Notes
PennantPark Investment Corporation (PNNT) is a publicly listed business development firm specializing in direct and mezzanine investments in middle market companies. The firm seeks to invest in companies based in the United States. Its investments of mezzanine loans, senior secured loans, and other investments in its portfolio companies are between $15 million and $50 million. The firm invests in equity securities and debt in the form of preferred stock, common stock, warrants, options, subordinated loans, mezzanine loans, and senior secured loans. It prefers to invest in private companies. The firm may also make non-control equity and debt investments.Pennant is a regulated investment company (RIC), so the earnings it distributes as dividend aren't taxed at the corproate level. That means they aren't "qualified" dividends under the current tax system.
2SEP08
As of March 31, 2008"Because we have the capital resources to make long term investment decisions based on fundamental value, PennantPark is uniquely positioned to take advantage of the market correction," said Arthur Penn, Chairman and Chief Executive Officer. "The investments we are making in this market environment have lower leverage, higher yields and better covenants than we have seen in years."
Consistent insider buying in 2008, at $9 and under, most recently in May.
As of SEP 2, the price/book ratio is 0.76, all tangible.
23NOV08 - $2.37
Notes from the recent annual report.Net asset value per share
$10.00 (SEP 30, 2008)
$12.83 (SEP 30, 2007)
Hm. Pennant is like a junk bond fund. Junk debt has fallen 30% in 2008, and Pennant is leveraged. Pennant must be able to price the value of its loans with great discretion, since they are mostly private. You can get the same credit quality, with more accurate pricing, buying junk bonds that are publicly traded.
Here is an excerpt from Barron's:
"Commercial-mortgage securities with triple-A credit ratings now yield 15% or more, while junk bonds yield an average of 20%. The junk market has collapsed this year, falling 32% after interest payments, by far the worst decline in its 25-year history, according to Merrill Lynch. So-called leveraged loans -- bank loans made to junk-grade companies -- yield 15% or more and trade for an average of 70 cents on the dollar.
http://online.barrons.com/article/SB122732177515750213.html?page=2
In the next reporting period, the NAV will get a $2 per share boost, for reasons unrelated to the fundamentals of the business.
"In February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial Assets and Financial Liabilities ÑIncluding an Amendment of FASB 115. This statement permits an entity to choose to measure many financial instruments and certain other items at fair value.... We have adopted SFAS 159 on October 1, 2008 and have made an irrevocable election to apply the fair value option to our credit facility liability. Upon our adoption our Net Asset Value increased by $41.8 million, or $1.98 per share, due to the fair value adjustment related to our credit facility.....We have not elected to apply the fair value option to any other financial assets or liabilities.
Its assets have lost enough value that they are getting near the limit of their permitted leverage:
"If the valuations of our portfolio companies continue to decline from their present values, we may suffer reduced availability under our credit facility because such availability depends on our asset coverage, which generally requires that the valuation of our total assets be at least equal to 200% of our total liabilities....A decrease in the value of our investments will have a greater negative impact on the value of our common stock than it would if we did not use debt. Our ability to pay distributions is restricted when our asset coverage ratio is not at least 200%. If this ratio declines below 200%, we may not be able to pay dividends to our stockholders or incur additional debt and may need to sell a portion of our investments to repay some debt when it is disadvantageous to do so, and we may not be able to make distributions.
Total assets: $420 million (8% of total assets is cash.)
Total liabilities: $200 million
Portfolio:
45% subordinated debt
28% second lien secured debt
6% equity
21% senior secured loans
Thoughts.
If its assets decline 5%, the company will have to sell assets at firesale prices to pay off debt. That would also cause a dividend suspension or cut. Yet, the current yield is over 35%, and the PB ratio is under 0.3. Is that enough of a discount?
Market cap. is $50 million. If Pennant completely deleverages, under what circumstances will it have $50 million in total assets and $0 million in liabilities? To be forced into that position, the value of its assets would have to decline another 40% (That leaves $250 million of assets, or $50 million after eliminating liabilities.) So, the stock is priced as if company assets were worth 60% of what the company says.
Given the Barron's report that leveraged loans are trading at 70% of par, and that Pennant doesn't seem to be marking them down much, it seems that the stock is undervalued by a little over 10% (10/70=14%), relative to a plausible liquidation value. This analysis makes pessimistic assumptions in the name of safety: equating assets with the portoflio, valuing assets according to current prices, and assuming that Pennant's valuation doesn't reflect any discount from par at all. I have no idea how the quality of Pennant's loans compares to the average mentioned in the Barron's article.
13DEC08
Another article describing the leveraged loan market, indicating that the going price is around $0.70 on the dollar.http://www.businessweek.com/investor/content/dec2008/pi20081211_476844.htm
16FEB09 - $2.72
Financial Results for the Quarter Ended December 31, 2008Investment portfolio: $ 328.8 million
Net assets: $ 215.7 million
"Net expenses for the three months ended December 31, 2008 and December 31, 2007, totaled $6.3 million and $4.3 million, respectively. Of these totals, $1.8 million and $1.1 million were attributable to credit facility related expenses, and $1.2 million and $1.3 million to general and administrative expenses, respectively, for the same periods. Net base management fee totaled $1.8 million and $1.4 million, and performance-based incentive fee totaled $1.5 million and approximately $447,000, respectively, for the same periods.
"Our overall portfolio consisted of thirty-six companies with an average investment size of $9.1 million and a weighted average yield on debt investments of 10.4%, and was invested 46% in subordinated debt, 30% in second lien secured debt, 3% in preferred equity, 3% in common equity and 18% in senior secured loans as of December 31, 2008.
Thoughts: The expenses are excessive. Total expenses--for the quarter--were almost 2% of the total portfolio, or 8% annualized. Non-debt-related expenses were also 2% of net assets, or 8% annualized. Leveraged closed-end funds probably average around 2% per year in expenses.
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