Q2 2025 PennantPark Floating Rate Capital Ltd Earnings Call
Speaker Change: [music].
Good morning, and welcome to the pennant park floating rate capital circuit.
Operator: Good morning and welcome to the Pennant Park Floating Rate Capital's second fiscal quarter 2025 earnings conference call. Today's conference is being recorded. At this time, all participants have been placed in listen-only mode. 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. Thank you, and good morning everyone. I'd like to welcome you to PennantPark Floating Rate Capital's second fiscal quarter 2025 earnings conference call.
Speaker Change: Fiscal quarter 2025 earnings Conference call. Today's conference is being recorded at this time all participants have been placed in listen only mode.
Speaker Change: All will be open for question and answer session. Following the Speakers' 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 Press Star two on your telephone keypad.
Speaker Change: Now my pleasure to turn the call over to Mr Art, Penn Chairman and Chief Exec Executive Officer M. Pinet Park floating rate capital.
Art Penn: Mr. Penn You May now begin your conference.
Speaker Change: Thank you and good morning, everyone I'd like to welcome you to pennant Park floating rate Capital's second fiscal quarter 2025 earnings conference call I'm joined today by Rick The Loreto, our Chief Financial Officer, Rick. Please start off by disclosing some general conference call information and included discussion about forward looking statements.
Richard Allorto: I'm joined today by Rick Allorto, our Chief Financial Officer.
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.
Speaker Change: Thank you art I'd like to remind everyone that today's call is being recorded.
Speaker Change: Please note that this call is the property dependent part floating rate capital and that any unauthorized broadcast of this call in any form is strictly prohibited.
Speaker Change: 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. 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.
Speaker Change: Also like to call your attention to the customary safe Harbor disclosure in our press release regarding forward looking information.
Speaker Change: 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.
Speaker Change: 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.
Speaker Change: To obtain copies of our latest SEC filings. Please visit our website at pennant Park dot com or call us at 212905 1000.
Speaker Change: At this time I would like to turn the call back to our chairman and Chief Executive Officer Art Penn.
Arthur Penn: At this time, I'd like to turn the call back to our Chairman and Chief Executive Officer, Art Penn. Thanks Rick.
Speaker Change: Thanks, Rick I'm going to spend a few minutes discussing the current market environment for private middle market lending.
Arthur Penn: I'm going to spend a few minutes discussing the current market environment for private middle market lending and how the portfolio is positioned for the upcoming quarters. I'll then discuss how we fared in the quarter ended March 31st and finally highlight how our financial strength has been significantly enhanced through strategic capital raising activities during the quarter and over the last 12 months.
Speaker Change: And how the portfolio is positioned for the upcoming quarters. I'll then discuss how we fared in the quarter ended March 31st and finally highlight how our financial strength has been significantly enhanced through strategic capital raising activities during the quarter and over the last 12 months.
Arthur Penn: Rick will provide a detailed review of the financials and then we'll open up the call for Q&A. With regard to the current market environment, despite continued volatility in the broader markets, we had a solid quarter, particularly given the seasonally slower start to the fiscal year. Our platform continues to prove its strength, enabling us to support our existing portfolio companies and private equity borrowers with strategic capital solutions to help grow their businesses. Approximately 80% of our originations came from existing borrowers, while 20% were from new platform investments, each one underwritten with attractive credit statistics and yields.
Speaker Change: Nick will provide a detailed review of the financials and then well open up the call for Q&A.
Speaker Change: With regard to the current market environment. Despite continued volatility in the broader markets, we had a solid quarter, particularly given the seasonally slower start to the fiscal year.
Speaker Change: Our platform continues to prove its strength, enabling us to support our existing portfolio of companies and private equity borrowers with strategic capital solutions to help grow their businesses.
Speaker Change: Approximately 80% of originations came from existing borrowers, while 20% were from new platform investments each one underwritten with attractive credit statistics and yields.
Arthur Penn: Our ability to remain active and disciplined during uncertain periods reinforces the value of our longstanding relationships and the breadth of our origination capabilities. Looking ahead, we expect Originations to remain concentrated among existing portfolio companies with select opportunities from high-quality new platforms. In this evolving environment, pricing will likely increase and leverage will moderate as buyers and lenders adjust to a new risk framework. We believe the strongest assets, those with demonstrated growth and tariff resilience, will still command premium valuations and attract sponsor interest. As always, we will remain rigorous in our underwriting and highly selective in pursuing new investments.
Speaker Change: Our ability to remain active and disciplined during uncertain periods reinforces the value of our long standing relationships and the breadth of our origination capabilities.
Speaker Change: Looking ahead, we expect originations to remain concentrated among existing portfolio companies with select opportunities from high quality new platforms.
Speaker Change: In this evolving environment pricing will likely increase in leverage will moderate as buyers and lenders adjust to a new risk framework.
We believe the strongest assets those with demonstrated growth and tariff resilience will still command premium valuations and attract sponsor interest.
Speaker Change: As always we will remain rigorous in our underwriting and highly selective in pursuing new investments.
Speaker Change: Throughout the past year, we've taken significant steps to strengthen our balance sheet and enhanced P. F. L T as liquidity to maximize our ability to take advantage of current market opportunities.
Arthur Penn: Throughout the past year, we've taken significant steps to strengthen our balance sheet and enhance PFLT's liquidity to maximize our ability to take advantage of current market opportunities. As is typically the case, market volatility creates opportunities and this upcoming vintage of loans is shaping up to be particularly attractive. We continue to see attractive investments in the core middle market. During the quarter, for investments in new portfolio companies, the weighted average debt to EBITDA was 4.3 times. The Weighted Average Interest Coverage was 2.3 times, and the Weighted Average Loan-to-Value was 39%, with a yield to maturity of 9.9%.
Speaker Change: As is typically the case market volatility creates opportunities and this upcoming vintage of loans is shaping up to be particularly attractive.
Speaker Change: We continue to see attractive investments in the core middle market during the quarter for investments in new portfolio companies. The weighted average debt to EBITDA was four three times.
Speaker Change: The weighted average interest coverage was two three times and the weighted average loan to value was 35, 39% with a yield to maturity of nine 9%.
Arthur Penn: In the core middle market, the pricing on first lien term loans appears to have stabilized in the SOFR plus 500 to 550 range for high quality assets. 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 leverage is lower and spreads are higher than in the upper middle market. We continue to get meaningful covenant protections while the upper middle market is primarily characterized as covenant light. With regard to how the current portfolio is positioned, over the past several weeks our team has been closely evaluating the potential impact of tariffs across the portfolio.
Speaker Change: In the core middle market the pricing on first lien term loans appears to have stabilized and the surfer plus 500 to $5 50 range for high quality assets.
Speaker Change: As the credit statistics, just highlighted indicate we continue to believe that the current vintage of core middle market directly originated loans is excellent.
Speaker Change: In the core middle market leverage is lower and spreads are higher than the upper middle market.
Speaker Change: We continue to get meaningful covenant protections, while the upper middle market is primarily characterized as covenant light.
Speaker Change: With regard to how the current portfolio is positioned over the past several weeks. Our team has been closely evaluating the potential impact of tariffs across the portfolio. We are pleased to report that exposure is limited.
Arthur Penn: We are pleased to report that exposure is limited. As of March 31st, the portfolio's weighted average leverage ratio through our debt security was 4.2 times and the portfolio's weighted average interest coverage was 2.3 times. We believe that this is one of the most conservatively structured portfolios in the direct lending industry and can withstand volatility in the current environment. We continue to believe that our focus on the core middle market provides us 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.
Speaker Change: As of March 31st the portfolio's weighted average leverage ratio through our debt security was 4.2 times and the portfolio's weighted average interest coverage was two three times. We believe that this is one of the most conservatively structured portfolios and the direct lending industry and can withstand volatility in the current environment.
Speaker Change: <unk>.
Speaker Change: We continue to believe that our focus on the core middle market provides us with attractive investment opportunities, where we provide important strategic capital to our borrowers.
Speaker Change: 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. They are business services, consumer, government services and defense, healthcare, and software and technology. These sectors have been recession resilient, tend to generate strong free cash flow, and have a limited direct impact to the recent tariff increases and uncertainty. The core middle market, companies with $10-50 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. In the core middle market, because we are an important strategic lending partner, the process and package of terms we receive is attractive.
Speaker Change: These are sectors, where we were where we have substantial domain expertise and the right questions to ask and have an excellent track record. They are business services consumer government services, and defense health care and software and technology.
Speaker Change: These sectors have been recession resilient tend to generate strong free cash flow and have a limited direct impact of the recent tariff increases and uncertainty.
Speaker Change: Middle market companies with 10 to 15 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.
Speaker Change: In the core middle market, because we are an important strategic lending partner.
Speaker Change: 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 cushion to protect our capital attractive spreads and equity co investment.
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, attractive spreads, and equity co-investments. Additionally, from a monitoring perspective, we receive monthly financial statements to help us stay on top of the companies. With regard to covenants, unlike the erosion in the upper middle market, virtually all of our originated first lien loans have meaningful covenants, which help protect our capital. Credit quality of the portfolio has remained strong. During the quarter, three new investments were added to the non-accrual status and total non-accruals represent only 2.2% of the portfolio at cost and 1.2% at market value.
Speaker Change: Additionally from a monitoring perspective, we received monthly financial statements to help us stay on top of the companies.
Speaker Change: 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.
Speaker Change: Credit quality of the portfolio has remained strong.
Speaker Change: During the quarter three new investments were added to the nonaccrual status and total non accruals represented only two 2% of the portfolio at cost and 1.2% at market value.
Arthur Penn: Subsequent to quarter end, two non-accrual investments were put back on accrual and pro forma for these subsequent events, PFLT's non-accruals represent only 1% of the portfolio cost and 0.5% at market value as of today. Pay in kind or pick income is only 3% of interest income. This is among the lowest in the industry and is a testament to the quality of our underwriting and our portfolio versus our peers. Our credit quality, since inception over 14 years ago, has been excellent. PFLT has invested $7.6 billion in over 500 companies, and we have experienced only 23 non-accruals.
Speaker Change: Subsequent to quarter end, two non accrual investments were put back on accrual and pro forma for these subsequent events P. F. L. T. <unk> non accruals represented only 1% of the portfolio at cost and 0.5% at market value as of today.
Speaker Change: Pay in kind or Pik income is only 3% of interest income. This is among the lowest in the industry and is a testament to the quality of our underwriting and our portfolio versus our peers are.
Speaker Change: Our credit quality since inception over 14 years ago has been excellent P. F. L. T has invested $7.6 billion and over 500 companies and we have experienced only 23 non accruals since inception P. F. L. He's loss ratio on invested capital was only 11 basis points annually.
Arthur Penn: Since inception, PFLT's loss ratio on invested capital is only 11 basis points annually. 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. Our returns on these equity co-investments have been excellent over time. Overall for our platform from inception through March 31st, we've invested over $566 million in equity co-investments and have generated an IRR of 26% and a multiple uninvested capital of two times.
Speaker Change: As 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 investment.
Speaker Change: Our returns on these equity co investments have been excellent overtime.
Speaker Change: We're off our platform from inception through March 31st we've invested over $566 million in equity co investments and have generated an IRR of 26% and a multiple on invested capital of two times.
Speaker Change: Moving onto how we fared in the quarter ended March 31st our core net investment income was 28 cents per share.
Arthur Penn: Moving on to how we fared in the quarter ended March 31st, our Core Net Investment Income was $0.28 per share. If adjusted for the additional shares issued during the quarter, Core NII would have been $0.30 per share. We are looking forward to ramping the portfolio of both PFLT and the JV in this attractive vintage, which we believe will result in PFLT's Net Investment Income comfortably covering the dividends. As of March 31, our portfolio grew to $2.3 billion, or up 7% from the prior quarter. During the quarter, we continued to originate attractive investment opportunities and invested $293 million in three new and 54 existing portfolio companies at a weighted average yield of 9.9%.
Speaker Change: If adjusted for the additional shares issued during the quarter core NII would have been 30 cents per share.
Speaker Change: We're looking forward to ramping the portfolio of both P. F L T and the JV in this attractive vintage, which we believe will result in P. F. L. T as net investment income comfortably covering the dividend.
Speaker Change: As of March 31st our portfolio grew to $2 $3 billion or up 7% from the prior quarter.
During the quarter, we continued to originate attractive investment opportunities and invested 293 million in three new and 54 existing portfolio companies at a weighted average yield of nine 9%.
Arthur Penn: Throughout the past year, we've taken significant steps to strengthen our balance sheet in order to enhance our liquidity and maximize the company's ability to take advantage of market opportunities. On the liability side of our balance sheet, over the last 12 months, we've increased our total leverage capacity by $750 million. This was done through a combination of expanding and reducing the cost of our revolving credit facility and closing on a substantial new securitized financing. Securitization financing continues to be a good match for our lower risk first lien assets. We believe that securitizations are attractive financing structures as they have a 12 year stated maturity and generally have 4 to 5 year reinvestment periods.
Speaker Change: Throughout the past year, we've taken significant steps to strengthen our balance sheet in order to enhance our liquidity and maximize the company's ability to take advantage of market opportunities.
Speaker Change: On the liability side of our balance sheet over the last 12 months, we've increased our total leverage capacity by $750 million. This was done through a combination of expanding and reducing the cost of our revolving credit facility and closing on a substantial new securitized financing.
Speaker Change: Securitization financing continues to be a good match for our lower risk first lien assets.
We believe that Securitizations are attractive financing structures as they have a 12 year stage of maturity and generally have four to five year reinvestment periods.
Arthur Penn: In March, PFLT closed on a new $361 million dollar securitization financing with a weighted average spread of 1.59%. a four-year reinvestment period and a 12-year final maturity. The ratio of external debt to PFLT's junior capital was 3.2 times to 1. In April, we amended the truest revolving credit facility and reduced the interest rate on the facility to SOFR plus 200 from SOFR plus 225. The amendment also extended the revolving period of final maturity by one year to August 2028 and August 2030, respectively.
Speaker Change: In March P. F. L. T closed on a new $361 million securitization financing with a weighted average spread of 1.59%.
Speaker Change: A four year reinvestment period, and a 12 year final maturity.
Speaker Change: The ratio of external debt the P. F. L. T S Junior capital was three two times to one.
Speaker Change: In April we amended the true its revolving credit facility and reduced the interest rate on the facility to silver plus 200 from silver plus 225. The amendment also extended the revolving period and final maturity by one year to August 2028 in August 2030, respectively.
Arthur Penn: Our PSSL joint venture has also taken significant strides in bolstering its financial strength as well. As of March 31st, the JV portfolio totaled $1.1 billion and during the quarter invested $60 million in four new and five existing portfolio companies at a weighted average yield of 9.8%, including $53 million of assets purchased from PFLT. In April, again accessing attractive securitization financing, PSSL closed on a new financing at an attractive weighted average price of SOFR plus 1.71%. PSSL has $350 million of additional committed capital, debt and equity capital, and can grow its total portfolio to $1.5 billion.
Speaker Change: Our P. S. L. P. S. S. L. Joint venture has also taken significant strides in bolstering its financial strength as well as of March 31st the JV portfolio totaled $1 1 billion.
Speaker Change: And during the quarter invested 60 million in four new and five existing portfolio companies at a weighted average yield of nine 8%, including $53 million of assets purchased from P. F. L T.
Speaker Change: In April again, accessing attractive securitization financing P. S. S. L closed on a new financing and.
Speaker Change: An attractive weighted average price of silver plus 1.71%.
Speaker Change: P. S. S. L has $350 million of additional committed capital debt and equity capital and can grow its total portfolio to $1 $5 billion.
Speaker Change: We believe that the increasing scale of the JV is balance sheet will continue to drive attractive mid teens return on invested capital and enhance P. F L T's earnings momentum.
Arthur Penn: We believe that the increase in scale of the JV's balance sheet will continue to drive attractive mid-teens' return on invested capital and enhance PFLT's earnings momentum. Our financial strength was also substantially enhanced by attractive equity capital raised from our ATM program. Over the last 12 months we have raised meaningful equity capital through this program. This includes $163 million raised during the quarter ended March 31st from the issuance of 14.4 million shares of our common stock at an average price of $11.33 per share. As a result of our capital activities over the last 12 months, PFLT has over $500 million of available capital.
Speaker Change: Our financial strength was also substantially enhanced by attractive equity capital raised from our ATM program.
Speaker Change: Over the last 12 months, we've raised meaningful equity capital through this program. This includes a 163 million raised during the quarter ended March 31st from the issuance of 14.4 million shares of our common stock at an average price of $11 33 per share.
Speaker Change: As a result of our capital activities over the last 12 months P. F. L. T is over 500 million of available capital.
Arthur Penn: That availability, along with the JV having $350 million of committed capital, brings the total overall capacity of the platform to approximately $850 million.
Speaker Change: That availability along with the JV, having $350 million of committed capital brings the total overall capacity of the platform to approximately $850 million.
Arthur Penn: As a result, we believe that we are well positioned from both a defensive and offensive perspective in this current market environment. From an Outlook perspective, our experienced and talented team and our wide origination funnel is well set up to produce active deal flow. Our continued focus remains on capital preservation and being patient investors. Our mission and goal are a steady, stable, and protected dividend stream, coupled with the preservation of capital. Everything we do is aligned to that goal. We seek to find investment opportunities in growing middle market companies that have high free cash flow conversion.
Speaker Change: As a result, we believe that we are well positioned from both a defensive and offensive perspective in this current market environment.
Speaker Change: From an outlook perspective, our experienced and talented team and our wide origination funnel is well set up to produce active deal flow are continuing to focus remains on capital preservation and being patient investors, our mission and goal or a steady stable and protected dividend stream coupled with the preservation of capital everything we do is aligned to that goal.
Speaker Change: We seek to find investment opportunities and growing middle market companies that have high free cash flow conversion, we capture that free cash flow primarily in first lien senior secured instruments and we pay out those contractual cash flows in the form of dividends to our shareholders let.
Arthur Penn: We capture that free cash flow primarily in first lien senior secured instruments. 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 detail. Thank you, Art. For the quarter ended March 31st, GAAP net investment income was $0.28 per share and CORE net investment income was $0.28 per share. If adjusted for the additional shares issued during the quarter, CORE NII would have been $0.30 per share. Operating expenses for the quarter were as follows, interest and expenses on debt were $23 million, base management and performance-based incentive fees were $11.9 million, general and administrative expenses were $1.85 million, and provision for taxes was $0.2 million.
Speaker Change: Let me now turn the call over to Rick our CFO to take us through the financial results in detail.
Rick: Thank you art for the quarter ended March 31st GAAP net investment income was 28 per share and core net investment income was 28 cents per share if.
Rick: If adjusted for the additional shares issued during the quarter core NII would have been <unk> 30 per share.
Rick: Operating expenses for the quarter were as follows interest and expenses on debt were 23 million base management and performance based incentive fees were $11 9 million general and administrative expenses were $1 $85 million and provision for taxes was <unk> 2 million.
Richard Allorto: For the quarter ended March 31st, net realized and unrealized change on investments, including provision for taxes, was a loss of $23.8 million. As of March 31st, NEV was $11.07 per share, which is down 2.4% from $11.34 per share last quarter. As of March 31, our debt-to-equity ratio was 1.3 times, and our capital structure is diversified across multiple funding sources, including both secured and unsecured debt.
Rick: But for the quarter ended March 31, net realized and unrealized change on investments, including provision for taxes was a loss of $23 8 million.
Rick: As of March 31.
Rick: <unk> was $11.07 per share, which is down two 4% from $11 34 per share last quarter.
Rick: As of March 31, our debt to equity ratio was one three times and our capital structure is diversified across multiple funding sources, including both secured and unsecured debt.
Richard Allorto: As of March 31st, our key portfolio statistics were as follows. The portfolio remains highly diversified with 159 companies across 49 different industries. The weighted average yield on our debt investments was 10.5% and approximately 100% of the debt portfolio is floating rate. Pick income for the quarter equals only 3% of total interest income. We had four non-accruals, which represent 2.2% of the portfolio at cost and 1.2% at market value. After quarter end, two of these non-accruals came off non-accrual and pro forma, non-accruals represent only 1% of the portfolio at cost and 0.5% at market value. The portfolio is comprised of 90% first lien senior secure debt, less than 1% in subordinated debt, 3% in equity of PSSL and 7% in other equity.
Rick: As of March 31, our key portfolio statistics, whereas follows the portfolio remains highly diversified with 159 companies across 49 different industries.
Rick: The weighted average yield on our debt investments was 10, 5% and approximately 100% of the debt portfolio is floating rate.
Rick: Pik income for the quarter equaled only 3% of total interest income.
Rick: Yeah.
Rick: We had four non accruals, which represent two 2% of the portfolio at cost and one 2% at market value.
Rick: After quarter end two of these non accruals came off nonaccrual and pro forma non accruals represent only 1% of the portfolio at cost and <unk>, 5% at market value.
Rick: The portfolio is comprised of 90% first lien senior secured debt.
Rick: Less than 1% in subordinated debt.
Rick: 3% in equity of PSS L.
Rick: And 7% in other equity.
Richard Allorto: Our debt to EBITDA ratio on the portfolio is 4.2 times and the interest coverage was 2.3 times.
Rick: Our debt to EBITDA ratio on the portfolio is four two times and the 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.
Art Penn: Thanks, Rick and closing.
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: I'd like to thank our dedicated and talented team of professionals for their continued commitment to P. F L T and its shareholders.
Art Penn: You all for your time today and for your investment and confidence in us.
Operator: That concludes our remarks at this time.
Art Penn: That concludes our remarks at this time.
Operator: I would like to open up the call to questions.
Art Penn: I would like to open up the call to questions.
Speaker Change: I would like to ask a question please.
Art Penn: Yes.
Art Penn: On your telephone keypad.
Art Penn: Ed.
Art Penn: On a speaker phone. Please make sure your mute function is turned off.
Art Penn: Our equipment.
Art Penn: Press Star one to ask a question.
Speaker Change: And our first question is going to come from Robert Dodd.
James: James Please go ahead.
Operator: Hi guys, I apologize for the background noise. start with.
Robert Dodd: Hi, guys I apologize for that.
James: Okay.
James: Let's start with all of them.
Mickey Schleien: On the equity-raising journey... Were you seeing a... was this kind of like just a long-term, um... Are we seeing an increase in pipelines?
James: Equity raising.
James: Sure.
James: What are you seeing.
James: Is this just a.
James:
James: Okay.
James: Are you seeing a.
James: Hi.
You bet.
James: Yeah.
Arthur Penn: Thank you for watching. or you know, which kind of, how would you characterize kind of the, the, the voter... Yeah, so it's a great question. Look, we had a very robust 2024, originating about $4 billion across the entire PennantPark platform, including PFLT. And we were gearing up to have a very robust 2025 again. So the ATM raise, along with all these debt capital raises, the securitization, redialing the credit facility, were setting the table for a robust 2025.
James: Yeah.
James: Domestic.
James: Okay.
Speaker Change: Which kind of how would you characterize kind of the motivation.
Speaker Change: Yeah. So it's a great question look we had a very robust 2020 for originating about 4 billion across the entire pennant Park Plaza platform, including P. F. L T.
Speaker Change: And we were gearing up to have a very robust 2025 again, so the ATM raise along with all of these debt capital raises the securitization re dialing the credit facility.
Speaker Change: We're setting the table for a robust 2025.
Speaker Change: And then liberation day happened and kind of you know activity slowed down substantially.
Arthur Penn: um... and then liberation day happened and kind of you know activity slowed down substantially That's left us in a really good position though, you know, we raised all this capital, you know, kind of the ATM, we raised the capital and average stock price of $11.33 per share, which is in excess of quarter end NAV. So that was accretive, quarter end NAV ended up $11.07. So it turned out that we really raised this kind of really nice war chest. And we're hoping that now that, you know, the tariff situation seems to be clearing up a bit, we will be able to deploy, you know, that capital and ramp into it, you know, over the coming six to nine to 12 months, you know, activity, you know, even in a normalized environment, there's always activity in the core middle market.
Speaker Change: And that's left us in a really good position, though you know we we raised all this capital you know kind of the ATM, we raised the capital in average stock price of $11 33.
Speaker Change: Per share.
Speaker Change: Which is in excess of a quarter and then a V. So that was accretive a quarter and then ended up 11 O. Seven so it turned out that we really raised this kind of really nice war chest.
Speaker Change: And we're hoping that now that the tariff.
Situation seems to be clearing up a bit we will be able to deploy that capital in a ramp into it.
Speaker Change: You know over the coming six to nine to 12 months.
Speaker Change: Activity, even in a normalized environment, there's always activity in the core middle market. So we're hopeful we can we can do that.
Operator: So we're hopeful we can do that, you know, over the next, you know, time period.
Speaker Change: You know over the next time period.
Speaker Change: Got it appreciate it that's all.
Operator: Gotta appreciate that.
Operator: On, on, on that, um...
Speaker Change: Hum.
Mickey Schleien: Liberation Day China, it could change the land... What do you think is necessary? Unlock 4 for kind of platform M&A, I mean it's prepared by... follow on in the near term. I mean, is it just certainty in tariffs or is it tariffs returning? Wall Park to where they were.
Speaker Change: At this stage.
Speaker Change: Change the landscape.
Speaker Change: What do you think is necessary to.
Speaker Change: Sure.
Speaker Change: What kind of.
Speaker Change: Yeah.
Speaker Change: Bob You said you expect to be.
Speaker Change: Paul wanted to niche.
Speaker Change: Yeah.
Speaker Change: I mean is it is it just certainty.
Speaker Change: Is it.
Speaker Change: But oh.
Speaker Change: To where they were.
Arthur Penn: Deliberation Day. I mean, what does it take to unlock new era? Yeah, so, as I said, most of our, you know, the tariff exposure to the portfolio is very limited. You know, we're in things like health care and government services and defense and other areas that really are not impacted by tariffs. So it's really been the uncertainty that has slowed things down. And certainly tariff-impacted deals are going to be, it's going to take a while for those to rev back up. That I think will require certainty of tariffs. I think for the non-tariff, you know, non-tariff-related names, it's just going to be certainty of the environment and so people can start making decisions again.
Speaker Change: Okay.
Speaker Change: What does it take to them.
Speaker Change: M&A activity.
Speaker Change: Yeah. So as I said most of our you know are the the tariff exposure to the portfolio has very limited you know we're more in things like health care and government services defense and other areas that really are not impacted by tariffs. So it's really been the uncertainty.
Speaker Change: That has slowed a slow things down and then certainly tariff impacted deals.
Speaker Change: Deals are and are going to be it's going to take a while for those two to ramp back up to that I think will will require certainty of tariffs I think for the non tariff.
Speaker Change: In our non tariff related names, it's just gonna be certainty of the environment and and so people can start making decisions again, we're starting to see some activity.
Arthur Penn: We're starting to see some activity. Not a flood by any stretch, but we're starting to see some stabilization. We're starting to get more active.
Speaker Change: It's not a flood by any stretch, but we're starting to see some stabilization we're starting to get more active it's early days, though.
Operator: It's early days though.
Speaker Change: Got it got it. Thank you one last one.
Mickey Schleien: One last one, on the nautical restructuring post-quarter end, I assume there was some extra So of the income production that was put on the call, how much of the income... And obviously, all the assets going off, not at all, but what kind of income? Yeah, so when you add them up, it's ZIPS, which has done its restructuring. It's 4WALL, which the restructuring will be done in the next couple of weeks. It's Integrative Nutrition, which has been done and completed. On a run rate basis, you get back about 60% of your income that you lost and adds up to about a penny a share on a run rate basis.
Speaker Change: On the <unk>.
Speaker Change: Medical restructuring this quarter right.
Speaker Change: There was some exercise.
Speaker Change: So.
Speaker Change: Fee income production that was put on non accrual how much income production comes back.
Speaker Change: Go ahead.
Speaker Change: But.
Speaker Change: Kind of.
Speaker Change: Yeah.
Speaker Change: Do you expect.
Speaker Change: Yeah. So yeah. So when you when you add them up it's a <unk>, which has done its restructuring.
Speaker Change: It's a four wall, which the restructuring will be done in the next couple of weeks.
Speaker Change: Its integrative nutrition, which has been done and completed on a run rate basis, you get back about 60% of your income that you lost and adds up to about a penny a share on a run rate basis. So you know the way we look at it as adjusting for the ATM, we are a 30 cents.
Arthur Penn: The way we look at it is, adjusting for the ATM, we were at $0.30 a share up from $0.28. You add the penny of run rate on the non-accruals, that gets you to $0.31, so you're covering your dividend, and you're still under leveraged. You're at 1.3 times leverage. Our target leverage is 1.5 times. And that doesn't include the growth of the JVPSSL, which has, you know, substantial capital to grow $350 million.
Speaker Change: Share up from 28, you had the penny of run rate on the non accruals that gets you to 31, so you're covering your dividend.
Speaker Change: And Youre still under Levered here, it kind of one three times leverage our target leverage is one five times.
Speaker Change: And that doesn't include the growth of the JV PSL, which has substantial capital to grow 350 million. So kind of we've reloaded the balance sheet at very attractive terms, both debt and equity.
Arthur Penn: So kind of, we've reloaded the balance sheet at very attractive terms, both debt and equity, and are looking forward to, we don't even need the ramp to cover the dividend, we just need to get through these non-accruals, and then ramping more, that's why we said we believe we can comfortably cover the dividend, you know, as we ramp into this vintage.
Speaker Change: And are looking forward to and we don't even need to ramp to cover the dividend, we just need to get through these non accruals and then.
Speaker Change: Ramping more that's why we said we believe we can comfortably cover the dividend.
Speaker Change: As we as we ramp into this vintage.
Speaker Change: Thank you.
Operator: Thank you. Yeah, thank you.
Speaker Change: Thank you.
Speaker Change: Mark.
Speaker Change: Please go ahead.
Speaker Change: Yes, Thank you and good morning.
Mark Hughes: Good morning. The activity with existing bars, like you said, that ought to be sustained, how much of that is say repricing versus growth capital, and is that at an elevated level relative to historical terms, or is it a new platform activity is low and so That's a great question, Mark. On the repricings, that ended.
Speaker Change: Activity with existing borrowers like you said that ought to be sustained how much of that is the repricing versus.
Speaker Change: Growth capital and is that at an elevated level relative to historical terms or is it just that the.
Speaker Change: Our new platform activity is low.
Speaker Change: The existing borrowers are dominating the originations.
Mark: That's a great question Mark.
Speaker Change: On the re pricings that ended deliberation, Dave put in and I guess, that's a good news for of Liberation. They put an end to the re pricings so spreads are.
Arthur Penn: Liberation Day put an end. I guess that's the good news of Liberation Day, put an end to the repricings. So spreads have started to move back up, call it 25 to 50 basis points from pre-Liberation Day. So the vast majority of the activity is existing platforms that are growing.
Speaker Change: We've started to move back up call. It 25 to 50 basis points from pre realization day. So the vast majority of the activity is existing platforms that are growing as we've discussed a prototypical deal for us in the core middle market is a company that starts out of $10 million to $20 million of EBITDA with.
Arthur Penn: As we've discussed, a prototypical deal for us in the core middle market is a company that starts out at 10 to 20 million of EBITDA with a sponsor who wants to grow the company, in many cases through add-on acquisitions. It's a fragmented industry. We give them the debt to do the initial acquisition. We co-invest in the equity because, by and large, the growth is locked. I mean, this company's companies are gonna grow and we arrange for a delay draw or incremental term loan to fuel that growth. So the vast majority of the add-ons are taking $10 or $20 million EBITDA companies.
Speaker Change: The sponsor who wants to grow the company in many cases through add on acquisitions, its a fragmented industry.
Speaker Change: We give them the the debt to do the initial acquisition, we co invest in the equity because by and large.
Speaker Change: The growth is is locked I mean, this company's companies are going to grow and we arrange for a delay draw or incremental term loan to fuel that growth. So the vast majority of the add ons are taking 10 or $20 million EBITDA companies.
Operator: taking them to 30, 40, 50 and above. They get sold or the upper market guys take us out with a covenant light deal. We wish them the best. We have a residual equity co-investment and hopefully that residual equity co-investment gets monetized at some point. very good.
Speaker Change: Taking them to 30, 40 50 and above.
Speaker Change: They get sold or the upper market guys take us out with Covenant light deal.
Speaker Change: We wish them the best we have a residual equity co investment.
Speaker Change: And hopefully that residual equity co investment gets monetized at some point.
Speaker Change: Yeah.
Speaker Change: Very good.
Arthur Penn: Then the question of kind of core middle market versus larger businesses. pretty consistent on your view that the credit in the core middle market is very good, for the reasons you've articulated. Same thoughts around tariff. I think you mentioned https://www.pennantpark.com Sensitivity Yeah, so I mean, with our industry groups, which which are the five we've talked about By and large, they're not. The only one where it might touch is consumer, and in particular, consumer goods, where there's consumer goods that are manufactured overseas, and particularly China. Most of those companies from the first Trump administration had already moved to Vietnam and other jurisdictions.
Speaker Change: This question of kind of core middle market versus larger businesses I think you've been pretty consistent on your view of the credit in the core middle market is very good for the reasons you've articulated.
Speaker Change: The same thoughts around tariffs I think you mentioned that the.
You know when Youre doing health care, it's not gonna be much impacted by tariffs, but any just general observations about.
Speaker Change: There are sensitivity.
Speaker Change: Or are your portfolio versus a larger.
Speaker Change: Businesses.
Speaker Change: Yeah, So I mean with our industry groups, which were which are the five we've talked about.
Speaker Change: By and large they're not the only one where it might touch as consumer and in particular consumer goods or there's consumer goods that are manufactured overseas and particularly China most of those companies.
Speaker Change: From its first Trump administration had already moved to Vietnam and other jurisdictions.
Arthur Penn: uh... but again it's a very limited part of the uh...
Speaker Change: But again, it's a very limited part of the portfolio and again all of these companies in whatever sector are always structured in a way where leverage is low the loan to value is attractive.
Arthur Penn: the portfolio and again all of these companies in whatever sector are always structured in a way where leverage is low, the loan value is attractive and can withstand you know stress whether it be recessionary stress or any kind of shock so you know we think it's a very limited piece of the portfolio and uh... uh...
Speaker Change: And can withstand stress, whether there'd be a recessionary stress or any kind of shock. So.
Speaker Change: We think it's very limited piece of the portfolio and.
Operator: you know and again most of these companies already made their moves from the first trump administration Thank you very much.
Speaker Change: And again most of these companies already made their moves from the first Trump administration.
Speaker Change: Thank you very much.
Speaker Change: Thank you.
Speaker Change: And our next question is going to come from.
Speaker Change: Ladenburg. Please go ahead.
Mickey Schleien: Yes, good morning, Art. I wanted to start by asking you at a high level how you feel about the equilibrium in the private credit market that you target for PFLT. You know, I think you said in your prepared remarks that you're seeing stabilization of pricing, but at the same time, there's just huge buildup of capital, particularly by private BDCs. So, just want to understand how, you know, sticky you think these spreads are that we're currently seeing. So, you know, again, we're focused on the 10 to 50 million of EBITDA. The mega players have moved far up market from that.
Speaker Change: Yes, good morning art.
Art Penn: Wanted to start by asking you at a high level, how you feel about the equal.
Speaker Change: Equilibrium in the private.
Speaker Change: Private credit market that you target for P. F L T.
Speaker Change: I think you said in your prepared remarks that youre seeing stabilization of pricing.
Speaker Change: But at the same time, there's just huge buildup of capital, particularly by private Bdcs. So just want to understand how.
Speaker Change: Sticky you think these spreads are that we're currently seeing.
Speaker Change: Yeah. So you know.
Speaker Change: Again, we're focused on the $10 million to $15 million of EBITDA.
Speaker Change: The Mega players have moved far our market from that.
Arthur Penn: They're competing with a broadly syndicated low market, providing covenant light direct loans. And if you think about the business model, of course, it makes sense for them to write big checks to big companies. That's the business model of those players. And most of the capital raised, private or public, is by many of those big players. So those big guys keep getting bigger. God bless.
Speaker Change: They're competing with the broadly syndicated loan market, providing covenant light direct loans and if you think about the business model of course, it makes sense for them to write big checks to big companies. That's the that's the business model of those of those players.
Speaker Change: And most of the capital raised.
Speaker Change: Private or public is by many of those big players so that those big guys keep getting bigger.
Speaker Change: God bless.
Arthur Penn: That should create more opportunity for those of us focused on the core. If our range today is 10 to 50 of EBITDA, maybe that'll be 10 to 75 of EBITDA a year or two from now as those folks raise additional capital because their business model just doesn't move the needle for them to write a check to a 20 or $30 million EBITDA company enough when they're managing that kind of AUM. We wish them all the best. We want them to raise a lot of capital and we'd like them to continue to move up market, leave more room in the core middle market for us.
Speaker Change: That would that should create more opportunity for those of us focused on the core if our range today is 10 to 50 of EBITDA.
Speaker Change: That'll be 10% to 75 of EBITDA year or two from now as those folks or raise additional capital because their business model just doesn't it just doesn't move the needle for them to write a check to a 20 or $30 million EBITDA company enough. When they are managing that kind of that kind of AUM. So we wish we wish them all the best way, we want them to.
Speaker Change: We raised a lot of capital and we'd like them to move up market continuing to move up market leave more room in the core middle market for us and Theres a handful of other people, we see day in and day out who are peers and our colleagues, who we club deals with who we were.
Mickey Schleien: There's a handful of other people we see day in and day out who are our peers and our colleagues who we club deals with, who we compete with. Those are the same old players. Generally, the competition is what we'd call rational and we're pleased for the big to get bigger because it leaves more room for us. Thanks for that, Art. That's quite helpful.
Speaker Change: We compete with and those are the same old players are generally the competition is what we call rational.
Speaker Change: And.
Speaker Change: We're pleased for the big get bigger because the Leeds leaves more room for us.
Speaker Change: Okay. Thanks for that arc, that's quite helpful and touching on the senior loan fund.
Operator: And touching on the Senior Loan Fund, if I'm not mistaken, PFLP has about a $66 million unfunded equity commitment to the fund. Looks like you've finished your debt funding.
Speaker Change: Mistaken P F O T has about $66 million.
Speaker Change: Unfunded equity commitment to the fund.
Speaker Change: It looks like you finished your debt funding.
Arthur Penn: How quickly do you expect to inject that additional equity into the Senior Loan Fund? Yeah, so in general, you know, as I've said, we have about 850 million of comprehensive capital and the platform 500 PFLT and 350 at the at the joint venture and we think look, obviously depends on M&A right M&A was put on pause to large extent on Liberation Day. But as you know, the core middle market keeps moving. It's not like we're, unlike the upper market, we're not subject to the big cap M&A, which can be lumpier, there's always core market M&A.
Speaker Change: How quickly do you expect to inject that additional equity equity into the senior loan.
Speaker Change: Yeah, Yeah. So in general again as I've said, we have about 850 million of comprehensive capital in the plan.
Speaker Change: Four of 500 P F L T and $3 50 at the <unk>.
Speaker Change: That's a joint venture and we think look obviously it depends on M&A right M&A was put on pause to large extent on liberation day.
Speaker Change: But as you know the core middle market keeps moving its not like worse. Unlike the upper market, we're not subject to the big cap M&A, which can be lumpier, there's always core market M&A. So.
Arthur Penn: So, you know, 6 to 12 months is always a good time frame for us to deploy our excess capital as a general range.
Speaker Change: You know six to 12 months is always a good timeframe for us to deploy our excess capital.
Speaker Change: As it is a general range.
Speaker Change: Yeah.
Speaker Change: Okay. That's it for me this morning I appreciate your time as always thank you.
Mickey Schleien: Okay, that's it for me this morning. I appreciate your time, as always. Thank you. Thanks, Mickey. Thanks.
Mickey: Thanks Mickey.
Speaker Change: And our last question is going to come from Doug Harter from UBS. Please go ahead.
Mickey: Thanks.
Operator: Also, another question on the Senior Loan Fund.
Speaker Change: So another question on the senior loan fund.
Arthur Penn: You know, I know you have excess, you know, financing capacity there today, but you know, I guess, how do you think about, you know, the longer term opportunity to either continue to grow that relationship or possibly add other other parts? That's a great question. Look, the JV and this BDC, PFLT, and our JV and our sister BDC, PNNT, have been really helpful to shareholders from the standpoint of creating incremental return on investment, ROE, return on equity. They've generated very strong returns over time. So we're going to continue to, it can be an end to both, either grow this JV and potentially add another one over time.
Speaker Change: I know you have excess financing capacity there today, but you know I guess, how do you think about the longer term opportunity to either continue to grow that relationship or possibly at other other partners.
Speaker Change: That's a great question look.
Speaker Change: Look the JV in this B D C. P F L T in our JV and our sister BDC P N N T.
Speaker Change: I have been really helpful to shareholders from the standpoint of creating incremental return on investment ROE return on equity.
Speaker Change: We've generated very strong returns over time, so we're going to continue to.
Speaker Change: It can be in and both either grow this JV and potentially add another one over time.
Arthur Penn: You know, you have to find the right partner who's simpatico with you on kind of how you see credit and being able to make investment decisions that are similar and to move in the time frame that our borrower clients need to. We found two, one in each BDC and it's quite conceivable over time we're going to add another JV partner to this BDC PFLT.
Speaker Change: You have to find the right partner, whose simpatico with you on kind of how you see credit and being able to make investment decisions that are similar and to move in the timeframe that our borrower clients need to we found two one in each BDC and it's quite conceivable over time, we're going to we're going to add another JV.
Speaker Change: <unk> to this BDC <unk>.
Speaker Change: Great I appreciate it thank you.
Operator: Great, appreciate it.
Speaker Change: Okay.
Speaker Change: And that concludes today's question and answer session.
Art Penn: I'd now like to turn the conference back over to art.
Art Penn: Additional or closing remarks.
Art Penn: Just wanted to thank everybody for being on the call today and for your interest in <unk>.
Arthur Penn: I just want to thank everybody for being on the call today and for your interest in PFLT. We look forward to speaking to you next in early August after the next earnings report. In the meantime, wishing everybody a terrific spring and early summer. Have a great day.
Art Penn: We look forward to speaking to you next in early August after the next earnings report in the meantime, wishing everybody terrific spring and early summer have a great day.
Art Penn: Okay.
Art Penn: And this concludes today's call. Thank you for your participation you may now disconnect.
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