Q1 2023 PennantPark Floating Rate Capital Ltd Earnings Call
Speaker 2: Good morning and welcome to the Pennant Park Floating Rate Capital's first Fiscal Quarter 2020-2023 Earnings Conference Call. Today's conference is being recorded and 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 speaker's remarks. 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. It is now my pleasure to turn the call over to Mr. Art Penn.
Speaker 3: Chairman and Chief Executive Officer of Pennant Park Floating Rate Capital. Mr. Penn, you may begin your conference. Thank you and good morning everyone. I'd like to welcome you to Pennant Park Floating Rate Capital's first Fiscal Quarter 2023 Earnings Conference Call. I'm joined today by Rick Alorda, our Chief Financial Officer.
Speaker 4: Rick, please start off by disclosing some general conference call information and included discussion about forward-looking statements.
Speaker 5: Thank you Art. I'd like to remind everyone that today's call is being recorded. Please note that this call is the property of Penn and Park floating rate capital and that any unauthorized broadcast of this call in any form is
Speaker 6: and audio replay of the call will be available on our website.
Speaker 7: I'd also like to call your attention to the customary safe harbor disclosure in our press release regarding forward looking information.
Speaker 8: 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 SEC for important factors that could cause actual results to differ materially from those projections.
Speaker 9: We do not undertake to update our forward-looking statements unless required by law.
Speaker 10: To obtain copies of our latest SEC filings, please visit our website at pennantpark.com or call us at 212-905-1000.
Speaker 11: At this time, I'd like to turn the call back over to our Chairman and Chief Executive Officer, Part 10.
Speaker 12: Thanks, Rick. We're going to spend a few minutes discussing how we fared and the quarter ended December 31st.
Speaker 13: how the portfolio is positioned for the upcoming quarters, our capital structure and liquidity, a detailed review of the financials, and then open it up for Q&A. Combination of excellent credit quality and higher yields on our portfolio matched with a visible pathway to more optimized balance sheets at PFLT.
Speaker 14: and the JV positioned us for stable and growing NII over the coming quarters.
Speaker 15: For the quarter ended December 31st, our net investment income was 30 cents per share.
Speaker 16: The credit quality of the portfolio remains solid. As we guided last quarter, we have placed one new loan on non-croll. As of December 31st, we had only three non-crolls out of 126 different names in PFLT.
Speaker 17: This represents only 1.9% of the portfolio at cost and 0.6% at market value.
Speaker 18: Our credit statistics are among the most conservative in the industry with an average death e-beta on our underlying portfolio of 4.7 times.
Speaker 19: With a debt portfolio that is 100% floating rate, we are well positioned to continue to grow our net investment income as base rates rise.
Speaker 20: Before the quarter ended, December 31st, our weighted average yield to maturity was 11.3%.
Speaker 21: which is up from 10% last quarter and 7.5% last year.
Speaker 22: With this backdrop of consistent earnings and stable portfolio, the Board of Directors has approved an increase in the monthly distribution to 10 cents per share beginning with the March distribution.
Speaker 23: This represents a 5.3% increase in the monthly distribution.
Speaker 24: We believe net investment income can continue to grow as we optimize the balance of both PFLT and RJV.
Speaker 25: With PFLT leverage at 1.3 times death to equity and target leverage of 1.4 to 1.6 times, we plan on thoughtfully moving towards our target.
Speaker 26: Gap NAV decreased to $11.30 or 2.7%, which was due primarily to market-related fair value adjustments to our equity portfolio and our new non-accrual partially offset by an increase in Gap NAV due to fair value adjustments on our credit facility and notes.
Speaker 27: and their investment income and access of the dividend.
Speaker 28: During the quarter we continue to originate attractive investment opportunities for both the PFLT portfolio as well as the JV portfolio.
Speaker 29: For the quarter, PFLT invested $66 million in new and existing portfolio companies, had a weighted average yield of 11.2% and had sales and repayments of $63 million.
Speaker 30: For the new investments and new portfolio companies, the weighted average debt to the EBDA was 3.7 times.
Speaker 31: The weighted average interest coverage was 2.3 times.
Speaker 32: And the weighted average loan to value was 22%.
At quarter end, the J.B. portfolio was $751 million and we will continue to execute on our plan to grow the J.B. portfolio to $1 billion of assets.
We believe that the increase in scale and the JB's attractive ROE will also enhance PFLT's earnings momentum.
We believe that the current vintage of middle market directly originated loans should be excellent.
Leverages lower, spreads and up front fees and no idea higher and covenants are tighter.
In January , we issued 4.25 million shares and raised $48 million, which provides the company with additional capital to invest in this excellent vintage in order to grow NII.
From an overall perspective in this market environment of inflation rising interest rates
geopolitical risk and a potentially weakening economy, we believe that we are well positioned.
We like being positioned for capital preservation as a senior secured first lien lender focused on the United States
Where floating rates on our loans can protect us against rising inflation.
We continue to believe that our focus on the core middle market provides the company with attractive investment opportunities
where we are an important strategic capital to our borrowers.
We have a long-term track record of generating value by successfully financing high-growth middle-market companies in five key sectors.
These are sectors where we have substantial domain expertise. Know the right questions to ask and have an excellent track record.
They are business services, consumer, government services and defense.
health care and software and technology.
These sectors have also been resilient and tend to generate strong free cash flow. It is important to note that we do not have any crypto exposure in our software and technology investments.
In many cases, we are typically part of the first institutional capital into a company, and the loans that we provide are important strategic capital that fuel the growth.
and helps that 10 to $20 million dollar Ubisoft company grow to 30, 40, 50 million of Ubisoft or more. We typically participate in the upside by making inequity co-investment.
Our returns on these equity co-investments have been excellent over time. Overall for our portfolio and overall for our platform, from inception through December 31st, we have invested over $375 million in equity co-invests.
and have generated an IRR of 27% and a multiple uninvested capital of 2.3 times.
Because we are an important strategic lending partner, the process and package of terms we receive is attractive.
We have many weeks to do our diligence with care. We thoughtfully structured transactions with sensible credit statistics, meaningful covenants, substantial equity cushions to protect our capital, attractive upfront fees, and spreads, and inequity investment.
Additionally, from a monitoring perspective, we receive monthly financial statements to help us stay on top of the companies.
With regard to covenants, virtually all of our originated personally loans have meaningful covenants which help protect our capital.
This is one reason why our default rate and our performance during COVID was so strong and why we believe we are well positioned in this environment.
This sector of the market, companies with 10 to 50 million of EBITDA is the core middle market. The core middle market is below the threshold and does not compete with the broadly syndicated loan or high yield markets.
Many of our peers who focus on the upper-middle market state that those bigger companies are less risky.
That may make some intuitive sense, but the reality is different.
According to S&P, loans to companies with less than $50 million of EBITDA have a lower the fall rate and higher recovery rate than loans to companies with higher EBITDA.
We believe that the meaningful covenant protections of core middle market loans, more careful diligence and tighter monitoring, have been an important part of this differentiated performance.
The borrowers in our investment portfolio are generally performing well. As we said earlier as of December 31st, the weighted average debt fee in the portfolio was 4.7 times and the average interest coverage ratio, the amount by which cash income exceeds the cash interest expense was 2.8 times.
calculated upon LTM interesting expense. The interest expense coverage ratio when calculated using the annualized interest expense and the current liboard and so-for-base rates is 2.2 times.
This compares very favorably to the market average of 1.6 times which is according to Lincoln International.
Credit quality since inception over 10 years ago has been excellent.
PFLT has invested 5.1 billion dollars in 455 companies.
And we have experienced only 16 non-acrolls.
Since inception, PFLT's loss ratio is only six basis points annually.
Our experience and talented team and our wide origination funnel is producing active deal flow. Our continued focus remains on capital preservation and being patient investors.
Our mission in goal, our steady stable and protected dividend stream, coupled with preservation of capital, everything we do is aligned to that goal.
We seek to find investment opportunities and growing middle market companies that have high free cash flow conversion.
We capture that free cash flow primarily in first lane senior secured instruments
and pay out those contractual cash flows in the form of dividends to our shareholders.
Let me now turn the call over to Rick, our CFO , to take us through the financial results in more detail.
Thank you, Art. For the quarter end of December 31, Net Investment Income was 30 cents per share, and operating expenses for the quarter were as follows.
Interest and expenses on debt were $9.9 million.
Base management and performance-based incentive fees were $6.4 million.
General and Administrative expenses were $850,000 and provision for taxes were $534,000.
For the quarter ended December 31, net realized and unrealized change on investments
including provision for taxes was a loss of 15.4 million or 34 cents per share.
The unrealized appreciation on our credit facility and notes for the quarter was $2.1 million, or $0.05 per share.
As of December 31st our GAAP NAV was $11.30, which is down 2.7% from $11.62 per share.
Adjusted NAV, excluding the mark to market of our liabilities, was $1,122 per share, down from $1,159 last quarter.
Our capital structure is diversified across multiple funding sources, including both secured and unsecured debt.
Our gap debt to equity ratio was 1.3 times.
As of December 31, our key portfolio statistics were as follows.
Our portfolio remains highly diversified with 126 companies across 44 different industries.
The portfolio was invested in 87% first-learn senior-scured debt.
including 17% in PSSL.
Less than 1% in second lien debt.
and 13% in equity, including 4% in PSSL.
Our overall dead portfolio has a weighted average yield of 11.3% and 100% of the portfolio is floating rate.
Now let me turn the call back to Art.
Thanks Rick. In closing, I'd like to thank our dedicated and talented team of professionals for their continued commitment to PFLT and the shareholders. Thank 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. To our audience today, if you would like to ask a question, please signal us by pressing Star and One on your telephone keypad. If you're using a speaker phone, please make sure that your mute function is turned off to allow your signal to reach our equipment. Again, please press Star and One if you would like to ask a question.
We'll go first to the line of Mickey Schleen at Latin Bird. Please go ahead. Your line is open.
Art, I wanted to understand your view on the outlook for credit. There are certain investments in the portfolio marked in the 80s or even below, which obviously indicates some distress. Meanwhile, we had a very strong January jobs number and...
you know, perhaps the possibility of a soft landing is even more real than we thought maybe even a quarter ago, but the consumers were trenching. So, you know, when we think about all of that, what do you see in terms of trends in terms of the portfolio's credit quality as this year progresses?
Thanks, Mickey. It's a really good question. Let me just state that when we underwrite new deals. It's a really good question. Let me just state that when we underwrite new deals. Let me just
Today, we're assuming a soft economy out of the gates that are going in assumption that's how we need to underwrite.
And usually when you're in our business, when you're doing a five to seven year loan, you need to put a downside or recession case in the model at some point anyway, these odds are over a five to seven year period, you're going to get a period of economic weakness. We're underwriting our new deals, we're assuming We're going to say that we want a new loan as money that includeslet's say more 198,000 people lead is very much the
that there's a weak economy, you know, out of the gates. That said, it's not your right, it's not as clear given the data that we're all seeing, that there really is that much of a soft economy, at least at this point. Certainly the consumer area is one of most focused.
and how the consumers doing walk or add to center one new non-cooled his evidence of
of that we've done extra scanning of our consumer portfolio recently and lighted that.
Consumer we always upfront put less leverage on out of the gates than we did the rest of our portfolio. So even though the rest of our portfolio at inception may have been underwritten at that deep at the top of three of four and a half times, four and a half times, our consumer names we would typically underwrite even before this.
kind of with a three handle and a three times three and a half time zone that he but does so we were always up front kind of extra cautious on that. You know we've done an extra scan of the consumer companies we've had extra external scrubbing and we feel actually pretty good that the companies we've selected in that space.
I have a real reason to be.
people care about them, their customers care about them, their margins are sustainable. They've got real brands that have value. So there's never any guarantee, but we feel fairly decent about that piece of the portfolio, the rest of the portfolio, which is our in our key industry self-care.
government services, business services, technology software. Those names today are performing pretty well. And we feel pretty good about that. Again, the comfort you get, or we get is we're conservative going in. We underwrite to low multiples.
That's been the key of PFLT from the get-go. We specifically wanted a lower risk portfolio knowing we would get lower yield as part of that. Now for 11 years that seems to be working out.
I appreciate that in-depth explanation. That's really helpful. And just one follow-up question on the right-hand side of the balance sheet. The balance of the principal on the 2023 notes is due at the end of the year. Just from the use of proceeds of the Common Equity offering, are you targeting...
some of those proceeds to go towards that, or do you expect to use the credit facility, or just proceeds from sales and repayments? How should we think about financing the maturity of those notes?
So the maturity is the December of this year. So right now we're not specifically earmarking some of the equity proceeds for that refinancing. We do have the capability today.
to repay those bonds using the revolving credit facility. So we're continuing to look at other refinancing options, knowing that we could use the revolving credit facility we have in place today to refinance that debt.
I understand. Those are all my questions this morning. I appreciate your time. Thank you.
Thank you. Our next question comes from Paul Johnson at KBW.
Good morning guys, thanks for taking my questions. Just given the overlap portfolio with JV, just wondering if you have any thoughts around the non-cruel walker Edison and if that should affect the ROE.
given the JB's high credit quality other than Walker Edison.
as well as the anticipated growth.
I think the JV was about 750 million of assets at quarter end. We're targeting over time to get that to about a billion. So we feel as though the NII there coming out or the ROE coming out of that JV should continue to grow.
Okay, thanks. And then just one investment I had a question on one particular credit. Research now just marked down this quarter. I'm curious if that was credit related. There's any sort of marked mark to mark going on there and just.
any sort of description of what exactly that investment company is.
Yeah. So research now is traded and actively traded in the BSL market. It's a company we've financed for a long time. It's one of the predecessor companies called Survey Sampling. We did a private loan for it. So we've followed it over the years.
We thought the credit was a solid credit. It did hit a little pocket of weakness recently. We don't feel as though at this point there's a.
There's a cruel risk with research now. They seem to have ample liquidity. There's a big slug secondly beneath it. A big chunk of equity beneath that. We feel our low in the value is in good shape and that even with, if they have soft results going forward, even with,
Thanks, Paul. Thank you.
Our next question today comes from Kevin Foltz at JMP Securities.
Hi, good morning guys and thank you for taking my questions.
My first question is a platform level one on your deal selectivity rate and deal volume. Could you remind me where your historical average, sorry, what your historical average deal selectivity rate is and how that has trended recently? And then second, could you give us an idea of the total dollar value or number of deals you review on an annual basis?
Yeah, I mean, we actually like to be very hugely typically around 5% of what we track.
There's a lot of deals which come in that are kind of you know what we call desk kills that Don't even kind of get logged into our system It's amazing once you have a publicly traded BDC or an SBIC license the amount of incoming emails that an organization can get so Very high seal activity. The good news is our team knows really what fits our box
You know, usually it's about, you know, a thousand deals a year. We usually pick 50 or 60. And that's kind of been the historical, the historical kind of hit ratio. You know, in terms of deal activity, certainly it's slowed down and that could be at least this path. But the quarter wind.
today the quarter ends in March. Could be a couple reasons for that A, there's a typical seasonal flow down, first Q, fourth quarter, if anyone wanted to get a deal typically they'd like to get it done before December 31st. So part of the apartment is that we're sure that there's some.
There's some slow down due to the new equilibrium in the market. Are people paying the multiples that they were paying a year ago? Are they going to pay multiples a little bit less? Are sellers going to accept those multiples?
that are now less than they thought they could get a year ago. So like in any market that's shifting
the equilibrium needs, you know, the buyers and sellers need to find their equilibrium and we sense that that's going on right now as We're still active. We still get lots of things. We're still deploying capital as we stated. It's it's a really good vintage
You know leverage is low the interest coverage is high and loan to value still is excellent I think I've sat I throughout there was like 22% loan to value 25% one the value. It's
It's really attractive. So, again, I will take it as it comes, deal by deal. You're going to try to take the right deals. I don't know if I answered your question, Governor. Anything else that you had in that question, I needed to answer.
You hit all the points, thank you. My follow up is on how you're structuring new origination.
Now that we're in a higher rate environment, are you negotiating higher interest rate for the new deals that you're doing?
Well, the new deals that are coming in, just to give you a sense, on the senior side, a year ago we might have been LIBOR or so for 575.
you know, four and a half times Betsy, but.
And today we're more like live or so for 650, maybe 700.
Maybe for, you know, the, the, the, the static quoted for the actual deals we did was under four times that deep of a call four times that deep of a. So less leverage.
More and more spread, more yield obviously because base rates are much higher. So these new loans are 11, 12%.
you know, yielding loans. And the thing you got to look at is obviously interest coverage. You know, the interest coverage statistic is.
You know because we're getting now 11-12% versus 7-8% interest coverage you know credits that is one that we all need to look at more carefully and make sure that the companies
are in good stead. You know, as the types of companies we finance typically are more services, businesses, walk out back.
working capital that's not that high. So two times, two and a quarter times interest coverage, we still feel pretty strong about with our companies.
We'll take our next question from the line of Mark Hughes at Truist.
Thank you. Good morning.
Is there any notable trend in EBITDA among your portfolio companies generating growth, the pace of that growth of the last 12 months?
Yeah, look as I said, good question Mark. As I said a moment ago, the only sector where we're seeing a little bit of weakness is
other sectors were still seeing revenue and EBITDA growth.
We have all 5 to 10% year-over-year on average. So, in tumors, been the one that's been flatish, you know, some of the consumer names are up, some are flat, and then some, you know, like walker, I just turned it down. So, that's in the one where we're seeing a more mixed picture, et cetera.
Then the mix, when you look at your new commitments, new investments in the quarter, how much of that was with existing borrowers versus new borrowers, and how's that trended lately?
Yeah, most of it's been been new.
Most of it's been new, but there are delayed draws that we have in the portfolio. That's part of the arrangement we have when we get involved with these companies that are these middle market growth companies where there's add-on acquisitions to do.
So that's usually a substantial part of the pipeline as well.
Yeah.
And I know this probably depends on market circumstances, but what's your latest thought in terms of timing? You wanna grow the JV to a billion? Any thoughts on the pace you can do that?
Yeah, and you're right. It depends on the activity.
So, you know, if our bikes there are $15 or $20 million.
And we're at 750 now and we're trying to grow to a billion. That's kind of 8 to 12 deals. So that's probably a 12 month methodical.
growing of that JV.
Great, thank you very much.
And at this time we have no further signals from our audience. Mr. Penn, I will turn it back to you, sir, for any additional or closing remarks.
I just want to thank everybody for their participation this morning and the next call we'll be doing is in early May. So we look forward to speaking to you then and we appreciate all your support.
This does include today's conference and thank you for your participation. You may now disconnect.
And.