Tuesday, March 18, 2014

PNNT: February 2014 Report

Summary and Recommendations

I have upgraded PennantPark Investment (PNNT) to a ‘Buy’ and added it to my ‘higher total return’ BDC portfolio due to its higher than average dividend yield and net asset value (“NAV”) per share growth.  PennantPark Investment was founded by Arthur Penn who also co-founded Apollo Investment (AINV) in 2004.

One of the keys to PNNT’s strategy that allows it to grow NAV more than other BDCs is its ‘equity co-invest’ strategy of having an equity investment in many of its portfolio companies.  I believe this is more of a partner type approach to lending with upside potential for investors.  At this point PNNT is a mature BDC that has reached its optimum dividend rate with little room for growth.  However I believe the dividend is sustainable through mostly recurring income and through the use of increased leverage to offset potential declines in portfolio yield (see page 7).

I consider PNNT to have an average risk profile due to its investment mix, portfolio companies leverage ratio of 4.4 times EBITDA (see page 10) that is near the industry average and no loans on non-accrual status.  My primary concern is its higher than average portfolio yield and the potential for early repayments and falling yields.  

Currently PNNT is increasing its use of leverage and plans to tap its second SBIC license with $75 million in potential financing at attractive long-term rates.  This will lower its overall cost of capital and increase returns in the coming quarters.  I do not expect an equity offering until late calendar Q2 or early Q3 as management has given guidance regarding increases in leverage to fully cover dividends first.

Thanks to the research in this report I will most likely be starting a position in PNNT on the next dip due to its higher than average returns for average amounts of risk.

This report includes updated projections, recommendations, pricing, rankings, total return and earnings estimates for dividend sustainability including the best and worst case scenarios along with the potential impacts to dividend growth. It also includes an interest rate sensitivity analysis that discuss the potential impacts to income and expenses if interest rates begin to rise with a side by side comparison to other BDCs.  There is a new section covering the potential impacts from being excluded from the Russell 2000. 

This report is not publicly available, will not be published on Seeking Alpha. If you would like to become a premium subscriber please visit “Premium Subscriber”.

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