PennantPark Floating Rate Capital Ltd. Q3 FY2025 earnings call

• Fared well in the quarter ended June 30 with core net investment income of $0.27 per share. - Executed financing activities to strengthen balance sheets of PFLT and PSSL joint venture. - Formed a new joint venture with Hamilton Lane, with $200 million of capital committed and an expected $300 million financing facility, total portfolio to be $500 million, anticipating investment towards end of September or beginning of October. - Current market environment for private middle market lending: core middle market loans have lower leverage and higher spreads than upper middle market, with pricing on high-quality first lien term loans at SOFR plus 4.75 to SOFR 5.25. - Portfolio is conservatively structured: weighted average leverage ratio through debt security was 4.3x, weighted average interest coverage ratio was 2.5x; new platform investments had weighted average debt-to-EBITDA of 3.8x and weighted average interest coverage of 2.6x, weighted average loan to value 46% and yield of maturity 10.3%. - Focus on core middle market loans across sectors like business services, consumer, government services and defense, health care, software and technology; these sectors are recession-resilient. - Strong credit metrics since inception: PFLT invested $7.8 billion in over 500 companies with only 23 nonaccruals and a loss ratio on invested capital of 11 basis points annually. - Provided strategic capital to portfolio companies, with over $583 million invested in equity co-investments generating an IRR of 26% and multiple on invested capital of 2x. - Undertook key initiatives to fortify balance sheet, enhance liquidity: amended revolving credit facility, reduced interest rate, extended revolving period and final maturity; raised $32 million from ATM program; PSSL joint venture invested $52 million in new and existing portfolio companies at weighted average yield of 10.8% and closed new securitization financing at attractive rate.

For the quarter ended June 30, core net investment income was $0.27 per share. GAAP net investment income was $0.25 per share. Operating expenses included interest and expenses on debt ($25.4 million), base management and performance-based incentive fees ($11.3 million), general and administrative expenses ($1.95 million), and provision for taxes ($0.2 million). Net realized and unrealized change on investments was a loss of $5.3 million. As of June 30, NAV was $10.96 per share, down 1% from the prior quarter. The portfolio grew to $2.4 billion, up from $2.3 billion in the prior quarter. The PSSL joint venture portfolio totaled $1.1 billion. The portfolio was well diversified with 155 companies across 50 industries, 90% first lien senior secured debt, weighted average yield on debt investments was 10.4%, and 99% of the debt portfolio was floating rate. There were 2 nonaccruals representing 1% of the portfolio at cost and 0.5% at market value.

• Expect to achieve net investment income coverage of the dividend as scale into target leverage range with new joint venture operational. - Encouraged by recent uptick in deal activity, anticipating increased loan originations in second half of 2025. - Levers for NII growth: leveraging up to target leverage ratio of about 1.5x, filling out PSSL JV, and ramping the new Hamilton Lane JV over 12-18 months to cover and potentially exceed dividend coverage.

Q: Congratulations on the new JV with Hamilton Lane. If deal activity acceleration continues, how much of the $500 million could be deployed over next few quarters? How about accretion from JV within PFLT and leveraging from Hamilton Lane platform?

A: Bunch of great questions. Think of 12-18-month ramp for the $500 million JV. Expect mid-to upper teens NII returns on the capital invested. Hamilton Lane has great relationships with private equity sponsors and others that could help with deal flow.

Q: You and team have grown public BDCs, what are longer-term growth plans for both vehicles? When does it make sense to merge them? Any thought on internalizing corporate structure?

A: Growth is organic based on market opportunities. All things are always on the table regarding merging. PNNT still has equity rotation issues to work through first. Shareholder value is number one.

Q: You expect NII to fully cover dividend over time. Talk about timing and expectations for rest of year?

A: Have 3 levers of NII growth: leveraging to target leverage ratio, filling out PSSL JV, and ramping the new Hamilton Lane JV. Models show can more than cover dividend over time.

Q: Credit quality is strong. Talk about portfolio company level metrics like EBITDA growth?

A: EBITDAs continue to grow nicely, mid- to upper single digits overall. Nonaccruals are relatively light. Leverage levels on new deals and overall portfolio are low, new deals have debt-to-EBITDA of 3.8x and interest coverage of 2.6x, overall portfolio has debt-to-EBITDA of 4.7x and interest coverage of 2.5x.

Q: High level of unrestricted cash at quarter end, will it be directed towards the JV?

A: Some of the cash will be used for the JV. Quarter end is a high collection period, cash balance is a timing issue for cash management and working capital in deploying and funding new investments.

Q: Strategically, given lending market comments, expecting improved loan pricing power?

A: Hope so. Spreads have come down, but credit first. Select excellent credit, and hopefully with more supply, there'll be opportunity to maintain or expand spreads, though no guarantees.

Q: Recent rebound in M&A activity, any mix shift in pipeline or where dollars are deployed?

A: Up until about a month ago, mostly add-ons and delay draws to existing companies. In the last month, some new platforms have been increasingly coming to them. In PFLT, virtually all are sponsor deals, focus on capital preservation and yield, with loan to value typically 40% or 50% and sponsor capital providing cushion.

Q: ATM activity for the quarter, stock trading at discount to NAV, will you subsidize discount going forward?

A: Did issue shares at $11.31 pre-Liberation Day to build war chest. Timing was good. Remainder of 2025 hopeful to deploy war chest. ATM programs are efficient, and they look at deal flow, capital structure, and stock trading when considering future actions.