Q1 2021 PennantPark Floating Rate Capital Ltd Earnings Call
Good morning, and welcome to the pennant park floating rate Capital's first fiscal quarter 'twenty 'twenty, One earnings conference call.
Today's conference is being recorded at this time, all participants have been placed in a listen only mode. The.
The call will be opened for a question and answer session. Following the Speakers' remarks.
If you would like to ask a question at that time simply press star one on your telephone keypad.
If you would like to withdraw your question Press Star two on your telephone keypad.
It is now my pleasure to turn the call over to Mr Art, Penn Chairman and Chief Executive Officer of Penn at Park floating rate capital. Mr. Penn You May begin your conference.
Okay.
Thank you and good morning, everyone I'd like to welcome you depend on Park Lane Capital's first fiscal quarter 2021 earnings Conference call I'm joined today by D that father, Chief Financial Officer.
Please start off by disclosing some general conference call information and included discussion about forward looking statements.
Thank you art I'd like to remind everyone that today's call is being recorded. Please note that this call. These day property, all kind of part floating rate capital and that any unauthorized broadcast of this call in any form is strictly prohibited.
Audio replay on the call will be available by using the telephone numbers and Kim provided in our earnings press release as well as on our website.
I'd also like to call your attention to the customer Safe Harbor disclosure in our press release regarding forward looking information.
Today's conference call May also include forward looking statements and projections and we ask that you refer to our most recent filings with the FCC force.
Factors that could cause actual results to differ materially from these projections.
We do not undertake to update our forward looking statements unless required by law.
Copies of our latest SEC filings please visit our website at.
<unk> dot com or call us at two once you ninth year of five 1000.
At this time I'd like to turn the call back to our chairman and Chief Executive Officer Art Penn.
Thanks Rajiv.
First we hope that you your families and those you worked with are staying healthy.
I'm going to spend a few minutes discussing how we fared in the quarter ended December 31st.
The portfolio is positioned for the upcoming quarters, our capital structure and liquidity the financials and then open it up for Q&A.
Despite the challenging economic conditions brought on by the pandemic. We are pleased with our performance this past quarter.
We achieved another substantial increase in NAV during the quarter adjusted <unk> increased four 3% from $11 81 to $12.32 on their portfolio continued to improve during the quarter.
We have several portfolio companies in which our equity co investments have materially appreciated in value.
We're benefiting from the case rate recovery.
Let's say solidify and bolstering a rainy day.
Location of that equity into debt instruments should help grow P. F. L Pic income.
We will highlight those companies in a few minutes.
As part of our business model alongside the debt investments, we make we selectively choose to co invest from the equity side by side with the financial sponsor.
Returns on these equity co investments have been excellent over time.
Overall for our platform from inception through December 31.
$217 million of equity call investments have generated an IRR of 28 per cent and a multiple on invested capital of two nine times.
On a world where investors may want to understand differentiation among middle market lenders are long term returns on our equity co investment program on a clear differentiator.
Additionally, in late December we price to CLO financing.
P S X L J D.
Closed in late January.
I'm pleased with the stable performance of Tfl teas, low long term low cost securitization CLO financing through Covid decided to financing is well matched to finance, our senior debt positions, which we believe are among the lowest risk in the industry.
As a result of the completion of the CLO financing at PFS al we can efficiently growth debenture, which should generate additional income from <unk>.
The combination of potential income growth from equity location.
Larger and more efficiently finance P. S. S L.
Growing more optimized P. F. L T balance sheet should help grow the company's net investment income relative to its dividend over time.
Those factors combined with strong portfolio performance through Covid.
22 spillover as of September 30.
Let us to conclude that we book, we will be keeping our dividend steady at this point.
Although the although we never predicted a global pandemic as you may know, we have been preparing for an eventual recession for some time.
Prior to the COVID-19 crisis, we proactively positioned the portfolio as defensively as possible.
Since inception, we've had a portfolio that was among the lowest risk and the direct lending industry.
As of December 31st average debt to EBITDA on the portfolio was four times.
Average interest coverage ratio the amount by which cash income exceeds cash interest expense was two nine times, which provides significant cushion to support stable investment income fees.
These statistics are among the most conservative in the direct lending industry.
We have only two non accruals out of 105 different names and P. F. L T in PFS out.
It represents only two three per cent of the portfolio on cost at one 9% at market value.
We have largely avoided some of the sectors that have been hurt the most by the pandemic such as retail restaurants health clubs apparel and airlines.
He also has no exposure to oil and gas.
The portfolio is highly diversified with 100 companies from 22 different industries.
Credit quality since inception over nine years ago has been excellent out of 387 companies in which we have invested since inception, we've experienced only 13 non accruals.
<unk> P. F. L. T has invested over $3 $7 billion and an average yield of eight 1%.
This compares to an annualized realized loss ratio of only 10 basis points annually.
If we include both realized and unrealized losses annualized loss ratio was only 12 basis points annually.
We are one of the few middle market direct lenders, who was in business prior to the global financial crisis.
Underwriting track record during that time.
The P F. L. T was not in existence back on pennant Park as an organization was investing at that time.
So when that recession, the weighted average EBITDA, if I don't get a lot of portfolio companies.
<unk> by seven 2% at the bottom of the recession.
First the average EBITDA decline of the Bloomberg North American high yield index.
On a 42 per se.
Proud of this downside case track record in the prior recession.
Based on tracking EBITDA Avago on company through Covid. So far we believe that our EBITDA decline will be substantially less than it was during the global financial crisis.
Looking forward to 2021, where things stand today, our analysis suggests that the vast majority of the companies in our portfolio on a strong position to perform well on the coming quarters.
Many of our portfolio companies on an industry such as government services Defense Health care technology software business services and select consumer companies that are less impacted by Covid, and where we have meaningful domain expertise.
Believe that we are experiencing a case shaped recovery, but some companies and industries being large beneficiaries of the environment.
I'm pleased that we have significant equity investments in three of these companies, which can substantially move the needle on both NAV and overtime.
Net income I would like to highlight those three companies or three companies are kanno Walker Edison and buy rate.
Cano health as a national leader in primary health care is leading the way in transforming health care to provide high quality care at a reasonable cost to a large population.
40 position as a cost and fair market value on December 31.
$431009 1 million respectively.
I know, it's been experiencing rapid growth with revenues nearly quintupled free and EBITDA more than tripling over the last three years.
We believe that there is a massive market opportunity for Canada to grow in the years ahead with the Medicare advantage program.
During the quarter ended December 31, we received $200000 of cash as a return of capital the merger with <unk> acquisition is scheduled to close at the end of March or early April.
At that time, we will receive another 800000 of cash and 825000 and 274 shares of Keno Hill.
A limited partnership controlled by a financial sponsor, where the sponsor will earn 20 per cent of the exit proceeds.
The shares will be locked up for six months from a valuation perspective due to the lockup the independent valuation firm value proposition with a 7% illiquidity discount to the traded value on December 31.
Walker Edison is a leading ecommerce platform focused on selling furniture exclusively online through top E commerce companies.
Our investment was made in 2018 sales on more than tripled and EBITDA is up almost four times.
Our position on the cost of $1 $4 million on a fair market value on $11 1 million as of December 31.
Highlight as a leading software hardware and engineering solutions company focused on national security challenges across modeling and simulation cyber and global defense networks.
Our initial investment was made me every four years ago sales on the golf had gone up one and a half times and EBITDA has more than doubled.
Our position as a cost of $2 2 million and a fair market value of $10 8 million.
December 31.
All three of these companies are getting financial momentum in this environment.
And our any vs should be solidified and bolstered from the substantial equity investments and the momentum continues.
Over time, we would expect to exit these positions and rotate those proceeds into debt instruments to increase income and P. F. L T.
We were active this past quarter, making new loans I'll walk through some of the highlights.
We purchased $15 million on the first lien term loan on the agents Technologies' growth. The company is a government contractor, providing differentiated solutions across space superiority directed energy and missile defense, our leasing capital partners is the sponsor.
Applied technical services as a provider of non destructive testing calibration labs, and consulting and engineering services, we purchased $9 $5 million of first lien term loan and co invested in 504000 of common equity.
I see investment partners sponsor.
Thank God claims consultants is a leading insurance claims services company focused on the residential roofing market on behalf of carriers, we purchased $6 million on the term loan and four.
50000 of equity century equity partners is the sponsor.
Rancho health as a primary care provider in southern California, we're going to start with on offering value based primary care.
We purchased $3 7 million of first lien term loan I'm, calling back the $1 1 million of common equity like day capital is the sponsor.
In the defense systems is a leading it services provider and systems integrator of satellite communications equipment permission critical airborne surveillance programs.
Seven $5 million of first lien term loan and purchased 642000 common equity for Sigma Defense systems Sage when capital is the sponsor.
The outlook for new loans is attractive we believe that middle market lending as a vintage business its upcoming vintage of loans is likely to be the most attractive we've seen since the 2009 to 2012 time period.
On your levels are lower equity cushion is higher yields are higher and the package it protections, including covenants are tighter.
During about five years on a late cycle market in the middle market lending.
Freshly they have attractive risk rewards available to us.
I'll now turn the call over to lead our CFO to take us through the financial results in more detail.
Okay.
Thank you art.
For the quarter ended December 31st net income was 26 cents per share.
Looking at some of the expense categories.
Management fees totaled about $4 $5 million.
General and administrative expenses totaled about $800000 and interest expense totaled $5 3 million.
During the quarter ended December 31, net unrealized depreciation on investment was $23 million or 58 per share.
Net realized losses was about $2 $7 million or <unk> <unk> per share.
Net unrealized depreciation on our per facility notes was <unk> 10 per share.
Net investment income was lower than the dividend by <unk> <unk> per share.
Consequently, GAAP NAV went from $12 31 to $12 70 per.
Sure.
Adjusted EBITDA, excluding the mark to market of our liabilities was $12 32 per share up four 3% from $11.81 per.
Sure.
Our entire portfolio, our credit facility and notes are mark to market by our board of directors each quarter using the exit price provided by an independent valuation firm exchanges or independent broker dealer quotes when active markets are available under ASC 828.
<unk> 25.
Okay cause where broker dealer quotes are inactive we use independent valuation firms to value day investments.
Our spillover as of September 30 was 22 cents per share.
We have ample liquidity and are prudently liberate.
Our GAAP debt to equity ratio was one two times down from one four times last quarter.
GAAP net to debt to equity after subtracting cash was one one times down from one three times last quarter.
Regulatory debt to equity ratio was one three times down from one point pipelines last quarter and our regulatory net debt to equity ratio after subtracting cash flow.
One two times down from one four times last quarter.
With regard to leverage we've been targeting a debt to equity ratio of one four to one six times.
Our net cash regulatory asset coverage ratio of one two times reported.
Below the low end of our range of this past quarter.
We have ample liquidity to fund revolver drawn.
We're in compliance with all of our facilities at December 31st.
We have regularly available borrowing capacity and cash liquidity to support our commitments.
We have a strong capital structure.
Diversified funding sources and no near term maturity.
We have 400 billion revolving credit facility maturing in 2023.
Syndicate of 11 banks with 257 million from December 31.
$118 million on unsecured senior secured notes.
During 2023 and $228 million on asset backed debt associated with Penn and Park CLO, one due 2031.
Our portfolio remains highly diversified with 100 companies across 42 different industries.
87% invested in first lien senior secured debt, including 12 per cent you'd be able to fill.
3% in second lien debt.
10, five per cent in equity, including corporate them to make the NFL.
Our overall debt portfolio has.
Average yield of seven five per cent.
98% on the portfolio is floating rate and 86% a day portfolio has a LIBOR floor.
Average LIBOR floor is one perfect.
Now, let's take her on the call back to art.
Thanks, Steve to conclude we want to reiterate our mission. Our goal is a steady stable and protected dividend stream, coupled with the preservation of capital.
Everything we do is aligned to that goal, we try to find less risky middle market companies that have high free cash flow conversion free.
Recapture on free cash flow, primarily in first lien senior secured instruments and.
And we pay out those contractual cash flow in the form of dividends to our shareholders.
In closing I'd like to thank our extremely talented team of professionals for their commitment and dedication. Thank you.
You all for your time today and for your investment and confidence in US that concludes our remarks at this time I would like to open up the call to questions.
Thank you. Thank you I'd like to ask a question. Please signal by pressing star one on your telephone from Pat If you are using a speaker phone. Please make sure on mute function is turned off to later signals from each of our equipment.
Our GAAP press star one to ask a question.
So you can go ahead and take our first question from Kevin thoughts with JMP Securities.
Yes.
Good morning, and thank you for taking my question.
First looking at I'm looking.
Looking at non accruals, but they'll start secondly, mentally PRA events first and removed from non accrual during the quarter can you provide some color on why those investments are being removed from non accrual.
Sure Thanks, Kevin PRA.
The sponsor put in injected more equity.
So we are we agreed to.
As part of that deal, we agreed to a formula where the sponsor put on more equity and we put them on back on non accrual.
And and that companies are moving forward with a much better liquidity position.
And spark or mail sale did go through a full restructuring.
Where our original second lien was converted to equity.
And the other second lien holders put in additional second lien.
And when you have an agreement with the first lien player to give the company a couple of years have room to rebound coming down quite nicely.
Structuring and seems to be.
Rebounding quite nicely.
Okay I appreciate that color and then now that <unk> completed the CLO financing can you discuss the level of growth. We can expect on the JV moving forward.
Sure So PSS elkin with.
With leverage get up to 550 million on total assets.
Or so so that's something we'll look oh can achieve thoughtfully and carefully over the coming quarters.
Okay. Thank you and then lastly, just touching on prepayments what visibility do you have around that type of prepayments and then just the level of prepayments quarter to date so far.
Yes.
Yeah. It's a good question what level of transparency, we have around prepayments usually have pretty good transparency.
We have we typically on getting monthly financial statements.
Typically talking to the management and sponsor you know at all times, so far on prepayments have been somewhat muted so far this quarter.
But frankly with the portfolio performing so well, which ultimately is perhaps the most important thing.
We could have more prepayment so I'd say, if we're going back into a more normalized environment.
We're on a like environment prices were in the portfolio.
Rotates, 25% to 33% a year on the debt side and.
The need to replace it in and as we said in the prepared remarks on potentially go out so I'd say, we're back to a more normalized environment.
Okay. That's it from me and I appreciate you taking my questions.
Thanks, Kevin.
All right. We'll go ahead and take our next question from Ryan Lynch with kw.
Please go ahead.
Hey, good morning, Thanks for taking my questions.
First of all on Art, you mentioned the outlook for new loans being pretty attractive as far as lower leverage level is higher protection from some.
Higher yields and just wondering.
Have you been seeing though that bad.
The quality.
Some of the benefits of those.
You guys are you seeing those start to shrink.
Return on get a sort of pre COVID-19 levels, certainly you've seen in the liquid markets.
Turnkey structures on our kind of reverted pretty close if not all the way back to kind of pre COVID-19 levels. So yes.
In the market that Youre planning on are you starting to see.
Those sort of revert back book, while they're there.
And if so how long do you expect there to be you'll see better deals versus pre COVID-19 levels.
That's a terrific question, Ryan and firstly, because it's a definitional question, which is what market do we play in.
And where do we plan on where some of our peers play and we focus on what we call the core middle market core middle market, which is companies with 15 $15 million to $50 million of EBITDA, which is kind of below the fray competing with the broadly syndicated loan market or the high yield market. Many of our very very large peers to manage.
Tens and twenties and $30 billion of assets really do compete on a day in and day out basis with a broadly syndicated loan market on the business, you're writing big checks to big companies.
And you know where you have to make quick decisions.
So I was quite clear on the getting financial statements every three months, it's covenant light or a covenant covenant wide.
And there's a lot of velocity in that space because there is a lot less.
Less of an opportunity for due diligence we compete in the $15 million to $50 million basically we call it core middle market deals take longer to gestate.
We're doing many many weeks of due diligence we are negotiating multiple covenants so much more labor intensive than slower process as part of this we also get these equity co invest which we've had a very nice.
Track record on what the two nine times MLR IC track record. So it's a different world, it's a slower moving world and as a result, it's taken it's taking longer from the bounce back we were competing with the broadly syndicated loan market or the high yield market, which is back to where it was pre COVID-19, we basically have to move to that level and our world.
Certainly is has bounced back somewhat since the bottom of Covid, but certainly nowhere all the way back. So we kind of like where we're positioned we like this 50% to $60 million core middle market and we think we can get really attractive risk adjusted returns.
I think we've come through Covid and I think it's kind of improvements we call day.
We've had very minimal defaults on these equity co invests about it you know a lot of return if you look at our our senior private.
Credit vehicle on what she is a private version of <unk>.
On a net return of 18% for 2020, which is kind of.
Ridiculous when do you think about Covid happened in 2020, we had an 18% net return per vehicle that.
Or does equal looks a lot like P. A L P and our credit ops vehicle, which looks a lot like the PNC. We had a 28, 29% net return to work for 2020, so a combination of low defaults the equity call invests really.
<unk> joined Pilgrim's.
Okay.
California, Colorado on the market.
I know in the past you know prior to Covid.
You as well as a lot of other direct lenders talked about you know rate cycle and vaccine.
Of course, Tfl Pea targets that in general as far as being high up the capital structure.
More recession resistant.
And just wondering though now that we're coming out of a downturn or pandemic do you intend or do you have any appetite to shift your investment focus.
L T at all maybe taking on more risk and since we just kind of ran them through a down down scenario or is there going to be kind of steady as you all kind of invested in it and kind of your target markets, where you are on the capital structure, where you are as far as industry exposure.
Yes, so <unk> has always been positioned from day one as you know we opened think has been your grandmother's BDC with a lower.
Whereas lower reward low.
Lower expense structure. So our yields are among the lowest in the industry. Our leverage of four times is among the lowest in the industry. Our expenses are among the lowest interest rate. So for <unk>. We're not you know we're not intending to gear off that I think one of our key focuses going forward, though as you know we had these kind of five key sectors.
We have developed really meaningful domain expertise.
Where we can be among the smartest people on the room rate deals come in.
And I think that's where we're digging deeper and that's kind of government services defense health care technology and software business services and consumer.
Where when a deal comes in we know the right questions to ask where we.
Were really prepared and and in those areas, where we have on what we think we have real domain expertise, where we're going to play.
Okay.
And then I just had one last one.
In January pennant Park on the platform you close pennant Park credit opportunities fund three I'm just curious.
If the investment strategy that spawned similar to P. F L Ts or is it more similar to <unk> and there is there any ability.
Co invest with Tfl Keytruda co invest across that bond or does that have any sort of impact on on on.
On PMT, our pennant park at the platform's ability to speak on Walgreens Coco without that that'd be helpful.
Yeah, no. We we have a growing growing private business overall tenant park, we have two separate strategies, we have opportunistic which is a blend of higher yielding first lien second lien mezz and equity co invest and we have senior debt.
It's basically senior and stretch senior as well as equity call invests Tfl T is a senior debt vehicles, and we have private vehicles.
That look a lot like <unk>, but our private.
<unk>.
So as I said that.
That those vehicles on Saturday, 18% net return.
And 2020 due to very minimal non accruals and the strong equity co invest track record and then on the.
The other side of the equation as our opportunistic strategy, which looks a lot like <unk>, excluding the energy as you know with PNM day, we have a call later energy has been.
On a challenge for PNM tape on our credit ops business, which looks a lot like PMT without the energy.
Is it that focus and that's defined that we closed in again.
29% net return in 2020 due to very minimal defaults and these equity co invest which.
Which had been doing so well so Penn.
Dark writ large two swaps two strategies at opportunistic and senior debt and our BDC is kind of mimic that although PMT were hoping to get out of energy at some point on move moving strength going forward on it and I think we're making good progress and we will talk about that later.
Okay.
Thats helpful clarification on on that on that private fund.
Obviously on work there.
Those are all my questions I really appreciate the time today.
Thank you.
Okay.
Okay. We'll go ahead on click on next question from Mickey <unk> with Ladenburg. Thank you. Please go ahead.
Thank you good morning, Art and Aviv hope you're well.
Art I wanted to ask about a little bit of.
Query on the pandemic when we think about the pace of explanations and the viruses mutations it certainly looks like the pandemic will go on longer than we had hoped.
That will obviously continue to stress excuse me some companies in some industries like event planning, where I see that you injected additional capital in one of your borrowers on my question is how significant do you think the need is to continue to inject capital on these sort of specific.
Situations in and how willing are your private equity partners to write additional checks to support those borrowers and get them through to the other side.
Yes, that's a great question, it's one we grappled with in some of these companies.
I mean, I think first of all of these companies have done a really good job maintaining liquidity and they're all in very liquid.
<unk> and and we feel good about their liquidity, however, long mistakes.
You know our underwriting case does not assume a bounce back.
In the spring or the summer our underwriting case assumes balances back later.
In 2021 and 2022 so.
We weren't counting on any kind of bounce back in the spring or summer and we may or may not have any bounce back in the spring and summer, but we do not on the right that way and.
And on.
Moving on it and we've made sure. All these companies are are very liquid.
Which they are so really good management teams. These are you know what you would have called on which we do call good companies, which just happened to.
Be hit by Covid, but you really solid management teams and done the rate done the right things, whether the management team from the sponsors.
And we feel there is well positioned as they can be to deal with an elongated.
Vaccination schedule on watch, which we may do that.
Thank you for that are looking at the portfolios.
Portfolios in the fourth quarter, and the fourth calendar quarter with strong for middle market M&A.
I noticed that both PFS fees on balance sheet and the senior loan funds portfolios those shrink and fee income was up particularly high for the company could you just discuss the backdrop for that trend in terms of the market opportunity in your pipeline and you know what.
Prepayments higher than you had expected it just some background on that would be helpful.
So it's a great question on I think a lot of the repayments were earlier in the quarter, including China are we on a big position in Canada on which which got repaid and taken out with the broadly syndicated loan.
By and large investment bank and then we've got a really busy towards the back end of the quarter. I think we had a bunch of deals closing between Christmas and new year's and our.
Teams seem to be very very busy so we think we're in a.
Motoring along again in this core middle market deals are more handcrafted in mortality they take longer to intelligent they take longer to negotiate.
The package of risk adjusted return on including the co invest is really attractive in some cases better but it takes <unk> that takes a little while to get the engine going again I think so.
Things are busy.
Im looking at a lot of deals and that.
We've learned the hard way, sometimes you Shouldnt rush it sometimes you see from Russia. We do believe that this vintage isn't really great vintage, we're seeing really nice companies by and large, but we want to be very thoughtful and methodical and careful about what we put on these portfolios and and.
And we will land.
Appropriate judicious fashion, they always have and you've never had a problem ramping I mean, if you look at our history and near East There are bdcs on a private funds. We've never had a profit of ramping its a question of what exactly is the timing how many quarters and just making sure that the deals that we put on these vehicles are a really strong deals.
Yes, I understand thank you for that or.
Just a couple of more sort of housekeeping questions was the marketplace events restructuring the main driver of the realized loss or was there something else, causing that occur.
Okay.
Yes.
On that as well as a male south and spark.
Two.
You realized you realized warrant gains or losses winners.
Losses in this case when there's a restructuring so when this restructurings completed you realized the loss.
Okay, and lastly, administrative expenses continued to decline what was that due to some sort of change in the.
Agreement with the advisor or was it due to the relative size of <unk> to the overall platform or something else.
And is the main driver is our growing private funds business. So when we do we have a we have a finance and ops team and we on fixed G&A and that gets allocated pro rata around our platform. So to the extent help our pilots on the business is growing which it is and the fees returns that will continue to grow.
It really helps the bdcs and lowers the G&A.
Okay. So it was a relative size that's it from me. Thank you for your time take care.
Thank you.
It appears there are no further questions I'd like to turn the conference back to the speakers for any additional or closing remarks.
Thanks, everybody for your interest in <unk>.
We look forward to speaking with you in early May.
We review the March results. Thank you stay safe and healthy have a good day.
This concludes today's call. Thank you for your participation you may now disconnect.
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