PennantPark Floating Rate Capital Ltd. Q1 FY2026 earnings call

• Launched new joint venture PSSL2, which invested $197 million during the quarter and an additional $133 million after quarter end, with total portfolio at $326 million and credit facility commitment at $250 million (expandable to $350 million).
• Observed increase in M&A transactions activity in private middle market, expanding investment opportunities and expected to drive repayments and equity rotation.
• Portfolio conservatively structured with low PIK interest (2.5% of total interest income), median leverage 4.5x EBITDA, median interest coverage 2.1x. Only 4.4% of portfolio in software, structured with all cash pay loans, covenants, 5.3x leverage, average maturity 3.4 years.
• Strong credit quality since inception: invested $8.7 billion in 545 companies, only 26 non-accruals, loss ratio on invested capital 13 basis points annually.
• Originated four new platform investments during the quarter with median debt to EBITDA 4x, interest coverage 2.9x, loan to value ratio 43%.
• Participated in equity co-investments, investing over $615 million since inception, generating IRR 25% and multiple on invested capital 1.9x.

For the quarter ended December 31, core net investment income was $0.27 per share. GAAP net investment income and core net investment income were both $0.27 per share. Operating expenses included interest and expenses on debt ($27.2 million), base management and performance-based incentive fees ($13.5 million), general and administrative expenses ($2.1 million), provision for taxes ($200,000), and credit facility amendment costs ($500,000). Net realized and unrealized change on investments including provision for taxes was a loss of $30 million. NAV was $10.49 per share as of December 31, down 3.1% from prior quarter. Portfolio statistics: diversified across 160 companies in 50 industries, weighted average yield on debt investments 9.9%, ~99% floating rate, PIK income 2.5% of total interest income, 89% first lien senior secured debt, 4% in equity of PSSL1 and PSSL2, 7% in equity co-investments, debt to EBITDA 4.5x, interest coverage 2.1 times.

• Objective to scale PSSL2 to over $1 billion in assets. Run rate NII projected to cover current dividend as portfolio ramps.
• M&A activity expected to populate JV and drive equity rotation, helping cover dividend.
• Expectations based on models considering base rate decreases and JV growth driven by M&A activity.

• Potential market factors causing actual results to differ from projections, as per SEC filings.
• Software sector risks if not managed properly, including higher leverage, covenant light structures seen in peers.
• Vintage-related markdowns, such as with 2021 vintage companies like PL Acquisition, Research Now/Dynata, and Wash and Wax.

Q: Paul Johnson asked about underweight software exposure in the portfolio and why.

A: Arthur Penn said they stick to cash flow loans with reasonable multiples, defensibility, covenants, and cash interest. They avoided software loans with high leverage, covenant light structures, etc., and focused on enterprise software in regulated industries with reasonable maturities.

Q: Paul Johnson asked about NII covering dividend and JV optimization.

A: Arthur Penn said it's based on JV models, expecting to cover dividend once PSSL2 reaches ~$1 billion with 75% ownership, driven by M&A and considering base rate changes.

Q: Robert Dodd asked about software exposure beyond product and AI impact.

A: Arthur Penn discussed defining software exposure as main product, and AI impact varies by industry, with some sectors like military defense less likely to quickly adopt AI.

Q: Robert Dodd asked about JV ramp timeline.

A: Arthur Penn said it's largely driven by M&A, expecting 18 months to reach $1 billion, with M&A activity indicating potential growth.

Q: Brian McKenna asked about drivers of unrealized marks and future markdowns.

A: Arthur Penn mentioned 2021 vintage companies like PL Acquisition, Research Now/Dynata, and Wash and Wax as drivers, with expectation of M&A upside to offset markdowns.

Q: Christopher Nolan asked about credit amendment charge and M&A in software sector.

A: Richard Allorto said the $500k charge was nonrecurring and not related to $75 million debt, and Arthur Penn stated they're not the best to ask about M&A in software sector due to not being big software lenders.