PNNT - PennantPark

[SmallCap]

I picked up more shares last week. I have no new data and no changes to my thinking just seeing it drop i decided to add a little more.

[Packer16]

The question I have folks investing is PNNT park is why invest in something that has so much second lien/pfd/equity so late in the credit cycle?  I would think if you are investing here you would want to invest in a BDC like TSLX where you have first lien secure debt, with a proven underwriting team (I knew them before they ran the BDC all the way back to 2000) & an exclusive flow from a PE entity (TSP) & relationships the team has made over the years.  TSLX also specializes in software recurring revenue, IP finance & bankruptcy DIP financing.  The underwriting team came from a bank (Wells Fargo) so they think about this business different than your typical BDC.  TSLX is yielding around 9% with special dividends & can grow with the new BDC leverage requirements.  The CEO has done some interesting things to create value (like trying to buy other BDCs etc.) 

 

TSLX is one of the few BDCs that sell a premium to par but it is worth it as they have been able compound value versus the value stagnation/destruction which has happened at the typical BDCs.  For the 5 years to year end 2017, TSLX has a yearly return of 13.8% vs. 3.5% for PNNT.  As a comparison, PNNT had about the same return as a junk bond fund.  Do you know if after the declines of 2014/15 did PNNT change anything they were doing in terms of underwriting?

 

Packer

[DTEJD1997]

The question I have folks investing is PNNT park is why invest in something that has so much second lien/pfd/equity so late in the credit cycle?  I would think if you are investing here you would want to invest in a BDC like TSLX where you have first lien secure debt, with a proven underwriting team (I knew them before they ran the BDC all the way back to 2000) & an exclusive flow from a PE entity (TSP) & relationships the team has made over the years.  TSLX also specializes in software recurring revenue, IP finance & bankruptcy DIP financing.  The underwriting team came from a bank (Wells Fargo) so they think about this business different than your typical BDC.  TSLX is yielding around 9% with special dividends & can grow with the new BDC leverage requirements.  The CEO has done some interesting things to create value (like trying to buy other BDCs etc.) 

 

TSLX is one of the few BDCs that sell a premium to par but it is worth it as they have been able compound value versus the value stagnation/destruction which has happened at the typical BDCs.  For the 5 years to year end 2017, TSLX has a yearly return of 13.8% vs. 3.5% for PNNT.  As a comparison, PNNT had about the same return as a junk bond fund.  Do you know if after the declines of 2014/15 did PNNT change anything they were doing in terms of underwriting?

 

Packer

 

Packer:

 

Why invest in PNNT?  How about a dividend yield of over 11%? (most of my cost basis is somewhat lower than current market quote).

 

They did change underwriting standards after the big blow up and dividend reduction...they will not be underwriting much energy/oil/gas loans going forward.

 

Another factor is that I suspect they will actually have some gains from the O&G loans that were converted to equity a few years ago.  If so, book value is going to be higher than what it currently at.  When they sell out of their equity positions, the capital will be put into more income producing loans.

 

Another factor to consider is that PNNT has had a historically very good recovery rate from their defaulted debt.  Check out their performance in the great financial crisis.

 

If there is another downturn like in 08-09, then yes, PNNT is going to have trouble, along with everybody else...but I have a hunch the next downturn is not going to be as severe as 08-09.

 

Finally, TSLX may very well be a good BDC, arguably even better than PNNT.  If you invest in TSLX, you are also allowed to own PNNT.  The two are not mutually exclusive.

[DTEJD1997]

Hey all:

 

PNNT announced earnings today after the market closed.  Earnings of $.20/share, that was a couple of cents higher than analyst's expectations.

 

Looks like the dividend will be maintained at $.18/share.

 

Conference call in the morning.  Will be interesting to hear of progress/valuation on the O&G equity that they have.

 

Any thoughts?

[DTEJD1997]

Hey all:

 

Anybody else looking at the BDC's?

 

PNNT is now yielding solidly over 12%

 

They have improved the composition of their loan book over the last 18 months.

 

NAV is just under $9/share.

 

If we are headed into a recession/depression, this is probably a fair price OR perhaps still a bit overvalued?

 

If we recover from the Corona virus quickly and just have a mild downturn, then PNNT is probably pretty cheap.

 

I have not bought any more, but I am tempted if it goes down another 5% to 10% and things in general don't blow apart.

 

I am going to guess that at these price levels, they will start buying back shares rather than putting capital into lending at 8-9-10%

 

Any thoughts?

[Packer16]

IMO PNNT is a company being run for the management company not the shareholders.  The loans & underwriting have performed in line with industry index (CLDI) but the management fee has reduced the dividends/cash flow to shareholders significantly below the loan returns.  The pre-fee RoE is 12.8%, after fees it was 7.8% in Q12010.  The dividend does not make much difference if the RoE is less than the dividend as the NAV declines, like it has done in PNNT's case.  If you look at the 5-yr RoE of PNNT it is only 4.2%.  The real return you are getting here in a good environment is 7.8% in Q12020 & you have alot of risk in the portfolio with only about 50% first-lien loans.  In the next downturn, this portfolio will decline much more than more senior portfolios, like TSLX's.  They do not even disclose portfolio level coverage ratios like TSLX. You can also look at the returns since out last interaction in Oct 2018.  PNNT is down 9% while BDCs generating value like TSLX is up 20% and the high yield index was down 1%. 

 

BDCs have interesting assets with a great diversification benefit but IMO I would stick with a BDCs that is adding value like TSLX or MAIN versus one generating sub-par returns like PNNT.

 

Packer

[FCharlie]

Lots of buying by the CEO & CFO down here in the $2.00-$2.50 range.  From what I recall, these guys nailed the bottom back in 2016 with a flood of insider buying.

 

https://www.sec.gov/cgi-bin/browse-edgar?action=getcompany&CIK=0001383414&type=&dateb=&owner=only&count=40

 

 

I don't particularly love BDCs long-term, but buying here with insiders at 25% of NAV doesn't seem like a bad idea at all.