PennantPark Floating Rate Capital Ltd.

Good morning and welcome to the Pennant Park Floating Rate Capital Second Fiscal Quarter 2025 Earnings Conference Call. Today's conference is being recorded at this time. All participants have been placed in listen-only mode. The call will be open for question and answer session following the speaker's remarks. If you would like to ask a question at that time, simply press star one on your telephone keypad. If you would like to withdraw your question, Press star two on your telephone keypad. It is now my pleasure to turn the call over to Mr. Art Pinn, Chairman and Chief Executive Officer and Pennant Park Floating Rate Capital. Mr. Pinn, you may now begin your conference.

Thank you, and good morning, everyone. I'd like to welcome you to Pennant Park Floating Rate Capital's second fiscal quarter 2025 earnings conference call. I'm joined today by Rick Valordo, our Chief Financial Officer, Rick, please start off by disclosing some general conference call information and include a discussion about forward-looking statements.

Thank you, Art. I'd like to remind everyone that today's call is being recorded. Please note that this call is the property of Penn and Park Floating Rate Capital and that any unauthorized broadcast of this call in any form is strictly prohibited. An audio replay of the call will be available on our website. 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 pennandpark.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, Rick. I'm going to spend a few minutes discussing the current market environment for private middle market lending and how the portfolio is positioned for the upcoming quarters. I'll then discuss how we fared in the quarter ended March 31st, and finally, highlight how our financial strength has been significantly enhanced through strategic capital raising activities during the quarter and over the last 12 months. Rick will provide a detailed review of the financials, and then we'll open up the call for Q&A. With regard to the current market environment, despite continued volatility in the broader markets, we had a solid quarter, particularly given the seasonally slower start to the fiscal year. Our platform continues to prove its strength, enabling us to support our existing portfolio companies and private equity borrowers with strategic capital solutions to help grow their businesses. Approximately 80 percent of our originations came from existing borrowers, while 20 percent were from new platform investments, each one underwritten with attractive credit statistics and yields. Our ability to remain active and disciplined during uncertain periods reinforces the value of our longstanding relationships and the breadth of our origination capabilities. Looking ahead, we expect originations to remain concentrated among existing portfolio companies with select opportunities from high-quality new platforms. In this evolving environment, pricing will likely increase and leverage will moderate as buyers and lenders adjust to a new risk framework. We believe the strongest assets, those with demonstrated growth and tariff resilience, will still command premium valuations and attract sponsor interest. As always, we will remain rigorous in our underwriting and highly selective in pursuing new investments. Throughout the past year, we've taken significant steps to strengthen our balance sheet and enhance PFLT's liquidity to maximize our ability to take advantage of current market opportunities. As is typically the case, market volatility creates opportunities, and this upcoming vintage of loans is shaping up to be particularly attractive. We continue to see attractive investments in the core middle market. During the quarter, for investments in new portfolio companies, the weighted average debt to EBITDA was 4.3 times, the weighted average interest coverage was 2.3 times, and the weighted average loan-to-value was 39 percent, with a yield to maturity of 9.9 percent. In the core middle market, the pricing on first lien term loans appears to have stabilized in the SOFR plus 500 to 550 range for high-quality assets. As the credit statistics just highlighted indicate, we continue to believe that the current vintage of core middle market directly originated loans is excellent. And the core middle market leverage is lower and spreads are higher than in the upper middle market. We continue to get meaningful covenant protections while the upper middle market is primarily characterized as covenant light. With regard to how the current portfolio is positioned, Over the past several weeks, our team has been closely evaluating the potential impact of tariffs across the portfolio. We are pleased to report that exposure is limited. As of March 31st, the portfolio's weighted average leverage ratio through our debt security was 4.2 times, and the portfolio's weighted average interest coverage was 2.3 times. We believe that this is one of the most conservatively structured portfolios in the direct lending industry. and can withstand volatility in the current environment. We continue to believe that our focus on the core middle market provides us with attractive investment opportunities where we provide important strategic capital to our borrowers. We have a long-term track record of generating value by successfully financing growing middle market companies in five key sectors. These are sectors where we have substantial domain expertise, know the right questions to ask, and have an excellent track record. They are business services, consumer, government services and defense, healthcare, and software and technology. These sectors have been recession resilient, tend to generate strong free cash flow, and have a limited direct impact to the recent tariff increases and uncertainty. The core middle market, companies with 10 to 50 million of EBITDA, is below the threshold and does not compete with the broadly syndicated loan or high yield markets, unlike our peers in the upper middle market. In the core middle market, because we are an important strategic lending partner, the process and package of terms we receive is attractive. We have many weeks to do our diligence with care. We thoughtfully structure transactions with sensible credit statistics, meaningful covenants, substantial equity 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. With regard to covenants, unlike the erosion in the upper middle market, virtually all of our originated first lien loans had meaningful covenants, which helped protect our capital. Credit quality of the portfolio has remained strong. During the quarter, three new investments were added to the non-accrual status, and total non-accruals represent only 2.2% of the portfolio at cost and 1.2% at market value. Subsequent to quarter end, two non-accrual investments were put back on accrual And pro forma for these subsequent events, PFLTs non-accruals represent only 1% of the portfolio cost and 0.5% at market value as of today. Pay in kind or pick income is only 3% of interest income. This is among the lowest in the industry and is a testament to the quality of our underwriting and our portfolio versus our peers. Our credit quality since inception over 14 years ago has been excellent. PFLT has invested $7.6 billion in over 500 companies, and we have experienced only 23 non-accruals. Since inception, PFLT's loss ratio on invested capital is only 11 basis points annually. As a provider of strategic capital, we fuel the growth of our portfolio companies. In many cases, we participate in the upside of the company by making an equity co-investment. Our returns on these equity co-investments have been excellent over time. Overall, for our platform from inception through March 31st, We've invested over $566 million in equity co-investments and have generated an IRR of 26 percent and a multiple uninvested capital of two times. Moving on to how we fared in the quarter ended March 31st, our core net investment income was 28 cents per share. If adjusted for the additional shares issued during the quarter, core NII would have been 30 cents per share. We are looking forward to ramping the portfolio of both PFLT and the JV in this attractive vintage, which we believe will result in PFLT's net investment income comfortably covering the dividend. As of March 31st, our portfolio grew to $2.3 billion, or up 7% from the prior quarter. During the quarter, we continued to originate attractive investment opportunities and invested $293 million in three new and 54 existing portfolio companies, at a weighted average yield of 9.9%. Throughout the past year, we've taken significant steps to strengthen our balance sheet in order to enhance our liquidity and maximize the company's ability to take advantage of market opportunities. On the liability side of our balance sheet, over the last 12 months, we've increased our total leverage capacity by $750 million. This was done through a combination of expanding and reducing the cost of our revolving credit facility and closing on a substantial new securitized financing. Securitization financing continues to be a good match for our lower-risk first lien assets. We believe that securitizations are attractive financing structures as they have a 12-year stated maturity and generally have four- to five-year reinvestment periods. In March, PFLT closed on a new $361 million securitization financing with a weighted average spread of 1.59%. a four-year reinvestment period, and a 12-year final maturity. The ratio of external debt to PFLT's junior capital was 3.2 times to one. In April, we amended the truest revolving credit facility and reduced the interest rate on the facility to SOFR plus 200 from SOFR plus 225. The amendment also extended the revolving period and final maturity by one year to August 2028 and August 2030, respectively. Our PSSL joint venture has also taken significant strides in bolstering its financial strength as well. As of March 31st, the JV portfolio totaled $1.1 billion, and during the quarter invested $60 million in four new and five existing portfolio companies at a weighted average yield of 9.8 percent, including $53 million of assets purchased from PFLT. In April, again, accessing attractive securitization financing PSSL closed on a new financing at an attractive weighted average price of so far plus 1.71 percent. PSSL has 350 million of additional committed capital, debt, and equity capital and can grow its total portfolio to $1.5 billion. We believe that the increase in scale of the JV's balance sheet will continue to drive attractive mid-teens' return on invested capital and enhance PFLT's earnings momentum. Our financial strength was also substantially enhanced by attractive equity capital raised from our ATM program. Over the last 12 months, we have raised meaningful equity capital through this program. This includes $163 million raised during the quarter ended March 31st from the issuance of 14.4 million shares of our common stock at an average price of $11.33 per share. As a result of our capital activities over the last 12 months, PFLT is over $500 million of available capital. That availability, along with the JV having $350 million of committed capital, brings the total overall capacity of the platform to approximately $850 million. As a result, we believe that we are well positioned from both a defensive and offensive perspective in this current market environment. From an outlook perspective, our experienced and talented team and our wide origination funnel is well set up to produce active deal flow. Our continued focus remains on capital preservation and being patient investors. Our mission and goal are a steady, stable, and protected dividend stream, coupled with the preservation of capital. Everything we do is aligned to that goal. We seek to find investment opportunities in growing middle market companies that have high free cash flow conversion. 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, our CFO, to take us through the financial results in detail.

Thank you, Art. For the quarter ended March 31st, GAAP net investment income was $0.28 per share and core net investment income was $0.28 per share. If adjusted for the additional shares issued during the quarter, core NII would have been $0.30 per share. Operating expenses for the quarter were as follows. Interest and expenses on debt were $23 million. Base management and performance-based incentive fees were $11.9 million. General and administrative expenses were $1.85 million, and provision for taxes was $0.2 million. For the quarter ended March 31st, net realized and unrealized change on investments, including provision for taxes, was a loss of $23.8 million. As of March 31st, NAV was $11.07 per share, which is down 2.4% from $11.34 per share last quarter. As of March 31st, 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. As of March 31st, our key portfolio statistics were as follows. The portfolio remains highly diversified with 159 companies across 49 different industries. The weighted average yield on our debt investments was 10.5%, and approximately 100% of the debt portfolio is floating rate. Pick income for the quarter equals only 3% of total interest income. We had four non-accruals, which represent 2.2% of the portfolio at cost, and 1.2% at market value. After quarter end, two of these non-accruals came off non-accrual, and pro forma non-accruals represent only 1% of the portfolio at cost and 0.5% at market value. The portfolio is comprised of 90% first lien senior secured debt, less than 1% in subordinated debt, 3% in equity of PSSL, and 7% in other equity. Our debt to EBITDA ratio on the portfolio is 4.2 times, and the interest coverage was 2.3 times. Now let me turn the call back to Art.

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

If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star 1 to ask a question. And our first question is going to come from Robert Dodd from Raymond James. Please go ahead. Hi, guys.

I apologize for the background noise to start with. On the equity raising during the quarter, were you seeing a – was this kind of like just a long-term capital build, or were you seeing an increase in pipeline activity? I mean, at the beginning part of the year, right, people were more optimistic, pre-liberation day. Yes. How would you characterize kind of the motivation there?

Yeah, so it's a great question. Look, we had a very robust 2024 originating about $4 billion across the entire Penn and Park platform, including PFLT. And we were gearing up to have a very robust 2025 again. So the ATM raise, along with all these debt capital raises, the securitization, redialing the credit facility, We're setting the table for a robust 2025. And then Liberation Day happened and kind of, you know, activity slowed down substantially. That's left us in a really good position, though. You know, we raised all this capital, you know, kind of the ATM. We raised the capital and average stock price of $11.33 per share. which is in excess of quarter-end NAV. So that was accretive. Quarter-end NAV ended up 11.07. So it turned out that we really raised this kind of really nice war chest. And we're hoping that now that the tariff situation seems to be clearing up a bit, we will be able to deploy that capital and ramp into it over the coming six to nine to 12 months. you know, activity, you know, even in a normalized environment, there's always activity in the core middle market. So we're hopeful we can do that, you know, over the next, you know, time period.

Got it. I appreciate that. On that, Liberation Day, China, change the landscape. I mean, what do you think is necessary to unlock more kind of platform M&A. I mean, in the prepared remarks, you said you expect it to be follow-on in the near term to existing borrowers. I mean, is it just certainty in tariffs, or is it tariffs returning ballpark to where they were, you know, pre-liberation day? I mean, what does it take to unlock new M&A activity in your markets?

Yeah, so as I said, most of our, you know, the tariff exposure to the portfolio is very limited. You know, we're in things like health care and government services and defense and other areas that really are not impacted by tariffs. So it's really been the uncertainty that has slowed things down. And certainly tariff impacted deals are going to be, it's going to take a while for those to rev back up. That, I think, will require certainty of tariffs. I think for the non-tariff-related names, it's just going to be certainty of the environment, and so people can start making decisions again. We're starting to see some activity, not a flood by any stretch, but we're starting to see some stabilization. We're starting to get more active. It's early days, though.

Got it. Got it. Thank you. One last one. On the non-recall restructurings post-quarter end, I assume there was some expertise in there. So of the income production that was put on non-recall, how much of the income production comes back? I mean, obviously, all the assets going off non-recall, but what kind of income rebound would we expect from those restructurings back?

Yeah, so when you add them up, it's Zips, which has done its restructuring. It's 4Wall, which the restructuring will be done in the next couple weeks. It's Integrative Nutrition, which has been done and completed. On a run rate basis, you get back about 60% of your income that you lost and adds up to about a penny a share on a run rate basis. So the way we look at it is, Adjusting for the ATM, we were at 30 cents a share up from 28. You add the penny of run rate on the non-accruals, that gets you to 31, so you're covering your dividend, and you're still under leveraged. You're kind of 1.3 times leverage. Our target leverage is 1.5 times, and that doesn't include the growth of the JVPSSL, which has substantial capital to grow 350 million. So kind of we've reloaded uh the balance sheet at very attractive uh terms but then equity uh and are looking forward to we don't even need the ramp to cover the dividend we just need to get through these non-accruals and then uh ramping more that's why we said we believe we can comfortably cover the dividend you know as we as we ramp into this vintage thank you

And our next question is going to come from Mark Hughes from Tourist. Please go ahead.

Yeah, thank you. Good morning. The activity with existing borrowers, I think you said that ought to be sustained. How much of that is, say, repricing versus growth capital? And is that at an elevated level relative to historical terms, or is it just that the new platform activity is low, and so this is the existing borrowers are dominating those originations.

Yeah, that's a great question, Mark. On the repricings, that ended. Liberation Day put an end. I guess that's the good news for Liberation Day, put an end to the repricings. So spreads have started to move back up, call it 25 to 50 basis points from pre-reliberation day. So the vast majority of the activity is existing platforms that are growing. As we've discussed, a prototypical deal for us in the core middle market is a company that starts out at 10 to 20 million of EBITDA with a sponsor who wants to grow the company, in many cases through add-on acquisitions. It's a fragmented industry. We give them the debt to do the initial acquisition. We co-invest in the equity because, by and large, The growth is locked. I mean, these companies are going to grow, and we arrange for a delay draw or incremental term loan to fuel that growth. So the vast majority of the add-ons are taking $10 or $20 million EBITDA companies, taking them to $30, $40, $50 and above. They get sold or the upper market guys take us out with a covenant light deal. We wish them the best. We have a residual equity co-investment. And hopefully that residual equity co-investment gets monetized at some point.

Very good. And then this question of kind of core middle market versus larger businesses, I think you've been pretty consistent on your view that the credit and the core middle market is very good for the reasons you've articulated. The same thoughts around tariff. I think you mentioned that when you're doing health care, it's not going to be much impacted by tariff. But any just general observations about tariff sensitivity for your portfolio versus larger businesses?

Yeah, so, I mean, with our industry groups, which are the five we've talked about, by and large, they're not. The only one where it might touch is consumer, and in particular, consumer goods, where there's consumer goods that are manufactured overseas, and particularly China. Most of those companies, you know, from the first Trump administration had already moved to Vietnam and other jurisdictions. But, again, it's a very limited part of the portfolio. And, again, all of these companies in whatever sector are always structured in a way where leverage is low, the loan-to-value is attractive, and can withstand, you know, stress, whether it be recessionary stress or any kind of shock. So... You know, we think it's a very limited piece of the portfolio. And, you know, and again, most of these companies already made their moves from the first Trump administration.

Thank you very much. Thank you.

And our next question is going to come from Mickey Schlein from Latinburg. Please go ahead.

Yes, good morning, Art. I wanted to start by asking you at a high level how you feel about the equilibrium in the private credit market that you target for PFLT. You know, I think you said in your prepared remarks that you're seeing stabilization of pricing and But at the same time, there's just huge buildup of capital, particularly by private BDCs. So just want to understand how sticky you think these spreads are that we're currently seeing.

Yeah. So, you know, again, we're focused on the 10 to 50 million of EBITDA. The mega players have moved far up market from that. They're competing with the broadly syndicated low market, providing covenant-like direct loans. And if you think about the business model, of course it makes sense for them to write big checks to big companies. That's the business model of those players. And most of the capital raised, private or public, is by many of those big players. So those big guys keep getting bigger. God bless. That should create more opportunity for those of us focused on the core. If our range today is 10 to 50 EBITDA, maybe that'll be 10 to 75 EBITDA a year or two from now as those folks raise additional capital because their business model just doesn't move the needle for them to write a check to a $20 or $30 million EBITDA company enough when they're managing that kind of AUM. So we wish We wish them all the best. We want them to raise a lot of capital. And we'd like them to continue to move up market, leave more room in the core middle market for us. And there's a handful of other people we see day in and day out who are our peers and our colleagues, who we club deals with, who we compete with. And those are the same old players. Generally, the competition is what we call rational. And we're pleased for the big to get bigger because the lead's leaves more room for us.

Thanks for that, Art. That's quite helpful. And touching on the senior loan fund, if I'm not mistaken, PFLT has about a $66 million unfunded equity commitment to the fund. Looks like you've finished your debt funding. How quickly do you expect to inject that additional equity into the senior loan fund?

Yeah, so in general, as I've said, we have about $850 million of comprehensive capital and PFLT platform, $500 to PFLT and $350 at the joint venture. And we think, look, obviously it depends on M&A, right? M&A was put on pause to a large extent on Liberation Day. But as you know, the core middle market keeps moving. It's not like we're, unlike the upper market, we're not subject to the big cap M&A, which can be lumpier. There's always core market M&A. So, you know, six to 12 months is always a good timeframe for us to deploy our excess capital as a general range.

Okay. That's it for me this morning. I appreciate your time as always. Thank you. Thanks, Mickey.

And our last question is going to come from Doug Carter from UBS. Please go ahead.

Thanks. Also, another question on the Senior Loan Fund. You know, I know you have excess, you know, financing capacity there today, but, you know, I guess how do you think about, you know, the longer-term opportunity to either continue to grow that relationship or possibly add other partners?

That's a great question. Look, the JV and this BDC PFLT and our JV and our sister BDC PNNT have been really helpful to shareholders from the standpoint of creating incremental return on investment, ROE, return on equity. They've generated very strong returns over time. So we're going to continue to, it can be an end to both, either grow this JV and potentially add another one over time. You know, you have to find the right partner who's simpatico with you on kind of how you see credit. and being able to make investment decisions that are similar and to move in the time frame that our borrower clients need to. We found two, one in each BDC, and it's quite conceivable over time we're going to add another JV partner to this BDC PFLT.

Great. Appreciate it. Thank you, Art.

And that concludes today's question and answer session. I'd now like to turn the conference back over to Art Pence for additional or closing remarks.

I just want to thank everybody for being on the call today and for your interest in PFLT. We look forward to speaking to you next in early August after the next earnings report. In the meantime, wishing everybody a terrific spring and early summer. Have a great day.

This concludes today's call. Thank you for your participation. You may now disconnect.