PENNANTPARK INVESTMENT CORPORATION FORWARD-LOOKING STATEMENTS
This Report, including Management's Discussion and Analysis of Financial Condition and Results of Operations, contains statements that constitute forward-looking statements, which relate to us and our consolidated subsidiaries regarding future events or our future performance or future financial condition. These forward-looking statements are not historical facts, but rather are based on current expectations, estimates and projections about our Company, our industry, our beliefs and our assumptions. The forward-looking statements contained in this Report involve risks and uncertainties, including statements as to:
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our future operating results;
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our business prospects and the prospects of our prospective portfolio companies, including as a result of the current pandemic caused by COVID-19 or any worsening there of;
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changes in political, economic or industry conditions, the interest rate environment or conditions affecting the financial and capital markets that could result in changes to the value of our assets, including changes from the impact of the current COVID-19 pandemic or any worsening there of;
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our ability to continue to effectively manage our business due to the significant disruptions caused by the current COVID-19 pandemic or any worsening there of;
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the dependence of our future success on the general economy and its impact on the industries in which we invest;
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the impact of a protracted decline in the liquidity of credit markets on our business;
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the impact of investments that we expect to make;
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the impact of fluctuations in interest rates and foreign exchange rates on our business and our portfolio companies;
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our contractual arrangements and relationships with third parties;
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the valuation of our investments in portfolio companies, particularly those having no liquid trading market;
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the ability of our prospective portfolio companies to achieve their objectives;
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our expected financings and investments;
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the adequacy of our cash resources and working capital;
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the timing of cash flows, if any, from the operations of our prospective portfolio companies;
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the impact of price and volume fluctuations in the stock market;
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the ability of our Investment Adviser to locate suitable investments for us and to monitor and administer our investments;
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the impact of future legislation and regulation on our business and our portfolio companies; and
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the impact of the
We use words such as "anticipates," "believes," "expects," "intends," "seeks," "plans," "estimates" and similar expressions to identify forward-looking statements. You should not place undue influence on the forward-looking statements as our actual results could differ materially from those projected in the forward-looking statements for any reason, including the factors in "Risk Factors" and elsewhere in this Report. Although we believe that the assumptions on which these forward-looking statements are based are reasonable, any of those assumptions could prove to be inaccurate, and, as a result, the forward-looking statements based on those assumptions also could be inaccurate. Important assumptions include our ability to originate new loans and investments, certain margins and levels of profitability and the availability of additional capital. In light of these and other uncertainties, the inclusion of a projection or forward-looking statement in this Report should not be regarded as a representation by us that our plans and objectives will be achieved. We have based the forward-looking statements included in this Report on information available to us on the date of this Report, and we assume no obligation to update any such forward-looking statements. Although we undertake no obligation to revise or update any forward-looking statements in this Report, whether as a result of new information, future events or otherwise, you are advised to consult any additional disclosures that we may make directly to you or through reports that we in the future may file with theSEC , including reports on Form 10-Q/K and current reports on Form 8-K. You should understand that under Section 27A(b)(2)(B) of the Securities Act and Section 21E(b)(2)(B) of the Exchange Act, the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995 do not apply to forward-looking statements made in periodic reports we file under the Exchange Act.
The following analysis of our financial condition and results of operations should be read in conjunction with our Consolidated Financial Statements and the related notes thereto contained elsewhere in this Report.
Overview
PennantPark Investment Corporation is a BDC whose objectives are to generate both current income and capital appreciation while seeking to preserve capital through debt and equity investments primarily made toU.S. middle-market companies in the form of first lien secured debt, second lien secured debt, subordinated debt and equity investments. 38 -------------------------------------------------------------------------------- We believe middle-market companies offer attractive risk-reward to investors due to a limited amount of capital available for such companies. We seek to create a diversified portfolio that includes first lien secured debt, second lien secured debt, subordinated debt and equity investments by investing approximately$10 million to$50 million of capital, on average, in the securities of middle-market companies. We expect this investment size to vary proportionately with the size of our capital base. We use the term "middle-market" to refer to companies with annual revenues between$50 million and$1 billion . The companies in which we invest are typically highly leveraged, and, in most cases, are not rated by national rating agencies. If such companies were rated, we believe that they would typically receive a rating below investment grade (between BB and CCC under theStandard & Poor's system) from the national rating agencies. Securities rated below investment grade are often referred to as "leveraged loans" or "high yield" securities or "junk bonds" and are often higher risk compared to debt instruments that are rated above investment grade and have speculative characteristics. Our debt investments may generally range in maturity from three to ten years and are made toU.S. and, to a limited extent, non-U.S. corporations, partnerships and other business entities which operate in various industries and geographical regions. Our investment activity depends on many factors, including the amount of debt and equity capital available to middle-market companies, the level of merger and acquisition activity for such companies, the general economic environment and the competitive environment for the types of investments we make. We have used, and expect to continue to use, our debt capital, proceeds from the rotation of our portfolio and proceeds from public and private offerings of securities to finance our investment objectives.
Organization and Structure of
PennantPark Investment Corporation , aMaryland corporation organized inJanuary 2007 , is a closed-end, externally managed, non-diversified investment company that has elected to be treated as a BDC under the 1940 Act. In addition, for federal income tax purposes we have elected to be treated, and intend to qualify annually, as a RIC under the Code. SBIC II, our wholly-owned subsidiary, was organized as aDelaware limited partnership in 2012. SBIC II received a license from the SBA to operate as a SBIC under Section 301(c) of the 1958 Act. SBIC II's objectives are to generate both current income and capital appreciation through debt and equity investments generally by investing with us in SBA eligible businesses that meet the investment selection criteria used byPennantPark Investment . Our investment activities are managed by the Investment Adviser. Under our Investment Management Agreement, we have agreed to pay our Investment Adviser an annual base management fee based on our average adjusted gross assets as well as an incentive fee based on our investment performance.PennantPark Investment , through the Investment Adviser, provides similar services to SBIC II under its investment management agreement. SBIC II's investment management agreement does not affect the management and incentive fees on a consolidated basis. We have also entered into an Administration Agreement with the Administrator. Under our Administration Agreement, we have agreed to reimburse the Administrator for our allocable portion of overhead and other expenses incurred by the Administrator in performing its obligations under our Administration Agreement, including rent and our allocable portion of the costs of compensation and related expenses of our Chief Compliance Officer, Chief Financial Officer, Corporate Counsel and their respective staffs.PennantPark Investment , through the Administrator, provides similar services to SBIC II under its administration agreement with us. Our board of directors, a majority of whom are independent of us, provides overall supervision of our activities, and the Investment Adviser supervises our day-to-day activities. COVID-19 Developments COVID-19 was first detected inDecember 2019 and has since been identified as a global pandemic by theWorld Health Organization . The effect of the ongoing COVID-19 pandemic or any worsening thereof, uncertainty relating to more contagious strains of the virus, the length of recovery of certain economic sectors in theU.S. and globally and the speed and efficiency of the vaccination process, including the extent to which the available vaccines are ineffective against any new COVID- 19 variants may create stress on the market and may affect some of our portfolio companies. We cannot predict the full impact of the COVID-19 pandemic, including any worsening thereof or its duration inthe United States and globally and any impact to our business operations or the business operations of our portfolio companies. Due to the nature of certain governmental restrictions imposed in response to the COVID-19 pandemic and their potentially long-lasting duration, some portfolio companies, especially those in vulnerable industries such as retail, food and beverage and travel, have experienced significant financial distress and may default on their financial obligations to us and their other capital providers. Moreover, certain of our portfolio companies that remain subject to prolonged and severe financial distress, have substantially curtailed their operations, deferred capital expenditures, furloughed or laid off workers and/or terminated relationships with their service providers. Depending on the length and magnitude of the disruption to the operations of our portfolio companies, certain portfolio companies may experience financial distress and possibly default on their financial obligations to us and their other capital providers in the future. These developments could impact the value of our investments in such portfolio companies. The COVID-19 pandemic, including any worsening thereof, may have an adverse impact on certain sectors of the global economy. Particularly, COVID-19 presents material uncertainty and risk with respect to our future performance and financial results as well as the future performance and financial results of our portfolio companies due to the risk of any sever adverse reaction to the vaccine, politicization of the vaccination process or general public skepticism of the safety and efficacy of the vaccine. While we are unable to predict the ultimate adverse effect of the COVID-19 pandemic, or any worsening thereof, on our results of operation, we have identified certain factors that are likely to affect market, economic and geopolitical conditions, and thereby may adversely affect our business, including:
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changes in interest rates, including LIBOR;
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limited availability of credit, both in
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disruptions to supply-chains and price volatility;
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changes to existing laws and regulations, or the imposition of new laws and regulations; and
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uncertainty regarding future governmental and regulatory policies.
The business disruption and financial harm resulting from the COVID-19 pandemic experienced by some of our portfolio companies may reduce, over time, the amount of interest and dividend income that we receive from such investments and may require us to provide an increase of capital to such companies in the form of follow on investments. In connection with the adverse effects of the COVID-19 pandemic, we may also need to restructure the capitalization of some of our portfolio companies, which could result in reduced interest payments, an increase in the amount of PIK interest we receive or a permanent reduction in the value of our investments. If our net investment income decreases, the percentage of our cash flows dedicated to debt servicing and distribution payments to stockholders would subsequently increase. This has required us to reduce the amount of our distributions to stockholders as compared to distributions in previous years. As ofJune 30, 2022 , we had one portfolio company on non-accrual status, and the continuing impact of the COVID-19 pandemic, or any worsening thereof, may result in portfolio investments being placed on non-accrual status in the future. 39 -------------------------------------------------------------------------------- Additionally, as ofJune 30, 2022 andSeptember 30, 2021 , our asset coverage ratio, as computed in accordance with the 1940 Act, was 187% and 221%, respectively. The Truist Credit Facility includes standard covenants and events of default provisions. If we fail to make the required payments or breach the covenants therein, it could result in a default under the Truist Credit Facility. Failure to cure such default or obtain a waiver from the appropriate party would result in an event of default, and the lenders may accelerate the repayment of our indebtedness under the Truist Credit Facility, such that all amounts owed are due immediately at the time of default. Such an action would negatively affect our liquidity, business, financial condition, results of operations, cash flows and ability to pay distributions to our stockholders. We are also subject to financial risks, including changes in market interest rates. As ofJune 30, 2022 , our interest bearing debt portfolio consisted of 96% variable-rate investments. The variable-rate loans are usually based on a floating interest rate index such as LIBOR and typically have durations of three months after which they reset to current market interest rates. Variable-rate investments subject to a floor generally reset by reference to the current market index after one to nine months only if the index exceeds the floor. In addition, the Truist Credit Facility also has floating rate interest provisions, with pricing set at 225 basis points over LIBOR (or an alternative risk-free floating interest rate index). Due to such rates, our gross investment income may decrease, which could result in a decrease in our net investment income if such decreases in LIBOR are not offset by, among other things, a corresponding increase in the spread over LIBOR that we earn on such loans or a decrease in the interest rate of our floating interest rate liabilities tied to LIBOR. See "Item 3. Quantitative and Qualitative Disclosures About Market Risk" below. In addition, we have continued to implement our business continuity planning strategy. Our priority has been to safeguard the health of our employees and to ensure continuity of business operations on behalf of our investors. As a result of our business continuity planning strategy, nearly all of our employees have returned to the office. Our systems and infrastructure have continued to support our business operations. We implemented a heightened level of communication across senior management, our investment team and our board of directors, and we have proactively engaged with our vendors on a regular basis to ensure they continue to meet our criteria for business continuity.
LIBOR Developments
InJuly 2017 , the head of theUnited Kingdom Financial Conduct Authority announced the desire to phase out the use of LIBOR by the end of 2021. As ofDecember 31, 2021 , all non-U.S. dollar LIBOR publications have been phased out. The phase out of a majority of theU.S. dollar publications is currently delayed untilJune 30, 2023 . The Alternative Reference Rates Committee, a steering committee comprised of largeU.S. financial institutions, has identified the Secured Overnight Financing Rate ("SOFR") as its preferred alternative rate for LIBOR. SOFR is a measure of the cost of borrowing cash overnight, collateralized by theU.S. Treasury securities, and is based on directly observableU.S. Treasury -backed repurchase transactions. Although SOFR appears to be the preferred replacement rate forU.S. dollar LIBOR, it is not possible at this time to predict the effect of any such changes, any establishment of alternative reference rates, whether the COVID-19 pandemic will have further effect on LIBOR transition timelines, or other reforms to LIBOR that may be enacted. The effect of the establishment of alternative reference rates or other reforms to LIBOR or other reference rates is complex and could have a material adverse effect on our business, financial condition and results of operations. Given the inherent differences between LIBOR and SOFR, or any other alternative benchmark rate that may be established, there are continuing uncertainties regarding the transition from LIBOR, including, but not limited to, the need to amend all contracts with LIBOR as the referenced rate and how this will impact the cost of variable rate debt and certain derivative financial instruments. In addition, SOFR or other replacement rates may fail to gain market acceptance. Any failure of SOFR or alternative reference rates to gain market acceptance could adversely affect the return on, value of and market for securities linked to such rates. Factors such as the pace of the transition to replacement or reformed rates, the specific terms and parameters for and market acceptance of any alternative reference rate, prices of and the liquidity of trading markets for products based on alternative reference rates, and our ability to transition and develop appropriate systems and analytics for one or more alternative reference rates could also have a material adverse effect on our business, financial condition and results of operations. Revenues We generate revenue in the form of interest income on the debt securities we hold and capital gains and dividends, if any, on investment securities that we may acquire in portfolio companies. Our debt investments, whether in the form of first lien secured debt, second lien secured debt or subordinated debt, typically have a term of three to ten years and bear interest at a fixed or a floating rate. Interest on debt securities is generally payable quarterly or semiannually. In some cases, our investments provide for deferred interest payments and PIK interest. The principal amount of the debt securities and any accrued but unpaid interest generally becomes due at the maturity date. In addition, we may generate revenue in the form of amendment, commitment, origination, structuring or diligence fees, fees for providing significant managerial assistance and possibly consulting fees. Loan origination fees, OID and market discount or premium and deferred financing costs on liabilities, which we do not fair value, are capitalized and accreted or amortized using the effective interest method as interest income or, in the case of deferred financing costs, as interest expense. Dividend income, if any, is recognized on an accrual basis on the ex-dividend date to the extent that we expect to collect such amounts. From time to time, the Company receives certain fees from portfolio companies, which are non-recurring in nature. Such fees include loan prepayment penalties, structuring fees and amendment fees, and are recorded as other investment income when earned.
Expenses
Our primary operating expenses include the payment of a management fee and the payment of an incentive fee to our Investment Adviser, if any, our allocable portion of overhead under our Administration Agreement and other operating costs as detailed below. Our management fee compensates our Investment Adviser for its work in identifying, evaluating, negotiating, consummating and monitoring our investments. Additionally, we pay interest expense on the outstanding debt and unused commitment fees on undrawn amounts, under our various debt facilities. We bear all other direct or indirect costs and expenses of our operations and transactions, including:
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the cost of calculating our net asset value, including the cost of any third-party valuation services;
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the cost of effecting sales and repurchases of shares of our common stock and other securities;
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fees payable to third parties relating to, or associated with, making investments, including fees and expenses associated with performing due diligence and reviews of prospective investments or complementary businesses;
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expenses incurred by the Investment Adviser in performing due diligence and reviews of investments;
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transfer agent and custodial fees;
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fees and expenses associated with marketing efforts;
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federal and state registration fees and any exchange listing fees;
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federal, state, local and foreign taxes;
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independent directors' fees and expenses;
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brokerage commissions;
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fidelity bond, directors and officers, errors and omissions liability insurance and other insurance premiums;
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direct costs such as printing, mailing, long distance telephone and staff;
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fees and expenses associated with independent audits and outside legal costs;
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costs associated with our reporting and compliance obligations under the 1940 Act, the 1958 Act and applicable federal and state securities laws; and
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all other expenses incurred by either the Administrator or us in connection with administering our business, including payments under our Administration Agreement that will be based upon our allocable portion of overhead, and other expenses incurred by the Administrator in performing its obligations under our Administration Agreement, including rent and our allocable portion of the costs of compensation and related expenses of our Chief Compliance Officer, Chief Financial Officer, Corporate Counsel and their respective staffs. Generally, during periods of asset growth, we expect our general and administrative expenses to be relatively stable or to decline as a percentage of total assets and increase during periods of asset declines. Incentive fees, interest expense and costs relating to future offerings of securities would be additive to the expenses described above.
PORTFOLIO AND INVESTMENT ACTIVITY
As ofJune 30, 2022 , our portfolio totaled$1,314.8 million , which consisted of$721.8 million of first lien secured debt,$129.7 million of second lien secured debt,$121.2 million of subordinated debt (including$88.0 million in PSLF) and$342.2 million of preferred and common equity (including$53.1 million in PSLF). Our debt portfolio consisted of 96% variable-rate investments and 4% fixed-rate investments. As ofJune 30, 2022 , we had one portfolio company on non-accrual, representing 0.9% and 0.5% of our overall portfolio on a cost and fair value basis, respectively. Overall, the portfolio had net unrealized depreciation of$64.9 million as ofJune 30, 2022 . Our overall portfolio consisted of 118 companies with an average investment size of$11.1 million , had a weighted average yield on interest bearing debt investments of 9.3% and was invested 55% in first lien secured debt, 10% in second lien secured debt, 9% in subordinated debt (including 7% in PSLF) and 26% in preferred and common equity (including 4% in PSLF). As ofJune 30, 2022 , all of the investments held by PSLF were first lien secured debt. As ofSeptember 30, 2021 , our portfolio totaled$1,255.3 million and consisted of$552.5 million of first lien secured debt,$176.9 million of second lien secured debt,$121.2 million of subordinated debt (including$64.2 million in PSLF) and$404.7 million of preferred and common equity (including$41.2 million in PSLF). Our interest bearing debt portfolio consisted of 92% variable-rate investments and 8% fixed-rate investments. As ofSeptember 30, 2021 , we had no portfolio companies on non-accrual. Overall, the portfolio had net unrealized appreciation of$34.2 million as ofSeptember 30, 2021 . Our overall portfolio consisted of 97 companies with an average investment size of$12.9 million , had a weighted average yield on interest bearing debt investments of 9.0% and was invested 44% in first lien secured debt, 14% in second lien secured debt, 10% in subordinated debt (including 5% in PSLF) and 32% in preferred and common equity (including 3% in PSLF). As ofSeptember 30, 2021 , all of the investments held by PSLF were first lien secured debt. For the three months endedJune 30, 2022 , we invested$326.3 million in 11 new and 36 existing portfolio companies with a weighted average yield on debt investments of 8.7%. Sales and repayments of investments for the three months endedJune 30, 2022 totaled$198.3 million . For the nine months endedJune 30, 2022 , we invested$799.4 million in 35 new and 95 existing portfolio companies with a weighted average yield on debt investments of 8.2%. Sales and repayments of investments for the nine months endedJune 30, 2022 totaled$736.0 million . For the three months endedJune 30, 2021 , we invested$133.4 million in seven new and nine existing portfolio companies with a weighted average yield on debt investments of 7.9%. Sales and repayments of investments for the three months endedJune 30, 2021 totaled$191.0 million . For the nine months endedJune 30, 2021 , we invested$276.4 million in 14 new and 32 existing portfolio companies with a weighted average yield on debt investments of 8.4%. Sales and repayments of investments for the nine months endedJune 30, 2021 totaled$358.6 million .
As ofJune 30, 2022 , PSLF's portfolio totaled$608.4 million , consisted of 72 companies with an average investment size of$8.5 million and had a weighted average yield on debt investments of 7.9 %. As ofSeptember 30, 2021 , PSLF's portfolio totaled$405.2 million , consisted of 47 companies with an average investment size of$8.6 million and had a weighted average yield on debt investments of 7.2%. For the three months endedJune 30, 2022 , PSLF invested$200.5 million (of which$176.0 million was purchased from the Company) in 14 new and 17 existing portfolio companies with a weighted average yield on debt investments of 7.3% . PSLF's sales and repayments of investments for the same period totaled$35.1 million . For the nine months endedJune 30, 2022 , PSLF invested$278.6 million (of which$235.6 million was purchased from the Company) in 29 new and 19 existing portfolio companies with a weighted average yield on debt investments of 7.3%. PSLF's sales and repayments of investments for the same period totaled$73.0 million . For the three months endedJune 30, 2021 , PSLF invested$54.1 million (of which$54.1 million was purchased from the Company) in six new and two existing portfolio companies with a weighted average yield on debt investments of 7.1%. PSLF's sales and repayments of investments for the same period totaled$50.9 million . For the nine months endedJune 30, 2021 , PSLF invested$117.8 million (of which$91.9 million was purchased from the Company) in 12 new and eight existing portfolio companies with a weighted average yield on debt investments of 7.3%. PSLF's sales and repayments of investments for the same period totaled$91.6 million .
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of our Consolidated Financial Statements in conformity with GAAP
requires management to make estimates and assumptions that affect the reported
amount of our assets and liabilities at the date of the Consolidated Financial
Statements and the reported amounts of income and expenses during the reported
periods. In the opinion of management, all adjustments, which are of a normal
recurring nature, considered necessary for the fair presentation of financial
statements have been included. Actual results could differ from these estimates
due to changes in the economic and regulatory environment, financial markets and
any other parameters used in determining such estimates and assumptions,
including the credit worthiness of our portfolio companies and the global
outbreak of COVID-19. We may reclassify certain prior period amounts to conform
to the current period presentation. We have eliminated all intercompany balances
and transactions. References to ASC serve as a single source of accounting
literature. Subsequent events are evaluated and disclosed as appropriate for
events occurring through the date the Consolidated Financial Statements are
issued. In addition to the discussion below, we describe our critical accounting
policies in the notes to our Consolidated Financial Statements. We discuss our
critical accounting estimates
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in Management's Discussion and Analysis of Financial Condition and Results of
Operations in our 2021 Annual Report on Form 10-K. There have been no
significant changes in our critical accounting estimates during the nine months
from those disclosed in our 2021 Annual Report on Form 10-K.
Investment Valuations
We expect that there may not be readily available market values for many of the investments which are or will be in our portfolio, and we value such investments at fair value as determined in good faith by or under the direction of our board of directors using a documented valuation policy and a consistently applied valuation process, as described in this Report. With respect to investments for which there is no readily available market value, the factors that our board of directors may take into account in pricing our investments at fair value include, as relevant, the nature and realizable value of any collateral, the portfolio company's ability to make payments and its earnings and discounted cash flow, the markets in which the portfolio company does business, comparison to publicly traded securities and other relevant factors. When an external event such as a purchase transaction, public offering or subsequent equity sale occurs, we consider the pricing indicated by the external event to corroborate or revise our valuation. Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the price used in an actual transaction may be different than our valuation and the difference may be material. Our portfolio generally consists of illiquid securities, including debt and equity investments. With respect to investments for which market quotations are not readily available, or for which market quotations are deemed not reflective of the fair value, our board of directors undertakes a multi-step valuation process each quarter, as described below:
(1)
Our quarterly valuation process begins with each portfolio company or investment being initially valued by the investment professionals of our Investment Adviser responsible for the portfolio investment;
(2)
Preliminary valuation conclusions are then documented and discussed with the management of the Investment Adviser;
(3)
Our board of directors also engages independent valuation firms to conduct independent appraisals of our investments for which market quotations are not readily available or are readily available but deemed not reflective of the fair value of the investment. The independent valuation firms review management's preliminary valuations in light of their own independent assessment and also in light of any market quotations obtained from an independent pricing service, broker, dealer or market maker;
(4)
The audit committee of our board of directors reviews the preliminary valuations of the Investment Adviser and those of the independent valuation firms on a quarterly basis, periodically assesses the valuation methodologies of the independent valuation firms, and responds to and supplements the valuation recommendations of the independent valuation firms to reflect any comments; and
(5)
Our board of directors discusses these valuations and determines the fair value of each investment in our portfolio in good faith, based on the input of our Investment Adviser, the respective independent valuation firms and the audit committee. Our board of directors generally uses market quotations to assess the value of our investments for which market quotations are readily available. We obtain these market values from independent pricing services or at the bid prices obtained from at least two brokers or dealers, if available, or otherwise from a principal market maker or a primary market dealer. The Investment Adviser assesses the source and reliability of bids from brokers or dealers. If our board of directors has a bona fide reason to believe any such market quote does not reflect the fair value of an investment, it may independently value such investments by using the valuation procedure that it uses with respect to assets for which market quotations are not readily available. Fair value, as defined under ASC 820, is the price that we would receive upon selling an investment or pay to transfer a liability in an orderly transaction to a market participant in the principal or most advantageous market for the investment or liability. ASC 820 emphasizes that valuation techniques maximize the use of observable market inputs and minimize the use of unobservable inputs. Inputs refer broadly to the assumptions that market participants would use in pricing an asset or liability, including assumptions about risk. Inputs may be observable or unobservable. Observable inputs reflect the assumptions market participants would use in pricing an asset or liability based on market data obtained from sources independent of us. Unobservable inputs reflect the assumptions market participants would use in pricing an asset or liability based on the best information available to us on the reporting period date.
ASC 820 classifies the inputs used to measure these fair values into the following hierarchies:
Level 1: Inputs that are quoted prices (unadjusted) in active markets for
identical assets or liabilities, accessible by us at the measurement
date.
Level 2: Inputs that are quoted prices for similar assets or liabilities in
active markets, or that are quoted prices for identical or similar
assets or liabilities in markets that are not active and inputs that
are observable for the asset or liability, either directly or
indirectly, for substantially the full term, if applicable, of the
financial instrument.
Level 3: Inputs that are unobservable for an asset or liability because they
are based on our own assumptions about how market participants would
price the asset or liability.
A financial instrument's categorization within the valuation hierarchy is based
upon the lowest level of input that is significant to the fair value
measurement. Generally, most of our investments, our Credit Facility, 2026
Notes, 2026-2 Notes and our SBA debentures are classified as Level 3. Our 2024
Notes are classified as Level 1, as they were valued using the closing price
from the primary exchange. Due to the inherent uncertainty of determining the
fair value of investments that do not have a readily available market value, the
price used in an actual transaction may be different than our valuation and
those differences may be material.
The SEC recently adopted Rule 2a-5 under the 1940 Act which established
requirements for determining fair value in good faith purposes of the 1940 Act.
We will comply with the requirement of the rule before the requirement date of
September 8, 2022 .
In addition to using the above inputs to value cash equivalents, investments,
our SBA debentures, our 2024 Notes, our 2026 Notes, 2026 Notes-2 and our Credit
Facility, we employ the valuation policy approved by our board of directors that
is consistent with ASC 820. Consistent with our valuation policy, we evaluate
the source of inputs, including any markets in which our investments are
trading, in determining fair value.
Generally, the carrying value of our consolidated financial liabilities
approximates fair value. We have adopted the principles under ASC Subtopic
825-10, Financial Instruments, or ASC 825-10, which provides companies with an
option to report selected financial assets and liabilities at fair value, and
made an irrevocable election to apply ASC 825-10 to our Credit Facility. We
elected to use the fair value option for the Credit Facility to align the
measurement attributes of both our assets and liabilities while
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mitigating volatility in earnings from using different measurement attributes.
Due to that election and in accordance with GAAP, we did not incur any expenses
relating to amendment costs on the Credit Facility for both the three and nine
months ended June 30, 2022 and 2021. ASC 825-10 establishes presentation and
disclosure requirements designed to facilitate comparisons between companies
that choose different measurement attributes for similar types of assets and
liabilities and to more easily understand the effect on earnings of a company's
choice to use fair value. ASC 825-10 also requires entities to display the fair
value of the selected assets and liabilities on the face of the Consolidated
Statements of Assets and Liabilities and changes in fair value of the Credit
Facility is reported in our Consolidated Statements of Operations. We elect not
to apply ASC 825-10 to any other financial assets or liabilities, including the
2024 Notes, 2026 Notes, 2026 Notes-2 and SBA debentures.
For the three and nine months ended June 30, 2022 , the Truist Credit Facility
had a net change in unrealized depreciation of $8.9 million and $9.1 million ,
respectively. For the three and nine months ended June 30, 2021 , our Truist
Credit Facility had a net change in unrealized appreciation of $1.6 million and
$18.5 million , respectively. As of June 30, 2022 and September 30, 2021 , the net
unrealized depreciation on the Truist Credit Facility totaled $10.9 million and
$1.7 million , respectively. We use a nationally recognized independent valuation
service to measure the fair value of our Truist Credit Facility in a manner
consistent with the valuation process that the board of directors uses to value
our investments.
Revenue Recognition
We record interest income on an accrual basis to the extent that we expect to
collect such amounts. For loans and debt investments with contractual PIK
interest, which represents interest accrued and added to the loan balance that
generally becomes due at maturity, we will generally not accrue PIK interest
when the portfolio company valuation indicates that such PIK interest is not
collectable. We do not accrue as a receivable interest on loans and debt
investments if we have reason to doubt our ability to collect such interest.
Loan origination fees, OID, market discount or premium and deferred financing
costs on liabilities, which we do not fair value, are capitalized and then
accreted or amortized using the effective interest method as interest income or,
in the case of deferred financing costs, as interest expense. We record
prepayment penalties on loans and debt investments as income. Dividend income,
if any, is recognized on an accrual basis on the ex-dividend date to the extent
that we expect to collect such amounts. From time to time, the Company receives
certain fees from portfolio companies, which are non-recurring in nature. Such
fees include loan prepayment penalties, structuring fees and amendment fees, and
are recorded as other investment income when earned.
Net Realized Gains or Losses and Net Change in Unrealized Appreciation or Depreciation
We measure realized gains or losses by the difference between the net proceeds from the repayment or sale and the amortized cost basis of the investment, using the specific identification method, without regard to unrealized appreciation or depreciation previously recognized, but considering unamortized upfront fees and prepayment penalties. Net change in unrealized appreciation or depreciation reflects the change in fair values of our portfolio investments and our Credit Facility including any reversal of previously recorded unrealized appreciation or depreciation, when gains or losses are realized.
Foreign Currency Translation
Our books and records are maintained in
1.
Fair value of investment securities, other assets and liabilities - at the exchange rates prevailing at the end of the applicable period; and
2.
Purchases and sales of investment securities, income and expenses - at the exchange rates prevailing on the respective dates of such transactions.
Although net assets and fair values are presented based on the applicable foreign exchange rates described above, we do not isolate that portion of the results of operations due to changes in foreign exchange rates on investments, other assets and debt from the fluctuations arising from changes in fair values of investments and liabilities held. Such fluctuations are included with the net realized and unrealized gain or loss from investments and liabilities.
Payment-in-Kind, or PIK Interest
We have investments in our portfolio which contain a PIK interest provision. PIK interest is added to the principal balance of the investment and is recorded as income. In order for us to maintain our ability to be subject to tax as a RIC, substantially all of this income must be paid out to stockholders in the form of dividends forU.S. federal income tax purposes, even though we may not have collected any cash with respect to interest on PIK securities.
Federal Income Taxes
We have elected to be treated, and intend to qualify annually to maintain our election to be treated, as a RIC under Subchapter M of the Code. To maintain our RIC tax election, we must, among other requirements, meet certain annual source-of-income and quarterly asset diversification requirements. We also must annually distribute dividends for federal income tax purposes to our stockholders out of the assets legally available for distribution of an amount generally at least equal to 90% of the sum of our net ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, or investment company taxable income, determined without regard to any deduction for dividends paid. Although not required for us to maintain our RIC tax status, in order to preclude the imposition of a 4% nondeductibleU.S. federal excise tax imposed on RICs, we must distribute dividends forU.S. federal income tax purposes to our stockholders in respect of each calendar year of an amount at least equal to the sum of (1) 98% of our net ordinary income (subject to certain deferrals and elections) for the calendar year, (2) 98.2% of the excess, if any, of our capital gains over our capital losses, or capital gain net income (adjusted for certain ordinary losses) for the one-year period ending onOctober 31 of the calendar year plus (3) the sum of any net ordinary income plus capital gain net income for preceding years that was realized but not distributed during such years and on which we did not incur anyU.S. federal income tax, or the Excise Tax Avoidance Requirement. In addition, although we may distribute realized net capital gains (i.e., net long-term capital gains in excess of net short-term capital losses), if any, at least annually, out of the assets legally available for such distributions in the manner described above, we have retained and may continue to retain such net capital gains or investment company taxable income, contingent on maintaining our ability to be subject to tax as a RIC, in order to provide us with additional liquidity. Because federal income tax regulations differ from GAAP, distributions characterized in accordance with tax regulations may differ from net investment income and net realized gain recognized for financial reporting purposes. Differences between tax regulations and GAAP may be permanent or temporary. Permanent differences are reclassified among capital accounts in the Consolidated Financial Statements to reflect their appropriate tax character. Temporary differences arise when certain items of income, expense, gain or loss are recognized at some time in the future. For the three and nine months endedJune 30, 2022 , we recorded a provision for taxes on net investment income of$0.2 million and$0.6 million respectively, all of which pertains toU.S. federal excise tax. For the three and nine months endedJune 30, 2021 , we recorded a provision for taxes on net investment income of$0.2 million and$0.5 million respectively, all of which pertains toU.S. federal excise tax. 43
--------------------------------------------------------------------------------PNNT Investment Holdings, LLC , a wholly-owned subsidiary of the Company, is subject toU.S. federal, state and local corporate income taxes. The income tax expense and related tax liabilities of the Taxable Subsidiary are reflected in the Company's consolidated financial statements. For the three and nine months endedJune 30, 2022 , the Company recognized a provision for taxes of$1.1 million and$6.2 million , respectively, on net realized gain on investments by the Taxable Subsidiary. For the three and nine months endedJune 30, 2022 , the Company recognized a provision for taxes of$8.1 million and$8.1 million , respectively, on net unrealized gain on investments by the Taxable Subsidiary. The provision for taxes on net realized and unrealized gains on investments is the result of netting (i) the expected tax liability on the gains from the sales of investments which were realized and unrealized during fiscal year endingSeptember 30, 2022 and (ii) the expected tax benefit resulting from the use of loss carryforwards to offset such gains. For the three and nine months endedJune 30, 2021 , the Company recognized a provision for taxes of zero on net realized and unrealized gains on investments by the Taxable Subsidiary. During the three and nine months endedJune 30, 2022 , the Company paid zero and$4.0 million , respectively, in federal taxes on realized gains on the sale of investments held by the Taxable Subsidiary. Due to offsetting losses in the three months endedJune 30, 2022 the$4.0 million is expected to be refunded and is shown on the consolidated statement of assets and liabilities under prepaid expenses and other assets. The state and local tax liability of$6.2 million as ofJune 30, 2022 is included under accrued other expenses in the consolidated statement of assets and liabilities. We have formed the Taxable Subsidiary, which is subject to tax as a corporation. The Taxable Subsidiary allows us to hold equity securities of certain portfolio companies treated as pass-through entities forU.S. federal income tax purposes while facilitating our ability to qualify as a RIC under the Code.
RESULTS OF OPERATIONS
Set forth below are the results of operations for the three and nine months
ended
Investment Income
Investment income for the three and nine months endedJune 30, 2022 was$23.3 million and$76.0 million , respectively, which was attributable to$17.6 million and$52.2 million from first lien secured debt,$2.9 million and$13.7 million from second lien secured debt,$0.3 million and$2.6 million from subordinated debt and$2.5 million and$7.4 million from preferred and common equity, respectively. This compares to Investment income for the three and nine months endedJune 30, 2021 was$20.5 million and$58.5 million , respectively, which was attributable to$11.8 million and$33.9 million from first lien secured debt,$5.2 million and$15.8 million from second lien secured debt,$1.8 million and$5.2 million from subordinated debt and$1.7 million and$3.6 million from preferred and common equity, respectively. The increase in investment income compared to the same periods in the prior year was primarily due to the increase in the size of our debt portfolio.
Expenses
Expenses for the three and nine months endedJune 30, 2022 totaled$12.8 million and$41.3 million , respectively. Base management fee for the same periods totaled$4.9 million and$15.0 million , performance base incentive fee for the same periods totaled zero and$2.7 million , debt related interest and expenses totaled$6.7 million and$20.1 million , general and administrative expenses totaled$1.0 million and$3.0 million and provision for taxes totaled$0.2 million and$0.6 million , respectively. This compares to expenses for the three and nine months endedJune 30, 2021 $12.3 million and$33.2 million , respectively. Base management fee for the same periods totaled$4.4 million and$12.8 million , debt related interest and expenses totaled$6.9 million (including a one-time$1.1 million payment, which is related to the early repayment of SBA Debt) and$16.8 million , general and administrative expenses totaled$0.9 million and$3.2 million and provision for taxes totaled$0.2 million and$0.5 million , respectively. The increase in expenses for the three months endedJune 30, 2022 compared to the same period in the prior year was primarily due to increased financing costs.
Net Investment Income
Net investment income totaled$10.6 million and$34.8 million , or$0.16 and$0.52 per share, for the three and nine months endedJune 30, 2022 , respectively. Net investment income totaled$8.1 million and$25.2 million , or$0.12 and$0.38 per share, for the three and nine months endedJune 30, 2021 , respectively. The increase in net investment income compared to the same period in the prior year was primarily due to increased investment income.
Net Realized Gains or Losses
Sales and repayments of investments for the three and nine months endedJune 30, 2022 totaled$198.3 million and$736.0 million , respectively, and net realized gains (losses) totaled$(34.3) million and$82.4 million , respectively. Sales and repayments of investments for the three and nine months endedJune 30, 2021 totaled$191.0 million and$358.6 million , respectively, and net realized gains (losses) totaled$41.7 million and$24.4 million , respectively. The change in realized gains was primarily due to changes in the market conditions of our investments and the values at which they were realized.
Unrealized Appreciation or Depreciation on Investments and the Credit Facility
For the three and nine months endedJune 30, 2022 , we reported net change in unrealized appreciation (depreciation) on investments of$5.6 million and$(99.1) million , respectively. For the three and nine months endedJune 30, 2021 , we reported net change in unrealized appreciation (depreciation) on investments of$(16.3) million and$110.4 million , respectively. As ofJune 30, 2022 andSeptember 30, 2021 , our net unrealized appreciation (depreciation) on investments totaled$(64.9) million and$34.2 million , respectively. The net change in unrealized depreciation on our investments compared to the same period in the prior year was primarily due to the reversal of the unrealized appreciation ofPT Network Intermediate Holdings, LLC associated with the realization of the investment. For the three and nine months endedJune 30, 2022 , the Truist Credit Facility had a net change in unrealized depreciation of$8.9 million and$9.2 million , respectively. For the three and nine months endedJune 30, 2021 , the Truist Credit Facility had a net change in unrealized appreciation of$1.6 million and$18.5 million , respectively, respectively. As ofJune 30, 2022 andSeptember 30, 2021 , the net unrealized depreciation on the Truist Credit Facility totaled$10.9 million and$1.7 million , respectively. The net change in unrealized depreciation compared to the same periods in the prior year was primarily due to changes in the capital markets. 44 --------------------------------------------------------------------------------
Net Change in Net Assets Resulting from Operations
Net change in net assets resulting from operations totaled$(18.5) million and$10.2 million , or$(0.28) and$0.15 per share, for the three and nine months endedJune 30, 2022 , respectively. Net change in net assets resulting from operations totaled$31.9 million and$141.5 million , or$0.48 and$2.11 per share, for the three and nine months endedJune 30, 2021 , respectively. The decrease in the net change in net assets from operations for the three and nine months endedJune 30, 2022 compared to the same periods in the prior year was primarily due to a decrease in unrealized appreciation.
LIQUIDITY AND CAPITAL RESOURCES
Our liquidity and capital resources are derived primarily from proceeds of securities offerings, debt capital and cash flows from operations, including investment sales and repayments, and income earned. Our primary use of funds from operations includes investments in portfolio companies and payments of fees and other operating expenses we incur. We have used, and expect to continue to use, our debt capital, proceeds from the rotation of our portfolio and proceeds from public and private offerings of securities to finance our investment objectives. As ofJune 30, 2022 , in accordance with the 1940 Act, with certain limited exceptions, we are only allowed to borrow amounts such that we are in compliance with a 150% asset coverage ratio requirement after such borrowing, excluding SBA debentures pursuant to exemptive relief from theSEC received inJune 2011 . This "Liquidity and Capital Resources" section should be read in conjunction with the "COVID-19 Developments" section above. OnFebruary 5, 2019 , our stockholders approved the application of the modified asset coverage requirements set forth in Section 61(a)(2) of the 1940 Act, as amended by the Consolidated Appropriations Act of 2018 (which includes the SBCAA) as approved by our board of directors onNovember 13, 2018 . As a result, the asset coverage requirement applicable to us for senior securities was reduced from 200% (i.e.,$1 of debt outstanding for each$1 of equity) to 150% (i.e.,$2 of debt outstanding for each$1 of equity), subject to compliance with certain disclosure requirements.
As of
The annualized weighted average cost of debt for the nine months endedJune 30, 2022 and 2021, inclusive of the fee on the undrawn commitment and amendment costs on the Truist Credit Facility, amortized upfront fees on SBA debentures, was 4.0% and 3.5%, respectively. As ofJune 30, 2022 , we had the multi-currency Truist Credit Facility for up to$465.0 million (increased from$435.0 million inDecember 2021 ) in borrowings with certain lenders andTruist Bank , acting as administrative agent, andJPMorgan Chase Bank, N.A ., acting as syndication agent for the lenders. As ofJune 30, 2022 andSeptember 30, 2021 , we had$422.9 million and$316.5 million , respectively, in outstanding borrowings under the Truist Credit Facility. The Truist Credit Facility had a weighted average interest rate of 3.9% and 2.4%, respectively, exclusive of the fee on undrawn commitments, as ofJune 30, 2022 andSeptember 30, 2021 . The Truist Credit Facility is a revolving facility with a stated maturity date ofSeptember 4, 2024 , a one-year term-out period onSeptember 4, 2023 and pricing set at 225 basis points over LIBOR (or an alternative risk-free floating interest rate index). As ofJune 30, 2022 andSeptember 30, 2021 , we had$42.1 million and$118.5 million of unused borrowing capacity under the Truist Credit Facility, respectively, subject to leverage and borrowing base restrictions. The Truist Credit Facility is secured by substantially all of our assets excluding assets held by SBIC II. As ofJune 30, 2022 , we were in compliance with the terms of the Truist Credit Facility. OnNovember 13, 2021 , the 2024 Notes were redeemed at a redemption price of$25.00 per 2024 Note, plus accrued and unpaid interest toNovember 13, 2021 , pursuant to the indenture governing the 2024 Notes. Accordingly, as ofJune 30, 2022 andSeptember 30, 2021 , we had zero and$86.3 million in aggregate principal amount of 2024 Notes outstanding, respectively. Interest on the 2024 Notes was paid quarterly onJanuary 15 ,April 15 ,July 15 andOctober 15 , at a rate of 5.5% per year. As ofJune 30, 2022 , we had$150.0 million in aggregate principal amount of 2026 Notes outstanding. Interest on the 2026 Notes is paid semi-annually onMay 1 andNovember 1 , at a rate of 4.50% per year, commencingNovember 1, 2021 . The 2026 Notes mature onMay 1, 2026 , and may be redeemed in whole or in part at our option subject to a make-whole premium if redeemed more than three months prior to maturity. The 2026 Notes are direct unsecured obligations and rank pari passu in right of payment with future unsecured unsubordinated indebtedness. The 2026 Notes are structurally subordinated to all existing and future indebtedness and other obligations of any of our subsidiaries, financing vehicles, or similar facilities. As ofJune 30, 2022 , we had$165.0 million in aggregate principal amount of 2026 Notes-2 outstanding. Interest on the 2026 Notes is paid semi-annually onMay 1 andNovember 1 , at a rate of 4.0% per year, commencingMay 1, 2022 . The 2026 Notes-2 mature onNovember 1, 2026 , and may be redeemed in whole or in part at our option subject to a make-whole premium if redeemed more than three months prior to maturity. The 2026 Notes-2 are direct unsecured obligations and rank pari passu in right of payment with future unsecured unsubordinated indebtedness. The 2026 Notes-2 are structurally subordinated to all existing and future indebtedness and other obligations of any of our subsidiaries, financing vehicles, or similar facilities. We may raise additional equity or debt capital through both registered offerings off our shelf registration statement and private offerings of securities, by securitizing a portion of our investments or borrowing from the SBA, among other sources. Any future additional debt capital we incur, to the extent it is available, may be issued at a higher cost and on less favorable terms and conditions than the Truist Credit Facility, 2026 Notes, 2026 Notes-2 and SBA debentures. Furthermore, the Truist Credit Facility availability depends on various covenants and restrictions. The primary use of existing funds and any funds raised in the future is expected to be for repayment of indebtedness, investments in portfolio companies, cash distributions to our stockholders or for other general corporate or strategic purposes such as our stock repurchase program. SBIC II is able to borrow funds from the SBA against regulatory capital (which approximates equity capital) that is paid-in and is subject to customary regulatory requirements including an examination by the SBA. We have funded SBIC II with$75.0 million of equity capital and it had SBA debentures outstanding of$27.5 million and$63.5 million as ofJune 30, 2022 andSeptember 30, 2021 , respectively. SBA debentures are non-recourse to us and may be prepaid at any time without penalty. The interest rate of SBA debentures is fixed at the time of issuance, often referred to as pooling, at a market-driven spread over 10-yearU.S. Treasury Notes. Under current SBA regulations, a SBIC may individually borrow up to a maximum of$175.0 million , which is up to twice its potential regulatory capital, and as part of a group of SBICs under common control may borrow a maximum of$350 million in the aggregate. As of bothJune 30, 2022 andSeptember 30, 2021 , SBIC II had an initial$150.0 million in debt commitments, all of which were drawn. During the three and nine months endedJune 30, 2022 , zero and$36.0 million in SBA debentures were repaid, respectively. During the three and nine months endedJune 30, 2021 , there was$45.0 million and$55.0 million in SBA debentures were repaid, respectively. As of bothJune 30, 2022 andSeptember 30, 2021 , the unamortized fees on the SBA debentures was$0.4 million , respectively. The SBA debentures' upfront fees of 3.4% consist of a commitment fee of 1.0% and an issuance discount of 2.4%, which are being amortized. 45 --------------------------------------------------------------------------------
Our fixed-rate SBA debentures as of
Fixed All-in Coupon
As of
Issuance Dates Maturity Rate (1) Principal Balance
September 20, 2017 September 1, 2027 2.9 % 27,500
Fixed All-in Coupon As of September 30, 2021
Issuance Dates Maturity Rate (1) Principal Balance
September 20, 2017 September 1, 2027 2.9 % $ 27,500
March 21, 2018 March 1, 2028 3.5 36,000
Weighted Average Rate / Total 3.2 % $ 63,500
(1)Excluding 3.4% of upfront fees.
The SBIC program is designed to stimulate the flow of capital into eligible businesses. Under SBA regulations, SBIC II is subject to regulatory requirements, including making investments in SBA eligible businesses, investing at least 25% of regulatory capital in eligible smaller businesses, as defined under the 1958 Act, placing certain limitations on the financing terms of investments, prohibiting investment in certain industries and requiring capitalization thresholds that limit distributions to us, and is subject to periodic audits and examinations of their financial statements that are prepared on a basis of accounting other than GAAP (for example, fair value, as defined under ASC 820, is not required to be used for assets or liabilities for such compliance reporting). As ofJune 30, 2022 , SBIC II was in compliance with their regulatory requirements. In accordance with the 1940 Act, with certain limited exceptions,PennantPark Investment is only allowed to borrow amounts such that our required 150% asset coverage ratio is met after such borrowing. As ofJune 30, 2022 andSeptember 30, 2021 , we excluded the principal amounts of our SBA debentures from our asset coverage ratio pursuant toSEC exemptive relief. In 2011, we received exemptive relief from theSEC allowing us to modify the asset coverage ratio requirement to exclude the SBA debentures from the calculation. Accordingly, our ratio of total assets on a consolidated basis to outstanding indebtedness may be less than 150% which, while providing increased investment flexibility, also increases our exposure to risks associated with leverage. We have entered into certain contracts under which we have material future commitments. Under our Investment Management Agreement, which was reapproved by our board of directors (including a majority of our directorswho are not interested persons of us or the Investment Adviser) inFebruary 2022 PennantPark Investment Advisers serves as our investment adviser.PennantPark Investment , through the Investment Adviser, provides similar services to SBIC II under its investment management agreement with us. SBIC II's investment management agreement does not affect the management or incentive fees that we pay to the Investment Adviser on a consolidated basis. Payments under our Investment Management Agreement in each reporting period are equal to (1) a management fee equal to a percentage of the value of our average adjusted gross assets and (2) an incentive fee based on our performance. Under our Administration Agreement, which was most recently reapproved by our board of directors, including a majority of our directorswho are not interested persons of us, inFebruary 2022 the Administrator furnishes us with office facilities and administrative services necessary to conduct our day-to-day operations.PennantPark Investment , through the Administrator, provides similar services to SBIC II under its administration agreements, which are intended to have no effect on the consolidated administration fee. If requested to provide significant managerial assistance to our portfolio companies, we or the Administrator will be paid an additional amount based on the services provided. Payment under our Administration Agreement is based upon our allocable portion of the Administrator's overhead in performing its obligations under our Administration Agreement, including rent and our allocable portion of the costs of our Chief Compliance Officer, Chief Financial Officer and their respective staffs. If any of our contractual obligations discussed above are terminated, our costs under new agreements that we enter into may increase. In addition, we will likely incur significant time and expense in locating alternative parties to provide the services we expect to receive under our Investment Management Agreement and our Administration Agreement. Any new investment management agreement would also be subject to approval by our stockholders. As ofJune 30, 2022 andSeptember 30, 2021 , we had cash and cash equivalents of$29.5 million and$20.4 million , respectively, available for investing and general corporate purposes. We believe our liquidity and capital resources are sufficient to allows us to effectively operate our business. Our operating activities used cash of$97.5 million for the nine months endedJune 30, 2022 , and our financing activities provided cash of$106.9 million for the same period. Our operating activities used cash primarily due to our investment activities and our financing activities provided cash primarily due to borrowings under the Truist Credit Facility and proceeds from our 2026-2 Notes. Our operating activities provided cash of$95.7 million for the nine months endedJune 30, 2021 and our financing activities used cash of$107.4 million for the same period. Our operating activities provided cash primarily from our investment activities and our financing activities used cash primarily to pay down the Truist Credit Facility and our SBA Debentures.
InJuly 2020 , we and Pantheon formed PSLF, an unconsolidated joint venture. PSLF invests primarily in middle-market and other corporate debt securities consistent with our strategy. PSLF was formed as aDelaware limited liability company. As ofJune 30, 2022 andSeptember 30, 2021 , PSLF had total assets of$664.6 million and$417.4 million , respectively. PSLF's portfolio consisted of debt investments in 72 and 47 portfolio companies as ofJune 30, 2022 andSeptember 30, 2021 , respectively. As of the same dates, we and Pantheon had no remaining commitments to fund first lien secured debt and equity interests in PSLF. As ofJune 30, 2022 , at fair value, the largest investment in a single portfolio company in PSLF was$17.9 million and the five largest investments totaled$87.2 million . As ofSeptember 30, 2021 , at fair value, the largest investment in a single portfolio company in PSLF was$16.8 million and the five largest investments totaled$74.4 million . PSLF invests in portfolio companies in the same industries in which we may directly invest. We provide capital to PSLF in the form of subordinated notes and equity interests. As ofJune 30, 2022 andSeptember 30, 2021 , we and Pantheon owned 60.5% and 39.5%, respectively, of each of the outstanding subordinated notes and equity interests of PSLF. As ofJune 30, 2022 andSeptember 30, 2021 our investment in PSLF consisted of subordinated notes of$88.0 million and$64.2 million , respectively, and equity interests of$53.1 million and$41.2 million , respectively. We and Pantheon each appointed two members to PSLF's four-person Member Designees' Committee, or the Member Designees' Committee. All material decisions with respect to PSLF, including those involving its investment portfolio, require unanimous approval of a quorum of Member Designees' Committee. Quorum is defined as (i) the presence of two members of the Member Designees' Committee; provided that at least one individual is present that was elected, designated or appointed by each of us and Pantheon; (ii) the presence of three members of the Member Designees' Committee, provided that the individual that was elected, designated or appointed by each of us 46 -------------------------------------------------------------------------------- or Pantheon, as the case may be, with only one individual present shall be entitled to cast two votes on each matter; and (iii) the presence of four members of the Member Designees' Committee shall constitute a quorum, provided that two individuals are present that were elected, designated or appointed by each of us and Pantheon. Additionally, PSLF, through its wholly-owned subsidiary, or PSLF Subsidiary, has entered into a$225.0 million (reduced from$275.0 million onMarch 2, 2022 ) senior secured revolving credit facility which bears interest at SOFR (or an alternative risk-free interest rate index) plus 255 basis points during the investment period, or the PSLF Credit Facility, withBNP Paribas , subject to leverage and borrowing base restrictions. InMarch 2022 , PSLF completed a$304.0 million debt securitization in the form of a collateralized loan obligation, or the "2034 Asset-Backed Debt". The 2034 Asset-Backed Debt is secured by a diversified portfolio ofPennantPark CLO IV, LLC ., a wholly-owned and consolidated subsidiary of PSLF, consisting primarily of middle market loans and participation interests in middle market loans. The 2034 Asset-Backed Debt is scheduled to mature inApril 2034 . On the closing date of the transaction, in consideration of PSLF's transfer toPennantPark CLO IV, LLC . of the initial closing date loan portfolio, which included loans distributed to PSLF by certain of its wholly owned subsidiaries and us,PennantPark CLO IV, LLC . transferred to PSLF 100% of the Preferred Shares ofPennantPark CLO IV, LLC . and 100% of the Subordinated Notes issued byPennantPark CLO IV, LLC .
Below is a summary of PSLF's portfolio at fair value:
September 30,
($ in thousands) June 30, 2022 2021
Total investments $ 608,375 $ 405,233
Weighted average cost yield on income producing
investments 7.9 % 7.1 %
Number of portfolio companies in PSLF 72 47
Largest portfolio company investment $ 17,897
Below is a listing of PSLF's individual investments as of
47
--------------------------------------------------------------------------------
Basis Point
Current Spread Above
Issuer Name Maturity Industry Coupon Index (1) Par Cost Fair Value (2)
First Lien Secured
Debt - 693.3%
Ad.net Acquisition,
LLC 5/6/2026 Media 8.25 %
3M L+600 4,950
Containers,
Corp II 11/30/2026 Packaging and Glass 7.22 % 3M L+800 10,000 9,806 9,800
Altamira Aerospace and
Technologies, LLC 7/24/2025 Defense 9.24 % 3M L+550 884 876 842
American Insulated
Glass, LLC 12/21/2023 Building Materials 6.50 % 3M L+575 17,463 17,417 17,463
Amsive Holding
Corporation (f/k/a
Vision Purchaser
Corporation) 6/10/2025 Media 7.75 % 1M L+550 13,905 13,757 13,835
Personal, Food and
Miscellaneous
Any Hour Services 7/21/2027 Services 6.75 % - 9,978 9,969 9,878
Personal, Food and
Apex Service Miscellaneous
Partners, LLC 7/31/2025 Services 6.25 % 3M L+575 6,569 6,498 6,536
Apex Service Personal, Food and
Partners, LLC Term Miscellaneous
Loan B 7/31/2025 Services 6.55 % 3M L+550 3,323 3,296 3,307
Apex Service Personal, Food and
Partners, LLC - Term Miscellaneous
Loan C 7/31/2025 Services 6.50 % 3M L+600 7,607 7,607 7,569
Applied Technical Environmental
Services, LLC 12/29/2026 Services 8.00 % 3M L+500 7,388 7,296 7,295
Blackhawk Industrial
Distribution, Inc. 9/17/2024 Distribution 7.20 % 3M L+600 18,078 17,829 17,897
CF512, Inc. 8/20/2026 Media 7.58 % 3M L+575 2,992 2,964 2,948
Connatix Buyer, Inc. 7/13/2027 Media 6.91 % 1M L+550 9,190 9,236 9,029
Crash Champions, LLC 8/5/2025 Auto Sector 6.83 % 3M L+750 15,940 15,637 15,860
Personal and
Non-Durable Consumer
Dr. Squatch, LLC 8/31/2027 Products 8.00 % 3M L+475 6,452 6,445 6,452
DRS Holdings III,
Inc. 11/3/2025 Consumer Products 7.42 % 3M L+600 15,182 15,099 14,742
Duraco Specialty Manufacturing /
Tapes LLC 6/30/2024 Basic Industries 6.87 % 3M L+575 8,200 8,049 8,028
ECL Entertainment, Hotels, Motels, Inns
LLC 5/1/2028 and Gaming 9.75 % 3M L+500 4,569 4,569 4,452
ECM Industries, LLC 12/23/2025 Electronics 6.32 % 3M L+600 2,823 2,757 2,766
Exigo Intermediate
II, LLC 3/15/2027 Business Services 6.81 % 1M L+575 10,000 9,863 9,850
Banking, Finance,
Global Holdings Insurance & Real
InterCo LLC 3/16/2026 Estate 7.00 % 3M L+600 7,380 7,350 7,159
Graffiti Buyer, Inc. 8/10/2027 Distribution 8.00 % 3M L+550 1,979 1,943 1,925
Hancock Roofing and
Construction L.L.C. 12/31/2026 Insurance 7.09 % 1M L+575 6,838 6,838 6,770
Holdco Sands Aerospace and
Intermediate, LLC 11/23/2028 Defense 7.00 % 1M L+800 13,990 13,720 13,710
HW Holdco, LLC 12/10/2024 Media 6.00 % 3M L+700 14,475 14,325 14,186
Healthcare,
IDC Infusion Education and
Services, Inc. 12/30/2026 Childcare 7.00 % 3M L+750 9,975 9,791 9,875
IG Investments
Holdings, LLC 9/22/2028 Business Services 8.02 % 1M L+575 4,484 4,397 4,417
Imagine
3M L+625 5,660 5,554 5,490
Healthcare,
Inception Fertility Education and
Ventures, LLC 12/7/2023 Childcare 9.08 % 3M L+550 17,409 16,979 16,973
Infolinks Media
Buyco, LLC 11/1/2026 Media 8.00 % 1M L+550 6,461 6,461 6,461
Integrity Marketing
Acquisition, LLC 8/27/2025 Insurance 7.83 % 3M L+575 17,490 17,412 17,322
K2 Pure Solutions Chemicals, Plastics
NoCal, L.P. 12/20/2023 and Rubber 9.67 % 3M L+550 14,475 14,333 14,345
Leisure, Amusement,
LAV Gear Holdings, Motion Pictures,
Inc. 10/31/2024 Entertainment 8.50 % 3M L+500 2,137 2,127 2,081
Lash OpCo, LLC 2/18/2027 Consumer Products 9.25 % 1M L+650 9,950 9,824 9,850
Healthcare,
Lightspeed Buyer Education and
Inc. 2/3/2026 Childcare 7.42 % 3M L+475 12,377 12,137 12,129
Aerospace and
MAG DS Corp. 4/1/2027 Defense 7.75 % 3M L+550 5,585 5,124 5,083
Mars Acquisition
Holdings Corp. 5/14/2026 Media 7.17 % 1M L+625 7,940 7,880 7,861
3M L+575 7,425 7,343 7,351
Meadowlark Acquirer,
LLC 12/10/2027 Business Services 6.84 % 3M L+575 2,998 2,938 2,923
MeritDirect, LLC 5/23/2024 Media 7.75 % 3M L+600 15,371 15,276 15,294
Municipal Emergency
Services, Inc. 9/28/2027 Distribution 7.25 % 3M L+550 4,164 4,099 4,006
Healthcare,
Education and
NBH Group LLC 8/19/2026 Childcare 6.37 % 3M L+575 7,524 7,442 7,486
Healthcare,
OIS Management Education and
Services, LLC 7/9/2026 Childcare 5.61 % 3M L+600 5,316 5,266 5,236
Owl Acquisition, LLC 2/4/2028 Education 6.75 % 3M L+550 4,000 3,925 3,880
Ox Two, LLC (New
Issue) 5/18/2026 Distribution 8.00 % 1M L+650 4,987 4,933 4,888
PL Acquisitionco,
LLC 11/9/2027 Retail 8.17 % 1M L+575 8,656 8,506 8,505
PlayPower, Inc. 5/8/2026 Consumer Products 7.75 % 1M L+525 2,587 2,489 2,244
Quantic Electronics, Aerospace and
LLC 11/19/2026 Defense 7.25 % 1M L+600 3,429 3,365 3,361
Radius Aerospace, Aerospace and
Inc. 3/31/2025 Defense 6.76 % 3M L+600 12,784 12,676 12,592
Healthcare,
Rancho Health MSO, Education and
Inc. 12/18/2025 Childcare 6.75 % 1M L+450 5,207 5,207 5,207
Reception Purchaser,
LLC 2/28/2028 Transportation 8.20 % SOFR+600 4,988 4,915 4,788
Recteq, LLC 1/29/2026 Consumer Products 8.25 % 3M L+700 9,875 9,736 9,628
Research Now Group,
LLC and Dynata, LLC 12/20/2024 Business Services 6.50 % 1M L+550 14,580 14,468 13,705
Healthcare,
Riverpoint Medical, Education and
LLC 6/20/2025 Childcare 6.75 % 3M L+525 3,229 3,207 3,149
Riverside
Assessments, LLC 3/10/2025 Education 8.45 % 1M L+575 10,000 9,920 9,800
Sales Benchmark
Index LLC 1/3/2025 Business Services 8.25 % 3M L+625 7,225 7,134 7,225
Sargent & Greenleaf
Inc. 12/20/2024 Electronics 7.15 % 3M L+550 5,082 5,082 5,031
Signature Systems Chemicals, Plastics
Holding Company 5/3/2024 and Rubber 8.75 % 1M L+450 12,139 12,058 12,078
Solutionreach, Inc. 1/17/2024 Communications 7.42 % 6M L+675 11,420 11,380 10,986
STV Group
Incorporated 12/11/2026 Transportation 6.92 % 3M L+575 12,099 12,029 11,917
System Planning and
Analysis, Inc.
(f/k/a Management
Consulting & Aerospace and
Research, LLC) 8/16/2027 Defense 8.83 % SOFR+600 9,962 9,704 9,803
TAC LifePort Aerospace and
Purchaser, LLC 3/1/2026 Defense 7.00 % 3M L+600 4,439 4,439 4,421
TeleGuam Holdings,
LLC 11/20/2025 Telecommunications 8.25 % 3M L+450 4,553 4,532 4,553
3M L+525 2,974 2,960 2,914
The Aegis
Technologies Group, Aerospace and
LLC 10/31/2025 Defense 8.12 % 3M L+600 11,293 11,180 11,180
The Bluebird Group
LLC 7/27/2026 Business Services 8.75 % 3M L+650 5,549 5,599 5,605
The Vertex
Companies, LLC 8/30/2027 Business Services 7.17 % 3M L+550 4,543 4,495 4,461
TPC Canada Parent,
Inc. and TPC US
Parent, LLC 11/24/2025 Food 6.50 % 3M L+525 5,550 5,398 5,384
TVC Enterprises, LLC 3/26/2026 Transportation 7.67 % 3M L+600 17,424 17,282 17,076
TWS Acquisition
Corporation 6/16/2025 Education 8.76 % 3M L+625 7,949 7,914 7,910
Aerospace and
Tyto Athene, LLC 4/3/2028 Defense 6.47 % 3M L+550 12,125 11,997 11,470
Printing and
UBEO, LLC 4/3/2024 Publishing 6.75 % 3M L+450 4,674 4,655 4,581
Wildcat Buyerco,
Inc. 2/27/2026 Electronics 6.75 % SOFR+575 11,562 11,471 11,252
3M L+725 7,498 7,373 7,348
Total First Lien
Secured Debt 612,509 608,375
Total Investments - 693.3%
Cash and Cash Equivalents - 61.2%
BlackRock Federal FD
Institutional 30 53,690 53,690
Total Cash and Cash
Equivalents 53,690 53,690
Total Investments and Cash Equivalents - 754.4% $ 666,200 $ 662,065
Liabilities in Excess of Other Assets - (654.4)% (574,309 )
Members'
Equity-100.0% $ 87,756
(1)
Represents floating rate instruments that accrue interest at a predetermined
spread relative to an index, typically the applicable LIBOR, or "L" or Prime
rate or "P". The spread may change based on the type of rate used. The terms in
the Schedule of Investments disclose the actual interest rate in effect as of
the reporting period. LIBOR loans are typically indexed to a 30-day, 60-day,
90-day or 180-day LIBOR rate (1M L, 2M L, 3M L, or 6M L, respectively), at the
borrower's option. All securities are subject to a LIBOR or Prime rate floor
where a spread is provided, unless noted. The spread provided includes PIK
interest and other fee rates, if any.
(2)
Valued based on PSLF's accounting policy.
(3)
Represents the purchase of a security with delayed settlement or a revolving
line of credit that is currently an unfunded investment. This security does not
earn a basis point spread above an index while it is unfunded.
48
--------------------------------------------------------------------------------
Below is a listing of PSLF's individual investments as of
Basis Point
Current Spread Above
Issuer Name Maturity Industry Coupon Index (1) Par Cost Fair Value (2)
First Lien Secured Debt
- 570.7%
Ad.net Acquisition, LLC 05/06/26 Media 7.00% 3M L + 600 $ 4,988 $ 4,920 $ 4,913
Altamira Technologies, 07/24/25 Aerospace and
LLC Defense 8.00% 3M L+700 921 912 864
American Insulated 12/21/23
Glass, LLC Building Materials 6.50% 3M L+550 14,625 14,481 14,479
Any Hour Services
Miscellaneous
Services 6.75% 1M L+525 6,500 6,378 6,370
Miscellaneous
Services 6.25% 1M L+550 6,569 6,518 6,504
Apex Service Partners, 07/31/25 Personal, Food and
LLC Term Loan B Miscellaneous
Services 6.55% - 3,347 3,313 3,313
Applied Technical 12/29/26 Environmental
Services, LLC Services 6.75% 3M L+575 7,444 7,336 7,295
Education and
Childcare 6.25% 1M L+550 13,729 13,674 13,729
5,985 5,873 5,865
13,428 13,335 13,334
and Gaming 8.25% 3M L+750 4,604 4,560 4,707
2,827 2,805 2,770
Global Holdings InterCo 03/16/26 Banking, Finance, 7,360 7,425
LLC Insurance & Real
Estate 7.00% 3M L+600 7,463
Hancock Roofing and 12/31/26 5,819 5,895
Construction L.L.C. Insurance 6.00% 3M L+500 5,955
Holdco Sands 12/19/25 Aerospace and
Intermediate, LLC Defense 7.50% 3M L+600 12,071 11,934 12,010
HW Holdco, LLC 12/10/24 Media 5.50% 3M L+450 14,588 14,499 14,442
Defense 6.75% 3M L+600 9,059 8,890 8,878
Integrity Marketing 08/27/25
Acquisition, LLC Insurance 6.50% 3M L+550 7,868 7,803 7,829
Miscellaneous
Services 6.50% 3M L+550 9,420 9,420 9,420
and Rubber 8.00% 1M L+700 14,588 14,479 14,199
Motion Pictures,
Entertainment 8.50% 3M L+750 2,120 2,107 1,987
Education and
Childcare 6.75% 1M L+550 12,472 12,273 12,472
Education and
Childcare 7.25% 1M L+825 16,817 16,729 16,817
MAG DS Corp. 04/01/27 Aerospace and
Defense 6.50% 1M L+550 5,837 5,581 5,253
Mars Acquisition 05/14/26
Holdings Corp. Media 6.50% 1M L+575 8,000 7,852 7,920
7,481 7,338 7,332
MeritDirect, LLC 05/23/24 Media 6.50% 3M L+550 13,386 13,272 13,252
PlayPower, Inc. 05/08/26 Consumer Products 5.65% 3M L+575 3,805 3,778 3,736
Radius Aerospace, Inc. 03/31/25 Aerospace and 13,202 13,068
Defense 6.75% 3M L+600 13,335
Rancho Health MSO, Inc. 12/18/25 Healthcare, 5,140 5,232
Education and
Childcare 6.75% 3M L+550 5,232
Recteq, LLC 01/29/26 Consumer Products 7.00% 3M L+450 9,950 9,775 9,851
Research Now Group, LLC 12/20/24 14,602 14,508
and Dynata, LLC Business Services 6.50% 3M L+600 14,695
Riverpoint Medical, LLC 06/20/25 Healthcare, 3,217 3,206
Education and
Childcare 5.50% 1M L+550 3,246
Sales Benchmark Index 01/03/25 7,526 7,442
LLC Business Services 7.75% 3M L+750 7,632
Sargent & Greenleaf Inc. 12/20/24 Electronics 7.00% 3M L+575 5,232 5,181 5,232
Signature Systems 05/03/24 Chemicals, Plastics 13,397 13,365
Holding Company and Rubber 8.50% 1M L+525 13,500
11,882 11,758 11,882
12,099 12,003 12,038
TAC LifePort Purchaser, 03/01/26 Aerospace and 4,891 4,966
LLC Defense 7.00% 1M L+525 4,967
4,593 4,558 4,547
2,997 2,884 2,981
TPC Canada Parent, Inc. 11/24/25
and TPC US Parent, LLC Food 6.25% 1M L+625 5,593 5,537 5,425
TVC Enterprises, LLC 03/26/26 Transportation 6.75% 3M L+550 12,773 12,643 12,773
TWS Acquisition 06/16/25 9,515
Corporation Education 7.25% 3M L+450 9,648 9,648
Tyto Athene, LLC 04/03/28 Aerospace and 9,853
Defense 6.25% 1M L+675 9,950 9,950
UBEO, LLC 04/03/24 Printing and 4,676
Publishing 5.50% 1M L+500 4,710 4,687
Vision Purchaser 06/10/25 14,056
Corporation Media 7.75% 3M L+675 14,249 14,035
7,425 7,360 7,388
- -
Total First Lien Secured
Debt 409,602 405,009 405,232
Cash and Cash
Equivalents-18.9% - -
BlackRock Federal FD
Institutional 30 11,013 11,013
US Bank Cash - -
Total Cash and Cash
Equivalents 11,013 11,013
Total Investments and
Cash Equivalents-592.7% $ 416,023 $ 416,246
Liabilities in Excess of
Other Assets-(492.7)% (348,213 )
Members' Equity-100.0% $ 68,032
(1)
Represents floating rate instruments that accrue interest at a predetermined
spread relative to an index, typically the applicable LIBOR, or "L" or Prime
rate or "P". The spread may change based on the type of rate used. The terms in
the Schedule of Investments disclose the actual interest rate in effect as of
the reporting period. LIBOR loans are typically indexed to a 30-day, 60-day,
90-day or 180-day LIBOR rate (1M L, 2M L, 3M L, or 6M L, respectively), at the
borrower's option. All securities are subject to a LIBOR or Prime rate floor
where a spread is provided, unless noted. The spread provided includes PIK
interest and other fee rates, if any.
(2)
Valued based on PSLF's accounting policy.
49
--------------------------------------------------------------------------------
Below are the consolidated statements of assets and liabilities for PSLF,($ in
thousands):
June 30, 2022
(Unaudited) September 30, 2021
Assets
Investments at fair value (cost-$612,509 and
$405,009 , respectively) $ 608,375 $ 405,233
Cash and cash equivalents (cost-$53,690 and$11,013 , respectively) 53,690
11,013
Interest receivable 1,708
1,175
Prepaid expenses and other assets 842 - Total assets 664,615
417,421
Liabilities
Distribution payable to Members 4,000
2,800
Payable for investments purchased 67,265
12,793
Credit facility payable 110,900
224,000
2034 Asset-backed debt, net (par-$246,000) 243,799 - Notes payable to members 145,472
106,041
Interest payable on credit facility 2,718
1,499
Interest payable on notes to members 2,080 1,644 Accrued other expenses 625 612 Total liabilities 576,859 349,389 Members' equity 87,756 68,032 Total liabilities and members' equity$ 664,615 $
417,421
(1)
As of
Below are the consolidated statements of operations for PSLF, ($ in thousands):
Three Months Ended June 30 ,
Nine Months Ended
2022 2021 2022 2021
Investment income:
Interest $ 8,491 $ 7,101 $ 23,759 $ 20,359
Other income 18 1,081 160 1,808
Total investment income 8,509 8,182 23,919 22,167
Expenses:
Interest expense on credit facility
and asset-backed debt 2,183 1,505 5,838 4,755
Interest expense on notes to members 2,992 2,410 7,861 7,094
Administrative services expenses 293 293 879 879
Other general and administrative
expenses 112 112 335 335
Total expenses 5,580 4,320 14,913 13,063
Net investment income 2,929 3,862 9,006 9,104
Realized and unrealized (loss) gain on
investments and credit facility
foreign
currency translations:
Net realized gain on investments 120 - 506 464
Net change in unrealized
(depreciation) appreciation on:
Investments (3,630 ) 92 (4,357 ) 4,546
Net change in unrealized
(depreciation) appreciation on
investments (3,630 ) 92 (4,357 ) 4,546
Net realized and unrealized (loss)
gain from investments (3,510 ) 92 (3,851 ) 5,010
Net increase in members' equity
resulting from operations $ (581 ) $ 3,954 $ 5,155 $ 14,114
(1)No management or incentive fees are payable by PSLF.
Recent Developments
OnJuly 29, 2022 , the Company entered into the Fifth Amendment to the Truist Credit Facility. The Fifth Amendment amends certain provisions of the Credit Agreement to, among other things, (1) increase the facility size from$465.0 million to$500.0 million , which may be further increased up to$750.0 million , subject to the terms of the Amended Credit Agreement, (2) extend the term of the revolving period fromSeptember 4, 2023 toJuly 29, 2026 and the stated maturity date fromSeptember 4, 2024 toJuly 29, 2027 for$475.0 million out of the total$500.0 million commitments (with the revolving period with respect to the remaining$25.0 million of commitments continuing to expire onSeptember 4, 2023 and the related obligations maturing onSeptember 4, 2024 ), (3) adjust the applicable margin with respect to the loans extended by the lenders of the extended$475.0 million commitments and (4) replace the LIBOR benchmark provisions with SOFR benchmark provisions, including applicable credit adjustment spread. In connection with the facility increase contemplated by the Fifth Amendment,Regions Bank joined the Amended Credit Agreement as an additional multicurrency lender.
The foregoing descriptions of the Fifth Amendment does not purport to be complete and is qualified in their entirety by reference to the full text of the Fifth Amendment, which is filed as an exhibit hereto and incorporated by reference herein.
Subsequent to quarter end we and
Distributions
In order to be treated as a RIC for federal income tax purposes and to not be subject to corporate-level tax on undistributed income or gains, we are required, under Subchapter M of the Code, to annually distribute dividends forU.S. federal income tax purposes to our stockholders out of the assets legally available for distribution of an amount generally at least equal to 90% of our investment company taxable income, determined without regard to any deduction for dividends paid. Although not required for us to maintain our RIC tax status, in order to preclude the imposition of a 4% nondeductible federal excise tax imposed on RICs, we must distribute dividends forU.S. federal income tax purposes to our stockholders in respect of each calendar year of an amount at least equal to the Excise Tax Avoidance 50 -------------------------------------------------------------------------------- Requirement. In addition, although we may distribute realized net capital gains (i.e., net long-term capital gains in excess of net short-term capital losses), if any, at least annually, out of the assets legally available for such distributions in the manner described above, we have retained and may continue to retain such net capital gains or investment company taxable income, contingent on our ability to be subject to tax as a RIC, in order to provide us with additional liquidity. During the three and nine months endedJune 30, 2022 , we declared distributions of$0.145 and$0.405 per share, for total distributions of$9.4 million and$26.8 million , respectively. For the same periods in the prior year, we declared distributions of$0.12 and$0.36 per share, for total distributions of$8.0 million and$24.1 million , respectively. We monitor available net investment income to determine if a return of capital for tax purposes may occur for the fiscal year. To the extent our taxable earnings fall below the total amount of our distributions for any given fiscal year, stockholders will be notified of the portion of those distributions deemed to be a tax return of capital. Tax characteristics of all distributions will be reported to stockholders subject to information reporting on Form 1099-DIV after the end of each calendar year and in our periodic reports filed with theSEC .
We intend to continue to make quarterly distributions to our stockholders. Our quarterly distributions, if any, are determined by our board of directors.
We maintain an "opt out" dividend reinvestment plan for our common stockholders. As a result, if we declare a distribution, then stockholders' cash distributions will be automatically reinvested in additional shares of our common stock, unless they specifically "opt out" of the dividend reinvestment plan so as to receive cash distributions. We may not be able to achieve operating results that will allow us to make distributions at a specific level or to increase the amount of these distributions from time to time. In addition, we may be limited in our ability to make distributions due to the asset coverage ratio for borrowings applicable to us as a BDC under the 1940 Act and/or due to provisions in future credit facilities. If we do not distribute at least a certain percentage of our income annually, we could suffer adverse tax consequences, including possible loss of our ability to be subject to tax as a RIC. We cannot assure stockholders that they will receive any distributions at a particular level.
Recent Accounting Pronouncements
InMarch 2020 , the FASB issued Accounting Standards Update No. 2020-04, "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting." The guidance provides optional expedients and exceptions for applying GAAP to contract modifications, hedging relationships and other transactions, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued because of the reference rate reform. ASU 2020-04 is effective for all entities as ofMarch 12, 2020 throughDecember 31, 2022 . The Company is currently evaluating the impact the adoption of this new accounting standard will have on its consolidated financial statements, but the impact of the adoption is not expected to be material. InJune 2022 , the FASB issued Accounting Standards Update, or ASU, 2022-03, Fair Value Measurement (Topic 820): Fair Value Measurement ofEquity Securities Subject to Contractual Sale Restrictions, or ASU 2022-03, which changed the fair value measurement disclosure requirements of ASC Topic 820, Fair Value Measurements and Disclosures, or ASC 820. The amendments clarify that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value. The amendments also clarify that an entity cannot, as a separate unit of account, recognize and measure a contractual sale restriction. The new guidance is effective for fiscal years beginning afterDecember 15, 2023 , including interim periods therein. Early application is permitted. The Company is currently evaluating the impact the adoption of this new accounting standard will have on its consolidated financial statements, but the impact of the adoption is not expected to be material.
Stock Repurchase Program
OnFebruary 9, 2022 , we announced a share repurchase program which allows us to repurchase up to$25 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. The shares may be purchased from time to time at prevailing market prices, through open market transactions, including block transactions. Unless extended by our board of directors, the program, which may be implemented at the discretion of management, will expire on the earlier ofMarch 31, 2023 and the repurchase of$25 million of common stock. During the three and nine months endedJune 30, 2022 , we repurchased 717,709 and 1,631,163, respectively, shares of common stock in open market transactions for an aggregate cost (including transaction costs) of$4.9 million and$12.0 million , respectively. During the three and nine months endedJune 30, 2021 , we did not make any repurchases of shares of our common stock.
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