Q4 2024 PennantPark Floating Rate Capital Ltd Earnings Call

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

Good morning, and welcome to the pennant Park floating rate Capital's fourth 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 question and answer session. Following the.

Operator: The call will be open for question and answer session following If you would like to ask a question at that time, simply press star 1 on your telephone. If you would like to withdraw your question, press star 2 on your telephone.

Speakers remarks, if you would like to ask a question at that time simply press star one on your telephone keypad, if you'd like to withdraw your question Press Star two on your telephone keypad.

Operator: 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 call.

Speaker Change: This is 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: Thank you and good morning everyone. I'd like to welcome you to PennantPark Floating Rate Capital's fourth fiscal quarter 2024 earnings conference call. I'm joined today by Rick Allorto, our Chief Financial Officer.

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

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 PennantPark 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.

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

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

Rick: 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: 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 pennandpark.com or call us at 212-905-1000.

Rick: To obtain copies of our latest SEC filings. Please visit our website at pennant Park dot com or call us at 212905 1000.

Arthur Penn: At this time, I'd like to turn the call back to our Chairman and Chief Executive Officer, Thanks Rick. We're going to spend a few minutes discussing the current market environment for private middle market lending. We fared in the quarter ended September 30th. how the portfolio is positioned for the upcoming quarters.

Speaker Change: At this time I'd like to turn the call back to our chairman and Chief Executive Officer Art Penn.

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

Art Penn: How we fared in the quarter ended September 30th.

Art Penn: How the portfolio is positioned for the upcoming quarters.

Arthur Penn: a detailed review of the financials, and then open it up for Q&A. For the quarter ended September 30th, core net investment income was $0.32 per share. As of September 30th, our portfolio grew to $2 billion, or 20% from the prior quarter. During the quarter, we continued to originate attractive investment opportunities and invested $446 million in 10 new and 50 existing portfolio companies at a weighted average yield of 11%. We continue to see an attractive vintage in the core middle market. For investments in new portfolio companies, the weighted average debt to EBITDA was 3.4 times, the weighted average interest coverage was 2.5 times, and the weighted average alone to value was 38%.

A detailed review of the financials and then open it up for Q&A.

Art Penn: For the quarter ended September 30th core net investment income was 32 cents per share.

Art Penn: As of September 30th our portfolio grew to $2 billion or 20% from the prior quarter.

Art Penn: During the quarter, we continued to originate attractive investment opportunities and invested 446 million and 10, new and 50 existing portfolio of companies had a weighted average yield of 11%.

Art Penn: We continue to see an attractive vintage in the core middle market for investments in new portfolio companies. The weighted average debt to EBITDA was 3.4 times. The weighted average interest coverage was two five times and the weighted average loan to value was 38%.

Arthur Penn: Subsequent to quarter end, we remained active and invested over $330 million at a weighted average yield of 10.2%. Investment volume is increasing, we have a robust pipeline, and we expect the remainder of 2024 to be active. During 2024, the market yield on first lean term 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 middle market, directly originated loans is excellent. And the core middle market leverages lower, spreads are higher, and covenants are tighter than in the upper middle market. Despite covenant erosion in the upper middle market, in the core middle market we are still getting meaningful covenant protection.

Art Penn: Subsequent to quarter end, we remained active and invested over $330 million.

Art Penn: Weighted average yield of 10, 2%.

Art Penn: Investment volatile volume is increasing we have a robust pipeline and we expect the remainder of 'twenty 'twenty four to be active.

Art Penn: During 2024, the market yield on first lien term loans has tightened 50 to 75 basis points as.

Art Penn: Is it credit statistics, just highlighted indicate we continue to believe that the current vintage of core middle market directly originated loans is excellent.

Art Penn: In the core middle market, Leverages, lower spreads or higher and covenants are tighter than the upper middle market.

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

Arthur Penn: As of September 30th, our debt to equity ratio was 1.35 times to 1. With a target ratio of 1.5 times to 1, we believe that we are 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 asset. During the quarter, PFLT closed the refinancing and upsize of a $351 million term debt securitization transaction with a weighted average spread of 1.89%, a 4-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%.

Art Penn: As of September 30th our debt to equity ratio was 1.35 times to one.

Art Penn: What's the target ratio of one five times to one we believe that we are positioned to drive additional growth and net investment income going forward.

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

Art Penn: During the quarter P. F. L. T closed the refinancing an upsize or a $351 million.

Art Penn: Term debt securitization transaction with a weighted average spread of 189% a four year reinvestment period, and a 12 year final maturity.

Art Penn: Weighted average spread of 1.89% as a meaningful decrease of 50 basis points 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%. The ratio of external debt to PFLT's junior capital was 3.1 times to 1, which creates plenty of liquidity for the company. Additionally, during the quarter, we closed on an amendment, an extension of the truest revolving credit facility. 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.

Art 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%.

Art Penn: The ratio of external debt to <unk> Junior capital was three one times to one which creates plenty of liquidity for the company.

Art Penn: Additionally, during the quarter, we closed on an amendment and extension of the truest revolving credit facility.

Art Penn: The highlights of the amendment or an increase in total commitments to $636 million a reduction in the rate to silver plus 225, which is down from separate plus $2 36, and then extension and 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 September 30, the JV portfolio totaled $913 million, and the JV remained active during the quarter and invested $46 million in five new and seven existing portfolio companies at a weighted average yield of 11.3%, including $45 million of assets purchased from PFLT. Gap in adjusted NAV decreased 0.3% to $11.31 per share from $11.34 per share. The decrease in NAV for the quarter was due primarily to the write-off of fees and expenses associated with the previously noted securitization refinancing and revolving facility amendment and extension.

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

Art Penn: As of September 30th the JV portfolio totaled $913 million and the JV remained active during the quarter and invested $46 million in five new and seven existing portfolio companies.

Art Penn: The weighted average yield of 11, 3%, including $45 million of assets purchased from P. F. L T.

Art Penn: GAAP and adjusted NAV decreased 0.3% to $11.31 per share from $11.34 per share the decrease in NAV for the quarter was due primarily to the write off of fees and expenses associated with the previously noted securitization refinancing.

Art Penn: And revolving facility amendment and extension.

Arthur Penn: Credit quality of the portfolio has remained strong. We didn't add any new investments to non-accrual status and non-accruals represent only 0.4% of the portfolio at cost and 0.2% at market value. As of September 30, the portfolio's weighted average leverage ratio through our debt security was 4.1 times and the portfolio's weighted average interest coverage was 2.3 times. We believe this is one of the most conservatively structured portfolios in the direct lending industry and is a testament to our focus on the core middle market. We like being positioned for capital preservation as a senior secured first lien lender focused on the United States.

Art Penn: Credit quality of the portfolio has remained strong we didn't add any new investments to non accrual status and non accruals represented only 0.4% of the portfolio at cost and 0.2% at market value.

Art Penn: As of September 30th the portfolio's weighted average leverage ratio through our debt security was four one times and the portfolio's weighted average interest coverage was two three times. We believe this is one of the most conservatively structured portfolios and the direct lending industry is a testament to our focus on the core middle market.

Art Penn: We like being positioned for capital preservation is a senior secured first lien lender focused on the United States. We continue to believe that our focus on the core middle market provides the company with attractive investment opportunities, where we provide important strategic capital to our borrowers we have a long term track record of generating value by successfully financing growing mid.

Arthur 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. There are business services, consumer, government services and defense, healthcare, and software and 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.

Art Penn: Market companies and five key sectors.

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

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

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

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. We have many weeks to do our diligence with care, we thoughtfully structure transactions with sensible credit statistics, meaningful covenants, substantial equity questions to protect our capital, attractive spreads, and an equity co-investment. 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.

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

Art 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 attractive spreads and an equity co investment.

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

With regard to covenants. Unlike the erosion in the upper middle market virtually all of our originated first lien loans had meaningful covenants, which help protect our capital. This is a significant reason why we believe we are well positioned in this environment.

Arthur Penn: This is a significant reason why we believe we are well positioned in this environment. Many of our peers should focus on the upper middle market states 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.

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

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

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

Arthur Penn: Our credit quality since inception over 13 years ago has been excellent. PFLT has invested $6.7 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. as a provider of strategic capital, 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 September 30th, we have invested over $540 million in equity call investments.

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

P. S. L. T has invested $6 $7 billion and over 500 companies and we've experienced only 20 non accruals since.

Art Penn: Inception P F L T's loss ratio on invested capital is only 10 basis points annually.

Art Penn: As a provider of strategic capital.

Art Penn: The growth of our portfolio companies.

Many cases, we participate in the upside of the company by making an equity co investment.

Art Penn: Our returns on these equity co investments had been excellent overtime.

Art Penn: Overall for our platform from inception through September 30, we have invested over $540 million in equity co investments.

Arthur Penn: have generated an IRR of 26% and a multiple uninvested capital of two times. Our experienced and talented team and our wide origination funnel is producing active deal flow. Our continued focus remains on capital preservation and being patient investors.

Art Penn: Have generated an IRR of 26% and a multiple on invested capital of two times.

Art Penn: Experienced and talented team and our wide origination funnel is producing active deal flow.

Art Penn: <unk> 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 the preservation of capital. Everything we do is aligned to that goal. We seek to find investment opportunities in growing middle market companies that have high free cash flow conversion. We capture that free cash flow primarily in first lien senior secured instruments and we pay out those contractual cash flows in the form of dividends to our shareholders.

Art Penn: Michigan, a goal or 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 and growing middle market companies that have high free cash flow conversion, we capture that free cash flow primarily in first lien senior secured instruments and we pay out those contractual cash flows.

In the form of dividends to our shareholders.

Richard Allorto: Let me now turn the call over to Rick, our CFO, to take us through the financial results in more detail. For the quarter ended September 30th, GAAP Net Investment Income was $0.24 per share and Core Net Investment Income was $0.32 per share. Core net investment income includes the add back of $0.08 per share of one-time financing costs that were expensed during the quarter, net of the impact on incentives.

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

Rick: Thank you art for the quarter ended September 30th GAAP net investment income was 24 cents per share and core net investment income was 32 per share.

Rick: Core net investment income includes the add back of eight <unk> per share of onetime financing costs that were expensed during the quarter net of the impact on incentive fees.

Richard Allorto: Operating expenses for the quarter were as follows. Interest and expense on debt were $19.3 million. Base management and performance-based incentive fees were $7.8 million. General and administrative expenses were $1.7 million. And provision for taxes were $0.2 million.

Operating expenses for the quarter were as follows.

Rick: Interest expense on debt were $19 3 million base.

Rick: Base management and performance based incentive fees were $7 8 million.

Rick: General and administrative expenses were $1 7 million and provision for taxes, we're point $2 million.

Richard Allorto: For the quarter ended September 30th, net realized and unrealized change on investments, including provision for taxes, was a gain of $3.4 million.

Rick: For the quarter ended September 30th net realized and unrealized change on investments, including provision for taxes was a gain of $3 4 million.

Richard Allorto: As of September 30th, our GAAP NAV was $11.31, which is down 0.3% from $11.34 per share last quarter. Adjusted NAV, excluding the mark-to-market of our liabilities, was $11.31 per share, down 0.3% from $11.34 per share last quarter.

As of September 30th R Gap, and a b was $11.31, which is down 3% from $11.34 per share last quarter.

Rick: Adjusted NAV, excluding the mark to market of our liabilities was $11 31 per share down <unk>, 3% from 11 34 per share last quarter.

Richard Allorto: As of September 30th, our debt to equity ratio was 1.35 times, and our capital structure is diversified across multiple funding sources, including both secured and unsecured debt.

Rick: As of September 30th our debt to equity ratio was 1.35 times and our capital structure is diversified across multiple funding sources, including both secured and unsecured debt.

Richard Allorto: As of September 30th, our key portfolio statistics were as follows. The portfolio remains highly diversified with 158 companies across 46 different industries. The weighted average yield on our debt investments was 11.5% and approximately 100% of the debt portfolio is floating rate. Pick income equaled only 2.9% of total interest income during the quarter. We had two non-accruals, which represent 0.4% of the portfolio at cost and 0.2% at market value. The portfolio is comprised of 88% first lien, senior secured debt, less than 1% in second lien debt. 3% in the equity of PSSL and 9% in other equities.

Rick: As of September 30th our key portfolio statistics, whereas follows.

Rick: The portfolio remains highly diversified with 158 companies across 46 different industries.

Rick: The weighted average yield on our debt investments was 11, 5% and approximately 100% of the debt portfolio is floating rate.

Rick: Pik income equaled only two 9% of total interest income during the quarter.

Rick: We had two non accruals, which represent 4% of the portfolio at cost and 0.2% at market value.

Rick: The portfolio is comprised of 88% first lien senior secured debt.

Less than 1% in second lien debt.

Rick: 3% in the equity of P. S S L and 9% in other equity.

Richard Allorto: Our debt to EBITDA on the portfolio is 4.1 times and interest coverage was 2.3 times.

Rick: Our debt to EBITDA on the portfolio is four one times and interest coverage was two three times.

Arthur Penn: Now let me turn the call back to Art. Thanks Rick.

Art Penn: Now, let me turn the call back to art.

Arthur Penn: 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.

Art Penn: Thanks, Rick in closing I'd like to thank our dedicated and talented team of professionals for their continued commitment to <unk> and its shareholders. Thank you all for your time today and for your investment and confidence in us.

Arthur Penn: That concludes our remarks.

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

Operator: At this time, I would like to open up the call to questions. Thank you. If you would like to ask a question, you may 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 our operator.

Speaker Change: Thank you if you would like to ask a question you may signal by pressing star one on your telephone keypad, if you're using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment.

Paul Johnson: We'll take our first question from Paul Johnson with KBD. Yeah, good morning. Thanks for taking my question.

Well take our first question from Paul Johnson with K B W.

Yeah. Good morning. Thanks.

Speaker Change: My question.

Paul Johnson: Congrats on year for My only question, I guess, would be kind of... What do you see, you know, in the current? that you currently find that's very attractive. And also, I know, what are your thoughts about the upcoming vintage in terms of next year?

Congrats on.

Speaker Change: Climate order, it's very active.

Speaker Change: Here for the firm.

Speaker Change: The other question I guess would be.

Speaker Change: Yeah.

What do you see.

Speaker Change: Correct.

Speaker Change: That you currently find that.

Speaker Change: Very attractive.

Speaker Change: And also what are your kind of thoughts about the upcoming vintage curves together next year administration changeover.

Speaker Change: Declining.

Speaker Change: <unk> environment.

Arthur Penn: Thanks, Paul, and good morning. Look, when you can originate loans that have an average debt to EBITDA of 3.4 times, average interest coverage of 2.5 times, a loan to value of 38%, and get kind of 550 over the risk-free rate on average. Our view is you're supposed to be doing that all day long.

Speaker Change: Thanks, Paul and good morning.

Speaker Change: Look when you can originate loans that have an average debt to EBITDA is three four times average interest coverage of two five times, a loan to value of 38% and get kind of $5 50 over the risk free rate on average.

Speaker Change: Our view is you're supposed to be doing that all day long.

Arthur Penn: So as you know, we we opt for safety and security over yield at PFLT. So, you know, we've had some yields compression over the last year, it seems to have plateaued for now. But, you know, I think the credit quality that we get has been very, very high here in the core middle market where there's a lot less competition. All the big players have moved up and it just doesn't make sense for their business models to be lending to $10 million, $20 million, even $30 million EBITDA companies. So, you know, we've been taking advantage of that opportunity and we think it's a really good one.

Speaker Change: So as you know.

Speaker Change: We opt for safety and security over yield at P. F. L T.

Speaker Change: So yeah, we've had some yield compression over the last year.

Speaker Change: It seems to have plateaued for now, but you know I think these credit and credit quality that we get has been very very high here in the core middle market where.

Speaker Change: Theres a lot less competition all the big players have moved up and it just doesn't makes sense for their business models to be lending to $10 million $20 million, even $30 million EBITDA company. So you know we've been we've been taken advantage of that that opportunity and.

Speaker Change: We think it's a really good one I think in terms of the outlook.

Arthur Penn: I think in terms of the outlook, as you can tell, it's been busy from an M&A standpoint in the core middle market. Hopefully that means we can rotate some of these equity positions. You know, we've had a very good track record with these equity columns, as we've said, two times MOIC over, you know, 18 years now. So hopefully we can get liquid on some of these, rotate that capital into, you know, cash paying yield. And then with the activity, the question will be with the supply-demand curve in the core middle market, can spreads widen again because of the supply?

Speaker Change: As you can tell it's been busy from an M&A standpoint in the core middle market.

Speaker Change: Hopefully that means we can rotate some of these equity positions you know we've had a very good track record with these equity co investments. We've said a few times M O I see over <unk>.

Speaker Change: 18 years now.

Speaker Change: So hopefully we can get liquid on some of these rotate that capital into cash paying yield.

Speaker Change: And then with the activity of the question will be with a supply demand and supply demand curve in the core middle market hence.

Speaker Change: Hence spreads widen again.

Speaker Change: Because of the supply that would be our hope even if they don't we're very pleased with the vintage given the credit stats I just outlined but we would hope that perhaps with more supply spreads widened in terms of the risk free rate you know that's way above our pay grade.

Arthur Penn: That would be our hope. Even if they don't, we're very pleased with the vintage given the credit that's just outlined, but we would hope that perhaps with more supply, spreads widen.

Arthur Penn: In terms of the risk-free rate, that's way above our pay grade. Certainly, the market believes it's going to go down. The question will be how much?

Speaker Change: Certainly the market believes it's going to go down the.

Speaker Change: The question will be how much.

Paul Johnson: So, did that answer your question, Paul? Yeah, yeah, yeah.

So does that answer your question Paul.

Paul: Yeah, Yeah, yeah, thanks for that.

Paul: Art.

Paul: That's good color there.

Speaker Change: Yeah, but in this year and I'm talking about the current year.

Speaker Change: I mean you.

Speaker Change: You say youre getting still meaningful evidence, but it's definitely been a tighter spread environment.

Arthur Penn: So, I would guess, you know, just ask you in a kind of where has... So if you're getting, has it just been? A little bit of pressure on pricing that you've seen, or how has DOC Douglas Hartman, CFP®, Financial Planner & Investment Advisor Certainly in the good old days of rising interest rates and fear, and we were getting $575,000 or $600,000 or even $625,000 over, the covenant cushions were closer to 25%. That's where you negotiate your cushion to the base gate. Today they're 30% or 35%. So they're certainly wider than they were, but they're still there and they're still protective.

Speaker Change: So I would guess.

That's kind of where has the deterioration.

Speaker Change: Occurred in terms of the two.

Terms that youre getting is it just end.

Speaker Change: A little bit of spread.

Speaker Change: Russia and are a little bit of pressure on pricing that you've seen or how has documentation.

Speaker Change: Or are you getting the same covenants that you were getting.

Last year.

Speaker Change: Less fees are less equity co invest whereas any.

Speaker Change: The deterioration or kind of the pressure I would say on terms occurred yeah yeah.

Speaker Change: That's a question certainly.

And in the battle good old days of.

Speaker Change: Rising interest rates and fear.

Speaker Change: And we are again.

Speaker Change: $5, 75, or 600 or even 625 over.

Speaker Change: The covenant the covenant questions were closer to 25% and that's where you negotiate your cushion to the to the base cases today, they're 30 or 35%. So they're certainly wider than they were but they're still there and they are still protected.

Arthur Penn: I mean, if you just want to go back to a dramatic example, you can go back to COVID. and the fact that there were quarterly maintenance tests that these companies had to live up to, as well as the fact that we were getting monthly financial statements along the way, really brought people to the table quickly to discuss and figure out how we were going to solve problems together. And we've seen a lot of the same phenomenon here well past COVID. It's really due to the loan to value that we're seeing because these sponsors have so much private equity capital beneath the debt.

Speaker Change: You just wanted to go back to a dramatic example, you go back to Covid.

Speaker Change: And you know the fact that they recorded quarterly maintenance tests that these companies had too.

Speaker Change: Live up to as well as the fact that we were getting monthly financial statements along the way.

Speaker Change: Really brought people to the table quickly to discuss and figure out how we're going to solve problems together.

Speaker Change: And we've seen a lot of the same phenomenon here well past COVID-19, it's really due to the loan to value that we're seeing because the sponsors have so much.

Speaker Change: Private equity capital beneath the debt.

Arthur Penn: And the vast majority of the cases, if there's a problem with a covenant or any kind of liquidity problem, they're generally willing to put more equity in to solve that problem. And our nonaccrual rate has remained. really low here and we're very thankful for that and we're protective of that but one of the reasons is They've got so much capital beneath us that if it takes a little bit more capital to solve a problem, they're by and large willing to do that.

Speaker Change: And the vast majority of the cases, if there's a problem with a covenant or <unk> or any kind of liquidity problem. They are generally willing to put more equity into solve that problem and you know our nonaccrual rate has remained.

Really low here and we're very thankful for that and we're protective of that but one of the reasons is.

Speaker Change: They've got so much cash.

Speaker Change: Capital beneath us.

If it takes a little bit more capital to solve a problem they are by and large willing to do that.

Speaker Change: Thanks for that.

Arthur Penn: and then.

Speaker Change: And then.

Richard Allorto: and one on the T- https://www.pennantpark.com Richard Allorto, PennantPark Floating Rate Capital Ltd Yeah, so we had three non-crulls last quarter, Dynata, Pragmatic, and Walker Edison. Dynata restructured. Walker Edison, and Pragmatic are still a non-equal. So, you know, same two out of three.

Speaker Change: That's great.

Speaker Change: Does it not.

Speaker Change: Non accruals this quarter could you just walk us through the driver that was there.

Speaker Change: Uh-huh restructured written off.

Speaker Change: Yeah. So we had three non accruals last quarter.

Speaker Change: The dynamic pragmatic and Walker Edison Dynameter restructured.

Speaker Change: Walker Edison and pragmatic or still on nonaccrual. So same same same same two out of three.

Speaker Change: Got it Okay, and then last question.

Richard Allorto: Okay, and then, last question. What did you tell us the impact is on a book value per share basis of the issuance from? No impact on NAV. We're issuing under the ATM either at or above above NAV. Impact has been immaterial.

Rick.

Speaker Change: Could you tell us the impact is on our books.

Per share basis, the issuance from this.

Speaker Change: This quarter, if there was any.

Speaker Change: Okay.

Speaker Change: No impact on the on an EV.

Speaker Change: Issuing.

Speaker Change: Under the ATM.

Speaker Change: They are at or above above an EV.

Speaker Change: Impact has been.

Speaker Change: Yeah.

Speaker Change: Immaterial.

Richard Allorto: Thank you. That's all.

Got it. Thank you that's all for me.

Speaker Change: Okay.

Mark Hughes: Thank you. We'll take our next question from Mark Hughes. Yeah, thank you. Good morning.

Speaker Change: Thank you we'll take our next question from Mark Hughes with Trust.

Speaker Change: Yes, Thank you and good morning art anything.

Arthur Penn: Art, anything with the doge in the offing? Pressure on government. Anything in your portfolio that you have your eyes on that could be impacted by the That's a great question, Mark, and we all wish we knew what those will mean from an impact. As you know, defense, government services. are have been a nice piece of this portfolio, steady and stable. You know, most of those businesses are service businesses where people walk into offices and do some form of cybersecurity, technology, you know, intelligence. It's not really, you know, building, you know, bombs and guns and bullets, so.

Speaker Change: With the dose in the offing and potential pressure on government spending anything in your portfolio that you have your eyes on that could be impacted by that.

Speaker Change: It's a great question, Mark and I, we all wish we knew what what goes well.

Speaker Change: I mean from an impact as you know defense government services.

Speaker Change: <unk> had been a nice piece of this portfolio is steady and stable.

Speaker Change: You know most of those businesses are service businesses, where people walk into offices.

Speaker Change: And do some form of.

Speaker Change: Some form of cyber security.

Speaker Change: Technology.

Speaker Change: <unk> intelligence.

Speaker Change: Not really building.

Speaker Change: No bombs.

Speaker Change: And guns and bullets so.

Arthur Penn: But it's been steady and stable, and maybe there's cross-currents here, certainly the world from a geopolitical standpoint is. is a little messy right now. And of course, as taxpayers, we all want an efficient government, right? So we all want our tax dollars to be used efficiently. So, you know, we'll see how it all plays through in terms of the government services and defense.

Speaker Change: But it's been steady and stable and maybe there's cross currents here certainly the world from a geopolitical standpoint is.

Speaker Change: Is it is a little messy right now.

Speaker Change: And of course as taxpayers, we all want an efficient government right. So we don't want our tax dollars be sufficiently so.

Speaker Change: We'll see how it all plays through in terms of the the government services and defense.

Arthur Penn: Healthcare is a big piece of what we do. We've had a very good healthcare track record, much better than our peers. We know some of our peers have stumbled in healthcare. I think it's just, you know, we keep our leverage pretty reasonable and low. You know, like if you're leveraging a healthcare company four, four and a half times on a senior basis, you could get hurt, of course, but it's a lot less risky than the six times or seven times that maybe some of our peers have done. So our healthcare track record has been good.

Speaker Change: Health care is a big piece of what we do we've had a very good health care track record much.

Speaker Change: Much better than our peers, we know some of our peers have stumbled in health care I think it's just you know, we keep our leverage pretty reasonable and low you know like if you're if.

Speaker Change: If youre leveraging health care company for foreign and five times on a senior basis.

Speaker Change: Could get hurt of course, but it's a lot less risky than the six times or seven times that maybe some of our peers have done so our health care tracker or it's been good we've selected the right companies in the right sectors.

Arthur Penn: We've selected the right companies in the right sectors. And we, like all taxpayers, want an efficient health care system. So we'll see. We're going to keep being conservative. If you keep leverage low, it can solve for a lot of ills. Not to say there won't be impacts to be seen, but we're just going to stick to that.

Speaker Change: And and we like all taxpayers in one of them one of them wanted to efficient health care system. So well see you know, where we're going to keep being conservative and keep Larry if you keep leverage low it can it can kind of solve for a lot of deals not to say there won't be impacts to be seen but we're.

Speaker Change: We're just going to stick to that.

Mark Hughes: Thank you. Okay. What about your origination activity so far in the fourth quarter has been quite strong. How about repayments? How are you looking on a net-based? Yeah, you know, we are getting repayments. It happens. And that's good. You know, when people pay us back, we say thank you. Sometimes, as you know, they don't. So we're getting repayments, you know, and that's all due to a more active M&A environment, which by and large is good for us. You know, the equity co-invest should churn a little bit more, turn those to cash, we'll get repayments, that's fine.

Speaker Change: Yeah, Okay I appreciate that.

Speaker Change: The your origination activity so far in the fourth quarter has been quite strong.

Speaker Change: Repayments how are you looking on a net basis.

Speaker Change: Yeah, you know, we aren't getting repayments it happens and.

Speaker Change: That's good you know, we when people pay us back.

Speaker Change: We say thank you.

Sometimes as you know they don't so we are getting repayments you know and that's all due to a more active M&A environment, which by and large is good for US you know the equity co invest should churn a little bit more turnover to cash will get repayments, that's fine, but we'll hopefully deploy capital sensibly and conservatively. So.

Mark Hughes: We'll hopefully deploy capital sensibly and conservatively. So, you know, it's probably at least recently, I'll estimate, you know, given the opportunity, we've been probably making new investments, $2 out to $1 getting repaid. That's just an off-the-cuff estimate. But that will happen slow.

Speaker Change: <unk>.

Speaker Change: You know, it's probably at least recently I'll I'll estimate.

Speaker Change: Given the opportunity we have been probably making new investments $2 out to $1 getting repaid that's just an off the cuff estimate.

But that will ebb and flow.

Mark Hughes: And then the equity co-invest, are you seeing in these new originations a kind of similar opportunity, is that going to be a relative? stable part of the strategy. both in terms of opportunity and then your appetite or your approach to those co-investors. Yeah, it's a good question. You know, having now done this, you know, 18 years at Pennant Park and before that elsewhere, that opportunity is always there. It's a question, do we take that opportunity? Sometimes we will We've graciously declined the opportunity, depending on the situation. Sometimes we'll work hard to invest more because we like the equity.

Speaker Change: And then the equity co invest are you seeing in that these new originations.

Speaker Change: A similar opportunity is that going to be a relatively.

Speaker Change: Stable part of the strategy.

Speaker Change: Both in terms of opportunity and then your appetite.

Speaker Change: Or your approach to those co invest.

Speaker Change: Yeah, It's a good question.

Speaker Change: You know having now done this.

Speaker Change: 18 years at pennant park and before that elsewhere that opportunity is always there.

Speaker Change: Question do we take that opportunity, sometimes we will.

Speaker Change: Graciously decline the opportunity.

Speaker Change: Pending on the situations, sometimes we'll work hard to invest more because we like the equity over a long period of time over many deals it's worked out by and large there's some big winners and there are some more some losers, but thats kind of the.

Arthur Penn: Over a long period of time, over many deals, it's worked out by and large. There's some big winners and there's some losers, but that's kind of the equity co-invest business. We've invested $540 million in the 18 years and had a 26% IRR and a 2x MOIC, multiple uninvested capital. So it's generally worked. We've certainly had some zeros in there. We've certainly had some that have been a lot more than 2x.

Speaker Change: That's kind of.

Speaker Change: The equity co invest business, we've invested $540 million.

Speaker Change: And the 18 years and at a 26% IRR and a two times <unk> multiple on invested capital. So it's generally worked.

Speaker Change: We certainly had some some zeros in there and we certainly had some that had been a lot more than two X.

Mark Hughes: Appreciate that. Thank you.

Speaker Change: Appreciate that thank you.

Speaker Change: Yeah.

Douglas Harter: We will take our next question from Doug Harter with EBS. Uh, thanks. Can you give us updated thoughts as to, you know, kind of how you're thinking about the dividend and maybe some of the puts and takes on earnings power in the coming year?

Thank you we'll take our next question from Doug Harter with UBS.

Speaker Change: Thanks.

Can you give us updated thoughts as to you know kind of how.

Speaker Change: Are you thinking about the dividend.

Speaker Change: Some of the puts and takes on earnings power.

Speaker Change: And they're coming here.

Speaker Change: Sure Great.

Arthur Penn: Great question. We think about it all the time, as you might imagine. These are all credit guys.

Speaker Change: Great question, we think about it all the time as you might imagine.

Arthur Penn: We're going to hit the downside first. That's how we think what's the downside. Downside, of course, are interest rates, right? Are interest rates going to continue to come down? and then credit quality, you know, we think credit quality will remain strong, of course there's never any guarantee. And the title of this vehicle is PennantPark Floating Rate Capital, which would imply that, you know, as interest rates rise and fall, you know, this floating rate portfolio will take its cue from that to some extent. So, certainly, potentially lowering rates, credit quality, and just highlighting that in the title of this vehicle, Floating Rate Capital.

Because of our credit guys were ahead to downsize first that's how we think what's the downside downside of course, our interest rates our interest rate is going to continue to come down.

Speaker Change: And their credit credit quality and.

Speaker Change: Credit quality remained strong and of course theres never any guarantee.

Speaker Change: And the title of this this vehicles 10, apart floating rate capital, which would imply that.

Speaker Change: As interest rates rise and fall you know this this floating rate portfolio well.

Speaker Change: Take its cue from that to some extent, so so certainly potentially lowering rates credit quality.

Speaker Change: And.

Speaker Change: And just highlighting that it's the tight and the title of this vehicle floating rate capital.

Arthur Penn: So, that's the downside.

Speaker Change: So that's the downside on the upside you have several different elements.

Arthur Penn: On the upside, you have several different elements. You know, we're not at target leverage yet. You know, we're kind of at 1.3, 1.35. Our target leverage is one and a half times. A, B, Equity Co-Investor Rotation, as you go through our Equity Co-Investor Portfolio you'll see some that are marked up substantially. Those are always ripe, those are kind of leading indicators of companies that are going to be sold. So, you know, we hope to get some decent equity rotation here in this more robust. M&A Environment And then we have this, you know, JV opportunity, you know, which gives us a very nice, historically been a mid-teens return on capital.

Speaker Change: No we're not at target leverage yet.

Speaker Change: 131 35.

Speaker Change: Our target Leverages as one and half times.

A b equity co invest rotation.

Speaker Change: You'll see some window as you go through equity commerce portfolio, you'll see some that are marked up substantially those are always right. So those are kind of leading indicators of companies that are going to be sold.

So you know we hope to get some.

Speaker Change: Decent equity rotation here in this more robust.

Speaker Change: M&A environment.

Speaker Change: And then we have this you know JV opportunity you know, which gives us a very nice historically has been a mid teens return on.

Arthur Penn: So, you know, we're looking, we're looking at that and saying, should we upsize existing JV? Should we do a new JV? JV's been very successful both for PFLT and PNNT. It's a nice way to take lower risk senior assets. Leverage them up a little bit more than we would, you know, on the balance sheet of the BDC. Still safe, safely though, and generating mid to upper teens, you know, return on capital. And for the shareholder, we're managing more capital and our management company is not charging a management fee on that. So those pure returns go to the bottom line of PSLT.

Speaker Change: Capital.

Speaker Change: So we're looking we're looking at essentially upsize the existing JV should we do a new JV.

Speaker Change: <unk> been very successful both with Tfl T N P. N N T. It's a nice way to take lower risk senior assets.

Leveraging them up a little bit more than we would.

Speaker Change: On the balance sheet as Bdcs does say safely, though and generate a mid to upper teens.

Speaker Change: Our return on capital and for the shareholder we're managing more capital.

Speaker Change: And our management company is not charging a management fee on that so those those those pure returns go.

Speaker Change: Bottom line of Tfl T. So that's got some puts and takes.

Arthur Penn: So that's got some puts and takes, you know, we'll see where we go and hopefully I answered your question.

Speaker Change: We'll see where we go.

Speaker Change: And hopefully I answered your question there.

Douglas Harter: I appreciate that, Arthur. Thank you.

Speaker Change: I appreciate that are thank you.

Speaker Change: Thank you with no additional questions in queue I would like to turn the call back over to Mr. Penn for any additional or closing remarks.

Arthur Penn: With no additional questions in queue, I would like to turn the call back over to Mr. Penn for any additional or closing remarks. Just want to thank everybody for being on this call today and the Thanksgiving weekend. I want to let everyone know we are certainly grateful and thankful for the interest you show in PFLT and investing in the company.

Art Penn: Just wanted to thank everybody for being on this call today and the.

Art Penn: Giving weekend I want to let everyone know, we are certainly grateful and thankful for.

Art Penn: For the interest you show <unk> and investing in the company. So wishing everybody a great holiday season, and we'll talk to you in February.

Arthur Penn: So wishing everybody a great holiday season and we'll talk to you in February. That will conclude today's call. We appreciate your...

Speaker Change: That will conclude today's call. We appreciate your participation.

Art Penn: Sure.

Art Penn: [music].