Q1 2024 PennantPark Floating Rate Capital Ltd Earnings Call

Operator: Good morning, and welcome to PennantPark Floating Rate Capital's Fiscal Quarter 2024 Earnings Conference Call. Today's conference is being recorded. At this time, all participants have been placed in a listen-only mode.

Good morning, and welcome to the pennant Park floating rate Capital's first fiscal quarter 2024 earnings Conference call. 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 question and answers.

Operator: 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.

Session. Following the Speakers' remarks, if you'd like to ask a question at that time simply press star one on your telephone keypad. If you would like to withdraw your question. Please press star two on your telephone keypad. It is now my pleasure to turn the call over to Mr Art, Penn Chairman and Chief Executive Officer.

Operator: It is now my pleasure to turn the call over to Mr. Art Penn, Chairman of the Board of Regents of Penn State and Executive Officer of PennantPark Floating Rate Capital. With your pen, you may now begin your conference. Thank you and good morning, everyone.

Of pennant park floating rate capital Mr. Penn You May now begin your conference.

Thank you and good morning, everyone I'd like to welcome you here dependent park floating rate Capital's first fiscal quarter 2024 earnings conference call I'm joined today by Rick <unk>, Our Chief Financial Officer, Rick. Please start off by disclosing some general conference call information and included discussion about forward looking statements.

Rick Aloro: I'd like to welcome you to PennantPark Floating Rate Capital's first fiscal quarter 2024 earnings conference call. I'm joined today by Rick Aloro, our Chief Financial Officer. Rick, please start off by disclosing some general conference call information and include a discussion about forward-looking statements. Thank you, Art.

Thank you art I'd like to remind everyone that today's call is being recorded.

Rick Aloro: I'd like to remind everyone that today's call is being recorded. Please note that this call is the property of Pennant Park Floating Rate Capital and that any unauthorized broadcast of this call in any form is strictly prohibited. An audio replay of the call will be available on our website. I'd 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, 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. We do not undertake to update our forward-looking statements unless required by law.

Please note that this call is the property of pennant park floating rate capital and that any unauthorized broadcast of this call in any form is strictly prohibited.

An audio replay of the call will be available on our website.

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 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.

We do not undertake to update our forward looking statements unless required by law to obtain copies of our latest SEC filings. Please visit our website at pennant park dot com or call us at 2129051.

Art Penn: To obtain copies of our latest SEC filings, please visit our website at pennandpark.com or call us at 212-905-1000. At this time, I'd like to turn the call back to our Chairman and Chief Executive Officer, Art Penn. Thanks, Rick.

At this time I would like to turn the call back to our chairman and Chief Executive Officer Art Penn.

Art Penn: We're going to spend a few minutes discussing the current market environment for middle market lending, how we fared in the quarter ended December 31st, how the portfolio is positioned for the upcoming quarters, a detailed review of the financials, then open it up for Q&A. For the quarter ended December 31st, GAAP and Core Net Investment Income was $0.33 per share. The gap in adjusted NAV increased 0.6% to $11.20 per share from $11.13 per share.

Thanks, Ric we're going to spend a few minutes discussing the current market environment for middle market lending.

How we fared in the quarter ended December 31st how the portfolio is positioned for the upcoming quarters. A detailed review of the financials and then open it up for Q&A.

For the quarter ended December 31st GAAP and core net investment income was 33 cents per share.

GAAP and adjusted NAV increased 0.6% to $11 20 per share from $11 13 per share the increase in NAV for the quarter was due primarily to the positive valuation adjustments on both debt and equity investments.

Art Penn: The increase in NAV for the quarter was due primarily to positive valuation adjustments on both debt and equity investments. As of December 31, our portfolio grew to $1.3 billion, or 19% from the prior quarter. During the quarter, we continued to originate attractive investment opportunities and invested $303 million in 13 new and 34 existing portfolio companies at a weighted average yield of 11.9%. For the investments in new portfolio companies, the weighted average debt to EBITDA was 3.8 times, the weighted average interest coverage was 2.4 times, and the weighted average loan to value was 51 percent. On average, we have seen a 25 basis point tightening on first lien spreads.

As of December 31, our portfolio grew to $1 3 billion or 19% from the prior quarter.

During the quarter, we continued to originate attractive investment opportunities and invested $303 million in 13, new and 34 existing portfolio companies at a weighted average yield of 11, 9%.

For the investments in new portfolio companies the weighted average debt to EBITDA was three eight times. The weighted average interest coverage was two four times and the weighted average loan to value was 51%.

On average we have seen a 25 basis point tightening on first lien spreads. However, we continue to believe that the current vintage of core middle market directly originated loans is excellent leverages lower spreads in upfront OID or higher covenants are tighter than in the upper middle market.

Art Penn: However, we continue to believe that the current vintage of core middle market directly originated loans is excellent, although leverage is lower, spreads and upfront OID are higher, and covenants are tighter than in the upper middle market. Despite covenant erosion in the upper middle market and the core middle market, we are still getting meaningful covenant protection. Our deal flow continues to be very active, and since quarter end, we invested $103 million into new and existing investments. As of December 31st, our debt-to-equity ratio was 1.02 to 1, and with a target ratio of 1.5 to 1, we believe that we are well-positioned to drive additional growth in net investment income going forward. We expect additional growth in NII, in part, to be driven by our investment in the joint venture.

Despite covenant erosion in the upper middle market in the core middle market, we are still getting meaningful covenant protections.

Therefore continues to be very active and since quarter end, we invested $103 million into new and existing investments.

As of December 31, our debt to equity ratio was at 1.02 to one with a target ratio of 1.5 to one we believe that we're well positioned to drive additional growth and net investment income going forward.

We expect additional growth in NII in part to be driven by our investment in the joint venture as of December 31st the JV portfolio totaled $837 million and together with our JV partner, we continue to execute on the plan to grow the JV portfolio to approximately $1 billion of assets.

Art Penn: As of December 31st, the JV portfolio totaled $837 million, and together with our JV partner, we continue to execute on the plan to grow the JV portfolio to approximately $1 billion of assets. During the quarter, the JV invested $76 million in four new and nine existing portfolio companies at a weighted average yield of 12.3%, including $75 million of assets purchased from PFLT. We believe that the increase in scale of the JV's balance sheet will continue to drive attractive mid-teens returns on invested capital and enhance PFLT's earnings momentum. The credit quality of the portfolio is stable.

During the quarter, the JV invested $76 million in four new and nine existing portfolio companies at a weighted average yield of 12, 3% <unk>.

Including $75 million of assets purchased from P. F L T.

We believe that the increase in scale of the Jv's balance sheet will continue to drive attractive mid teens returns on invested capital and enhanced P. F L T's earnings momentum.

Credit quality of the portfolio is stable, we had no new non accruals in the quarter ended December 31, and.

Art Penn: We had no new non-accruals and the quarter ended December 31st, and we restructured two investments that were on non-accrual, resulting in their return to accrual status. As of December 31st, the portfolio's weighted average leverage ratio through our debt security was 4.8 times, and despite the steep increase in base rates during 2023, the portfolio's weighted average interest coverage ratio at December 31s In an uncertain market environment, we like being positioned for capital preservation as a senior secured first lien lender focused on the United States. We continue to believe that our focus on the core middle market provides the company with attractive investment opportunities where we provide important strategic capital to our borrowers. We have a long-term track record of generating value by successfully financing growing 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, healthcare, and software and technology.

And we restructured two investments that were on non accrual, resulting in that returned to accrual status.

As of December 31st the portfolio's weighted average leverage ratio through our debt security was four eight times and despite the steep increase in base rates. During 2023, the portfolio's weighted average interest coverage ratio at December 31 was two one times.

And in an uncertain market environment, we like being positioned for capital preservation as a senior secured first lien lender focused on the United States.

Continue to believe that our focus on the core middle market provides the company with attractive investment opportunities, where we provide important strategic capital to our borrowers.

We have a long term track record of generating value by successfully financing growing middle market companies and five key sectors.

These are sectors, where we have substantial domain expertise now the right questions to ask and have an excellent track record.

Our business services consumer government services, and defense health care and software and technology.

Art Penn: These sectors have also been resilient and tend to generate strong free cash flow. Approximately 12% of our portfolio is in government services and defense, which is a sector with strong tailwinds in this geopolitical environment. In our software vertical, and in our software vertical, we don't have any exposure to ARR loans.

These sectors have also been resilient and tends to generate strong free cash flow.

Approximately 12% of our portfolio is in government services in defense, which is a sector with strong tailwind and this geopolitical environment.

Our software vertical and then our software vertical we don't have any exposure to a or our loans.

Art Penn: The core middle market, which is companies with $10 to $50 million of EBITDA, is below the threshold and does not compete with a broadly syndicated loan or high yield market, unlike our peers in the upper middle market. In the core middle market, 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.

The core middle market, which is companies with $10 million to $50 million of EBITDA is below the threshold and does not compete with a broadly syndicated loan or high yield markets. Unlike our peers in the upper middle market.

In the core middle market, because we are in an important strategic lending partner to process and package of terms. We receive is attractive we have many weeks to do our diligence with care, we thoughtfully structure transactions with sensible credit statistics meaningful covenants substantial equity cushions to protect our capital attractive.

Art Penn: We thoughtfully structure transactions with sensible credit statistics, meaningful covenants, substantial equity cushions to protect our capital, attractive spreads, and upfront OID and equity co-investment. Additionally, from a monitoring perspective, we receive monthly financial statements to help us stay on top of the companies. With regard to covenants, unlike the erosion in the upper middle market, virtually all of our originated first lien loans have meaningful covenants which help protect our capital. This is a significant reason why we believe we are well positioned in this environment. Many of our peers who focus on the upper middle market state that bigger companies are less risky. That may make some intuitive sense, but the reality is different.

Spreads.

Oh, I D and equity co investment.

Additionally from a monitoring perspective, we received monthly financial statements to help us stay on top of the companies.

With regard to covenants. Unlike the erosion in the upper middle market virtually all of our originated first lien loans had meaningful covenants, which help protect our capital.

This is a significant reason why we believe we are well positioned in this environment.

Any of our peers, who focus on the upper middle market state that those bigger companies are less risky.

That may makes 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 default rate and a higher recovery rate than loans to companies with higher EBITDA.

Art Penn: According to S&P, loans to companies with less than $50 million in EBITDA have a lower default rate and a 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. Our credit quality since inception over 13 years ago has been excellent. PFLT has invested $5.6 billion in 481 companies, and we have experienced only 18 non-accruals.

We believe that the meaningful covenant protections of core middle market loans more careful diligence and tighter monitoring had been an important part of it is differentiated performance.

Our credit quality since inception over 13 years ago has been excellent.

L. T has invested $5 $6 billion and 481 companies and we have experienced only 18 non accruals since inception <unk> loss ratio on invested capital is only 13 basis points annually.

As a provider of strategic capital that fuels the growth of our portfolio companies in many cases, we participate in the upside of the company by making an equity co investment.

Art Penn: Since inception, PFLT's loss ratio on invested capital is only 13 basis points annually, as a provider of strategic capital that fuels the growth of our portfolio companies. In many cases, we participate in the upside of the company by making an equity co-investment. Our returns on these equity co-investments have been excellent over time.

Our returns on these equity co investments have been excellent over time.

Overall for our platform from inception through December 31, we invested over $448 million in equity co investments and have generated an IRR of 26% and a multiple on invested capital of two one times.

Our experienced and talented team and our wide origination funnel is producing active deal flow.

Art Penn: Overall, for our platform from inception through December 31st, we have invested over $448 million in equity co-investments and have generated an IRR of 26% and a multiple of uninvested capital of 2.1 times. Our experienced and talented team and our wide origination funnel are producing active deal flow. Our continued focus remains on capital preservation and being patient investors. Our mission and goal are a steady, stable, and protected dividend stream coupled with the preservation of capital. Everything we do is aligned to that goal. We seek to find investment opportunities in growing 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 form of dividends to our shareholders. I will now turn the call over to Rick, our CFO, to take us through the financial results in more detail. Thank you, Art.

Our focus remains on capital preservation and being patient investors, our mission of Golar, a steady stable and protected dividend stream, coupled with the preservation of capital.

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 lien senior secured instruments and we 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 ended December 31st GAAP and core net investment income was <unk> 33 per share.

Operating expenses for the quarter, whereas follows interests and expenses on debt were $8 9 million base management and performance based incentive fees were $7 8 million.

General and administrative expenses were $1 6 million and provision for taxes for 154000.

For the quarter ended December 31, net realized and unrealized change on investments, including provision for taxes was a gain of $3 1 million or <unk> <unk> per share.

The unrealized appreciation on our credit facility and notes for the quarter was <unk> 1 million.

Rick Aloro: For the quarter ended December 31st, GAAP and core net investment income was $0.33 per share. Operating expenses for the quarter were as follows. Interest and expenses on debt were $8.9 million. Base management and performance-based incentive fees were $7.8 million. General and administrative expenses were $1.6 million, and provision for taxes were $154,000.

As of December 31st our GAAP <unk> was $11 20 per share, which is up <unk>, 6% from $11 13 per share last quarter.

Adjusted NAV, excluding the mark to market of our liabilities was $11 20 per share up 6% from $11 13 per share last quarter.

As of December 31, our debt to equity ratio was 1.02 times and our capital structure is diversified across multiple funding sources, including both secured and unsecured debt.

Rick Aloro: For the quarter ended December 31st, the net realized and unrealized change on investments, including provision for taxes, was a gain of $3.1 million, or $0.05 per share. The unrealized appreciation on our credit facility and notes for the quarter was $0.1 million. As of December 31, our GAAP NAV was $11.20 per share, which is up.6% from $11.13 per share last quarter. Adjusted NAV, excluding the mark-to-market of our liabilities, was $11.20 per share, up 0.6% from $11.13 per share last quarter.

During the quarter, we use the liquidity from our revolving credit facility to repay the $76 million of unsecured notes that matured on December 15th.

As of December 31, our key portfolio statistics, whereas follows.

Our portfolio remains highly diversified with 141 companies across 33 different industries.

The weighted average yield on our debt investments was 12, 5% and approximately 100% of the debt portfolio is floating rate.

Pik income equaled only 2% of total investment income for the quarter.

We had one nonaccrual, which represents 1% of the portfolio at cost at zero percent at market value.

Rick Aloro: As of December 31st, our debt-to-equity ratio was 1.02 times, and our capital structure is diversified across multiple funding sources, including both secured and unsecured debt. During the quarter, we used liquidity from our revolving credit facility to repay $76 million of unsecured notes that matured on December 15. As of December 31st, our key portfolio statistics were as follows. Our portfolio remains highly diversified, with 141 companies across 33 different industries. The weighted average yield on our debt investments was 12.5%, and approximately 100% of the debt portfolio is floating rate. However, pick income equaled only 2% of total investment income for the quarter.

We did not put any new investments on non accrual during the quarter.

The portfolio is comprised of 86% first lien senior secured debt.

Less than 1% in second lien debt.

4% in equity of PSS L and.

And 9% in other equity.

The debt to EBITDA on the portfolio is four eight times and interest coverage was two one times now.

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 <unk> and its 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.

Okay.

Thank you if you'd like to ask a question. Please signal by pressing star one on your telephone keypad. If you are using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment again press star one to ask a question, we'll pause for just a moment to allow every.

Rick Aloro: We had one non-accrual, which represents 0.1% of the portfolio at cost and 0% at market value. We did not put any new investments on non-accrual during the quarter. The portfolio is comprised of 86% first lien senior secured debt and less than 1% in second lien debt. 4% in equity of PSSL and 9% in other equities. The debt to EBITDA on the portfolio was 4.8 times, and interest coverage was 2.1 times. Now, let me turn the call back to Art.

One an opportunity to signal for questions.

We will take our first question from.

Ryan Mckenna with JMP.

Great. Thanks, Good morning, everyone. So it was good to see the pickup in origination activity during the quarter and then it seems like this momentum has carried into the new calendar year. So you know what's the base case expectation for for investment activity looking out over the next few quarters and then when you look at the new portfolio companies you've invested to more recently.

Art Penn: Thanks, Rick. In closing, I'd like to thank our dedicated and talented team of professionals for their continued commitment to PFLT and its 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. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you are using a speakerphone, please make sure that your mute is turned off to allow your signal to reach our equipment.

Where did the majority of these investments sit from a sector perspective.

Thanks, Brian Good morning, just I'll answer the second one first the sectors remain the same we are doing.

Quite a bit in government services, and defense, which as you might imagine as an active sector.

Doing quite a bit in health care and sectors of health care that we liked that have strong free cash flow and that are that are performing and then.

Operator: Again, press star 1 to ask a question. We'll pause for just a moment to allow everyone an opportunity to signal for questions. We will take our first question from Brian McKenna with JMP. Great, thanks. Good morning, everyone.

Just running the gamut of business services are kind of where we've been most active recently in <unk>.

<unk> of expectations. It's a great question of course, we don't really know.

We do believe that 2024 will be inactive year overall, certainly in the first calendar quarter of 'twenty four it's been more active than normal usually the first calendar quarter is light.

Art Penn: So it's good to see the pickup and origination activity during the quarter. And then it seems like this momentum has carried into the new calendar year. So, you know, what's the base case expectation for investment activity looking out over the next few quarters? And then when you look at the new portfolio companies you've invested in more recently, where did the majority of these investments sit for most? Thanks, Brian. Good morning.

From the standpoint of activity level. This had been more of a moderate.

Activity for Us Q1, so.

We do believe as you as you know if we're sitting here a year from now will be enacted for 2024 don't know what the ensuing quarters will.

Well Brian.

Got it helpful. And then maybe just a follow up on leverage so that that you know increased pretty meaningfully in the quarter, but that's from a pretty low base in the prior quarter. So you know sitting at about one times today, it's still kind of at that lower end of the range. So I guess, how should we think about the trajectory of leverage from here and then I guess.

Art Penn: I'll answer the second one first. The sectors remain the same. We're doing quite a bit in government services and defense, which, as you might imagine, is an active sector. We're doing quite a bit in healthcare, in sectors of healthcare that we like that have strong free cash flow and that are performing. And then just running the gamut of business services is kind of where we've been most active recently. In terms of expectations, it's a great question. Of course, we don't really know.

In what scenario or deployment environment would ultimately drive leverage notably higher from here.

Yeah. So we've <unk> our long term target is still about one five times area leverage for this portfolio, which has a lower risk.

Art Penn: We do believe that 2024 will be an active year overall. Certainly, in the first calendar quarter of 2024, it was more active than normal. Usually, the first calendar quarter is light, from the standpoint of activity level, but this has been more of a moderate Q1. So, you know, kind of. We do believe that if we're sitting here a year from now, we'll be inactive in 2024. Don't know what the ensuing quarters will bring.

First lien portfolio.

Look we take it as it comes we have a nice you know in essence war chest right now we believe that this vintage.

Is likely to continue to be a great vintage we share with you some of the credit stats and low leverage and good loan to value and high interest coverage that we're getting in this vintage. So we're going to try to be active when we can find high quality deals we're still highly selective about what fits our box.

As you can tell we've refined our box over time, and we've gotten to be better and better over time, which results in kind of below non accrual rate.

Art Penn: And then maybe just a follow-up on leverage, you know, so that, you know, increased pretty meaningfully in the quarter, but, you know, that was from a pretty low base in the prior quarter. So, you know, sitting at about one times today, it's still kind of at that lower end of the range. So I guess, how should we think about the trajectory of leverage from here? And then, I guess, what scenario or deployment environment would ultimately drive leverage, you know, notably? Yeah, so our long-term target is still about one and a half times area leverage for this portfolio, which is a lower risk. Look, we take it as it comes; it is likely to continue to be a great vintage.

That we've been seeing and and good credits that so.

When do we get to one five times leverage again that goes back to kind of expectations around origination where.

Where the markets are et cetera, but we feel good.

Having this nice war chest being able to take advantage of.

An excellent vintage and <unk>.

If we can earn these kinds of NII is in row.

No less levered.

Fully.

So theres, some really nice upside for our shareholders as we as we judiciously deploy over time.

Okay, Great I'll leave it there thank you.

Thank you.

Okay.

Okay.

We will take our next question from Paul Johnson with K B W.

Yeah. Good morning, Thanks for taking my questions you sort of answered my question there.

Art Penn: We shared with you some of the credit stats and low leverage and good low in the value and high interest coverage that we're getting in this vintage. So we're going to try to be active when we can find high-quality deals. We're still highly selective about what fits our box. As you can tell, we've refined our box over time, and we've gotten to be better and better over time, which results in kind of the low non-accrual rate that we've been seeing and good credits. So when do we get to one and a half times leverage?

On your outlook for activity, but.

Just.

Curious as to given recent quarter, what drove the higher originations and it wasn't just the attractive.

What was that you saw or was it anything to do to kind of timing things pending et cetera.

Yes, it's really all just on the you know what drove the high activity in the fourth quarter.

Yeah, and it's a good question and you know our business model is one where.

You know in many cases, we're providing that initial loan to a company. That's a platform investment for private equity sponsors sees a growth opportunity typically add on acquisitions in a particular industry or sector.

Art Penn: Again, that goes back to kind of expectations around origination, where the markets are, etc. But we feel good having this nice war chest, being able to take advantage of an excellent vintage, and if we can earn these kinds of NII's and ROE's less levered, hopefully, there's some really nice upside for our shareholders as we judiciously deploy over time. Okay, great. I'll leave it there. We will take our next question from Paul Johnson with KBW. Yeah, good morning.

So much of this was not refinancing or opportunistic financing, which is probably a lot of what you see in the upper middle market vast majority of this is kind of platform deals.

Deals and then the add on the add on investments to fuel the growth.

These are the sectors. So.

Typical investment for us will start out with a company that does 20 of EBITDA.

Art Penn: Thanks for taking my questions. You sort of answered my question there sort of on your outlook, you know for activity, but Just, I mean, I'm curious as to, given, Please see the complete disclaimer at https://sites.pennantpark.com the attractive loans that you saw or was it anything due to timing, things pending, etc. That's really all just on the topic of what drove the high activity in the fourth quarter. Yeah, and it's a good question.

But.

Goal is to get it to 40 or 50 or higher over time, we make our initial platform alone and then we become their strategic partner and you know you saw quite a bit of a kind of add on incremental delay draw activity and that's kind of that's a big part of what we do in.

It remains so.

So you know.

Certainly overall M&A trends are important around here, but in many cases.

This is driven by fundamental opportunity in particular sectors, where a private equity sponsor par.

Partners are finding.

Art Penn: And you know, our business model is one where, in many cases, we're providing that initial loan to a company that's a platform investment for a private equity sponsor who sees a growth opportunity typically out of acquisitions in a particular industry or sector. So much of this was not refinancing or opportunistic financing, which is probably a lot of what you see in the upper middle market. The best majority of this is kind of platform deals and then the add-on investments to fuel the growth of the United States, but the goal is to get it to 40 or 50 or higher over time. We make our initial platform loan, and then we become their strategic partner. And you saw quite a bit of kind of add-on, incremental delay-draw activity, and that's kind of a big part of what we do and remain.

Areas of opportunity so.

Kind of active active Q4 calendar Q4.

We remain active not as active we're not as active as we were in calendar Q4, where we're active but not in the United say were moderately active as we speak.

But that's just fine.

Not in a rush to deploy capital, we want to be careful and judicious.

And selective and we've learned learned a lesson that if you're if you force investment that always backfire. So we're taking a one deal at a time.

Okay.

Yes, thanks for the detail on that that's very helpful. And then I mean are these investments that you would expect to probably hold onto or are these going to find their way into the JV at some point.

Art Penn: So, you know, certainly overall M&A trends are important around here, but in many cases, you know, this is driven by fundamental opportunities in particular sectors where our private equity sponsor partners are finding, you know, areas of opportunity. So, you know, kind of active Q4, calendar Q4, we remain active, but not as active. We're not as active as we were in calendar Q4. We're active, but not, you know. I'd say we're moderately active, you know, as we speak. But that's just fine.

Yeah. So it's a good question the JV typically.

It takes a pro rata piece to extend it as liquidity. It does pro rata piece of the deals that we originate the JV is a couple of hundred million dollars of liquidity.

So overtime.

Much of what's what's new will find its way into the JV, which is a highly diversified portfolio and certainly it's certainly been a nicely accretive.

Vehicle for our <unk> shareholders and <unk> and.

And what we hope it continues to be so.

Art Penn: You know, we're not in a rush to play capital. We want to be careful and judicious and selective. And we've learned a lesson that if you force an investment, that always backfires. So we're taking it one deal at a time. Yeah, thanks for the detail on that. That's very helpful. And then, I mean, are these investments that you would expect to probably hold on to or not? www

Thanks for that and then my last question was just on the large increase in equity investments. This quarter I'm. Just curious if there was any kind of significant investments that you guys are.

Made in the quarter that drove that or was that just more of a function of the higher activity in co investments that you received during the quarter.

Yes.

Was just a really a function of the high activity in many cases as we say we will co invest in the equity and we are starting to see thankfully. Some some repayments and many of those repayments are actual exits where we hope to be rotating.

Art Penn: PennantParkFloatingRate.com: Yeah, so it's a good question. The JV typically, you know, kind of takes a pro rata piece to the extent it has liquidity, and it does a pro rata piece of the deals that we originate. The JV has a couple hundred million dollars of liquidity. So over time, you know, much of what's new will find its way into the JV, which is a highly diversified portfolio. And certainly, it's certainly been a nicely accretive vehicle for our PFLT shareholders and, and we hope it continues to be so. My last question was just on the large increase in equity investments this quarter. I'm just curious if there were any kind of significant investments that you guys made in the quarter that drove that, or was that just more of a function of the higher activity and co-investments that Yeah, there was just really a function of the high activity. In many cases, as we say, we will co-invest in the equity. And we are starting to see, thankfully, some repayments, and many of those repayments are actual exits where There's one that just closed the other day, which was three times the MOIC, so we're starting to see some rotation, which is nice.

Successful equity co investments that we've made in.

Yeah, there's one that.

Just close the other day, which was three times <unk>. So we're starting to see.

Some some rotation, which is nice but again this will go back to kind of deal activity.

What's the overall deal activity is a good time to exit are the sponsors.

Been holding on or are they going to are they going to exit and take the when are they going to hold on.

I do expect as things get.

Kept busy or won't be able to rotate that equity portfolio from existing names into new names.

Alright, thanks for the detail and congratulations on a good quarter.

Thank you.

We will take our next question from Mickey <unk> with Ladenburg.

Yes, good morning, everyone.

This quarter's fee income was the highest it's been in a couple of years.

Were there any outsized prepayment fees in the activity this quarter or what else could have caused that amount.

It was just a lot there's just a lot of activity there was one or two amendments that or.

Or bigger pieces of it but it was not it wasn't the main driver. So there was just you.

Art Penn: But again, this will go back to kind of deal activity; what's overall deal activity? Is it a good time to exit? Are these sponsors who've been holding on, are they going to exit and take the win? Or are they going to hold on?

You know quite a bit of activity looked at what he had quite a bit of a new loan activity would have been an active quarter.

Active quarter overall.

Okay.

And in terms of your unfunded.

Art Penn: So I'd expect as things get busier, we'll be able to rotate that equity portfolio from existing names into new names. Thanks for the detail and congratulations on a good quarter. We will take our next question from... I'm with Lautenberg. Yes, good morning, everyone.

Commitments are in.

In the Q. It says it's about $270 million, what proportion of that is at the discretion of the portfolio companies.

So it's about 50 50 revolver and delayed draw.

So the revolvers are at the company's discretion delay draw delay draw as typically they have to meet some kind of covenants or performance thresholds.

Art Penn: Art, this quarter's fee income was the highest in a couple of years. Were there any outsized prepayment fees in the activity this quarter? Or what else could have caused that amount? It was just a lot; there was just a lot of activity. There were one or two amendments that were... or bigger pieces of it, but it wasn't the main driver, so there was just..., you know, quite a bit of activity. Looked like we had quite a bit of new loan activity. It was just an active quarter; an active quarter overall. Okay, and in terms of your unfunded commitments, in the queue, it says it's about $270 million. What proportion of that is at the discretion of the portfolio? So it's about 50-50 revolver and delay draw.

And as and they have to find out on deals typically typically that's why they do delay draws is because.

They want to consolidate a particular industry.

And as we found in times of turmoil.

Like COVID-19 or even back in the GSE, although the delay draws were a lesser part of it then in times of turmoil is many borrowers will will borrow from the revolver, but the late draw activity will go to zero because theres no add on acquisitions. So if.

If you look at a couple of hundred million that we have it's about half and half if there were to be any kind of COVID-19 type or emergency scenario.

Who are their revolvers would not maybe not be fully drawn but at least half drawn but the delay draw activity would would go to go to zero.

Okay fair enough.

Art Penn: Right, so the revolvers are at the company's discretion. Delay draw, delay draw typically, they have to meet some kind of covenants or performance thresholds, and you know as, and they have to find out on deal typically, typically, that's why they do delay draws is because they want to consolidate a particular industry. And as we found in times of turmoil like COVID or even back in the GFC, although the delay draws were a lesser part of it then, in times of turmoil, many borrowers So if you look at the couple hundred million that we have, it's about half and half. If there were to be any kind of COVID type or emergency scenario, you know, the revolvers might not be fully drawn but at least half drawn, but the delay draw activity would go to zero.

Talking about the right side of the balance sheet or.

You're now in a position where about three quarters of your debt liabilities or are in the credit facility at floating rates.

Are you comfortable leaving it that way and potentially taking advantage of declining rates later this year or are you looking at.

You know issuing some more unsecured debt and unlocking some of the capacity from the revolver.

Yeah, I think before unsecured debt.

Yellow securitization technologies are really good lie.

Liability management hope, particularly for these lower risk first lien loans so.

Middle market Clo's are.

Kind of becoming a darling and the CLO market and you May know this I know you kind of cover Cielo is Mickey.

Art Penn: Okay, fair enough. Talking about the right side of the balance sheet, Art, you're now in a position where about three-quarters of your debt liabilities are in the credit facility at floating rates. Are you comfortable leaving it that way and potentially taking advantage of declining rates later this year? Or are you looking at issuing some more unsecured debt and unlocking some of the capacity from the revolving? Yeah, I think before unsecured debt, you know, CLO securitization technology is a really good liability management tool, particularly for these lower-risk first lien loans. So you know, middle market CLOs are kind of becoming a darling in the CLO market. You may know this. I know you kind of cover CLOs, Mickey.

And we have a very good track record of.

As a CLO middle market manager, and our Bdcs and our JV and as well as for third party investors, So probably step one to create liquidity for the revolver as a securitization.

And then of course, we're always looking to the unsecured markets, we have a big slug of unsecured paper that doesn't mature until 2026.

Four handle.

So we're in no rush with with yields coming down we can be opportunistic about it unsecured is certainly is part of the tool chest, but we don't really need it right now, particularly when we can get very efficient securitization.

Financing.

And if you were to do a new CRE securitization CLO structure any sense of where that would be priced in todays market.

Art Penn: And we have a very good track record as a CLO middle market manager in our BDCs and our JVs and as well as for third party investors. So, probably, step one to create liquidity for the revolver is securitization. And of course, we're always looking at the unsecured markets. We have a big slug of unsecured paper that doesn't mature until 2026. That's, you know, a four-handle.

Yeah, I mean, it would probably be low $202 30 ish.

Okay.

That's interesting.

All my questions. This morning, Thank you for your time on.

Thank you Mickey.

We will take our next question from Mark Hughes with true it.

Thanks, Good morning.

Art Penn: So, you know, we're in no rush with yields coming down. We can be opportunistic about unsecured. It certainly is part of the tool chest, but we don't really need it right now, particularly when we can get very efficient securitization financing. And Art, if you were to do a new securitization through a CLO structure, any sense of where that would be priced in today's market? Yeah, I mean, it would probably be in the low 200s, 230-ish.

Argue described pretty good interest coverage to one times I think for the portfolio.

Do you think about what proportion maybe closer to one times or below.

Any sense on how you think.

That will trend over the next 612 months.

Yeah. So.

I don't have it at our fingertips the end of the lower interest coverage well if theres a handful of deals we have.

Art Penn: Okay, that's interesting. Those are all my questions this morning. Thank you for your time. Thank you, Mick, www.pennantparkfloatingrate.com. You will take our next question from Mark. Thanks, good morning.

Well over 100 deal 100 loans I mean, there's always going to be a handful of loans that are underperforming.

We have that too I'm going to call. It it's only handful which to me means around three to five to six that are that are kind of on a major watch.

Art Penn: Argue described pretty good interest coverage there, 2.1 times, I think for the portfolio. If you see anything about what proportion may be closer to one time or below, and any sense on how you think credit will trend over the next 6-12 months? Yeah, so you know, don't have it at our fingertips, you know, the lower interest coverage. Look, there's a handful of deals, you know; we have, you know, over 100 deals and 100 loans. I mean, there's always going to be a handful of loans that are underperforming. We have that too.

And then they show up if you look at the Mark to market fair value, you'll you'll be able to ascertain which ones.

There are.

But by and large it's really kind of a very clean portfolio at this point.

Is this going to persist or are things going to.

Gray.

As high interest costs continue to eat away quite possibly I mean, this has been a very.

Art Penn: I'm going to call it it's only a handful, which to me means around three to five to six, that are kind of on, you know, major watch, and and they show up if you look at the mark to market and the fair value. You'll, you'll be able to ascertain which ones there are. But by and large, it's really kind of a very clean portfolio at this point. Is this going to as high interest costs continue to eat away at their profits, quite possibly. I mean, this has been a very benign environment, certainly for us and maybe for the market. Is it going to stay benign for the long term?

Benign environment, certainly for us and maybe for the market is it going to stay benign for the long term.

Unclear certainly we should assume that it's not going to be as benign as it has been.

But the economy seems strong and.

And certainly if and when interest rates start coming down the fed starts easing that will create some cushion in some of the capital structures that are a little tighter.

That are kind of.

Riding away here.

With tighter coverage so.

Right now we're in a pretty good position you've seen.

Art Penn: You can find more information at www.pennantpark.com, which is kind of, you know, grinding away here, you know, kind of with the tighter coverage. So, you know, right now, we're in a pretty good position. You've seen, you know, very low non-accruals, again, only a handful of names that are kind of more on the severe watch list, but You know, we're staying watchful and cautious, and certainly on the new deals that we're doing, and we shared with you the credit stats, we're finding some really great lower-risk, attractive return investments. And as the portfolio grows and gets populated with this vintage, some of the handful of deals that are underperforming will become even less significant in the overall scheme. Yeah, I understand. And then you mentioned the covenants. You think you're seeing erosion at the upper end of the market, but you're holding pretty firm. Are those those covenants? How do they compare to what you might have? Normal course of business, say pre-COVID, still pretty rich, you know; are you going to see some erosion? Perhaps within your own.

Very low non accruals again, only a handful of names that are kind of more on the severe watch list but.

We're staying watchful and cautious and certainly on the new deals that we're doing and we shared with you that the credit stats were.

We're finding some really great lower risk attractive return investments and as the portfolio grows and gets populated with with this vintage.

Some of the some of the handful of deals that are underperforming it will become even even less significant in the overall in the overall scheme.

Okay understood and then you mentioned the covenants do you think you're seeing erosion at the upper end of the market, but youre holding pretty firm.

Good.

Those covenants, how do they compare to what you might've seen the.

Normal course of business.

Okay.

Pretty rich.

Are you going to see some erosion, even perhaps within Europe.

Your packages.

Yeah, I'd say, we're kind of back to kind of pre COVID-19.

Levels with reasonable cushions that protect us.

That.

And we do get the monthly financial statements I'd say, we are back to pre Covid certainly if you look at <unk>.

2022 in early 'twenty three it was tighter we could get tighter and I kind of as we kind of said that spreads have come down 25% I think in line with that the covenants are kind of normalizing to pre COVID-19. So.

Art Penn: Your packages. Yeah. Yeah. I'd say we're kind of back to pre-COVID levels with reasonable cushions that protect us, and we do get the monthly financial statements. I'd say we're back to pre-COVID certainly. If you look at 2022 and early 23, it was tighter, you know, we could get tighter, you know, I kind of, we kind of said that spreads have come down by 25. I think in line with that, the covenants are kind of normalizing to pre-COVID.

If you remember going to Covid, we had at that point across our book of about 150.

Loans across our platform.

And between the quarterly maintenance test that we had and have and the monthly financial statements that we get that we're obligated to be shared with us.

Art Penn: So if you remember going to COVID, we had at that point across our book about 150, and between the quarterly maintenance test that we had and have and the monthly financials that were obligated to be shared with us, we could, and did, during a COVID scenario really get to the table early. Because of the quarterly maintenance tests, which, you know, many of the sponsors and companies knew that they were not going to make.

We could during a COVID-19 ended during a COVID-19 scenario really get to the table early.

Because of the quarterly maintenance tests, which.

Many of the sponsors and companies knew that they were not going to make and because they had to share with us the monthly financial information.

It really got us to the table early to be proactive and figure out how to solve problems and figure out what liquidity was needed. So we're back to the pre COVID-19 covenants and information rights, which.

Art Penn: And because they had to share with us the monthly financial information, it really got us to the table early to help be proactive and figure out how to solve problems and figure out what liquidity was needed. So we're back to the pre-COVID covenants and information rights, which, you know, really, really worked out very well for us in the core middle market. You know, when COVID hit, and out of 150 deals, loans that we had across our portfolio, just to refresh, 15 of those were about 10% actually needed cash liquidity to get through COVID, and in all of those cases, the sponsors offered to put capital in to solve the problem. So that's the benefit of monthly information rights, and quarterly maintenance covenants. You know, we talk about the core middle market versus the upper middle market and the pluses and the minuses.

Really really was worked out very well for us in the core middle market.

When when Covid hit and.

At a 150 deals are loans that we had across our portfolio just to refresh 15 of those are about 10% actually needed cash liquidity to.

To get through Covid and in all of those cases, the sponsored offered to put capital in to solve the problem.

So that's the benefit of monthly information rights quarterly maintenance covenants.

Can you talk about the core middle market versus the upper middle market and the pluses and minuses.

We really like this core middle market, where these protections or an information rights really kind of get us to the table quick.

Okay.

Thank you very much.

We will take our next question from virus Abraham with UBS.

Yeah.

Hey, everybody.

Just had a question on repayments can you share any kind of line of sight do you have any.

Art Penn: You know, we really like this core middle market, where these protections and information rights really kind of get us to the table quick. Thank you very much. We will take our next question from Vilas Abraham with UBS. Hey, everybody. I just had a question on repayments. Can you share any kind of line of sight that you have?

Repayments prepayments for for the first half of the year, I mean, presumably with origination activity.

It continues to be strong.

And our rebates should pick up as well and I'm, just kind of talk about that and if that would be.

Art Penn: www. PennantParkFloatingRate.com bit of an impediment to getting to your leverage goals. Yeah, look, we are starting to see repayments. It's not a wave.

A bit of a impediment in.

Getting to your leverage goals.

Yeah look we are starting to see repayments, it's not a wave.

They're not they're certainly nowhere near being equal to our originations.

Art Penn: They're not, they're certainly nowhere near being equal to our originations. Um, repayments indicate that M&A is... is maybe starting to percolate a little bit. So pluses and minuses, when we get repaid, we say thank you very much for repaying us because sometimes they don't. So we're very appreciative when we get repaid, and in many cases, that also means we're ringing the cash register on the equity co-investment side. So some of that is starting to happen, which we're happy with. And as I said, we're originating new deals. Again, we don't sit here and say, gee, we've got to get to 1 12 times because the research community wants to see it happen in their model in the next, you know, two or three quarters.

Our repayments indicate that M&A is.

Just maybe starting to percolate, a little bit so pluses and minuses when we get repaid we we say thank you very much for repaying us because sometimes they don't.

We're very appreciative, when we get repaid and in many cases that also means wearing it ringing the cash register from the equity co investment side.

So some of that is starting to happen, which we're happy with and as I said where were.

We're originating new deals again, we don't sit here and say Hey, we got to get to one five times because the research community wants to see it happen in their model in the next two or three quarters.

We try to.

Art Penn: We try to, and what we do is, each deal has to make sense on its own two feet. It's a very rigorous process that we go through. We'll get there when we get there. You know, we're healthily beating our dividend, even as we speak, in an under-levered, under-levered environment and also an environment where JV is also not fully deployed. So, you know, we're earning, you know, a healthy cushion for the dividend. We think the rest of this, whether it be on balance sheet leverage or the balance sheet of the JV kind of gives us, you know, a work chest to select hopefully great deals in what should be, what remains, what we think is a really good vintage. So we'll get there when we get there. We're not in a rush because we know if you're in a rush, that usually doesn't work out well, and the deal flow will come. We do think it will be. We think 2024 will be an active year.

What we do is each deal has to make sense on its own two feet, it's a very rigorous.

Process that we go through.

We will get there when we get there.

Fully meeting our dividend, even as we speak in an under Levered.

Under Levered environment, and also an environment, where JV is also now fully deployed.

So we're earning a healthy cushion to the dividend we think the rest of this whether it be on balance sheet leverage or the balance sheet balance sheet of the JV kind of gives US a war chest.

Select hopefully great deals and what should be what remains what we think are really good vintage.

So we'll get there when we get there we're not in a rush because we know if you're in a rush that usually doesn't work out well.

And the deal flow, we'll comp we do think it will be a 'twenty two where we think 2024 will be an active year.

Okay, Great and then just my other question just on the.

On yield and spread dynamics it looked like it looks like you are.

Q4.

Average yields for new deals were.

11, 9%.

The average portfolio is higher than that but then quarter to date yield.

Art Penn: Okay, great. And then just my other question, just on yield and spread dynamics, it looks like it looks like you're for www. PennantPark Floating Rate Capital Ltd. That's all around, www.pennantparkfloatingrate.com. Got it.

I saw around 13%.

The weighted average yield so can you just kind of talk about it looks like a little bit of choppiness, there and kind of what to what.

Do you expect to trend wise there in the near term yeah, Yeah, that's a typo, 13% to typo, it's closer to 12% for quarter to date. So that's very much in line with what we've been doing.

Art Penn: Okay. Thank you. Thank you. I do not have any further questions. I will now turn the call back to Mr. Art Penn for his closing remarks. Thank you. I want to thank everybody for their participation. We look forward to speaking to you again in early May. This concludes today's call. Thank you for your participation. You may now disconnect. PennantPark Floating Rate Capital Ltd, PennantPark.com www.pennantparkfloatingrate.com www.pennantpark.com?? www.pennantparkfloatingrate.com www.pennantpark.com www.pennantpark.com www.pennantpark.com www.pennantpark.com www.pennantpark.com www.pennantpark.com

Got it okay. Thank you.

Thank you.

We do not have any further questions in the queue I will now turn the call back to Mr Art Penn for closing remarks.

Thank you want to I want to thank everybody for their participation.

We look forward to speaking to you next in early May.

Okay.

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

Okay.

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