PennantPark Floating Rate Capital Ltd.

Good morning and welcome to the Pennant Park Floating Rate Capital's second fiscal quarter 2026 earnings conference call. Today's conference is being recorded. At this time, all participants have been placed in a listen-only mode. The call will be open for a question and answer session following the speaker's remarks. If you'd like to ask a question at that time, simply press star 1 on your telephone keypad. If you'd 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 Pennant Park Floating Rate Capital. Mr. Penn, you may begin your conference.

Thank you and good morning everyone. Welcome to Pennant Park Floating Rate Capital's second fiscal quarter 2026 earnings conference call. I'm joined today by Jose Briones, Senior Partner at Pennant Park. Rick Elordo, our CFO, is unable to be with us today due to a prior commitment. Jose, 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 and is the property of Penn and Park Clothing Rate Capital. 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 customer safe harbor disclosure in our press release regarding forward-looking information. Our remarks today may include forward-looking statements and projections. Please refer to our most recent SEC filings 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 the latest SEC filings, please visit our website, 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, Jose. I'll begin with an overview of our second quarter results, including our dividend adjustment and an outlook for net investment income. I'll then discuss the current market environment and how we believe PFLT is positioned going forward. Jose will follow up with a detailed review of our financial results, after which we will open up the call for questions. We are pleased with the continued strong performance and quality of our portfolio in what remains a challenging market environment. The risk-reward profile of the core middle market remains meaningfully more attractive than that of the upper market. NAV was flat quarter-over-quarter. Median portfolio company leverage remains moderate at 4.6 times. Last 12 months, pick interest is only 2.2% of total interest, and non-accruals are less than 1% of the portfolio, and we do not have material software exposure. The substantial growth of the PSSL2 JV this past quarter provides a solid base and positions us for growth in NII over time as the JV ramps. Let me now walk through our quarterly results. For the quarter ended March 31st, core net investment income was 27 cents per share. During the quarter, we continued to scale our new joint venture, PSSL2, investing $148 million in new and existing investments. At quarter end, the portfolio totaled $340 million. We are encouraged by the pace of deployment and remain focused on methodically scaling PSSL2 to over a billion dollars of assets consistent with our existing joint venture. Based upon the current market environment, we expect this ramp to occur over the next 12 to 18 months while maintaining our disciplined underwriting standards. In light of the current market dynamics and in consultation with our board, we are updating our dividend framework to better align with net investment income. Beginning with the July dividend, we will set a base monthly dividend at $0.08 per share, a level we believe is well supported by current earnings. In addition, we will introduce a variable supplemental dividend equal to 50 percent of the excess NII above the base dividend. The supplement will be declared and paid monthly along with the base dividend. Let me now turn to the broader market environment. M&A activity has increased over the last six to nine months, and although overall conditions remain uneven, private equity sponsors remain active, and we are seeing a growing pipeline of attractive opportunities across both new originations and add-on investments. However, activity levels remain below the unusually strong levels observed in 2024 as the market transitions toward a more normalized backdrop. We expect increased transaction activity to drive repayments across the portfolio, including opportunities to monetize equity co-investments and redeploy capital into income-generating investments. Notably, we expect a meaningful realization from our equity co-investment in Echelon this quarter. Echelon is a leading defense technology company sponsored by Sage Wind Capital, our long-term sponsor relationship. Echelon announced that it is agreed to be acquired by Shield AI, another cutting-edge defense technology company. Upon closing, we expect our $3.2 million equity co-investment to generate approximately $47 million in total proceeds. Proceeds will consist of $40 million of cash and $7 million of value in Shield AI stock. This represents nearly a 15 times multiple on invested capital and demonstrates the value of our equity co-investment program. Given the current geopolitical environment and the echelon news, it is important to highlight that approximately 20% of our portfolio is exposed to government services and defense. In the core middle market, pricing for high-quality first lien term loans remains attractive. typically ranging from SOFR plus 500 to 550 basis points with leverage of approximately four and a half times EBITDA. Importantly, these structures continue to include meaningful covenant protections in contrast to the covenant-like structures prevalent in the upper middle market. We believe that the current environment favors lenders with strong private equity-sponsored relationships and disciplined underwriting, areas where we have a clear competitive advantage. During the quarter, we invested $295 million at a weighted average yield of 9.3%, including $117 million invested in six new platform portfolio companies with a median debt-to-EBITDA ratio of three times, interest coverage of 3.4 times, and a loan-to-value of only 44%. Our portfolio remains conservatively positioned. Pick income. represents just 2.5 percent of total interest income among the lowest levels in the industry. Median leverage was 4.6 times, median interest coverage was two times, and median loan-to-value was 44 percent. We ended the quarter with three non-accrual investments representing just 0.8 percent of the portfolio at cost and 0.5 percent at market value. These results reflect the rigor of our underwriting process and the discipline of our investment approach. Turning to software exposure, which has been an area of recent market focus, our exposure remains limited at approximately 4.3% of the portfolio and is structured consistently with our core middle market strategy. These investments are primarily cash pay, covenant-protected loans with moderate leverage and shorter durations. Importantly, they are concentrated in mission-critical enterprise software serving regulated industries such as defense, healthcare, and financial institutions. We believe this represents a meaningful point of differentiation relative to our peers. 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. Core middle market companies, those typically with 10 to 50 million of EBITDA, operate below the threshold of broadly syndicated loan or high yield markets. 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. We thoughtfully structure transactions with sensible leverage, 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 informed on the performance of our portfolio 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. Our credit quality since our inception over 14 years ago has been excellent. PFLT has invested $9 billion in 551 companies, and we have experienced only 27 non-accruals. Since inception, our loss ratio on invested capital is only 12 basis points, annually. As a provider of strategic capital who fuels 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 $618 million in equity co-investments and have generated an IRR of 25%, and a multiple on invested capital of two times. Looking ahead, our experienced team and broad origination platform position us well to generate attractive deal flow. Our mission remains consistent to deliver a stable and well-covered dividend while preserving capital. Everything we do is aligned to that objective. We continue to focus on investing in high-quality middle market companies with strong free cash flow generation. We capture that value through first lien senior secured loans and we pay out those contractual cash flows in the form of dividends to our shareholders. With that overview, I'll turn it over to Jose for a more detailed review of our financial results.

Thank you, Art. For the quarter ended March 31st, GAAP net investment income was $0.26 per share, and core net investment income was $0.27 per share. Core net investment income includes the at-back of $1.1 million of debt issuance costs related to the refinancing of our securitization due 2038. Our operating expenses for the quarter were as follows. Interest expense on the debt were $24.1 million. Base management and performance-based incentive fees were $12.8 million. General administrative expenses were $2.1 million. Credit facility amendment and debt issuance costs were $1.1 million. And provision for taxes was less than $0.1 million. For the quarter ended March 31st, net realized and unrealized change of investments, including the provision for taxes, was a gain of $3 million. As of March 31st, NAV was $10.47 per share, essentially flat from $10.49 per share last quarter. As of March 31st, our debt to equity ratio was 1.6 times, and our capital structures diversified across multiple funding sources, including both secured and unsecured debt. Subsequent to quarter end, we paid down our revolving credit facility and reduced our debt to equity ratio to 1.5 times, which is within the target range of 1.4 to 1.6 times. As of March 31st, our key portfolio statistics were as follows. The portfolio remains well diversified, comprising 162 companies across 51 industries. The weighted average yield on our debt investment was 9.8%, and approximately 99% of our debt portfolio is floating rate. LTM PIC income equal to 2.2% of total interest income. The portfolio is comprised of 87% first lien senior secured debt, 1% in second lien and subordinated debt, 3% in equity of PSSL 1 and PSSL 2, and 9% in equity co-investments. Debt to EBITDA on the portfolio is 4.6, and interest coverage was 2.0. With that, I'll turn the call back to Art for closing remarks.

Thanks, Jose. In conclusion, I'd like to thank our exceptional team for their continued dedication and our shareholders for their trust and partnership. We remain focused on delivering durable earnings, preserving capital, and creating long-term value for all stakeholders. That concludes our remarks. At this time, I would like to open up the call to questions.

Thank you. If you'd 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, press star one to ask a question.

And we'll take our first question from Brian McKenna of Citizens.

Thanks. Good morning, everyone. So, NAV per share was roughly flat in the quarter. That's a pretty notable standout here within the group for the first quarter. What's driving the resiliency here? You do have the forthcoming, you know, pretty sizable realization event, I believe, coming in the next quarter or so. So I'm assuming that drives some incremental gains across the portfolio. But anything else just to note across the rest of the portfolio?

Thanks, Brian, and good morning. Yes, echelon is a big piece of the, you know, of the equation there. really uh showing the value of equity co-invest and we also have a few other equity co-invest that are percolating along nicely and and you'll see uh you'll see those in the soi we have one called guild garage which is an equity co-invest which uh has already been uh already been exited and we have some others that are certainly not the size of echelon but are percolating along and provide us some nice singles and doubles. And that's really, just to zoom out, that's really part of the reason we do equity co-invest. Many of our peers do it. Some of our peers do not. It's nice to have something in the portfolio that can give you some lift, that can offset, you know, the inevitable, you know, the inevitable non-accruals that you're going to have in a broadly diversified loan portfolio. So, you know, the program in this quarter is certainly meeting its mission and and providing a stable NAV.

Got it. That's helpful. Thanks, Art. And then when you look at your pipeline of new originations today, I mean, where are you leaning in? Is it, you know, a lot of the same sectors? I know you've been active in defense and government services, but kind of what's the mix of the pipeline there? And then how does spreads compare on these transactions versus spreads that are, you know, that are really tied to the prepayments that have come in over the last quarter or two. Just trying to gauge where the spreads are coming in today versus maybe some of the recent prepays.

Yeah, Jose, do you want to answer that one?

Sure. Good morning. With regards to areas of opportunities and what we're seeing, you know, defense and government services is a big part of our investment philosophy as well as healthcare and some business services. And so we're quite active with our private equity sponsors looking at those type of deals in the industries. And you saw the benefit of our exposure to defense with Echelon. With regards to spreads, by and large in our market, we're in that 500 to 550 over SOFR. And our view is that it's pretty consistent over the last couple of quarters.

Yeah, I'll also add in, you know, on the industry focus, obviously government services and defense, a big one. We also have, you know, substantial exposure to healthcare, which we think is a resilient and can be a resilient area of the economy. It's certainly a big part of the GDP. Some of our peers have stumbled a little bit in healthcare over time. Thankfully for us, by and large, uh we've done very well with it and it's just i think basically we keep leverage low you know we we don't get out over our skis we we take let we keep leverage low keep it reasonable i think where you've seen stumbles in healthcare it's kind of higher leverage situations and when you have higher leverage you just don't have the cushion to be able to withstand uh bumps in the road so you know we're we're pleased with healthcare obviously we have a we have a big business services um You know, consumer services are a big area. We've been doing quite a bit in, you know, kind of services around the home. That's been an active area. So those are kind of some of the areas where we focus.

Very helpful. Thank you, guys. And as a reminder, that is star one for questions. Okay.

We do have an extra question here.

Please. Yes. We'll go next to Christopher Nolan with Bladenburg-Dahlman.

Hey, guys. Apologies if I missed part of the call. On your comments earlier on the dividend adjustment, should we look at that as a proxy for the run rate direction for PFLT?

Yeah, it's a great question. Look, we still believe that as we ramp this up, joint venture, this JV2, that we can earn over time north of 30 cents a share per quarter. And if you were to model it out, Chris, I think you'd see that. Just with what was going on in the M&A market, which was not quite as robust as we would have hoped, we said, hey, let's not force it. Let's take our time in this more muted M&A market. The deals will be Forcing investment usually doesn't pay off. So we said, look, let's take this time, adjust the dividend to be more comfortable. We clearly want to position ourselves as a prudent, stable BDC. BDCs today are kind of a little bit out of favor. And as the market turns, and we hope they will be in favor again, we want to come out of it well positioned as a BDC that easily covers its dividend, comfortably covers its dividend, and also has dividend upside. So, this was an opportunity for us to kind of, you know, clear the table a bit, align the dividend comfortably to the NII, which is why we've chosen the 24 cents a quarter, 8 cents a month, plus 50% of the difference between the base and GAAP NII. then we will pay that out you know monthly so we've already stated that for the month of july there'll be an eight cent per share base dividend and a 0.33 cent supplemental dividend for july august september we'll announce earnings in august we'll be back here in a few months we'll see what gap nii was and we will you know adjust the the supplemental will be adjusted to whatever whatever that was so We just thought it was a good time, given what's going on, to kind of reset the table, make sure our investors know that we can comfortably cover it, and not force the issue on ramping the JV in a more muted M&A market. I hope that makes sense.

Yeah, no, it does. And I guess, you know, from a broader perspective, I mean, you guys see a lot of deals. And for this quarter, at least from my chair, it looks like asset quality for BDCs in general seems to be deteriorating. And I just want to, and I'm not isolating PFLT or any Penn and Park entity, but in general, where do you see us in the cycle for credit for these market companies?

Yeah, so for us, you missed the first part of the call, but our non-accruals are under 1%. So for us, that's pretty good. We'll take below 1% in any environment. But let me comment on the broader picture. Obviously, those BDCs that have significant software exposure, by definition, had to mark those loans down, right? Now, they still hopefully will perform well. Hopefully, it will pay off. All good. But by definition, there was a mark to market, particularly for those who have big software exposure. We have very limited software exposure. So, We did not get hung up on that. I will highlight that the area that where we do have our minimal non-accruals and where everyone in the industry has some non-accruals is I'll call it the post-COVID vintage of 21, 22 deals where, you know, right post-COVID, there was a lot of money flowing around and there was a perception that the era that we were in, for instance, consumer products were doing well, other areas of the economy that were more of an at-home economy, There was a perception by, you know, everybody that, you know, things would be kind of, you know, for the long term in that space. Guess what? Here we are in 2026. There's been a reversion to the mean. Some of those companies that were doing really well in 2022 were 2023. are doing less well. So for us in our below 1% non-accruals, and I think you see it elsewhere in the industry, I kind of think that's where you're seeing some of the non-accruals hit. Does that answer your question, Chris?

Yes, it does. Thanks for the call.

And at this time, there are no further questions. I'll turn the call back to Art for any closing remarks.

Thank you. Thanks, everybody, for being on the call today. We look forward to speaking with you in early August after our next earnings release. In the meantime, we're wishing all the mothers out there a great Mother's Day, have a great summer, and we'll speak to you in August. Thank you very much.

This does conclude today's conference. We thank you for your participation.