PennantPark Floating Rate Capital Ltd. Q2 FY2026 earnings call

• Overview of second quarter results including dividend adjustment and outlook for net investment income. - Market environment: M&A activity increased over last six to nine months, private equity sponsors active, growing pipeline of opportunities. - Positioning: Core middle market risk-reward profile more attractive than upper market. NAV flat quarter-over-quarter. Median portfolio company leverage moderate. Low pick interest and non-accruals. Substantial growth of PSSL2 JV. - Dividend framework update: Base monthly dividend at $0.08 per share, variable supplemental dividend equal to 50% of excess NII above base dividend. - Expect increased transaction activity to drive repayments and monetize equity co-investments. Notable realization from equity co-investment in Echelon. - Core middle market pricing for high-quality first lien term loans attractive with strong covenant protections. - Portfolio investments: $295 million invested at weighted average yield of 9.3%, including new platform portfolio companies. - Software exposure limited and structured consistently with core middle market strategy. - Experienced team and broad origination platform to generate deal flow. Mission to deliver stable and well-covered dividend while preserving capital.

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 their securitization due 2038. The portfolio remains well diversified, comprising 162 companies across 51 industries. The weighted average yield on their debt investment was 9.8%, and approximately 99% of their 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. During the quarter, they 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%. Their portfolio has three non-accrual investments representing just 0.8% of the portfolio at cost and 0.5% at market value. Software exposure is limited at approximately 4.3% of the portfolio.

• Expect ramp of PSSL2 JV to over a billion dollars of assets over next 12 to 18 months while maintaining disciplined underwriting standards. - Believe can earn over time north of 30 cents a share per quarter as JV ramps. - Adjusted dividend to be more comfortable in muted M&A market, aligning base dividend at $0.08 per share and variable supplemental dividend based on excess NII. - Expect increased transaction activity to drive repayments and redeploy capital. - Anticipate meaningful realization from equity co-investment in Echelon this quarter.

• Market conditions remain uneven, activity levels below unusually strong levels in 2024. - Geopolitical environment could impact portfolio. - Software exposure, although limited, could pose risks if market conditions change. - Non-accruals could occur in portfolio, although currently less than 1% of portfolio. - M&A market not as robust as hoped could impact investment and dividend.

Q: NAV per share was roughly flat in the quarter. What's driving the resiliency?

A: Echelon is a big piece, also other equity co-invests percolating. Equity co-invest program helps offset non-accruals.

Q: Where are you leaning in with pipeline of new originations? What's spread comparison?

A: Leaning in defense, government services, healthcare, business services. Spreads in their market are 500 to 550 over SOFR, consistent over last couple of quarters.

Q: On dividend adjustment, should we look at that as proxy for run rate direction?

A: Still believe can earn north of 30 cents per share per quarter as JV ramps. Adjusted dividend to be comfortable in muted M&A market, position as prudent stable BDC.

Q: General credit cycle for BDCs?

A: Non-accruals under 1% for them. Broader picture: BDCs with significant software exposure had mark downs. Post-COVID vintage deals (21,22) causing some non-accruals as reversion to mean.