PennantPark Floating Rate Capital Ltd. Q2 FY2025 earnings call

• Discussed the current market environment for private middle-market lending, noting a solid quarter despite the seasonally slower start to the fiscal year, with approximately 80% of originations from existing borrowers.
• Highlighted the portfolio's positioning, with exposure to tariffs being limited, and the portfolio having a highly diversified composition across 159 companies in 49 industries.
• Mentioned the financial results for the quarter ended March 31st, including core net investment income of $0.28 per share (adjusted to $0.30 per share when accounting for additional shares issued).
• Talked about the strengthening of the balance sheet over the past year, with an increase in total leverage capacity by $750 million through various debt capital raises and securitization financing.
• Noted the portfolio growth to $2.3 billion, with $293 million invested in new and existing portfolio companies at a weighted average yield of 9.9%, and the JV PSSL portfolio totaling $1.1 billion with $60 million invested in new and existing portfolio companies at a weighted average yield of 9.8%.

For the quarter ended March 31st, core net investment income was $0.28 per share. When adjusted for additional shares issued during the quarter, core net investment income would have been $0.30 per share. The portfolio grew to $2.3 billion as of March 31st, which was a 7% increase from the prior quarter. During the quarter, $293 million was invested in three new and 54 existing portfolio companies at a weighted average yield of 9.9%. The portfolio's weighted average leverage ratio through the debt security was 4.2 times, and the weighted average interest coverage was 2.3x. As of March 31st, non-accruals represented 2.2% of the portfolio at cost and 1.2% at market value. Post-quarter end, two non-accruals were taken off non-accrual, and pro forma, non-accruals represented 1% of the portfolio at cost and 0.5% at market value.

• Expect originations to remain concentrated among existing portfolio companies with select opportunities from high-quality new platforms.
• Anticipate pricing to likely increase and leverage to moderate as buyers and lenders adjust to a new risk framework.
• Believe the current vintage of core middle market directly originated loans is excellent, and PFLT's net investment income will comfortably cover the dividend as the portfolio ramps up.
• The capital raised through activities like the ATM program and debt raises positions the company to deploy capital over the next 6 to 12 months once market conditions stabilize.

• Market volatility could impact the ability to deploy capital and seize opportunities.
• Tariff uncertainty has slowed down deal activity, and tariff-impacted deals will take time to ramp back up.
• Competition from large private BDCs focusing on the upper middle market could affect the core middle market focus.

Q: On the equity raising during the quarter, how was it related to pipeline activity?

A: The ATM raise and debt capital raises set the table for a robust 2025. The capital was raised at an average stock price of $11.33 per share, which was in excess of quarter-end NAV of $11.07, and the company is hopeful to deploy this capital over the coming 6 to 12 months as market conditions stabilize.

Q: What is needed to unlock platform M&A activity?

A: Certainty in tariffs and a stable market environment are needed. The uncertainty has slowed down activity, and once there is certainty in tariffs and the overall environment, M&A activity can pick up, with some stabilization already seen but it being early days.

Q: On non-accrual restructurings post-quarter end, how much income rebound can be expected?

A: On a run rate basis, about 60% of the lost income comes back, which adds up to approximately $0.01 per share on a run rate basis. Adjusting for this, the core net investment income moves closer to covering the dividend comfortably.

Q: How does the equilibrium in the private credit market target for PFLT look?

A: Mega players moving up market from the core middle market leaves more room for PFLT's focus on the $10 million to $50 million EBITDA core middle market. The competition is generally rational, and the big players getting bigger creates more opportunity for PFLT in the core market.

Q: On the senior loan fund unfunded equity commitment, how quickly is the additional equity expected to be injected?

A: It is expected to take 6 to 12 months to inject the additional equity into the senior loan fund, as there is always core market M&A activity that allows for capital deployment within that time frame.

Q: What is the longer-term opportunity for the senior loan fund?

A: The company intends to continue growing the JV and possibly add other partners. Finding partners who are simpatico in terms of credit view and investment decision-making timeframe is key, with the potential to add another JV partner to PFLT over time.