Q2 2024 PennantPark Floating Rate Capital Ltd Earnings Call

Operator: Good morning, and welcome to Pennant Park Floating Rate Capital's second 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 opened 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, please press star 2 on your telephone keypad. It is now my pleasure to turn the call over to Mr. Art Penn, Chairman and Chief Executive Officer of Pennant Park Floating Rate Capital. Mr. Penn, you may begin your conference.

Good morning, and welcome to the pennant Park.

Speaker Change: <unk> second.

Operator: 20th 24 earnings Conference call today's conference.

Operator: At this time, all participants have been placed in a listen only mode.

Operator: Call will be open for a question and answer session. Following the speaker.

Operator: If you would like to ask a question that that time simply press star one on your telephone keypad.

Operator: If you would like to withdraw your question. Please press star two on your telephone keypad.

Arthur Howard Penn: It is now my pleasure to turn the call over to Mister.

Arthur Howard Penn: Chairman and Chief Executive Officer, Appendant parked lotion, Great capital. Mr. <unk> you may begin your conference.

Arthur Howard Penn: Thank you and good morning everyone. I'd like to welcome you to Pennant Park Floating Rate Capital's second fiscal quarter 2024 earnings conference call. I'm joined today by Rick Allorto, our Chief Financial Officer. Rick, please start off by disclosing some general conference call information and include a discussion about forward-looking statements.

Arthur Howard Penn: Thank you and good morning, everyone I'd like to welcome you to Pennantpark floating rate capitals second fiscal quarter 2024 earnings conference call I'm.

Richard Thomas Allorto: I'm joined today by Rick of Loreto, Our Chief Financial Officer, Rick.

Richard Thomas Allorto: <unk>. Please start off by disclosing some general conference call information and included discussion about forward looking statements.

Richard Thomas Allorto: 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 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.

Richard Thomas Allorto: 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 pen and park floating rate capital.

Richard Thomas Allorto: Any unauthorized broadcast of this call in any form is strictly prohibited.

Richard Thomas Allorto: An audio replay of the call will be available on our website.

Richard Thomas Allorto: 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 these 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 pennantpark.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.

Richard Thomas Allorto: Also like to call your attention to the customary safe Harbor disclosure and our press release regarding forward looking information.

Richard Thomas Allorto: Today's conference call and they also include forward looking statements and projections and we ask that you refer to our most recent filings with the SEC Four important factors that could cause the actual results to differ materially from these projections.

Richard Thomas Allorto: We do not undertake to update our forward looking statements unless required by law.

Richard Thomas Allorto: To obtain copies of her latest SEC filings. Please visit our website at <unk> Park Dot com or call.

Arthur Howard Penn: At 212905 1000 at.

Arthur Howard Penn: Thanks, Rick. We're going to spend a few minutes discussing current markets, the current market environment for middle market lending. How we fared in the quarter ended March 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 March 31st, GAAP and Core Net Investment Income was $0.31 per share. GAAP and adjusted NAV increased 1.8% to $11.40 per share from $11.20 per share.

Arthur Howard Penn: At this time I'd like to turn the call back to our chairman and Chief Executive Officer of Heart pen.

Arthur Howard Penn: Thanks, Rick we're gonna spend a few minutes discussing current market the current market environment for middle market lending.

Arthur Howard Penn: The increase in NAV for the quarter was due primarily to positive valuation adjustments on both debt and equity investments. As of March 31st, our portfolio grew to $1.5 billion, or up 16% from the prior quarter. During the quarter, we continued to originate attractive investment opportunities and invested $338 million in 11 new and 48 existing portfolio companies at a weighted average yield of 11.6%. For the investments in new portfolio companies, the weighted average debt to EBITDA was 4.2 times. The Weighted Average Interest Coverage was 2.1 times, and the weighted average loan to value was 42%. On average, we have seen a 50 basis point tightening on first-lien spreads over the last six months.

Arthur Howard Penn: How we fare during the quarter ended March 31st.

Arthur Howard Penn: The portfolios position for the upcoming quarters.

Speaker Change: Mailed to review the financials and then open it up for Q&A.

Arthur Howard Penn: For the quarter ended March 31st gap and coordinate investment income was 31 cents per share.

Arthur Howard Penn: Gap and adjusted N. A V increased 1.8% to $11.40 per share from $11.20 per share the.

Arthur Howard Penn: The increase in N. A V for the quarter was due primarily to positive valuation adjustments on both debt and equity investments.

Arthur Howard Penn: As of March 31st our portfolio grew to 1.5 billion or up 16% from the prior quarter.

Arthur Howard Penn: During the quarter, we continued to originate attractive investment opportunities and invested $338 million and 11, new in 48 existing portfolio companies at a weighted average yield of 11.6%.

Arthur Howard Penn: For the investments a new portfolio companies the weighted average debt to EBITDA was 4.2 times.

Arthur Howard Penn: Weighted average insurance coverage was 2.1 times in.

Arthur Howard Penn: And the weighted average loan to value is 42%.

Arthur Howard Penn: On average we have seen a 50 basis point tightening on first lien spreads over the last six months.

Arthur Howard Penn: However, we continue to believe that the current vintage of core middle market, directly originated loans is excellent. The core middle market leverages 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.

Arthur Howard Penn: However, we continue to believe that the current vintage of core middle market directly originated loans is excellent.

Arthur Howard Penn: Core middle market Leverages, lower spreads an upfront Oh, I D or higher covenants are tighter than in the upper middle market.

Arthur Howard Penn: Despite covenant erosion in the upper middle market in the corner Middle market, we are still getting meaningful covenant protections.

Arthur Howard Penn: As of March 31st, our debt to equity ratio was 1.2 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. Securitization financing continues to be a good match for our lower-risk first lien assets. During the quarter, PFLT closed a $351 million term debt securitization transaction with a weighted average spread of 2.79%. A four-year reinvestment period and a 12-year final maturity.

Arthur Howard Penn: As of March 31st or death equity ratio was 1.2 to one.

Arthur Howard Penn: With a target ratio of 1.5 to one we believe that we are well positioned to drive additional gross and net investment income going forward.

Arthur Howard Penn: Securitization financing continues to be a good match for our lower risk first lien assets.

Arthur Howard Penn: During the quarter P. F. L. T closed a 351 million dollar term debt securitization transaction with a weighted average spread of 2.79%.

Arthur Howard Penn: A four year reinvestment period, and a 12 year final maturity.

Arthur Howard Penn: The AAA portion of the structure priced at a weighted average spread of 2.3%. The ratio of external debt to PFLT's junior capital was 4.5 to 1, which creates plenty of liquidity for the company. The proceeds were used to repay a portion of our Senior Secured Revolving Facility, which will be available to reborrow and invest in new originations as we continue to grow the PFLT portfolio. We expect additional growth in NII, in part driven by our investment in the joint venture.

Arthur Howard Penn: The triple a portion of the structure priced at a weighted average spread of 2.3%.

Arthur Howard Penn: The ratio of external debt to P. F. L. Ts Junior capital was 4.5 to one which creates a plenty of liquidity for the company.

Arthur Howard Penn: The proceeds were used to repay a portion of our senior secured revolving facility.

Arthur Howard Penn: Which will be available to re borrow and invest in new originations as we continue to grow the P. F. L T portfolio.

Arthur Howard Penn: We expect additional growth and NII in part driven by our investment in the joint venture.

Arthur Howard Penn: As of March 31st, the JV portfolio totaled $870 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 $80 million in six new and four existing portfolio companies. Existing portfolio companies had a weighted average yield of 11.6%, including 77 million of assets purchased from PFLT. We believe that the increase in scale of the JV's balance sheet will continue to drive an attractive mid-teens return on invested capital and enhance PFLT's earnings momentum.

Arthur Howard Penn: As of March 31st the JV portfolio totaled $870 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.

Arthur Howard Penn: During the quarter, the JV invested 80 million and six new and for existing portfolio companies at a weighted average yield of 11.6%, including $77 million of assets purchased from P. F. L T.

Arthur Howard Penn: We believe that the increase in scale of the Jv's balance sheet will continue to drive an attractive mid teens return on invested capital and enhanced P. F L Ts earnings momentum.

Arthur Howard Penn: Credit quality of the portfolio has remained strong. We added one new investment to non-accrual status and removed one investment. Non-accruals represent only 0.4% of the portfolio at cost and 0.3% at market value. For the quarter ended March 31st, PIC income remained low at only 1.7% of total investment income, which we believe is among the lowest in the BDC sector.

Arthur Howard Penn: Credit quality of the portfolios remains strong we added one new investment to nonaccrual status and removed one investment.

Arthur Howard Penn: [noise] accruals represent only 0.4% of the portfolio at cost and 0.3% a market value for the quarter ended March 31st pick income remain low had only 1.7% of total investment income, which we believe is among the lowest in the BDC sector.

Arthur Howard Penn: As of March 31st, the portfolio's weighted average leverage ratio through our debt security was 4.4 times, and the portfolio's weighted average interest coverage was 2.2 times. We believe that this is one of the most conservatively structured portfolios in the direct lending industry and a testament to our focus on the core middle market. We like being positioned for capital preservation as a senior secured first lane lender focused on the United States.

Arthur Howard Penn: As of March 31st portfolio weighted average leverage ratio.

Arthur Howard Penn: That security was four four times.

Arthur Howard Penn: And the portfolios weighted average interest coverage was 2.2 times we.

Arthur Howard Penn: We believe that this is one of the most conservatively structured portfolios and a direct lending industry and is a testament to our focus on the core middle market.

Arthur Howard Penn: We like being position for capital preservation is a senior secured firstly in 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.

Arthur Howard Penn: 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.

Arthur Howard Penn: We provide important strategic capital to our borrowers.

Arthur Howard Penn: 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 no. The right questions to ask and have an excellent track record.

Arthur Howard Penn: Our business services consumer government services, and defense health care and software and technology. These sectors have also been resilient intend to generate strong free cash flow.

Arthur Howard Penn: These sectors have also been resilient and tend to generate strong free cash flows. Additionally, approximately 19% of our portfolio is in government services and defense, which is a sector with strong tailwinds in this geopolitical environment. In our software vertical, we don't have any exposure to ARR loans, and the core middle market, which we define as companies with 10 to 50 million in EBITDA, that is below the threshold and does not compete with the broadly syndicated low market or the 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.

Arthur Howard Penn: Approximately 19% of our portfolio is in government services and defense, which is a sector with strong tailwinds in this geopolitical environment.

Arthur Howard Penn: And our software vertical we don't have any exposure to a R. R loans.

Arthur Howard Penn: And the horror middle market, which we defined as companies with 10 to 50 million of EBITDA.

Arthur Howard Penn: That is below the threshold and does not compete with a broadly syndicated low market or the high yield markets.

Arthur Howard Penn: Unlike our peers in the upper middle market.

Arthur Howard Penn: And the horror middle market, because we are an important strategic lending partner the process impact of terms, we receive as attractive.

Arthur Howard Penn: 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.

Arthur Howard Penn: We thoughtfully structure transactions with sensible credit statistics, meaningful covenants, substantial equity cushions to protect our capital, attractive spreads, attractive Upfront OID, and Equity Columbus. Additionally, from a monitoring perspective, we receive monthly financial statements to help us stay on top of the company. 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 those bigger companies are less risky. That may make some intuitive sense, but the reality is different.

Arthur Howard Penn: Tractive spreads.

Arthur Howard Penn: Attractive upfront, Oh, I D and equity Coinvestment. Additionally from a monitoring perspective, we received monthly financial statements to help us stay on top of the companies.

Arthur Howard Penn: With regard to covenants. Unlike the erosion in the upper middle market virtually all of our originated firstly loans had meaningful covenants, which help protect our capital.

Arthur Howard Penn: This is a significant reason why we believe we're well positioned in this environment.

Arthur Howard Penn: Many of our peers should focus on the upper middle market state that those bigger companies are less risky.

Arthur Howard Penn: That may make some intuitive sense, but the reality is different according 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.

Arthur Howard 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 $5.9 billion in 492 companies, and we have experienced only 18 non-accruals. Since inception, PFLT's loss ratio on invested capital has been only 12 basis points annually.

Arthur Howard Penn: 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.

Arthur Howard Penn: Our credit quality since inception over 13 years ago has been excellent.

Arthur Howard Penn: P. F. L. T has invested $5.9 billion and 492 companies and we have experienced the only 18 nonaccruals.

Arthur Howard Penn: Since inception P. A L. Ts loss ratio on invested capital is only 12 basis points annually.

Arthur Howard Penn: 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 call investments have been excellent over time. Overall, for our platform from inception through March 31st, we've invested over $469 million in equity co-investments and have generated an IRR of 26% and a multiple on invested capital of 2.1 times.

Arthur Howard Penn: 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 investment Ah.

Arthur Howard Penn: Returns on these equity call investments had been excellent overtime.

Arthur Howard Penn: We're all for our platform from inception through March 31, we've invested over $469 million in equity come investments and have generated in IRR of 26% in a multiple on invested capital of 2.1 times.

Arthur Howard Penn: Our experienced, intelligent 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 rates. We capture that free cash flow primarily in FirstLink 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.

Arthur Howard Penn: Our experienced and talented team and are wide origination funnel is producing active dealflo. Our continued focus remains on capital preservation of being patient investors our mission a goal or a steady stable and protected dividend stream coupled with the preservation of capital everything we do is a line to that goal, we seek to find investment opportunities and grew.

Rick: [noise] middle market companies that have high free cash flow conversion.

Rick: Capture they free cash flow, primarily and firstly senior secured instruments and.

Rick: And we pay out those contractual cash flows in the form of dividends to our shareholders let.

Rick: Let me now turn the call over to Rick R. CFO to take us through the financial results in more detail.

Rick: Thank you art.

Richard Thomas Allorto: For the quarter ended March 31st, GAAP and Coordinate Investment Income was $0.31 per share. Operating expenses for the quarter were as follows. Interest and expenses on debt were $14.7 million. Base management and performance-based incentive fees were $8.2 million. General and administrative expenses were $1.8 million, and provision for taxes were $.5 million.

Rick: For the quarter ended March 31 gap and coordinate investment income was 31 per share.

Richard Thomas Allorto: Operating expenses for the quarter were as follows.

Richard Thomas Allorto: Interest and expenses on that were $14.7 million based management and performance based incentives fees were $8 2 million.

Richard Thomas Allorto: General and administrative expenses were 1.8 million and provision for taxes or.

Richard Thomas Allorto: $5 million.

Richard Thomas Allorto: For the quarter ended March 31st, net realized and unrealized change on investment, including provision for taxes, was a gain of $12 million, or $0.20 per share. As of March 31, our GAAP NEV was $11.40, which is up 1.8% from $11.20 per share last quarter. Adjusted NAV, excluding the mark-to-market of our liabilities, was $11.40 per share, up 1.8% from $11.20 per share last quarter.

Richard Thomas Allorto: For the quarter ended March 31, net realized and unrealized change on investments, including provision for taxes was a gain of $12 million or 20 per share.

Richard Thomas Allorto: As of March 31, or gap Nev was $11.40, which is up 1.8% from 11 20 per share last quarter.

Richard Thomas Allorto: Adjusted Navvy.

Richard Thomas Allorto: Excluding the mark to market of our liabilities was $11 and 40 per share up 1.8% from 11 20 per share last quarter.

Richard Thomas Allorto: As of March 31st, our debt-to-equity ratio was 1.2 times, and our capital structure is diversified across multiple funding sources, including both secured and unsecured debt. As of March 31st, our key portfolio statistics were as follows. Our portfolio remains highly diversified with 146 companies across 44 different industries. The weighted average yield on our debt investments was 12.3%, and approximately 100% of the debt portfolio is floating rate. Pick income equals only 1.7% of total investment income.

Richard Thomas Allorto: As of March 31, our debt to equity ratio was one two times in our capital structure is diversified across multiple funding sources, including both secured and unsecured debt.

Richard Thomas Allorto: We had one non-accrual, which represents 0.4% of the portfolio at cost and 0.3% at market value. The portfolio is comprised of 87% first lien, senior secured debt, less than 1% in second lien and subordinated debt, 6% in equity of PSSL, and 7% in other activities. Debt to EBITDA on the portfolio is 4.4 times, and interest coverage was 2.2 times. Now, let me turn the call back to Art

Richard Thomas Allorto: As of March 31 are key portfolios statistics were as follows.

Art: Our portfolio remains highly diversified with 146 companies across 44 different industries.

Art: Weighted average yield on there that investments was 12.3%.

Art: And approximately 100% of that portfolio is floating right.

Art: Pick income equaled only 1.7% a total investment income.

Richard Thomas Allorto: We had one nonaccrual, which represents 0.4% of the portfolio at cost and 0.3% at market value.

Art: The portfolio is comprised of 87% first lien senior secured debt.

Art: And 1% in second lien and subordinated debt.

Art: 6% equity PSL and.

Art: And 7% in other equity.

Art: That the EBITDA on the portfolio is four four times and interest coverage was 2.2 times.

Richard Thomas Allorto: Now, let me turn the call back to art.

Arthur Howard 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.

Art: Thanks, Rick in closing I'd like to thank our dedicated and talented team of professionals for their continued commitment to P. F. L T. In.

Arthur Howard Penn: And its shareholders. Thank you all for your time today and for your investment and confidence in us.

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

Speaker Change: [noise]. Thank you.

Operator: 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 your mute function is turned off to allow your signal to reach your equipment. Again, press star 1 to ask a question. We will take our first question from Brian McKenna from Citizens JMP. Please go ahead.

Speaker Change: If you would like to ask a question. Please signify by pressing star one on your telephone keypad.

Brian J. McKenna: Are you 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.

Brian J. McKenna: Alright, we'll take care of first question so.

Brian J. McKenna: Mckenna from J.

Brian J. McKenna: J M. P. Please go ahead.

Brian J. McKenna: Thanks, good morning all. So it's great to see all the growth in the investment portfolio year-to-date, up nearly 40% over the past two quarters. Leverage, as you mentioned, is still below your one and a half times target. So how should we think about growing the portfolio from here on in and then, you know, how does all this growth ultimately impact the trajectory of NII over the next few quarters?

Brian J. McKenna: Good morning, all so it's great to see all the growth in the investment portfolio year to date up nearly 40% over the past two quarters.

Brian J. McKenna: Leverage as you mentioned it it's still below your one and a half times targets. So how should we think about gross portfolio from here and then how does all this girl's ultimately impact the trajectory of NII over the next few quarters.

Arthur Howard Penn: Thanks, Brian. It's a good question.

Speaker Change: Thanks, Bryan. It's good question of our belief is that the back half of 2024 is going to be active.

Arthur Howard Penn: Look, our belief is that the back half of 2024 is going to be active. So, you know, we think we're going to be able to be very active, and deploy really good capital at this good vintage with these credit statistics. So, you know, kind of, we're hoping that come the turn of the year, turning into 2025, we'll kind of be, you know, pretty close to, or pretty close to, our target.

Brian: So we think we're going to be able to be very active deploy really good capital at this good vintage with these credit statistics.

Arthur Howard Penn: So you know kind of we're hoping that come come the turn of the year could turning into 2025 will kind of be pretty close at are pretty close to our target target leverage.

Brian J. McKenna: Yeah, got it. Okay, it makes sense.

Speaker Change: Yeah got it Okay makes sense and then just a follow up in the quarter. Yeah. You invested in 11 your portfolio companies 48 existing portfolio companies and that was at an average waited waited yield is 11.6 per cent. So a couple of questions here, how much did average yields come in relative to the.

Arthur Howard Penn: And then just a follow-up, in the quarter, you invested in 11 new portfolio companies and 48 existing portfolio companies, now that's an average weighted yield of 11.6%. So a couple questions here: how much did average yields come in relative to the last couple of quarters for new investments? Can you give any color on quarter-to-date spreads or yields? I know you mentioned some kind of tightening of 50 basis points. Has that trended differently just kind of over the last several weeks here? And then moving forward, just on deployment, how should we think about the mix of new investments versus kind of existing portfolio company investments?

Arthur Howard Penn: The last couple of quarters for new investments.

Arthur Howard Penn: Can you get any color on quarter today spreads her yields I know you mentioned kind of tightening of 50 basis points has that trend. It differently just kind of over the last several weeks here and then moving forward on deployment, how should we think about to make some new investments.

Arthur Howard Penn: Versus kind of existing profile company investments.

Arthur Howard Penn: Yeah, you know, yeah, we spread over the last six to nine months have come in, you know, on average, about 50. So what was a SOFR plus 600 is kind of more like a SOFR 550. Right now, we think that's kind of, you know, meeting its low, but we do believe there's a shot that spreads will widen again, particularly if there's a lot of supply, if there's a big, there's a lot of activity coming into the end of 24, which we believe there will be given supply and demand, we think there's a shot that spreads may widen. We don' But that's certainly a possibility.

Speaker Change: Yeah, Yeah, yes, we spreads over the last six to nine months have come in you know on average about 50, so what was.

Arthur Howard Penn: Silver plus 600 is kind of more like a soap or 550 right now we think that's kind of <unk>.

Arthur Howard Penn: Meeting, it's low we we do believe there's a shot that spreads will widen again.

Arthur Howard Penn: Particularly if there's a lot of supply if there's a big.

Arthur Howard Penn: There's a lot of activity coming into the end of 2004, which we believe there will be.

Arthur Howard Penn: Given supply demand, we think there's a shot that spreads may widened we don't want to write that you shouldn't underwrite that but that's certainly a possibility. We think at this point they've kind of reached kind of reached their minimum in terms of kind of new platforms versus existing I mean, that's the nice thing about.

Arthur Howard Penn: We think at this point, they've kind of reached their minimum in terms of new platforms versus existing ones. I mean, that's the nice thing about, you know, what we have is that we have over 100 companies in the portfolio, most of which are companies that are growing that need additional capital. Part of the value proposition that we add to those borrowers and those private equity sponsors is that we're a strategic lender there to help them grow and provide additional capital to fuel that growth.

Arthur Howard Penn: You know about what we have is we have over 100 companies in the portfolio most of which are companies that are growing that need additional capital part of the value proposition that we add to those borrowers in this private equity sponsors is that we're a strategic lender there to help them grow and to provide <unk>.

Arthur Howard Penn: National capital to fuel that growth.

Arthur Howard Penn: So even in quarters where there's less activity in newer platforms for us, we still are very busy with the existing portfolio and financing the existing portfolio. I guess what you're hearing from me is that between now and year-end, we believe there's going to be a greater mixture of new platform names in our portfolio as part of the mix. We like the new platform names, they are kind of part of this vintage. As you can see, it's kind of low-forged debt to EBITDA, very meaningful covenants, and very good loan-to-value. So we're optimistic that between now and year-end, calendar year-end, we're going to be busy with this newer vintage.

Arthur Howard Penn: So that so that even in quarters, where there's fewer activity and newer platforms for us. We still are very busy with the existing portfolio in financing the existing portfolio I guess, what you're hanging from me is that between now and your and we believe there's gonna be.

Arthur Howard Penn: A greater mixture of new platform names in our portfolio as part of the mix. We liked the new platform Knaves, New platform names are kind of part of this vintage as you can see it's kind of.

Arthur Howard Penn: Low for his debt to EBITDA very meaningful covenants very good loan to value. So we're we're we're optimistic that between now and year end calendar year, and we are going to be busy with this newer vintage.

Brian J. McKenna: All right, I'll leave it there. Thanks, Art.

Speaker Change: Alright, I'll leave it there.

Art: Thank you.

Operator: We will take our next question from Mark Hughes from Twist. Please go ahead.

Speaker Change: We will take our next question from.

Operator: Markets.

Mark Douglas Hughes: Please go ahead.

Mark Douglas Hughes: Yeah, thank you. Good morning.

Mark Douglas Hughes: Yeah. Thank you good morning.

Arthur Howard Penn: Are your outlook for spreads potentially to widen? As you say, don't take it to the bank, but it's an idea. Is that supply and demand? Is that because you think there'll be a lot of opportunities coming to market? And that'll benefit you all? Or do you think there's some additional risk that may be coming later in the year? How do you see that? Yeah.

Mark Douglas Hughes: Are your outlook for spreads potentially to widen as you say don't to take it to the bank, but it's an idea.

Arthur Howard Penn: Is that a supply and demand is that because you think there'll be a lot of opportunities coming to market and.

Arthur Howard Penn: And that will benefit you all or do you think there is some additional risks cause it may be coming later in the year, how do you see that.

Arthur Howard Penn: Yeah, I mean, it's a good question. My comments were more focused on supply and demand of deal flow. So, in a world where our view is that we think there's going to be a lot of deal flow in the back half of 24, that's where that comes from. It doesn't come from any.., any projection about the health of the economy. As you know, Mark, we underwrite, you know our scenarios as lenders always assuming there's a soft economic environment early on in the deal and whether there's one or not we have no idea no one really does but we assume that which is why we generally structure these loans as very conservative low leverage you know high equity cushion you know good covenants good information rights you know kind of believing at some point there may be a bump it could be sooner and we need to structure these deals as if there's a bump but we don't have any prognostication about that.

Arthur Howard Penn: Yeah, I mean, it's a good question my my comments were more focused on supply demand of deal flow.

Arthur Howard Penn: And then the positive valuation marks in the quarter help to drive up NAV. Any detail you can provide on broader capital market movements influencing that? Would be curious if any could break out or detail. Yeah, a little bit.

Arthur Howard Penn: So in a world where our view is that we think there's gonna be a lot of deal flow in the back half of 24, that's where that comes from it doesn't come from any.

Arthur Howard Penn: Any projection about the health of the economy has you know mark we underwrite.

Arthur Howard Penn: You know our scenarios as lenders always assuming there is a soft economic environment early on in the deal and whether there was one or not we have no idea no. One really does but we assume that which is why we generally structure. These loans is very conservative low leverage you know high equity.

Arthur Howard Penn: Cushion.

Arthur Howard Penn: Good covenants good information Rice, you know kind of believing at some point there may be a bump it could be sooner and we need to structure. These deals as if there's a bump sooner, but we don't have any prognostication about that.

Speaker Change: Understood and then the positive valuation marks in the quarter helped drive up Nab any detail you can provide we've got.

Arthur Howard Penn: Equity performance.

Arthur Howard Penn: Ah.

Arthur Howard Penn: Broader capital market the movement.

Arthur Howard Penn: Influencing the would be curious.

Arthur Howard Penn: Yeah breakout or detail.

Arthur Howard Penn: Some of the equity investments performed well, in particular a company called Bylight, as well as a company called Marketplace Events. Those two were the two kinds of larger markups in the value of the equity. And then there was a broad portfolio move on the debt securities. As we've said, we think spreads have tightened by about 50 beeps over the last six or nine months, and that's kind of what you see in the general increases in the valuations on the debt security.

Arthur Howard Penn: Yeah, a little bit. It's a little bit of both.

Speaker Change: Yeah, a little bit it's a little bit of both some of the equity converse performed well in particular company called violate.

Arthur Howard Penn: As well as a company called marketplace events. Those two were the two kind of.

Arthur Howard Penn: Larger markups in the value of the equity and then it is a broad portfolio move on the death Securities. As we've said, we think spreads tightened about 50 beeps.

Arthur Howard Penn: For the last six or nine months and that's kind of what you see in the in the general Ah increases and evaluations on the debt securities.

Arthur Howard Penn: And then.

Arthur Howard Penn: and then uh... You probably touched on this, but what is your broader general credit outlook, you know, from a macro perspective, as we think about, going through 2024? Any particular views on where things might be heading?

Arthur Howard Penn: You're probably puts them.

Arthur Howard Penn: Your broader general credit outlook from a macro perspective, as we think about.

Arthur Howard Penn: Going through 2024, any particular views on where things might be heading.

Arthur Howard Penn: Not really, you know; we're not macro-economists; we are micro-credit underwriters. For a leg for lenders flat is just fine if you've underwritten credit. Please see the video description for a link to the author's email. So we think we're well-positioned in any environment, but we don't have any... For macro calls, I'm sure Truist has some expertise and others do, but that's not really our fault.

Speaker Change: Nah not really you know we're not macro economist we are micro credit underwriters.

Arthur Howard Penn: For for letting for lenders flat is just fine if you've only written credit.

Arthur Howard Penn: Appropriately, we underwrite assuming there'll be some bump in the road early in the life of alone.

Arthur Howard Penn: So we think we're.

Arthur Howard Penn: Well positioned in any environment, but we don't have any.

Arthur Howard Penn: For macro calls you know I'm sure truest has some expertise and others do.

Arthur Howard Penn: That's not really our strength.

Mark Douglas Hughes: Okay, I appreciate it. Thank you, Eric.

Speaker Change: Okay I appreciate it thank you.

Speaker Change: Thank you.

Operator: We will now move to Vilas Abraham from UBS. Please go ahead.

Mark Douglas Hughes: We have a number two.

Vilas T. Abraham: Perhaps from U P. S. Please go ahead.

Vilas T. Abraham: Hey everybody, thanks for the question. Can you talk a little bit about the timing of the liability actions PSLT took in Q1 and just how we should think about the average cost of debt trend in Q2?

Vilas T. Abraham: Hey, everybody I think for the question can you talk a little bit about the timing of the liability accidents PLT took in in Q1 and just how we should think about the average cost of debt trend I'm into the queue to.

Arthur Howard Penn: It's a great question, you know; we've been talking about spread tightening, and you know, things are moving in a positive direction. Our securitization happened kind of in early February. So, kind of early to mid-quarter. Spreads on CLS have come down since then. I think we said, you know, we were about 230 over on the AAA on the PFLT securitization. We just priced an AAA, and we just priced the securitization for the JV. PFLT owns 87.5% of the JV with Kemper, and we just priced the AAA's at like $193.

Vilas T. Abraham: It's a great question you know what we've been talking about spread tightening in.

Arthur Howard Penn: You know things are moving in a positive reaction our our our securitization happened kind of an early February.

Arthur Howard Penn: So kind of early to mid quarter.

Arthur Howard Penn: Spreads on C. L us have come down since then I think we recently said.

Arthur Howard Penn: We were about 230 over on the Triple a on that on the P. F. L. T securitization, we just priced a triple a and we just prices securitization for the J V.

Arthur Howard Penn: <unk>, 87.5%.

Arthur Howard Penn: The JV with camper and we just price the triple as I'd like 193.

Arthur Howard Penn: So we're going to get the benefit of some tightening that happened. Please see the complete disclaimer at https://sites.google.com or at https://sites.google.com. We just know that it's a very good match for our lower risk first lien assets. It's 12 year money. It's matched from a fixed standpoint. The structure of these securitizations is such that we never have to worry about a credit officer in a corner office having a bad hair day. They're a kind of self-correcting.

Arthur Howard Penn: So we're gonna get the benefit of some tightening that happened between you know early February and here. We are in early may so.

Arthur Howard Penn: We liked the securitization financing again, we're never gonna be smart enough to pick the optimal time.

Arthur Howard Penn: We just know that it's very good matching four or lower risk first lien assets. It's 12 year money. It it's match from a fixed standpoint.

Arthur Howard Penn: The structure of the securitization are such that we never have to worry about Ah Ah credit officer on a corner office, having a bad hair day, they're very kind of self correcting so.

Arthur Howard Penn: So, you know, we were operating in a middle market CLO through COVID. It worked marvelously during that period. So we really like the securitization structure. It's very matched and helps us sleep at night, and we also like our revolvers, and we also like our bonds, but securitizations are a very good tool for this kind of portfolio.

Arthur Howard Penn: We were operating.

Arthur Howard Penn: Middle market Clo's recovered it worked wonderfully during that.

Arthur Howard Penn: That that period, so we really liked the securitization structure, it's very matched and.

Arthur Howard Penn: It helps us sleep at night, and we also looked like a revolvers and we also like our bonds, but the securitization is a very good tool for this kind of portfolio.

Arthur Howard Penn: Oh.

Speaker Change: Okay Alright.

Speaker Change: Alright, and then.

Arthur Howard Penn: Okay, all right. Then just on the amendment activity, can you comment a little bit about what you're seeing there? Other income was a little bit elevated again in Q1, so just thinking about how we should look at that moving forward.

Speaker Change: Uhm just on the amendment activity can you comment a little bit about what you're seeing there. So other income was a little bit elevated again and you know in Q1. So just you know thinking about how we should look at that moving forward.

Arthur Howard Penn: Yeah, look, their amendments are part of our business. They always are. It's not that material at this point. There are a handful of names that tend to amend every quarter. Some are bigger, some are smaller.

Speaker Change: Yeah, I love their amendments are part of our business. They always are.

Arthur Howard Penn: It's not that material at this point, there's a handful of names that tend to amend every quarter summer bigger some are lower.

Arthur Howard Penn: I think what we've seen though, and the nice thing about how we lend... with a loan to value so attractive in many cases. As part of an amendment, we'll ask the private equity sponsor to inject additional equity beneath us, and in many cases, they do. For instance, rolling back the tape to COVID, and in almost every case, the sponsors put equity in to solve the problem. That's what happens when you have well-structured covenants that have meaning, and that's what we do versus, let's say, what's going on in the upper middle market and the core middle market. We see covenants, which get us to the table, which does create that opportunity to have that conversation.

Arthur Howard Penn: Think what we've seen though and the nice thing about how we land.

Arthur Howard Penn: With a loan to value so attractive in many cases.

Arthur Howard Penn: As part of an amendment will ask the private equity sponsored to inject additional equity beneath us.

Arthur Howard Penn: And in many cases, they do for instance, rolling back to tape the Covid.

Arthur Howard Penn:

Arthur Howard Penn: In almost every case the sponsors but equity in to solve the problem and that's what happens when you have well structured covenants that has.

Arthur Howard Penn: Meaning and that's what we do versus let's say, what's going on in the upper middle market.

Arthur Howard Penn: And the core middle market, we see covenants, which get us to the table, which does create that opportunity to to have that conversation too.

Arthur Howard Penn: Ask for more equity or to ask for additional economics, whether those be fees, as you said, or whether they be increased spread. So having the monthly financial statements and the quarterly maintenance test, the quarterly covenant, has been a good thing for us over time, most importantly in protecting and preserving capital. Of course, we make mistakes, we all do, but it's kind of, we kind of, through our structures really try to minimize them.

Arthur Howard Penn: Asks for more equity or to ask for additional economics, where those be fees as you said or whether they be increased spread.

Arthur Howard Penn: So having the monthly financial statements under quarterly maintenance tasks quarterly covenants.

Arthur Howard Penn: Has been a good thing for US every time, most importantly in protecting and preserving capital you know.

Arthur Howard Penn: Of course, we make mistakes, we all do but it's kind of we kind of through our structures really try to minimize them.

Arthur Howard Penn: [laughter].

Vilas T. Abraham: Got it. I appreciate the call. Thanks.

Speaker Change: Got it I appreciate the color things.

Speaker Change: Thank you.

Operator: We will take our next question from Jill Marchan from the Knights of Columbus. Please go ahead.

Speaker Change: We will take our next question.

Operator: Mmm.

Jill Marchan: Please go ahead.

Jill Marchan: Good morning. If you can, can you just give some background on the new non-accrual and the one that came off?

Jill Marchan: Good morning, if you can can you just give us some background on the new nonaccrual and one nonaccrual that came off.

Arthur Howard Penn: Sure. Thank you. Good question. The non-accrual that came off is a company called Mail South or M-Spark, two different names. It was originally MailSouth, and it might have been listed in our schedule of investments as such. The name changed to MSpark. We had already marked that down to zero in the prior few quarters, so that was just the company that was sold. And in fact, we recovered zero, so that moved off our schedule of investments.

Jill Marchan: Sure. Thank you quick question. The nonaccrual came off that came off as a company called mail south or M. Spark.

Arthur Howard Penn: Two different names. It was originally mail south I might've been listed in our.

Arthur Howard Penn: Schedule investments such as the name changed to M. Spark, we already marked that down to zero and the prior few quarters. So that was just the company was sold and in fact, we recovered euros now moved off our schedule of investments.

Arthur Howard Penn: And the one that moved on is a company called Walker Edison. Walker Edison did a restructuring a while back, and it continues to not perform that well. We're optimistic though, we think the sector will heal, but it's taking a while, so we proactively put that company on nonaccrual.

Arthur Howard Penn: And the one that moved on as a company called Walker Edison.

Arthur Howard Penn: Walker Edison did a restructuring awhile back it continues to not performed that well we are optimistic that we we think you know we think the sector over time will heal, but it's taking a while so we proactively.

Arthur Howard Penn: Put that company on non accrual.

Arthur Howard Penn: [noise], Thank you and follow up.

Jill Marchan: Thank you. And a follow-up.

Arthur Howard Penn: Moody's came out yesterday with a report on middle market CLOs, saying the small companies were... I guess more affected by higher rates. Just wondering if you could comment on that, Art.

Jill Marchan: Moody's came out yesterday with a report middle market for yellows.

Speaker Change: Given the smaller companies where.

Speaker Change: I guess more effected with higher rates just wondering if you could.

Speaker Change: Feminine that art.

Art: Yeah look.

Arthur Howard Penn: You know, it's no shock that higher rates if we're in a higher rate environment and... [inaudible] and you know that's when people originally did these deals, and no one anticipated the risk-free rate going where it is. You know, on average, our companies are still covering their interest two times, right? So over two times, so that's really a testament to how we structured the deals up front more conservatively when we did most of these deals.

Art: You know, it's no shock that higher rates were at a higher rate environment and.

Arthur Howard Penn:

Arthur Howard Penn: And you know that's when when people were doing people do originally did he steals no one anticipated the risk free rate going where it is.

Arthur Howard Penn: You know an average or comfort you still covering their injuries two times right. So over two times. So that's.

Arthur Howard Penn: Really a testament to how we structure the deals upfront more conservatively when we did most of these deals.

Arthur Howard Penn: You know, prior to the interest rate increases, the interest coverage was over three times, uh... but now it's kind of over two times which which makes sense again we still seem very light not cruels and very late amendment activity uh... and i think that's really testament to, Kind of, you know, the core middle market where leverage is lower, you know, I don't know, you may follow some of our bigger peers who focus on the upper middle market, our sense is debt to EBITDA is higher, then, you know, four and a half times or so, which is kind of where we underwrite four times. Please see the complete disclaimer at https://sites.google.com or at https://sites.google.com.

Arthur Howard Penn: Prior to the interest rate increases the interest coverage was over three times.

Arthur Howard Penn: But now it's kind of over two times, which which makes sense again, we still seem very light nonaccruals and very light amendment activity.

Arthur Howard Penn: And I think that's really testament too.

Arthur Howard Penn: Kind of.

Arthur Howard Penn: Poor middle market, where leverages lower you know I I I don't know you may follow some of our bigger peers, who focus on the upper middle market, our senses that EBITDA is higher.

Arthur Howard Penn: And then a four and a half time show, which is kind of where we underwrite four times.

Arthur Howard Penn: Our senses interest coverage is tighter.

Arthur Howard Penn: And that's just frankly because of the supply demand of capital in the upper middle market there.

Arthur Howard Penn: They've got a lot of money to put to work, and they're quote unquote competing with a broadly syndicated loan market on Wall Street. So there's a lot of dollars chasing those upper middle market opportunities. What's resulted is it's an orphaned kind of core middle market company. So we have, you know, a playing field below 50 vipada where, you know, there's a few of us who are active. The competition's less. Our capital is very meaningful to the borrowers.

Arthur Howard Penn: They've got a lot of money to put the warfare quote unquote competing with a broadly syndicated loan market in wall Street.

Arthur Howard Penn: So there's a lot of dollars chasing those upper middle market opportunities.

Arthur Howard Penn: Which resulted is orphaned kind of a core middle market companies. So we have you know a a playing field.

Arthur Howard Penn: Below 50 of EBITDA.

Arthur Howard Penn: Where there's a few of US who are active the competitions less R. Capital is very meaningful to those borrowers we can still get meaningful covenants.

Arthur Howard Penn: We can still get meaningful covenants, uh... we get the monthly financial statement, so the overall package of risk and reward, you know, is very attractive and, and, and we think appropriate for the size of these companies.

Arthur Howard Penn: We get the monthly financial statements. So the overall package.

Arthur Howard Penn: Risk reward you know is is very attractive and.

Arthur Howard Penn: And we think appropriate for for the size of these companies.

Jill Marchan: Thanks Art. And lastly, um... The fund is doing well, and the metrics are very good. Have you thought about talking to Moody's or S&P or Fitch to get an idea?

Arthur Howard Penn: And lastly.

Jill Marchan: The fund is doing well and and and.

Jill Marchan: And the metrics are very good have you thought about talking to move to Moody's arrests and few you're finished.

Jill Marchan: To get another rating.

Arthur Howard Penn: Uh... yeah, I mean just to be uh... you know, S&P does rate our CLOs and does give us ratings estimates for all the loans that go into our CLOs. So basically, all of our senior loans get ratings estimates. And when we walk into the securitization side of S&P, they say, gee. The top 65% of this stack, we're going to rate AAA. Right?

Speaker Change: Yeah, I mean, just to be you know so it's interesting you know S&P does right.

Arthur Howard Penn: R C L OS and does give us ratings estimates for all the loans that go in our cielo. So.

Arthur Howard Penn: Basically all of our senior loans get ratings estimates.

Arthur Howard Penn: And while we walk into the securitization side of S&P.

Speaker Change: Hey, Jay.

Arthur Howard Penn: Top 65% of the stack, we're gonna rate Triple a.

Arthur Howard Penn: And we can issue AAA. We just issued AAA at $193 the other day in the JV. And so essentially, when you're getting two-to-one leverage in those CLOs through that portal of S&P. S&P thinks that you can leverage their assets two times, and it's triple-A. Then when you walk into the other door at S&P, where the name on the door says BDC, that door at S&P says, "whoa," you can leverage more than one and a quarter times and be triple B on an unsecured basis.

Arthur Howard Penn: Right and we can issue Triple a we just issue triple a 193.

Arthur Howard Penn: The other day and the J V.

Arthur Howard Penn: And so essentially when you get into to one leverage in that in those C. L o's through that portal S&P.

Arthur Howard Penn: S&P thinks that you can leverage that assets two times and it's a triple a.

Arthur Howard Penn: And then when you walk into the other door at S. M P, which.

Arthur Howard Penn: Name on the door says B D C.

Arthur Howard Penn: That door. It S&P says whoa, you can leverage more than one in a corner and times and be triple B.

Arthur Howard Penn: On an unsecured basis.

Arthur Howard Penn: So there's a bit of an inconsistency going on at... at S&P. We try to highlight it to them. We're happy to talk to them, and perhaps you can talk to them too. But if one portal of entry is giving us two-to-one leverage through securitization at AAA, It would appear to us that that's a very efficient way to do it versus going into something called the BDC room where they have a much different view of credits, which are, by the way, the same exact credits whether we're doing unsecured at the BDC level or securitization either in the BDC or at the JV. So, happy to talk to you about this at your convenience, Gil, but it's very.

Arthur Howard Penn: So there's a bit of an inconsistency going on at at.

Arthur Howard Penn: S&P, we try to highlight it to them, we're happy to talk to them and perhaps you can talk to them, but if one portal of entry is giving us a two to one leverage that's where securitization at triple a.

Arthur Howard Penn: What appeared lost that that's a very efficient way to deal with versus.

Arthur Howard Penn: Going into something called the BDC Ah room, where they're they're they're much they have a much different view of of credits, which by the way. The same exact credits, whether we're doing unsecured at B D C level or securitization either in the Bt's here. It's J V. So happy to talk to you about this.

Arthur Howard Penn: Now.

Arthur Howard Penn: At your convenience scale, but it's very interesting.

Arthur Howard Penn: Sorry.

Speaker Change: Thank you.

Arthur Howard Penn: Art, I'd like to turn the conference back to you for any additional or closing remarks.

Speaker Change: Alright, I'd like to turn the conference back to you for any additional are closing remarks.

Arthur Howard Penn: Thank you. I just want to thank everybody for being on the call today. The next time we'll be talking will be after our June quarterly earnings, which will be in early August. In the meantime, I'm wishing everybody a great... Spring and Summer.

Art: Thank you just want to thank everybody for being on the call. Today next time, we'll be talking that will be after our June quarterly earnings which will be an early early August in the meantime, wishing everybody a great spring and summer have a good day.

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

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

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