PennantPark waives fees during energy rout

The New York-based BDC didn’t charge shareholders management or incentive fees in Q2 as it continues to trek through a difficult period for energy investments.

The PennantPark Investment Corporation (PNNT) waived both management and incentive fees, as the BDC endures a less favourable period for energy investments. The vehicle reported lower net investment income (NII) at $17.8 million in the second quarter of 2016, compared with $20.6 million in the same quarter last year.

The fee waiver amounted to $1.6 million or $0.02 per share. It will run through the end of the year. “We believe that this waiver demonstrates a strong commitment to our shareholders and our focus on our energy portfolio,” said chief executive Art Penn, speaking on an earnings call Tuesday (9 August).

The BDC showed a $45 million realised loss mainly on the restructuring of New Gulf Resources, an Oklahoma-based oil and gas company that recently emerged from bankruptcy. Overall, energy companies represented about 11 percent of the market value of PNNT’s portfolio at the end of Q2. As of 30 June, the portfolio had a cost of $178 million and was marked at $131 million.

“As shareholders and managers, we are disappointed with the performance of our energy portfolio and intend to work diligently to recover our capital on our energy investments and to grow our NII back to historical levels,” Penn said. “We do not believe that the short-run option of selling these assets at fire sale prices is prudent.”

Despite the short-term challenges, Penn expressed a commitment to energy investing. “Our focus is on companies that have strong management teams, attractive asset portfolios and the ability and time to endure current market conditions. We intend to work with our portfolio companies to ensure that they have the resources, personnel, capital and runway to weather this tumultuous period,” he said.

Although oil prices are still relatively low, Penn said he’s encouraged by a recent upswing in prices (to about $40 per barrel) and is seeing increased M&A activity in the space.

Doug Mewhirter, an equity analyst at SunTrust, asked on the call whether, in the midst of restructuring, PennantPark had offers to sell some of its energy assets at discounts. “Have you seen any sort of vultures sweeping around these oil assets given the slightly higher prices?” Mewhirter said.

“We are starting to see more M&A in the sector, so that’s a positive sign. Of course, we could capitulate and sell at a fire sale price but I don’t think that’s in the best interest of our shareholders,” Penn replied.

Despite some energy losses, PNNT’s net asset value went up to $8.94 from $8.83 the prior quarter. Its assets were also slightly up to $1.285 billion from $1.275 quarter-over-quarter.