PennantPark Floating Rate Capital (PFLT) 10 May 232023 Q2 Earnings call transcript

Good morning, and welcome to the PennantPark Floating Rate Capital Second Fiscal Quarter 2023 Earnings Conference Call. Today's conference is being recorded. [Operator Instructions] 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. your begin may you conference. Penn,

joined good Thank conference statements. Rick, welcome XXXX please I'd Allorto, call I'm to start forward-looking off some and everyone. to you, Earnings Chief PennantPark general Officer. Call. Quarter information and about you Fiscal Floating like Second include Rick discussion disclosing morning, Rate Financial by today by Conference our Capital's a

harbor everyone is that note Thank property today's is in form to available you, in regarding Art. release information. An Rate on audio to our Please call I'd prohibited. is I'd any forward-looking being any of website. Floating that PennantPark remind of safe also this that like unauthorized strictly to a the disclosure like be of our attention recorded. and this call press call call will your replay Capital broadcast customary call the

not pennantpark.com forward-looking that We at the our projections, may to Today's and forward-looking SEC and from of please statements differ latest call important statements materially website for SEC To obtain undertake recent by ask us do we to cause most that factors also actual conference could results to refer filings include copies our update these you filings, our visit unless or projections. call required at our law. XXX-XXX-XXXX. with

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

the is minutes for financials of to it few March in spend discussing going a how quarter We're for a quarters, Q&A. open then detailed the XX, positioned we Rick. portfolio up how ended Thanks, and the upcoming the review fared

slightly excludes of to from to monthly on net Core backdrop represents investment July stable share, monthly was consistent NII by $X.XX X.X%, primarily increase of an was partially per this decreased beginning improved for equity the income. the share, to the $X.XX which net With a ended market-driven the share Board per income $XX.XX per dividend. For has valuation or investment which due co-investments, the of per interest share year Directors increase offset NAV March was distribution onetime portfolio, our GAAP per quarter a XX, $X.XXXX $X.XX share. earnings X% and ago. This X.X% distribution in a excess the in in income distribution. with and increase adjustments an

originate During attractive well both we investment PFLT for to the the continue portfolio the opportunities quarter, JV portfolio. as as

million million. and weighted of in For at the existing $XX a yield new portfolio $XX repayments average of quarter, sales had and PFLT companies invested and XX.X%

investments the and to X.Xx interest portfolio weighted the and was XX%. was new average weighted debt companies, value For loan in average EBITDA the average X.Xx, the to coverage was weighted

the vintage upfront lower, Leverage continue as and and are rise. of investment and We net to higher we be portfolio is our to OID current that spreads directly middle XXX% that should With is base excellent. floating positioned continue income loans to grow are covenants are rates well tighter. originated believe debt market rate, fees a

is year. up weighted ended XX.X% quarter to maturity last from XX, X.X% quarter average XX.X%, which the For yield last our March and was

the CLO ROE enhance allow JV's balance $X the As JV the sixth the JV financing the closed our its portfolio new end, to to the plan on continue to quarter scale for PennantPark attractive of $XXX and second million. XX, portfolio partner, to JV March And we increase that believe the diversify sheet. together JV with further execute will to CLO its financing and Subsequent of equaled will the grow platform. in JV earnings and momentum. assets. PFLT's This billion increase the We

X.X target. to The growing more X.XXx stable continue at a we With to balance at our on leverage visible towards debt-to-equity PFLT both combination coming the leverage PFLT matched sheets plan with yields of NII we thoughtfully our of and the can NII optimize at over quality pathway for X.Xx, grow higher of as on positions optimized sheets and PFLT believe We our JV. to us and portfolio quarters. moving balance and and credit excellent the JV target

In environment of of and a the well. portfolio credit the rising the challenging continues base face economic rates, quality perform to

of cost As in portfolio of This and had value. nonaccruals X.X% XXX X.X% represents we four XX, at of at March names PFLT. the out market different

completion placed to Lucky returned on the in a our Our investment Services restructuring, Group status and accrual in nonaccrual. were sheet balance of Walker Edison investments was after Bucks and Output

quarter in Dominion equity settlement an for News $X has net to to the Dominion proceeds and to distribute million. their PFLT lawsuit is share Voting, subsequent intention settled approximately communicated be million. which ownership end estimated PFLT has $XXX with Fox their

protect look on lender focused our forward, United for against we inflation. positioned being senior like lien As the as where preservation a can secured we'd capital the floating rising on first rates loans States,

the our with where on the middle to core to believe opportunities important borrowers. continue focus company our are provides investment capital We that strategic attractive we market

generating financing track sectors. long-term high-growth record companies in successfully a of value have by key middle-market We five

sectors exposure consumer, tend vertical, where we These domain health and right care free know been government software ARR strong expertise services questions generate are and have and In to cash the excellent also have to record. resilient any loans. are and to substantial have our technology. They sectors business flow. and and don't have track an These ask we services, defense, software

that growth company into typically of that an are to part and $XX million, co-investment. million or more. to $XX in capital grow we million a strategic making upside provide cases, the we participate and many capital the We typically million, company help million $XX fuel are important EBITDA loans of the EBITDA by institutional $XX first In $XX equity that the

and of excellent XX, multiple equity from on XX% platform $XXX March invested of a generated time. returns invested through have have an equity IRR Our capital co-investments over over for million Overall, these been inception co-investments we've on our in and X.Xx.

terms the of attractive. partner, package important is are strategic we we Because receive an process and lending

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

which from we our well was help are default financial performance the first why a on monitoring one perspective, covenants, covenants, we in COVID of monthly our to protect strong us help virtually capital. believe this stay This received reason is all With of during and why loans our rate have companies. top we statements and lien environment. positioned so Additionally, originated to regard meaningful

is reality upper an and with less higher to to companies have than that does have core some meaningful million million markets. focus to sector of Many monitoring syndicated with the intuitive that This of tighter this loan S&P, companies default We not EBITDA. higher the $XX lower core are part the $XX been sense important recovery to of a different. but of covenant or state According companies middle rate risky. differentiated make our of diligence and loans middle the is million bigger below more broadly loans, market the careful the threshold compete market on market of less That middle $XX than EBITDA, with core those with believe EBITDA loans is performance. rate and middle who protections companies market. the market, may high-yield peers The

PFLT and inception quality since in has been XX basis PFLT's companies, billion experienced inception, $X.X XXX has Since is only excellent. years ago we've annually. XX loss only invested credit over ratio XX Our nonaccruals. points

flow. Our active and producing wide talented deal experienced and team origination was funnel

patient remains Our investors. preservation capital on being continued and focus

primarily do steady, are first we goal cash free growing middle pay cash and lien senior Everything cash flow form goal. capture we the of those flows stream, flow dividends stable that preservation We in mission high Our the coupled out that in and secured dividend and market find seek We have opportunities our aligned free to to the contractual is that to conversion. instruments, with shareholders. of companies investment capital. protect in

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

Thank you, Art.

$X.XX and with early investment acceleration share. the per excludes investment repayment XX, onetime $X.XX PRA. to income per For our ended in of connection net share Core OID investment March share per loan net the income to related quarter income amortization net core income the was of was of $X.XX

expenses administrative expenses and were follows: expenses and management debt and base million; general interest were $XXX,XXX; the $X.X Operating were million; for and as for performance-based were taxes on $X.X quarter $XXX,XXX. provision incentive fees were

or XX, unrealized share. $X.XX the realized For per facility ended was million $X.XX The and the loss and net million or provision taxes for unrealized for a including share. our quarter was $X.X notes of quarter $X.X per credit investments on appreciation March on change

was liabilities per last $XX.XX which As $XX.XX down NAV, from XX, excluding down the GAAP was share, from of on March quarter. $XX.XX, mark-to-market our is our share. Adjusted per $XX.XX NAV X.X%

both and our As debt-to-equity capital and diversified multiple our structure sources, X.XXx, of is March including unsecured across secured XX, debt. was ratio funding

XX, a with a sensitivity equity; is in meaningful March portfolio and EBITDA the the key decrease whole different XX.X% and go points X% was than regard X.Xx. rate; PSSL of less senior of to as XXX XXX to X.Xx, EBITDA up highly of our secured to equity second and follows: industries; and statistics other interest weighted XX%. portfolio coverage in As our by diversified XX% decrease interest in investments for basis debt, portfolio floating average first a as overall base coverage. were was debt coverage the XX is need portfolio to would on to cushion across was with rates debt, lien XXX% companies On X% remains need to would debt on XX% yield the portfolio lien debt portfolio invested The the X.XXx, basis interest in has

back turn me let call Art. to Now the

Thanks, Rick.

the turn you. call And I Art, to we'll back apologize.

shareholders. our all of your investment Great. I'd and their PFLT to and us. in concludes and today for you confidence your like thank dedicated time team remarks. talented our closing, continued and for professionals Thank to its That Thanks, Rick. commitment In for

At this I'd open up the time, like to call questions. to

Paul our [Operator Johnson. first from We'll take Instructions] question

there of general I quarter a equity decline of investments but guess, I just slight the NAV? this guess in notable you kind kind of just contributed of, little sort movements quarter, to that the described bit the were any in

Yes. several in co-invest. equity It movements in was different decline was NAV Paul. minor -- thanks, slight The

time it for the names, different an By been over said which have GCOM, has PRA, names where vehicle it co-invest generally a equity our X.Xx. the positive and quarter. past portfolio, driver the the here, MOICs income. PRA of This was the was smattering co-invest last than really behind was been Light, exit quarter, We equity onetime PRA Events lower three very were was -- we on exited, and that we fee

changes. small of the culprits, little different a no just kind down the kind of wide on we was the major bit NAV But got variety So a onetime income, mark. of

in and conversions? I progressed quarter, sort just guys starting uptick are there? amendment in asking, Yes. Anything the as see here, guess potentially you notable things to requests I'm any quarter-to-date PIK of or

Yes.

get material nothing to We're tests, quarterly those table at sense, than done. Nothing And date, be maintenance things certainly saw mixed amendments which of we saw. more economy. there's us, mean it's really coming much a a mixed but diligence we a in some the have certainly right can material. economy early. meaningful, sponsor. They much seat good Look, Nothing much or potentially economy PIK. Certainly, more about, we from could than income for additional equity the the on talk us but more to these fee So of COVID. which, kind tests, we mixed out give seeing

like these it. Got on you the kind you side the the then JV. the able of kind financing just to I'm placements? kind of in or understand the other financing these curious, diverse and the or execute, of banks, those -- more -- these Are CLO a way, arrangement of who's at of I'm curious, that to guys any regional any investors of us are set play? arrangements are trying those of generally tell I'm And essentially of securitizations? Who's banks buyer sort

Yes.

banks. secure. a winning it's It's BBB securities, very buyers been rate for asset a generally. big deposits, insurance AAA asset because. big to companies, banks for are these the have floating it's who The can down asset be So good buyers It's good a are banks. them, The securities and

I been ever loss mean AAAs. never a on there's really

typically who and a placement insurance And a the So accesses we it's banks. companies mixture agent of goes market. and hire

And easier we're have CLOs, becoming and comfortable gotten of known that six and we each investors we had invest. because well with our in we Now the us time who've benefit getting platform marketplace. we've more getting repeat that do how we're it it

declining guess, I persistently your of be and seems maybe some inflation it you That's of of kind but high just thoughts guys, obviously interesting. And on kind light slowing what seeing with now. to just in for are then consumer, general inflation, lastly, the time economy the

what -- Yes. on been It's think On and on airlines. we've going The the and hotels they're mixed. mixed is hand, using. they're I word cruises consumer and trips going one is

to is rocketed case that's willing to exit on PRA are one the of the experiences. that and consumer spectrum, individuals back for pay end and So in companies happy experiences Events of kind corporate events as and travel for is our

On the on certainly a COVID where goods, where so. and it's hand, that's lot it been the now Edison of of it's furniture, is furniture, other consumers example other Walker for side were stickier. less during another much buying

action interesting on, both some negative the on positive. and the going there's where is consumer So

demand. to for consumer But they're a at paying this attuned on be So lot the less within and what's experiences, point. people going you need movements for paying goods clearly, and are really to

We'll Kevin Fultz take from Securities. from next JMP question our

relates first see Or do portfolio your nearing wider you cycle, portfolio the that you to end could drive opportunity its portfolio to I'm see of assuming term? longer incremental yield? Fed question nearing yield yield. My spreads peak in on rate up pick do of outlook terms is the higher kind of the hiking

Yes.

a another the So we trying do is can stamped -- of going just weather yesterday like don't man, had is What a economy yesterday you what inflation portfolio -- the tell though so Fed It's to X% on read inflation. our is is we not from being bet easily out. had know. read to

higher in SOFR for floors. So is or to go nomenclature. not is rate last our have environment said, interest change is this -- That I PennantPark this this we do that while. going my LIBOR view to a case, floors get

NII main on two floors little potentially two here, X.XXx. on of the And SOFR We're -- and all main we We're deals. we a mechanisms PFLT. our One less have have optimized get growing We leverage. dividend then for leverage. is

Our ROE X.Xx. target to time, $X and which generate for million is that is just financing billion And should course over JV, did then, some X.X the we leverage securitization PFLT. to $XXX grow to healthy course, of that JV our to of poised

Today, the JV is $XXX million.

to think we is, levers, very two capacity, if a if down, come are we is our But grow we which to our even helped decision take dividend So NII. we've about got think, drive coming generation rates that stance don't Even risk-free you good so. down, feel about SOFR it income the going still increase.

regards there. of any Okay. then guess, I And portfolio to there find I'm just appreciate where industries in one opportunities. the you're now? the insight right these curious attractive or just are I particularly seeing rest you pockets positioning, more, that return

Yes.

other geopolitical of the sector, key good health has for always a sector world key our uncertainty, needed, very and is be So to reimbursement loans. a catch-all, don't where a cash to focused. services on. sectors track X as record care, lenders. we're a the remains in and that been consumer. right got look, and careful you We're cost, you Health which flow EBITDA well. is and but about defense and and sectors always general be in area services classic do we've remain We Government had care, tech risk us Business got good. Consumer, of software good ARR is a

opportunity. those So are those where the we the sectors see remaining sectors, and most

comes next Ladenburg. question our And from Schleien from Mickey

following. are question the My just

their But mean, tough We that portfolio have have they BSL companies large the middle their boost lenders is commercial obviously, opportunity may -- for banks we also are market the most unless very where lower very and regional the have high-quality. I this dynamic problems, constraining lending your banks in market. and

But up actually that you are So market. and in opportunities pretty down that the the tight middle imply would have market. heard middle I've spreads lower

to like see you allocating terms I'd of capital risk-adjusted today structure given where So do in PFLT? returns the the you, of ask your best

call may are market, or seeing market middle spreads. core the in tight the Look, lower middle some not it we

upper do increased some seeing be We're who people may But the diligence, focus seeing covenants, wide to that spreads. OID. opportunity you we're hearing meaningful very from middle on So due of thorough market. the

So our someone market, for heard be environment from. know who's it a us. I It where you good in I but can tell you, don't might it's not

Mark from question next our And comes Hughes Truist. from

looking, how the see can XQ extent could pipeline Art, the balance you may happening is comment to terms how on What it? shaping up year you in of be might investment the the activity? see anyone of through

are guarantees. starting guaranteed investing we But it is up actually from are loosen up what we selective. get in starting little a to No incoming be flow. things bit. Yes. busier. never end so deal Look, inquiry more There's It's to to since to starting

deal good other it Our months properly deals steam. gain to Which month, a does negotiate or guess us end and Usually, XX? June least and side of take flow as to the X is diligence, this XX of up usually execute to June X a loan. side of those starting Your at on as mine. is

new was always economic out rates, First was first need given talking. uncertainty. -- year of is because quarter and calendar figure meet, to they It sellers this slow. the interest frankly, higher And buyers quarter some is, It the market. given seasonally equilibrium we're where where the turmoil slower was in

second feeling half So going of like we're it's be We'll to see. the busier a year.

the kind more in economics good. speak? structure? about well the next tempo Very observations to this When mentioned the on if one, ability what's generally the of the And Does transact? do you're known. so, that terms of the You that then to that any can help more just around And is CLO so the getting you financing, or that?

Yes.

securitizations, and at at So this we're although at the are opportunities. always PFLT, set we looking for point with now market

within PFLT also at The be the point. means PFLT may some complex the joint there other venture. securitizations means including complex So --

Look, mean and tighter table, I could to pricing. investors means well-known execution, getting think a come it easier means the more it an

that CLO fact name very known. our market in well the So middle in market the is now the -- getting

performance good. been Our has

was excellent. through Our performance really COVID

got pleased, we to as just the will and many And we execution the we So options the future financing of that have. we're to thought of in look was that form for we look that the JV one another attractive. it's

remarks. And any at to I'd like our this speakers the we further no call closing back questions. time, to have turn for

time to in come just I their next August to June everybody look to you the and early when XX speaking for want forward thank we support, and today out. your numbers

you day, good Have thank So very a much. weekend. have and great a

ladies you. Thank conclude and conference. gentlemen, wonderful and participation, does today's a day. appreciate And have that We your