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:
• our future operating results;
• our business prospects and the prospects of our prospective portfolio
companies, including as a result of the current pandemic caused by COVID-19;
• 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;
• our ability to continue to effectively manage our business due to the
significant disruptions caused by the current COVID-19 pandemic;
• the dependence of our future success on the general economy and its impact
on the industries in which we invest;
• the impact of a protracted decline in the liquidity of credit markets on
our business; • the impact of investments that we expect to make;
• the impact of fluctuations in interest rates and foreign exchange rates on
our business and our portfolio companies; • our contractual arrangements and relationships with third parties;
• the valuation of our investments in portfolio companies, particularly those
having no liquid trading market;
• the ability of our prospective portfolio companies to achieve their
objectives; • our expected financings and investments; • the adequacy of our cash resources and working capital;
• the timing of cash flows, if any, from the operations of our prospective
portfolio companies; • the impact of price and volume fluctuations in the stock market;
• the ability of our Investment Adviser to locate suitable investments for us
and to monitor and administer our investments;
• the impact of future legislation and regulation on our business and our
portfolio companies; and • the impact of Brexit and other world economic and political issues. 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. 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. 41 -------------------------------------------------------------------------------- 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 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 in the city ofWuhan inChina and has since been identified as a global pandemic by theWorld Health Organization . In response, governmental authorities of affected jurisdictions, including those inthe United States , have imposed travel restrictions and required the temporary closures of many corporate offices, retail stores, manufacturing facilities, factories and other common places of public congregation. These restrictions and "stay-at-home" orders have essentially resulted in the shutdown of all non-essential businesses, as defined by each governmental authority imposing the respective orders. The economic impact resulting from such restrictions has adversely affected the business operations of some, if not all, of our portfolio companies, as well as our own operations and the operations of our Adviser. While some jurisdictions have either lifted or started to ease certain restrictions on businesses, it is possible that a resurgence of COVID-19 will require additional closures in the future. We cannot predict with any level of certainty the magnitude of the ongoing impact to our business operations or the business operations of our portfolio companies due to the business and supply-chain disruptions caused by the COVID-19 pandemic and the resulting governmental responses. However, we expect such adverse effects to continue for the duration of the pandemic, and potentially for some time thereafter. Due to the nature of these governmental restrictions 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. These developments will likely continue to impact the value of our investments in such portfolio companies. The COVID-19 pandemic will likely continue to have an adverse impact on the global economy and result in a period, however long, of global economic slowdown. 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. While we are unable to predict the ultimate adverse effect of COVID-19 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: •U.S. and global economic slowdowns; • changes in interest rates, including LIBOR; • limited availability of credit, both inthe United States and internationally; • disruptions to supply-chains and price volatility;
• changes to existing laws and regulations, or the imposition of new laws and
regulations; and • uncertainty regarding future governmental and regulatory policies. The business disruption and financial harm resulting from COVID-19 experienced by our portfolio companies are likely to 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 the same quarter of the prior year. The continuing impact of the COVID-19 pandemic may result in additional portfolio investments being placed on non-accrual status in the future. We have had a significant reduction in our NAV as ofSeptember 30, 2020 as compared to our NAV as ofSeptember 30, 2019 , which was partly due to the immediate adverse economic effects of the COVID-19 pandemic, the continuing uncertainty surrounding its long-term impact as well as the re-pricing of credit risk in the broadly syndicated credit market. The decrease in NAV as ofSeptember 30, 2020 as compared toSeptember 30, 2019 primarily resulted from a decrease in the fair value of some of our portfolio company investments, which led to an increase in unrealized depreciation in respect of our portfolio company investments. In addition, our investment valuations are inherently less certain than they would be absent the impact of the COVID-19 pandemic and related market volatility and the values assigned as of this date may materially differ from the values that may ultimately be realized. Additionally, as ofSeptember 30, 2020 andSeptember 30, 2019 , our asset coverage ratio, as computed in accordance with the 1940 Act, was 208% and 207%, respectively. Our Credit Facilities include standard covenants and events of default provisions. If we fail to make payments required under such facilities or breach the covenants therein, it could result in a default under the Credit Facilities. Failure to cure such default or obtain a waiver from the appropriate party would result in an event of default, and the applicable lender may accelerate the repayment of our indebtedness under the respective 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 ofSeptember 30, 2020 , our debt portfolio consisted of 93% 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 BNP Credit Facility and the Truist Credit Facility also have floating rate interest provisions, with pricing set at 260 basis points over LIBOR (or an alternative risk-free floating interest rate index) and 225 basis points over LIBOR (or an alternative risk-free floating interest rate index), respectively. In connection with the COVID-19 pandemic, theU.S. Federal Reserve and other central banks have reduced interest rates, which has caused LIBOR to decrease. Due to such rates, our gross investment income has decreased, which 42 -------------------------------------------------------------------------------- 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 activated 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 the execution of our business continuity planning strategy, nearly all of our employees are working remotely. 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.
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:
* the cost of calculating our NAV, including the cost of any third-party
valuation services;
* the cost of effecting sales and repurchases of shares of our common stock
and other securities;
* 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;
* expenses incurred by the Investment Adviser in performing due diligence and
reviews of investments; * transfer agent and custodial fees; * fees and expenses associated with marketing efforts; * federal and state registration fees and any exchange listing fees; * federal, state, local and foreign taxes; * independent directors' fees and expenses; * brokerage commissions;
* fidelity bond, directors and officers, errors and omissions liability
insurance and other insurance premiums;
* direct costs such as printing, mailing, long distance telephone and staff;
* fees and expenses associated with independent audits and outside legal costs;
* costs associated with our reporting and compliance obligations under the
1940 Act, the 1958 Act and applicable federal and state securities laws;
and
* 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 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. 43 --------------------------------------------------------------------------------
PORTFOLIO AND INVESTMENT ACTIVITY
As ofSeptember 30, 2020 , our portfolio totaled$1,081.8 million and consisted of$439.0 million of first lien secured debt,$220.8 million of second lien secured debt,$113.6 million of subordinated debt (including$63.0 million in PSLF) and$308.3 million of preferred and common equity (including$36.3 million in PSLF). Our debt portfolio consisted of 93% variable-rate investments and 7% fixed-rate investments. As ofSeptember 30, 2020 , we had two portfolio companies on non-accrual, representing 4.9% and 3.4% of our overall portfolio on a cost and fair value basis, respectively. Overall, the portfolio had net unrealized depreciation of$83.8 million as ofSeptember 30, 2020 . Our overall portfolio consisted of 80 companies with an average investment size of$13.5 million , had a weighted average yield on interest bearing debt investments of 8.9% and was invested 41% in first lien secured debt, 20% in second lien secured debt, 10% in subordinated debt (including 6% in PSLF) and 29% in preferred and common equity (including 3% in PSLF). As ofSeptember 30, 2020 , all of the investments held by PSLF were first lien secured debt. As ofSeptember 30, 2019 , our portfolio totaled$1,219.4 million and consisted of$695.3 million of first lien secured debt,$269.3 million of second lien secured debt,$61.2 million of subordinated debt and$193.7 million of preferred and common equity. Our debt portfolio consisted of 87% variable-rate investments and 13% fixed-rate investments. As ofSeptember 30, 2019 , we had no portfolio companies on non-accrual. Overall, the portfolio had net unrealized depreciation of$37.6 million as ofSeptember 30, 2019 . Our overall portfolio consisted of 67 companies with an average investment size of$18.2 million , had a weighted average yield on interest bearing debt investments of 9.8% and was invested 57% in first lien secured debt, 22% in second lien secured debt, 5% in subordinated debt and 16% in preferred and common equity. For the year endedSeptember 30, 2020 , we invested$319.3 million of investments in 25 new and 58 existing portfolio companies with a weighted average yield on debt investments of 8.4%. Sales and repayments of investments for the same period totaled$162.7 million . For the year endedSeptember 30, 2019 , we invested$533.6 million of investments in 24 new and 49 existing portfolio companies with a weighted average yield on debt investments of 9.4%. Sales and repayments of investments for the same period totaled$426.5 million .
As ofSeptember 30, 2020 , PSLF's portfolio totaled$353.4 million , consisted of 37 companies with an average investment size of$9.6 million and had a weighted average yield on debt investments of 7.3%. For the period endedJuly 31, 2020 throughSeptember 30, 2020 , PSLF invested$5.7 million in one new portfolio company with a weighted average yield on debt investments of 7.5%. PSLF's sales and repayments of investments for the same period totaled$11.1 million . CRITICAL ACCOUNTING POLICIES 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. 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.
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 the 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 our 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 our 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 the 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. 44 -------------------------------------------------------------------------------- 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 Facilities and our SBA debentures are classified as Level 3. Our 2019 Notes were, and our 2024 Notes are, classified as Level 2 as they are financial instruments with readily observable market inputs. 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. In addition to using the above inputs to value cash equivalents, investments, our 2019 Notes, our SBA debentures, our 2024 Notes and our Credit Facilities valuations, 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 Facilities and, prior to their redemption, the 2019 Notes. We elected to use the fair value option for the Credit Facilities and, prior to their redemption, the 2019 Notes to align the measurement attributes of both our assets and liabilities while mitigating volatility in earnings from using different measurement attributes. Due to that election and in accordance with GAAP, we incurred expenses of zero,$7.1 million and zero relating to amendment costs on the Credit Facilities during the years endedSeptember 30, 2020 , 2019 and 2018, respectively. 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 Facilities and, prior to their redemption, the 2019 Notes are reported in our Consolidated Statements of Operations. We did not elect to apply ASC 825-10 to any other financial assets or liabilities, including the 2024 Notes and SBA debentures. For the years endedSeptember 30, 2020 , the Credit Facilities had a net change in unrealized depreciation of$12.3 million . For the years endedSeptember 30, 2019 and 2018, the Credit Facilities and the 2019 Notes had a net change in unrealized depreciation of$5.7 million and$3.9 million , respectively. As ofSeptember 30, 2020 , the net unrealized depreciation on Truist Credit Facility totaled$19.6 million . As ofSeptember 30, 2019 , the net unrealized depreciation on our Credit Facilities totaled$7.2 million . We use a nationally recognized independent valuation service to measure the fair value of our Credit Facilities and, prior to their redemption, the 2019 Notes 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 the fair value of our portfolio investments, our Credit Facilities and, prior to their redemption, the 2019 Notes during the reporting period, 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 value 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. 45 --------------------------------------------------------------------------------
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 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 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% 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 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, subject to maintaining our ability to be taxed as a RIC, in order to provide us with additional liquidity. Because federal income tax regulations differ from GAAP, distributions 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. We have formed and expect to continue to form certain taxable subsidiaries, including the Taxable Subsidiaries, which are taxed as corporations. These taxable subsidiaries allow 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 years endedSeptember 30, 2020 and 2019. For information regarding results of operations for the year endedSeptember 30, 2018 , see the Company's Form 10-K for the fiscal year endedSeptember 30, 2019 , as filed with theSEC onNovember 21, 2019 .
Investment Income
Investment income for the year endedSeptember 30, 2020 was$100.2 million and was attributable to$63.4 million from first lien secured debt,$25.9 million from second lien secured debt and$8.7 million from subordinated debt and$2.2 from preferred and common equity. The decrease in investment income over the prior year was primarily due to a decrease in LIBOR as well as an increase in our equity portfolio. Investment income for the year endedSeptember 30, 2019 was$112.1 million and was attributable to$62.6 million from first lien secured debt,$41.4 million from second lien secured debt and$8.1 million from subordinated debt.
Expenses
Net expenses for the year endedSeptember 30, 2020 totaled$61.5 million . Base management fee for the same period totaled$18.6 million , incentive fee totaled$2.7 million (after a waiver of$1.9 million ), debt related interest and other financing expenses totaled$34.4 million (including one-time costs of$2.2 million associated with the PSLF transaction) and general and administrative expenses totaled$4.7 million . The decrease in expenses over the prior year was primarily due to a decrease in debt related expenses as well as the incentive fee waiver. Net expenses for the year endedSeptember 30, 2019 totaled$67.5 million . Base management fee for the same period totaled$18.2 million , incentive fee totaled$5.1 million , debt related interest and expenses totaled$38.2 million (including one-time debt related costs of$9.2 million ) and general and administrative expenses totaled$4.7 million .
Net Investment Income
Net investment income totaled$38.7 million , or$0.58 per share, and$44.6 million , or$0.66 per share, for the years endedSeptember 30, 2020 and 2019, respectively. The decrease in net investment income per share compared to the prior year was primarily due to a decrease in LIBOR.
Net Realized Gains or Losses
Sales and repayments of investments for the years endedSeptember 30, 2020 and 2019 totaled$162.7 million and$426.5 million , respectively, and net realized losses totaled$20.8 million and$108.5 million , respectively. The change in realized gains/losses was primarily due to changes in the market conditions of our investments and the values at which they were realized, including the net realized loss onSuperior Digital Displays, LLC during the year endedSeptember 30, 2019 .
Unrealized Appreciation or Depreciation on Investments, Credit Facilities and the 2019 Notes
For the years endedSeptember 30, 2020 and 2019, we reported net change in unrealized (depreciation) appreciation on investments of($46.2) million and$74.1 million , respectively. As ofSeptember 30, 2020 and 2019, our net unrealized depreciation on investments totaled$83.8 million and$37.6 million , respectively. The net change in unrealized appreciation/depreciation on our investments for the year endedSeptember 30, 2020 compared to the prior year was primarily due to changes in the capital market conditions as well as the financial performance of certain portfolio companies primarily driven by the market disruption caused by the COVID-19 pandemic and the uncertainty surrounding its continued adverse economic impact, as discussed above under "COVID-19 Developments." For the years endedSeptember 30, 2020 and 2019, our Credit Facilities and the 2019 Notes had a net change in unrealized depreciation of$12.3 million and$5.7 million , respectively. As ofSeptember 30, 2020 and 2019, our net unrealized depreciation on our Credit Facilities and, prior to their redemption, the 2019 Notes totaled$19.6 million and$7.2 million , respectively. The net change in unrealized depreciation for the year endedSeptember 30, 2020 compared to the prior year was primarily due to changes in the capital markets.
Net Change in Net Assets Resulting From Operations
Net change in net assets resulting from operations totaled($16.0) million , or ($0.24 ) per share, and$15.9 million , or$0.24 per share, for the years endedSeptember 30, 2020 and 2019, respectively. The decrease in net assets from operations for the year endedSeptember 30, 2020 compared to the prior year was primarily due to depreciation of the portfolio primarily driven by the market disruption caused by the COVID-19 pandemic and the uncertainty surrounding its continued adverse economic impact, as discussed above under "COVID-19 Developments." 46 --------------------------------------------------------------------------------
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 ofSeptember 30, 2020 , 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 . For information regarding liquidity and capital resources for the year endedSeptember 30, 2018 , see the Company's Form 10-K for the fiscal year endedSeptember 30, 2019 , as filed with theSEC onNovember 21, 2019 . 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 years endedSeptember 30, 2020 and 2019, inclusive of the fee on the undrawn commitment and amendment costs on the Credit Facilities, amortized upfront fees on SBA debentures and debt retirement and issuance costs, was 4.0% and 6.0%, respectively. As ofSeptember 30, 2020 , we had the multi-currency Truist Credit Facility for up to$475.0 million in borrowings with certain lenders andTruist Bank (formerlySunTrust Bank ), acting as administrative agent, andJPMorgan Chase Bank, N.A ., acting as syndication agent for the lenders. As ofSeptember 30, 2020 and 2019, we had$388.3 million and$301.6 million , respectively, in outstanding borrowings under the Truist Credit Facility. The Truist Credit Facility had a weighted average interest rate of 2.5% and 4.2%, respectively, exclusive of the fee on undrawn commitment, as ofSeptember 30, 2020 and 2019. The Truist Credit Facility is a revolving facility with a stated maturity date ofSeptember 4, 2024 ($40.0 million of the$475 million commitment will matureMay 25, 2022 ), a one-year term-out period onSeptember 4, 2023 ($40.0 million of the$475 million commitment has a one year term-out period onMay 25, 2021 ) and pricing set at 225 basis points over LIBOR (or an alternative risk-free floating interest rate index). As ofSeptember 30, 2020 and 2019, we had$86.7 million and$173.4 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 ofSeptember 30, 2020 , we were in compliance with the terms of the Truist Credit Facility. As ofSeptember 30, 2020 , we had$86.3 million in aggregate principal amount of 2024 Notes outstanding. Interest on the 2024 Notes is paid quarterly onJanuary 15 ,April 15 ,July 15 andOctober 15 , at a rate of 5.5% per year, commencingJanuary 15, 2020 . The 2024 Notes mature onOctober 15, 2024 . The 2024 Notes are direct unsecured obligations and rank pari passu in right of payment with our existing and future unsecured unsubordinated indebtedness. The 2024 Notes are structurally subordinated to all existing and future indebtedness and other obligations of any of our subsidiaries, financing vehicles, or similar facilities. The 2024 Notes may be redeemed in whole or in part at our option on or afterOctober 15, 2021 at a redemption price of 100% of the outstanding principal amount of the 2024 Notes plus accrued and unpaid interest. InSeptember 2014 , we issued$250.0 million in aggregate principal amount of 2019 Notes, for net proceeds of$245.5 million after underwriting discounts and offering costs. Interest on the 2019 Notes was paid semi-annually onApril 1 andOctober 1 , at a rate of 4.5% per year. OnMarch 4, 2019 the 2019 Notes were redeemed in full and no amounts were outstanding as ofSeptember 30, 2020 . The 2019 Notes were redeemed onMarch 4, 2019 at a redemption price equal to$1,008.65 for each$1,000.00 of principal of notes outstanding, plus accrued and unpaid interest toMarch 4, 2019 , pursuant to the indenture governing the 2019 Notes. Please refer to our indenture agreement filed as Exhibit (d)(8) to our post-effective amendment filed onJanuary 22, 2013 and the supplemental indenture agreement filed as Exhibit (d)(11) to our post-effective amendment filed onSeptember 23, 2014 for more information. 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 our current Credit Facility or SBA debentures. Furthermore, our 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. OnMay 9, 2018 , we announced a share repurchase program which allowed us to repurchase up to$30 million of our outstanding common stock in the open market at prices below our NAV as reported in our then most recently published consolidated financial statements. The program expired onMay 9, 2019 . During the year endedSeptember 30, 2019 , we repurchased 2.0 million shares of common stock, respectively, in open market transactions for an aggregate cost (including transaction costs) of$14.5 million . FromMay 9, 2018 through the program's expiration, we purchased 4.0 million shares of common stock in open market transactions for an aggregate cost (including transaction costs) of$29.5 million . 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$118.5 million as ofSeptember 30, 2020 . 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 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$350.0 million in the aggregate. As of bothSeptember 30, 2020 and 2019, SBIC II had an initial$150.0 million in debt commitments, all of which were drawn. During the years endedSeptember 30, 2020 and 2019,$31.5 million and zero in SBA debentures were repaid, respectively. As ofSeptember 30, 2020 and 2019, the unamortized fees on the SBA debentures were$2.7 million and$3.9 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. 47 --------------------------------------------------------------------------------
Our fixed-rate SBA debentures were as follows:
Fixed All-in Coupon As of September 30, 2020 Issuance Dates Maturity Rate (1) Principal Balance March 23, 2016 March 1, 2026 2.9 % 22,500,000 September 21, 2016 September 1, 2026 2.4 10,000,000 September 20, 2017 September 1, 2027 2.9 27,500,000 March 21, 2018 March 1, 2028 3.5 58,500,000 Weighted Average Rate / Total 3.2 % $ 118,500,000 Fixed All-in Coupon As of September 30, 2019 Issuance Dates Maturity Rate (1) Principal Balance March 23, 2016 March 1, 2026 2.9 % 22,500,000 September 21, 2016 September 1, 2026 2.4 25,000,000 September 20, 2017 September 1, 2027 2.9 31,500,000 March 21, 2018 March 1, 2028 3.5 71,000,000 Weighted Average Rate / Total 3.1 % $ 150,000,000
(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 are 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 ofSeptember 30, 2020 , 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 ofSeptember 30, 2020 and 2019, 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. As ofSeptember 30, 2020 and 2019, we had cash and cash equivalents of$25.8 million and$59.5 million , respectively, available for investing and general corporate purposes. We believe our liquidity and capital resources are sufficient to take advantage of market opportunities. Our operating activities used cash of$129.6 million for the year endedSeptember 30, 2020 , and our financing activities provided cash of$95.8 million for the same period. Our operating activities used cash primarily for our investment activities and our financing activities provided cash primarily for net borrowings under our Credit Facilities. Our operating activities provided cash of$81.1 million for the year endedSeptember 30, 2019 , and our financing activities provided cash of$121.1 million for the same period. Our operating activities provided cash from sales and repayments on our investments and our financing activities provided cash primarily for net borrowings under our credit facilities as well as the issuance of the 2024 Notes, partially offset by cash used by our stock repurchase program. For more information regarding our borrowing arrangements, see "Business-Leverage" above. 48
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Senior Securities Information about our senior securities is shown in the following table as ofSeptember 30, 2020 , 2019, 2018, 2017, 2016, 2015, 2014, 2013, 2012 and 2011. The report ofRSM US LLP , an independent registered public accounting firm, on theSenior Securities table as ofSeptember 30, 2020 , is attached as an exhibit to this Report. Average Total Amount Asset Coverage Market Value Class and Year Outstanding (1) Per Unit (2), (3) Per Unit Truist Credit Facility Fiscal 2020 $ 388,252 $ 2,078 N/A Fiscal 2019 301,636 2,066 N/A Fiscal 2018 80,520 2,919 N/A Fiscal 2017 79,393 2,998 N/A Fiscal 2016 50,340 2,794 N/A Fiscal 2015 136,864 2,586 N/A Fiscal 2014 55,226 3,215 N/A Fiscal 2013 145,500 4,205 N/A Fiscal 2012 145,000 5,615 N/A Fiscal 2011 240,900 2,912 N/A BNP Credit Facility Fiscal 2019 171,000 2,066 N/A 2019 Notes Fiscal 2018 250,000 2,919 N/A Fiscal 2017 250,000 2,998 N/A Fiscal 2016 250,000 2,794 N/A Fiscal 2015 250,000 2,586 N/A Fiscal 2014 250,000 3,215 N/A 2024 Notes Fiscal 2020 86,250 2,078$ 23.47 (4) Fiscal 2019 75,000 2,066 24.87 (4) 2025 Notes Fiscal 2016 71,250 2,794 24.68 (5) Fiscal 2015 71,250 2,586 25.13 (5) Fiscal 2014 71,250 3,215 24.51 (5) Fiscal 2013 71,250 4,205 24.79 (5)
(1) Total cost of each class of senior securities outstanding at the end of the
period presented in thousands (000s).
(2) The asset coverage ratio for a class of senior securities representing
indebtedness is calculated as our consolidated total assets, less all
liabilities and indebtedness not represented by senior securities, divided by
senior securities representing indebtedness at par. This asset coverage ratio
is multiplied by
asset coverage per unit computation pursuant to an exemptive relief letter
provided by the
of the 2024 Notes trading on The Nasdaq Global Select Market under the symbol
"PNNTG." The 2024 Notes were issued in increments of
commenced trading on
closing price of the 2025 Notes, which were traded on the New York Stock
Exchange, or NYSE, under the symbol "PNTA" since issuance. The 2025 Notes
were issued in increments of
were redeemed in full.
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 ofSeptember 30, 2020 , PSLF had total assets of$361.8 million . PSLF's portfolio consisted of debt investments in 37 portfolio companies as ofSeptember 30, 2020 . As ofSeptember 30, 2020 , at fair value, the largest investment in a single portfolio company in PSLF was$18.4 million and the five largest investments totaled$77.9 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 ofSeptember 30, 2020 , we and Pantheon owned 72% and 28%, respectively, of each of the outstanding subordinated notes and equity interests of PSLF. As of the same date, our investment in PSLF consisted of subordinated notes of$63.0 million and equity interests of$36.3 million . We and Pantheon each appointed two members to PSLF's four-person Member Designees' Committee (the "Member Designees' Committee"). All material decisions with respect to PSLF, including those involving its investment portfolio, require unanimous approval of a quorum of the 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 Member Designees' Committee, provided that the individual that was elected, designated or appointed us 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 has entered into a$250.0 million senior secured revolving credit facility which bears interest at LIBOR (or an alternative risk-free interest rate index) plus 260 basis points, or the PSLF Credit Facility, withBNP Paribas through its wholly-owned subsidiary,PennantPark Investment Funding I, LLC , or PSLF Subsidiary, subject to leverage and borrowing base restrictions.
Below is a summary of PSLF's portfolio at fair value:
September 30, 2020 Total investments$ 353,366,358 Weighted average yield on debt investments
7.3 %
Number of portfolio companies in PSLF
37
Largest portfolio company investment $
18,411,916
Total of five largest portfolio company investments $ 77,896,431
49
-------------------------------------------------------------------------------- Below is a listing of PSLF's individual investments as ofSeptember 30, 2020 : Basis Point Current Spread Above Issuer Name Maturity Industry Coupon Index (1) Par Cost Fair Value (2) First Lien Secured Debt-701.6% Advantage Sales & Marketing 07/23/2021 Grocery 4.25 % 1M L+325 8,627,315$ 8,418,699 $ 8,456,926 Altamira Technologies, LLC 07/24/2025 Aerospace and Defense 7.00 % 3M L+600 971,231 958,950 937,238
6.50 % 3M L+550 14,775,105 14,571,097 14,479,603 07/31/2025 Personal, Food and Apex Service Partners, LLC Miscellaneous Services 6.25 % 1M L+525 6,607,449 6,546,594 6,409,225 Bazaarvoice, Inc. 02/01/2024 Printing and Publishing 6.75 % 1M L+575 14,628,085 14,509,210 14,408,664 Bottom Line Systems, LLC 02/13/2023 Healthcare, Education and Childcare 6.25 % 1M L+550 15,000,000 14,895,515 14,683,499 Cano Health, LLC 06/02/2025 Healthcare, Education and Childcare 8.50 % 1M L+750 18,274,854 18,174,687 18,411,916 Datalot Inc. 01/24/2025 Insurance 6.25 % 3M L+525 7,116,895 6,991,975 7,125,435 DRS Holdings III, Inc. 11/03/2025 Consumer Products 6.75 % 1M L+575 13,564,726 13,448,313 13,316,490 ECM Industries, LLC 12/23/2025 Electronics
5.50 % 1M L+450 2,873,184 2,846,226 2,858,818
7.50 % 3M L+600 12,193,571 12,028,384 11,888,732 HW Holdco, LLC 12/10/2024 Media 5.50 % 3M L+450 14,737,500 14,619,623 14,295,375 Integrity Marketing 08/27/2025 Acquisition, LLC Insurance 6.50 % 3M L+550 447,833 444,755 443,354 Chemicals, Plastics and K2 Pure Solutions NoCal, L.P. 12/20/2023 Rubber 8.00 % 1M L+700 14,737,500 14,583,983 14,413,275 Kentucky Downs, LLC 03/07/2025 Hotels, Motels, Inns and Gaming 9.50 % 1M L+850 10,153,350 9,978,792 10,001,050 Leisure, Amusement, Motion LAV Gear Holdings, Inc. 10/31/2024 Pictures, Entertainment 8.50 % 3M L+750 2,015,428 1,998,623 1,856,411 02/03/2026 Healthcare, Education and Lightspeed Buyer Inc. Childcare 6.25 % 1M L+525 12,598,209 12,365,207 12,440,731 Lombart Brothers, Inc. 04/13/2023 Healthcare, Education and Childcare 7.25 % 1M L+625 16,914,403 16,770,520 15,882,625 MAG DS Corp. 04/01/2027 Aerospace and Defense 6.50 % 1M L+550 6,000,000 5,700,000 5,707,500 MeritDirect, LLC 05/23/2024 Media 6.50 % 3M L+550 14,076,563 13,914,921 13,407,926 PlayPower, Inc. 05/08/2026 Consumer Products 5.72 % 3M L+550 4,025,520 3,990,631 3,824,244 Radius Aerospace, Inc. 03/31/2025 Aerospace and Defense 6.75 % 3M L+575 13,779,429 13,608,176 13,503,840Research Now Group, Inc. and Survey
6.50 % 3M L+550 14,847,328 14,728,854 14,023,302 Riverpoint Medical, LLC Healthcare, Education and 1,958,417 1,905,678 06/20/2025 Childcare 5.50 % 3M L+450 1,975,000 Sales Benchmark Index LLC 01/03/2025 Business Services 7.75 % 3M L+600 7,887,195 7,748,712 7,697,903 Sargent & Greenleaf Inc. 12/20/2024 Electronics 7.00 % 1M L+550 5,448,483 5,378,893 5,350,411 Signature Systems Holding Chemicals, Plastics and Company 05/03/2024 Rubber 7.50 % 3M L+650 14,250,000 14,096,623 13,786,875 Solutionreach, Inc. 01/17/2024 Communications 6.75 % 3M L+575 12,531,123 12,351,398 12,393,282 STV Group Incorporated 12/11/2026 Transportation 5.40 % 1M L+525 12,351,980 12,238,771 12,228,460 TeleGuam Holdings, LLC 11/20/2025 Telecommunications 5.50 % 1M L+450 5,080,832 5,034,725 4,928,407 Teneo Holdings LLC 07/18/2025 Financial Services
6.25 % 1M L+525 1,980,000 1,874,970 1,905,750
5,593,575 TPC US Parent, LLC 11/24/2025 Food 6.25 % 3M L+525 5,650,076 5,480,573 TVC Enterprises, LLC 01/18/2024 Transportation
6.50 % 1M L+550 14,547,897 14,343,185 14,438,788
Education 7.25 % 1M L+625 8,644,186 8,469,082 8,471,302 UBEO, LLC 04/03/2024 Printing and Publishing
5.50 % 3M L+450 4,738,102 4,700,032 4,453,816
Media
7.25 % 1M L+625 14,358,203 14,112,113 13,496,711
8.50 % 1M L+750 14,194,162 14,029,177 14,052,223 Total First Lien Secured Debt
358,023,408 353,366,358 Cash and Cash Equivalents-26.9% BlackRock Federal FD Institutional 30 7,353,307 7,353,307 US Bank Cash 183,412 183,412 Total Cash and Cash Equivalents 7,536,719 7,536,719 Total Investments and Cash Equivalents-1,141.9%$ 365,560,127 $ 360,903,077 Liabilities in Excess of Other Assets-(1,041.9)% (310,538,386 ) Members' Equity-100.0%$ 50,364,691
(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.
50 --------------------------------------------------------------------------------
Below is the financial information for PSLF:
Statements of Assets and Liabilities September 30, 2020 Assets Investments at fair value (cost-$358,023,408)$ 353,366,358 Cash and cash equivalents (cost-$7,536,719) 7,536,719 Interest receivable 877,008 Total assets 361,780,085 Liabilities Distribution payable 1,393,716 Payable for investments purchased 5,700,000 Credit facility payable 213,500,000 Notes payable to members 87,500,000 Interest payable on credit facility 1,649,852 Interest payable on members notes 1,356,250 Accrued other expenses 315,576 Total liabilities 311,415,394 Commitments and contingencies (1) - Members' equity 50,364,691 Total liabilities and members' equity$ 361,780,085 (1) As ofSeptember 30, 2020 , PSLF did not have any unfunded commitments to fund investments. Statements of Operations (1) Period Ended September 30, 2020 Investment income: Interest $ 4,504,788 Other income 2,444 Total investment income 4,507,232 Expenses: Interest and expenses on credit facility
1,039,327
Interest expense on members notes
1,356,250
Administrative services expenses
195,310
Other general and administrative expenses (2) 120,266 Total expenses 2,711,153 Net investment income 1,796,079 Realized and unrealized gain on investments: Net realized gain on investments
254,653
Net change in unrealized appreciation on investments
2,173,436
Net realized and unrealized gain from investments
2,428,089
Net increase in members' equity resulting from operations $ 4,224,168
(1) PSLF commenced operations on
(2) No management or incentive fees are payable by PSLF. If any fees were to be
charged, they would be separately disclosed in the Statement of Operations.
Contractual Obligations
A summary of our significant contractual payment obligations at cost as of
Payments due by period (in millions) Total Less than 1 year 1-3 years 3-5 years More than 5 years Truist Credit Facility$ 388.3 $ -$ 32.7 $ 355.6 $ - SBA debentures 118.5 - - - 118.5 2024 Notes 86.3 - - 86.3 - Total debt outstanding (1) 593.0 - 32.7 441.8 118.5 Unfunded investments (2) 37.4 6.0 11.4 16.4 3.6 Total contractual obligations$ 630.4 $ 6.0$ 44.1 $ 458.2 $ 122.1
(1) The annualized weighted average cost of debt as of
excluding debt issuance and retirement costs, was 3.0% exclusive of the fee
on the undrawn commitment on the Credit Facility and of upfront fees on SBA
debentures.
(2) Unfunded debt and equity investments are disclosed in the Consolidated
Schedule of Investments and Note 12 of our Consolidated Financial Statements.
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 2020 , 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. 51 -------------------------------------------------------------------------------- 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 2020 , 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.
Recent Developments
EffectiveOctober 31, 2020 , certain entities and managed accounts of the private credit investment manager ofPantheon Ventures (UK) LLP , or Pantheon, our joint-venture partner, contributed an additional$27.5 million to PSLF, bringing their total contribution to$62.5 million . Pantheon's additional investment came in at the then current net asset value. At the same time, the Company has also invested an additional$1.8 million in PSLF. As a result, the Company currently owns 60.5% of the joint venture. Additionally, in connection with this transaction,BNP Paribas has increased the size of PSLF's credit facility from$250.0 million to$275.0 million . Subsequent toSeptember 30, 2020 , our portfolio company,Cano Health, LLC (ITC Rumba, LLC ), entered into a business combination agreement with Jaws Acquisition Corp ("JWS"), a special purpose acquisition vehicle, and other parties, subject to certain closing conditions, with an expected closing late first quarter or early second quarter 2021. Based on the closing stock price of JWS onNovember 13, 2020 , our$18.8 million common stock fair valuation as ofSeptember 30, 2020 would increase to an estimated$72.3 million , which includes a combination of cash and stock, assuming the transaction closes based on the agreed terms. This would represent a net asset value increase of$0.80 per share, as ofNovember 13, 2020 . Our shares are owned by a limited partnership controlled by the financial sponsor and are subject to customary lock up restrictions. As a result, the fair value onDecember 31, 2020 , may likely include an illiquidity discount not in the public trading values indicated above. There can be no assurance that the implied value of our equity interest will be representative of the value ultimately realized on our equity investment.
Off-Balance Sheet Arrangements
We currently engage in no off-balance sheet arrangements other than our funding requirements for the unfunded investments described above.
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 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 years endedSeptember 30, 2020 and 2019, we declared distributions of$0.60 per share and$0.72 per share, respectively, for total distributions of$40.2 million and$48.4 million . 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
InMay 2020 , theSEC adopted rule amendments that will impact the requirement of investment companies, including BDCs, to disclose the financial statements of certain of their portfolio companies or certain acquired funds (the "Final Rules"). The Final Rules adopted a new definition of "significant subsidiary" set forth in Rule 1-02(w)(2) of Regulation S-X under the Securities Act. Rules 3-09 and 4-08(g) of Regulation S-X require investment companies to include separate financial statements or summary financial information, respectively, in such investment company's periodic reports for any portfolio company that meets the definition of "significant subsidiary." The new definition of "significant subsidiary" under Rule 1-02(w)(2) of Regulation S-X, which is tailored to investment companies, (i) modifies the investment test and the income test, and (ii) eliminates the asset test currently in the definition of "significant subsidiary." The new Rule 1-02(w)(2) of Regulation S-X is intended to more accurately capture those portfolio companies that are more likely to materially impact the financial condition of an investment company. The Final Rules will be effective onJanuary 1, 2021 , but voluntary compliance is permitted in advance of the effective date. We evaluated the impact of adopting the Final Rules on our consolidated financial statements and because the new definition of "significant subsidiary" contained therein is specific to investment companies, we elected to early adopt the Final Rules for our year endedSeptember 30, 2020 . The adoption of the Final Rules did not have a material impact on our financial statements. 52
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