Q3 2024 PennantPark Floating Rate Capital Ltd Earnings Call

August 8, 2024

Please stand by.

Operator: Welcome to the Pennant Parker, and good morning and welcome to the Pennant Park Floating Rate Capital Ltd.

Good morning and welcome to the PennantParker

Operator: Welcome to the PennantParker Good morning, and welcome to Pennant Park Floating Rate Capital's third 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 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 now begin your conference.

Operator: Good morning, and welcome to Pennant Park Floating Rate Capital's third fiscal quarter 2024 earnings conference call. Today's conference is being recorded. At this time, all participants are being placed in a listen-only mode. The call will open for a question and answer session following the speaker's remarks. If you would like to ask a question, at that time, simply press star 1 on your telephone keypad. If you would like to withdraw your question, press star 2 on your telephone keypad. It is now my pleasure to turn the call over to Mr. Art Penn, Chairman and Chief Executive Officer of PennantPark Floating Rate Capital. Mr. Penn, you may begin your conference.

Operator: Good morning and welcome to the Pennant Park Floating Rate Capital's third 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.

Operator: Fiscal quarter 2024 earnings conference call. Today's conference is being recorded. At this time, all participants have been placed in a listen-only vote. 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 one on your telephone keypad. If you would like to withdraw your question, please press star two on your telephone keypad.

Operator: The call will be open for a question and answer session following the speaker's remarks.

Operator: 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.

Arthur Penn: 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 now begin your conference. Thank you and good morning, everyone. I'd like to welcome you to Pennant Park Floating Rate Capital's third fiscal quarter 2024 earnings conference call. I'm joined today by Rick Allorto, our Chief Financial Officer.

Speaker Change: it is now my pleasure to turn the call over to mr arpen chairman and cheap executive oxer a panal park floating gr capsuital mr pen you may now begin your conference

Arthur Penn: Thank you and good morning everyone. I'd like to welcome you to Pennant Park Floating Rate Capital's third 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. Thank you, Art.

Richard Allorto: Rick, please start off by disclosing some general conference call information and include a discussion about forward-looking statements. 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.

Arthur Penn: Rick, please start off by disclosing some general conference call information and include a discussion about forward-looking statements.

Rick Allorto: 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 these projections.

Rick 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.

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

Richard 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.

Rick Allorto: I'd also like to call your attention to the customary safe harbor disclosure in our press release regarding forward-looking information.

Rick Allorto: 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

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

Richard Allorto: To obtain copies of our latest SEC filings, please visit our website at pennantpark.com or call us at 212-905-1000.

Rick Allorto: 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 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.

Rick Allorto: To obtain copies of our latest SEC filings, please visit our website at pennandpark.com or call us at 212-905-1000.

Arthur Penn: At this time, I'd like to turn the call back to our Chairman and Chief Executive Officer, Art Penn. Thanks, Rick. We're going to spend a few minutes discussing the current market environment for private, middle-market lending.

Rick Allorto: At this time, I'd like to turn the call back to our Chairman and Chief Executive Officer, Art Penn.

Arthur Penn: We're going to spend a few minutes discussing the current market environment for private middle market lending, how we fared in the quarter ended June 30th, and how the portfolio is positioned for the upcoming quarters. A detailed review of the financials, and then open it up for Q&A.

Speaker Change: thanks reick we're going to spend a few minutes discussing the current market environment for private middle market lending how we fairared in the quarter energy and thirtieth of the portfolio was positioned for the upcoming quarters a detailed review of the financials and then openened it up for qa

Arthur Penn: How we fared in the quarter-ended June 30th of the portfolio's position for the upcoming quarters, a detailed review of the financials, and then open it up for Q&A. For the quarter ended June 30th, GAP and core net investment income was 31 cents per share. As of June 30th, our portfolio grew to $1.7 billion, or 12 percent from the prior quarter. During the quarter, we continued to originate attractive investment opportunities and invested $321 million in 11 new and 47 existing portfolio companies at the weighted average yield of 11.5%. We continued to see an attractive vintage in the new portfolio companies.

Arthur Penn: For the quarter ended June 30th, GAAP and Core Net Investment Income was 31 cents per share. As of June 30th, our portfolio grew to $1.7 billion. 12% from the prior quarter. During the quarter, we continued to originate attractive investment opportunities and invested $321 million in 11 new and 47 existing portfolio companies at a weighted average yield of 11.5%. We continue to see an attractive vintage in the core metal market for investments in new portfolio companies. The weighted average debt fee per dollar was 3.8 times.

Arthur Penn: For the quarter ending June 30th, GAAP and Core Net Investment Income was $0.31 per share.

Arthur Penn: As of June 30th, our portfolio grew to $1.7 billion.

Arthur Penn: or twelve percent from the prior quarter during quarter we continue to originated attractive investment opportunities invested three or twenty-one million dollars and eleven new and forty-seven exsixteen portfolio companies at the weighted average yield of eleven point five percent

Arthur Penn: We continue to see an attractive vintage in the core metal market.

Arthur Penn: The weighted average debt fee of $3.8 times, the weighted average interest coverage was 2.2 times, and the weighted average loan value was 47 percent. Subsequence to quarter-end, we remained active and invested over $115 million at a weighted average yield of 11.2 percent. Investment volume is increasing, and we have a robust pipeline and expect a second half of 2024 to be active. During 2024, the market yield on first lean loans has tightened 50 to 75 basis points. As the credit statistics just highlighted indicate, we continue to believe that the current vintage of core metal market loans is excellent.

Arthur Penn: For investments in new portfolio companies, the weighted average debt debit dollar was 3.8 times, the weighted average interest coverage was 2.2 times, and the weighted average loan to value was 47 percent.

Arthur Penn: The weighted average interest coverage was 2.2 times, and the weighted average loan-to-value was 47%. Subsequent to quarter end, we remained active and invested over $115 million at a weighted average yield of 11.2%. Investment volume is increasing, and we have a robust pipeline and expect the second half of 2024 to be active. During 2024, the market yield on first lien loans tightened 50 to 75 basis points

Arthur Penn: Subsequent to quarter end, we remained active and invested over $115 million at a weighted average yield of 11.2%.

Arthur Penn: Investment volume is increasing and we have a robust pipeline and expect the second half of 2024 to be active.

Speaker Change: ear two thousand and twenty four the market yield the firstly lounans as tightened fifty to seventy-five basis points

Arthur Penn: As the credit statistics just highlighted indicate, we continue to believe that the current vintage of core middle market loans, and the Core Metal Market leverages lower, spreads are higher, and covenants are tighter than in the Upper Metal Market. Despite covenant erosion in the upper middle market and the core middle market, we are still getting meaningful covenant protection. As of June 30th, our death to equity ratio was 1.1 times to 1, and with a target ratio of 1.5 times to one, we believe that we are well positioned to drive additional growth in net investment income going forward.

Arthur Penn: As the credit statistics just highlighted indicate, we continue to believe that the current vintage of core middle market loans

Arthur Penn: And the core metal market leverages lower, spreads are higher, and covenants are tighter than in the upper metal market. Despite covenant erosion in the upper metal market and the core metal market, we are still getting meaningful covenant protections. As of June 30th, our debt equity ratio was 1.1 times to 1. With the target ratio of 1.5 times to 1, we believe that we are well positioned to drive additional growth and net investment income going forward. Securitization financing continues to be a good match for our lower risk first lean assets. Subsequence to quarter NPF-LT loans on the refinancing and upsides of a $351 million term alone, term debt securitization transaction for the weighted average spread of 1.89%.

Arthur Penn: is excellent. In the core middle market, leverage is lower, spreads are higher, and covenants are tighter than in the upper middle market.

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

Arthur Penn: as of jwe thirtieth our debt equity ratio was one point one times to one with the target ratio at one point five times to one we believe that we are well positioned to drive additional growth in net investment income going forward

Arthur Penn: Securitization financing continues to be a good match for our lower risk first lien assets. Subsequent to quarter end, PFLT closed on the refinancing and upsizing of a $351 million term debt securitization transaction with a weighted average spread of 1.89%, a four-year reinvestment period, and its 12-year final maturity. The weighted average spread of 1.89% is a meaningful decrease of 50 basis points from the prior level of 2.39%.

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

Arthur Penn: subsequent the quarter npl clos on the refinancing upsi

Arthur Penn: of a $351 million term loan, term debt securitization transaction with a weighted average spread of 1.89%, a four-year reinvestment period, and a 12-year final maturity.

Arthur Penn: A four-year reinvestment period and a 12-year final maturity. The weighted average spread of 1.89% is a meaningful decrease of 50 basis points from the prior level of 2.39%. The main contributor to this decrease was a favorable market environment in which the AAA portion of the structure priced at an attractive weighted average spread of 1.75%. The ratio of external debt to PF-LT's junior capital was 3.1 times to 1, which creates plenty of liquidity for the company. During the quarter, we added two new lenders to the Truest revolving credit facility and upsized total commandments to $611 million from $436 million.

Arthur Penn: The weighted average spread of 1.89% is a meaningful decrease of 50 basis points.

Arthur Penn: The main contributor to this decrease was a favorable market environment in which the AAA portion of the structure priced at an attractive weighted average spread of 1.75%. The ratio of external debt to PFLT's junior capital was 3.1 times to 1. During the quarter, we added two new lenders to the Truist Revolving Credit Facility and upsized total commitments to $611 million from $436 million. In addition, this week, we expect to close on an amendment, an extension of the Truist Revolving Credit Facility.

Arthur Penn: from the prior level of 2.39%.

Arthur Penn: The main contributor to this decrease was a favorable market environment in which the AAA portion of the structure priced at an attractive weighted average spread of 1.75%.

Arthur Penn: The ratio of external debt to PFLT's junior capital was 3.1 times to 1 which creates plenty of liquidity for the company.

Arthur Penn: during the quarter we added two new lenders to the truest revolving credit facility and upsized total commendments to six hundred and eleven million from four or thirty-six million

Arthur Penn: In addition, this week, we expect to close on an amendment, an extension of the truest revolving credit facility. The highlights of the amendment are an increase in total commandments to $636 million, a reduction in rate to several plus 2.25, which is down from several plus 2.36, and an extension in the revolving period to 20.27. We expect continued stability and NII, and part due to our investment in the joint venture. As of June 30th, the J.V. Portfolio totaled $904 million. Together with our J.V. partner, we continue to execute on the plan to grow the J.V. Portfolio to approximately $1 billion of assets.

Arthur Penn: In addition, this week we expect to close on an amendment and extension of the Truist Revolving Credit Facility.

Arthur Penn: The highlights of the amendment are an increase in total commitments to $636 million, a reduction in the rate to SOFR plus 225, which is down from SOFR plus 236, and an extension in the revolving period to 2027.

Arthur Penn: The highlights of the amendment are an increase in total commitments to $636 million dollars.

Arthur Penn: a reduction in rate to SOFR plus 225 which is down from SOFR plus 236 and an extension in the revolving period to 2027.

Arthur Penn: We expect continued stability in NII, in part due to our investment in the joint venture. As of June 30, the JV portfolio totaled $904 million, and together with our JV partner, we continue to execute on the plan to grow the JV portfolio to approximately $1 billion in assets. During the quarter, the JV invested $85 million in five new and 11 existing portfolio companies at a weighted average yield of 11.6%, including $69 million of assets purchased from PFLT.

Arthur Penn: We expect continued stability in NII in part due to our investment in the joint venture.

Arthur Penn: As of June 30, the JV portfolio totaled $904 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 Penn: During the quarter, the J.V. invested $85 million in five new and 11 existing portfolio companies at a weighted average yield of 11.6%, including $69 million of assets purchased from PF-LT. We believe that the increase in scale of the J.V.'s balance sheet will continue to drive attractive mid-teens returns on invested capital and enhanced PF-LT's earnings momentum. The app and adjusted NAV decreased 0.5% to $11.34 per share from $11.40 per share. The decrease in NAV for the quarter was due primarily to valuation adjustments on both debt and equity investments. Credit quality of the portfolio has remained strong.

Arthur Penn: During the quarter, the JAB invested $85 million in five new and 11 existing portfolio companies at a weighted average yield of 11.6%, including $69 million of assets purchased from PFLT.

Arthur Penn: 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 PSLT's earnings momentum. Gap in adjusted NAV decreased 0.5% to $11.34 per share from $11.40 per share. The decrease in NAV for the quarter was due primarily to valuation adjustments on both debt and equity investments.

Arthur Penn: 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 PSLT's earnings momentum.

Arthur Penn: Gap in adjusted NAV decreased 0.5% to $11.34 per share from $11.40 per share. The decrease in NAV for the quarter was due primarily to valuation adjustments on both debt and equity investments.

Arthur Penn: Credit quality of the portfolio has remained strong. We added two new investments to the non-accrual status. Non-accruals represent only 1.5% of the portfolio cost and 1.1% at market value.

Arthur Penn: We added two new investments to the non-accrual status. Non-accruals represent only 1.5% of the portfolio cost at 1.1%. As of June 30th, the portfolio's weighted average leverage ratio to our debt security was 4.1 times, and the portfolio's weighted average interest coverage ratio was 2.2 times. We believe that this is one of the most conservatively structured portfolios in the direct lending industry as a testament to our focus on the core middle market. We like being positioned for capital preservation as a senior secured, firstly and 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.

Arthur Penn: As of June 30th, the portfolio's weighted average leverage ratio through our debt security was 4.1 times, and the portfolio's weighted average interest coverage ratio was 2.2 times. We believe that this is one of the most conservatively structured portfolios in the direct lending industry as 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 Penn: As of June 30th, the portfolio's weighted average leverage ratio through our debt security was 4.1 times and the portfolio's weighted average interest coverage ratio was 2.2 times.

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

Arthur Penn: We like being positioned for capital preservation as a senior-secured, first-lane lender focused on the United States. We continue to believe that our focus on the poor middle market provides the company with attractive investment opportunities. We provide important strategic capital to our borrowers.

Arthur Penn: We continue to believe that our focus on the poor middle market provides the company with attractive investment opportunities. 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. There are business services, consumer, government services, and defense, healthcare, and software technology.

Arthur Penn: 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. Another right question to ask and have an excellent track record. They are business services, consumer, government services, and defense, health care, and software technology. These sectors have also been resilient and tend to generate strong free cash flow. The core middle market, companies with 10 to 50 million of EBITDA, is below the threshold and does not compete with the broadly syndicated loan or high-yield markets. Unlike our peers in the upper middle market.

Arthur Penn: We have a long-term track record of generating value by successfully financing growing middle-market companies in five key sectors.

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

Arthur Penn: There are business services, consumer, government services and defense, healthcare, and software technology. These sectors have also been resilient and tend to generate strong free cash flow.

Arthur Penn: These sectors have also been resilient and tend to generate strong free cash flow. The core middle market, companies with $10 to $50 million of EBITDA, is below the threshold and does not compete with the broadly syndicated loan or high yield markets, unlike our peers in the upper middle market. Thank you for joining us today.

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

Arthur Penn: The core middle market because we are an important strategic lending partner, the process and passive terms we receive is attractive. We have many weeks to do our diligence with care. We thoughtfully structured transactions with sensible credit statistics, meaningful covenants, substantial equity cushions to protect our capital, attractors, spreads, and equity 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 personally known to have meaningful covenants, we shall protect our capital.

Arthur Penn: In the core middle market, because we are an important strategic lending partner, the process and package of terms we receive is attractive.

Arthur 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, attractor spreads, and equity combats. 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 originators are personally known to have meaningful covenants, which help protect our capital.

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

Arthur Penn: With regard to covenants, unlike the erosion in the upper middle market, virtually all of our rich and native first land owners have meaningful covenants which help protect our capital. This is a significant reason why we believe we are well positioned in this environment.

Arthur Penn: 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. According to S&P, loans to companies with less than $50 million of EBITDA have a lower default rate and higher recovery rate than loans to companies with higher EBITDA. We believe that the meaningful covenant protections of core middle market loans, more careful diligence, and tighter monitoring have been an important part of this differentiated performance.

Arthur Penn: 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.

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

Arthur Penn: According to S&P, loans to companies with less than $50 million in EBITDA have a lower default rate and higher recovery rate than loans to companies with higher EBITDA. We believe that the meaningful covenant protections of core middle market loans, more careful diligence, and tighter monitoring have been an important part of this differentiated performance. Our credit quality since inception over 13 years ago has been excellent. CFLT has invested $6.3 billion in over 500 companies, and we have experienced only 20 non-accruals.

Arthur Penn: That may make some intuitive sense, but the reality is different. According to S&P, loans to companies with less than $50 million of EBITDA have a lower default rate and higher recovery rate than loans to companies with higher EBITDA.

Arthur Penn: Our credit quality since inception of our 13 years ago has been excellent. CFLT has invested $6.3 billion in over 500 companies, and we have experienced only 20 non-accruals. Since inception, the CFLT has lost very little on the capital. It is only 10 basis points annually. As a provider of strategic capital, we feel the growth of our portfolio companies, and 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. Overall, for our platform from inception to June 30th, we have invested over 511 million in equity co-investments, and have generated an IRR of 26% and a multiple uninvested capital of two times.

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

PFLT: PFLT has invested $6.3 billion in over 500 companies, and we have experienced only 20 non-accruals. Since inception, PFLT's loss ratio on invested capital is only 10 basis points annually.

Arthur Penn: Since inception, PFLT's loss ratio on invested capital is only 10 basis points annually. PFLT is a provider of strategic capital. It fuels the growth of our portfolio companies. In many cases, we participate in the upside of the company by making an equity co-investor. Our returns on these equity co-investments have been excellent over time. Overall, for our platform from inception through June 30th, we have invested over $511 million in equity co-investments and have generated an IRR of 26% and a multiple on invested capital of two times.

Arthur Penn: As a provider of strategic capital, we fuel the growth of our portfolio companies. In many cases, we participate in the upside of the company by making an equity co-investment.

Arthur Penn: Our returns on these equity co-investments have been excellent over time. Overall, for our platform from inception through June 30th, we have invested over $511 million in equity co-investments and have generated an IRR of 26% and a multiple on invested capital of two times.

Arthur Penn: Our experienced and talented team and our wide origination fund was producing active deal flow. Our continued focus remains on capital preservation and being patient investors.

Arthur Penn: Our experienced and talented team and our wide origination fund were producing active deal flows. 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.

Arthur Penn: Our experienced and talented team and our wide origination fund was producing active deal flow. Our continued focus remains on capital preservation and being patient investors.

Arthur Penn: Our mission and goal are a steady, stable, and protected dividend stream coupled with a 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 and personally, senior security instruments, and we pay out those contractual cash flows in the form of dividends to our shareholders.

Arthur Penn: Our mission and goal are a steady, stable, and protected dividend stream, coupled with a preservation of capital.

Rick Allorto: 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, junior security instruments, and we pay out those contractual cash flows in the form of dividends to our shareholders. Now, I will turn the call over to Rick, our CFO, to take us through the financial results in more detail. Thank you, Art.

Rick Allorto: 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, junior security instruments, and we pay out those contractual cash flows in the form of dividends to our shareholders.

Richard Allorto: 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 June 30th, GAAP and core net investment income was 31 cents per share. Operating expenses for the quarter were 16.4 million, interest and expenses on debt were 1.5 million, and provision for taxes were 0.2 million. For the quarter ended June 30th, net realized and unrealized change on investments, including provision for taxes, was a loss of 4.3 million. As of June 30th, our GAAP NAV was 11 dollars and 34 cents per share, which is down 0.5% from 11 dollars and 40 cents per share last quarter. As of June 30th, our debt equity ratio was 1.1 times, and our capital structure is diversified across multiple funding sources, including both secured and unsecured debt. As of June 30th, our key portfolio statistics were as follows: our portfolio remains highly diversified with 151 companies across 45 different industries. The weighted average yield on our debt investments was 12.1%, and approximately 100% of the debt portfolio is floating rate. Picking income equaled only 1.4% of total interest income for the quarter. We had 3 non-accruals, which represented 1.5% of the portfolio at cost and 1.1% at market value. The portfolio is comprised of 87% first lien senior secured debt, less than 1% in second lien and subordinated debt, 4% in equity of PSSL, and 9% in other equity. The debt EBITDA on the portfolio is 4.1 times, and interest coverage was 2.2 times. 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 commitment to PSLT and the shareholders. Thank you all for your time today and for your investment and confidence in us. I conclude my remarks at this time. I would like to open up the call to questions. If you would like to ask a question, please sign up by pressing star 1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach Richard Equipment.

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

Rick Allorto: For the quarter ended June 30th, GAAP and core net investment income was $0.31 per share. Operating expenses for the quarter were as follows. Interest and expenses on debt were $16.4 million, and base management and performance-based Incentive Fees were $9.2 million. General and administrative expenses were $1.5 million, and provision for taxes was $0.2 million. By the quarter end of June 30th, the net realized and unrealized change on investments, including provision for taxes, was a loss of $4.3 million.

Art: Thank you Art. For the quarter ended June 30th, GAAP and Core Net Investment Income was 31 cents per share.

Rick Allorto: Operating expenses for the quarter were as follows. Interest and expenses on debt were $16.4 million. Base management and performance-based incentive fees were $9.2 million.

Rick Allorto: General and administrative expenses were $1.5 million and provision for taxes were $0.2 million.

Rick Allorto: For the quarter ended June 30th, net realized and unrealized change on investments, including provision for taxes, was a loss of $4.3 million.

Rick Allorto: As of June 30th, our GAAP NAV was $11.34 per share, which is down 0.5% from $11.40 per share last quarter. Adjusted NAV, excluding the mark-to-market of our liabilities, was $11.34 per share, down 0.5% from $11.40 per share last quarter. As of June 30th, our key portfolio statistics were as follows. Our portfolio remains highly diversified, with 151 companies across 45 different industries. The debt to EBITDA on the portfolio is 4.1 times, and interest coverage was 2.2 times. That concludes our remarks at this time. I would like to open up the call to questions.

Rick Allorto: as of june thirtieth our gaap nv was eleven dollars and thirty four cents per share which is down point five percent from eleven dollars and forty cents per share last quarter

Rick Allorto: Adjusted NAV, excluding the mark to market of our liabilities, was $11.34 per share, down 0.5% from $11.40 per share last quarter.

Rick Allorto: As of June 30th, our debt-to-equity ratio was 1.1 times, and our capital structure is diversified across multiple funding sources, including both secured and unsecured debt.

Rick Allorto: As of June 30th, our key portfolio statistics were as follows.

Rick Allorto: Our portfolio remains highly diversified with 151 companies across 45 different industries.

Rick Allorto: The weighted average yield on our debt investments was 12.1%, and approximately 100% of the debt portfolio is floating rate.

Rick Allorto: Pick income equaled only 1.4% of total interest income for the quarter.

Rick Allorto: We had three non-accruals, which represented 1.5% of the portfolio at cost and 1.1% at market value.

Rick Allorto: the portfolio is comprised of eighty seven percent firstly senior secured debt less than one percent in secondlyleane and subordinated debt

Rick Allorto: 4% in equity of PSSL and 9% in other equity.

Rick Allorto: The debt to EBITDA on the portfolio is 4.1 times and interest coverage was 2.2 times.

Rick Allorto: Now let me turn the call back to Art.

Rick Allorto: 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.

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

Speaker Change: Thank you. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad.

Speaker Change: If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star 1 to ask a question.

Operator: Again, press star one to ask a question.

Brian McKenna: We'll take our first question from Brian McKenna from Systems JMP. Thanks, good morning everyone. There was another strong quarter of growth for the investment portfolio, and that's actually now increased 55% year to date. So, what's the expectation around growth for the portfolio over the next couple of quarters? You still have capacity on the leverage side, and then cash also remain somewhat elevated. So, I'm just trying to think through the trajectory of the portfolio from here. And ultimately, if you're actually in a position to grow earnings into next year or even with what's likely going to be lower base rates.

Speaker Change: We will take our first question from Brian McKenna from Citizens JMP.

Speaker Change: Thanks. Good morning, everyone.

Rick Allorto: It was another strong quarter of growth for the investment portfolio, and that's actually now increased 55% year-to-date. So what's the expectation around growth for the portfolio over the next couple of quarters?

Speaker Change: You still have capacity on the leverage side, and then cash also remains somewhat elevated. So, I'm just trying to think through the trajectory of the portfolio from here. And ultimately, if you're actually in a position to grow earnings into next year, even with what's likely going to be lower base rates.

Arthur Penn: Yeah, thank you.

Arthur Penn: It's the right question, and I got to say we're busy. We're busy. We've been busy, obviously, the last quarter or two, maybe somewhat differentiated in some of our peers who are in the upper middle market where it's been either slower or they have severe competition going against the broadly syndicated low market. Here in the quarter middle market, we're active. We're seeing a lot of deal flow. We're kind of doing our prototypical start with the platform that's a little smaller, but with that on acquisitions, the later all-term loans, substantial equity from the sponsor and grow it over time.

Speaker Change: Yeah, thank you. It's the right question and I got to say we're busy. We're busy. We've been busy obviously the last quarter or two.

Speaker Change: May be somewhat differentiated than some of our peers who are in the upper middle market where It's been either slower or they have you know severe competition going against the broadly syndicated load market here in the core middle market

Speaker Change: You know, we're active. We're seeing a lot of deal flow. We're kind of doing our prototypical Start with a platform that's a little smaller, but with add-on acquisitions, delayed raw term loans Substantial equity from the sponsor and grow it over time

Arthur Penn: So, that's a lot of what we're doing. Hard to put a pin in for your brine in terms of actual capital deployed. We've built a very nice war chest between the upsized, truest facility, a couple hundred million dollar upsized, the upsized securitization, and the ATM program. So, really, really well positioned from liquidity and capital side to take advantage of the opportunity, and should the markets become choppy, and that's certainly a possibility, having capital to be able to take advantage of that should that happen. So, feel like we're in a really good position, liquidity-wise and capital-wise to grow.

Speaker Change: So that's a lot of what we're doing Hard to put a pin in it for you Brian in terms of actual capital Deployed we've built a very nice war chest

Speaker Change: between the upsized Truist facility, a couple hundred million dollar upsize, the upsized securitization.

Rick Allorto: and the ATM program.

Speaker Change: Really, really well positioned from the liquidity and capital side to take advantage of the opportunity and should the markets become choppier, and that's certainly a possibility, having capital to be able to take advantage of that should that happen. So, I feel like we're in a really good position, liquidity-wise and capital-wise.

Arthur Penn: Certainly, in terms of NII for share, as we lever up, that should fall to the bottom line. So, we're trying to find the balance of keeping a lot of powder dry to take advantage of the vintage, to take advantage of the opportunity, and also to leverage up and drive NII for share hopper. Okay, super helpful thanks, and then just to follow up on leverage specifically, you know, so you've clearly leaned into the ATM on the last several quarters, and that's been a big driver of kind of leverage being quite a bit below that target range.

Speaker Change: to grow. Certainly in terms of NII per share as we lever up, that should fall to the bottom line.

Speaker Change: So we're trying to find the balance of keeping a lot of powder dry to take advantage of the vintage, to take advantage of the opportunity, and also to leverage up and drive NII per share up.

Speaker Change: Okay, super helpful. Thanks. And then just to follow up on leverage specifically, you know, so you've clearly leaned into the ATM the last several quarters and you know that that's been a big driver of kind of leverage being quite a bit below that target range so

Arthur Penn: So, give more of the stock trading today. I'm assuming you'll shy away from raising equity capital, then leverage will start to move higher, but is there just a way to think about kind of the timeline around getting back to that one and a half times leverage target? Yeah, it's a good question. Look, with the stock where it is today relative to NAV, we're not going to be, you know, that would be deluded. We would not issue shares. We would not do that. We're very pleased that we did the last round of ATM. We raised it, you know, around $11.40, so feel good about that.

Speaker Change: Given where the stock is trading today, I'm assuming you'll shy away from raising equity capital and leverage will start to move higher, but is there just a way to think about kind of the timeline around getting back to that 1.5x leverage target?

Speaker Change: Yeah, it's a good question. Look, with the stock where it is today relative to NAV, we're not going to be, you know, that would be diluted. We would not issue shares. We would not do that. We're very pleased that we did.

Speaker Change: The last run of ATM we raised it, you know, around $11.40. So feel feel good about that today It's a time to deploy the that capital and the capital we've built on the on the on the credit facility side on the CLO side

Arthur Penn: Today, it's time to deploy that capital, and the capital we built on the credit facility side, on the CLO side. So, right now, we kind of timed it propitiously or whatever, and now it's a time to kind of deploy and use the capital to take advantage of the opportunity.

Speaker Change: So, I think right now we kind of timed it propitiously or whatever and now is the time to kind of deploy and use the capital to take advantage of the opportunity.

Arthur Penn: Okay, great.

Arthur Penn: And then, Art, just, you know, one more bigger picture question for you. You've clearly operated the business through a number of different cycles and operating environments. And the macro today remains very fluid, and there's quite a bit of uncertainty just around kind of the broader economic outlook into 2025. So yeah, I'm curious, you know, what are your broader thoughts on where we are in the cycle, what this evolving macro means for your business. And then, are you leaning in on, you know, any of your past experiences to make sure that PFLT remains well positioned to deliver strong results for all stakeholders?

Rick Allorto: Okay, great. And then, Art, just, you know, one more bigger picture question for you. You've clearly operated the business through a number of different cycles and operating environments and the macro today remains

Speaker Change: Very fluid and there's quite a bit of uncertainty just around kind of the broader economic outlook into 2025 So, yeah, I'm curious, you know, what are your broader thoughts on where we are in the cycle? What this evolving macro means for your business and then are you leaning in on you know? Any of your past experiences to make sure that PFLT remains well positioned to deliver strong results for for all stakeholders?

Arthur Penn: Yeah, thank you. Look, we have been in business. We're going into our 18th year, so we've lived through the global financial crisis, an industrial downturn in the middle of last decade, and the pandemic. And, you know, most of it still comes down to the micro versus the macro, the micro being select excellent companies, keep the leverage low and sensible structure. Good packages, including meaningful covenants. And if you do that while maintaining liquidity at the vehicle level, making sure you have dry powder to defend and to play offense, the rest of it usually takes care of itself.

Speaker Change: Yeah, thank you. Look, we have been in business.

Rick Allorto: We're going into our 18th year. So we've lived through the global financial crisis

Rick Allorto: a industrial downturn in the middle of last decade, the pandemic. And, you know, most of it still comes down to the micro versus the macro. The micro being

Arthur Penn: Keep the leverage low and sensible. Structure good packages, including meaningful covenants. And if you do that,

Arthur Penn: select excellent companies

Arthur Penn: Keep the leverage low and sensible. Structure good packages including meaningful covenants. And if you do that...

Speaker Change: while maintaining liquidity at the beable a level making sure you have drive powder to

Arthur Penn: to defend and to play offense.

Arthur Penn: So that's kind of lessons from many years in the business. Hard to say whether we're going into a recession or not. Any good credit underwriter always underwrites a deal with the recession case in the underwriting package. Let's assume there's a recession. What happens, what are the levers the company has to pull, how much cost are variable, how much are fixed, can cap X be managed, working capital be managed. So, you know, PFLT has about 150 names. If you go back to the credit memos and all of them, we had down side cases. We had recession cases in all of them.

Speaker Change: The rest of it usually takes care of itself. So that's kind of lessons from many years in the business Hard to say whether we're going into a recession or not Any good credit underwriter always underwrites a deal

Operator: Welcome to the Pennant Parker, and good morning and welcome to the Pennant Park Floating Rate Capital Ltd, fiscal quarter 2024 earnings conference call. Today's conference is being recorded. At this time all participants have been placed in a listen-only vote.

Speaker Change: with the recession case in the underwriting package. Let's assume there's a recession. What happens? What are the levers the company has to pull? How much costs are variable? How much are fixed? Can CapEx be managed? Working capital be managed?

Operator: The call will be open for a question-an-answer session following the speaker's remarks. If you would like to ask a question at that time, simply press star one on your telephone keypad. If you would like to withdraw your question, please press star two on your telephone keypad.

Arthur Penn: So, you know, PFLT has about 150 names. If you go back to the credit memos and all of them, we had downside cases. We had recession cases in all of them. And so, of course, you can always get surprised, but generally, generally, we have pretty solid packages, and you see it in the portfolio. Non-accruals are very low.

Arthur Penn: So, you know, PFLT has about 150 names. If you go back to the credit memos and all of them, we had downside cases. We had recession cases.

Arthur Penn: And so, you know, of course, you always can get surprised, but generally, generally, you know, we have pretty solid packages, and you're seeing it in the portfolio. So, you know, non-accruals are very low. When we do have non-accruals, they are usually idiosyncratic. And even our consumer names, and we have some consumer in the portfolio, are generally performing just fine right now.

Arthur Penn: and all of them and so you know of course you always can get surprised but but generally generally you know we have pretty solid packages and you're seeing it in the portfolio you know non accruals are very low

Arthur Penn: 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 now begin your conference. Thank you and good morning everyone. I'd like to welcome you to Pennant Park Floating Rate Capital's third fiscal quarter 2024 earnings conference call.

Arthur Penn: When we do have a lot of crawls, they're usually idiosyncratic, and even our consumer names, and we have some consumer in the portfolio, are generally performing just fine right now.

Richard Allorto: 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. 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.

Arthur Penn: All right, I'll leave it there. Thanks for taking my questions. Thank you.

Speaker Change: Alright, I'll leave it there. Thanks for taking my questions.

Douglas Harter: We will take our next question from Doug Harder from UBS. Please go ahead. Thanks.

Speaker Change: thank you we

Speaker Change: We will take our next question from Doug Harter from UBS. Please go ahead.

Arthur Penn: Can you talk a little bit about the competition you're seeing on new loans, both in terms of spreads and covenant packages? Sure, Doug. Thank you. So, spreads, as we said, in the prepared remarks, are down over the course of the year or over the course of 2024. We're now in August, 50 to, in some cases, 75 basis points. That's driven by some of our peers. That's driven by what's been a stable, sanguine environment. That's been driven by high base rates. You know, when you're still getting 11 plus percent on a first lean on an absolute basis, that's still attractive for investors, even though the spread obviously is tighter than it was nine months ago.

Speaker Change: thanks can you talk a little bit about the competition you're seeing on new loans both in terms of both spreads and coven ant packages

Arthur Penn: Sure, Doug. Thank you.

Richard 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.

Doug: Sure, Doug, thank you.

Speaker Change: So, spreads, as we said in the prepared remarks, are down over the course of the year, over the course of 2024. We're now in August , 50 to, in some cases, 75 basis points.

Arthur Penn: That's driven by some of our peers, that's driven by what's been a stable, sanguine environment, that's been driven by high base rates. You know, when you're still getting 11 plus percent on a first lien on an absolute basis, that's still attractive for investors, even though the spread obviously is tighter than it was nine months ago. So we have seen spread tightening. That said, as we kind of reviewed the statistics in the prepared remarks, we are getting really nice packages. So we still think it's an attractive vintage.

Arthur Penn: That's driven by some of our peers, that's driven by what's been a stable, sanguine

Arthur Penn: environment that's been driven by high base rates know when you're still getting eleven plus percent on a first lean on an absolute basis

Arthur Penn: That's still attractive for investors, even though the spread obviously is tighter than it was nine months ago. So we have seen spread tightening. That said, as we kind of reviewed the statistics in the prepared remarks,

Arthur Penn: So, we have seen spread tightening. That said, as we, as we kind of reviewed the statistics in the prepared remarks, we are getting really nice packages. So, we still think it's an attractive vintage average debt to be thought on the new loans. It was 3.8 times average interest coverage, 2.2 times, even in these elevated rates. and the way to average the value of 47%. And we are getting meaningful covenant protections. That's one thing you get in the core middle market that you may not get. And the upper middle market is covenants that are meaningful, that are quarterly maintenance tests that the companies have to meet.

Arthur Penn: At this time, I'd like to turn the call back to our chairman and Chief Executive Officer Art Penn. Thanks, Rick. We're going to spend a few minutes discussing the current market environment for private, middle-market lending. How we fared in the quarter-ended June 30th of the portfolio's position for the upcoming quarters, a detailed review of the financials, and then open it up for Q&A. For the quarter-ended June 30th, GAP and core net investment income was 31 cents per share.

Arthur Penn: We are getting really nice packages, so we still think it's an attractive vintage. Average debt to EBITDA on the new loans was 3.8 times.

Arthur Penn: Average debt EBITDA on the new loans was 3.8 times, so the companies have to meet that, and if they don't meet it, you know, there's a conversation. Some of the names in the upper middle market and some of the I'll call shenanigans that went on with moving intellectual property around and getting assets away from the lenders, etc. None of that happens in the core middle market; it's just not allowed, you know, because the upper middle market went covenant light and had to compete with a broadly syndicated space.

Arthur Penn: average interest coverage two point two times even in these elevated rates

Speaker Change: and the weight average loan to value of 47%. And we are getting meaningful covenant protections, that's one thing you get in the core middle market that you may not get in the upper middle market is covenants that are meaningful, that are quarterly maintenance tests.

Arthur Penn: As in June 30th, our portfolio grew to $1.7 billion or 12 percent from the prior quarter. During the quarter, we continued to originate attractive investment opportunities and invested $321 million and 11 new and 47 existing portfolio companies at the weighted average yield of 11.5%. We continued to see an attractive vintage in the new portfolio companies. The weighted average debt fee of $3.8 times, the weighted average interest coverage was 2.2 times, and the weighted average loan value was 47 percent.

Arthur Penn: And if they don't meet them, you know, there's conversation. Additionally, the overall structures are much stronger structures. There's been a lot of press on some of the names in the upper middle market and some of the, I'll call Chinatigans, that went on with moving intellectual property around and getting assets away from the lenders, et cetera. None of that happens in the core middle market. It's just not allowed. You know, because the upper middle market went covenant light and had to compete with the broadly syndicated space. That was just a market they had to absorb in our market.

Arthur Penn: that the companies have to meet. And if they don't meet them, there's a conversation.

Arthur Penn: Additionally, the overall structures are much stronger structures. There's been a lot of press on

Arthur Penn: Some of the names in the upper middle market and some of the I'll call shenanigans that went on with moving intellectual property around and getting assets away from the lenders, etc. None of that happens in the core middle market. It's just not allowed.

Arthur Penn: Subsequence to quarter-end, we remained active and invested over $115 million at a weighted average yield of 11.2 percent. Investment volume is increasing and we have a robust pipeline and expect a second half of 2024 to be active. During 2024, the market yield on first lean loans has tightened 50 to 75 basis points. As the credit statistics just highlighted indicate, we continue to believe that the current vintage of core metal market loans is excellent.

Arthur Penn: You know, because the upper middle market went covenant light and had to compete with a broadly syndicated space.

Arthur Penn: That was just a market they had to absorb. In our market, these are very strong structures. So we feel very good about the vintage to date, even though the spreads are down. We feel very good about the credits, and the yields.

Arthur Penn: These are very strong structures. So we feel very good about that. The vintage to date, even though these spreads are down, we feel very good about the credits and the yields and not a cruise continue to be light and the portfolio is generally performing very well.

Arthur Penn: Great. Thank you.

Maxwell Fritscher: We will now move to Maxwell, Richard from Truth Decorities. Please go ahead. Very good morning.

Speaker Change: Great, thank you.

Arthur Penn: We will now move to Maxwell Pritchard from Truth Securities. Please go ahead.

Arthur Penn: And the core metal market leverages lower, spreads are higher and covenants are tighter than in the upper metal market. Despite covenant erosion in the upper metal market and the core metal market, we are still getting meaningful covenant protections. As of June 30th, our debt equity ratio was 1.1 times to 1. With the target ratio of 1.5 times to 1, we believe that we are well positioned to drive additional growth and net investment income going forward.

Arthur Penn: I'm on from Mark Hughes. Kind of going off the competition question. You mentioned all the benefits of operating in the core middle market. Are you seeing any of those competitors from the upper middle market or the middle market come downstream a little bit? To tap these better loan values and better covenants? It's a great question. We have not seen a lot of evidence of the big players moving down into the core now. It depends how you define core. We define core as 10 to 50 of EBITDA. Occasionally, you'll see some of the big guys come down to a 40 or 50 EBITDA company.

Speaker Change: Good morning. I'm on for Mark Hughes.

Arthur Penn: Kind of going off the competition question, you know, you mentioned all the benefits of operating in the core middle market. Are you seeing any of those competitors from the upper middle market or the middle market come downstream a little bit?

Arthur Penn: to tap these better loan values and better covenants.

Arthur Penn: It's a great question. We have not seen a lot of evidence of the big players moving down into the core. Now, it depends how you define core. We define core as 10 to 50 percent of EBITDA. And it's a fragmented industry. But there's a game plan. There are identified acquisitions for growth, and the goal is to take that $10 to $20 million EBITDA company and grow it to $30, $40, $50, and above. So we'll be that lender, that strategic partner to the borrower.

Arthur Penn: Securitization financing continues to be a good match for our lower risk first lean assets. Subsequence to quarter NPF-LT loans on the refinancing and upsides of a $351 million term alone, term debt securitization transaction for the weighted average spread of 1.89%. A four-year reinvestment period and a 12-year final maturity. The weighted average spread of 1.89% is a meaningful decrease of 50 basis points from the prior level of 2.39%. The main contributor to this decrease was a favorable market environment in which the AAA portion of the structure priced at an attractive weighted average spread of 1.75%.

Arthur Penn: It's a great question. We have not seen a lot of evidence of the big players moving down into the core. Now, it depends how you define core. We define core as 10 to 50 of EBITDA.

Arthur Penn: Occasionally you'll see some of the big guys come down to a 40 or 50 EBITDA company.

Arthur Penn: They can deploy a couple of hundred million in one check, but that's occasional. And many of our deals, our prototypical situation is it's a company that's doing 10 to 20, and it's a fragmented industry. There's a game plan. There's identified acquisitions for growth. And the goal is to take that 10 to 20 million EBITDA company and grow it to 30, 40, 50 and above. So we'll be that will be that lender that's strategic to the borrower. We will provide the later all-term loan and a pathway to get that company larger. And so if we're doing that, it's less about the last few basis points.

Arthur Penn: They can deploy a couple hundred million in one check, but that's occasional and many of our deals, you know, our prototypical situation is it's a company that's doing 10 to 20

Arthur Penn: and it's a fragmented industry. There's a game plan, there's identified acquisitions for growth.

Arthur Penn: The ratio of external debt to PF-LT's junior capital was 3.1 times to 1, which creates plenty of liquidity for the company. During the quarter, we added two new lenders to the truest revolving credit facility and upsized total commandments to $611 million from $436 million. In addition, this week, we expect to close on an amendment an extension of the truest revolving credit facility. The highlights of the amendment are an increase in total commandments to $636 million, a reduction in rate to several plus 2.25, which is down from several plus 2.36, and an extension in the revolving period to 20.27.

Arthur Penn: And the goal is to take that 10 to 20 million EBITDA company and grow it to 30, 40, 50 and above.

Arthur Penn: So, we'll be that lender that's strategic to the borrower.

Arthur Penn: We will provide a delayed draw term loan and a pathway to get that company larger. And so if we're doing that, it's less about the last few basis points. It's much more about, are we aligned in terms of the game plan for growing the company? Certainly, in some of those companies, since we're growing those companies, the equity story is actually very attractive, which is why we like, in many cases, doing the equity co-investment and putting some of our capital side-by-side with the sponsor so that we can participate in some of the upside that we're helping to generate on the debt

Arthur Penn: We will provide the late draw term loan and a pathway to get that company, you know, larger.

Arthur Penn: and so if we're doing that it's less about the last few basis points it's much more about our realaligned in terms of the game plan for growing the company

Arthur Penn: It's much more about are we aligned in terms of the game plan for growing the company? And certainly, in some of those companies, since we're growing those companies, the equity story is actually very attractive, which is why we like, in many cases, doing the equity investment. And putting some of our capital side by side with the sponsor so that we can participate in some of the upside that we're helping to generate on the debt side. And those equity convests over 17 years, you know, over 500 million deployed in our various vehicles have had a two times multiple invested capital on the 26% IRR.

Arthur Penn: And certainly in some of those companies, since we're growing those companies, the equity story is actually very attractive, which is why we like, in many cases, doing the equity co-investment.

Arthur Penn: and putting some of our capital side-by-side with the sponsor so that we can participate in some of the upside.

Arthur Penn: We expect continued stability and NII and part due to our investment in the joint venture. As of June 30th, the J.V. Portfolio totaled $904 million. Together with our J.V, partner, we continue to execute on the plan to grow the J.V. Portfolio to approximately $1 billion of assets. During the quarter, the J.V, invested $85 million in five new and 11 existing portfolio companies at a weighted average yield of 11.6%, including 69 million of assets purchased from PF-LT. We believe that the increase in scale of the J.V.

Arthur Penn: And those equity com invests, over 17 years, you know, over $500 million deployed in our various vehicles have had a two-times multiple on invested capital and 26% IRR. So that's a nice, you know, bonus of our model.

Arthur Penn: They were helping to generate on the debt side and those those equity com invest over 17 years, you know over 500 million Deployed in our various vehicles have had a two times multiple on the best capital of 26% IRR. So

Arthur Penn: So that's a nice bonus of our model.

Arthur Penn: that's a nice bonus of our model

Arthur Penn: Yeah, thank you. And then with a little bit more visibility and clarity into the future rate trajectory and Fed actions, have you seen any portfolio companies kind of resume normalized cat-back spending, add-on acquisitions, assuming that they have previously paused these investments? You know, it's case by case. I don't know, I can give you a, you know, one that kind of sticks out where someone's proactively leaning in ahead. You know, we just don't, I think most of our companies just have long-term game plans to kind of stick to them and have pulled back if needed. There's unfortunately nothing that comes to my mind that kind of sticks out if someone is proactively leaning into a situation where they're kind of running ahead of it.

Arthur Penn: Yeah, thank you. And then with a little bit more visibility and clarity into the future rate trajectory and said actions, have you seen any portfolio companies kind of resume normalized capex spending on acquisitions, assuming that they had previously paused these investments?

Speaker Change: Yeah, thank you. And then with a little bit more visibility and clarity into the ...

Speaker Change: future rate trajectory and Fed actions. Have you seen any portfolio companies kind of resume normalized CapEx spending out on acquisitions, assuming that they had previously paused these investments?

Arthur Penn: 's balance sheet will continue to drive attractive mid-teens returns on invested capital and enhanced PF-LT's earnings momentum. The app and adjusted NAV decreased 0.5% to $11.34 per share from $11.40 per share. The decrease in NAV for the quarter was due primarily to valuation adjustments on both debt and equity investments. Credit quality of the portfolio has remained strong. We added two new investments to the non-accrual status. Non-accruals represent only 1.5% of the portfolio cost at 1.1% As of June 30th, the portfolio's weighted average leverage ratio to our debt security was 4.1 times and the portfolio's weighted average interest coverage ratio was 2.2 times.

Arthur Penn: You know, it's case by case; I don't know that I can give you a specific example where someone's proactively leaning in ahead. You know, I think most of our companies just have long-term game plans that kind of stick to them and have pulled back if needed. Unfortunately, nothing that comes to my mind that kind of sticks out as someone who is proactively leaning into a situation where they're kind of running ahead of it. Got it. Thank you. Thanks Maxwell.

Arthur Penn: You know, it's case-by-case. I don't know that I can give you a, you know, one that kind of sticks out where someone's proactively leaning in ahead.

Arthur Penn: I think most of our companies just have long-term game plans and kind of stick to them.

Arthur Penn: and have pulled back if needed. There's unfortunately nothing that comes to my mind that kind of sticks out as someone who's proactively leaning into a situation where they're kind of running ahead of it.

Maxwell Fritscher: Got it, thank you.

Maxwell Fritscher: Thanks, Maxwell.

Arthur Penn: Got it. Thank you.

Maxwell: Thanks, Maxwell.

Arthur Penn: We believe that this is one of the most conservatively structured portfolios in the direct lending industry as a testament to our focus on the core middle market. We like being positioned for capital preservation as a senior secured, firstly and 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.

Arthur Penn: I would now turn the call back to RFPEN for any additional or closing remarks.

Arthur Penn: I will now turn the call back to Arthur Penn for any additional or closing remarks.

Arthur Penn: I want to thank everybody for being on the call today, and we have to work a little bit more. Thank you for your interest.

Arthur Penn: I want to thank everybody for being on the call today. On behalf of Rick Allorto, our Chief Financial Officer, and our entire team, thank you for your interest.

Arthur Penn: Looking forward to speaking to you in mid-November. Reminder that the 930-quarter is our 10K, so our earnings release and call will be a little bit later than our typical quarterly timing, but we look forward to speaking to you then. Thank you for your interest, and have a great rest of the summer.

Speaker Change: Looking forward to speaking to you in mid-November. Reminder that the 930 quarter is our 10k, so our earnings release and call will be out a little bit later than our typical quarterly timing, but we look forward to speaking to you then. Thank you for your interest.

Operator: This concludes today's call. Thank you for your participation.

Arthur Penn: and have a great rest of the summer.

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

Operator: You may now disconnect.

Arthur Penn: Unlike our peers in the upper middle market. The core middle market because we are an important strategic lending partner, the process and passive terms we receive is attractive. We have many weeks to do our diligence with care. We thoughtfully structured transactions with sensible credit statistics, meaningful covenants, substantial equity cushions to protect our capital, attractors, spreads, and equity investment. Additionally, from a monitoring perspective, we receive monthly financial statements to help us stay on top of the companies.

Arthur Penn: With regard to covenants, unlike the erosion in the upper middle market, virtually all of our originated personally known to have meaningful covenants, we shall 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. According to S&P, loans to companies with less than $50 million of EBITDA have a lower default rate and higher recovery rate than loans to companies with higher EBITDA.

Arthur Penn: [music]

Arthur 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. Our credit quality since inception of our 13 years ago has been excellent. CFLT has invested $6.3 billion in over 500 companies, and we have experienced only 20 non-accruals. Since inception, the CFLT has lost very little on the capital. It is only 10 basis points annually. As a provider of strategic capital, we feel the growth of our portfolio companies, and many cases we participate in the upside of the company by making an equity co-investment.

Operator: Good morning and welcome to the Pennant Park Floating Rate Capital Ltd. Fiscal Quarter 2024 Earnings Conference Call. Today's conference has been recorded. At this time, all participants have been placed in a listen-only mode. The call will open for a question and answer session following the speakers' marks. 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.

Operator: Got it. Thank you.

Arthur Penn: Our returns on these equity co-investments have been excellent over time. Overall, for our platform from inception to June 30th, we have invested over 511 million in equity co-investments, and have generated an IRR of 26% and a multiple uninvested capital of two times. Our experienced and talented team and our wide origination fund was 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 a preservation of capital.

Speaker Change: Good morning and welcome to the Pennant Park Floating Rate Capital's 3rd Fiscal Quarter 2024 Earnings Conference Call.

Speaker Change: Today's conference is being recorded. At this time, all participants are being placed in a listen-only mode.

Speaker Change: The call will open for a question and answer session following the speaker's remarks.

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

Art Penn: If you would like to withdraw your question, press star 2 on your telephone keypad. It is now my pleasure to turn the call over to Mr. Art Penn, Chairman and Chief Executive Officer of Pennant Park Floating Rate Capital. Mr. Penn, you may begin your conference.

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

Arthur Penn: I will now turn the call back to Arthur Penn for any additional or closing remarks.

Arthur Penn: 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 and personally, senior security instruments, and we pay out those contractual cash flows in the form of dividends to our shareholders.

Arthur Penn: I want to thank everybody for being on the call today. On behalf of Rick Allorto, our Chief Financial Officer, and our entire team, thank you for your interest. I'm looking forward to speaking to you in mid-November. Reminder that the 930 quarter is our 10K, so our earnings release and call will be out a little bit later than our typical quarterly timing, but we look forward to speaking to you then. Thank you for your interest, and have a great rest of the summer.

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

Operator: Thank you for watching!

Richard Allorto: 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 June 30th gap and core net investment income was 31 cents per share Operating expenses for the quarter where it follows interest and expenses on debt were 16.4 million for 1.5 million and provision for taxes were 0.2 million for the quarter-ended June 30th net realized and unrealized change on investments including provision for taxes was a loss of 4.3 million as of June 30th our gap NAV was 11 dollars and 34 cents per share which is down 0.5% from 11 dollars and 40 cents per share last quarter as of June 30th our debt equity ratio was 1.1 times and our capital structure is diversified across multiple funding sources including both secured and unsecured debt as of June 30th our key portfolio statistics were as follows our portfolio remains highly diversified with 151 companies across 45 different industries the weighted average yield on our debt investments was 12.1% and approximately 100% of the debt portfolio is floating rate picking income equaled only 1.4% of total interest income for the quarter we had 3 non accruals which represented 1.5% of the portfolio at cost and 1.1% at market value the portfolio is comprised of 87% first lean senior secured debt less than 1% in second lean and subordinated debt 4% in equity of PSSL and 9% in other equity the debt EBITDA on the portfolio is 4.1 times and interest coverage was 2.2 times now let me turn the call back to art thanks Rick and closing I'd like to thank our dedicated and talented team of professionals for their commitment to PSLT and the shareholders thank you all for your time today and for your investment and confidence in us I conclude every remarks at this time I would like to open up the call to questions if you would like to ask a question please sign up by pressing star 1 on your telephone keypad if you're using a speakerphone please make sure your mute function is turned off to allow your signal to reach and Richard Equipment. Again, press star one to ask a question.

Brian McKenna: We'll take our first question from Brian McKenna from Systems JMP. Thanks, good morning everyone. There was another strong quarter of growth for the investment portfolio, and that's actually now increased 55% year to date. So, what's the expectation around growth for the portfolio over the next couple of quarters? You still have capacity on the leverage side and then cash also remain somewhat elevated. So, I'm just trying to think through the trajectory of the portfolio from here. And ultimately, if you're actually in a position to grow earnings into next year or even with what's likely going to be lower base rates. Yeah, thank you.

Arthur Penn: So, that's a lot of what we're doing. Hard to put a pin in for your brine in terms of actual capital deployed. We've built a very nice war chest between the upsized, truest facility, a couple hundred million dollar upsized, the upsized securitization, and the ATM program. So, really, really well positioned from liquidity and capital side to take advantage of the opportunity, and should the markets become choppy, and that's certainly a possibility having capital to be able to take advantage of that should that happen.

Arthur Penn: So, feel like we're in a really good position, liquidity wise and capital wise to grow. Certainly, in terms of NII for share, as we lever up, that should fall to the bottom line. So, we're trying to find the balance of keeping a lot of powder dry to take advantage of the vintage, to take advantage of the opportunity, and also to leverage up and drive NII for share hopper. Okay, super helpful thanks, and then just to follow up on leverage specifically, you know, so you've clearly leaned into the ATM on the last several quarters, and that's been a big driver of kind of leverage being quite a bit below that target range.

Arthur Penn: We would not issue shares. We would not do that. We're very pleased that we did the last round of ATM. We raised it, you know, around $11.40, so feel good about that. Today, it's a time to deploy that capital and the capital we built on the credit facility side, on the CLO side. So, right now, we kind of timed it propitiously or whatever, and now it's a time to kind of deploy and use the capital to take advantage of the opportunity.

Speaker: Okay, great.

Arthur Penn: And then, Art, just, you know, one more bigger picture question for you. You've clearly operated the business through a number of different cycles and operating environments. And the macro today remains very fluid and there's quite a bit of uncertainty just around kind of the broader economic outlook into 2025. So yeah, I'm curious, you know, what are your broader thoughts on where we are in the cycle, what this evolving macro means for your business.

Arthur Penn: And then, are you leaning in on, you know, any of your past experiences to make sure that PFLT remains well positioned to deliver strong results for all stakeholders? Yeah, thank you. Look, we have been in business. We're going into our 18th year, so we've lived through the global financial crisis, a industrial downturn in the middle of last decade, the pandemic. And, you know, most of it still comes down to the micro versus the macro, the micro being select excellent companies, keep the leverage low and sensible structure.

Arthur Penn: Good packages, including meaningful covenants. And if you do that while maintaining liquidity at the vehicle level, making sure you have dry powder to defend and to play offense, the rest of it usually takes care of itself. So that's kind of lessons from many years in the business. Hard to say whether we're going into a recession or not, any good credit underwriter always underwrites a deal with the recession case in the underwriting package.

Arthur Penn: Let's assume there's a recession. What happens, what are the levers the company has to pull, how much cost are variable, how much are fixed, can cap X be managed, working capital be managed. So, you know, PFLT has about 150 names. If you go back to the credit memos and all of them, we had down side cases. We had recession cases in all of them. And so, you know, of course, you always can get surprised, but generally, generally, you know, we have pretty solid packages and you're seeing it in the portfolio. So, you know, non-accruals are very low. When we do have a non-accruals are usually idiosyncratic. And even our consumer names, and we have some consumer in the portfolio are generally performing just fine right now.

Speaker: All right, I'll leave it there. Thanks for taking my questions. Thank you.

Doug Harder: We will take our next question from Doug Harder from UBS. Please go ahead. Thanks.

Arthur Penn: That's been driven by high base rates. You know, when you're still getting 11 plus percent on a first lean on an absolute basis, that's still attractive for investors, even though the spread obviously is tighter than it was nine months ago. So, we have seen spread tightening. That said, as we, as we kind of reviewed the statistics in the prepared remarks, we are getting really nice packages. So, we still think it's an attractive vintage average debt to be thought on the new loans.

Arthur Penn: It was 3.8 times average interest coverage 2.2 times, even in these elevated rates, and the way to average the value of 47%. And we are getting meaningful covenant protections. That's one thing you get in the core middle market that you may not get. And the upper middle market is covenants that are meaningful, that are quarterly maintenance tests that the companies have to meet. And if they don't meet them, you know, there's conversation.

Arthur Penn: Additionally, the overall structures are much stronger structures. There's been a lot of press on some of the names in the upper middle market and some of the, I'll call Chinatigans that went on with moving intellectual property around and getting assets away from the lenders, et cetera. None of that happens in the core middle market. It's just not allowed. You know, because the upper middle market went covenant light and had to compete with the broadly syndicated space.

Arthur Penn: That was just a market they had to absorb in our market. These are very strong structures. So we feel very good about that. The vintage to date, even though these spreads are down, we feel very good about the credits and the yields and not a cruise continue to be light and the portfolio is generally performing very well. Great.

Speaker: Thank you.

Maxwell Fritscher: We will now move to Maxwell, Richard from Truth Decorities. Please go ahead.

Arthur Penn: Very good morning. I'm on from Mark Hughes. Kind of going off the competition question. You mentioned all the benefits of operating in the core middle market. Are you seeing any of those competitors from the upper middle market or the middle market come downstream a little bit? To tap these better loan values and better covenants? It's a great question. We have not seen a lot of evidence of the big players moving down into the core now.

Arthur Penn: It depends how you define core. We define core as 10 to 50 of EBITDA. Occasionally you'll see some of the big guys come down to a 40 or 50 EBITDA company. They can deploy a couple of hundred million in one check, but that's occasional. And many of our deals, our prototypical situation is it's a company that's doing 10 to 20 and it's a fragmented industry. There's a game plan. There's identified acquisitions for growth.

Arthur Penn: And the goal is to take that 10 to 20 million EBITDA company and grow it to 30, 40, 50 and above. So we'll be that will be that lender that's strategic to the borrower. We will provide the later all-term loan and a pathway to get that company larger. And so if we're doing that, it's less about the last few basis points. It's much more about are we aligned in terms of the game plan for growing the company?

Arthur Penn: And certainly in some of those companies, since we're growing those companies, the equity story is actually very attractive, which is why we like in many cases doing the equity investment. And putting some of our capital side by side with the sponsor so that we can participate in some of the upside that we're helping to generate on the debt side. And those equity convests over 17 years, you know, over 500 million deployed in our various vehicles have had a two times multiple invested capital on the 26% IRR. So that's a nice bonus of our model.

Maxwell Fritscher: Yeah, thank you. And then with a little bit more visibility and clarity into the future rate trajectory and Fed actions, have you seen any portfolio companies kind of resume normalized cat-back spending, add-on acquisitions, assuming that they have previously paused these investments? You know, it's case by case, I don't know, I can give you a, you know, one that kind of sticks out where someone's proactively leaning in ahead. You know, we just don't, I think most of our companies just have long-term game plans to kind of stick to them and have pulled back if needed. There's unfortunately nothing that comes to my mind that kind of sticks out if someone is proactively leaning into a situation where they're kind of running ahead of it. Got it, thank you.

Speaker: Thanks, Maxwell.

Arthur Penn: I would now turn the call back to RFPEN for any additional or closing remarks.

Arthur Penn: I want to thank everybody for being on the call today and we have to work a little bit more. Thank you for your interest. Looking forward to speaking to you in mid-November, reminder that the 930-quarter is our 10K, so our earnings release and call will be a little bit later than our typical quarterly timing, but we look forward to speaking to you then. Thank you for your interest and have a great rest of the summer.

Operator: This concludes today's call. Thank you for your participation.

Operator: You may now disconnect.

Operator: Good morning and welcome to the Pennant Park Floating Rate Capital Ltd. Fiscal Quarter 2024 earnings conference call. Today's conference has been recorded. At this time all participants have been placed in a listen only mode. The call will open for a question and answer session following the speakers or marks. 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.

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

Q3 2024 PennantPark Floating Rate Capital Ltd Earnings Call

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