PennantPark Floating Rate Capital Ltd. (PFLT) Earnings

Management highlights

- Q3 2026 Core Financial Results * Core net investment income per share was $0.26, exceeding the $0.24 per share base quarterly dividend, leading to a $0.01 per share supplemental dividend (representing 50% of excess income per the firm's dividend policy) * Net asset value (NAV) per share was $10.26 as of June 30, a 2% decrease quarter-over-quarter, driven primarily by a single write-down of a non-accrual investment * Total operating expenses for the quarter were $40.2 million, including $25 million in debt interest expenses, $12.9 million in management and incentive fees, and $2.3 million in general and administrative costs * Net loss from realized and unrealized changes in investments was $18.3 million for the quarter - Portfolio Credit Quality & Diversification * The portfolio holds 159 companies across 51 industries, with only 4 non-accrual investments representing 1% of portfolio cost and 0.4% of market value * Key portfolio credit metrics: median debt-to-EBITDA of 4.6x, median interest coverage of 2.1x, average loan-to-value of 44%, and non-accrual income equal to just 2.4% of total investment income, among the lowest in the industry * Since inception, PFLT has posted an annual loss ratio of only 13 basis points on invested capital across 556 invested companies, with only 27 non-accruals * 99% of the debt portfolio is floating rate, with a weighted average yield on debt investments of 9.8% - Investment Activity & Strategic Positioning * PFLT invested $212 million in new and existing investments during the quarter at a weighted average yield of 9%, split evenly between 5 new platform companies and 18 existing platform companies, both with attractive low-risk credit metrics * PFLT realized a 14x multiple on invested capital from an equity co-investment in a leading defense technology company, generating $45 million in proceeds from an original $3.2 million investment * Management maintains high conviction in the government services and defense sector, which has generated a 12.2% overall IRR since inception, with 92% of investments as first lien senior secured; the sector benefits from durable federal funding, long-term contract visibility, resilient cash flows, and strong M&A activity * Equity co-investments have generated a 25% IRR and 2x multiple on invested capital on an aggregate $629 million invested since inception * Debt-to-equity ratio was 1.56x at quarter-end, and was reduced to 1.5x post-quarter, within the firm's target range of 1.4x to 1.6x * The PSSL2 joint venture is on track to scale to over $1 billion in assets over the next 12 to 18 months under disciplined underwriting standards

Guidance

- Management maintains the target debt-to-equity range of 1.4x to 1.6x for PFLT, and adjusted leverage to 1.5x post-quarter to fall within this target - Management expects the PSSL2 joint venture to grow to over $1 billion in total assets over the next 12 to 18 months, with expansion proceeding at a measured pace that preserves disciplined underwriting standards - Management is optimistic that M&A and transaction activity will remain elevated through the second half of FY2026, which is expected to drive higher portfolio repayments and create opportunities to monetize equity co-investments and redeploy capital into new income-generating investments - Management intends to maintain or increase its current 18% portfolio exposure to the government services and defense sector over time, given the attractive opportunity set and the firm's established sourcing expertise - The firm's core strategic objectives remain unchanged: deliver stable, well-covered dividends to shareholders while preserving invested capital

Segment performance

PFLT's overall investment portfolio for the quarter ended June 30 2026 had the following segment composition by allocation: 89% first lien senior secured debt, 1% second lien and subordinated debt, 3% equity in the PSSL and PSSL2 joint ventures, and 7% equity co-investments. Total investment income for the quarter was $66 million, consisting of $59 million in interest income, $6.2 million in joint venture dividends, and $0.8 million in other income. The PSSL2 joint venture, which is still in a growth phase, held $390 million in total assets as of the call date and generated a 12.7% cash yield on invested capital for Q3 FY2026. Government services and defense, a high-conviction investment vertical, represents 18% of PFLT's total portfolio; software exposure represents 4.3% of the total portfolio.

Risks & headwinds

- The majority of the firm's limited credit issues, including the single non-accrual write-down that reduced Q3 NAV, are concentrated in the 10-15% of the portfolio originating from the post-COVID zero-interest rate vintage, when underwriting metrics were inflated by unsustainable temporary consumer strength - The consumer sector faces current headwinds, including tariffs and post-COVID demand reversion, that have led to credit stress; PFLT does not plan to increase its consumer exposure and maintains a cautious posture toward new consumer investments - While the government services and defense sector is highly resilient, management acknowledges potential downside risks from future budget tightening (similar to the 2010s sequestration period) and leveraged company cash flow volatility; the firm mitigates this risk through maintaining lower leverage ratios, strong interest coverage cushions, and focusing on resilient service-focused sub-sectors rather than capital-heavy equipment sub-sectors - Higher interest rates increase PFLT's cost of capital, requiring higher asset yields to maintain accretive returns; management balances this through targeted investment in high-yield opportunities and prudent leverage management - Market conditions for M&A and originations remain uneven overall despite recent increases in activity

Analyst Q&A

• Q: How does the government services/defense sector perform in economic stress with rising rates, compared to other portfolio sectors? What is management's target allocation for the sector going forward?

  A: Management notes government services/defense has been extraordinarily resilient across multiple presidential administrations, due to guaranteed government payment for contracted work. The firm has 19 years of experience in the sector with a strong track record of returns, and it is a differentiated sourcing opportunity with limited competition from other lenders. Management plans to hold the sector's allocation around the current 18% level to maintain proper overall portfolio diversification. ---

• Q: How does PFLT balance higher current incremental cost of capital, the stock's very high dividend yield, leverage levels, and return of capital to shareholders with the firm's positive investment outlook?

  A: Management explains that the firm's two joint ventures generate teen-level returns, so incremental new debt raised at ~7% remains accretive to overall ROE. PFLT maintains a targeted leverage level around 1.5x, aligned with the portfolio's low risk profile, which management views as appropriately balanced. Management also believes PFLT stock is currently undervalued relative to the portfolio's underlying credit risk and the firm's ability to optimize net investment income. ---

• Q: Is there any risk of inflated cash flows and future downside in the government services/defense sector, similar to the credit issues seen in the post-COVID vintage portfolio?

  A: Management notes that during the 2010s sequestration period of military budget cuts, the firm's government services portfolio weathered the slowdown without major losses, in part due to the sub-sector focus. PFLT focuses on resilient government services rather than capital-heavy equipment, and mitigates sector risk by maintaining low leverage on new deals and requiring strong interest coverage cushions, which provide protection if budgets are cut in the future. ---

• Q: What drove the elevated unrealized depreciation in the quarter beyond routine accounting adjustments?

  A: The primary driver was a write-down on a single non-accrual investment, K&S, which also had a flow-through impact to the firm's joint venture holdings. An additional secondary drag on unrealized value came from a write-down on an equity co-investment position in Athletico Holdings.