PennantPark Floating Rate Capital Ltd.

Thank you.

The code you have entered has been accepted. At any time during the program, you may press 5 to return to the beginning, 7 to back up 30 seconds, 8 to pause, and 9 to advance 30 seconds. Again, press 5 to return to the beginning, 7 to back up, 8 to pause, and 9 to advance the program.

Good morning and welcome to the Pennant Park Floating Rate Capital's third fiscal quarter 2020 earnings conference call. Today's conference is being recorded. At this time, all participants have been placed in the listen-only mode. The call will be open for a question and answer session following the speaker's remarks. If you would like to ask a question at that time, simply press star 1 on your telephone keypad. If you would like to withdraw your question, press star 2 on your telephone keypad. It is now my pleasure to turn the call over to Mr. Art Penn, Chairman and Chief Executive Officer of Penn and Park Floating Rate Capital. Mr. Penn, you may begin your conference.

Thank you, and good morning, everyone. I'd like to welcome you to Penn and Park Floating Rate Capital's third fiscal quarter 2020 earnings conference call. I'm joined today by Aviv Afran, our Chief Financial Officer. Aviv, 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 a property of Tenant Park Floating Rate Capital and that any unauthorized broadcast of this call in any form is strictly prohibited. Audio replay of the call will be available by using the telephone numbers and PIN provided in our earnings press release as well as on our website. I'd also like to call your attention to the customer safe hardware 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 findings with 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 findings, please visit our website at pennantpark.com or call us at 212-905-1000. At this time, I'd like to turn the call back to our Chairman and Chief Executive Officer, Art Penn.

Thanks, Aviv. First, we hope that you, your family, and those you work with are staying healthy. We are pleased to report that Penn and Park continues to operate smoothly and effectively and remains committed to working diligently on behalf of our investors. I'm going to spend a few minutes discussing how we fared in the quarter ended June 30th, how the portfolio was positioned for the upcoming quarters, Our capital structure and liquidity, the value proposition of the stock, the financials, and then open it up for Q&A. Despite the challenging economic conditions brought on by the pandemic, we are pleased that we accomplished several key goals this past quarter. We achieved a 3% increase in adjusted NAV as the market stabilized during the quarter. Additionally, we also achieved our goals of reducing leverage and increasing liquidity. We believe that our rigorous underwriting process and disciplined approach has successfully positioned us to manage through the challenges of this environment. We have an excellent team of talented and dedicated professionals, many with decades of experience managing through multiple economic cycles to help ensure the best possible outcome in this type of market. Although we never predicted the global pandemic, as you may know, we have been preparing for an eventual recession for some time. Prior to the COVID-19 crisis, we proactively positioned the portfolio as defensively as possible. Since inception, we have had a portfolio that was among the lowest risk in the direct lending industry, as proven by a portfolio that has among the strongest credit statistics in the industry. As of June 30, the average debt to EBITDA on the portfolio was 4.3 times, and the average interest coverage ratio, the amount by which cash-in crumb exceeds cash interest expense, was 2.7 times. This provides significant cushion to support stable investment income. These statistics are among the most conservative in the direct lending industry. We had only two new non-accruals during the quarter, bringing our total non-accruals to three out of 109 different names in PFLT and PSSL, representing only 2.2% of the portfolio at cost and 1.8% at market value. We have largely avoided some of the sectors that have been hurt the most, The portfolio is highly diversified with 104 companies in 43 different industries. Our credit quality since inception over nine years ago has been excellent. Out of 380 companies in which we have invested since inception, we have experienced only 11 non-accruals. Since inception, PFLT has invested over $3.7 billion in At an average yield of 8.1%, this compares to an annualized realized loss ratio of only 9 basis points annually. If we include both realized and unrealized losses, the annualized loss ratio is only 24 basis points annually. From an experience standpoint, we are one of the few middle market direct lenders who was in business prior to the global financial crisis and have a strong underwriting track record during that time. Although PFLT was not in existence back then, Penn and Park as an organization was, and at that time was primarily focused on investing in subordinated and mezzanine debt. Prior to the onset of the global financial crisis in September of 2008, we initiated investments which ultimately aggregated $480 million, again primarily in subordinated debt. Our playbook then is similar to our playbook now. We focus primarily on the existing portfolio to preserve capital, While raising the bar and becoming even more highly selective on new investments. During that recession, the weighted average EBITDA of those underlying portfolio companies declined by 7.2% at the trough of the recession. This compares to the average EBITDA decline of the Bloomberg North American High Yield Index of down 42%. As a result, the IRR of those underlying investments was 8%, even though they were made prior to the financial crisis and recessions. We are proud of this downside case track record on primarily subordinated debt. Now let's turn to the outlook ahead in the coming quarters and how our portfolio is positioned. We've been communicating on a frequent basis with management teams and the private equity sponsor owners of our portfolio companies. As mentioned previously, we are gratified that our historical investment focus has protected us from some of the worst hit areas of the economy such as retail, restaurants, health clubs, apparel, airlines, and energy. We have been pleased with the way our portfolio companies have moved to rapidly adjust costs and have focused on shoring up liquidity. Looking forward to the quarter ended September 30 and beyond, there remains meaningful uncertainty about the economy and its impact on the portfolio. Nevertheless, where things stand today, our analysis suggests that the vast majority of the companies in our portfolio have sufficient liquidity to pay their interest payments as they come due in the coming quarters. Many of our portfolio companies are in businesses such as government services, defense contracting, software, communications, and cybersecurity, which collectively comprises a substantial portion of our portfolio and should be less impacted by COVID. Additionally, our structuring of transactions, including strong covenant protections, is enhancing both credit support and the economics to the portfolio. These covenants enable us to see potential challenges in portfolio companies before they become critical. J.D. J.D. As we have proven over 13 years in business, we are adept at dealing with and maximizing value over time in these situations. With regard to our financials, I'll give you some summary highlights and Aviv will go over more in detail. Our NII was 26 cents per share. At this point in time, we intend to maintain the current dividend. A reminder that our spillover as of September 30th was 30 cents per share. We will continue to evaluate our earning stream over time relative to the dividend

J.D. J.D.

Down from 1.8 times last quarter and our regulatory net debt to equity ratio after subtracting cash was 1.5 times down from 1.7 times last quarter. As many of you know, in early 2009 in response to the GFC, we started marking to market many of our liabilities, our credit facilities and bonds to better align asset and liability values. This reduces the volatility of NAV in times of market volatility such as we have today. The additional benefit at that time and for the ensuing decade was that it reduced the volatility of our leverage as calculated by the regulatory asset coverage test. Last year, the SEC guided us that for regulatory asset coverage purposes, they would prefer we mark the liabilities at cost, not market, which we now do for that test. As a result, we will be highlighting both gap leverage and regulatory asset coverage leverage in times such as these when there is a material difference. With regard to NAV, our GAAP NAV was $12.16 as of June 30th, up 4 cents from the prior quarter, which reflects both a markup of assets and certain liabilities. Assuming liabilities were not marked to market, adjusted NAV would have been $11.44, up 3% from the prior quarter. With regard to leverage, we've been targeting debt-to-equity ratio of 1.4 to 1.7 times. Our net of cash regulatory asset coverage ratio of 1.5 times was comfortably within our range in this past quarter. This was primarily due to paydowns from borrowers, selected asset sales, and an increase in the mark-to-market of our portfolio. We had ample liquidity fund revolver draws and were in compliance with all of our facilities at June 30th. We have readily available borrowing capacity and cash liquidity to support our commitments. We are looking to carefully manage our leverage over time and we expect to stay in compliance with both regulatory requirements and covenants under our credit facilities. We have a strong capital structure with diversified funding sources and no near-term maturities. We have $520 million of a revolving credit facility maturing in 2023 with a syndicate of 11 banks with $352 million drawn as of June 30th. We have $139 million of unsecured senior notes maturing in 2023 and $228 million of asset-backed debt associated with Penn and Park CLO1 due 2031. We have been in consistent dialogue with our lenders and are thankful for their support. With regard to our stock price, we believe that the share price of TFLT does not accurately reflect the long-term value of the company. As stated earlier, the average debt to EBITDA of our underlying portfolio as of June 30th was 4.3 times. Translating this into the language of value investors, J.D. have reasonable leverage, covenant protections, and attractive returns. The outlook for new financings is attractive. We believe that middle market lending is a vintage business. This upcoming vintage of loans is likely to be the most attractive we've seen since the 2009 to 2012 time period. Leverage levels are lower, equity cushion is higher, yields are higher, and the package of protections, including covenants, are tighter. After enduring about five years of a late-cycle market for middle-market lending, it's refreshing to have attractive risk-reward available to us. Let me now turn the call over to Aviv, our CFO, to take us through the financial results in more detail.

Thank you, Art. Before the quarter ended June 30th, net investment income was $0.26 per share. Looking at some of the expense categories, management fees totaled about $4.8 million. Taxes, general and administrative expenses, totaled about 1.1 million dollars and interest expense totaled about 6.7 million dollars. During the quarter ended June 30th, net unrealized appreciation on investment was about 22 million dollars or 56 cents per share. Net realized losses was about 7.4 million dollars or 19 cents per share. Net unrealized depreciation on our credit facility and notes was 31 cents per share. Net Investment Income was lower than the dividend by $0.02 per share. Consequently, GAAP NAB went from $12.12 to $12.16 per share. Adjusted NAB, excluding the mark-to-market of our liability, was $11.44 per share, up 3% from $11.10 per share. Our entire portfolio, our credit facility, and note our mark-to-market by Our Board of Directors each quarter using the exit price provided by an independent valuation firm, exchanges, or independent broker-dealer quotes when active markets are available under ASC 820 and 825. In cases where broker-dealer quotes are inactive, we use independent valuation firms to value the investments. Our portfolio remains highly diversified with 104 companies across 43 different industries. 90% is invested in first lien senior secured debt, including 11% in PSSL, 3% in second lien debt, and 7% in equity, including 4% in PSSL. Our overall debt portfolio has a weighted average yield of 7.4%. 99% of the portfolio is floating rate and Nearly 90% of the portfolio has a LIBOR floor. The average LIBOR floor is 1%. Now, let me turn the call back to Art.

Thanks, Aviv. To conclude, we want to reiterate our mission. Our goal is a steady, stable, and protected dividend stream, coupled with the preservation of capital. Everything we do is aligned to that goal. We try to find less risky middle market companies that have high free cash flow conversion, 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. In closing, I'd like to thank our extremely talented team of professionals for their commitment and dedication. 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 to questions.

Thank you. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, that's star 1 to ask a question. And we will take our first question from Mr. Paul Johnson with KBW. Please go ahead, sir.

Hey, good morning, guys. Thanks for taking my question this morning. I just wanted to ask, so... As I look at earnings today, you know, 26 cents this quarter, I wanted to get a sense if you think that's kind of stable for the environment or if you see, you know, a pathway for earnings to get possibly higher, you know, back up closer to the dividend. And also, secondly, around the dividend, I mean, the yield basically on book value at this point is about 9.4%. and I believe the portfolio yield dropped to about 7.4% this quarter. I just want to get a sense of maybe how the board is evaluating the dividend coverage going forward.

Thanks, Paul. That's an excellent question and thank you for your question. You know, we've been focused for the last five years in prioritizing capital preservation We've done a pretty good job of that. 109 companies now have only two non-accruals after this very challenging quarter. Income has come down due to LIBOR. LIBOR has come down quite dramatically. We do have LIBOR floors with about 1% on almost the entire portfolio, but Thank you for joining us. We're going to evaluate the portfolio and the strength of the portfolio. We hope it remains strong. We're going to evaluate the earning stream of the company. Certainly, the new deals that come in over time should be at higher yields. Certainly, there are some deals that we have where we are getting higher yields due to amendments, so that could and should help the income stream. That said, there's no real outlook of live work going up again, so we're going to evaluate all these things over time. We do have substantial spillover, so there's no kind of quick decisions. I think we're going to kind of see how the next couple quarters go in terms of the portfolio, number one, in terms of the yields on the portfolio, number two, and kind of make the call a few quarters down the road as we see the long-term earning stream. So the income has come down, but I think we're very pleased that from the standpoint of asset value and NAD and capital preservation, This portfolio is very, very robust.

Okay, thank you for that. And then just on your repayments for the quarter, about $104 million in repayments, I'm just curious, do you have any sort of breakdown of how much of that was repayments versus sales during the quarter?

I don't have it off the top of my head.

J.D., Brian Kendall, Boaz Magid J.D., Brian Kendall, Boaz Magid Come into the portfolio, which is a healthy thing. And as we get those repayments, we will repopulate the portfolio with kind of this new vintage. We're very excited about the vintage that we're seeing, even though it's early days. We're excited about the risk-adjusted return that we're seeing in the market today. So over time, we expect some natural deleveraging. There were some asset sales that clearly probably the majority of what the repayments or sales were kind of last quarter were kind of J.D. J.D.

Are you still getting requests from any of your borrowers for such sort of waivers? Do you expect to continue providing those?

Yeah, so, you know, look, we, and I try to make this comment in the prepared remarks, you know, unlike, you know, some people in our industry, we have gotten real covenants over the course of time that have real structural protection. Certainly those that have been focused and competing against the broadly syndicated market have been, you know, doing more covenant light work. or very wide covenants. So our covenants are real. They get us at the table quickly, which can be a good thing to preserve capital where we can get some capital support from the sponsor or where we can get some interesting economics either in amendment fees or higher yields. That said, the pace and momentum of amendments has really slowed down. We saw quite a few asks and In the April time period and early May and then as kind of the quarter kind of, you know, kind of worked its way through and here we are today. There are still some amendments in process for sure, but the pacing of those amendments has slowed down. So, and that's probably in line with kind of, you know, what's been going on with the economy or what's been going on with the underlying portfolio where, you know, there have been some really strong actions by the companies and the sponsors to to make sure that they pay their interest in principle.

So it's slowed down.

There's still some amendments. And by the way, it could be a good thing for this portfolio when we do kind of either get credit support or incremental economics. Great. Appreciate that.

And my last question was just on J.D. I was just curious maybe to get a little bit of commentary of how that's performing. I think the parallel you mark on the equity Investment in the JV was pretty much flat quarter over quarter. I didn't look too closely, so I'm not familiar if the dynamics are the same as how liabilities are marked on the balance sheet, if that's what's at play. But any sort of commentary on the JV quarter over quarter would be helpful.

Yeah. So the JV is really a microcosm of overall PFLT. So NAB was up a similar amount, about 3%. Non-accruals, you know, the same non-accruals, you know, the couple non-accruals we had are in the JVA, so pretty similar, you know, mirror image of PFLT. Like PFLT, we've deleveraged that vehicle, so the earnings in that vehicle are down a little bit as well. NAV was up, so kind of same theme, asset values are strong, portfolio is performing well, slightly leveraging LIBOR coming down, you know, hurt the earnings a little bit, but, you know, Thank you, Paul.

Again, that is Star 1 to ask a question. If you find your question has been answered, you may remove yourself from the queue by pressing Star 2. It appears there are no further questions at this time. Mr. Penn, I'd like to turn the conference back to you for any additional or closing remarks, sir.

I'd like to thank you all for your time today. I appreciate your interest in the company. This concludes today's call. Thank you for your participation. You may now disconnect. Thank you for calling.