are different today.  I for one, have little "cushion" left.  Many people & businesses don't have the reserves that they had back in 08.  Thus, if a crash/severe downturn comes, I think the consequences will be much graver this time around.

[Libs]

Results out. NAV down to $9.02. They wrote energy holdings down by 40MM.

 

Mgt waived a portion of their fees, and will do so the rest of the year. This adds .02 / quarter to interest income.

 

CEO said if they wrote all energy to zero, NAV would be 7.28 and interest income would drop by .05 per Q.

 

Non -accruals down from 4 to 3.

1st lien up to 38% of portfolio from 28% last Q.

 

Ex energy, the portfolio is doing fine, they expect 3% revenue growth in the aggregate from the portfolio ( this was a good question on the CC)

 

They are comfortably above the 1:1 leverage trigger. (It helps that SBA loans do not count. For some reason their lender excludes this, even though they have no recourse)

 

CEO " We could lose all of our energy holdings plus more and still be above 1:1."

 

CEO: Bull case net interest income: ( we are trying to maintain the .28)

 

.23 recurring

.02 fee waiver

.04 Average 'other income"

.01 SBIC (?)

+ hopefully expanded yield from new opportunities

 

= .30 plus

 

 

Bear case:

 

Knock off .05 for all energy=

 

.25

 

Remember, they have .53 cushion they can use also.

 

IMO, summarizing all this, it still looks compelling at $5.51. Stock is up 5% on the news.

 

 

 

 

 

 

 

 

 

[no_free_lunch]

PennantPark Investment Corporation (the "Company") ( NASDAQ : PNNT ) declares second fiscal quarter 2017 distribution of $0.18 per share, payable on April 3, 2017 to stockholders of record as of March 22, 2017. Distributions are paid from taxable earnings and may include a return of capital and/or capital gains. The specific tax characteristics of the distribution will be reported to stockholders on Form 1099 after the end of the calendar year and in the Company's periodic report filed with the Securities and Exchange Commission.

 

The are reducing the dividend it appears and I am out.  Small 5% capital gain and 13-14% dividends on the way, this worked out okay given how oil and gas has been performing.

[DTEJD1997]

Hey all:

 

Anybody still in PNNT or watching it?

 

I've been thinking about getting some more as it has pulled back a bit lately...not back to where I bought most of my position, but maybe within $.75/share.  Of course, I've picked up a few dividends along the way...

 

With the reduced dividend, they are yielding close to 10%.

 

Insiders have been buying lately.

 

They came out with TERRIBLE earnings last night!  They "missed" analysts expectations by $.02/share.  Earnings were $.26/share, backout one time gains and they were $.18/share.  Book value increased to $9.18/share.

 

Stock is trading at a significant discount to book at $7.40/share.

 

I think they have written down a LOT of their energy related loans...probably won't have too much more trouble with this going forward.  Of course, that is assuming oil doesn't go to $12/barrel.

 

An investor could make a pretty decent return IF:

 

1). Company keeps dividend level (highly likely)

2). The discount to B/V narrows (likely, but not as likely as 1)

3). The company continues to modestly grow B/V every quarter by a couple pennies.

 

If the 3 things above take place, I could see somebody making 15% a year for a few years...

 

Any thoughts?

[Libs]

https://seekingalpha.com/article/4096678-pennantpark-investments-pnnt-ceo-arthur-penn-q3-2017-results-earnings-call-transcript?part=single

 

Thanks for bringing this up again. It had slipped under my radar - I sold way too soon BTW.

 

Some highlights from the CC:

 

If they marked all of their E & P to zero, NAV would be 7.54.

Recurring revenue last Q was .17.

No holdings are on non-accrual currently.

 

I agree with your take, I think you can make 10% or even a bit more going forward here.

 

 

 

 

 

 

[DTEJD1997]

Hey all:

 

Anybody still invested in PNNT or following it:

 

They came out with earnings yesterday and did a conference call today.

 

I've only skimmed the material...but there are a few things happening:

 

A). Earnings was $.01/share less than expected.  Of course, that has resulted in a dramatic sell off early in the day.  The stock came back some in the end of the session.  As of close, it is now yielding just a bit over 10%.  At the day's low, it was yielding almost 11%!  Wish I was in front of a computer instead of out in the field today!

 

B). Management has lowered the fee & incentive fees going forward.  Obviously, a good thing.

 

C). Yield of newly placed debt has gone down somewhat.  It also appears to be that way going forward.  As 11% loans get paid off, they are being invested in 9.5% to 10% loans....

 

D). The lower yield does come with a slight step up in the credit chain.

 

E). Their impaired energy investments are doing somewhat better.  They converted their defaulted loans in one borrower to 1/2 lower interest debt and 1/2 to an equity stake.  Since the conversion, interest has been paid in CASH MONEY! previously it was PIK :(

 

F). NAV is down from $9.18 to $9.10

 

G). If stabilization & sanity continues in the energy market, this will obviously be good for PNNT.  Even zeroing out energy (which is not going to happen), the stock is now below NAV.  A little bit of incremental strength in O&G will result in MUCH better results for PNNT.  They are levered to energy prices.

 

I have not gone through the presentation & conference but once...will double & triple check later.

 

Overall, I think they are doing OK.  I think the market over reacted as usual.

 

I will be watching, as I think there may be tax loss selling going forward.  I would be very tempted to grab more shares if this goes below $7/share again.

 

Anybody have any thoughts/opinions?

[no_free_lunch]

In my mind PNNT was always on the bottom half as far as quality.  However there was this thesis that they had done well through the GFC so maybe there was something to the management.  Now that they have reduced the dividend, that thesis is broken.  We are in an economic upswing so it is really tough to defend cutting the yield.  I know they are O&G focused but still, this is a strong economy.

 

In general this business cycle is getting older so I prefer to move towards quality.

[eclecticvalue]

Now that they have reduced the dividend, that thesis is broken.

 

I disagree the thesis is broken. So they did cut the dividend at the time but I remember in that conference call. Arthur Penn said he wants to increase the dividend eventually back to where it was a couple of years ago.

[DTEJD1997]

Hey all:

 

A few things have been going on with PNNT.

 

1). Stock price is now solidly below $7/share, trading at $6.90/share on 1.17.18.  Yield is over 10% (10.35%).

 

2). Arthur Penn, and other senior managers have been purchasing shares in the open market:

 

08/10/2017 Arthur H. Penn Chairman and CEO / Investment 32,000 $7.72 $246,991.50

08/15/2017 Arthur H. Penn Chairman and CEO / Investment 28,000 $7.62 $213,381.50

12/01/2017 Arthur H. Penn Chairman and CEO / Investment 12,000 $7.10 $85,232.40

12/04/2017 Arthur H. Penn Chairman and CEO / Investment 14,000 $7.14 $99,967.00

12/04/2017 Aviv Efrat         CFO and Treasurer                 10,000      $7.14 $71,420.00

12/05/2017 Arthur H. Penn Chairman and CEO / Investment 13,000 $7.13 $92,736.80

12/06/2017 Arthur H. Penn Chairman and CEO / Investment 12,000 $7.31 $87,718.80

 

3). I am surprised that oil has been as strong as it has been!  PNNT has significant investments in oil/oil related companies.  They have had problems with these in the near past.  If oil continues to firm in price...they may not take much (if any) ultimate loss on these loans.  PNNT is a "under the radar" play on oil prices.

 

4). I would argue that PNNT management is better than the "average" BDC management team.  They have made mistakes in the past, but not nearly as bad as some other BDC management teams.  Mr. Penn has stated that he would like to RAISE the dividend if possible.  If the economy AND oil stays strong, is it possible to see a dividend increase a year from now?  YES, I think it is possible...

 

5). If I am correct in my supposition about oil prices, then PNNT trades SIGNIFICANTLY below it's NAV.  A year from now, you might be looking at a capital gain, dividends, and dividend raise?  Maybe?

 

Any thoughts?

[DTEJD1997]

Hey all:

 

One point I forgot to bring up was that when PNNT's oil & gas loans went South, they converted some parts of them to equity positions.

 

Fast forward a couple/few years, and if oil & gas keeps firming up pricing like it has, I wonder if some of those equity positions will make up for the impairment that they took.  Heck, if O&G gets really solid, might not those equity positions MORE than make up the impairment? (PNNT books a gain?).

 

This is an optimistic postulation, but not unprecedented.  If I recall correctly, a similar situation happened after the great financial meltdown.

 

This upcoming year will certainly be interesting!

[Libs]

DJEJD,

 

Why has interest income dropped so much? Revenue is down 25% in two years (and interest income is down from .28 to .18 per quarter)

 

 

[DTEJD1997]

DJEJD,

 

Why has interest income dropped so much? Revenue is down 25% in two years (and interest income is down from .28 to .18 per quarter)

 

I believe the lowering of the yield of the portfolio has to do with MANY different factors:

 

A). They are moving up slightly in the priority of creditors, originating somewhat safer loans at a lower yield.  They are developing a lower risk, more secured portfolio.

B). The loans they originated years ago were during/around the financial crisis and yields were higher, as opposed to recently with lower yields.

C). There is more competition to underwrite loans.

D). A percentage of loans got in trouble and the company had to convert to equity.  This mainly happened with companies related to O&G.  IF O&G continues to strengthen, I think PNNT will do well on these.  This sector accounts for about 13% of their portfolio.

E). I also believe that they have somewhat de-levered their balance sheet paying off 6.25% baby bonds as their portfolio loans come due and pay off.

 

They have earnings coming out in early FEB.  I think we will learn a lot more at that point.

[brycepeterson]

Thanks to each of you who provided your thoughts.  I read everything and am doing more work today and this weekend.

 

Intriguing investment:  $7 share price vs. $9 NAV (12.31.17) + insiders buying around $7.  Previous person said the "bull case" perfectly - you get sustainable 6% to 8% dividend + share price closes the 30% gap ($7 to $9).  Looks like PNNT could have been over-looked / tossed-aside by the market, providing an opportunity to those paying attention.

 

I went through the 12.31.17 10Q quickly & noticed more 1st lien secured loans than I expected. 

 

Bear case for me is I don't have any clue on the quality of businesses they've lent to.  I can read all the detailed loans in 10Q/K like everyone else, but when I go down the list I realize you're putting your trust in management.

 

BP

[DTEJD1997]

Thanks to each of you who provided your thoughts.  I read everything and am doing more work today and this weekend.

 

Intriguing investment:  $7 share price vs. $9 NAV (12.31.17) + insiders buying around $7.  Previous person said the "bull case" perfectly - you get sustainable 6% to 8% dividend + share price closes the 30% gap ($7 to $9).  Looks like PNNT could have been over-looked / tossed-aside by the market, providing an opportunity to those paying attention.

 

I went through the 12.31.17 10Q quickly & noticed more 1st lien secured loans than I expected. 

 

Bear case for me is I don't have any clue on the quality of businesses they've lent to.  I can read all the detailed loans in 10Q/K like everyone else, but when I go down the list I realize you're putting your trust in management.

 

BP

 

Bryce:

 

I very much would argue that PNNT is going to pay great than a 6-8% dividend going forward.

 

The stock price is about $7/share.  NAV is greater than that. 

 

If you want to get optimistic, add something from the "busted" energy investments, you could come close to $10/share.

 

They should be able to make 8% on that NAV...that would give you income of $.80/share.  That is not a stretch at all...dividend that out and you get an 11.5% yield.  I suspect that the discount to NAV would narrow also.  Pick up two points on that, and you get a 29% capital gain.

 

Suppose that takes 2 years to play out....29%+11%+11% and you are looking at about 50% gain in two years.  Then you are at the envious position of "let it run?" or do you harvest your gain(s) and plow it into a new idea?  A good problem to have!

[brycepeterson]

 

You're definitely right on the capital appreciation potential to bridge the gap from market price to NAV.  That, and call it "luke-warm" investor sentiment is what attracted me.

 

On the sustainable cash dividend, I just ball-parked 6% to 8% - looked at historical earnings - stabilizing by quarter ($0.20 12.31.17), but still trending down + read the commentary re "high yielding loans maturing & making higher quality, lower-yielding, secured loans," and assumed worst case stabilization = $0.15/quarter = 8.5% @ $7 per share.  (much higher than my 6% low - I guess I was being too pessimistic on worst case...I just like to measure the downside). 

 

Question for DTE or anyone interested:  Does anyone have a handle on the quality of companies PNNT lends to?  Anything when you read the list that gives you confidence - "I know that company...they're solid" etc.?  That's definitely my biggest weakness.

 

I plan to post more when finished reading / taking notes.  Have good days all!

 

BP

[DTEJD1997]

 

You're definitely right on the capital appreciation potential to bridge the gap from market price to NAV.  That, and call it "luke-warm" investor sentiment is what attracted me.

 

On the sustainable cash dividend, I just ball-parked 6% to 8% - looked at historical earnings - stabilizing by quarter ($0.20 12.31.17), but still trending down + read the commentary re "high yielding loans maturing & making higher quality, lower-yielding, secured loans," and assumed worst case stabilization = $0.15/quarter = 8.5% @ $7 per share.  (much higher than my 6% low - I guess I was being too pessimistic on worst case...I just like to measure the downside). 

 

Question for DTE or anyone interested:  Does anyone have a handle on the quality of companies PNNT lends to?  Anything when you read the list that gives you confidence - "I know that company...they're solid" etc.?  That's definitely my biggest weakness.

 

I plan to post more when finished reading / taking notes.  Have good days all!

 

BP

 

Bryce:

 

I know a little bit about a few of the companies...most of them I think are "OK".  Remember, PNNT is lending to "junk rated" or non-investment grade companies.  It is difficult to get information on most of the companies that PNNT works with as they are usually privately held.

 

HOWEVER, I would suggest looking at the track record/experience of management. PNNT's is better than the typical BDC.  Further, look at their prior recovery rates from defaulted loans.  The prior recovery rate is pretty darn good. 

 

Barring a BIGLY runup in crude oil prices, I don't think we get a resolution to most of the current problem loans until 6-12-18 months.  My guess would be 12-18 months.  I think PNNT will take a hit, how big that is open to debate.  I think it will be worse than the prior 15% to 20% losses on prior defaults.  I don't think it will be 50% losses, but maybe 25% to 30% loss?  If that is correct, NAV is higher than $9/share.  There is a small chance that if oil goes to say $80/barrel, they may even get a small capital gain...

 

On income potential going forward, you can't use current market price.  You shouldn't really even use NAV, as they have leverage...but use NAV and that is $9/share, put 8% on that, and you get $.72/share.  That would support a 10% yield going forward.

 

I think that assumption is a bit low/pessimistic.  I think ultimate NAV is higher than $9, and I think they will be able to get a bit more than 8% on new loans.

 

I think they will most likely HOLD the current dividend.  If things go well for the economy AND they recover well on the "busted" loans, there is a chance of  even an increase.  I put this at less than 50%, but it is a distinct possibility.  If you listen/read conference calls, management has even addressed this.

 

I think PNNT is pretty good, I have a large position in it...but there are other BDC's that offer good possibilities and I am studiously researching them.

 

 

 

Then if there is a recovery on the defaults (which there almost certainly will be)

[brycepeterson]

DTE,

 

What did you think of the 1Q18 report?  I haven't listened to the call yet - anything news worthy?

 

(+) $30 million buyback with the NAV at $9 vs. current stock price at $7.

 

Bryce

[DTEJD1997]

DTE,

 

What did you think of the 1Q18 report?  I haven't listened to the call yet - anything news worthy?

 

(+) $30 million buyback with the NAV at $9 vs. current stock price at $7.

 

Bryce

 

Bryce:

 

I have not listened to the conference call.  It is on my list of things to do tonight.

 

The latest earnings report seemed OK.  Nothing great, nothing bad.

 

Insiders have been purchasing stock lately.  Always a good sign.

 

Buying back stock at these levels is an EXCELLENT use of capital.  Why loan out money at 9% interest when you buy back stock at almost 11%?  There is some amount of risk to loaning out money.  There is no risk to buying back & retiring stock at these levels.

 

The are some of the factors that set management of PNNT apart from their competitors.

 

I will be sure to post something if I have any insights after listening to the conference call.

 

This is one of my larger positions.

[DTEJD1997]

Hey all:

 

I finally managed to listen to the conference call.

 

It was about as I expected.

 

They are going to try and do the buyback on a quarterly basis, split evenly in the upcoming 4 quarters.  So that SHOULD be about a 1.5% reduction of shares each quarter.  My only concern is that I think the stock will start to move now that the price of oil is over $70 and they may not buy back as much as expected/presumed.

 

The loan rates are generally going DOWN, but credit quality is going UP.

 

I think they will easily be able to maintain the dividend EVEN in the face of declining loan rates.  WHY?  They are going to monetize a lot of their equity holdings over the upcoming 12 months and will put that into loans.

 

They are careful on the amount of leverage being used.  The company's investment rating on their own debt is VERY important to them.  They aim to maintain this.

 

I still think that somewhat more $$$$ than is commonly anticipated will be realized from the current EQUITY positions. This should lead to a modest increase in book value.

 

I think the stock is underpriced and certainly has room to move up a point or so and go into the 8's.  Meanwhile, investors collect the dividend all along the way.

 

Are these guys the best managers in the BDC space?  NO.  However, they are better than most, and EASILY in the top quartile.

 

I think investors will do well in the upcoming year.

[DTEJD1997]

hey all:

 

PNNT has moved down in price lately.

 

I'll be looking to add more shares if the yield hits 11% or more.

 

Earnings are coming out in the upcoming week.

 

Anybody still following this?