Q3 2025 PennantPark Floating Rate Capital Ltd Earnings Call

Speaker #2: We do thank you for your patience and ask that you please continue to remain on the line. Please stand by. We're about to begin.

Speaker #2: Good morning and welcome to PennantPark Floating Rate Capital's third fiscal quarter 2025 earnings conference call. At this time, all participants have been placed on listen-only mode.

Speaker #2: The call will open for question and answer session following the speaker's remarks. If you would like to ask a question at that time, simply press *1 on your telephone keypad.

Speaker #2: If you would like to withdraw your question, press *2. It is now my pleasure to turn the call over to Mr. Arthur Penn, Chairman and Chief Executive Officer of PennantPark Floating Rate Capital.

Speaker 2: It is now my pleasure to turn the call over to Mr. Art Penn, Chairman and Chief Executive Officer of PennantPark Floating Rate Capital. Mr. Penn, you may begin your conference.

Speaker #2: Mr. Penn, you may begin your conference.

Speaker #3: Thank you, and good morning, everyone. Welcome to PennantPark Floating Rate Capital's third fiscal quarter 2025 earnings conference call. I'm joined today by Richard Allorto, our Chief Financial Officer.

Art Penn: Thank you and good morning, everyone. Welcome to PennantPark Floating Rate Capital's third fiscal quarter 2025 earnings conference call. I am joined today by Rick Allorto, our Chief Financial Officer. Rick, please start off by disclosing some general conference call information and include a discussion about forward-looking statements.

Speaker #3: Rich, please start off by disclosing some general conference call information and include a discussion about forward-looking statements.

Speaker #4: Thank you, Arthur. 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.

Rick Allorto: Thank you, Art. I'd like to remind everyone that today's call is being recorded. Please note that this call is the property of PennantPark Floating Rate Capital Ltd. and that any unauthorized broadcast of this call in any form is strictly prohibited. An audio replay of the call will be available on our website. I'd also like to call your attention to the customary safe harbor disclosure in our press release regarding forward-looking information. Today's conference call may also include forward-looking statements and projections, and we ask that you refer to our most recent filings with the SEC for important factors that could cause actual results to differ materially from these projections. We do not undertake to update our forward-looking statements unless required by law. To obtain copies of our latest SEC filings, please visit our website at pennantpark.com or call us at 212-905-1000.

Speaker #4: An audio replay of the call will be available on our website. I'd also like to call your attention to the customer safe harbor disclosure in our press release regarding forward-looking information.

Speaker #4: 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 #4: We do not undertake to update our forward-looking statements unless required by law. To obtain copies of our latest SEC filings, please visit our website at pennantpark.com or call us at 212-905-1000.

Speaker #4: At this time, I'd like to turn the call back to our Chairman and Chief Executive Officer Arthur Penn.

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

Speaker #3: Thanks, Rich. I'm going to spend a few minutes discussing how we fared in the quarter and in June 30th, highlight the financing activities we executed during the quarter to strengthen the balance sheets, both PFLT and the PSSL joint venture.

Art Penn: Thanks, Rick. I am going to spend a few minutes discussing how we fared in the quarter ended June 30th. I will highlight the financing activities we executed during the quarter to strengthen the balance sheets of both PFLT and the PSSL joint venture. Then I will comment on our new joint venture, the current market environment for private middle market lending, and how the portfolio is positioned for upcoming quarters. Rick Allorto will conclude with a detailed review of the financials, and then we will open up the call for Q&A. We are seeing an encouraging recent uptick in deal activity, which we believe will lead to increased loan originations in the second half of 2025. Additionally, we continue to provide additional capital to many of our existing portfolio companies as they execute their respective growth plans.

Speaker #3: Then I'll comment on our new joint venture, the current market environment for private middle market lending, and how the portfolio is positioned for upcoming quarters.

Speaker #3: Rich will conclude with a detailed review of the financials, and then we'll open up the call for Q&A. We are seeing an encouraging recent uptick in deal activity, which we believe will lead to increased loan originations in the second half of 2025.

Speaker #3: Additionally, we continue to provide additional capital to many of our existing portfolio companies as they execute their respective growth plans. Our platform continues to prove its strength as we support our existing portfolio companies and private equity borrowers with strategic capital solutions to help grow their businesses.

Art Penn: Our platform continues to prove its strength as we support our existing portfolio companies and private equity borrowers with strategic capital solutions to help grow their businesses. With regard to how we fared in the quarter ended June 30th, the net investment income for the quarter was $0.27 per share. We believe we will achieve net investment income coverage of the dividend as we scale into our target leverage range and as the new joint venture becomes operational. A reminder, prior to Liberation Day, we proactively built a war chest through our ATM program and debt financing activities based on the expectation of sustained deal flow throughout the year. While market activity slowed following Liberation Day, we have seen a notable rebound in recent weeks. Looking ahead, we are encouraged by the strong outlook for the remainder of the year and anticipate continued NII growth and full dividend coverage.

Speaker #3: With regard to how we fared in the quarter ended June 30th, core net investment income for the quarter was $0.27 per share. We believe we will achieve net investment income coverage of the dividend as we scale into our target leverage range and as the new joint venture becomes operational.

Speaker #3: A reminder, prior to liberation day, we proactively built a war chest to our ATM program and debt financing activities based on the expectation of sustained deal flow throughout the year.

Speaker #3: While market activity slowed following liberation day, we have seen a notable rebound in recent weeks. Looking ahead, we are encouraged by the strong outlook for the remainder of the year and anticipate continued NII growth and full dividend coverage.

Speaker #3: We are pleased to announce the formation of a new joint venture with our long-term and trusted partner, Hamilton Lane. The company and Hamilton Lane have committed to provide $200 million of capital to the joint venture and combined with an expected $300 million financing facility, the total portfolio will be $500 million.

Art Penn: We are pleased to announce the formation of a new joint venture with our long-term and trusted partner, Hamilton Lane. The company and Hamilton Lane have committed to provide $200 million of capital to the joint venture, and combined with an expected $300 million financing facility, the total portfolio will be $500 million. Similar to PSSL, the new joint venture will invest in our core middle market directly originated senior secured loans. We anticipate beginning to invest the capital towards the end of September or the beginning of October. 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.

Speaker #3: Similar to PSSL, the new joint venture will invest in our core middle market, directly originated senior secured loans. We anticipate beginning to invest the capital toward the end of September or the beginning of October.

Speaker #3: 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.

Speaker #3: In the core middle market, the pricing on high-quality first lien term loans is over plus $475 to $525 and we continue to get meaningful covenant protections while the upper middle market is primarily characterized as covenant-like.

Art Penn: In the core middle market, the pricing on high-quality first lien term loans is over plus 475 to 525, and we continue to get meaningful covenant protections while the upper middle market is primarily characterized as covenant-like. Earning through our current portfolio, we continue to maintain what we believe is one of the most conservatively structured portfolios in the direct lending industry. As of June 30, our portfolio's weighted average leverage ratio through our debt security was 4.3 times, and the portfolio's weighted average interest coverage ratio was 2.5 times. For new platform investments made during the quarter, the weighted average debt-to-EBITDA was 3.8 times, and the weighted average interest coverage was 2.6 times. The weighted average loan to value was 46%, and the yield to maturity was 10.3%.

Speaker #3: Turning to our current portfolio, we continue to maintain what we believe is one of the most conservatively structured portfolios in the direct lending industry.

Speaker #3: As of June 30th, our portfolio's weighted average leverage ratio through our debt security was 4.3 times, and the portfolio's weighted average interest coverage ratio was 2.5 times.

Speaker #3: Our new platform investments made during the quarter, the weighted average debt to EBITDA was 3.8 times and the weighted average interest coverage was 2.6 times.

Speaker #3: The weighted average loan-to-value was 46%, and the yield-to-maturity was 10.3%. As of June 30th, we had two investments on non-accrual status, and total non-accruals represented only 1% of the portfolio at cost and 0.5% at market value.

Art Penn: As of June 30, we had two investments on non-accrual status, and total non-accruals represented only 1% of the portfolio at cost and 0.5% at market value. These are strong credit metrics, which reflect the rigor of our underwriting process and the discipline of our investment approach. We continue to believe that our focus on core middle market loans provides us with attractive investment opportunities where we provide important strategic capital to our borrowers. We have a demonstrated track record of value creation through the successful financing of growing middle market companies across five key sectors. These are sectors in which we possess deep domain expertise, enabling us to ask the right questions and consistently deliver strong investment outcomes. They are business services, consumer, government services and defense, healthcare, and software and technology.

Speaker #3: These are strong credit metrics, which reflect the rigor of our underwriting process and the discipline of our investment approach. We continue to believe that our focus on core middle-market loans provides us with attractive investment opportunities, where we provide important strategic capital to our borrowers.

Speaker #3: We have a demonstrated track record of value creations through the successful financing of growing middle market companies across five key sectors. These are sectors in which we possess deep domain expertise enabling us to ask the right questions and consistently deliver strong investment outcomes.

Speaker #3: 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 limited direct impact to the recent tariff increases and uncertainty.

Art Penn: 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. Core middle market companies, typically those with $10 million to $50 million of EBITDA, operate below the threshold of broadly syndicated loan or high-yield markets. 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 cushions to protect our capital, attractive spreads, and equity co-investment. Additionally, from a monitoring perspective, we receive monthly financial statements to help us stay on top of the companies. Regarding covenant protections, while the upper middle market has seen significant erosion, our originated first lien loans consistently include meaningful covenants that safeguard our capital.

Speaker #3: Core middle market companies typically those with 10 to 50 million of EBITDA operate below the threshold of broadly syndicated loan or high-yield markets. The core middle market, because we are an important strategic lending partner, the process and package of terms we receive is attractive.

Speaker #3: 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-investment.

Speaker #3: Additionally, from a monitoring perspective, we receive monthly financial statements to help us stay on top of the companies. Regarding covenant protections, while the upper middle market has seen significant erosion, our originated first lien loans consistently include meaningful covenants that safeguard our capital.

Speaker #3: Credit quality since inception over 14 years ago has been excellent. PFLT has invested $7.8 billion in over 500 companies, and we have experienced only 23 non-accruals.

Art Penn: Credit quality since inception, over 14 years ago, has been excellent. PFLT has invested $7.8 billion in over 500 companies, and we have experienced only 23 non-accruals. 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 June 30th, we have invested over $583 million in equity co-investments and have generated an IRR of 26% and a multiple on invested capital of two times. As of June 30th, our portfolio grew to $2.4 billion, up from $2.3 billion in the prior quarter.

Speaker #3: 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.

Speaker #3: Our returns on these equity co-investments have been excellent over time. Overall, for our platform from inception through June 30th, we've invested over $583 million in equity co-investments and have generated an IRR of 26% and a multiple on invested capital of two times.

Speaker #3: As of June 30th, our portfolio grew to $2.4 billion up from $2.3 billion in the prior quarter. During the quarter, we continue to originate attractive investment opportunities and invested $208 million in four new and 17 existing portfolio companies at a weighted average yield of 10.1%.

Art Penn: During the quarter, we continued to originate attractive investment opportunities and invested $208 million in four new and 17 existing portfolio companies at a weighted average yield of 10.1%. During the quarter, we undertook several key initiatives to fortify our balance sheet, enhance liquidity, and position the company to capitalize on emerging market opportunities. In April, we amended the Truist 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 and final maturity by one year to August 2028 and August 2030, respectively. Our financial strength was also enhanced by attractive equity capital raised from our ATM program. During the quarter, we raised $32 million from the issuance of 2.8 million shares of our common stock at an average price of $11.31 per share.

Speaker #3: During the quarter, we undertook several key initiatives to fortify our balance sheet and enhance liquidity and position the company to capitalize on emerging market opportunities.

Speaker #3: In April, we amended the truest revolving credit facility and reduced the interest rate on the facility to show for plus $200, from SOFR plus $225.

Speaker #3: The amendment also extended the revolving period and final maturity by one year to August 2028, and August 2030, respectively. Our financial strength was also enhanced by attractive equity capital raised from our ATM program.

Speaker #3: During the quarter, we raised $32 million from the issuance of 2.8 million shares of our common stock at an average price of $11.31 per share.

Speaker #3: Our PSSL joint venture is also taking significant strides in bolstering its financial strength. As of June 30th, the JV portfolio totaled $1.1 billion, and during the quarter, it invested $52 million in seven new and two existing portfolio companies at a weighted average yield of 10.8%.

Art Penn: Our PSSL joint venture has also taken significant strides in bolstering its financial strength as well. As of June 30th, the JV portfolio totaled $1.1 billion, and during the quarter, it invested $52 million in seven new and two existing portfolio companies at a weighted average yield of 10.8%. In April, PSSL closed on a new securitization financing at an attractive weighted average price of SOFR plus 171. PSSL has $250 million of additional committed debt and equity capital and can grow its total portfolio to $1.4 billion. We believe that the increase in scale of the JVs balance sheet will continue to drive attractive mid-teens returns on invested capital and enhance PFLT's earnings momentum. 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.

Speaker #3: In April, PSSL closed on a new securitization financing and an attractive weighted average price of SOFR plus $171, PSSL has $250 million of additional committed debt and equity capital and can grow its total portfolio to $1.4 billion.

Speaker #3: We believe that the increase in the scale of the JV's balance sheet will continue to drive attractive mid-teens returns on invested capital and enhance PFLT's earnings momentum.

Speaker #3: From an outlook perspective, our experienced and talented team and our wide origination funnel are well set up to produce active deal flow. Our continued focus remains on capital preservation and being patient investors.

Speaker #3: 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.

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

Speaker #3: We seek to find investment opportunities and growing middle market companies that have high free cash flow conversion, recapture 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.

Speaker #3: Let me now turn the call over to Rich, our CFO, to take us through the financial results in more detail.

Speaker #4: Thank you, Arthur. For the quarter ended June 30th, GAAP net investment income was $0.25 per share, while core net investment income was $0.27 per share.

Rick Allorto: Thank you, Art. For the quarter ended June 30th, GAAP net investment income was $0.25 per share, while core net investment income was $0.27 per share. Operating expenses for the quarter were as follows: Interest and expenses on debt were $25.4 million. Base management and performance-based incentive fees were $11.3 million. General and administrative expenses were $1.95 million, and provision for taxes was $0.2 million. For the quarter ended June 30th, net realized and unrealized change on investments, including provision for taxes, was a loss of $5.3 million. As of June 30th, NAV was $10.96 per share, which is down 1% from $11.07 per share last quarter. As of June 30th, 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.

Speaker #4: Operating expenses for the quarter were as follows: interest and expenses on debt were $25.4 million, base management and performance-based incentive fees were $11.3 million, general and administrative expenses were $1.95 million, and the provision for taxes was $0.2 million.

Speaker #4: For the quarter ended June 30th, net realized and unrealized change on investments including provision for taxes was a loss of 5.3 million. As of June 30th, NAV was $10.96 per share, which is down 1% from $11.07 per share last quarter.

Speaker #4: As of June 30th, 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.

Speaker #4: As of June 30th, our key portfolio statistics were as follows: the portfolio remains well diversified, comprising 155 companies across 50 industries. The weighted average yield on our debt investments was 10.4%, and approximately 99% of the debt portfolio is floating rate. Fixed income equaled only 1.8% of total interest income. We had two non-accruals, which represent 1% of the portfolio at cost and 0.5% at market value. The portfolio is comprised of 90% first lien senior secured debt, less than 1% in subordinated debt, 2% in equity of PSSL, and 8% in equity co-investments.

Rick Allorto: As of June 30th, our key portfolio statistics were as follows: The portfolio remains well diversified, comprising 155 companies across 50 industries. The weighted average yield on our debt investments was 10.4%, and approximately 99% of the debt portfolio is floating rate. Base income equals only 1.8% of total interest income. We have two non-accruals, which represent 1% of the portfolio at cost and 0.5% at market value. The portfolio is comprised of 90% first lien senior secured debt, less than 1% in subordinated debt, 2% in equity of PSSL, and 8% in equity co-investments. The debt-to-EBITDA on the portfolio is 4.3 times, and interest coverage was 2.5 times. Now let me turn the call back to Art.

Speaker #4: The debt-to-EBITDA on the portfolio is 4.3 times and interest coverage was 2.5 times. Now let me turn the call back to Arthur.

Speaker #3: Thanks, Rich. In conclusion, I want to express my gratitude to our dedicated team of professionals, for their unwavering commitment to PFLT and its shareholders.

Art Penn: Thanks, Rick. In conclusion, I want to express my gratitude to our dedicated team of professionals for their unwavering commitment to PFLT and its shareholders. Thank you all for your time today and for your investment and confidence in us. That concludes our remarks. At this time, I would like to open up the call for questions.

Speaker #3: Thank you all for your time today and for your investment and confidence in us. That concludes our remarks. At this time, I would like to open up the call for questions.

Speaker #1: Thank you. If you are dialed in via the telephone and would like to ask a question, please signal by pressing *1 on your telephone keypad.

Speaker 2: Thank you. If you are dialed in via the telephone and would like to ask a question, please signal by pressing star one on your telephone keypad. If you are joining us today using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star one to ask a question. If you are in the event via the web interface and would like to ask a question, simply type your question in the ask a question box and click send. We will pause for just a moment. We will take your first question from Brian McKenna with Citizens.

Speaker #1: If you are joining us today using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment.

Speaker #1: Again, press *1 to ask a question. If you are in the event via the web interface and would like to ask a question, simply type your question in the Ask a Question box and click Send.

Speaker #1: We'll pause for just a moment. We will take your first question from Brian McKenna with Citizens.

Speaker #5: Thanks. Good morning, everyone. Congratulations on the new JV with Hamilton Lane. Just a few questions here: if this pickup and acceleration in deal activity continues, how much of the $500 million could you deploy over the next few quarters?

Brian McKenna: Thanks. Good morning, everyone. Congratulations on the new JV with Hamilton Lane. Just a few questions here. If this pickup in the acceleration in deal activity continues, how much of the $500 million could you deploy over the next few quarters? How are you thinking about the potential accretion from the JV within the P&L at PFLT? Obviously, Hamilton Lane is getting access to high-quality core middle market deal flow and transactions. But is there anything you can leverage from the Hamilton Lane platform to drive better outcomes for the JV as well?

Speaker #5: How are you thinking about the potential accretion from the JV within the P&L at PFLT and then obviously Hamilton Lane is getting access to high-quality core middle market deal flow and transactions.

Speaker #5: But is there anything you can leverage from the Hamilton Lane platform to drive better outcomes for the JV as well?

Speaker #6: A A bunch of great questions in there, Brian. Let's make sure I hit them all. In terms of being able to ramp it, I think we think of it as kind of a 12-month ramp for the $500 million.

Art Penn: A bunch of great questions in there, Brian. Let us make sure I hit them all. In terms of being able to ramp it, I think we think of it as kind of a 12-month ramp for the $500 million, maybe 18 months on the outside. In light of our platform, we think of it as a 12 to 18-month ramp. As you have seen the two other JVs we have had in our platform, both PennantPark Floating Rate Capital Ltd. and PennantPark Investment Corporation, these things can, if done well, and we hope it will be well in a good simpatico with Hamilton Lane, they can grow very substantially above and beyond that.

Speaker #6: Maybe 18 months on the outside, but in light of our platform, we think of it as a 12 to 18-month ramp. As you've seen, the two other JVs we've had in our platform, both the PFLT and P&NT, these things can, if done well—and we hope it will be—well in a good simpatico with Hamilton Lane. They can grow very substantially above and beyond that.

Speaker #6: So our goal would be this is a long-term partnership. With this JV, then it grows from $500 million to something larger over time. We've been able to get kind of NII dividend yields on these JVs in the mid to upper teens between the PSSL one here and PFLT as well as PSSL over P&NT, kind of mid to upper teens.

Art Penn: Our goal would be this is a long-term partnership with this JV and that it grows from $500 million to something larger over time. We have been able to get kind of net investment income dividend yields on these JVs in the mid to upper teens between the PennantPark Senior Secured Loan Fund I LLC here and PennantPark Floating Rate Capital Ltd., as well as PFLF over PennantPark Investment Corporation, kind of mid to upper teens returns on a net investment income basis on the capital invested. You can model the $150 million we are putting in and put a mid to upper teens net investment income return on that and see what that means. Over time, we hope it is a really great long-term partnership. We have had a lot of exposure to Hamilton Lane to date, and that is kind of what led the way to this.

Speaker #6: Returns on an NII basis on the capital invested, so you could model the $150 million we're putting in and put a mid- to upper-teens NII return on that and see what that means.

Speaker #6: But over time, we hope it's a really long-term, great partnership. We've had a lot of exposure to Hamilton Lane to date, and that's kind of what led the way to this. We think there's a real simpatico around credit and how we look at things.

Art Penn: We think there is a real simpatico around credit and how we look at things. Yes, we expect all these JVs, the other JVs we have as well, to be real partnerships where both parties contribute ideas and diligence and thoughts with what is going on in the economy. Hamilton Lane has a lot of great relationships with private equity sponsors and other people that we could be doing business with. We expect and hope that they will help us in that regard. We are very excited about it.

Speaker #6: And then, yes, we expect all these JVs, the other JVs we have as well, to be real partnerships where both parties contribute ideas and diligence and thoughts with what's going on in the economy, Hamilton Lane has a lot of great relationships with private equity sponsors and other people that we could be doing business with.

Speaker #6: So we expect and hope that they will help us in that regard. So we're very excited about it.

Speaker #5: Okay. That's really helpful. Thanks, Arthur. And then maybe just a little bit of a bigger picture question. You and the team have clearly done a great job growing your public BDCs.

Brian McKenna: Okay, that is really helpful. Thanks, Art. You know, maybe just a little bit of a bigger picture question. You and the team have clearly done a great job growing your public BDCs in aggregate to market caps for both PFLT and PNT, total about $1.5 billion. I am curious, though, what are your longer-term growth plans for both of these vehicles? I think I asked you this almost every quarter, but at what point or size does it make sense to merge them? Assuming you ultimately have one public BDC longer term, would you ever think about internalizing the corporate structure?

Speaker #5: In aggregate, the market caps for both PFLT and P&NT total about $1.5 billion. I'm curious, though, what are your longer-term growth plans for both of these vehicles?

Speaker #5: And I think I've asked you this almost every quarter, but at what point or size does it make sense to merge them? And then, assuming you ultimately have one public BDC longer term?

Speaker #5: I mean, would you ever think about internalizing the corporate structure?

Speaker #6: So in terms of the first question, growth, we're not the type of firm to sit here and put kind of growth parameters out there and then kind of have goals because we think that's antithetical to credit quality and investment selection.

Art Penn: So, in terms of the first question, growth, we are not the type of firm to sit here and put growth parameters out there and then have goals because we think that is antithetical to credit quality and investment selection. In a business where you have quality on one scale and quality on the other, clearly we focus on quality. So the growth will be organic based on the opportunity in the market and where it makes sense to invest. The growth will be the growth edge, as you have seen over all these years, and it will be based on the market opportunity. You do ask the same question every quarter, Brian, about potentially merging, and the answer every quarter, and you can record this and play back to yourself going forward, is all things are always on the table.

Speaker #6: So in a business where where you have quality on one scale and quality on the other, clearly we focus on quality. So the growth will be organic based on the opportunity in the market.

Speaker #6: And where it makes sense to invest. So, the growth will be the growth, as you've seen over all these years, and it'll be based on kind of the market opportunity.

Speaker #6: You do ask the same question every quarter, Brian, about potentially merging, and the answer every quarter—and you can record this and play it back to yourself going forward.

Speaker #6: All things are always on the table. That said, P&NT, we still got to work through some equity rotation issues at P&NT. So our main focus there is to do that.

Art Penn: That said, PennantPark Investment Corporation, we still have to work through some equity rotation issues at PennantPark Investment Corporation. So, our main focus there is to do that. Then once we do that, we can come up for air and assess all the different options that are available in the world. We, of course, put shareholder value as number one, what is best for shareholders. That is always our north star when we look at these things.

Speaker #6: And then once we do that, we can come up for air and assess all the different options that are available in the world. We, of course, put shareholder value is number one.

Speaker #6: What's best for shareholders? And that's always our North Star when we look at these things.

Speaker #5: All right. It was worth a shout. Appreciate all the color here, Arthur.

Brian McKenna: All right, it was worth the shot. Appreciate all the color here, Art.

Speaker #6: Thank you.

Art Penn: Thank you.

Speaker #1: We'll hear next from Aaron Saganovich from Truist.

Speaker 2: will hear next from Aaron Cyganovich from Truist.

Speaker #7: Thanks. You mentioned in your press release that you expect that NII will, or you anticipate that NII will fully cover the dividend over time.

Aaron Cyganovich: Thanks. You mentioned in your press release that you expect that net investment income will, or you anticipate that net investment income will fully cover the dividend over time. Maybe you could talk a little bit about timing associated with that or expectations as you go throughout the rest of the year.

Speaker #7: Maybe you could talk a little bit about timing associated with that or expectations as you go throughout the rest of the year.

Speaker #6: Yeah. So look, we have it's a good question, Aaron, and welcome back to PennantPark and PFLT. We have three levers of NII growth. At the company, lever one is leveraging up to our target leverage ratio of about one and a half times area or below that.

Art Penn: Yeah, so look, we have, there's a good question, Aaron, and welcome back to PennantPark and PFLT. We have three levers of net investment income growth at the company. Lever one is leveraging up to our target leverage ratio of about 1.5 times area. We're below that, as of quarter end. So that's lever number one. Lever number two is filling out PSSL I, that's the Kemper JV. As we said, we've got some more capital to deploy there before that's kind of full at this point in time. Of course, you can always grow these things once you get full, but that's kind of lever number two. And then lever number three is the new Hamilton Lane JV, PSSL II. As I just said, that's probably a 12 to 18-month ramp.

Speaker #6: As of quarter end, so that's lever number one, lever number two is filling out PSSL one, that's the Kemper JV. As we said, we've got some more capitals to deploy there before that's kind of full at this point in time.

Speaker #6: Of course, you can always grow these things once you get full, but that's kind of lever number two. And then lever number three is the new Hamilton Lane JV, PSSL II.

Speaker #6: As I just said, that's probably 12 to 18-month ramp. So we think as we pull those levers, one, two, and three, we'll target covering certainly covering the dividend, if not more.

Art Penn: So we think as we pull those levers, one, two, and three, we'll target covering, certainly covering the dividend, if not more. You guys can do the model. You're an expert at modeling, but our models show that between those levers, we can more than cover the dividend over time.

Speaker #6: You guys can do the model. You're an expert in modeling, but our model showed that between those levers, we can more than cover the dividend over time.

Speaker #7: That's helpful. Thanks. Credit quality continues to be very strong. Can you talk a little bit about what you're seeing at the portfolio company level in terms of some of the metrics there, in terms of EBITDA growth, etc.?

Aaron Cyganovich: That's helpful. Thanks. Credit quality continues to be very strong. Can you talk a little bit about what you're seeing at the portfolio company level in terms of some of the metrics there in terms of debt-to-EBITDA growth, et cetera?

Speaker #6: Yeah. Look, EBITDA is continues to grow nicely in general, kind of mid to upper single digits overall. Certainly, it's dependent on the underlying company, the industry, but you could see non-accruals are relatively light.

Art Penn: Yeah, look, EBITDA continues to grow nicely in general, kind of mid to upper single digits overall. Certainly, it's dependent on the underlying company, the industry, but you know, you could see non-accruals are relatively light. We hope to keep them that way. You can also see that we're keeping leverage level on both new deals and the overall portfolio low as well. New deals, 3.8 times debt-to-EBITDA, 2.6 times interest coverage. Overall portfolio, 4.7 times debt-to-EBITDA, 2.5 times coverage. A very limited pick in this portfolio. That's what happens when you keep leverage low. Again, we feel like we are among the lowest risk in our peer group, in addition to the fact that we still get covenants that are meaningful to protect the capital. So, you know, the portfolio is chugging along well, of course, like any portfolio with, you know, 150 names or so.

Speaker #6: We hope to keep them that way. You can also see that we're keeping leverage levels on both new deals and the overall portfolio low as well.

Speaker #6: New deal: 3.8 times debt to EBITDA; 2.6 times interest coverage. Overall portfolio: 4.7 times debt to EBITDA. Two and a half times coverage in a very limited pick in this portfolio.

Speaker #6: That's what happens when you keep leverage low. Again, we feel like we are among the lowest risk in our peer group. In addition to the fact that we still get covenants that are meaningful to protect the capital.

Speaker #6: So the portfolio is chugging along well, of course. Like any portfolio with 150 names or so, there's going to be a few underperformers, and there are, but overall, we are seeing a relatively strong situation with the portfolio.

Art Penn: There's going to be a few underperformers, and there are, but overall, we are seeing a relatively strong situation with the portfolio.

Speaker #7: Great. Thanks, Arthur.

Aaron Cyganovich: Great. Thanks, Art.

Speaker #1: And as a reminder, ladies and gentlemen, that is the cirque followed by the digit one. We'll move next to Christopher Nolan from Ladenburg, Tullman.

Speaker 2: As a reminder, ladies and gentlemen, that is the circuit followed by the digit 1. We will move next to Christopher Nolan from Ladenburg Thalmann.

Speaker #8: Hey, guys. Arthur, is the high or I guess Rick, is the high level of unrestricted cash at quarter end going to be directed towards the JV?

David Brown: Hey guys. Art, is the high, or I guess Rick, is the high level of unrestricted cash at quarter end going to be directed towards the JV?

Speaker #7: Hi, Chris. Good morning. That cash, some of it, yes, will be used for the JV. Quarter end tends to be a high collection period, so it's just some part of that cash balance is just a timing from a cash management of working capital perspective in terms of using it to deploy and fund new investments versus temporarily pay down debt.

Rick Allorto: Hey Chris, good morning. That cash, some of it, yes, will be used for the JV. Quarter end tends to be a high collection period. So it's just some part of that cash balance is just a timing from a cash management working capital perspective in terms of using it to deploy and fund new investments versus, you know, temporarily pay down debt, waiting for new opportunities.

Speaker #7: Waiting for new opportunities.

Speaker #8: Great. And Arthur, strategically, given the comments you gave on the lending market, are you expected to see improved loan pricing power given what seems to be increased appetite for leverage by middle market companies?

David Brown: Great. Art, strategically, given the comments you gave on the lending market, are you expected to see improved loan pricing power given what seems to be increased appetite for leverage by middle market companies?

Speaker #7: Yeah. Thanks, Chris. And by the way, welcome back to PennantPark as well. It's good to see you back. On the case, we certainly hope so.

Art Penn: Yeah, thanks, Chris. Welcome back to PennantPark as well. Good to see you back on the case. We certainly hope so. Spreads have certainly come down over the last year, year and a half. Today, 475 to 525 is kind of the range. We hope that an increased supply will give us an opportunity to maintain and then maybe expand those spreads. Constitutionally, though, lessons learned over many years is credit first. We are generally okay if the credit is excellent, taking a slightly lower spread because, of course, non-accruals are really what gets you and where the pain is felt in these portfolios. We are going to be trying to get more spread if we can. At the same time, most importantly, select excellent credit. Hopefully, with more supply, there will be an opportunity to get more spread, but of course, no guarantees.

Speaker #7: I mean, spreads have certainly come down over the last year, year and a half. Today, 4.75% to 5.25% is kind of the range. We hope that an increased supply will give us an opportunity to maintain and maybe expand those spreads.

Speaker #7: Constitutionally, though, kind of lessons learned over many years is credit first. So we're generally okay if the credit's excellent, taking a slightly lower spread.

Speaker #7: Because, of course, non-accruals are really what gets you and where the pain is felt in these portfolios. So we're going to be trying to get more spread if we can.

Speaker #7: At the same time, and most importantly, select excellent credit. So hopefully with more supply, there will be an opportunity to get more spread, but of course, there are no guarantees.

Speaker #8: Great. Thanks for that. Thanks for the welcome, and good to be covering you guys again. See you.

David Brown: Great. Thanks for that. Thanks for the welcome. Good to be covering you guys again soon.

Speaker #7: Thanks, Chris.

Art Penn: Thanks, Chris.

Speaker #1: We'll hear next from Miheli Chef from Raymond James.

Speaker 2: will hear next from Michael Scheff from Raymond James.

Speaker #9: Morning. Thanks for the question. So going back to the recent rebound in M&A activity, is there any sort of makeshift in terms of what's in the pipeline or where dollars are being deployed?

Michael Scheff: Morning. Thanks for the question. Going back to the recent rebound in M&A activity, is there any sort of makeshift in terms of what's in the pipeline or where dollars are being deployed, whether it's the industries you're investing in or whether it's incumbent borrowers versus new borrowers or sponsor versus non-sponsor?

Speaker #9: Whether it's the industry you're investing in or whether it's incumbent borrowers versus new borrowers or sponsor versus non-sponsor?

Speaker #7: Yeah. Great question, Heli. So up to about a month ago, I would have said it's mostly incumbencies where we're doing delayed drawdowns or add-on loans to existing companies.

Art Penn: Yeah, great question, Healy. Up to about a month ago, I would have said it is mostly incumbencies where we are doing delayed draw, drawdowns, or add-on loans to existing companies. Again, most of our prototypical deals are where we start with a company that is being bought from a founder, a family, an entrepreneur by a middle market private equity firm. It does between 10 and 20 EBITDA. It is a fragmented industry. The private equity firm wants to do a consolidation play in a fragmented industry. We come in, we provide the capital to do the initial deal and then add on loans, whether delayed draw or otherwise, to take that 10 to 20 million EBITDA company up to 30, 40, 50, and above. In that case, we become kind of a strategic partner. Our capital is the fuel to drive that growth.

Speaker #7: Again, most of our prototypical deals are where we start with a company that's being bought from a founder, a family, an entrepreneur by a middle-market private equity firm.

Speaker #7: It does between 10 and 20 EBITDA. It's a fragmented industry. And the private equity firm wants to do a consolidation play in a fragmented industry.

Speaker #7: We come in, we provide the capital to do the initial deal, and then add-on loans where they're delayed draw or otherwise. To take that 10 to 20 million dollar EBITDA company up to 30, 40, 50, and above, and in that case, we become kind of a strategic partner where our capital is the fuel to drive that growth.

Speaker #7: We participate in the equity through the co-invest. So there's kind of a built-in equity upside. To the package of what we deliver. So up until about a month ago, I would have said it's virtually all add-ons and delayed draws, and that's pretty good.

Art Penn: We participate in the equity through the co-invest. So there is kind of a built-in equity upside to the package of what we deliver. Up until about a month ago, I would have said it is virtually all add-ons and delayed draws, and that is pretty good. We have a lot of incumbency. We have 190 some companies broadly throughout the platform, 158 in PennantPark Floating Rate Capital Ltd. So there is just a lot of just incumbency and add-ons with credits that you know and like, and that is great. If we do not like the credit or the credit is underperforming, we do not have to give them the extra capital. So that is really a built-in competitive edge when you have portfolios of this size and scale.

Speaker #7: I mean, we have a lot of incumbency. We have 190-some companies broadly throughout the platform, 158 in PFLT. So there's just a lot of incumbency and add-ons with credits that you know and like, and that's great.

Speaker #7: And if we don't like the credit or the credit's underperforming, we don't have to give them the extra capital. So that's really a built-in competitive edge when you have portfolios of this size and scale.

Speaker #7: I would say that in the last month, in the last month, some new platforms have been increasingly coming. To us and we've been more active starting the new platforms again back with that smaller company with the add-on acquisition pipeline and regenerating that.

Art Penn: I would say that in the last month, some new platforms have been increasingly coming to us, and we have been more active starting the new platforms again, back with that smaller company with the add-on acquisition pipeline and regenerating that. So that is kind of the difference in the last month. In PennantPark Floating Rate Capital Ltd. in particular, it is virtually all sponsors, sponsor deals. Again, our focus here is capital preservation and yield, but capital preservation first. So we like having a loan to value of 40% or 50%, which is typically what it is today. So that if there is a bump in the road, that sponsor capital provides the cushion. Typically, when they are putting in 50%, 60% of the equity from the get-go, if there is a bump in the road, typically they will invest additional capital to solve that problem.

Speaker #7: So that's kind of the difference in the last month. In PFLT in particular, it's virtually all sponsors. Sponsor deals again in our focus here is capital preservation and yield by capital preservation first.

Speaker #7: So we like having a loan-to-value of 40% or 50%, which is typically what it is today. So that if there's a bump in the road, that sponsor capital provides the cushion. Typically, when they're putting in 50% to 60% of the equity from the get-go, if there's a bump in the road, they will typically invest additional capital to solve that problem. We certainly saw that in spades during COVID.

Art Penn: We certainly saw that in spades during COVID, when virtually every liquidity situation was solved with additional sponsor capital. In terms of the industries, it is the same old industries where we think we have the domain expertise. Clearly, we are shying away from tariffs. We always shied away from tariff impact, even more so today. But by and large, it is the same industries.

Speaker #7: When virtually every liquidity situation was solved with additional sponsor capital. In terms of the industries, it's the same old industries where we think we have the domain expertise, clearly we're shying away from tariff.

Speaker #7: We always shy away from tariff impact, even more so today. But by and large, it's the same industries.

Speaker #9: Got it. Thanks for the call. I appreciate it.

Michael Scheff: Got it. Thanks for the call. I appreciate it.

Speaker #1: And at this time, there are no additional callers in the queue. I'd like to turn the conference back over to Mr. Arthur Penn for any additional or closing comments.

Speaker 2: At this time, there are no additional callers in the queue. I would like to turn the conference back over to Mr. Art Penn for any additional or closing comments.

Speaker #6: I think there might be a question in the queue if we could or may have gone away. Yeah. It looks like there is.

Art Penn: I think there might be a question in the queue, or it may have gone away. Yeah, but it looks like there is.

Speaker #1: Looks like we just had Paul Johnson from KBW.

Speaker 2: Looks like we just had Paul Johnson from KBW.

Speaker #7: Good. Thanks for letting me on here. Last minute, I popped on a little late here. I apologize if you already mentioned this on the call or if the questions have already been asked.

Aaron Cyganovich: Thanks for letting me on here last minute. I popped on a little late here. I apologize if you already mentioned this on the call or if the question has already been asked. It looks like, just kind of based on the ATM activity for the quarter, that you guys issued most likely most of the shares on the ATM pretty early in the quarter. The stock would have, you know, been trading at a bigger discount to NAV than kind of where you guys trade today. You obviously have the history of subsidizing that discount when you issue those shares. I am just curious, is that something that you would plan on doing going forward pretty regularly in terms of just kind of capital management, or is there going to be more, I guess, context around valuation of shares going forward?

Speaker #7: But it looks like just kind of based on the ATM activity for the quarter that you guys issued most likely most of the shares on the ATM pretty early in the quarter.

Speaker #7: The stock would have been trading at a bigger discount than that than kind of where you guys trade today. But you obviously have the history of subsidizing that discount when you issue those shares.

Speaker #7: I'm just curious, I mean, is that something that you would plan on doing going forward pretty regularly in terms of just kind of capital management, just sort of, or is there going to be more I guess context around valuation of shares, I guess, going forward?

Speaker #7: Yeah. It's a good question, Paul. And the answer is, of course, yes and yes. You know we did issue $32 million of shares 2.8 million shares at $11.31 cents.

Art Penn: Yeah, it's a good question, Paul. The answer is, of course, yes and yes. You know, we did issue $32 million of shares, 2.8 million shares at $11.31. That was a pre-Liberation Day price. We were building our war chest for what we thought was going to be a very active 2025. So between the ATM program and all the things that we were doing with our credit facility and the redialing of the securitizations, our timing was good from the standpoint of issuing shares at a very attractive price pre-Liberation Day. Unfortunately, the deal flow didn't come after Liberation Day. We had 60 to 90 days of light deal flow. It seems to be picking back up again.

Speaker #7: That was a preliminary day. Price, you know we were building our war chest for what we thought was going to be a very active 2025.

Speaker #7: So, between the ATM program and all the things that we were doing with our credit facility and the redialing of the securitizations, our timing was good from the standpoint of issuing shares at a very attractive price pre-literation day.

Speaker #7: Unfortunately, the deal flow didn't come. You know, after Liberation Day, we had 60 to 90 days of light deal flow. It seems to be picking back up again.

Speaker #7: And we certainly think, and are hopeful that the remainder of this year will be good, and we can deploy that war chest that we built through the ATM program and through our credit facilities nicely here for the remainder of 2025.

Art Penn: We certainly think and are hopeful that the remainder of this year will be good and we can deploy that war chest that we built through the ATM program and through our credit facilities nicely here for the remainder of 2025. As you know, ATM programs are very efficient. They're low cost. They tend to, at least the way we've done it, have been surgical in terms of how the stock trades. So we look at everything. We look at our deal flow. We look at the capital structure. We look at where the stock is trading. But right now we are, as we speak, very, you know, have a lot of capital, as you can see, between being under-levered at PFLT and having two JVs that have available capital.

Speaker #7: As you know, ATM programs are very efficient. They're low cost, and they tend to waste away. We've done it and been surgical in terms of how the stock trades.

Speaker #7: So we look at everything. We look at our deal flow. We look at the capital structure. We look at where the stock is trading.

Speaker #7: And but right now we are as we speak very have a lot of capital, as you can see, between being under-levered at PFLT. And having two JVs that have available capital.

Speaker #7: So, at least at this point, we're set, and we're in good shape to now deploy all the capital that we raised. Thank you. Appreciate that.

Art Penn: So at least at this point, we're set and we're in good shape to now deploy all the capital that we raised.

Aaron Cyganovich: Thank you. Appreciate that. Very helpful. That's all for me.

Speaker #7: Very helpful. That's all from me.

Speaker #1: And at this time, there are no additional callers in the queue. Mr. Penn, I'd like to turn the conference back over to you for any additional or closing comments.

Speaker 2: At this time, there are no additional callers in the queue. Mr. Penn, I would like to turn the conference back over to you for any additional or closing comments.

Speaker #6: Yeah, I just want to thank everybody for participating today and wish everyone a terrific remainder of summer. Our next quarterly earnings call will be after 10-Q.

Art Penn: I just want to thank everybody for participating today and wishing everybody a terrific remainder of summer. Our next quarterly earnings will be after 10 Q, so later than normal because of the annual report. It will be kind of mid to late November, probably right before Thanksgiving. We will talk to everybody next. Thank you for your time and support of PFLT.

Speaker #6: So later than normal because of the annual report. So it'll be kind of mid to late November. Probably right before Thanksgiving that we'll talk to everybody next and thank you for your time.

Speaker #6: It's supportive PFLT.

Speaker 2: That does conclude today's teleconference. We thank you all for your participation. You may now disconnect.