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Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2016

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM              TO             

COMMISSION FILE NUMBER: 814-00736

 

 

PENNANTPARK INVESTMENT CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

MARYLAND

 

  20-8250744
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)

590 Madison Avenue, 15th Floor

 

New York, N.Y.

  10022
(Address of principal executive offices)   (Zip Code)

(212) 905-1000

(Registrant’s Telephone Number, Including Area Code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The number of shares of the registrant’s common stock, $0.001 par value per share, outstanding as of August 8, 2016 was 71,060,836.

 

 


Table of Contents

PENNANTPARK INVESTMENT CORPORATION

FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2016

TABLE OF CONTENTS

 

PART I. CONSOLIDATED FINANCIAL INFORMATION   

Item 1. Consolidated Financial Statements

  

Consolidated Statements of Assets and Liabilities as of June  30, 2016 (unaudited) and September 30, 2015

     4   

Consolidated Statements of Operations for the three and nine months ended June 30, 2016 and 2015 (unaudited)

     5   

Consolidated Statements of Changes in Net Assets for the nine months ended June 30, 2016 and 2015 (unaudited)

     6   

Consolidated Statements of Cash Flows for the nine months ended June  30, 2016 and 2015 (unaudited)

     7   

Consolidated Schedules of Investments as of June  30, 2016 (unaudited) and September 30, 2015

     8   

Notes to Consolidated Financial Statements (unaudited)

     15   

Report of Independent Registered Public Accounting Firm

     25   

Item  2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     26   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     33   

Item 4. Controls and Procedures

     33   
PART II. OTHER INFORMATION   

Item 1. Legal Proceedings

     34   

Item 1A. Risk Factors

     34   

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

     34   

Item 3. Defaults Upon Senior Securities

     34   

Item 4. Mine Safety Disclosures

     34   

Item 5. Other Information

     34   

Item 6. Exhibits

     35   

SIGNATURES

     36   

 

2


Table of Contents

PART I—CONSOLIDATED FINANCIAL INFORMATION

We are filing this Quarterly Report on Form 10-Q, or the Report, in compliance with Rule 13a-13 promulgated by the Securities and Exchange Commission, or the SEC. In this Report, “Company,” “we,” “our” or “us” refer to PennantPark Investment Corporation and its consolidated subsidiaries unless the context suggests otherwise. “PennantPark Investment” refers to only PennantPark Investment Corporation; “our SBIC Funds” refers collectively to our consolidated subsidiaries, PennantPark SBIC LP, or SBIC LP, and its general partner, PennantPark SBIC GP, LLC, and PennantPark SBIC II LP, or SBIC II, and its general partner, PennantPark SBIC GP II, LLC; “PennantPark Investment Advisers” or “Investment Adviser” refers to PennantPark Investment Advisers, LLC; “PennantPark Investment Administration” or “Administrator” refers to PennantPark Investment Administration, LLC; “SBA” refers to the Small Business Administration; “SBIC” refers to a small business investment company under the Small Business Investment Act of 1958, as amended, or the “1958 Act”; “Credit Facility” refers to our multi-currency, senior secured revolving credit facility, as amended and restated; “2025 Notes” refers to our 6.25% senior notes due 2025; “2019 Notes” refers to our 4.50% notes due 2019; “our Notes” refers, collectively, to our 2025 Notes and our 2019 Notes; “BDC” refers to a business development company under the Investment Company Act of 1940, as amended, or the “1940 Act”; “Code” refers to the Internal Revenue Code of 1986, as amended; and “RIC” refers to a regulated investment company under the Code. References to our portfolio or investments include investments we make through our SBIC Funds and other consolidated subsidiaries.

 

3


Table of Contents

 

Item 1. Consolidated Financial Statements

PENNANTPARK INVESTMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES

 

                                                                 
     June 30, 2016
(unaudited)
    September 30, 2015  

Assets

    

Investments at fair value

    

Non-controlled, non-affiliated investments (cost—$916,933,385 and $1,138,155,969, respectively)

   $ 904,615,102      $ 1,096,719,079   

Non-controlled, affiliated investments (cost—$261,810,939 and $133,693,295, respectively)

     208,959,772        95,503,104   

Controlled, affiliated investments (cost—$180,718,378 and $152,387,898, respectively)

     123,006,217        106,825,650   
  

 

 

   

 

 

 

Total of investments (cost—$1,359,462,702 and $1,424,237,162, respectively)

     1,236,581,091        1,299,047,833   

Cash and cash equivalents (cost—$38,106,415 and $49,637,415, respectively)

     37,872,854        49,619,256   

Interest receivable

     7,396,797        7,590,197   

Prepaid expenses and other assets

     3,564,680        8,790,944   
  

 

 

   

 

 

 

Total assets

     1,285,415,422        1,365,048,230   
  

 

 

   

 

 

 

Liabilities

    

Distributions payable

     19,897,034        20,430,492   

Payable for investments purchased

            3,591,177   

Credit Facility payable (cost—$117,143,923 and $136,864,300, respectively) (See Notes 5 and 10)

     101,067,312        132,356,860   

2019 Notes payable (par—$250,000,000) (See Notes 5 and 10)

     249,675,000        253,102,500   

SBA debentures payable (par—$197,500,000 and $150,000,000, respectively) (See Notes 5 and 10)

     193,073,622        146,269,957   

2025 Notes payable (par—$71,250,000) (See Notes 5 and 10)

     70,566,000        71,136,000   

Base management fee payable, net (See Note 3)

     5,200,087        6,602,029   

Performance-based incentive fee payable, net (See Note 3)

     3,393,005        5,007,792   

Interest payable on debt

     6,377,581        7,638,514   

Accrued other expenses

     611,269        2,322,367   
  

 

 

   

 

 

 

Total liabilities

     649,860,910        648,457,688   
  

 

 

   

 

 

 

Commitments and contingencies (See Note 11)

    

Net assets

    

Common stock, 71,060,836 and 72,966,043 shares issued and outstanding, respectively.
Par value $0.001 per share and 100,000,000 shares authorized.

     71,061        72,966   

Paid-in capital in excess of par value

     822,532,643        834,711,229   

Distributions in excess of net investment income

     (17,850,376     (13,424,886

Accumulated net realized (loss) gain on investments

     (63,173,143     18,919,305   

Net unrealized depreciation on investments

     (123,111,284     (125,207,012

Net unrealized depreciation on debt

     17,085,611        1,518,940   
  

 

 

   

 

 

 

Total net assets

   $ 635,554,512      $ 716,590,542   
  

 

 

   

 

 

 

Total liabilities and net assets

   $ 1,285,415,422      $ 1,365,048,230   
  

 

 

   

 

 

 

Net asset value per share

   $ 8.94      $ 9.82   
  

 

 

   

 

 

 

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

4


Table of Contents

PENNANTPARK INVESTMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

     Three Months Ended June 30,     Nine Months Ended June 30,  
     2016     2015     2016     2015  

Investment income:

        

From non-controlled, non-affiliated investments:

        

Interest

   $ 26,432,244     $ 31,722,226      $ 81,300,064      $ 101,811,852   

Other income

     2,151,427       3,138,382        9,679,096        9,535,685   

From non-controlled, affiliated investments:

        

Interest

     3,458,232       4,263,709        8,956,381        7,000,896   

Other income

     61,094        159,437        80,521        159,437   

From controlled, affiliated investments:

        

Interest

     3,436,797       1,357,778        9,895,449        3,998,887   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total investment income

     35,539,794       40,641,532        109,911,511        122,506,757   
  

 

 

   

 

 

   

 

 

   

 

 

 

Expenses:

        

Base management fee (See Note 3)

     6,190,579       6,497,136        18,811,434        20,093,624   

Performance-based incentive fee (See Note 3)

     4,039,292       5,163,582        12,607,547        15,556,767   

Interest and expenses on debt (See Note 10)

     7,005,077       6,616,779        20,674,327        19,699,606   

Administrative services expenses (See Note 3)

     898,167       855,313        2,666,167        2,562,033   

Other general and administrative expenses

     899,508       854,397        2,721,700        2,367,661   
  

 

 

   

 

 

   

 

 

   

 

 

 

Expenses before management fee waiver and provision for taxes

     19,032,623        19,987,207        57,481,175        60,279,691   
  

 

 

   

 

 

   

 

 

   

 

 

 

Management Fee waiver (See Note 3)

     (1,636,779            (5,027,041       

Provision for taxes

     350,000               2,000,000          
  

 

 

   

 

 

   

 

 

   

 

 

 

Net expenses

     17,745,844       19,987,207        54,454,134        60,279,691   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net investment income

     17,793,950       20,654,325        55,457,377        62,227,066   
  

 

 

   

 

 

   

 

 

   

 

 

 

Realized and unrealized gain (loss) on investments and debt:

        

Net realized (loss) gain on investments

     (45,507,467 )     13,820,350        (82,092,448     31,936,928   

Net change in unrealized appreciation (depreciation) on:

        

Non-controlled, non-affiliated investments

     50,184,115       (24,919,481     27,230,048        (102,855,290 )

Controlled and non-controlled, affiliated investments

     7,770,408       (5,260,674     (25,134,320     (5,258,057 )

Debt (appreciation) depreciation (See Notes 5 and 10)

     (2,408,132 )     641,430        15,566,671        2,318,310   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net change in unrealized appreciation (depreciation) on investments and debt

     55,546,391       (29,538,725     17,662,399        (105,795,037 )
  

 

 

   

 

 

   

 

 

   

 

 

 

Net realized and unrealized gain (loss) from investments and debt

     10,038,924       (15,718,375     (64,430,049     (73,858,109 )
  

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in net assets resulting from operations

   $ 27,832,874     $ 4,935,950      $ (8,972,672   $ (11,631,043 )
  

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in net assets resulting from operations per common share (See Note 7)

   $ 0.39     $ 0.07      $ (0.12   $ (0.16 )
  

 

 

   

 

 

   

 

 

   

 

 

 

Net investment income per common share

   $ 0.25     $ 0.28      $ 0.77      $ 0.83   
  

 

 

   

 

 

   

 

 

   

 

 

 

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

5


Table of Contents

PENNANTPARK INVESTMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS

(Unaudited)

 

                                                         
     Nine Months Ended June 30,  
     2016     2015  

Net decrease in net assets from operations:

    

Net investment income

   $ 55,457,377      $ 62,227,066   

Net realized (loss) gain on investments

     (82,092,448 )     31,936,928   

Net change in unrealized appreciation (depreciation) on investments

     2,095,728        (108,113,347 )

Net change in unrealized depreciation on debt

     15,566,671        2,318,310   
  

 

 

   

 

 

 

Net decrease in net assets resulting from operations

     (8,972,672 )     (11,631,043 )
  

 

 

   

 

 

 

Distributions to stockholders:

     (59,882,867     (62,844,746
  

 

 

   

 

 

 

Capital transactions:

    

Repurchase of common stock (See Note 12)

     (12,180,491     (7,990,983
  

 

 

   

 

 

 

Net decrease in net assets

     (81,036,030 )     (82,466,772 )
  

 

 

   

 

 

 

Net assets:

    

Beginning of period

     716,590,542        828,009,949   
  

 

 

   

 

 

 

End of period

   $ 635,554,512      $ 745,543,177   
  

 

 

   

 

 

 

Distributions in excess of net investment income, at end of period

   $ (17,850,376 )   $ (12,420,260 )
  

 

 

   

 

 

 

Capital share activity:

    

Shares of common stock repurchased

     (1,905,207 )     (833,213
  

 

 

   

 

 

 

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

6


Table of Contents

PENNANTPARK INVESTMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

     Nine Months Ended June 30,  
     2016      2015  

Cash flows from operating activities:

     

Net decrease in net assets resulting from operations

   $ (8,972,672    $ (11,631,043 )

Adjustments to reconcile net decrease in net assets resulting from operations to net cash provided by operating activities:

     

Net change in net unrealized (appreciation) depreciation on investments

     (2,095,728      108,113,347   

Net change in unrealized depreciation on debt

     (15,566,671 )      (2,318,310

Net realized loss (gain) on investments

     82,092,448         (31,936,928

Net accretion of discount and amortization of premium

     (3,992,102      (4,937,779

Purchases of investments

     (307,264,571      (344,808,702

Payment-in-kind income

     (10,392,583      (7,693,992

Proceeds from dispositions of investments

     304,104,246         289,545,505   

Decrease (increase) in interest receivable

     193,400         (147,839

Decrease (increase) in prepaid expenses and other assets

     5,226,264         (521,890

(Decrease) increase in payable for investments purchased

     (3,591,177      43,190,530   

(Decrease) increase in interest payable on debt

     (1,260,933 )      4,237,937   

Amortization of deferred financing costs

     455,540         413,353   

(Decrease) increase in base management fee payable, net

     (1,401,942 )      112,034   

(Decrease) increase in performance-based incentive fee payable, net

     (1,614,787 )      540,828   

Decrease in accrued other expenses

     (1,711,098 )      (708,245
  

 

 

    

 

 

 

Net cash provided by operating activities

     34,207,634         41,448,806   
  

 

 

    

 

 

 

Cash flows from financing activities:

     

Repurchase of common stock

     (12,180,491      (7,990,983

Distributions paid to stockholders

     (60,416,325      (63,078,045

Borrowings under SBA debentures

     47,500,000           

Deferred financing costs

     (1,151,875        

Borrowings under Credit Facility

     365,664,923         467,000,000   

Repayments under Credit Facility

     (385,385,300      (420,689,600
  

 

 

    

 

 

 

Net cash used by financing activities

     (45,969,068 )      (24,758,628 )
  

 

 

    

 

 

 

Net (decrease) increase in cash equivalents

     (11,761,434      16,690,178   

Effect of exchange rate changes on cash

     15,032         120,112   

Cash and cash equivalents, beginning of period

     49,619,256         66,518,682   
  

 

 

    

 

 

 

Cash and cash equivalents, end of period

   $ 37,872,854       $ 83,328,972   
  

 

 

    

 

 

 

Supplemental disclosure of cash flow information:

     

Interest paid

   $ 21,479,719       $ 15,048,316   
  

 

 

    

 

 

 

Taxes paid

   $ 2,154,226       $ 60,808   
  

 

 

    

 

 

 

Non-cash exchanges and conversions

   $ 60,438,396       $ 19,765,183   
  

 

 

    

 

 

 

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

7


Table of Contents

PENNANTPARK INVESTMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED SCHEDULE OF INVESTMENTS

JUNE 30, 2016

(Unaudited)

 

Issuer Name

  Maturity /
Expiration
  Industry     Current
Coupon
    Basis Point
Spread Above
Index (4)
    Par /
Shares
    Cost     Fair Value (3)  

Investments in Non-Controlled, Non-Affiliated Portfolio Companies—142.3% (1), (2)

  

First Lien Secured Debt—43.2%

  

         

AP Gaming I, LLC

  12/21/2020     Hotels, Motels, Inns and Gaming        9.25     L+825        23,393,344      $ 23,113,334      $ 21,902,018   

Broder Bros., Co., Tranche A

  06/03/2021     Consumer Products        7.00     L+575        9,206,250        9,037,320        9,048,435   

Broder Bros., Co., Tranche B

  06/03/2021     Consumer Products        13.50     L+1,225        9,262,500        9,088,675        9,103,721   

Hollander Sleep Products, LLC

  10/21/2020     Consumer Products        9.00     L+800        4,372,074        4,321,452        4,284,633   

Interior Specialists, Inc.

  06/30/2020     Building Materials        9.00     L+800        25,113,896        24,902,143        25,113,896   

K2 Pure Solutions NoCal, L.P.

  02/19/2021     Chemicals, Plastics and Rubber        10.00     L+900        14,522,529        14,269,911        14,166,684   

LSF9 Atlantis Holdings, LLC

  01/15/2021     Retail        10.00     L+900        38,883,238        38,353,399        38,883,238   

Prince Mineral Holding Corp. (5)

  12/16/2019    
 
Mining, Steel, Iron and Non-
Precious Metals
 
  
    11.50            14,250,000        14,150,328        12,397,500   

Robertshaw US Holding Corp.

  06/18/2019     Electronics        9.00     L+750        13,252,937        13,173,859        13,252,937   

Sotera Defense Solutions, Inc.

  04/21/2017     Aerospace and Defense        9.00     L+750        18,306,549        17,973,854        18,215,017   

Sunborn International (UK) Limited (10), (12), (13)

  09/28/2018     Hotels, Motels, Inns and Gaming       

 

13.01

(PIK 0.50


%) 

    L+1,250 (8)      20,017,246        30,213,895        26,648,098   

Triad Manufacturing, Inc.

  12/28/2020     Manufacturing / Basic Industries        11.25     L+1,075        30,590,164        30,025,040        30,546,118   

Trust Inns Limited (10), (12), (13)

  02/12/2020     Buildings and Real Estate        11.09     L+1,050 (8)      22,562,950        36,015,363        29,289,923   

US Med Acquisition, Inc.

  08/13/2021    
 
Healthcare, Education and
Childcare
  
  
    10.00     L+900        8,673,438        8,673,437        8,673,437   

U.S. Well Services, LLC

  05/02/2019     Oil and Gas        12.00 %(7)      L+1,150        14,674,286        14,466,463        13,195,351   
           

 

 

   

 

 

 

Total First Lien Secured Debt

              287,778,473        274,721,006   
           

 

 

   

 

 

 

Second Lien Secured Debt—75.2%

             

American Gilsonite Company (5)

  09/01/2017    
 
Diversified Natural Resources,
Precious Metals and Minerals
  
  
    11.50            25,400,000        25,400,000        15,240,000   

Balboa Capital Corporation (13)

  03/04/2022     Financial Services        13.00            19,000,000        18,744,147        19,000,000   

Bennu Oil & Gas, LLC

  11/01/2018     Oil and Gas        (6)             26,925,057        25,422,260        14,808,781   

Howard Berger Co. LLC

  09/30/2020     Distribution        11.00     L+1,000        41,250,000        39,330,448        38,362,500   

Intermediate Transportation 100, LLC (5)

  03/01/2017     Cargo Transport        (6)             4,632,948        3,739,797        1,667,861   

J.A. Cosmetics Holdings, Inc.

  07/31/2019     Consumer Products        11.00     L+1,000        34,000,000        33,556,766        34,170,000   

Jacobs Entertainment, Inc.

  10/29/2019     Hotels, Motels, Inns and Gaming        13.00     L+1,175        51,775,000        51,317,866        51,775,000   

Language Line, LLC

  07/07/2022    
 
Personal, Food and
Miscellaneous Services
  
  
    10.75     L+975        40,312,500        39,757,357        39,976,697   

MailSouth, Inc.

  10/22/2021     Printing and Publishing        11.50     L+1,050        26,425,000        25,907,825        25,896,500   

Novitex Acquisition, LLC

  07/07/2021     Business Services        11.75     L+1,050        41,250,000        40,914,722        40,837,500   

Parq Holdings Limited Partnership (10), (13)

  12/17/2021     Hotels, Motels, Inns and Gaming        13.00     L+1,200        75,000,000        75,000,000        75,706,169   

Penton Media, Inc.

  10/02/2020     Media        9.00     L+775        18,270,159        18,091,545        17,722,054   

Pre-Paid Legal Services, Inc.

  07/01/2020    
 
Personal, Food and
Miscellaneous Services
  
  
    10.25     L+900        56,750,000        56,176,571        56,182,500   

Prime Security Services Borrower, LLC

  07/01/2022    
 
Personal, Food and
Miscellaneous Services
  
  
    10.47     L+875        28,500,000        28,126,488        28,761,345   

VT Buyer Acquisition Corp.

  01/30/2023     Business Services        10.75     L+975        18,375,000        17,756,552        18,007,500   
           

 

 

   

 

 

 

Total Second Lien Secured Debt

              499,242,344        478,114,407   
           

 

 

   

 

 

 

Subordinated Debt/Corporate Notes—16.0%

             

Alegeus Technologies, LLC

  02/15/2019     Financial Services        13.00     L+1,200        8,930,000        8,834,499        8,791,947   

Cascade Environmental LLC

  08/20/2021     Environmental Services        12.00            32,675,553        32,040,288        32,348,797   

Credit Infonet, Inc.

  10/26/2018    
 
Personal, Food and
Miscellaneous Services
  
  
   

 

13.50

(PIK 2.25


%) 

           10,983,467        10,875,320        10,135,984   

Goldsun Trading Limited (10), (12), (13)

  02/19/2018    
 
Healthcare, Education and
Childcare
  
  
   

 

14.50

(PIK 6.00


%) 

    L+1,000        8,250,821        12,118,330        10,945,519   

Randall-Reilly, LLC

  04/15/2020     Other Media        12.00            26,500,000        26,622,740        26,251,345   

Roto Holdings, Inc.

  05/13/2021     Manufacturing / Basic Industries        11.00            13,300,000        13,080,883        13,300,000   
           

 

 

   

 

 

 

Total Subordinated Debt/Corporate Notes

              103,572,060        101,773,592   
           

 

 

   

 

 

 

Preferred Equity/Partnership Interests—1.3% (6)

             

AH Holdings, Inc.

     
 
Healthcare, Education and
Childcare
  
  
    6.00            211        500,000        171,569   

Alegeus Technologies Holdings Corp.

      Financial Services                      949        949,050        975,602   

Convergint Technologies Holdings, LLC

      Electronics        8.00            2,375        2,088,121        2,383,517   

HW Holdco, LLC

      Other Media        8.00            3,591               31,303   

J.A. Cosmetics US, Inc.

      Consumer Products        8.00            3,397        2,511,333        3,213,422   

Roto Holdings, Inc.

      Manufacturing / Basic Industries                      1,197        1,197,000        1,386,177   
           

 

 

   

 

 

 

Total Preferred Equity/Partnership Interests

              7,245,504        8,161,590   
           

 

 

   

 

 

 

 

 

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

8


Table of Contents

PENNANTPARK INVESTMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED SCHEDULE OF INVESTMENTS – (Continued)

JUNE 30, 2016

(Unaudited)

 

Issuer Name

  Maturity /
 Expiration 
                Industry                  Current
    Coupon    
        Basis Point    
Spread
    Above Index (4)    
    Par /
    Shares    
        Cost            Fair Value (3)     

Common Equity/Partnership Interests/Warrants—6.6% (6)

  

     

AH Holdings, Inc. (Warrants)

  03/23/2021   Healthcare, Education and
Childcare
                  753      $      $   

Alegeus Technologies Holdings Corp.

    Financial Services                   1        950        977   

ASP LCG Holdings, Inc. (Warrants)

  05/05/2026   Education                   933        586,975        967,929   

Autumn Games, LLC

    Broadcasting and Entertainment                   1,333,330        3,000,000          

Cardinal Logistics Holdings LLC (11)
(Intermediate Transportation 100, LLC)

    Cargo Transport                   137,923        2,111,588          

Cascade Environmental LLC (11)

    Environmental Services                   23,600        2,360,000        5,020,913   

CI (Galls) Prime Investment Holdings, LLC (11)

    Distribution                   1,745,639        1,745,639        3,525,392   

Convergint Technologies Holdings, LLC

    Electronics                   2,375               1,897,583   

Faraday Holdings, LLC
(Interior Specialists, Inc.)

    Building Materials                   3,520        171,601        311,193   

HW Holdco, LLC

    Other Media                   388,378               3,385,512   

J.A. Cosmetics US, Inc.

    Consumer Products                   252        1,860        3,519,921   

Kadmon Holdings, LLC, Class A

    Healthcare, Education and
Childcare
                  1,079,920        1,236,832        3,628,553   

Kadmon Holdings, LLC, Class D

    Healthcare, Education and
Childcare
                  1,079,920        1,028,807        1,028,807   

LaMi Acquisition, LLC (11)

    Distribution                   19        493,280        517,143   

Lariat ecoserv Co-Invest Holdings, LLC (11) 

    Environmental Services                   1,000,000        1,000,000        268,405   

MidOcean PPL Holdings, Corp.
(Pre-Paid Legal Services, Inc.)

    Personal, Food and
Miscellaneous Services
                  3,000        3,000,000        5,137,074   

Patriot National, Inc.

    Insurance                   100,885        238,038        825,239   

Power Products Holdings, LLC, Class A Units (11)

    Electronics                   1,350,000        901,263        1,202,325   

Power Products Holdings, LLC, Class B Units (11)

    Electronics                   150,000        142,300        2,540,408   

Ride Group Parent, Inc.

    Personal Transportation                   1,870,331        148,998        130,319   

Roto Holdings, Inc.

    Manufacturing / Basic Industries                   1,330        133,000        918,335   

Vestcom Parent Holdings, Inc.

    Printing and Publishing                   211,797        793,873        7,018,479   
           

 

 

   

 

 

 

Total Common Equity/Partnership Interests/Warrants

          19,095,004        41,844,507   
           

 

 

   

 

 

 

Total Investments in Non-Controlled, Non-Affiliated Portfolio Companies

          916,933,385        904,615,102   
           

 

 

   

 

 

 

Investments in Non-Controlled, Affiliated Portfolio Companies—32.9% (1), (2)

         

First Lien Secured Debt—8.4%

         

Corfin Industries LLC

  11/25/2020   Aerospace and Defense     10.75     L+975        23,581,500        23,152,720        23,581,500   

Corfin Industries LLC (Revolver) (9)

  11/25/2020   Aerospace and Defense                   1,942,623                 

PAS Technologies, Inc.

  03/21/2017   Aerospace and Defense    

 

6.01

(PIK 1.00


%) 

    L+500        4,434,345        2,901,001        3,990,910   

TRAK Acquisition Corp.

  04/30/2018   Business Services     12.00     L+1,050        23,014,911        22,834,953        23,014,911   

TRAK Acquisition Corp. (Revolver)

  11/22/2016   Business Services     12.00     L+1,050        3,000,000        3,000,000        3,000,000   
           

 

 

   

 

 

 

Total First Lien Secured Debt

          51,888,674        53,587,321   

Second Lien Secured Debt—3.5%

         

Affinion Group, Inc.

  10/31/2018   Consumer Products     8.50     L+700        18,000,000        16,854,084        12,895,740   

EnviroSolutions Real Property Holdings, Inc.

  12/26/2017   Environmental Services     9.00     L+800        9,409,740        9,285,737        9,268,594   
           

 

 

   

 

 

 

Total Second Lien Secured Debt

          26,139,821        22,164,334   

Subordinated Debt/Corporate Notes—11.6%

         

Affinion International Holdings Limited (5), (13)

  07/30/2018   Consumer Products    

 

7.50

(PIK 7.50


%) 

           9,858,025        8,828,676        7,689,260   

DirectBuy Holdings, Inc.

  11/05/2019   Consumer Products     (6)             14,306,057        12,340,534        3,004,272   

New Gulf Resources, LLC, Convertible Note (5)

  05/03/2021   Oil and Gas    

 

12.50

(PIK 12.50


%) 

           24,531,068        36,287,549        35,079,427   

Service Champ, Inc.

  10/02/2017   Auto Sector     12.50            28,000,000        27,805,299        27,862,349   
           

 

 

   

 

 

 

Total Subordinated Debt/Corporate Notes

          85,262,058        73,635,308   
           

 

 

   

 

 

 

Preferred Equity—0.8% (6)

  

     

PAS International Holdings, Inc.

    Aerospace and Defense                   53,071        20,059,340        5,254,029   
           

 

 

   

 

 

 

Common Equity/Partnership Interests/Warrants—8.6% (6)

  

     

Affinion Group Holdings, Inc.

    Consumer Products                   859,496        30,503,493        30,802,205   

Affinion Group Holdings, Inc., Series C and Series D

    Consumer Products                   37,181        10,265,972        167,317   

Corfin InvestCo, L.P.

    Aerospace and Defense                   11,250        1,125,000        1,910,601   

Corfin InvestCo, L.P. (9)

    Aerospace and Defense                   11,250                 

DirectBuy Holdings, Inc.

    Consumer Products                   104,719        21,492,822          

DirectBuy Holdings, Inc. (Warrants)

  11/05/2022   Consumer Products                   15,486                 

EnviroSolutions Holdings, Inc.

    Environmental Services                   143,668        11,960,702        12,005,894   

New Gulf Resources, LLC (11)

    Oil and Gas                   113,610                 

New Service Champ Holdings, Inc.

    Auto Sector                   16,800        2,721,600        5,597,009   

NGR Management Company LLC (11)

    Oil and Gas                   119,603                 

PAS International Holdings, Inc.

    Aerospace and Defense                   53,071        202,620        769,289   

TRAK Acquisition Corp.

    Business Services                   491,755        188,837        3,066,465   

Total Common Equity/Partnership Interests/Warrants

          78,461,046        54,318,780   

Total Investments in Non-Controlled, Affiliated Portfolio Companies

          261,810,939        208,959,772   

 

 

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

9


Table of Contents

PENNANTPARK INVESTMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED SCHEDULE OF INVESTMENTS – (Continued)

JUNE 30, 2016

(Unaudited)

 

Issuer Name

  Maturity /
 Expiration 
                Industry                    Current
    Coupon    
        Basis Point    
Spread

Above Index  (4)
    Par /
    Shares    
        Cost            Fair Value (3)     

Investments in Controlled, Affiliated Portfolio Companies—19.4% (1), (2)

  

     

First Lien Secured Debt—14.8%

  

     

RAM Energy LLC

  07/18/2019     Energy and Utilities       

 

10.00

(PIK 10.00


%) 

    L+800        82,497,790      $ 81,464,183      $ 68,060,677   

Superior Digital Displays, LLC

  12/31/2018     Media       

 

14.00

(PIK 14.00


%) 

    L+1,300        25,600,396        23,803,645        25,600,396   
           

 

 

   

 

 

 

Total First Lien Secured Debt

              105,267,828        93,661,073   
           

 

 

   

 

 

 

Second Lien Secured Debt—1.3%

  

     

Superior Digital Displays, LLC

  07/01/2019     Media       

 

16.00

(PIK 16.00


%) 

    L+1,500        8,335,006        8,335,006        8,335,006   
           

 

 

   

 

 

 

Preferred Equity—2.3% (6)

             

MidOcean JF Holdings Corp.

      Distribution                      143,183        14,318,325        14,318,325   

Superior Digital Displays Holdings, Inc.

      Media        15.00%               37,046        5,000,000        98,514   

Total Preferred Equity

              19,318,325        14,416,839   
           

 

 

   

 

 

 

Common Equity—1.0% (6)

  

     

MidOcean JF Holdings Corp.

      Distribution                      65,933        24,761,831        6,593,299   

RAM Energy Holdings LLC

      Energy and Utilities                      23,141        20,824,388          

Superior Digital Displays Holdings, Inc.

      Media                      11,100        2,211,000          
           

 

 

   

 

 

 

Total Common Equity

              47,797,219        6,593,299   
           

 

 

   

 

 

 

Total Investments in Controlled, Affiliated Portfolio Companies

  

          180,718,378        123,006,217   
           

 

 

   

 

 

 

Total Investments—194.6%

  

      1,359,462,702        1,236,581,091   
           

 

 

   

 

 

 

Cash and Cash Equivalents—5.9%

  

     

BlackRock Liquidity Funds, Temp Cash, Institutional Shares

  

          4,007,434        4,007,434   

BNY Mellon Cash Reserve and Cash

              34,098,981        33,865,420   
           

 

 

   

 

 

 

Total Cash and Cash Equivalents

              38,106,415        37,872,854   
           

 

 

   

 

 

 

Total Investments and Cash Equivalents—200.5%

  

    $ 1,397,569,117      $ 1,274,453,945   
           

 

 

   

 

 

 

Liabilities in Excess of Other Assets—(100.5%)

  

        (638,899,433

Net Assets—100.0%

  

      $ 635,554,512   
             

 

 

 

 

(1) The provisions of the 1940 Act classify investments based on the level of control that we maintain in a particular portfolio company. As defined in the 1940 Act, a company is generally presumed to be “non-controlled” when we own 25% or less of the portfolio company’s voting securities and “controlled” when we own more than 25% of the portfolio company’s voting securities.
(2) The provisions of the 1940 Act classify investments further based on the level of ownership that we maintain in a particular portfolio company. As defined in the 1940 Act, a company is generally deemed as “non-affiliated” when we own less than 5% of a portfolio company’s voting securities and “affiliated” when we own 5% or more of a portfolio company’s voting securities (see Note 6).
(3) Valued based on our accounting policy (see Note 2).
(4) Represents floating rate instruments that accrue interest at a predetermined spread relative to an index, typically the applicable London Interbank Offered Rate, or LIBOR or “L,” or Prime rate, or “P.” All securities are subject to a LIBOR or Prime rate floor where a spread is provided, unless noted. The spread provided includes payment-in-kind, or PIK, interest and other fee rates, if any.
(5) Security is exempt from registration under Rule 144A promulgated under the Securities Act of 1933, as amended, or the Securities Act. The security may be resold in transactions that are exempt from registration, normally to qualified institutional buyers.
(6) Non-income producing securities.
(7) Coupon is payable in cash and/or PIK.
(8) Coupon is not subject to a LIBOR or Prime rate floor.
(9) 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.
(10) Non-U.S. company or principal place of business outside the U.S.
(11) Investment is held through a consolidated taxable subsidiary (See Note 1 to the financial statements).
(12) Par amount is denominated in British Pounds.
(13) The investment is treated as a non-qualifying asset under Section 55(a) of the 1940 Act. Under the 1940 Act, we may not acquire any non-qualifying asset unless, at the time the acquisition is made, qualifying assets represent at least 70% of our total assets.

 

 

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

10


Table of Contents

PENNANTPARK INVESTMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED SCHEDULE OF INVESTMENTS

SEPTEMBER 30, 2015

 

Issuer Name

 

Maturity /
Expiration

 

Industry

  Current
Coupon
    Basis Point
Spread
Above
Index (4)
    Par /
Shares
    Cost     Fair Value (3)  

Investments in Non-Controlled, Non-Affiliated Portfolio Companies—153.0% (1), (2)

  

     

First Lien Secured Debt—39.1%

         

Aircell Business Aviation Services LLC

  03/21/2018   Communications     11.25     L+975        22,689,469      $ 22,109,951      $ 23,483,601   

AKA Diversified Holdings, Inc.

  04/02/2018   Retail     11.97     L+1,175 (8)      44,459,443        43,751,988        45,126,826   

AKA Diversified Holdings, Inc. (Revolver) (9)

  04/02/2018   Retail                   4,371,469               65,620   

AP Gaming I, LLC

  12/21/2020   Hotels, Motels, Inns and Gaming     9.25     L+825        23,573,292        23,268,725        23,180,325   

Hollander Sleep Products, LLC

  10/21/2020   Consumer Products     9.00     L+800        4,477,500        4,418,746        4,477,500   

Interior Specialists, Inc.

  06/30/2020   Building Materials     9.00     L+800        25,500,000        25,254,194        25,500,000   

K2 Pure Solutions NoCal, L.P.

  08/19/2019   Chemicals, Plastics and Rubber     11.00     L+1,000        21,644,154        21,333,439        20,091,220   

Linc USA GP and Linc Energy Finance (USA), Inc. (5)

  10/31/2017   Oil and Gas     9.63            5,626,850        5,626,850        5,007,897   

Prince Mineral Holding Corp. (5)

  12/16/2019   Mining, Steel, Iron and Non-Precious Metals     11.50            14,250,000        14,137,010        11,970,000   

Robertshaw US Holding Corp.

  06/18/2019   Electronics     9.00     L+750        13,435,343        13,339,249        13,407,176   

Sotera Defense Solutions, Inc.

  04/21/2017   Aerospace and Defense     9.00     L+750        19,704,329        19,043,541        17,733,896   

Sunborn International (UK) Limited (10), (12), (13)

  09/28/2018   Hotels, Motels, Inns and Gaming    

 

13.00

(PIK 0.50


%) 

    L+1,250 (8)      19,947,600        30,053,647        29,873,876   

Trust Inns Limited (10), (12), (13)

  02/12/2020   Buildings and Real Estate     11.08     L+1,050 (8)      24,386,987        38,764,474        36,411,706   

US Med Acquisition, Inc.

  08/13/2021   Healthcare, Education and Childcare     10.00     L+900        8,739,063        8,739,063        8,739,062   

U.S. Well Services, LLC

  05/02/2019   Oil and Gas     12.00     L+1,150        15,297,762        15,036,838        15,308,835   
           

 

 

   

 

 

 

Total First Lien Secured Debt

              284,877,715        280,377,540   
           

 

 

   

 

 

 

Second Lien Secured Debt—83.7%

             

Affinion Group, Inc.

  10/31/2018   Consumer Products     8.50     L+700        18,000,000        16,544,788        16,076,340   

American Gilsonite Company (5)

  09/01/2017   Diversified Natural Resources, Precious Metals and Minerals     11.50            25,400,000        25,400,000        24,130,000   

Ascensus, Inc.

  12/02/2020   Financial Services     9.00     L+800        15,500,000        15,322,421        15,441,875   

Balboa Capital Corporation (13)

  03/04/2022   Financial Services     13.00            19,000,000        18,721,641        18,810,000   

Bennu Oil & Gas, LLC

  11/01/2018   Oil and Gas    

 

12.25

(PIK 2.50


%) 

    L+1,100        26,484,773        25,150,663        20,393,275   

Foundation Building Materials, LLC

  04/30/2019   Building Materials     13.25     P+1,000        45,000,000        44,625,152        45,900,000   

Foundation Building Materials, LLC

  04/30/2019   Building Materials    

 

14.25

(PIK 1.00


%) 

    P+1,100        33,109,864        32,588,028        33,772,061   

Howard Berger Co. LLC

  09/30/2020   Distribution     11.00     L+1,000        41,250,000        39,088,044        40,012,500   

Intermediate Transportation 100, LLC (5)

  03/01/2017   Cargo Transport     (6)             4,391,420        4,391,422        1,229,598   

J.A. Cosmetics Holdings, Inc.

  07/31/2019   Consumer Products     11.00     L+1,000        34,000,000        33,476,169        34,340,000   

Jacobs Entertainment, Inc.

  10/29/2019   Hotels, Motels, Inns and Gaming     13.00     L+1,175        48,765,129        48,307,757        48,765,129   

Language Line, LLC

  07/07/2022   Personal, Food and Miscellaneous Services     10.75     L+975        40,312,500        39,711,804        40,211,719   

Linc USA GP and Linc Energy Finance (USA), Inc. (5)

  10/31/2017   Oil and Gas     12.50 %(7)             11,875,000        11,667,848        9,143,751   

New Gulf Resources, LLC (5)

  05/15/2019   Oil and Gas     (6)             45,000,000        44,698,345        31,500,000   

Novitex Acquisition, LLC    

  07/07/2021   Business Services     11.75     L+1,050        41,250,000        40,883,259        40,425,000   

Parq Holdings Limited Partnership (10), (13)

  12/17/2021   Hotels, Motels, Inns and Gaming     13.00     L+1,200        75,000,000        75,000,000        75,586,475   

Penton Media, Inc.

  10/02/2020   Media     9.00     L+775        19,698,091        19,478,649        19,615,950   

Pre-Paid Legal Services, Inc.

  07/01/2020   Personal, Food and Miscellaneous Services     10.25     L+900        56,750,000        56,098,358        56,608,125   

Prime Security Services Borrower, LLC

  07/01/2022   Personal, Food and Miscellaneous Services     9.75     L+875        28,500,000        28,082,664        28,001,250   
           

 

 

   

 

 

 

Total Second Lien Secured Debt

              619,237,012        599,963,048   
           

 

 

   

 

 

 

Subordinated Debt/Corporate Notes—20.7%

  

       

Affinion Group Holdings, Inc.

  09/14/2018   Consumer Products     (6)             41,389,881        37,715,391        15,728,155   

Affinion Investments LLC

  08/15/2018   Consumer Products     (6)             21,625,412        18,687,177        14,489,026   

Alegeus Technologies, LLC

  02/15/2019   Financial Services     12.00            8,930,000        8,819,557        8,872,566   

Cascade LP Holdings, LLC

  08/20/2021   Environmental Services     12.00            27,475,553        26,893,410        26,926,042   

Cascade LP Holdings, LLC (9)

  02/20/2017   Environmental Services                   11,124,447               27,811   

Credit Infonet, Inc.

  10/26/2018   Personal, Food and Miscellaneous Services    

 

13.00

(PIK 1.75


%) 

           10,800,349        10,664,093        10,628,485   

MSPark, Inc.

  06/15/2017   Printing and Publishing     14.50 %(7)             15,000,000        14,836,009        15,000,000   

New Gulf Resources, LLC (5)

  11/15/2019   Oil and Gas     (6)             15,204,289        14,829,719        1,520,429   

Randall-Reilly, LLC

  04/15/2019   Other Media     12.50 %(7)             42,275,000        41,618,180        41,892,583   

Roto Holdings, Inc.

  05/13/2021   Manufacturing / Basic Industries     11.00            13,300,000        13,057,260        13,167,000   
           

 

 

   

 

 

 

Total Subordinated Debt/Corporate Notes

  

        187,120,796        148,252,097   
           

 

 

   

 

 

 

 

 

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

11


Table of Contents

PENNANTPARK INVESTMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED SCHEDULE OF INVESTMENTS – (Continued)

SEPTEMBER 30, 2015

 

Issuer Name

 

Maturity /
Expiration

 

Industry

  Current
Coupon
    Basis Point
Spread
Above
Index (4)
    Par /
Shares
    Cost     Fair Value (3)  

Preferred Equity/Partnership Interests—1.8% (6)

  

 

AH Holdings, Inc.

    Healthcare, Education and Childcare     6.00            211      $ 500,000      $ 355,508   

Alegeus Technologies Holdings Corp.

    Financial Services                   949        949,050        995,487   

Convergint Technologies Holdings, LLC

    Electronics     8.00            2,375        2,088,121        2,222,223   

HW Holdco, LLC

    Other Media     8.00            3,591               24,177   

J.A. Cosmetics US, Inc.

    Consumer Products     8.00            3,397        3,397,484        3,871,624   

Roto Holdings, Inc.

    Manufacturing / Basic Industries                   1,197        1,197,000        1,295,710   

vRide Holdings, Inc. (f/k/a Ride Holdings, Inc.)

    Personal Transportation     8.00            1,966,667        2,102,669        4,275,107   
           

 

 

   

 

 

 

Total Preferred Equity/Partnership Interests

  

      10,234,324        13,039,836   
           

 

 

   

 

 

 

Common Equity/Partnership Interests/Warrants—7.7% (6)

  

     

A2Z Wireless Holdings, Inc.

    Retail                   1,736        445,500        2,528,247   

Affinion Group Holdings, Inc., Series A (Warrants)

  12/12/2023   Consumer Products                   4,798,624        10,265,972        2,519,278   

Affinion Group Holdings, Inc., Series B (Warrants)

  12/12/2023   Consumer Products                   9,822,196               196,444   

AH Holdings, Inc. (Warrants)

  03/23/2021   Healthcare, Education and Childcare                   753                 

Alegeus Technologies Holdings Corp.

    Financial Services                   1        950        996   

ASP LCG Holdings, Inc. (Warrants)

  05/05/2026   Education                   933        586,975        820,067   

Autumn Games, LLC    

    Broadcasting and Entertainment                   1,333,330        3,000,000          

Cardinal Logistics Holdings LLC (11)
(Intermediate Transportation 100, LLC)

    Cargo Transport                   137,923        2,111,588          

Cascade LP Holdings, LLC (11)

    Environmental Services                   23,600        2,360,000        3,473,308   

CI (FBM) Holdings, LLC (11)
(Foundation Building Materials, LLC)

    Building Materials                   207,242        2,250,000        8,223,485   

CI (FBM) Holdings, LLC (9), (11)
(Foundation Building Materials, LLC)

    Building Materials                   103,621                 

CI (Galls) Prime Investment Holdings, LLC (11)

    Distribution                   1,745,639        1,745,639        2,040,629   

Convergint Technologies Holdings, LLC

    Electronics                   2,375               999,889   

Faraday Holdings, LLC
(Interior Specialists, Inc.)

    Building Materials                   3,520        171,601        196,748   

HW Holdco, LLC

    Other Media                   388,378               2,500,113   

J.A. Cosmetics US, Inc.

    Consumer Products                   252        2,516        1,833,357   

Kadmon Holdings, LLC, Class A

    Healthcare, Education and Childcare                   1,079,920        1,236,832        6,701,684   

Kadmon Holdings, LLC, Class D

    Healthcare, Education and Childcare                   1,079,920        1,028,807        1,028,807   

LaMi Acquisition, LLC (11)

    Distribution                   16        383,447        383,447   

Lariat ecoserv Co-Invest Holdings, LLC (11) 

    Environmental Services                   1,000,000        1,000,000        761,955   

Magnum Hunter Resources Corporation (Warrants) (13)

  04/16/2016   Oil and Gas                   122,192        182,498          

MidOcean PPL Holdings, Corp.
(Pre-Paid Legal Services, Inc.)

    Personal, Food and Miscellaneous Services                   3,000        3,000,000        4,813,759   

New Gulf Resources, LLC (Warrants) (11)

  05/09/2024   Oil and Gas                   13,500        495,000          

Patriot National, Inc. (Warrants)

  11/27/2023   Insurance                   123,129        238,049        1,620,378   

Power Products Holdings, LLC, Class A Units (11)

    Electronics                   1,350,000        901,263        1,141,900   

Power Products Holdings, LLC, Class B Units (11)

    Electronics                   150,000        142,300        1,351,202   

Ride Group Parent, Inc.

    Personal Transportation                   1,870,331        148,998        148,998   

Roto Holdings, Inc.

    Manufacturing / Basic Industries                   1,330        133,000        612,550   

vRide Holdings, Inc. (f/k/a Ride Holdings, Inc.)

    Personal Transportation                   9,882        11,314        21,481   

Vestcom Parent Holdings, Inc.

    Printing and Publishing                   211,797        793,873        3,570,645   

VText Holdings, Inc.

    Business Services                   35,526        4,050,000        7,597,191   
           

 

 

   

 

 

 

Total Common Equity/Partnership Interests/Warrants

  

    36,686,122        55,086,558   
           

 

 

   

 

 

 

Total Investments in Non-Controlled, Non-Affiliated Portfolio Companies

  

    1,138,155,969        1,096,719,079   
           

 

 

   

 

 

 

 

 

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

12


Table of Contents

PENNANTPARK INVESTMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED SCHEDULE OF INVESTMENTS – (Continued)

SEPTEMBER 30, 2015

 

Issuer Name

  

Maturity /
Expiration

  

Industry

  Current
Coupon
    Basis Point
Spread
Above
Index (4)
    Par /
Shares
    Cost     Fair Value (3)  

Investments in Non-Controlled, Affiliated Portfolio Companies—13.3% (1), (2)

         

First Lien Secured Debt—3.2%

               

TRAK Acquisition Corp.

   04/30/2018    Business Services     12.00     L+1,050        23,514,911      $ 23,285,423      $ 23,044,613   
             

 

 

   

 

 

 

Second Lien Secured Debt—1.3%

               

EnviroSolutions Real Property Holdings, Inc.

   12/26/2017    Environmental Services     9.00     L+800        9,409,740        9,237,014        9,127,448   

EnviroSolutions Real Property Holdings, Inc. (9)

   12/31/2015    Environmental Services                   758,850                 
             

 

 

   

 

 

 

Total Second Lien Secured Debt

                9,237,014        9,127,448   
             

 

 

   

 

 

 

Subordinated Debt/Corporate Notes—4.8%

               

DirectBuy Holdings, Inc.

   11/05/2019    Consumer Products     (6)             13,092,070        13,092,071        6,284,194   

Service Champ, Inc.

   10/02/2017    Auto Sector     12.50            28,000,000        27,702,867        27,931,507   
             

 

 

   

 

 

 

Total Subordinated Debt/Corporate Notes 

                40,794,938        34,215,701   
             

 

 

   

 

 

 

Preferred Equity—0.7% (6)

               

PAS International Holdings, Inc.

      Aerospace and Defense                   53,071        20,059,340        5,254,029   
             

 

 

   

 

 

 

Common Equity/Partnership Interests/Warrants—3.3% (6)

  

   

DirectBuy Holdings, Inc.

      Consumer Products                   104,719        21,492,822          

DirectBuy Holdings, Inc. (Warrants)

   11/05/2022    Consumer Products                   15,486                 

EnviroSolutions Holdings, Inc.

      Environmental Services                   143,668        11,960,702        11,337,381   

NCP-Performance, L.P.    

     

Leisure, Amusement,

Motion Pictures and Entertainment

                  375,000        3,750,000          

New Service Champ Holdings, Inc.

      Auto Sector                   16,800        2,721,600        4,457,055   

PAS International Holdings, Inc.

      Aerospace and Defense                   53,071        202,619        6,178,645   

TRAK Acquisition Corp.

      Business Services                   491,755        188,837        1,888,232   
             

 

 

   

 

 

 

Total Common Equity/Partnership Interests/Warrants

  

      40,316,580        23,861,313   
             

 

 

   

 

 

 

Total Investments in Non-Controlled, Affiliated Portfolio Companies

  

      133,693,295        95,503,104   
             

 

 

   

 

 

 

Investments in Controlled, Affiliated Portfolio Companies—15.0% (1), (2)

  

     

First Lien Secured Debt—13.4%

               

RAM Energy LLC, Tranche A

   07/18/2019    Energy and Utilities    

 

10.00

(PIK 10.00


%) 

    L+800        76,425,000        75,177,005        72,759,582   

Superior Digital Displays, LLC

   12/31/2018    Media    

 

14.00

(PIK 14.00


%) 

    L+1,300        23,055,423        20,951,257        23,055,423   
             

 

 

   

 

 

 

Total First Lien Secured Debt

                96,128,262        95,815,005   
             

 

 

   

 

 

 

Second Lien Secured Debt—0.5%

               

Superior Digital Displays, LLC

   07/01/2019    Media    

 

16.00

(PIK 16.00


%) 

    L+1,500        3,462,417        3,462,417        3,462,417   

Superior Digital Displays, LLC (9)

   07/01/2019    Media                   2,575,000                 
             

 

 

   

 

 

 

Total Second Lien Secured Debt

                3,462,417        3,462,417   
             

 

 

   

 

 

 

Preferred Equity—0.1% (6)

               

Superior Digital Displays Holdings, Inc.

      Media     15.00            37,046        5,000,000        648,021   
             

 

 

   

 

 

 

Common Equity—1.0% (6)

               

MidOcean JF Holdings Corp.

      Distribution                   65,933        24,761,831        6,900,207   

RAM Energy Holdings LLC (f/k/a RAM Energy, LLC)

      Energy and Utilities                   23,141        20,824,388          

Superior Digital Displays Holdings, Inc.

      Media                   11,100        2,211,000          
             

 

 

   

 

 

 

Total Common Equity

                47,797,219        6,900,207   
             

 

 

   

 

 

 

Total Investments in Controlled, Affiliated Portfolio Companies

                152,387,898        106,825,650   
             

 

 

   

 

 

 

Total Investments—181.3%

                1,424,237,162        1,299,047,833   
             

 

 

   

 

 

 

Cash and Cash Equivalents—6.9%

               

BlackRock Liquidity Funds, Temp Cash, Institutional Shares

                4,564,638        4,564,638   

BNY Mellon Cash Reserve and Cash

                45,072,777        45,054,618   
             

 

 

   

 

 

 

Total Cash and Cash Equivalents

                49,637,415        49,619,256   
             

 

 

   

 

 

 

Total Investments and Cash Equivalents—188.2%

  

    $ 1,473,874,577      $ 1,348,667,089   
             

 

 

   

 

 

 

Liabilities in Excess of Other Assets—(88.2%)

                  (632,076,547

Net Assets—100.0%

                $ 716,590,542   
               

 

 

 

 

 

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

13


Table of Contents

PENNANTPARK INVESTMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED SCHEDULE OF INVESTMENTS – (Continued)

SEPTEMBER 30, 2015

 

 

(1) The provisions of the 1940 Act classify investments based on the level of control that we maintain in a particular portfolio company. As defined in the 1940 Act, a company is generally presumed to be “non-controlled” when we own 25% or less of the portfolio company’s voting securities and “controlled” when we own more than 25% of the portfolio company’s voting securities.
(2) The provisions of the 1940 Act classify investments further based on the level of ownership that we maintain in a particular portfolio company. As defined in the 1940 Act, a company is generally deemed as “non-affiliated” when we own less than 5% of a portfolio company’s voting securities and “affiliated” when we own 5% or more of a portfolio company’s voting securities (see Note 6).
(3) Valued based on our accounting policy (see Note 2).
(4) 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.” 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.
(5) Security is exempt from registration under Rule 144A promulgated under the Securities Act. The security may be resold in transactions that are exempt from registration, normally to qualified institutional buyers.
(6) Non-income producing securities.
(7) Coupon is payable in cash and/or PIK.
(8) Coupon is not subject to a LIBOR or Prime rate floor.
(9) 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.
(10) Non-U.S. company or principal place of business outside the U.S.
(11) Investment is held through a consolidated taxable subsidiary (See Note 1).
(12) Par amount is denominated in British Pounds.
(13) The investment is treated as a non-qualifying asset under Section 55(a) of the 1940 Act. Under the 1940 Act, we may not acquire any non-qualifying asset unless, at the time the acquisition is made, qualifying assets represent at least 70% of our total assets.

 

 

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

14


Table of Contents

PENNANTPARK INVESTMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2016

(Unaudited)

1. ORGANIZATION

PennantPark Investment Corporation was organized as a Maryland corporation in January 2007. We are a closed-end, externally managed, non-diversified investment company that has elected to be treated as a BDC under the 1940 Act. PennantPark Investment’s objective is to generate both current income and capital appreciation through debt and equity investments. We invest primarily in U.S. middle-market companies in the form of senior secured debt, mezzanine debt and, to a lesser extent, equity investments. On April 24, 2007, we closed our initial public offering and our common stock trades on the NASDAQ Global Select Market under the symbol “PNNT.” Our 2025 Notes trade on the New York Stock Exchange, or the NYSE, under the symbol “PNTA.”

We have entered into an investment management agreement, or the Investment Management Agreement, with the Investment Adviser, an external adviser that manages our day-to-day operations. We have also entered into an administration agreement, or the Administration Agreement, with the Administrator, which provides the administrative services necessary for us to operate. PennantPark Investment, through the Investment Adviser, manages day-to-day operations of and provides investment advisory services to each of our SBIC Funds under separate investment management agreements. PennantPark Investment, through the Administrator, also provides similar services to each of our SBIC Funds under a separate administration agreement. See Note 3.

Our wholly owned subsidiaries, SBIC LP and SBIC II, were organized as Delaware limited partnerships in 2010 and 2012, respectively. SBIC LP and SBIC II received licenses from the SBA to operate as SBICs, under Section 301(c) of the 1958 Act. Our SBIC Funds’ 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 criteria used by PennantPark Investment.

We have formed and expect to continue to form certain taxable subsidiaries, or the Taxable Subsidiaries, which are taxed as corporations for federal income tax purposes. The Taxable Subsidiaries allow us to hold equity securities of portfolio companies organized as pass-through entities while continuing to satisfy the requirements of a RIC under the Code.

2. SIGNIFICANT ACCOUNTING POLICIES

The preparation of our consolidated financial statements, or Consolidated Financial Statements, in conformity with U.S. generally accepted accounting principles, or 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 the Financial Accounting Standards Board’s Accounting Standards Codification, as amended, or 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.

Our Consolidated Financial Statements are prepared in accordance with GAAP, consistent with ASC 946, Financial Services – Investment Companies, and pursuant to the requirements for reporting on Form 10-K/Q and Article 6 or 10 of Regulation S-X, as appropriate. In accordance with Article 6-09 of Regulation S-X, we have provided a Consolidated Statement of Changes in Net Assets in lieu of a Consolidated Statement of Changes in Stockholders’ Equity.

Our significant accounting policies consistently applied are as follows:

(a)   Investment Valuations

We expect that there may not be readily available market values for many of our 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. See Note 5.

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 the Investment Adviser and those of the independent valuation firms on a quarterly basis, periodically assess 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.

 

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PENNANTPARK INVESTMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

JUNE 30, 2016

(Unaudited)

 

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 by 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.

(b)   Security Transactions, Revenue Recognition, and Realized/Unrealized Gains or Losses

Security transactions are recorded on a trade-date basis. 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 prepayment penalties. Net change in unrealized appreciation or depreciation reflects the change in the fair values of our portfolio investments, our Credit Facility and our Notes during the reporting period, including any reversal of previously recorded unrealized appreciation or depreciation, when gains or losses are realized.

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, original issue discount, or 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.

Loans are placed on non-accrual status when principal or interest payments are past due 30 days or more and/or there is reasonable doubt that principal or interest will be collected. Accrued interest is generally reversed when a loan is placed on non-accrual status. Interest payments received on non-accrual loans may be recognized as income or applied to principal depending upon management’s judgment. Non-accrual loans are restored to accrual status when past due principal and interest is paid and, in management’s judgment, are likely to remain current.

(c)  Income Taxes

We have complied with the requirements of Subchapter M of the Code and have qualified to be subject to tax as a RIC. As a result, we account for income taxes using the asset and liability method prescribed by ASC 740, Income Taxes. Under this method, income taxes are provided for amounts currently payable and for amounts deferred as tax assets and liabilities based on differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities. Based upon our qualification and election to be subject to taxation as a RIC, we typically do not incur any material level of federal income taxes. Although we are not subject to federal income taxes as a RIC, we may elect to retain a portion of our calendar year income, which may result in an excise tax, or we may incur taxes through our Taxable Subsidiaries. For the three and nine months ended June 30, 2016, we accrued taxes of $0.4 million and $2.0 million, respectively. We accrued no taxes for either the three or nine month periods ended June 30, 2015.

We recognize the effect of a tax position in our Consolidated Financial Statements when it is more likely than not, based on the technical merits, that the position will be sustained upon examination by the applicable tax authority. We did not have any uncertain tax positions or any unrecognized tax benefits that met the recognition or measurement criteria of ASC 740-10-25 as of the periods presented herein.

Because federal income tax regulations differ from GAAP, distributions in accordance with tax regulations may differ from net investment income and net realized gains 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 tax character. Temporary differences arise when certain items of income, expense, gain or loss are recognized at some time in the future. We do not consolidate the Taxable Subsidiaries for income tax purposes, but we do consolidate the results of these Taxable Subsidiaries for financial reporting purposes.

(d)  Distributions and Capital Transactions

Distributions to common stockholders are recorded on the ex-dividend date. The amount to be paid, if any, as a distribution is ratified by the board of directors each quarter and is generally based upon the earnings estimated by management. Net realized capital gains, if any, are distributed at least annually. The tax attributes for distributions will generally include ordinary income and capital gains, but may also include qualified dividends and/or return of capital.

Capital transactions, in connection with our dividend reinvestment plan or through offerings of our common stock, are recorded when issued and offering costs are charged as a reduction of capital upon issuance of our common stock.

(e)   Foreign Currency Translation

Our books and records are maintained in U.S. dollars. Any foreign currency amounts are translated into U.S. dollars on the following basis:

 

  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.

Foreign security and currency translations may involve certain considerations and risks not typically associated with investing in U.S. companies and U.S. Government securities. These risks include, but are not limited to, currency fluctuations and revaluations and future adverse political, social and economic developments, which could cause investments in foreign markets to be less liquid and prices to be more volatile than those of comparable U.S. companies or U.S. Government securities.

 

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PENNANTPARK INVESTMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

JUNE 30, 2016

(Unaudited)

 

(f)   Consolidation

As permitted under Regulation S-X and as explained by ASC 946-810-45, PennantPark Investment will generally not consolidate its investment in a company other than an investment company subsidiary or a controlled operating company whose business consists of providing services to us. Accordingly, we have consolidated the results of our SBIC Funds and our Taxable Subsidiaries in our Consolidated Financial Statements.

3. AGREEMENTS

The Investment Management Agreement with the Investment Adviser was reapproved by our board of directors, including a majority of our directors who are not interested persons of us or the Investment Adviser, in February 2016. Under the Investment Management Agreement, the Investment Adviser, subject to the overall supervision of our board of directors, manages the day-to-day operations of and provides investment advisory services to us. Our SBIC Funds’ investment management agreements do not affect the management or incentive fees that we pay to the Investment Adviser on a consolidated basis. For providing these services, the Investment Adviser receives a fee from us, consisting of two components—a base management fee and an incentive fee, or collectively referred to as Management Fee.

The base management fee is calculated at an annual rate of 2.00% of our “average adjusted gross assets,” which equals our gross assets (net of U.S. Treasury Bills, temporary draws under any credit facility, cash and cash equivalents, repurchase agreements or other balance sheet transactions undertaken at the end of a fiscal quarter for purposes of preserving investment flexibility for the next quarter and adjusted to exclude cash, cash equivalents and unfunded commitments, if any) and is payable quarterly in arrears. The base management fee is calculated based on the average adjusted gross assets at the end of the two most recently completed calendar quarters, and appropriately adjusted for any share issuances or repurchases during the current calendar quarter. For example, if we sold shares on the 45th day of a quarter and did not use the proceeds from the sale to repay outstanding indebtedness, our gross assets for such quarter would give effect to the net proceeds of the issuance for only 45 days of the quarter during which the additional shares were outstanding. For the three and nine months ended June 30, 2016 and through December 31, 2016, the Investment Adviser has voluntarily agreed, in consultation with the board of directors, to waive 16% of base management fees, correlated to our 16% energy exposure (oil & gas and energy & utilities industries) at cost as of December 31, 2015. For the three and nine months ended June 30, 2016, the Investment Adviser earned base management fees of $5.2 million (after a waiver of $1.0 million) and $15.8 million (after a waiver of $3.0 million), respectively, from us. For the three and nine months ended June 30, 2015, the Investment Adviser earned base management fees of $6.5 million and $20.1 million, respectively, from us.

The incentive fee has two parts, as follows:

One part is calculated and payable quarterly in arrears based on our Pre-Incentive Fee Net Investment Income for the immediately preceding calendar quarter. For this purpose, Pre-Incentive Fee Net Investment Income means interest income, dividend income and any other income, including any other fees (other than fees for providing managerial assistance), such as amendment, commitment, origination, prepayment penalties, structuring, diligence and consulting fees or other fees received from portfolio companies, accrued during the calendar quarter, minus our operating expenses for the quarter (including the base management fee, fee waivers, if any, any expenses payable under the Administration Agreement and any interest expense or amendment fees under any credit facility and distribution paid on any issued and outstanding preferred stock, but excluding the incentive fee). Pre-Incentive Fee Net Investment Income includes, in the case of investments with a deferred interest feature (such as OID, debt instruments with PIK interest and zero coupon securities), accrued income not yet received in cash. Pre-Incentive Fee Net Investment Income does not include any realized capital gains, computed net of all realized capital losses or unrealized capital appreciation or depreciation. Pre-Incentive Fee Net Investment Income, expressed as a percentage of the value of our net assets at the end of the immediately preceding calendar quarter, is compared to the hurdle rate of 1.75% per quarter (7.00% annualized). We pay the Investment Adviser an incentive fee with respect to our Pre-Incentive Fee Net Investment Income in each calendar quarter as follows: (1) no incentive fee in any calendar quarter in which our Pre-Incentive Fee Net Investment Income does not exceed the hurdle rate of 1.75%, (2) 100% of our Pre-Incentive Fee Net Investment Income with respect to that portion of such Pre-Incentive Fee Net Investment Income, if any, that exceeds the hurdle rate but is less than 2.1875% in any calendar quarter (8.75% annualized), and (3) 20% of the amount of our Pre-Incentive Fee Net Investment Income, if any, that exceeds 2.1875% in any calendar quarter. These calculations are pro-rated for any share issuances or repurchases during the relevant quarter, if applicable. For the three and nine months ended June 30, 2016 and through December 31, 2016, the Investment Adviser has voluntarily agreed, in consultation with the board of directors, to waive 16% of incentive fees, correlated to our 16% energy exposure (oil & gas and energy & utilities industries) at cost as of December 31, 2015. For the three and nine months ended June 30, 2016, the Investment Adviser earned an incentive fee on net investment income as calculated under the Investment Management Agreement of $3.4 million (after a waiver of $0.6 million) and $10.6 million (after a waiver of $2.0 million), respectively, from us. For the three and nine months ended June 30, 2015, the Investment Adviser earned an incentive fee on net investment income as calculated under the Investment Management Agreement of $5.2 million and $15.6 million, respectively, from us.

The second part of the incentive fee is determined and payable in arrears as of the end of each calendar year (or upon termination of the Investment Management Agreement, as of the termination date) and equals 20% of our realized capital gains, if any, on a cumulative basis from inception through the end of each calendar year, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis, less the aggregate amount of any previously paid capital gain incentive fees. For each of the three and nine months ended June 30, 2016 and 2015, the Investment Adviser did not earn an incentive fee on capital gains as calculated under the Investment Management Agreement (as described above).

Under GAAP, we are required to accrue a capital gains incentive fee based upon net realized capital gains and net unrealized capital appreciation and depreciation on investments and foreign currencies held at the end of each period. In calculating the capital gains incentive fee accrual, we considered the cumulative aggregate unrealized capital appreciation in the calculation, as a capital gains incentive fee would be payable if such unrealized capital appreciation were realized, even though such unrealized capital appreciation is not permitted to be considered in calculating the fee actually payable under the Investment Management Agreement. This accrual is calculated using the aggregate cumulative realized capital gains and losses and cumulative unrealized capital appreciation or depreciation. If such amount is positive at the end of a period, then we record a capital gains incentive fee equal to 20% of such amount, less the aggregate amount of actual capital gains related incentive fees paid in all prior years. If such amount is negative, then there is no accrual for such year. There can be no assurance that such unrealized capital appreciation will be realized in the future. For each of the three and nine months ended June 30, 2016 and 2015, the Investment Adviser did not accrue an incentive fee on capital gains as calculated under GAAP.

The Administration Agreement with the Administrator was reapproved by our board of directors, including a majority of our directors who are not interested persons of us, in February 2016. Under the Administration Agreement, the Administrator provides administrative services and office facilities to us. The Administrator provides similar services to our SBIC Funds under each of their administration agreements with PennantPark Investment. For providing these services, facilities and personnel, PennantPark Investment has 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 PennantPark Investment’s allocable portion of the costs of compensation and related expenses for its Chief Compliance Officer, Chief Financial Officer and their respective staffs. The Administrator also offers, on PennantPark Investment’s behalf, managerial assistance to portfolio companies to which PennantPark Investment is required to offer such assistance. Reimbursement for certain of these costs is included in administrative services expenses in the Consolidated Statements of Operations. For the three and nine months ended June 30, 2016, the Investment Adviser was reimbursed $0.4 million and $2.9 million, respectively, from us, including expenses the Investment Adviser incurred on behalf of the Administrator, for the services described above. For the three and nine months ended June 30, 2015, the Investment Adviser was reimbursed $0.7 million and $3.1 million, respectively, from us, including expenses the Investment Adviser incurred on behalf of the Administrator, for the services described above.

 

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PENNANTPARK INVESTMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

JUNE 30, 2016

(Unaudited)

 

4. INVESTMENTS

Purchases of investments, including PIK interest, for the three and nine months ended June 30, 2016 totaled $94.7 million and $317.7 million, respectively. For the same periods in the prior year, purchases of investments, including PIK interest, totaled $115.7 million and $352.5 million, respectively. Sales and repayments of investments for the three and nine months ended June 30, 2016 totaled $103.1 million and $304.1 million, respectively. For the same periods in the prior year, sales and repayments of investments totaled $107.0 million and $289.5 million, respectively.

Investments and cash and cash equivalents consisted of the following:

 

     June 30, 2016      September 30, 2015  

Investment Classification

   Cost      Fair Value      Cost      Fair Value  

First lien

   $ 444,934,975       $ 421,969,400       $ 404,291,400       $ 399,237,158   

Second lien

     533,717,171         508,613,747         631,936,443         612,552,913   

Subordinated debt / corporate notes

     188,834,118         175,408,900         227,915,734         182,467,798   

Equity and partnership interests

     191,976,438         130,589,044         160,093,585         104,789,964   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investments

     1,359,462,702         1,236,581,091         1,424,237,162         1,299,047,833   
  

 

 

    

 

 

    

 

 

    

 

 

 

Cash and cash equivalents

     38,106,415         37,872,854         49,637,415         49,619,256   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investments, cash and cash equivalents

   $ 1,397,569,117       $ 1,274,453,945       $ 1,473,874,577       $ 1,348,667,089   
  

 

 

    

 

 

    

 

 

    

 

 

 

The table below describes investments by industry classification and enumerates the percentage, by fair value, of the total portfolio assets (excluding cash equivalents) in such industries as of:

 

                                                                 

Industry Classification

   June 30, 2016     September 30, 2015  

Hotels, Motels, Inns and Gaming

     14     14

Personal, Food and Miscellaneous Services

     11        11   

Consumer Products

     10        8   

Business Services

     7        6  

Energy and Utilities

     6        6  

Distribution

     5        4   

Environmental Services

     5        4  

Oil and Gas

     5        6   

Aerospace and Defense

     4        2   

Manufacturing / Basic Industries

     4        1   

Media

     4        4   

Auto Sector

     3        2  

Printing and Publishing

     3        1   

Retail

     3        4  

Building Materials

     2        9   

Buildings and Real Estate

     2        3  

Electronics

     2        1  

Financial Services

     2        3  

Healthcare, Education and Childcare

     2        1   

Other Media

     2        3   

Chemicals, Plastics and Rubber

     1        2  

Other

     3        5   
  

 

 

   

 

 

 

Total

     100     100 %
  

 

 

   

 

 

 

 

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PENNANTPARK INVESTMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

JUNE 30, 2016

(Unaudited)

 

5. FAIR VALUE OF FINANCIAL INSTRUMENTS

Fair value, as defined under ASC 820, Fair Value Measurement, or 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 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 and Credit Facility are classified as Level 3. 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 inputs into the determination of fair value may require significant management judgment or estimation. Even if observable market data are available, such information may be the result of consensus pricing information, disorderly transactions or broker quotes which include a disclaimer that the broker would not be held to such a price in an actual transaction. The non-binding nature of consensus pricing and/or quotes accompanied by disclaimer would result in classification as Level 3 information, assuming no additional corroborating evidence was available. Corroborating evidence that would result in classifying these non-binding broker/dealer bids as a Level 2 asset includes observable orderly market-based transactions for the same or similar assets or other relevant observable market-based inputs that may be used in pricing an asset.

Our investments are generally structured as debt and equity investments in the form of senior secured debt, mezzanine debt and equity co-investments. The transaction price, excluding transaction costs, is typically the best estimate of fair value at inception. Ongoing reviews by our Investment Adviser and independent valuation firms are based on an assessment of each underlying investment, incorporating valuations that consider the evaluation of financing and sale transactions with third parties, expected cash flows and market-based information including comparable transactions, performance multiples and yields, among other factors. These non-public investments valued using unobservable inputs are included in Level 3 of the fair value hierarchy.

A review of fair value hierarchy classifications is conducted on a quarterly basis. Changes in our ability to observe valuation inputs may result in a reclassification for certain financial assets or liabilities. Reclassifications impacting Level 3 of the fair value hierarchy are reported as transfers in or out of the Level 3 category as of the end of the quarter in which the reclassifications occur. During the nine months ended June 30, 2016, our ability to observe valuation inputs resulted in one reclassification of an asset from Level 2 to 1. During the nine months ended June 30, 2015, there was one reclassification from Level 2 to 3 and one reclassification from Level 3 to 2.

In addition to using the above inputs in cash equivalents, investments, our Notes and our Credit Facility 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. See Note 2.

As outlined in the table below, some of our Level 3 investments using a market approach valuation technique are valued using the average of the bids from brokers or dealers. The bids typically include a disclaimer, have no corroborating evidence, may be the result of a disorderly transaction and may be the result of consensus pricing. 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 bids do not reflect the fair value on an investment, it may independently value such investment by using the valuation procedure that it uses with respect to assets for which market quotations are not readily available.

The remainder of our portfolio and our long-term Credit Facility are valued using a market comparable or an enterprise market value technique. 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, 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, the pricing indicated by the external event, excluding transaction costs, is used to corroborate the valuation. When using earnings multiples to value a portfolio company, the multiple used requires the use of judgment and estimates in determining how a market participant would price such an asset. Generally, the sensitivity of unobservable inputs or combination of inputs such as industry comparable companies, market outlook, consistency, discount rates and reliability of earnings and prospects for growth, or lack thereof, affects the multiple used in pricing an investment. As a result, any change in any one of those factors may have a significant impact on the valuation of an investment.

 

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PENNANTPARK INVESTMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

JUNE 30, 2016

(Unaudited)

 

Our Level 3 valuation techniques, unobservable inputs and ranges were categorized as follows for ASC 820 purposes:

 

Asset Category

   Fair Value at
June 30, 2016
     Valuation Technique    Unobservable Input    Range of Input
(Weighted Average)

Debt investments

   $ 212,767,114       Market Comparable    Broker/Dealer bids or quotes    N/A

Debt investments

     893,224,933       Market Comparable    Market Yield    9.3% – 19.8% (13.0%)

Equity investments

     129,763,805       Enterprise Market Value    EBITDA multiple    4.4x – 21.3x (8.1x)
  

 

 

          

Total Level 3 investments

   $ 1,235,755,852            
  

 

 

          

Long-Term Credit Facility

   $ 101,067,312       Market Comparable    Market Yield    3.8%
  

 

 

          

Asset Category

   Fair Value at
September 30, 2015
     Valuation Technique    Unobservable Input    Range of Input
(Weighted Average)

Debt investments

   $ 281,455,418       Market Comparable    Broker/Dealer bids or quotes    N/A

Debt investments

     912,802,451       Market Comparable    Market Yield    9.6% – 34.7% (14.1%)

Equity investments

     2,715,722       Market Comparable    Broker/Dealer bids or quotes    N/A

Equity investments

     100,453,864       Enterprise Market Value    EBITDA multiple    3.4x – 22.5x (9.2x)
  

 

 

          

Total Level 3 investments

   $ 1,297,427,455      
  

 

 

          

Long-Term Credit Facility

   $ 132,356,860       Market Comparable    Market Yield    3.4%
  

 

 

          

Our investments, cash and cash equivalents, Credit Facility and our Notes were categorized as follows in the fair value hierarchy for ASC 820 purposes:

 

                                                                                                                               
     Fair Value at June 30, 2016  

Description

   Fair Value      Level 1      Level 2      Level 3  

Debt investments

   $ 1,105,992,047       $       $       $ 1,105,992,047   

Equity investments

     130,589,044         825,239                 129,763,805   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investments

     1,236,581,091         825,239                 1,235,755,852   

Cash and cash equivalents

     37,872,854         37,872,854                   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investments and cash and cash equivalents

   $ 1,274,453,945       $ 38,698,093       $       $ 1,235,755,852   
  

 

 

    

 

 

    

 

 

    

 

 

 

Long-Term Credit Facility

   $ 101,067,312       $       $       $ 101,067,312   

2019 Notes

     249,675,000                 249,675,000           

2025 Notes

     70,566,000         70,566,000                   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total debt

   $ 421,308,312       $ 70,566,000       $ 249,675,000       $ 101,067,312   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

                                                                                                                               
     Fair Value at September 30, 2015  

Description

   Fair Value      Level 1      Level 2      Level 3  

Debt investments

   $ 1,194,257,869       $       $       $ 1,194,257,869   

Equity investments

     104,789,964                 1,620,378         103,169,586   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investments

     1,299,047,833                 1,620,378         1,297,427,455   

Cash and cash equivalents

     49,619,256         49,619,256                   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investments and cash and cash equivalents

   $ 1,348,667,089       $ 49,619,256       $ 1,620,378       $ 1,297,427,455   
  

 

 

    

 

 

    

 

 

    

 

 

 

Long-Term Credit Facility

   $ 132,356,860       $       $       $ 132,356,860   

2019 Notes

     253,102,500                 253,102,500           

2025 Notes

     71,136,000         71,136,000                  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total debt

   $ 456,595,360       $ 71,136,000       $ 253,102,500       $ 132,356,860   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

PENNANTPARK INVESTMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

JUNE 30, 2016

(Unaudited)

 

The tables below show a reconciliation of the beginning and ending balances for fair valued investments measured using significant unobservable inputs (Level 3):

 

     Nine Months Ended June 30, 2016  

Description

   Debt
    investments    
    Equity
    investments    
    Totals  

Beginning Balance

   $ 1,194,257,869     $ 103,169,586      $ 1,297,427,455  

Net realized (losses) gains

     (88,191,975 )     6,055,002        (82,136,973 )

Net unrealized appreciation (depreciation)

     8,391,489       (5,471,142     2,920,347  

Purchases, PIK interest, net discount accretion and non-cash exchanges

     275,592,605       46,056,651        321,649,256  

Sales, repayments and non-cash exchanges

     (284,057,941     (20,046,292     (304,104,233

Transfers in/out of Level 3

                    
  

 

 

   

 

 

   

 

 

 

Ending Balance

   $ 1,105,992,047     $ 129,763,805      $ 1,235,755,852  
  

 

 

   

 

 

   

 

 

 

Net change in unrealized depreciation reported within the net change in unrealized depreciation on investments in our Consolidated Statements of Operations attributable to our Level 3 assets still held at the reporting date.

   $ (41,585,936)     $ (3,480,364)      $ (45,066,300)  
  

 

 

   

 

 

   

 

 

 
     Nine Months Ended June 30, 2015  

Description

   Debt
investments
    Equity
investments
    Totals  

Beginning Balance

   $ 1,161,475,899     $ 111,862,237     $ 1,273,338,136   

Net realized gains

     2,962,343       28,883,600        31,845,943   

Net unrealized depreciation

     (69,360,865 )     (30,048,498 )     (99,409,363 )

Purchases, PIK interest, net discount accretion and non-cash exchanges

     302,313,341       39,307,424       341,620,765   

Sales, repayments and non-cash exchanges

     (248,604,839 )     (40,940,666 )     (289,545,505 )

Transfers in/out of Level 3

     29,146,379       (1,234,984 )     27,911,395   
  

 

 

   

 

 

   

 

 

 

Ending Balance

   $ 1,177,932,258     $ 107,829,113     $     1,285,761,371   
  

 

 

   

 

 

   

 

 

 

Net change in unrealized depreciation reported within the net change in unrealized depreciation on investments in our Consolidated Statements of Operations attributable to our Level 3 assets still held at the reporting date.

   $ (66,210,579 )   $ (16,287,835 )   $ (82,498,414
  

 

 

   

 

 

   

 

 

 

The table below shows a reconciliation of the beginning and ending balances for carrying/fair valued liabilities measured using significant unobservable inputs (Level 3):

 

Long-Term Credit Facility                                                                                 

   Nine Months Ended June 30,  
   2016     2015  

Beginning Balance (cost – $106,864,300 and $305,226,300, respectively)

   $ 102,356,860      $ 304,847,870  

Net change in unrealized depreciation included in earnings

     (11,569,171     (2,432,310 )

Borrowings (1)

     242,664,923        249,000,000  

Repayments (1)

     (232,385,300     (228,689,600 )

Transfers in and/or out of Level 3

             
  

 

 

   

 

 

 

Ending Balance (cost – $117,143,923 and $325,536,700, respectively)

   $ 101,067,312      $ 322,725,960  

Temporary draws outstanding, at cost

            26,000,000  
  

 

 

   

 

 

 

Ending Balance (cost – $117,143,923 and $351,536,700, respectively)

   $ 101,067,312      $ 348,725,960  
  

 

 

   

 

 

 

 

(1)  Excludes temporary draws.

As of June 30, 2016, we had outstanding non-U.S. dollar borrowings on our Credit Facility. Net change in fair value from foreign currency translating on outstanding borrowings is listed below:

 

Foreign Currency

   Local Currency      Original
Borrowing Cost
     Current Value      Reset Date    Change in Fair
Value
 

British Pound

   £ 53,000,000       $ 84,143,923       $ 70,556,621       July 1, 2016    $ (13,587,302)   

 

As of September 30, 2015, we had outstanding non-U.S. dollar borrowings on our Credit Facility. Net change in fair value from foreign currency translating on outstanding borrowings is listed below:

 

   

Foreign Currency

   Local Currency      Original
Borrowing Cost
     Current Value      Reset Date    Change in Fair
Value
 

British Pound

   £ 28,000,000       $ 46,864,300       $ 42,356,860       October 1, 2015    $ (4,507,440)   

 

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Table of Contents

PENNANTPARK INVESTMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

JUNE 30, 2016

(Unaudited)

 

The carrying value of our consolidated financial liabilities approximates fair value. We adopted 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 and our Notes. We elected to use the fair value option for the Credit Facility and our Notes to align the measurement attributes of both our assets and liabilities while mitigating volatility in earnings from using different measurement attributes. 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 and our Notes are reported in our Consolidated Statements of Operations. We elected not to apply ASC 825-10 to any other financial assets or liabilities, including the SBA debentures. For the three and nine months ended June 30, 2016, our Credit Facility and our Notes had a net change in unrealized (appreciation) depreciation of $(2.4) million and $15.6 million, respectively. For the three and nine months ended June 30, 2015, our Credit Facility and our Notes had a net change in unrealized depreciation of $0.6 million and $2.3 million, respectively. As of June 30, 2016 and September 30, 2015, net unrealized depreciation on our Credit Facility and our Notes totaled $17.1 million and $1.5 million, respectively. We use a nationally recognized independent valuation service to measure the fair value of our Credit Facility and our 2019 Notes in a manner consistent with the valuation process that the board of directors uses to value investments. Our 2025 Notes trade on the NYSE, under the ticker “PNTA” and we use the closing price on the exchange to determine their fair value.

6. TRANSACTIONS WITH AFFILIATED COMPANIES

An affiliated portfolio company is a company in which we have ownership of 5% or more of its voting securities. A portfolio company is generally presumed to be a non-controlled affiliate when we own at least 5% but 25% or less of its voting securities and a controlled affiliate when we own more than 25% of its voting securities. Transactions related to our funded investments with both controlled and non-controlled affiliates for the nine months ended June 30, 2016 were as follows:

 

Name of Investment

   Fair Value at
September 30, 2015 (1)
     Purchases of /
Advances to
Affiliates (1), (2)
    Sale of /
Distributions
from Affiliates (1)
    Income
       Accrued       
     Fair Value at
June 30, 2016 (1)
     Net Realized Gains
(Losses)
 

Controlled Affiliates

               

MidOcean JF Holdings Corp.
(JF Acquisition, LLC)

   $ 6,900,207       $ 14,318,325      $  —      $  —       $ 20,911,624       $   

RAM Energy LLC

     72,759,582         6,072,790               6,237,571         68,060,677           

Superior Digital Displays Holdings, Inc.

     27,165,861         7,417,561               3,653,132         34,033,916           

Non-Controlled Affiliates

               

Affinion Group Holdings, Inc. (3)

             341,025               1,568,698         51,554,522           

Corfin Industries LLC (3)

             24,351,000        (118,500     1,650,034         25,492,101           

DirectBuy Holdings, Inc.

     6,284,194         (751,537                    3,004,272           

EnviroSolutions Holdings, Inc.

     20,464,829                       693,291         21,274,488           

NCP-Performance, L.P.

                                           (3,750,000

New Gulf Resources, LLC (4)

                                   35,079,427           

PAS International Holdings, Inc.

     11,432,674         2,800,650        (11,132     148,801         10,014,228           

Service Champ, Inc.

     32,388,562                       2,762,433         33,459,358           

TRAK Acquisition Corp.

     24,932,845         15,000,000        (12,500,000)        2,218,391         29,081,376           

Total Controlled and Non-Controlled Affiliates

   $ 202,328,754       $ 69,549,814      $ (12,629,632   $ 18,932,351       $ 331,965,989       $ (3,750,000
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

 

(1)  Excluding delayed draw investments.
(2)  Includes PIK and PIK adjustments.
(3)  Became a non-controlled affiliate during the three months ended December 31, 2015.
(4)  Became a non-controlled affiliate during the three months ended June 30, 2016.

7. CHANGE IN NET ASSETS RESULTING FROM OPERATIONS PER COMMON SHARE

The following information sets forth the computation of basic and diluted per share net increase in net assets resulting from operations:

 

     Three Months Ended June 30,      Nine Months Ended June 30,  
     2016      2015      2016     2015  

Numerator for net increase (decrease) in net assets resulting from operations

   $ 27,832,874       $ 4,935,950       $ (8,972,672 )   $ (11,631,043 )

Denominator for basic and diluted weighted average shares

     71,060,836         74,779,503         71,809,792        74,988,442   

Basic and diluted net increase (decrease) in net assets resulting from operations

   $ 0.39       $ 0.07       $ (0.12 )   $ (0.16 )

8. CASH AND CASH EQUIVALENTS

Cash equivalents represent cash in money market funds pending investment in longer-term portfolio holdings. Our portfolio may consist of temporary investments in U.S. Treasury Bills (of varying maturities), repurchase agreements, money market funds or repurchase agreement-like treasury securities. These temporary investments with original maturities of 90 days or less are deemed cash equivalents and are included in the Consolidated Schedule of Investments. At the end of each fiscal quarter, we may take proactive steps to preserve investment flexibility for the next quarter by investing in cash equivalents, which is dependent upon the composition of our total assets at quarter-end. We may accomplish this in several ways, including purchasing U.S. Treasury Bills and closing out our positions on a net cash basis after quarter-end, temporarily drawing down on the Credit Facility, or utilizing repurchase agreements or other balance sheet transactions as are deemed appropriate for this purpose. These amounts are excluded from average adjusted gross assets for purposes of computing the Investment Adviser’s management fee. U.S. Treasury Bills with maturities greater than 60 days from the time of purchase are valued consistent with our valuation policy. As of June 30, 2016 and September 30, 2015, cash and cash equivalents consisted of $37.9 million and $49.6 million at fair value, respectively.

 

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PENNANTPARK INVESTMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

JUNE 30, 2016

(Unaudited)

 

9. FINANCIAL HIGHLIGHTS

Below are the financial highlights:

 

             Nine Months Ended June 30,          
     2016     2015  

Per Share Data:

    

Net asset value, beginning of period

   $ 9.82     $ 11.03  

Net investment income (1)

     0.77       0.83  

Net realized and unrealized loss (1)

     (0.89 )     (0.99 )
  

 

 

   

 

 

 

Net decrease in net assets resulting from operations (1)

     (0.12 )     (0.16 )

Distributions to stockholders (1), (2)

     (0.84     (0.84

Repurchase of common stock (1)

     0.08        0.01   
  

 

 

   

 

 

 

Net asset value, end of period

   $ 8.94     $ 10.04  
  

 

 

   

 

 

 

Per share market value, end of period

   $ 6.83     $ 8.78  
  

 

 

   

 

 

 

Total return* (3)

     19.77 %     (17.07 )%

Shares outstanding at end of period

     71,060,836        74,259,698   
  

 

 

   

 

 

 

Ratios**/ Supplemental Data:

    

Ratio of operating expenses to average net assets (4), (5), (6)

     6.71 %     6.83 %

Ratio of interest and expenses on debt to average net assets

     4.15 %     3.32 %
  

 

 

   

 

 

 

Ratio of total expenses to average net assets (5), (6)

     10.86 %     10.15 %

Ratio of net investment income to average net assets (6)

     11.20 %     10.47 %

Net assets at end of period

   $ 635,554,512     $ 745,543,177  
  

 

 

   

 

 

 

Weighted average debt outstanding (7)

   $         631,748,088     $         577,509,319  
  

 

 

   

 

 

 

Weighted average debt per share (1), (7)

   $ 8.80     $ 7.70  

Asset coverage per unit (8)

   $ 2,509      $ 2,772   

Portfolio turnover ratio

     32.49 %     29.74 %

 

 

* Not annualized for periods less than one year.

 

** Annualized for periods less than one year.

 

(1)  Based on the weighted average shares outstanding for the respective periods.

 

(2)  The tax status of distributions is calculated in accordance with income tax regulations, which may differ from amounts determined under GAAP, and reported on Form 1099-DIV each calendar year.

 

(3)  Based on the change in market price per share during the period and takes into account distributions, if any, reinvested in accordance with our dividend reinvestment plan.

 

(4)  Excludes debt related costs.

 

(5)  For the nine months ended June 30, 2016, the ratio of operating expenses before the waiver of certain Management Fees to average net assets was 7.72% and the ratio of total expenses before the waiver of certain Management Fees to average net assets was 11.87%.

 

(6)  Does not annualize non-recurring provisions for taxes.

 

(7)  Includes SBA debentures outstanding.

 

(8)  The asset coverage ratio for a class of senior securities representing indebtedness is calculated on our consolidated total assets, less all liabilities and indebtedness not represented by senior securities, divided by the senior securities representing indebtedness. This asset coverage ratio is multiplied by $1,000 to determine the asset coverage per unit. These amounts exclude our SBIC Funds’ SBA debentures from our asset coverage per unit computation pursuant to an exemptive relief letter provided by the SEC in June 2011.

10. DEBT

Our annualized weighted average cost of debt for the nine months ended June 30, 2016 and 2015, inclusive of the fee on the undrawn commitment on the Credit Facility and amortized upfront fees on SBA debentures but excluding debt issuance costs, was 4.36% and 4.55%, respectively. In accordance with the 1940 Act, with certain limited exceptions, we are only allowed to borrow amounts such that we are in compliance with our asset coverage ratio after such borrowing, excluding SBA debentures, pursuant to exemptive relief from the SEC received in June 2011.

Credit Facility

As of June 30, 2016, we have a $545 million multi-currency Credit Facility with certain lenders and SunTrust Bank, acting as administrative agent, and JPMorgan Chase Bank, N.A., acting as syndication agent for the lenders. As of June 30, 2016 and September 30, 2015, there was $117.1 million and $136.9 million (including a temporary draw of $30.0 million), respectively, in outstanding borrowings under the Credit Facility, with a weighted average interest rate at the time of 2.82% and 3.07%, exclusive of the fee on undrawn commitments of 0.375%. The Credit Facility is a five-year revolving facility with a stated maturity date of June 25, 2019, a one-year term-out period following its fourth year and pricing set at 225 basis points over LIBOR. The Credit Facility is secured by substantially all of our assets excluding assets held by our SBIC Funds.

 

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Table of Contents

PENNANTPARK INVESTMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

JUNE 30, 2016

(Unaudited)

 

SBA Debentures

Our SBIC Funds are 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 LP with $75.0 million of equity capital and it had SBA debentures outstanding of $150.0 million as of June 30, 2016. We have funded SBIC II with $47.5 million of equity capital, and it had SBA debentures outstanding of $47.5 million and commitments from the SBA for another $27.5 million of debentures. 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-year U.S. Treasury Notes. Under current SBA regulations, a SBIC may individually borrow to a maximum of $150 million, which is up to twice its potential regulatory capital, and per recent regulatory changes, as part of a group of SBICs under common control may borrow a maximum of $350 million in the aggregate.

As of June 30, 2016 and September 30, 2015, our SBIC Funds had $225.0 million in debt commitments, of which $197.5 million and $150.0 million was drawn, respectively. As of June 30, 2016 and September 30, 2015, the unamortized fees on the SBA debentures was $4.4 million and $3.7 million, respectively. The SBA debentures’ upfront fees of 3.43% consist of a commitment fee of 1.00% and an issuance discount of 2.43%, which are being amortized.

Our fixed-rate SBA debentures were as follows:

 

Issuance Dates

  Maturity   Fixed All-in
coupon rate(1),  (2)
    As of June 30, 2016
Principal Balance
    As of September 30, 2015
Principal Balance
 

September 22, 2010  

  September 1, 2020       3.50   $ 500,000      $ 500,000   

March 29, 2011  

  March 1, 2021       4.46        44,500,000        44,500,000   

September 21, 2011  

  September 1, 2021       3.38        105,000,000        105,000,000   

March 23, 2016  

  March 1, 2026       2.86        22,500,000          

September 21, 2016 (3)  

  September 1, 2026 (3)       1.40 (4)      25,000,000          

Weighted Average Rate / Total  

      3.31   $ 197,500,000      $ 150,000,000   
   

 

 

   

 

 

   

 

 

 

 

  (1)  Excluding 3.43% of upfront fees.
  (2)  As of September 30, 2015, the fixed all-in coupon rate was 3.70%.
  (3)  Represents expected next pooling date and maturity date.
  (4)  Represents a temporary financing that will reset to a market-driven rate in September 2016 and remain fixed thereafter for ten years.

The SBIC program is designed to stimulate the flow of capital into eligible businesses. Under SBA regulations, our SBIC Funds are 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 of June 30, 2016, our SBIC Funds were in compliance with their regulatory requirements.

2019 Notes

As of June 30, 2016 and September 30, 2015, we had $250.0 million in aggregate principal amount of 2019 Notes outstanding. Interest on the 2019 Notes is paid semi-annually on April 1 and October 1, at a rate of 4.50% per year. The 2019 Notes mature on October 1, 2019. The 2019 Notes are general, unsecured obligations and rank equal in right of payment with all of our existing and future senior unsecured indebtedness. The 2019 Notes are structurally subordinated to our SBA debentures and the assets pledged or secured under our Credit Facility.

2025 Notes

As of June 30, 2016 and September 30, 2015, we had $71.3 million in aggregate principal amount of 2025 Notes outstanding. Interest on the 2025 Notes is paid quarterly on February 1, May 1, August 1 and November 1, at a rate of 6.25% per year. The 2025 Notes mature on February 1, 2025. The 2025 Notes are general, unsecured obligations and rank equal in right of payment with all of our existing and future senior unsecured indebtedness. The 2025 Notes are structurally subordinated to our SBA debentures and the assets pledged or secured under our Credit Facility.

11. COMMITMENTS AND CONTINGENCIES

From time to time, we, the Investment Adviser or the Administrator may be a party to legal proceedings in the ordinary course of business, including proceedings relating to the enforcement of our rights under contracts with our portfolio companies. While the outcome of these legal proceedings cannot be predicted with certainty, we do not expect that these proceedings will have a material effect upon our financial condition or results of operations. Unfunded debt and equity investments, if any, are disclosed in the Consolidated Schedules of Investments. As of June 30, 2016 and September 30, 2015, we had $3.1 million and $19.7 million, respectively, in commitments to fund investments.

12. STOCK REPURCHASE PROGRAM

On May 6, 2015, we announced a share repurchase plan which allows us to repurchase up to $35 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 program expired on May 6, 2016. During the three and nine months ended June 30, 2016, we repurchased zero and 1.9 million shares of common stock, respectively, in open market transactions for an aggregate cost (including transaction costs) of zero and $12.2 million, respectively. From May 6, 2015 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 $30.1 million.

 

24


Table of Contents

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

PennantPark Investment Corporation and its Subsidiaries:

We have reviewed the accompanying consolidated statements of assets and liabilities of PennantPark Investment Corporation and its Subsidiaries (collectively referred to as the “Company”), including the consolidated schedule of investments, as of June 30, 2016, the consolidated statements of operations for the three and nine months ended June 30, 2016 and 2015, and the consolidated statements of changes in net assets and cash flows for the nine months ended June 30, 2016 and 2015. These consolidated financial statements are the responsibility of the Company’s management.

We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to the accompanying consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board, the consolidated statement of assets and liabilities of the Company, including the consolidated schedule of investments, as of September 30, 2015, and the related consolidated statements of operations, changes in net assets, and cash flows for the year then ended (not presented herein); and in our report dated November 10, 2015, we expressed an unqualified opinion on those financial statements.

/s/ RSM US LLP

New York, New York

August 8, 2016

 

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Table of Contents
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 our 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;

 

    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 European sovereign debt and other world economic 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.

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 the SEC, 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 Securities Exchange Act of 1934, or 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 through debt and equity investments primarily in U.S. middle-market companies in the form of senior secured debt, mezzanine debt and equity investments.

We believe middle-market companies offer attractive risk-reward to investors due to the limited amount of capital available for such companies. We seek to create a diversified portfolio that includes senior secured debt, mezzanine 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 the Standard & 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 to U.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 Credit Facility, SBA debentures, proceeds from the rotation of our portfolio and proceeds from public and private offerings of securities to finance our investment objectives.

 

 

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Organization and Structure of PennantPark Investment Corporation

PennantPark Investment Corporation, a Maryland corporation organized in January 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.

Our wholly owned subsidiaries, SBIC LP and SBIC II, were organized as Delaware limited partnerships in 2010 and 2012, respectively. SBIC LP and SBIC II received licenses from the SBA to operate as SBICs under Section 301(c) of the 1958 Act. Our SBIC Funds’ 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 criteria used by PennantPark 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 our SBIC Funds under their investment management agreements. Our SBIC Funds investment management agreements do 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 our SBIC Funds under their administration agreements with us. Our board of directors, a majority of whom are independent of us, supervises our activities, and the Investment Adviser manages our day-to-day activities.

Revenues

We generate revenue in the form of interest income on the debt securities we hold and capital gains and distributions, if any, on investment securities that we may acquire in portfolio companies. Our debt investments, whether in the form of senior secured debt or mezzanine debt, typically have terms 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, some of 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 managerial assistance and possibly consulting fees. Loan origination fees, OID, market discount or premium and deferred financing costs on 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 cost, as interest expense. We record prepayment penalties on loans and debt securities 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.

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 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 net asset value, 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.

 

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PORTFOLIO AND INVESTMENT ACTIVITY

As of June 30, 2016, our portfolio totaled $1,236.6 million and consisted of $422.0 million of senior secured debt, $508.6 million of second lien secured debt, $175.4 million of subordinated debt and $130.6 million of preferred and common equity. Our debt portfolio consisted of 81% variable-rate investments (including 77% with a LIBOR or prime floor) and 19% fixed-rate investments. As of June 30, 2016, we had three companies on non-accrual, representing 3.1% and 1.6% of our overall portfolio on a cost and fair value basis, respectively. Overall, the portfolio had net unrealized depreciation of $123.1 million as of June 30, 2016. Our overall portfolio consisted of 59 companies with an average investment size of $21.0 million, had a weighted average yield on interest bearing debt investments of 11.8% and was invested 34% in senior secured debt, 41% in second lien secured debt, 14% in subordinated debt and 11% in preferred and common equity.

As of September 30, 2015, our portfolio totaled $1,299.0 million and consisted of $399.2 million of senior secured debt, $612.5 million of second lien secured debt, $182.5 million of subordinated debt and $104.8 million of preferred and common equity. Our debt portfolio consisted of 71% variable-rate investments (including 65% with a LIBOR or prime floor) and 29% fixed-rate investments. As of September 30, 2015, we had four companies on non-accrual, representing 9.4% and 5.5% of our overall portfolio on a cost and fair value basis, respectively. Overall, the portfolio had net unrealized depreciation of $125.2 million as of September 30, 2015. Our overall portfolio consisted of 61 companies with an average investment size of $21.3 million, had a weighted average yield on interest bearing debt investments of 12.1% and was invested 31% in senior secured debt, 47% in second lien secured debt, 14% in subordinated debt and 8% in preferred and common equity.

For the three months ended June 30, 2016, we invested $90.5 million in eight existing portfolio companies with a weighted average yield on debt investments of 12.4%. Sales and repayments of investments for the three months ended June 30, 2016 totaled $103.1 million. For the nine months ended June 30, 2016, we invested $307.3 million in six new and 18 existing portfolio companies with a weighted average yield on debt investments of 11.9%. Sales and repayments of investments for the nine months ended June 30, 2016 totaled $304.1 million.

For the three months ended June 30, 2015, we invested $113.3 million in three new and nine existing portfolio companies with a weighted average yield on debt investments of 10.8%. Sales and repayments of investments for the three months ended June 30, 2015 totaled $107.0 million. For the nine months ended June 30, 2015, we invested $344.8 million in eight new and 22 existing portfolio companies with a weighted average yield on debt investments of 12.1%. Sales and repayments of investments for the nine months ended June 30, 2015 totaled $289.5 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 the 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.

Valuation of Portfolio Investments

We expect that there may not be readily available market values for many of our 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 investments generally consist 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 by 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.

 

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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 and our Credit Facility are classified as Level 3. 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 in cash equivalents, investments, our Notes and our Credit Facility 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.

The carrying value of our consolidated financial liabilities approximates fair value. We adopted 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 and our Notes. We elected to use the fair value option for the Credit Facility and our Notes to align the measurement attributes of both our assets and liabilities while mitigating volatility in earnings from using different measurement attributes. 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 and our Notes are reported in our Consolidated Statements of Operations. We elected not to apply ASC 825-10 to any other financial assets or liabilities, including the SBA debentures. For the three and nine months ended June 30, 2016, our Credit Facility and our Notes had a net change in unrealized (appreciation) depreciation of $(2.4) million and $15.6 million, respectively. For the three and nine months ended June 30, 2015, our Credit Facility and our Notes had a net change in unrealized depreciation of $0.6 million and $2.3 million, respectively. As of June 30, 2016 and September 30, 2015, net unrealized depreciation on our Credit Facility and our Notes totaled $17.1 million and $1.5 million, respectively. We use a nationally recognized independent valuation service to measure the fair value of our Credit Facility and our 2019 Notes in a manner consistent with the valuation process that the board of directors uses to value investments. Our 2025 Notes trade on the NYSE under the ticker “PNTA,” and we use the closing price on the exchange to determine their fair value.

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 collectible. 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.

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 investment values, our Credit Facility and our 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 U.S. dollars. Any foreign currency amounts are translated into U.S. dollars on the following basis:

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 Interest or PIK

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. For us to maintain our status as a RIC, substantially all of this income must be paid out to stockholders in the form of distributions, even though we may not collect any cash with respect to PIK securities.

Federal Income Taxes

We have elected to be taxed, and intend to qualify annually to maintain our election to be taxed, as a RIC under Subchapter M of the Code. To maintain our RIC tax election, we must, among other requirements, meet certain source-of-income and quarterly asset diversification requirements. We also must annually distribute dividends to our stockholders 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, out of the assets legally available for distribution. 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 to our stockholders in respect of each calendar year of an amount generally at least equal to the sum of (1) 98% of our net ordinary income for the calendar year, (2) 98.2% of the sum of our capital gain net income (i.e. the excess, if any, of our capital gains over capital losses) for the one-year period ending on October 31 of the calendar year plus (3) the sum of any net ordinary income plus capital gain net income for preceding years that was not distributed during such years and on which we paid no federal income tax. 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 retain such net capital gains or investment company taxable income in the future, subject to maintaining our ability to be subject to tax as a RIC, to provide us with additional liquidity.

 

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Because federal income tax regulations differ from GAAP, distributions in accordance with tax regulations may differ from net investment income and net realized gains 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 tax character. Temporary differences arise when certain items of income, expense, gain or loss are recognized at some time in the future.

RESULTS OF OPERATIONS

Set forth below are the results of operations for the three and nine months ended June 30, 2016 and 2015.

Investment Income

Investment income for the three and nine months ended June 30, 2016 was $35.5 million and $109.9 million, respectively, and was attributable to $14.3 million and $46.7 million from senior secured loans, $14.9 million and $46.2 million from second lien secured debt and the remainder from subordinated debt, preferred and common equity, respectively. This compares to investment income for the three and nine months ended June 30, 2015, which was $40.6 million and $122.5 million, respectively, and was attributable to $12.3 million and $42.6 million from senior secured loans, $19.5 million and $54.1 million from second lien secured debt, $7.2 million and $23.5 million from subordinated debt and the remainder from preferred and common equity, respectively. The decrease in investment income compared with the same periods in the prior year was primarily due to a lower yielding portfolio.

Expenses

Net expenses for the three and nine months ended June 30, 2016 totaled $17.7 million and $54.5 million, respectively. Base management fee for the same periods totaled $5.2 million (after a base management fee waiver of $1.0 million) and $15.8 million (after a base management fee waiver of $3.0 million), incentive fee totaled $3.4 million (after an incentive fee waiver of $0.6 million) and $10.6 million (after an incentive fee waiver of $2.0 million), debt related interest and expenses totaled $7.0 million and $20.7 million, general and administrative expenses totaled $1.7 million and $5.4 million and provision for taxes totaled $0.4 million and $2.0 million, respectively. This compares to expenses for the three and nine months ended June 30, 2015, which totaled $20.0 million and $60.3 million, respectively. Base management fee for the same periods totaled $6.5 million and $20.1 million, incentive fee totaled $5.2 million and $15.6 million, debt related interest and expenses totaled $6.6 million and $19.7 million and general and administrative expenses totaled $1.7 million and $4.9 million, respectively. The decrease in expenses compared with the same periods in the prior year was primarily due to the Management Fee waiver and lower portfolio size partially offset by a higher provision for taxes.

Net Investment Income

Net investment income totaled $17.8 million and $55.5 million, or $0.25 and $0.77 per share, for the three and nine months ended June 30, 2016, respectively. Net investment income totaled $20.7 million and $62.2 million, or $0.28 and $0.83 per share, for the three and nine months ended June 30, 2015, respectively. The decrease in net investment income per share compared to the same periods in the prior year was primarily due to the repayments of higher yielding investments.

Net Realized Gains or Losses

Sales and repayments of investments for the three and nine months ended June 30, 2016 totaled $103.1 million and $304.1 million, respectively, and realized losses totaled $45.5 million and $82.1 million, respectively. Sales and repayments of investments for the three and nine months ended June 30, 2015 totaled $107.0 million and $289.5 million, respectively, and realized gains totaled $13.8 million and $31.9 million, respectively. The increase in realized losses compared with the same periods in the prior year was primarily due to certain portfolio companies sales or restructurings.

Unrealized Appreciation or Depreciation on Investments, Credit Facility and our Notes

For the three and nine months ended June 30, 2016, we reported a net change in unrealized appreciation on investments of $58.0 million and $2.1 million, respectively. For the three and nine months ended June 30, 2015, we reported a net change in unrealized depreciation on investments of $30.2 million and $108.1 million, respectively. As of June 30, 2016 and September 30, 2015, our net unrealized depreciation on investments totaled $123.1 million and $125.2 million, respectively. The net change in unrealized depreciation on our investments was driven primarily by changes in the capital market conditions, financial performance of certain portfolio companies, and the reversal of unrealized depreciation (appreciation) of investments sold or restructured.

For the three and nine months ended June 30, 2016, we reported a net change in unrealized (appreciation) depreciation on our Credit Facility and our Notes of $(2.4) million and $15.6 million, respectively. For the three and nine months ended June 30, 2015, we reported a net change in unrealized depreciation on our Credit Facility and our Notes of $0.6 million and $2.3 million, respectively. The change compared with the same periods in 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 $27.8 million and $(9.0) million, or $0.39 and $(0.12) per share, for the three and nine months ended June 30, 2016, respectively. This compares to a net change in net assets resulting from operations of $4.9 million and $(11.6) million, or $0.07 and $(0.16) per share, for the three and nine months ended June 30, 2015, respectively. The increase in the net change in net assets from operations compared with the same periods in the prior year reflects the change in portfolio investment values during the reporting periods.

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 and proceeds from the rotation of our portfolio and proceeds from public and private offerings of securities to finance our investment objectives.

As of June 30, 2016, we had a $545 million multi-currency Credit Facility with certain lenders and SunTrust Bank, acting as administrative agent, and JPMorgan Chase Bank, N.A., acting as syndication agent for the lenders. As of June 30, 2016 and September 30, 2015, there was $117.1 million and $136.9 million (including a temporary draw of $30.0 million), respectively, in outstanding borrowings under the Credit Facility. The Credit Facility had a weighted average interest rate at the time of 2.82% and 3.07%, respectively, exclusive of the fee on undrawn commitments. The annualized weighted average cost of debt for the nine months ended June 30, 2016 and 2015, inclusive of the fee on the undrawn commitment of 0.375% on the Credit Facility and upfront fees on SBA debentures, was 4.36% and 4.55%, respectively. The Credit Facility is a five-year revolving facility with a stated maturity date of June 25, 2019, a one-year term-out period following its fourth year and pricing is set at 225 basis points over LIBOR. As of June 30, 2016 and September 30, 2015, we had $427.9 million and $408.1 million of unused borrowing capacity under our Credit Facility, respectively, subject to the regulatory restrictions. The Credit Facility is secured by substantially all of our assets excluding assets held by our SBIC Funds.

 

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For a complete list of covenants contained in the Credit Facility, see our Form 8-K filed on June 30, 2014 and the Credit Facility agreement filed as Exhibit 99.2 thereto and incorporated by reference herein. As of June 30, 2016, we were in compliance with the terms of our Credit Facility.

In September 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 is paid semi-annually on April 1 and October 1, at a rate of 4.50% per year. The 2019 Notes mature on October 1, 2019. The 2019 Notes are general, unsecured obligations and rank equal in right of payment with all of our existing and future senior unsecured indebtedness. The 2019 Notes are structurally subordinated to our SBA debentures and the assets pledged or secured under our Credit Facility. Please see our base indenture filed as Exhibit (d)(8) to our post-effective amendment filed on January 22, 2013, or the Base Indenture, and the supplemental indenture filed as Exhibit (d)(11) to our post-effective amendment filed on September 23, 2014 for more information.

In January 2013, we issued $71.3 million in aggregate principal amount of 2025 Notes, after exercise of the over-allotment option, for net proceeds of $68.8 million after underwriting discounts and offering costs. Interest on the 2025 Notes is paid quarterly on February 1, May 1, August 1 and November 1, at a rate of 6.25% per year. The 2025 Notes mature on February 1, 2025. The 2025 Notes are general, unsecured obligations and rank equal in right of payment with all of our existing and future senior unsecured indebtedness. The 2025 Notes are structurally subordinated to our SBA debentures and the assets pledged or secured under our Credit Facility. Please see our Base Indenture and the supplemental indenture filed as Exhibit (d)(9) to our post-effective amendment filed on January 22, 2013 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, SBA debentures or our Notes. 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. For each of the nine month periods ended June 30, 2016 and 2015, we did not issue shares of common stock in connection with an equity offering.

Our SBIC Funds are 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 LP with $75.0 million of equity capital and it had SBA debentures outstanding of $150.0 million as of June 30, 2016. We have funded SBIC II with $47.5 million of equity capital, and it had SBA debentures outstanding of $47.5 million and commitments from the SBA for another $27.5 million of debentures. 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-year U.S. Treasury Notes. Under current SBA regulations, a SBIC may individually borrow to a maximum of $150.0 million, which is up to twice its potential regulatory capital, and per recent regulatory changes, as part of a group of SBICs under common control may borrow a maximum of $350.0 million in the aggregate.

As of June 30, 2016 and September 30, 2015, our SBIC Funds had $225.0 million in debt commitments, of which $197.5 million and $150.0 million was drawn, respectively. As of June 30, 2016 and September 30, 2015, the unamortized fees on the SBA debentures was $4.4 million and $3.7 million, respectively. The SBA debentures’ upfront fees of 3.43% consist of a commitment fee of 1.00% and an issuance discount of 2.43%, which are being amortized.

Our fixed-rate SBA debentures were as follows:

 

Issuance Dates

   Maturity   Fixed All-in
coupon rate(1), (2)
    As of June 30, 2016
Principal Balance
     As of September 30, 2015
Principal Balance
 

September 22, 2010  

   September 1, 2020       3.50   $ 500,000       $ 500,000   

March 29, 2011  

   March 1, 2021       4.46        44,500,000         44,500,000   

September 21, 2011  

   September 1, 2021       3.38        105,000,000         105,000,000   

March 23, 2016  

   March 1, 2026       2.86        22,500,000           

September 21, 2016 (3)

   September 1, 2026 (3)     1.40 (4)      25,000,000           
    

 

 

   

 

 

    

 

 

 

Weighted Average Rate / Total  

       3.31   $ 197,500,000       $ 150,000,000   
    

 

 

   

 

 

    

 

 

 

 

 

(1)  Excluding 3.43% of upfront fees.
(2)  As of September 30, 2015, the fixed all-in coupon rate was 3.70%.
(3)  Represents expected next pooling date and maturity date.
(4)  Represents a temporary financing that will reset to a market-driven rate in September 2016 and remain fixed thereafter for ten years.

The SBIC program is designed to stimulate the flow of capital into eligible businesses. Under SBA regulations, our SBIC Funds are 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 of June 30, 2016, our SBIC Funds were 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 asset coverage ratio is met after such borrowing. As of June 30, 2016 and September 30, 2015, we excluded the principal amounts of our SBA debentures from our asset coverage ratio pursuant to SEC exemptive relief. In 2011, we received exemptive relief from the SEC 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 200% which, while providing increased investment flexibility, also increases our exposure to risks associated with leverage.

At June 30, 2016 and September 30, 2015, we had cash and cash equivalents at fair value of $37.9 million and $49.6 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 provided cash of $34.2 million for the nine months ended June 30, 2016, and our financing activities used cash of $46.0 million for the same period. Our operating activities provided cash from sales and repayments on our investments and our financing activities used cash primarily for our stock repurchase plan.

Our operating activities provided cash of $41.4 million for the nine months ended June 30, 2015, primarily for net purchases of investments. Our financing activities used cash of $24.8 million for the same period, primarily to repay certain amounts under our Credit Facility.

 

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Contractual Obligations

A summary of our significant contractual payment obligations at cost as of June 30, 2016, including borrowings under our various debt facilities and other contractual obligations, is as follows:

 

                                                                                                                                                          
     Payments due by period (in millions)  
     Total      Less than 1 year      1-3 years      3-5 years      More than 5 years  

Credit Facility

   $ 117.1       $       $ 117.1       $       $   

SBA debentures

     197.5                         45.0         152.5   

2019 Notes

     250.0                         250.0           

2025 Notes

     71.3                                 71.3   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total debt outstanding (1)

     635.9                 117.1         295.0         223.8   

Unfunded investments (2)

     3.1                         2.0         1.1   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total contractual obligations

   $ 639.0       $       $ 117.1       $ 297.0       $ 224.9   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)  The annualized weighted average interest rate as of June 30, 2016, excluding debt issuance costs, was 4.02% exclusive of the fee on the undrawn commitment on the Credit Facility and 3.43% of upfront fees on SBA debentures.
(2)  Unfunded debt and equity investments are disclosed in the Consolidated Schedule of Investments.

We have entered into certain contracts under which we have material future commitments. Under our Investment Management Agreement, which was most recently reapproved by our board of directors, including a majority of our directors who are not interested persons of us or the Investment Adviser, in February 2016, PennantPark Investment Advisers serves as our Investment Adviser in accordance with the terms of that Investment Management Agreement. PennantPark Investment, through the Investment Adviser, provides similar services to our SBIC Funds under their investment management agreements with us. Our SBIC Funds’ investment management agreements do 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 directors who are not interested persons of us, in February 2016, PennantPark Investment Administration 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 our SBIC Funds under their administration agreements, which are intended to have no effect on the consolidated administration fee. If requested to provide 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 is 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.

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 subject to tax as a RIC 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 to stockholders of an amount generally at least equal to 90% of the sum of our ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, or investment company taxable income, out of the assets legally available for distribution. 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 to our stockholders in respect of each calendar year of an amount generally at least equal to the sum of (1) 98% of our net ordinary income for the calendar year, (2) 98.2% of the sum of our capital gain net income (i.e., the excess, if any, of capital gains over capital losses) for the one-year period ending on October 31 of the calendar year plus (3) the sum of any net ordinary income plus capital gain net income for preceding years that was not distributed during such years and on which we paid no federal income tax. 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 retain such net capital gains or investment company taxable income in the future, subject to maintaining our ability to be subject to tax as a RIC, to provide us with additional liquidity.

During the three and nine months ended June 30, 2016, we declared distributions of $0.28 and $0.84 per share, respectively, for total distributions of $19.9 million and $59.9 million, respectively. For the same periods in the prior year, we declared distributions of $0.28 and $0.84 per share, respectively, for total distributions of $20.8 million and $62.8 million, respectively. We monitor available net investment income to determine if a return of capital for taxation 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, common stockholders will be notified of the portion of those distributions may be deemed to be a return of capital. Tax characteristics of all distributions will be reported to stockholders on Form 1099-DIV after the end of each calendar year and in our periodic reports filed with the SEC.

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 a certain percentage of our income annually, we will 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.

STOCK REPURCHASE PROGRAM

On May 6, 2015, we announced a share repurchase plan which allows us to repurchase up to $35 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 program expired on May 6, 2016. During the three and nine months ended June 30, 2016, we repurchased zero and 1.9 million shares of common stock, respectively, in open market transactions for an aggregate cost (including transaction costs) of zero and $12.2 million, respectively. From May 6, 2015 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 $30.1 million.

 

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Item 3. Quantitative And Qualitative Disclosures About Market Risk

We are subject to financial market risks, including changes in interest rates. As of June 30, 2016, our debt portfolio consisted of 81% variable-rate investments (including 77% with a LIBOR or prime floor) and 19% fixed-rate investments. The variable-rate loans are usually based on a LIBOR rate 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 regards to variable-rate instruments with a floor, we do not benefit from increases in interest rates until such rates exceed the floor and thereafter benefit from market rates above any such floor. In contrast, our cost of funds, to the extent it is not fixed, will fluctuate with changes in interest rates since it has no floor.

Assuming that the most recent Consolidated Statements of Assets and Liabilities was to remain constant, and no actions were taken to alter the interest rate sensitivity, the following table shows the annualized impact of hypothetical base rate changes in interest rates:

 

Change In Interest Rates

                             

Change In Interest Income,

Net Of Interest Expense
(In Thousands)

                       

Per Share

  

                                                       

Up 1%

     $                                  1,636      $                                  0.02   

Up 2%

     $                                  9,604      $                                  0.14   

Up 3%

     $                                17,571      $                                  0.25   

Up 4%

     $                                25,539      $                                  0.36   

Although management believes that this measure is indicative of our sensitivity to interest rate changes, it does not adjust for potential changes in the credit market, credit quality, size and composition of the assets on the Consolidated Statements of Assets and Liabilities and other business developments that could affect net increase in net assets resulting from operations, or net investment income. Accordingly, no assurances can be given that actual results would not differ materially from those shown above.

Because we borrow money to make investments, our net investment income is dependent upon the difference between the rate at which we borrow funds and the rate at which we invest these funds as well as our level of leverage. As a result, there can be no assurance that a significant change in market interest rates will not have a material adverse effect on our net investment income or net assets.

We may hedge against interest rate and foreign currency fluctuations by using standard hedging instruments such as futures, options and forward contracts or our Credit Facility subject to the requirements of the 1940 Act and applicable commodities laws. While hedging activities may insulate us against adverse changes in interest rates and foreign currencies, they may also limit our ability to participate in benefits of lower interest rates or higher exchange rates with respect to our portfolio of investments with fixed interest rates. During the periods covered by this Report, we did not engage in interest rate hedging activities or foreign currency hedging activities.

 

Item 4. Controls and Procedures

As of the period covered by this Report, we, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act). Based on that evaluation, our management, including the Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were effective and provided reasonable assurance that information required to be disclosed in our periodic filings with the SEC is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. However, in evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of such possible controls and procedures.

There have been no changes in our internal control over financial reporting that occurred during the quarter ended June 30, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings

Neither we nor our Investment Adviser nor our Administrator is currently subject to any material legal proceedings, nor, to our knowledge, is any material legal proceeding threatened against us, or against our Investment Adviser or Administrator. From time to time, we, our Investment Adviser or Administrator may be a party to certain legal proceedings in the ordinary course of business, including proceedings relating to the enforcement of our rights under contracts with our portfolio companies. While the outcome of these legal proceedings cannot be predicted with certainty, we do not expect that these proceedings will have a material effect upon our financial condition or results of operations.

 

Item 1A. Risk Factors

In addition to the other information set forth in this Report, you should consider carefully the factors discussed in Part I “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended September 30, 2015, which could materially affect our business, financial condition and/or operating results. The risks described in our Annual Report on Form 10-K are not the only risks facing PennantPark Investment. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition and/or operating results.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities

Repurchases of our common stock under our share repurchase plan are as follows:

 

Period

  Total Number of Shares
Purchased
    Average Price per Share     Total Number of Shares
Purchased as Part of
Publicly Announced Plans

or Programs (1)
    Approximate Dollar Value
of Shares that
May Yet Be Purchased
Under the Plans or
Programs (in millions)
 

October 1, 2015 through October 31, 2015

         $ N/A             $ 11.2   

November 1, 2015 through November 30, 2015

    877,933        6.82        877,933        11.2   

December 1, 2015 through December 31, 2015

    342,400        7.22        342,400        8.7   

January 1, 2016 through January 31, 2016

           N/A               8.7   

February 1, 2016 through February 29, 2016

    578,049        5.34        578,049        5.6   

March 1, 2016 through March 31, 2016

    106,825        6.09        106,825        4.9   
 

 

 

     

 

 

   

Total

    1,905,207          1,905,207     
 

 

 

     

 

 

   

 

(1)  On May 6, 2015, we announced a share repurchase plan which allows us to repurchase up to $35.0 million of our outstanding common stock. The program expired on May 6, 2016.

 

Item 3. Defaults Upon Senior Securities

None.

 

Item 4. Mine Safety Disclosures

Not applicable.

 

Item 5. Other Information

None.

 

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Item 6. Exhibits

Unless specifically indicated otherwise, the following exhibits are incorporated by reference to exhibits previously filed with the SEC:

 

  3.1    Articles of Incorporation (Incorporated by reference to Exhibit 99(a) to the Registrant’s Pre-Effective Amendment No. 3 to the Registration Statement on Form N-2/A (File No. 333-140092), filed on April 5, 2007).
  3.2    Amended and Restated Bylaws of the Registrant (Incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K (File No. 814-00736), filed on December 2, 2015).
  4.1    Form of Share Certificate (Incorporated by reference to Exhibit 99(d)(1) to the Registrant’s Registration Statement on Form N-2 (File No. 333-150033), filed on April 2, 2008).
  11    Computation of Per Share Earnings (included in the notes to the Consolidated Financial Statements contained in this Report).
31.1 *    Certification of Chief Executive Officer pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended.
31.2 *    Certification of Chief Financial Officer pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended.
32.1 *    Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 *    Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.1    Privacy Policy of the Registrant (Incorporated by reference to Exhibit 99.1 to the Registrant’s Annual Report on Form 10-K (File No. 814-00736), filed on November 16, 2011).

 

                                 
*   Filed herewith.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report on Form 10-Q to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  PENNANTPARK INVESTMENT CORPORATION
Date: August 8, 2016   By:            

/s/ Arthur H. Penn        

    Arthur H. Penn
   

Chief Executive Officer and Chairman of the Board of Directors

(Principal Executive Officer)

Date: August 8, 2016   By:  

/s/ Aviv Efrat        

    Aviv Efrat
   

Chief Financial Officer and Treasurer

(Principal Financial and Accounting Officer)

 

 

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