Q1 2022 PennantPark Floating Rate Capital Ltd Earnings Call

Good morning, and welcome to the pennant Park floating rate Capital's first fiscal quarter 2022 earnings Conference call Today's conference is being recorded.

Speaker 1: Good morning and welcome to the Pennant Park Floating Rate Capital's first fiscal quarter 2022 earnings consolidation from the blue diagram to the red X geometricelection in the orange

Speaker 1: Today's conference is being recorded. At this time, all participants have been placed in a listen-only mode. The call will be open for a question-and-answer session following the speakers' remarks.

At this time all participants have been placed in a listen only mode. The call will be open 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 Chris started too on your telephone keypad.

Speaker 1: If you would like to ask a question at that time, simply press star 1 on your telephone keypad. If you would like to withdraw your question, press star 2 on your telephone keypad.

Speaker 1: It is now my pleasure to turn the call over to Mr. Art Penn, Chairman and Chief Executive Officer of Penn and Park Floating Rate Capital. Mr. Penn, you may begin your conference.

It is now my pleasure to turn the call over to Mr. Art, Penn Chairman and Chief Executive Officer of pennant Park floating rate capital. Mr. Penn You May begin your conference.

Thank you.

Speaker 2: Good morning, everyone. I would like to welcome you to Penn and Park Richard, please start off by disclosing some general conference information and included discussion about forward-looking statements.

Hey, good morning, everyone I'd like to welcome you to kind of bark floating rate capital's first fiscal quarter of 2022 earnings conference call.

I'm joined today by Richard <unk>, Our Chief Financial Officer, Richard Please start off by disclosing some general conference call information.

Included discussion about forward looking statements.

Richard.

Okay.

Yes.

Yeah.

Thank you art.

Speaker 3: Thank you, Art. I'd like to remind everyone that today's call is being recorded. Please know that this call is the property of Penn and Pott's Bowling Red Capital. That any unauthorized broadcast of this call in any form is strictly prohibited. Order a replay of the call will be available by using the telephone numbers and 10 provided in our earnings press release as well as our website.

Like to remind everyone that today's call is being recorded. Please note that this call is the property.

Floating rate capital.

All right broadcast of this call in any form strictly prohibited.

A replay of the call will be available by using the telephone numbers and pin.

Provided in our earnings press release as well as our website.

Speaker 3: I'd also like to call your attention to the Customary Safe Harbor Disclosure, an hour of press release. Regarding forward-looking information...

Also like to call your attention to the customary safe Harbor disclosure in our press release regarding forward looking information.

Today's conference call May also include forward looking statements and projections that we ask you.

Speaker 3: conference call may also include forward-looking statements of projections that we ask for.

Speaker 3: to our most recent filings with SEC for important factors that could cause actual results to differ materially from these projections.

Before I tell most recent filings with SEC for important 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.

Speaker 3: cannot undertake to update our overlooking statements unless required by law.

Speaker 3: For more information on the following copies of our latest SEC following, please visit our website at pennantpark.com or call us at 212-905-1-DAL.

Copies of our latest SEC filings. Please visit our website at <unk> dot com caused us to want to verify that.

Yes.

Speaker 3: I'd like to turn the call back to our Chairman and Chief Executive Officer, Audrey

At this time I'd like to turn the call back to our chairman and Chief Executive Officer Ted.

Thanks, Richard I'm going to spend a few minutes discussing how we fared in the quarter ended December 31st.

Speaker 2: Thanks Richard. I'm going to spend a few minutes discussing how we fared in the quarter end of December 31st, how the portfolio is positioned for the upcoming quarters, our capital structure and liquidity, the financials, and then open it up for Q&A.

Portfolio is positioned for the upcoming quarters, our capital structure and liquidity with financials.

And then open it up for Q&A.

Our net investment income grew to 33 per share which includes five cents of other nonrecurring income.

Speaker 2: Our net investment income grew to $0.33 per share, which includes $0.05 of other non-recurring income. Our credit quality remains solid.

Credit quality remained solid where.

Speaker 2: We're pleased that we've grown NII through growing the assets on balance sheet at PFLT, as well as that of our PSFL joint venture.

We're pleased with the growing NII for growing the assets on balance sheet at P. F. L T as well as out of our P. S. S L joint venture.

Speaker 2: Now that we have reached the zone of our target debt to equity ratio at PFLT, we remain focused on two additional prongs to our strategy to grow NII. Number one, growing our PSSL JV with Kemper to enhance overall ROE at PFLT. And number two, rotating the equity value in our portfolio that has come from our Strong Equity Co-Investment Program into cash paying debt instruments.

Now that we've reached the zone of our target debt to equity ratio of P. F. L. T. We remain focused on two additional prongs to our strategy to grow NII.

One growing our PSS L JV with Kemper to enhance overall ROE Tfl T. A number two we're taking the equity value in our portfolio that has come from a strong equity co investment program into cash paying debt instruments.

With regard to the <unk> joint venture with the CLO financing, we completed earlier this year as well as additional capital contributions from Tfl team Kemper the JV will continue to grow.

Speaker 2: With regard to the PFSL joint venture, with the CLF financing we completed earlier this year, as well as additional capital contributions from PFLT and Kemper, the JV will continue to grow. The capital contributions from PFLT are targeted to generate a 10-12% return.

The capital contributions from Tfl T are targeted to generate a 10% to 12% return.

Speaker 2: We're on a path to grow PSSL to over $700 million in the current quarter. We have started discussions with Kemper to increase the JV to have approximately $1 billion of assets over time.

We're on a path to grow PSS held over $700 million in the current quarter.

We have started discussions with Kemper to increase the JV to have approximately $1 billion of assets overtime.

Speaker 2: We believe that the increase in scale and the attractive RLE will enhance PFLT's earnings and momentum.

We believe that the increase in scale in the attractive orally will enhance <unk> earnings momentum.

Speaker 2: As part of our business model, alongside the debt investments we make, we selectively choose to co-invest in the equity side by side with the financial sponsor.

As part of our business model alongside the debt investments, we make we selectively choose to co invest in the equity side by side with a financial sponsor.

Speaker 2: Our returns on these equity investments have been excellent over time. Overall for our platform, from inception through December 31st, our $297 million of equity investments have generated an IRR of 29% and a multiple on invested capital of 2.9x.

Our returns on these equity call investments have been excellent over time overall for our platform from inception through December 31, or $297 million of equity call investments have generated an IRR of 29% and a multiple on invested capital of two nine times.

Speaker 2: In a world where investors may want to understand differentiation among middle market lenders, our long-term returns on our equity co-investment program are clear differentiators.

In a world where investors may want to understand differentiation among middle market lenders.

Long term returns on our equity co investment program are a clear differentiator.

We have implemented a significant portion of the NII growth strategy to date investor.

Speaker 2: We have implemented a significant portion of the NII growth strategy to date. The investment portfolio of PFLT increased by approximately $100 million in the quarter to $1.18 billion from $1.08 billion.

The investment portfolio P. F L T increased by approximately $100 million.

In the quarter to $1 8 billion from 1.08 billion.

Speaker 2: TSSL's investment portfolio also grew this quarter from 600 to 642 million from 565 million, an increase of 77 million.

<unk> investment portfolio also grew this quarter from 600 to 600.

$642 million from $565 million, an increase of $77 million.

We're focused on the core middle market, which we generally define as companies with between 10 to 15 million of EBITDA.

Speaker 2: We're focused on the core middle market, which we generally define as companies with between 10 and 50 million to be, but that.

Speaker 2: The target market where we think we add the most value and where we get the strongest package of risk return is in the 10 to 30 million of EBITDA rates.

Target market, where we think we add the most value and where we get the strongest package of risk return is in the $10 million to $30 million of EBITDA range.

Speaker 2: We like the core middle market because it is below the threshold and does not compete with a broadly syndicated loan or high yield market.

We like the core middle market because it is below the threshold and does not compete with a broadly syndicated loan or high yield markets.

Speaker 2: unlike the upper middle market. As such, we do not compete with markets where leverage is higher, equity push and lower, covenants are light, wide, or non-existent, information rights are pure, EBITDA adjustments are higher and less diligent, and the time frame for making an investment decision is compressed.

Unlike the upper middle market as such we do not compete with markets, where leverages higher equity cushion lower.

These are light why it or nonexistent information rights or pure EBITDA adjustments are higher and less diligence and the timeframe for making an investment decision is compressed.

Speaker 2: On the other hand, where we focus on the core middle market, generally our capital is more important to the borrower. As such, leverage is lower, equity cushion is higher, we have real quarterly maintenance covenants, we receive monthly financial statements to be on top of the companies, EBITDA adjustments are more diligent and achievable, and we typically have six to eight weeks to make thoughtful and careful investment decisions.

On the other hand, we focused in the core middle market generally our capital is more important to the borrower as.

As such Leverages lower equity cushion is higher we have real quarterly maintenance covenants.

Received monthly financial statements to be on top of the Companys EBITDA adjustments are more diligence and achievable and we typically have six to eight weeks to make thoughtful and careful investment decisions.

According to Lincoln International the Covenant light share of direct lending loans increased from 20% in Q3, 'twenty 'twenty, 1% to 35% in Q4 15.

Speaker 2: According to Lincoln International, the Covenant-like share of direct lending loans increased from 20% in Q3 2021 to 35% in Q4, a 15% increase in just one quarter.

15% increase in just one quarter.

We believe that this was driven primarily by the growth of the Mega multibillion dollar direct loans to them by the largest direct lenders who compete heavily amongst themselves as well as the broadly syndicated loan market.

Speaker 2: We believe that this was driven primarily by the growth of the mega multi-billion dollar direct loans done by the largest direct lenders who compete heavily amongst themselves, as well as the broadly syndicated loan market.

Less covenant protection May ultimately have important ramifications down the road to outcomes.

Speaker 2: less covenant protection may ultimately have important ramifications down the road to outcomes.

Speaker 2: Virtually all of our loans in the core middle market have meaningful covenant packages which protect lenders.

Virtually all of our loans in core middle market had meaningful covenant packages, which protect lenders.

Speaker 2: According to S&P, loans to companies with less than 50-90 EBITDA have a lower default rate and a higher recovery rate than those loans to companies with higher EBITDA. We believe that the meaningful covenant protections of the core middle market have been an important part of this differentiated performance.

According to S&P loans to companies with less than 15 nine of EBITDA have a lower default rate and higher recovery rates than those loans to companies with higher EBITDA.

We believe that the meaningful covenant protections of core middle market had been an important part of this differentiated performance.

Our portfolio performance remains strong.

Speaker 2: Our portfolio performance remains strong. As of December 31st, average debt to EBITDA on the portfolio was 4.6 times, and the average interest coverage ratio, the amount by which cash income exceeds cash interest expense, was 3.3 times. This provides significant cushion to support stable investment income.

December 31st average debt to EBITDA on the portfolio was 4.6 times and the average interest coverage ratio the amount by which cash income exceeds cash interest expense was $3. Three times. This provides significant cushion to support stable investment income.

Speaker 2: These statistics are among the most conservative in the direct lending industry.

These statistics are among the most conservative in the direct lending industry.

Speaker 2: As of December 31st, we had only three non-accruals out of 120 different names in PFLT and PFFL. This represents only 2.9% of the portfolio cost and 2.5% at market value.

As of December 31st we had only three non accruals out of 120 different names and P. F. L T and P. S. S L.

This represents only 2.9% of the portfolio at cost and two 5% at market value.

Speaker 2: The portfolio is highly diversified with 115 companies and 46 different industries.

The portfolio is highly diversified with 115 companies in 46 different industries.

Speaker 2: Our credit quality since inception over 10 years ago has been excellent. Out of 434 companies in which we have invested since inception, we have experienced only 15 non-cruels.

Our credit quality since inception over 10 years ago has been excellent at 434 companies in which we have invested since inception, we've experienced only 15 non accruals.

Speaker 2: Since inception, PFLT has invested over $4.7 billion at an average yield of 8%. This compares to a loss ratio of only 7 basis points annually.

Since inception P. F. L. T has invested over $4 $7 billion.

At an average yield of 8%.

This compares to a loss ratio of only seven basis points annually.

Many of our portfolio companies arent industries, such as government services healthcare technology software business services, and select consumer companies, where we had meaningful domain expertise.

Speaker 2: Many of our portfolio companies are in industries such as government services, healthcare, technology, software, business services, and select consumer companies where we have meaningful domain expertise.

Speaker 2: The outlook for new loans is attractive. We have been busy. We have been as busy as we have ever been at 15 years in the business, reviewing and doing new deals. With our experienced, talented, and growing team, our wide funnels producing active deal flow that we can then carefully and thoughtfully analyze so that we can be selective as to what ends up in our portfolio. Let me now turn the call over to Richard, our CFO , to take us through the financial results in more detail.

I'll look for new loans is attractive we have been busy we have been as busy as we've ever been at 15 years in the business reviewing and doing new deals with our experienced talented and growing team our Wi funnels producing active deal flow that we can then carefully and thoughtfully analyzed so that we can be selective as to what ends up in our portfolio. Let me now to <unk>.

I'll turn the call over to Richard our CFO to take us through the financial results in more detail.

Speaker 3: Thank you, O'Hare. For the quarter ended December 31, net investment income was $0.33 per share.

Thanks, a lot for the quarter ended December 31, net investment income was 33 per share.

Excluding <unk> <unk> per share of other income.

Speaker 3: Looking at some of the expense categories, management fees and performance-based incentive fees, total of about $6.1 million.

Looking at some of the expense categories management.

Fees and performance based incentive fees totaled about $6 1 million.

Speaker 3: Texas General administrative expenses totaled about $900,000. The

General and administrative expenses totaled about 900000.

Interest expense totaled about $6 6 billion.

During the quarter ended December 31st net change in unrealized depreciation on investments.

Speaker 3: Then a quarter ended December 31st, and that changed an unrealized appreciation on investments. This of any associated tax provision was a loss of $5 million, but 13 cents per share.

If any associated tax provision was a loss of $5 million of 13 cents per share.

Net realized gains were about $3 1 million.

That's for sure.

And changes in the value of our credit facility and notes increased NAV by <unk> <unk> per share.

Speaker 3: and changes in the value of our credit facility notes increased NAV by 9 cents per share.

Net investment income was higher than the dividend by four cents per share.

Speaker 3: Consequently, GAAP-NAB went from $12.62 to $12.70 per share. GAAP-NAB, excluding the mark-to-market of our liabilities, was 12.62.

Currently <unk> went from $12 62 to $12 77 per share adjusted.

Adjusted NAV, excluding the mark to market of our liabilities was $12 43 per share light for the quarter.

Speaker 3: Our entire portfolio, our credit facility, and notes a mark-to-market about Board of Directors each quarter using the exit price provided by an independent valuation fund.

Our entire portfolio, our credit facility and notes are mark to market about board of directors each quarter using the exit price provided by independent valuation.

Changes in independent broker dealer quotations when active markets a vote on the a S E 2025.

Speaker 3: when active markets are available under ASC 820 and 825.

In cases, where broker dealer quotes enacted we use independent valuation firms to value the investments.

Speaker 3: In cases where broker-dealer quotes are inactive, we use independent valuation firms to value them back.

Our debt to equity ratio was one five times net debt to equity after subtracting cash was one four times.

Speaker 3: Our debt to equity ratio was 1.5 times, while net debt to equity after subtracting cash was 1.4 times.

Speaker 3: We have a strong capitalist structure with diversified funding sources and non-linear term maturities. We have a $300 million revolving credit facility in return in 2026 with $257 million.

We have a strong capital structure with diversified funding sources and no near term maturities, we have a $300 million revolving credit facility maturing in 2026.

$77 million drawn as of December 31.

Speaker 3: $97 million of unsecured senior notes maturing in 2023, and $228 million of asset backed debt associated with Pennant Park sale 1 through 2033.

Bye.

Unsecured senior notes maturing in 2023 and $220 million of asset backed debt associated with pennant Park sale wanted to do 2031.

During the December quarter.

Speaker 3: During the December quarter, PFLT issued an additional $85 million of the 4.25 unsecured senior notes, bringing the total principal balance to $185 million. The add-on notes were issued at a premium, resulting in a yield of 3.875%. The Pro-6 fund has no issuance, provided additional $85 million to the PFLT.

He issued an additional $85 million of the Warner corner 2026, unsecured senior notes, bringing the total principal balance to $185 million.

Add on notes were issued at a premium resulting in a yield of 3.875%.

All six of them, there's no issuance provided additional capital for investments.

Speaker 3: Our portfolio remains highly diversified with 115 companies across 46 different industries.

Our portfolio remains highly diversified with hydrogen.

When companies across 26 different industries.

7%.

It's invested in first lien senior secured debt, including 13% and P. S. S L.

Speaker 3: invested in first lien senior security debt including 13 percent in pfsl less than one percent and secondly

1% in second lien debt and 13% in equity, including 4% in P. S. S L.

Speaker 3: and 13% in equity, including 4% in PSSL.

Speaker 3: Our overall debt portfolio has a weighted average yield of 7.5%. 99% of the portfolio is falling rate and 84% of the portfolio is liable floor. Average liable floor is 1%. Now let me turn the call back to R.

Our overall debt portfolio has a weighted average yield of seven 5%, 99% of the portfolio swollen right at 84% of the portfolio has a LIBOR floor.

Average LIBOR floor is 1% now let me turn the call back to art.

Thanks Richard.

Speaker 2: Thanks, Richard. To conclude, we want to reiterate our mission. Our goal is a steady, stable, and protected dividend stream, coupled with a 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. We capture that free cash flow primarily in personally and senior security instruments, and we pay out those contractual cash flows in the point of dividends to our shareholders.

<unk>, 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, we capture that free cash flow primarily in first lien senior secured instruments and we pay out those contractual cash flows in the point of dividends to our shareholders.

In closing.

Speaker 2: I'd like to thank our 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.

I'd like to thank our 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.

Speaker 2: That concludes our remarks at this time. I would like to open up the call to questions.

That concludes our remarks at this time I would like to open up the call to questions.

And we will take your first question from Mike <unk> with Ladenburg. Please go ahead.

Speaker 1: And we'll take our first question from Mikey Schlion with a question from

Speaker 4: Good morning everyone. Art, did you accrue any past due interest or any other non-recurring items into interest income?

Good morning, everyone.

Art did you accrue any past due interest or any other nonrecurring.

Items into interest income this quarter at <unk>.

I think I understand your question I don't think we did that just what you're getting at some specific Nicky.

Speaker 2: I think I understand your question. I don't think we did. Are you getting that from a specific mickey?

Speaker 4: I'm just doing the math, the effective yield looks a little higher than our...

I'm just doing the math the effective yield looks a little higher than I expected.

Yeah.

Look I think the growth of the joined the joint ventures is certainly helping out.

Speaker 2: Look, I think the growth of the joint ventures is certainly helping out.

Alright, and what caused the increase in other G&A expense this quarter and what's the outlook for that line item.

Yeah Richard.

Sure.

Speaker 3: Sure. The GNA increased this quarter because the fund has grown in size and the activity volume. So GNA expenses are made up largely of audit expense, legal, evaluation firm, sub-administration services, and those fees have gone up because of the increase in size and volume of the activity.

<unk> increased this quarter because of finance grown in size and they can revalue. So G&A expenses made up largely of audit expense legal valuation firm self administration services and those fees have gone up because of the increasing size and volume of the activity. So.

Speaker 3: So we do expect the GNA to continue to clip at this pace that we have in the first fiscal quarter for the remainder of the year. OK, thank you for that.

So we do we do expect that the G&A to continue at this pace that we have in our first fiscal quarter for the remainder of the year.

Okay. Thank you for that.

Does your on balance sheet credit facility and securitization measure collateral at fair value or at cost.

Speaker 2: It's a classic CLO structure based on cost. And the credit facility art.

It's a it's a that's a classic CLO structure based on cost.

And the credit facility art.

The credit facility on costs as well.

Terrific.

And how much leverage does the SLS credit facility allow art.

You know, it's a it's an S. P V.

Speaker 2: You know, it's an SPV. So, you know, we have two kinds of pieces of debt. It's a joint venture. We have our securitization CLL, and we have an SPV. And they kind of work hand in glove and you get kind of an advanced rate based on certainly in the SPV, you get an advanced rate based on the type of collapse.

So we.

We have to.

Two kinds of pieces of debt at the joint venture, we have a securitization CLO and we have an SPV and.

And they can they kind of work hand in glove and you get kind of an advance rate based on certainly in the SPV get advance rate based on the type of collateral. So it can it can permit kind of essentially two to one debt to equity in that SPV. The CLO itself can permit you know more than that as a typical CLO Ken.

Speaker 2: So it can permit essentially two to one debt to equity in that SPV. The CLO itself can permit more than that as a typical CLO can.

Okay. Thank you for that I have a couple more questions, but I'll get back in the queue. Thank you.

Okay.

Thank you Mickey.

Speaker 1: And our next question comes from Kevin Foltz with JMP Securities. Please go ahead.

And our next question comes from Kevin faults with JMP Securities. Please go ahead.

Hi, good morning, and thank you for taking my questions.

Clearly the December quarter was really nice from a capital deployment standpoint growing assets on balance sheet as well as T. SSL.

Speaker 5: Clearly the December quarter was really nice from a capital deployment standpoint, growing assets on Bountsheet as well as TFSL.

Speaker 2: I know over the past year you've described the vintage is very attractive. Just curious how you would describe the deal making environment attracts with this with deals here in 2022. So first let's a good question Kevin. Thank you. Let's just talk about pacing 2021 was a blistering.

I know over the past year, you've described the vintages very attractive just curious how you would describe the deal making environment attraction desperate deals here at 2022.

Yeah. So first lets good question, Kevin and thank you, let's just talk about pacing 2021 was a blistering.

Speaker 2: pace in the elective or particularly towards your end. A number of things came together to make 2021 extraordinarily active.

Pace in deal activity, particularly towards your at a number.

Number of things came together and make 2021 extraordinarily active.

Is 2022 going to be as active as 2021.

Speaker 2: Is 2022 going to be as active as 2021?

Speaker 2: Right now it looks like that's unlikely. You know, the year has started out as a typical year where the first quarter is relatively slower, first calendar quarter is relatively slower as people still digest and still are recovering from a very active, you know, calendar 2-4. So, you know, we think this will probably be a more normalized year. Is that going to look like 2019?

Right now it looks like that's unlikely you know the year has started out as a typical year, where the first quarter is relatively slower.

First calendar quarters relatively slower as people still digest and still are recovering from a very active.

You know calendar Q4, so you know.

We think this will probably be more normalized year or is that going to look like 2019.

Speaker 2: You know, that might be if you said, OK, you know, if 2019 activity, the base case, probably, you know, I think that'd be probably a reasonable expectation to model the 2019 kind of pacing for 2022 versus the 2021 pacing for 2022.

You know that might be you said, okay. You know, it's 2019 activity. The base case, probably you know I think that would be probably a reasonable expectation to model 2019 kind of pacing.

For 2022 versus the 2021 pacing for 2022.

Second part of the question is how do you think about it from a vintage standpoint, and the types of deals that you're seeing I think we're we're we're pleased at least dependent park.

Speaker 2: Second part of the question is how do you think about it from a vintage standpoint and the types of deals that you're seeing? I think we're pleased at least at Penn and Park.

Speaker 2: that we're focused on an area of the market that is not getting the attention and the focus.

That we're focused on an area of the market that is not getting the attention and focus.

Speaker 2: and therefore we can be much more important to the borrowers. Where is the focus and the attention and you're seeing it in all the articles that everyone reads and some of the research you all provide, which is that upper middle market or the Goliath investment management firms have very massive pools of direct lending capital.

And therefore, we can be much more important to the borrowers, whereas the whereas the focus and the attention and we're seeing it in all the articles that everyone reads in some of the research you all provide which is that upper middle market or the Goliath.

You know our investment management firms had very massive pulls in direct lending capital.

Speaker 2: and they are competing heavily among themselves and they are competing heavily against the broadly syndicated loan market and their pitch, as you all know, is their leading share of the broadly syndicated loan market.

And they are competing heavily among themselves and they are competing heavily against the broadly syndicated loan market and their pitch as you. All know is they're eating share of the broadly syndicated loan market.

Speaker 2: And that's great, you know, up there at that upper middle market.

That's great you know up there that that upper upper.

Upper middle market.

Speaker 2: decision making is compressed, the leverage is higher, there are no covenants, you know, the information rights are far fewer. They only get financial statements every quarter. And, you know, for us, that's all very good because it leaves the core middle market or even the lower middle market a big opportunity for people like us where our capital has meaning to the borrower or we have.

As you are making is compressed leverages higher there are no covenants.

The information rights are far fewer they only get financial statements every quarter and you know for US. That's all very good b. The leaves the core middle market or even a lower middle market, a big opportunity for people like us where our capitalize meaning to the borrower where we have.

Speaker 2: 60 weeks to do proper due diligence where we can really understand what we're buying, what we're more important to the borrower, and as such, you know, the yields are higher, the upfront OID is higher, the covenants, we get quarterly maintenance tests that have meaning. In all cases, we get monthly financial statements.

Six to eight weeks to do proper due diligence, where we can really understand what we're buying what we're more important to the borrower and as such you know the yields are higher the upfront OID is higher the covenants, we get quarterly maintenance test that had meaning.

In all cases, we get monthly financial statements.

Speaker 2: So for us, that whole move in the upper middle market is creating this very nice window for us. Our target market today is kind of we start out with these companies that start out with between 10 and 30 of EBITDA. And they all have a game plan for growth, whether it be organic growth or inorganic growth.

So for us that will move in the upper middle market is creating this very nice a window for us and our target market. Today is kind of we started out with these companies that start out with between 10 and 30 of EBITDA.

They all have a game plan for growth, whether it be organic growth or inorganic growth.

Speaker 2: our debt capital can fuel that growth, and we can participate in the upside through the equity combat.

Our debt capital can fuel that growth.

Can participate in the upside through the equity call invests. So we take that $10 million to $30 million EBITDA company, along with the sponsor we grow with the 40 50 60 70 hundreds of EBITDA. It then goes up to that upper tier of the market, we exit the debt and we're still riding the equity call invests. So it's been a very good place for us to be a return.

Turns have been over the last you know five six years excellent because that's kind of the niche we're in and in the niche is getting bigger as the big guys scale up.

Speaker 5: Great, that's really helpful color there are and then just a follow up question relating to industry sensitivity because you provide the weighted average LIBOR floor for floating rate investments. Yes, it's about 1% Richard, right?

Great. That's really helpful color there and then just a follow up question relating to interest rate sensitivity could you provide the weighted average LIBOR floor for floating rate investments.

Yeah, it's about 1% Richard right.

Yes, that's right an average LIBOR floor is.

Just 1%.

Okay. Thank you and then I'll leave it there congratulations on a really strong quarter.

Speaker 5: OK, thank you. And then I'll leave it there. Congratulations on a really strong quarter.

Thanks Kim.

Yeah.

And we will take our next question from Paul Johnson with K B W. Please go ahead.

Speaker 1: And we'll take our next question from Paul Johnson with KBW.

Yes. Good morning, guys. Thanks for taking my questions just going back to Mickey's question on the.

Speaker 6: Yeah, good morning guys. Thanks for taking the questions. Just going back to Miffy's question on the portfolio income. I know you said it doesn't sound like there's really that many non-recurring items in there. If I'm looking at it right, I think there was roughly $17 million of interest income this quarter.

The portfolio income.

I know you said it doesn't sound like there's really that many nonrecurring items in there.

If im looking at it right I think it was you know roughly $17 million.

Interest income this quarter.

Speaker 6: It's like roughly like a 7.5% yield on the debt portfolio. Do you see that as pretty sustainable for where the portfolio is at today going forward?

It's like roughly like a seven 5% yield on the debt portfolio.

Do you see that as pretty sustainable for where the portfolio is at today going forward.

Speaker 2: Yeah, look, as long as our credit quality remains strong, we do have some more rotation to do in that equity column best portfolio. We're going to talk more about pivot later at PNNT, but PFLT does have a piece of pivot. And so we will we should continue to have some more equity rotation. And certainly as we upside this joint venture with Kemper, we're very hopeful that we can continue to grow recurring.

Yeah, Hey look as long as our credit quality remains strong we do have some more rotation to do in that equity co invest portfolio.

We are going to talk more about pivot a later P. N N T. But P. F. L. T does have a piece of pivot and so we will we should continue to have some more.

Equity rotation and certainly as we upsize this joint venture with Kemper.

We're very hopeful that we can continue to grow recurring.

Speaker 2: NII to clearly have the case where we're beating the dividend handily on a consistent basis.

NII.

You know clearly.

The case, where we're.

We're beating the dividend handily on a consistent basis.

Speaker 6: Great, thanks for that. My other question, which is on investment in the portfolio, I'm just curious on marketplace events. I think that's been a role for some time on your books. But the mark on that has been kind of steadily going up over time. Do you guys have any kind of update on that company or outlook as far as what's going on there?

Great Thanks for that.

My other question.

Which is on our investments in the portfolio.

Just curious on the marketplace.

It's been on non accrual for some time on your books.

The Mark on that has been kind of steadily going up over.

Over time, what you guys have any kind of update on that company or does your outlook as far as what's going on there.

Yeah, and you can see it in the market the Tradeshow business home goods things of that nature.

Speaker 2: Yeah, and you can see it in the market, the trade show business.

Speaker 2: home goods, things of that nature.

Speaker 2: It's a really well run company. We took control of it, you know, shortly after COVID. Excellent management team.

It's a really well run company, we took control of it you know shortly after Covid excellent management team.

Speaker 2: And they've operated very well through COVID and managed to cut their costs appropriately, still keep the business going, maintain strong cash position. And now that we hopefully are coming out of COVID in a more fulsome fashion, you know, we think it's well positioned to bounce back.

And they've operated very well through us recovered and manage too you know cut their cost appropriately still keep the business going maintained strong cash position and now that we hopefully are coming out of COVID-19 in a more fulsome fashion, we think it's well positioned to bounce back to what it was pre COVID-19 and in <unk>.

Speaker 2: to what it was pre-COVID and hopefully more and higher.

More at higher.

Speaker 2: you know as they operate it so they're the leader in their industry we think doesn't end up doing some add-on acquisitions

You know as as they operate it so they're the leader in their industry, we think they're going to end up doing some add on acquisitions.

Speaker 2: that can continue to help grow EBITDA. You know, over the coming, you know, over the coming quarters and year or two, we hope and we expect EBITDA to bounce back very nicely.

Yeah that can continue to outgrow EBITDA you know over the coming you know over the coming quarters in year or two we hope and we expect EBITDA to <unk>.

It's back very nicely.

Speaker 6: Okay, thanks for that. And then just last question. Do you guys have any update on an estimated spillover amount from this quarter?

Okay. Thanks for that and then just last question.

Do you guys have any update on the estimated spillover amount from this quarter.

Richard over to you I don't think it's anything major since last quarter, we announced we announced every year once a year in our September Q.

Speaker 2: Richard over to you, I don't think it's anything major since last quarter. We announced every year once a year in our September Q. What the spillover is Richard you want to refresh us with what that was. Yeah, we can look at you.

What's the spillover is what which of your refresh us as to what they owe us.

Yeah, we can.

Get back to you on that.

After this care.

Speaker 2: after this. It's in the queue. I'm going to say it's 20 cents a share something, maybe 30, something that's 20 cents a share.

If it's in the Q I'm going to say its 20 cents a share something that something may be 30, something that 'twenty share soon.

Speaker 6: Sure, yeah, I think it was like 22 cents last quarter. Yeah, yeah.

Sure, Yes, I think it was like one or two since last quarter.

Yeah.

Speaker 7: Okay, um, yeah, I appreciate that. Yeah. Yeah, and that

Okay.

Yes, I appreciate that lesser all my questions.

Yeah and that that would've grown.

That would have grown you know this quarter was the onboarding, we do that right. So if you take what was what was on September <unk>.

Speaker 2: I would have grown this quarter with the over the years. So, the table is what was on September . On the September and.

On the September and.

Speaker 2: and add that five cents or whatever it was, and that'll probably be good enough for now. We can follow up after. Thanks, Am Twitter.

And at that price sense of whatever was in.

Probably be good enough for Cornell we can follow up after.

Okay.

Thanks for that.

Yeah.

Speaker 1: And we'll take our next question from Mike E. Schlein with Laddenberg. Please go ahead.

And we will take our next question from Mike Each line with Ladenburg. Please go ahead.

Speaker 4: or just to follow up on that average floor in the debt portfolio.

Art just to follow up on that average floor in the debt portfolio. I think you said it was one 1% in the on the balance sheet is it similar in the senior loan fund as well.

Speaker 4: on the balance sheet. Is it similar in the Senior Loan Fund?

Speaker 2: Yeah, yeah. Look, the typical floors are 1% at least in our portfolios. I think we have a chart in the queue. You know, what it would mean, you know, if LIBOR, if interest rates go up, you know, 1%, I think it ends up being about hurting NII about a penny a share a quarter.

Yeah, Yeah. If you look at the typical floors of 1% at least in our portfolios and I think we have a chart in the queue. What it would mean you know if if LIBOR if interest rates go up 1% I think it ends up being about hurting and I had about a penny a share a quarter.

Right.

Speaker 4: Art, how do you feel about the scope to term out some of the credit facilities?

How do you feel about the scope to term out some of the credit facilities.

<unk>.

To help protect the balance sheet against rising interest rates.

Speaker 2: Yeah, it's something we think about. It has to do with credit rating. It has to do with the market. We like the securitization market, by the way, as you know. The CLM market is great long-term capital.

Yes, it's something something we think about it has to do with credit rating. It has to do with markets. We like the securitization market by the way as you know CLO market has great long term capital and its.

Speaker 2: You can do some of that fixed, most of it is floating. But we also like being matched. You know, we also like being matched. So it's a plus and a minuses I think, you know, as interest rates go up, yes, we'll probably be hurt a little bit. On NII, I think the growth of PSSL, the equity rotation, you know, is gonna mitigate that more and at least we'll be matched on the upside if and when rates get there. I understand. Thank you.

You can do some of that fixed most of it is floating.

But we also likely matched you know I would also like be masked. So it's it's a there's pluses and minuses I think you know as interest rates go up yes, we'll probably be hurt a little bit on NII I think the growth of P. S. S. L. The equity rotation.

You know it was going to always going to mitigate that and more and at least will be matched on the upside if and when rates get there.

I understand thank you last question art, how do you feel about the portfolio companies' ability on average.

Speaker 4: portfolio company's ability on average to pass through.

To pass through inflation on to their customers.

Speaker 2: You know, it's something that goes to the core of what we, how we underwrite and how we think about the companies that we invest in.

Yeah.

Something that goes to the core of what we how we underwrite and how we think about the companies.

That we invest in.

Speaker 2: You know, we're always asking ourselves the question, if this company goes away, does anybody really care? Who cares if this company goes away? Which really brings you to kind of how important are these companies to their customers?

You know, we're always asking ourselves the question is.

If this company goes away does anybody really cared too.

So this company goes away.

Which really brings you to kind of how important are these companies to their customers.

Speaker 2: Do they have a price? You know, can they raise prices in a relatively easy fashion? Will their customers accept those price increases? The average Yup'a dot margins in our portfolio are north of 20%, which by definition means

Do they have a pricing and how can they can a raise prices.

In a relatively easy fashion, whether customers accept those price increases.

The average EBITDA margins in our portfolio of north of 20%, which by definition means.

Speaker 2: they're getting really attractive margins and they're really well positioned with their customer base. So the vast majority of the companies that have asked for price increases so far have gotten them. And if they haven't asked for it, they are asking for it as we speak. And in this environment, these companies are getting them. They're important to their customers. And by the way, the environment does help everyone knows costs are going up.

We're getting really attractive margins and they are really really well positioned with their customer base. So the vast majority of the companies that have that have asked for price increases so far have gotten them.

And if they haven't asked for it they they they are asking for it as we speak.

And in this environment you know these companies are getting them. They are important to their customers by the way the environment does help everyone knows costs are going up.

Speaker 2: and it's not unreasonable for companies to be asking for price increases in this environment. So we've had a pretty good experience thus far with pricing increasing in the portfolio.

And it's not unreasonable for companies to be asking for price increases in this environment. So so we've had a pretty good a.

Pretty good experience, thus far with with pricing increasing in the portfolio.

Speaker 4: Thank you for that Art, that's really helpful. Those are all my questions this morning.

Thank you for that that's really helpful. Those are all my questions. This morning.

Thanks Maggie.

And our next question comes from David Miyazaki with confluence investment management. Please go ahead.

Speaker 1: And our next question comes from David Miyazaki with Confluence Investment Management.

Speaker 2: Hi, good morning. Congratulations on the quarter. Just kind of wanted to talk a little bit about, I mean, since you guys brought out Pennant Park floating, you have this overt strategy pointing your assets toward floating rate coupons. And I think that's something that has become more widely adopted across the industry. So I just like to hear your, your perspective on how the life.

Hi, good morning, congratulations on the quarter.

Thanks, Dan just kind of wanted to talk a little bit about I mean since you guys brought out.

Park floating.

We have risk overt strategy claim your assets towards floating rate.

Coupons.

I think thats something that has become more widely adopted across the industry.

I just like to hear your perspective on.

How the LIBOR floors.

Speaker 5: may change as we go into a period when, you know, if you look at the Fed's chart, we should be approaching LIBOR or the reference rate around 100 basis points at the end of this year. You know, historically, I don't think that a lot of people have moved their floors up while the Fed is tightening and they worry more about it when the Fed's coming down. So could you kind of talk about your views on that?

Change as we go into a period when you have to look at the Fed's Dot chart, where it should be approaching.

LIBOR or the reference rate around 100 basis points awarded this year.

Historically, I don't think that a lot of people have moved their floors up while the fed has tightened and worry more about it when the feds coming down so could you kind of talk about your views on that.

Yes. It is.

Speaker 2: Yes, it's interesting. I mean, we'll see how the market evolves, David. Historically, when we've had a rising...

It's interesting I mean, we will see how the market evolves, David historically, when we've had rising.

Speaker 2: Libor and you can go back and it's short as I think a couple years ago. I think Libor was 2.7 2.8 percent not too long ago There was some erosion of the Libor floor. Libor floors were getting taken out of

LIBOR and you can go back and it's a shortage I think a couple of years ago, I think LIBOR was 2.728% not too long ago.

There was some erosion of the LIBOR floor LIBOR floors were getting taken out.

Speaker 2: the documents and that's some, you know, I think the best majority of the deal still then when LIBOR was at 2.7% still had LIBOR floors. And I guess, by the way, they're going to SOFR floors as we, you know, as we see how the things go in the coming months. So if you look at the history floors...

The documents and that some of you know I think the vast majority of the deals still then when LIBOR was at 2.7% still have LIBOR floors, and I guess by the way, they're going to social floors. As we you know as we see how the things go in the coming months.

So if you look at the history.

Wars or seem like they're permanent part of the landscape, although used to see some erosion.

Speaker 2: or seem like they're a permanent part of the landscape, although you do see some erosion when, you know, so far reliable or far above what a typical floor would be. That's what we've seen. But it'll be interesting to see how things, you know, develop this time around if we do indeed get above 100 base points in terms of short term risk-free rates.

And you know so for a LIBOR or far above what a typical floor would be that's what we've seen but it'll be interesting to see how things go.

<unk> developed this time around if we do indeed get above 100 basis points in terms of short term risk free rates.

Do you ever have the ability.

Speaker 5: Do you ever have the ability, you know, let's go back to that period you talked about when LIBOR is 2% plus.

Let's go back to that period, you talk about one when LIBOR is 2% plus.

Is it something that you have the ability to negotiate for a higher floor for people aren't worried about lower rates is that something that you can extract more negotiations or is that just generally not yeah.

Speaker 5: Is it something that you have the ability to negotiate for a higher floor when people aren't worried about lower rates? Is that something that you can extract in your negotiations, or is that just generally not happening?

Speaker 2: Yeah, it's a great question. And, and yeah, the other side of the coin, you're right, is one libel is over 2%. You know, people are happy to give you a 1% floor because it's the sleeves off their vest, right? So, and if that's an opportunity to go for one and a quarter or one and a half.

Yeah, It's a great question and and and the other side of the coin right is when LIBOR was over 2% you know people were happy to give you a 1% floor because it's the sleeves off their best right. So.

And is that an opportunity to go for one in the quarter or one and a half.

Speaker 2: And that's certainly something we think about at that time. I think it really just comes down to the...

And that's certainly something we think about at that time I think it's really just comes down to the.

Speaker 2: the negotiation at that time, how much they need you, what their other options are, you know. And PFLT, specifically, we specifically seek out the lower risk portion of the direct lending market. That's always been for PFLT what we're looking to do. Okay to take a lower risk, get a lower reward, have a lower expense ratio.

The the negotiation at that time, how much they need you.

And what their other options are you now and P. F L T spot.

Specifically, we specifically seek out low the lower risk portion of the direct lending market. That's always been for P. F. L. T. What we're looking to do okay to take a lower risk at a lower reward have a lower expense ratio.

Speaker 2: And for that lower risk investor who wants to really sleep well at night, PFLP should be a good place for them to think about. So I would imagine in the strategy...

And for that you know lower risk investor, who wants to really sleep well at night.

P F L. P should be a good place for them to think about so I would imagine in the strategy.

Speaker 2: if even in a higher short-term rate environment, we're still going to be trying to select the absolute best credits and willing to take a lower yield for that comfort of sleeping at night. So probably in this strategy, maybe we can get it from time to time, but I won't count on it, since we specifically in the strategy want absolutely the best credits. Okay, that's helpful.

If it if we're even in a higher <unk>.

Short term rate environment, we're still going to be trying to select the absolutely best credits and willing to willing to take a lower yield for that you know comfort of sleeping at night. So probably in this strategy in a way you can get from time to time, but I wouldn't count on it since we specifically in the strategy you don't want a one absolutely the best credits.

Okay. That's helpful.

I'm wondering if the tunnel.

Extend a little bit on the concept that you.

Speaker 5: extend a little bit on the concept that you talked about with the ability of your borrowers to pass inflation pressure through. Because of the LIBOR floors, to some extent, your borrowers haven't benefited as the Fed has dropped rates down to zero, right, because they're at the floor, which has the opposite effect of kind of insulating them from the first four hikes in the Fed raises overnight rate. So how...

You talked about the ability of your borrowers to pass inflation pressure through.

Because of the LIBOR floors to some extent your borrowers haven't benefited as the fed dropped rates down to zero right because they are at the floor.

Which has the opposite effect of kind of insulating them from the first four hikes.

And the fed raises overnight right.

So how would you feel.

Is there enough pricing power in your borrowers model the hurdle, it's kind of isn't duality of rates rising.

Speaker 5: Is there enough pricing power in your borrower's model to handle this duality of rates rising, LIBOR rising above 100 basis points at the same time having to push inflationary costs through to customers? Is there enough room in that 20% EBITDA mark?

LIBOR rising above a 100 basis points at the same time, having a push inflationary cost through to customers is there enough room above that 20% EBITDA margin.

Speaker 2: Yeah, I mean, we think so. So far it's working. So far the price increases and it could be at 5% or 7% or 10% or two fives or whatever. I mean, everybody's got their own way of doing their price increases.

Well I mean, we think so so far it's working.

So far the price increases and it could be a 5% or 7% or 10%.

Or two fives or whatever I mean, everybody's got their own way of doing their price increases.

Speaker 2: They've been sticking. They've been sticking. When we look at our credit stats, we're over three times interest coverage, 3.3 times interest coverage. So we feel like we're in kind of an okay place. Sure, I wish we had the upside of the Fed. We had the upside of the lender as the Fed was rising, but it was raising rates, but we've had the benefit of...

They've been sticking you know they've been sticking out you know when we look at our credit stats you know were over three times interest coverage 3.3 times interest coverage so let's.

We feel like we're in kind of an okay place sure I wish we had the upside is that we had the upside as the lender as I said was.

It was rising, but who is raising rates, but you know we've had the benefit of.

Speaker 2: you know, very healthy yield, you know, as they were lowering and even through the pandemic, so we can't really complain about it.

You know very healthy yield you now as they were lowering and even through even through the pandemic. So we can't really complain about it.

Speaker 2: And we think, you know, if we're picking the right credits, they have the right cushion built into the credit stats. And if we can find credits.

And we think we're picking the right credits that have the right cushion built in into the into the <unk>.

Credit stats and if we can find credits.

Where they are important to their to their customers and that's really kind of honed in on kind of why we're we're focused today on five key sectors, that's where there's very high very good high free cash flow margins, where the margins period.

Speaker 2: where they're important to their customers. And that's really kind of hones in on kind of why we're focused today on high key sectors. That's where there's very good high free cash flow margins, where there's good margins period, and where we know the right questions to ask. So, you know, as we kind of think about ourselves and how we try to improve over the years, it's really kind of focusing in on those sectors that really provide those kinds of EBITDA margins.

And where we know the right questions to ask so you know as we kind of think about ourselves and how we tried to improve over the years, it's really kind of folks at focusing in on those sectors that really.

They're really provide those kinds of EBITDA margins.

Speaker 5: Okay, great. Thank you very much and congratulations again on the quarter.

Okay, great. Thank you very much and congratulations again on the quarter.

Thanks, David.

There are no further questions at this time I will now turn the conference back to Mr. Penn for any closing remarks.

Speaker 1: There are no further questions at this time, and we'll now turn the conference back to Mr. Penn for any.

Speaker 2: Thanks, everybody. We really appreciate your attendance today. And next time we chat, it'll be in early May for March quarter. So thanks, everybody. Take care.

Thanks, everybody, we really appreciate your attendance today and next time, we chat or it'll be in early may.

Each quarter. So thanks, everybody.

Take care.

This concludes today's call. Thank you for your participation you may now disconnect.

Yeah.

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