PennantPark Floating Rate Capital Ltd. Q2 2023 Earnings Call

Speaker 2: Hello?

Speaker 2: The FE, people for the people.

Speaker 2: ok care.

Speaker 3: and we're getting the benefit of it becoming easier each time we do it because we're getting more well-known in that marketplace. Thanks for that, that's interesting. And then lastly, just kind of maybe your general thoughts on what you guys, I guess, are seeing with the consumer, just in light of the slowing economy and what seems to be declining inflation, but obviously, persistently kind of high inflation for some time now. Yeah, I think the word mixed is what we've been using. The consumer's mixed. On one hand, they're going on trips and they're going on cruises and hotels and airlines.

Speaker 3: So the consumer is willing to pay for experiences and their exit on PRA events is one end of the spectrum and that's corporate events kind of rocketed back as companies in that case and individuals are happy to travel for experiences. On the other hand, for goods it's certainly been stickier. Walker Edison is another example on the other side of it where that's furniture where, you know, consumers during COVID were buying a lot of furniture and now it's much less so. So consumer is where there's some interesting action going on both on the negative and the positive so you really need to be attuned to what's going on and the movements within consumer demand.

Speaker 3: Clearly people are paying for experiences and they're paying a lot less for goods at this point.

Speaker 4: Thank you. We'll take our next question from Kevin Foltz from J&P Securities.

Speaker 3: Hi, good morning and thank you for taking my questions. My first question relates to your outlook on portfolio yield. I'm assuming the Fed is nearing the end of its rate hiking cycle. Do you see kind of a nearing the peak in terms of portfolio yield or do you see an incremental opportunity to pick up wider spreads that could drive portfolio yield higher longer term?

Speaker 3: Yeah, you know, so trying to bet on what the Fed is going to do is just like being a weatherman, you don't know.

Speaker 3: What we can tell from our portfolio though is inflation is not so easily stamped out.

Speaker 3: You know it's you know we had another read yesterday the economy had a regest at about 5% inflation So if this is not our Penn and Park view is

Speaker 3: is that this higher interest rate environment is going to last.

Speaker 5: for a while.

Speaker 3: You know that said you know we do get live or floors or in this case so for floors I have to change my nomenclature we get so for floors on On all of our deals, and then we have two main We have two main mechanisms for rowing NII and potentially the dividend here PFLT one is

Speaker 3: We just did that securitization financing and that JV is poised to grow to $950 million to a billion dollars over the course of time which should generate some healthy ROE for PFLT today, the JV 770 million. So we've got two.

Speaker 3: Two, levers we think to grow NII, even if you take a stance that risk-free rates coming down, server's going to come down, we don't think so, but even if it is, we still feel very good about our income generation capacity, which helped drive our decision about the dividend increase.

Speaker 6: Okay, I appreciate the insight there. And then just one more, in regards to portfolio positioning, are there any pockets or industries that you find particularly attractive right now? I'm just curious where you're seeing the best risk return opportunities.

Speaker 3: Yes, so our five key sectors remain where we're focused.

Speaker 5: healthcare.

Speaker 3: which is always needed. You've got to be careful about reimbursement and cost, but healthcare, we've had a very good track record on. Government services and defense has always been a key sector for us in a world of geopolitical risk and uncertainty.

Speaker 5: That is a good sector.

Speaker 5: So, and the other sectors as well. A consumer, you've got to be in the right area of consumer, business services, general catch-all, and software and tech remains good. We don't do ARR loans. You know, we're classic EBITDA, cash flow.

Speaker 5: lenders. So those are the sectors and those remaining sectors where we see the most opportunity.

Speaker 6: Okay, thank you for the time this morning. I'll leave it there.

Speaker 6: Thank you for the time this morning. I'll leave it there.

Speaker 4: Thank you very much. And our next question comes from Mickey Schleen from Leidenberg. Please go ahead....

Speaker 7: Yes, good morning everyone. Art having problems with my phones. Can you hear me okay? Yep, gotcha.

Speaker 7: My question is the following. We have this dynamic where the regional banks have their problems, obviously, and that may boost your opportunity in the lower middle market. But we also have large commercial banks, you know, constraining their lending. And the BSL market is very tough for most lenders. I mean.

Speaker 7: portfolio companies unless they're very high quality. So that would imply you have opportunities up and down the middle market but I've heard that spreads are actually pretty tight in the lower middle market so I'd like to ask you where do you see the best risk adjusted returns today in terms of allocating your capital.

Speaker 7: given the structure of PFLT.

Speaker 5: Look, in the core middle market or some would call it the lower middle market, we are not seeing tight spreads. So you may be hearing that from some of the people who focus on the upper middle market.

Speaker 5: But we're seeing.

Speaker 5: meaningful covenants, OID. So I don't know where you heard it from. It might be someone who's not in our market, but I can tell you it's a good environment for us.

Speaker 7: Appreciate it. That's it for me this afternoon, this morning. Thanks for taking my questions.

Speaker 7: That's it for me this afternoon, this morning. Thanks for taking my questions.

Speaker 4: And our next question comes from Mark Hughes from Tuist.

Speaker 8: Yeah, thank you. Good morning.

Speaker 8: Did you comment on how the pipeline is looking, how 2Q may be shaping up in terms of investment activity? Did you comment on how 2Q may be shaping up in terms of investment activity?

Speaker 8: You might see it happening through the balance of the year to the extent that anyone can see it.

Speaker 5: Yeah look things are starting to loosen up a little bit. They're starting to be more deal flow.

Speaker 5: No guarantees. It's never guaranteed from incoming inquiry to what we actually end up investing in since we are so selective. But it is starting to get busier. Our deal flow is starting to gain steam. Which of those deals end up on this side of the market?

Speaker 5: June 30th or the other side of June 30th

Speaker 5: And your guess is as good as mine usually does take us at least a month and usually two to three months to

Speaker 5: properly diligence, negotiate, and execute alone.

Speaker 5: first quarter was, it was always seasonally slow.

Speaker 5: first calendar quarter we're talking. It was slower this year because of all the turmoil in the market and frankly buyers and sellers need to figure out where the new equilibrium is, where they meet, you know, given higher interest rates, given some economic uncertainty.

Speaker 5: So we're feeling like it's going to be a busier second half of the year. You know, we'll see.

Speaker 8: Very good. And then the yellow

Speaker 8: financing, any observations about this round, the kind of the structure you mentioned that you're getting generally more well known, does that help in terms of the economics or is that more just the ability to transact and if so, what's the tempo on that? You know, when the...

Speaker 8: When can you do the next one, so to speak?

Speaker 5: Yeah, so for now at PFLT, we are set at this point with securitizations, although we're always looking at the market.

Speaker 5: and opportunities so there may be other securitizations within the PFLT complex at some point. PFLT complex means

Speaker 5: also means including the joint venture.

Speaker 5: Look, I think getting well known means more investors come to the table, it means an easier execution and it could mean a tighter pricing.

Speaker 5: The fact that our name in the middle market, CLM market is now getting very well known. Our performance has been good. Our performance through COVID was.

Speaker 5: was really excellent, so we're pleased and we thought the execution that we just got for the JV was attractive. It's another form of financing that we will look to in the future as one of the many options that we have.

Speaker 8: Very good. Appreciate it. Thank you.

Speaker 5: Thank you. And at this time, we have no further questions. I'd like to turn the call back to our speakers for any closing remarks. I just want to thank everybody for their time today and your support. And we look forward to speaking to you next in early August .

Speaker 5: when the June 30th numbers come out. So thank you very much, have a good day, and have a great weekend.

Speaker 4: Thank you, ladies and gentlemen. That does conclude today's conference. We appreciate your participation and have a wonderful day.