Q2 2020 Earnings Call
Please standby.
Good morning, and welcome the Pennantpark floating rate capital's second fiscal quarter 2020 Ernie.
This conference is being recorded.
At this time, all participants are in place and they listen only mode.
I will be open for a question answer session. Following the speakers remarks.
Like I say question at that time simply press star one on your telephone keypad.
If you'd like to withdraw your question, Chris Dark too.
It's now my pleasure to turn the call over to Mr. art.
Chairman and Chief Executive Officer, Pennantpark floating rate.
Mr Page you may begin your conference.
Thank you good morning, everyone I'd like to welcome your dependent park floating rate Capital's second fiscal quarter 2020 earnings conference call.
Joined today by heated up front or Chief financial Officer.
Please start off part is causing some journal conference call information.
A discussion about forward looking statements.
Thank you work I would like to remind everyone that today's call is being recorded. Please note that this quarter to property all kinda bought floating with capital spend up and on top of Whiteboards costs will be school in any form he is strictly prohibited.
Audio replay older coal will be available by using the telephone numbers.
Somebody didn't know earnings press release, its went live on our website.
I'd also like to called your attention to the customary safe Harbor disclosure in all the press release regarding forward looking information today's conference call May also include forward looking statements and projections.
But you refer to our most recent Collins with actually see court important factors that could cause actual results could differ materially from these goods actions.
We do not undertake loved it all forward looking statements unless required by law.
Good thing copies of our latest I could see filings. Please visit our website that's been a board dot com or cool off Q1, Q ones, you're fine 1000.
At this time I'd like to during the call back to our Germany, Chief Executive Officer or.
Thanks, Steve.
First we hope to you your families I know you work with or staying healthy and navigating through these challenging conditions.
We're pleased to report that Pennantpark continues to operate smoothly and effectively.
Remains committed to working diligently on behalf of our investors.
Going to spend a few minutes discussing all portfolio going into the covert 19 crisis.
We fared in the quarter ended March 31st.
Oh, the portfolio was positioned in the upcoming quarters or capital structure and liquidity.
And the value proposition overstock.
The financials and then open up for Q1 angle.
He believes that our rigorous underwriting process and disciplined approach has successfully positioned us to manage through the challenges ahead.
We have an excellent team of talented and dedicated professionals, many with decades of experience managing through multiple economic cycles to help ensure.
That's possible outcome in this type of difficult environment.
Although we never predicted a global pandemic as you may now we've been preparing for an eventual recession for some time.
Prior to the covered 19 crisis, we proactively positioning the portfolio as defensively as possible.
Since inception, we've had a portfolio that was among the lowest risk in the direct lending industry as proven by portfolio that I've had among the lowest yields in the industry.
At March 31st 91% of the portfolio was in first lien senior secured debt, we did it within a weighted average yield of 7.8%.
The portfolio was constructed to withstand market and economic volatility.
As of March 31st.
Average debt to EBITDA in the portfolio was 4.2 times the average interest coverage ratio the amount by which caching income exceeds cash interest expense was 2.7 times.
This provides significant cushion to support stable investment income.
These statistics are among the most conservative into direct lending industry.
Our focus has been on traditional middle market companies, where we have benefited from terms covenants and structures much more attractive to lenders and those are the larger companies.
These terms to enable us to see potential challenges and portfolio companies to be position to assist and protect our capital much sooner than the low to no covenant loans, which are typical of larger borrowers.
We have largely avoided some of the sectors that had been hurt the most by the pandemic such as retail restaurants apparel and airlines.
Yes, I'll kick. It also has no exposure to oil and gas.
The portfolio was extremely diversified with 108 companies and 43 different industries.
As of March 31st we had only two non accruals, representing only 0.6% of the portfolio at cost.
Zero percent market value of the portfolio.
On average our assets were marked down approximately 5.6% in the quarter.
Reflecting primarily softening market conditions due to cope with 19 not underlying portfolio performance.
We believe this valuation as of March 31st during a time as extreme volatility reflects that point in time, and it's not necessarily indicative of long term impairment of the portfolio.
Our growing team in capital resources have put us in a position to be both active and selective whereby we only invested in approximately 4% of the opportunities that we were showing over the past year.
Quality since inception nine years ago has been excellent out of 380 companies in which we have invested since inception.
We had only experience at nine non accruals.
Since inception, Pflp has invested over $3.7 billion.
At an average yield of 8%.
Compares to an annualized realized loss ratio I've only seven basis points annually.
If we include both realized and unrealized losses, including the unrealized losses through March 31st the annualized loss ratio was only 30 basis points annually.
From an experience standpoint, we're one of the few middle market direct lenders, who isn't business prior to the global financial crisis, and I'm, a strong underwriting track record during that time.
Pflp was not in existence back then.
Park as an organization was at that time was focused primarily on investing in subordinated and mezzanine debt.
Prior to the onset of the global financial crisis in September 2008, we initiated investments, which ultimately aggregated $480 million again, primarily in subordinated debt.
Right got recession, the weighted average EBITDA those underlying portfolio companies declined by 7.2% at the trough for the recession.
Appears to be average EBITDA decline of the Bloomberg North American high yield index of down 42%.
As a result, the IR those underlying investments was 8% even though they were made prior to the financial crisis in recession.
We are proud of this downside case track record on primarily subordinated debt.
Now, let's turn to the I'll look ahead in coming quarters, and how our portfolio was positions.
We think communicating on a constant basis with management teams and the private equity sponsor owners of our portfolio companies.
As mentioned previously we're gratified that our historical investment focus has protected us from some of the worst scenario of economy. So she's retail restaurants hospitality apparel airlines in energy.
We've been pleased with where portfolio companies have moved to rapidly just cost and have focused on shoring up liquidity.
As of March 31st of all the companies in the portfolio paid their printer principal and interest in full although two asked for and received an amendment to pay a portion of their interest in kind.
Looking forward to the quarter ended June thirtyth going beyond that remains meaningful uncertainty about the timing and pace of reopening the economy and its impact on the portfolio.
Nevertheless, where things stand today are analysis suggests that the vast majority of the company is not portfolio have significant and sufficient liquidity to pay their interest payments as they come due in the coming corners.
Having said that we expect that certain portfolio companies, who asked for amendments, allowing temporary covenant relief given the substantive impact of the shutdown on their operating performance.
We are comforted that most of the lunch in our portfolio benefit from real covenants, which step down. These covenants may require some amendments in the current environment.
They allow us to monitor the portfolio closely and to ensure companies are taking appropriate actions to protect our investment.
There are some companies in our portfolio than I've seen significant drops in revenue due to covered such as companies into gaming industry.
Any represented only 5.4% of the portfolio as of March 31st across seven investments.
The largest gaming investment last quarter was substantially refinanced remaining research all loans to a wholly owned subsidiary of large investment grade company with a full interest reserve until early 2021.
Two of the other gaming companies are undertaking construction phase projects, which provide them with interest reserves into mid 2021.
The other four properties or regional facilities is primary customer base does not need to get on a plane.
This properties were experiencing record performance prior to the shutdown.
Owners of those facilities have aggressively cut costs.
We do not know when the properties will reopen all have cash on the balance sheet that will allow cushion to reopen in the third or fourth quarter.
Spec strong performance once these properties reopened.
On the positive side, many of our portfolio companies aren't businesses, such as government services defense contracting software communications and cyber security, which collectively comprise a substantial portion of our portfolio and should be less impacted by coding.
With regard to our financials I'll give some summary highlights and if he will go into more detail.
Our net investment income of 30 cents per share, which exceeded our dividend of 25 cents 20.5 cents per share.
On the earnings stream at this point in time, we do not intend to jump the dividend.
Course, we will continue to evaluate our earnings stream over time relative to the dividend.
Our GAAP debt to equity ratio was 1.57 times.
GAAP net debt to equity after subtracting cash was 1.5 times.
Regulatory debt to equity ratio was 1.81 times in our regulatory net debt to equity ratio. After subtracting cash was 1.74 times.
As many of you know in early 2009 responses to the global financial crisis, We started marketing many of our liabilities our credit facility some bonds to market better align asset and liability values.
Reduces the volatility of any V in times of market volatility such as we have today.
Additional benefit at the time and for the ensuing decade, which had a reduced the volatility of our leverage as calculated for the lift regulatory asset coverage test.
About nine months ago, the FCC guided us that for the regulatory asset coverage purposes. They were prefer we mark liabilities at cost not market, which we now do for that test.
As a result, we will be highlighting both get leverage and regulatory asset coverage leverage and time such as these when there were some material difference.
With regard to any B R gap any be was $12 in 12 cents per share as of March 30, Onest down approximately 6% from the prior quarter, which reflects both the markdown of assets and certain liabilities.
You mean liabilities were not mark to market adjust as anybody would have been $11 in 10 cents down approximately 13% from the prior quarter.
With regard to leverage we've been targeting a debt to equity ratio of 1.4 to 1.7 times.
Our net of cash regulatory asset coverage ratio of 1.74 times, what's at the upper end of our range this past quarter.
Was primarily due to a 5.6% decrease in the mark to market of our portfolio as well as more active drawing of revolvers by our borrowers.
We have ample liquidity to fund the revolver draws on weren't compliance with all of our facilities at March 31st.
As of today, we had liquidity to support her commitments.
We are looking to carefully manage our leverage over time.
Spec stay in compliance with good regulatory requirements and covenants under our credit facilities.
We have a strong capital structure with diversified funding sources and no near term maturities.
$520 million of revolving credit facility maturing in 2023 with the syndicate of 11 banks.
413 million drawn as of March 31st.
Under 39 million of unsecured senior notes maturing in 2023.
And $220 million, we've got set back debt associated with kind of park CLL do 2031.
We've seen it consistent dialogue with our lenders and our thankful for their support.
We're primarily focused on our existing portfolio.
We will selectively make new investments, although the bars currently high.
Our focus continues to be on companies and structures as a more defensive have reasonable leverage covenant protections.
Track of returns.
With regard to our stock price, we believe that the share price. It pflp does not accurately reflect the long term value of the company.
As we stated earlier the average debt to EBITDA of our underlying portfolio as of March 31st was 4.2 times.
Translating this into the language of value investors.
At the stock price it pflp today, well below any b.
In the shareholders on a portfolio of companies at a multiple of about 2.6 times cash flow.
Even in a recession with potential decline from cash flow value investors should be able to appreciate at attractive low multiple.
As previously disclosed directors officers and employees had been a bark investment advisors purchased about 535000 shares of Pflp in February and March. These we thought it was an excellent investment opportunity and to demonstrate strong alignment of interest with our shareholders.
I mean, I'll turn the call over to lead our CFO to take us through the financial results in more detail.
Thank you art.
Quarter ended March 31st net investment income was 30 cents per share.
Looking at some of the expense categories.
Management fees totaled about $5.9 million taxes general and administrative expenses totaled about $1 million and interest expense totaled about $7.6 million.
During the quarter ended March 30, Onest net unrealized depreciation on investments, what about $65 million or 167 cents.
Sure.
Net realized losses, what about $1.6 million.
Or four cents per share.
Net unrealized appreciation of our car facility notes was 86 cents per share.
Net investment income exceeded the dividend by two cents per share.
Consequently for any of you went from $12.95 to $12.12 per share.
Adjusted and maybe excluding the mark to market of our liabilities was you live in dollars 10 cents per share.
The decline in I'd was primarily due to a 5.6% average written decline on the big investment portfolio combined with increased leverage.
Our entire portfolio, our credit facility and notes or mark to market by our board of directors each quarter using ticket price provided by an independent valuation firms exchanges or.
And broker dealer quotes were in active markets are available under the.
The big 20 and 825.
In cases, where a broker dealer quotes are inactive we'll use independent valuation firms to volume the investments.
Our portfolio remains highly diversified worked hard and they need to companies across 43 different industries.
91% either invested in first lien senior secured debt.
Including Tempus any PFS L, 3% second lien, but [laughter].
[laughter], 6% equity, including 4% MPS itself.
Our overall debt portfolio has a weighted I heard your call it 7.8%.
No you're not personal that portfolio floating rate earned about 90% of your portfolio has a light board Laurent.
Very good LIBOR floor, either warm person.
Now, let me turn the call back to arc.
Thanks, Steve.
Conclude we want to reiterate our mission.
Goals are steady stable and protected dividend stream, coupled with the preservation of capital.
Everything we do is aligned to that goal and we try to find less risky middle market companies that have high free cash flow conversion.
Capture that free cash flow, primarily in first lien senior secured instruments.
We pay out those contractual cash flows in the form of dividends to our shareholders.
One thing I'd like to thank are extremely talented team of professionals for their commitment and dedication. Thank you all for your time today and for your investment and confidence in us.
Concludes our remarks at this time I'd like to open up the call to questions.
Thank you.
You asked the question, we signaled accessing our one on your telephone keypad, if you're using I guess on he's making your mute function. It turned out to liar signals or me sorry, let me.
Again press Star, one asking lasting and we'll go first to Mickey Shaleen Atlanta.
Yes, good morning, everyone I'm part or just in terms of risk assessment and I'm, sorry, If you mentioned in the prepared remarks, but.
Can you give us a sense of what the portfolio average EBITDA is at this point.
The average EBITDA is Mickey can you hear me.
Yes.
[laughter] average EBITDA was roughly a 35 to 40 million on average in terms of University of Minnesota right in the middle market level and what trends did you see in the first quarter.
Luckily we had a we had a very strong yeah first calendar quarter, we had very strong quarter up until the end of March. So we saw very strong performance across the portfolio.
You know going into going into the Cubs 19 crisis.
Okay and in terms of UBS sponsors how would you characterize is there.
Maybe or you know in April and May in terms of helping support liquidity of or what are your portfolio companies.
Yeah, we've yes, we've seen very by and large good behavior and reactions from sponsors Bose and.
Doing what it takes in terms of <unk>.
Reducing expenses.
In terms of shoring up liquidity and managing their liquidity.
In many cases today has cut off their their fees that they're earning from these companies.
So by and large and that's one of the benefit you see from kind of a sponsor portfolio wise.
Bedded equity from the sponsors underneath us there's certainly a strong alignment of interest.
Going into this the average loan to value was about 50%. So there's a lot of equity beneath us a lot of support and the actions that we've seen or you know I've been helpful.
Okay. My last question or can you remind me what the target set their equity is for P.S.. So team in a normal market.
So in the normal market, we've been saying 1.4 to 1.7 times. So here we are at the upper upper end of that due to both the mark to market as well so drawing on on the revolver is from you know many of the underlying portfolio companies. So were you know, we're managing that that leverage carefully.
There's been some sell downs.
Nice prices post quarter end.
Create additional liquidity additional question and because so much of our portfolio is away from the combing 19 risk you know it's in a trendy we have a bunch of attractive deals that are most attractive for us as well for certain parties. So we haven't had problem.
Finding finding some nice levels, you know post quarter end thinks that we want to create more cushion in one liquid heating system.
That's good things here those are all my questions I appreciate.
Your time, and I hope, everyone, there stays safe and healthy.
Thank you Nick you too.
And then we'll go to Ryan Lynch He began the.
Hey, good morning, Thanks for taking my questions and hope you guys are all doing.
Doing well and Im sorry.
My first one just has to do you read your your asset backed nodes you know as deep as evolve through this process I think we've seen that there'd be asset backed nodes for securitization trusts yellows for different Bdcs are you know can be soon the most concerning liability trashed, just because they're not as flexible they don't work.
A banking partner and could come in there.
Work with with the bar, where so can you just talk about your comfort level surrounding.
The current covenants, whether it's the triple C. Bugs that are those key trust or any other covenants. They did you guys feel Oh, you know, though those asset backed notes.
Yeah. Thanks, Thanks, Ryan and that's an excellent question, so with that with our COO, we have a 17.5% triple C bucket.
And we have plenty plenty of cushion now against that is something that you know more watching and we manage but there's no no issues in the you know when she said, we see happening with that.
The other thing I'll note is that with our securitization. In addition to retaining the equity. We also retained a triple b tranche. So it's all less levered in essence of celestial efforts yellow to begin with.
Okay.
And then what about the ER or the credit facility that you guys have and see assets.
Can you talk about your comfort around back to back that has a little bit.
Got it that's high leverage as well can you talk about your guys comfort with the ability day to not trip colleagues Matt.
Yeah. So we have a in our joint venture T. S. I sell we have the that's again a joint to refresh everyone's memory actually joint venture, we haven't with with Kemper.
The bank, there's capital one and an A. syndicate of other banks, we've been having great conversations with capital one.
You know kind, a very transparently sharing with them, what's going on in the portfolio and those conversations ongoing but where are we feel very good about the context about dialogue and relationships and I think you know just to kind of take into a bigger level I think the banking regulators in United States. The fed he has he sees a controller.
Currency had been very clear, we see the people they regulate that.
Co Big 19 risks and portfolios at the bank should be very should have soft hands should be working with borrowers and and should be getting people on room and certainly you know as we've been having conversations with all of our banks across it Kinda Park a platform, we've seen very excellent behavior and back.
The up by many years over the long term partnerships that we've had with them so good and could open dialogue.
Certainly you know caught the 19 is hedging is having a significant impact on the economy.
And our banks, you know seem to understand that.
Okay.
Then I know you guys touched on this this earlier can you provide some comments around the gaming industry talked about you know for your properties or region or you don't have to get on quite comfortable or are under some construction one sold down in kind of forward into.
Quality investment grade company, but just can you talk about kind of how those businesses operate obviously I would assume that they're all shut down right now producing zero revenues.
What is the ability and how can those companies right during a downturn like this as far as cutting costs.
Christine.
The runway.
To conserve cash lots of a longer term.
Yeah, and then lastly jets.
What is kind of the ultimate outlook of those businesses in your mind right now obviously, it's going be largely dependent on when the economy open, but I would think but some of those businesses maybe some of the last one yeah, well just to be open hogs, just because it got it places that aren't really essential cities any any additional commentary would be helpful.
Sure. So so look I think you hit on all the right points, which are.
Sure one of those companies you really caught all youre all your costs through to the absolute minimum you know fixed costs and skeletal staff. Unfortunately means your variable costs such as your employees you can offer louder laid off.
And you are maximizing your liquidity.
In every way you can maximize your liquidity and creating several quarters of runway.
Being shut down and buying large most of them you know have done that many Indiana harbor their liquidity well. They have you know kind of cut their ongoing cost and to the bare minimum and based on what we can see they've got plenty of runway to two to deal with a gradual reopening over time even.
One there isn't reopening a gradual.
A gradual increase in traffic. So so we think that they've done they've done a good job and certainly since the vast majority of them our regional facilities, where.
You know you because customers are local they don't need to get on a plane.
You know, we think there as well set up as anybody to you know to deal with a prolonged.
Downtime so the play bucket there they've operated the playbook.
You know now we just need to kind of see how things go.
Okay.
We expect those are all my questions I appreciate the time to that.
That's right.
And now we will go t. like David millions and millions.
Well its investment management.
Oh, sorry about that.
So just.
A question.
Way back when you guys if elected to.
Mark your liabilities to market, we had some really great conversations around that I think one of the central point you made with.
It better aligns the movement of the asset side of the balance sheet with the liability side and the balance sheet and I think that was something that my recollection is that it was very helpful for PNM team during the financial crisis in the late.
So I was wondering if you could share with us and some of the details of what the FCC said when.
They express and preference for a cost base Mark on your liabilities I presume that you made the point to them that this was a better alignment of both sides of the balance sheet, So what would sort of where the nature of that conversation.
[laughter] I'm laughing because you know.
Hey, you know if these are very quiet conversations and and Ah you know just suffice to say that.
No you know, we we really liked the marketing liabilities to market for a lot of reasons, including a reduction of volatility and also you know for FCC asset coverage purposes to extend you can use it into a terrific insurance policy. It's a.
Really I am really seen it could be a solution for the broader industry in times of volatility like we're having today. So nine months ago of course, you know after using it for decades. He has he guided us that for the FCC regulatory asset problem asset coverage ratio. They would prefer that we do not use it going forward. So.
We are not for the regulatory asset test certainly it's already part of our GAAP financial statements and you know the the way of works news every time you.
We'll take on the liability wouldn't it be credit facility or bond you have a onetime option to to mark that liability to market under GAAP.
So so that's what we have been doing until recently, a using that option under GAAP.
And you know until recently gap and regulatory asset coverage or virtually the same because you had very calm markets. So you know we are in a volatile market and as a 331 hand for GAAP purposes. We we Mark you know many of our liabilities to market, which does.
Yes, the volatility of anybody but does not.
It does not get taken into account for their regulatory asset coverage Skus, which is kind of why we're now you'll see it on that on the press release, why we now to regulatory as well as gap debt to equity and we do also show an adjusted any be per share, which takes out the takes out the mark to market of liability. So it makes a comp.
Alex I apologize to everybody it was done and with the best intentions of reducing the risk of our vehicles a when we did it.
Today, just makes it more complex from the standpoint of of our financials, but we do think there isn't underlying logic.
Doing in terms of the FCC dialogue I did not have the dialogue it was our Chinese I'd the dialogue with the FCC.
And our attitude is when you actually see guides us to do something we should we should be listening to that so.
We are we're listening to their guidance and ER and we still are in fine shape as it has a as you've seen a we'd be in better shape in some sense if we.
Don't know under the onto the old regime, but it is what does that assume we will do a live on any of the constraints there that we're giving it to certainly in time.
[laughter].
Appreciate that are and I know that there is it's really a multi dimensional sort of the beta so whether or not.
But that's.
The best disclosures to market or not but certainly I think but.
The reason, we now have two different cycles of extreme market.
Liquidity to share that this could help dampen some of the.
The big swings that took place and.
It is for the Bdcs and then that asset. So I guess I was just a little surprised to see that there wasn't a little bit of recognition that there's some utilities you had that that accounting interpretation. So thank you for your comments there.
The other question I had was you'd mentioned I think you said that.
There's no shortage of will flow.
That.
You have a lot of different opportunities to put capital to work right now whether that looked pretty.
Attractive and that's a little bit in contrast to.
What we've heard from some of this use Atlanta I guess, what were you called upper middle market not that 35 to 40 million what are the driver, but probably more in the call. It 75 to 100 million dollar neighborhood, where I think the pilot somebody said, there's nothing what's happening lenders and borrowers to they carry.
Great and what they have a week so.
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Were you are commenting on the 35 to 40 million is that something that is market thats lower in the middle market that there's more local taking place right now.
Yeah, just just to clarify so did the I said I don't know how to think this was part of my my remarks.
There there really is not a lot of deal flow at this point in time in the primary so there's not a lot of primary deal flow certainly in some of the areas that are completely on impacted as we've seen in certain defense contractors government services. There is a little bit of deal flow and it's in part because that sector never really.
That's kind of motoring along this wouldn't reasonable chunk of our portfolio and there still are private equity sponsors trying to get deals done, but it sounds like there's been a lot of deals.
Don in that space, So there's not a lot going on or the market, both buyers and sellers of companies as well as you know lenders are trying to figure out where where I'm risk adjusted return should be no should be for non covidien impacted companies and antiques that there is activity some activity it's in that that space.
So there really isn't a lot lot knew there is some secondary opportunities you know that we think could be attractive.
For P.F.L. T. I think our mission today is really too soon to focus on the portfolio, we will selectively or we'll look to selectively make investments that are knew about the bar. The bar is is high at this point I think we've we've just got to kind of you were focused on our portfolio and and kind of a you know makes.
Sure. We happens you know we have focused on those portfolio companies first.
Okay. Thank you took a clarification then sorry I got that route.
Yeah.
I'd like to turn the call back to our.
Clinton County.
Thank you everybody for listening in today, we appreciate a really appreciate it we wish everyone safety and health.
In these times and we look forward to speaking with you next in August which will be or next quarter. Thank you very much.
But that ladies and gentlemen that does conclude today's call we'd like to thank you again for your participation you may now disconnect.
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