Pennantpark Investment (PNNT) risk factors, 2024 10-K

RISKS RELATING TO OUR BUSINESS AND STRUCTURE

1. 01We are subject to various covenants under our Truist Credit Facility which, if not complied with, could result in reduced availability and/or mandatory prepayments under our Truist Credit Facility
2. 02A requirement that our outstanding borrowings under the Truist Credit Facility not exceed a certain percentage of the value of our portfolio
3. 03We operate in a highly competitive market for investment opportunities
4. 04Our borrowers may default on their payments, which may have a materially negative effect on our financial performance
5. 05Any unrealized losses we experience on our investment portfolio may be an indication of future realized losses, which could reduce our income available for distribution
6. 06We are dependent upon our Investment Adviser’s key personnel for our future success, and if our Investment Adviser is unable to hire and retain qualified personnel or if our Investment Adviser loses any member of its management team, our ability to achieve our investment objectives could be significantly harmed
7. 07We are exposed to risks associated with changes in interest rates that may affect our cost of capital and net investment income
8. 08Our financial condition and results of operation depend on our ability to manage future growth effectively
9. 09We are highly dependent on information systems and systems failures could have a material adverse effect on our business, financial condition and results of operations
10. 10We may not replicate the historical performance of other investment companies and funds with which our senior and other investment professionals have been or are affiliated
11. 11Any failure on our part to maintain our status as a BDC would reduce our operating flexibility
12. 12Loss of RIC tax status would substantially reduce our net assets and income available for debt service and distributions
13. 13We may have difficulty paying our Annual Distribution Requirement if we recognize income before or without receiving cash representing such income
14. 14Legislation enacted in 2018 allows us to incur additional leverage
15. 15Because we intend to distribute substantially all of our income to our stockholders to maintain our ability to be subject to tax as a RIC, we may need to raise additional capital to finance our growth. If funds are not available to us, we may need to curtail new investments, and our common stock value could decline
16. 16Regulations governing our operation as a BDC will affect our ability to, and the way in which we raise additional capital
17. 17We currently use borrowed funds to make investments and are exposed to the typical risks associated with leverage
18. 18If we incur additional debt, it could increase the risk of investing in our shares
19. 19The assumed portfolio return is required by regulation of the SEC and is not a prediction of, and does not represent, our projected or actual performance
20. 20We may in the future determine to fund a portion of our investments with preferred stock, which is another form of leverage and would magnify the potential for loss and the risks of investing in us
21. 21We may in the future determine to fund a portion of our investments with debt securities, which would magnify the potential for loss and the risks of investing in us
22. 22Our credit ratings may not reflect all risks of an investment in our debt securities
23. 23A downgrade, suspension or withdrawal of the credit rating assigned by a rating agency to us, our 2026 Notes or our 2026 Notes-2, if any, or change in the debt markets could cause the liquidity or market value of our 2026 Notes or our 2026 Notes-2 to decline significantly
24. 24Market conditions may make it difficult to extend the maturity of or refinance our existing indebtedness and any failure to do so could have a material adverse effect on our business
25. 25There are significant potential conflicts of interest which could impact our investment returns
26. 26interests that differ from those of our stockholders, giving rise to a conflict. For example, the Investment Adviser may seek to invest in more speculative investments in order to increase its incentive fee, which practice could result in higher investment losses, particularly during economic downturns
27. 27We are subject to risks associated with cybersecurity and cyber incidents
28. 28We may experience fluctuations in our quarterly results
29. 29Holders of any preferred stock that we may issue will have the right to elect members of the board of directors and have class voting rights on certain matters
30. 30If we issue preferred stock, debt securities or convertible debt securities, the NAV and market value of our common stock may become more volatile
31. 31The trading market or market value of any publicly issued debt or convertible debt securities may be volatile
32. 32market rates of interest higher or lower than rates borne by the debt securities
33. 33Terms relating to debt redemption may have a material adverse effect on the return on any debt securities
34. 34If we issue subscription rights or warrants for our common stock, your interest in us may be diluted as a result of such rights or warrants offering
35. 35Changes in laws or regulations governing our operations or those of our portfolio companies may adversely affect our business
36. 36Our board of directors may change our investment objectives, operating policies and strategies without prior notice or stockholder approval
37. 37Our business and operations could be negatively affected if we become subject to stockholder activism, which could cause us to incur significant expense, hinder the execution of our investment strategy or impact our stock price

RISKS RELATING TO THE ILLIQUID NATURE OF OUR PORTFOLIO ASSETS

1. 38We invest in illiquid assets, and our valuation procedures with respect to such assets may result in recording values that are materially different than the values we ultimately receive upon disposition of such assets
2. 39The lack of liquidity in our investments may adversely affect our business
3. 40A general disruption in the credit markets could materially damage our business
4. 41We may invest in over-the-counter securities, which have and may continue to face liquidity constraints, to provide us with liquidity

RISKS RELATING TO OUR INVESTMENTS

1. 42We intend to invest primarily in first lien secured debt, second lien secured debt, subordinated debt and selected equity investments issued by U.S. and foreign middle-market companies
2. 43Under the 1940 Act, we may invest up to 30% of our assets in investments that are not qualifying assets for BDCs. If we do not invest a sufficient portion of our assets in qualifying assets, we could be precluded from investing in assets that we deem to be attractive
3. 44We are a non-diversified investment company within the meaning of the 1940 Act, and therefore we generally are not limited with respect to the proportion of our assets that may be invested in securities of a single issuer
4. 45Economic recessions or downturns could impair our portfolio companies and harm our operating results
5. 46If we fail to make follow-on investments in our portfolio companies, this could materially impair the value of our portfolio
6. 47attempt to preserve or enhance the value of our investment
7. 48Because we generally do not hold controlling equity interests in our portfolio companies, we are not in a position to exercise control over our portfolio companies or to prevent decisions by management of our portfolio companies that could decrease the value of our investments
8. 49Our portfolio companies may incur debt that ranks equally with, or senior to, our investments in such companies and our portfolio companies may be highly leveraged
9. 50Our incentive fee may induce the Investment Adviser to make speculative investments
10. 51Any investments in distressed debt may not produce income and may require us to bear large expenses in order to protect and recover our investment
11. 52Our investments in foreign securities may involve significant risks in addition to the risks inherent in U.S. investments
12. 53We may make investments that cause our stockholders to bear investment advisory fees and other expenses on such investments in addition to our management fees and expenses
13. 54We may be obligated to pay our Investment Adviser incentive compensation even if we incur a loss
14. 55We may invest in derivatives or other assets that expose us to certain risks, including market risk, liquidity risk, counterparty risk, operational and legal risk and other risks similar to those associated with the use of leverage

RISKS RELATING TO AN INVESTMENT IN OUR COMMON STOCK

1. 56There is a risk that our stockholders may not receive distributions or that our distributions may not grow over time
2. 57Investing in our shares may involve an above average degree of risk
3. 58Sales of substantial amounts of our securities may have an adverse effect on the market price of our securities
4. 59We may allocate the net proceeds from any offering of our securities in ways with which you may not agree
5. 60Our shares may trade at discounts from NAV or at premiums that are unsustainable over the long term
6. 61The market price of our common stock may fluctuate significantly
7. 62loss of a major funding source
8. 63We may be unable to invest the net proceeds raised from offerings on acceptable terms, which would harm our financial condition and operating results
9. 64You may have current tax liabilities on distributions you reinvest in our common stock
10. 65There is a risk that our common stockholders may receive our stock as distributions in which case they may be required to pay taxes in excess of the cash they receive
11. 66Provisions of the Maryland General Corporation Law and of our charter and bylaws could deter takeover attempts and have an adverse impact on the price of our common stock

RISKS RELATING TO AN INVESTMENT IN OUR DEBT SECURITIES

1. 67The 2026 Notes and the 2026 Notes-2 are unsecured and therefore are effectively subordinated to any secured indebtedness we have currently incurred or may incur in the future
2. 68The 2026 Notes and the 2026-2 Notes are structurally subordinated to the indebtedness and other liabilities of our subsidiaries
3. 69The indenture under which each of the 2026 Notes and the 2026-2 Notes were issued contains limited protection for their respective holders
4. 70In addition, the indenture will not require us to offer to purchase the Notes in connection with a change of control or any other event
5. 71The optional redemption provision may materially adversely affect your return on the 2026 Notes and the 2026 Notes-2
6. 72There is no active trading market for the Notes. If an active trading market does not develop for the Notes, you may not be able to sell them
7. 73If we default on our obligations to pay our other indebtedness, we may not be able to make payments on the 2026 Notes or the 2026 Notes-2
8. 74FATCA withholding may apply to payments to certain foreign entities
9. 75Inflation may adversely affect the business, results of operations and financial condition of our portfolio companies
10. 76Volatility or a prolonged disruption in the credit markets could materially damage our business
11. 77Any public health emergency, any outbreak of existing or new diseases, and the resulting financial and economic market uncertainty could have a significant adverse impact on us
12. 78Economic sanction laws in the United States and other jurisdictions may prohibit us and our affiliates from transacting with certain countries, individuals and companies
13. 79Failure or alleged failure to comply with applicable data protection and privacy laws and regulations could subject us to ongoing costs and, in some cases, fines and reputational harm
14. 80We may be the target of litigation
15. 81The effect of global climate change may impact the operations of our portfolio companies
16. 82Legislative or regulatory tax changes could adversely affect investors