PennantPark Floating Rate Capital Q2 Earnings Call Highlights

Key Points

• PennantPark Floating Rate Capital kept net asset value essentially flat in Q2, with NAV at $10.47 per share and non-accruals still low at 0.8% of the portfolio at cost, signaling continued portfolio credit stability.
• The company is resetting its dividend structure, starting with a base monthly dividend of $0.08 per share and adding a variable supplemental dividend tied to 50% of net investment income above that base.
• Management said its PSSL II joint venture is scaling and could help lift earnings over time, while a pending Echelon equity co-investment sale is expected to produce about $47 million in proceeds and support the quarter’s stable NAV.

PennantPark Floating Rate Capital NYSE: PFLT reported flat net asset value and continued low non-accruals for its second fiscal quarter of 2026, while management said it is resetting the company’s dividend framework to better align payouts with current net investment income.

Chairman and Chief Executive Officer Art Penn said the business development company remains focused on the core middle market, where he said risk-reward dynamics remain more attractive than in the upper middle market. For the quarter ended March 31, PennantPark Floating Rate Capital reported core net investment income of $0.27 per share and GAAP net investment income of $0.26 per share.

Net asset value was $10.47 per share at quarter-end, compared with $10.49 per share in the prior quarter. Penn said portfolio credit quality remained strong, with non-accrual investments representing less than 1% of the portfolio.

Dividend framework adjusted

Penn said the company will begin paying a base monthly dividend of $0.08 per share starting with the July dividend. In addition, the company will introduce a variable supplemental dividend equal to 50% of net investment income above the base dividend. The supplemental dividend will be declared and paid monthly along with the base dividend.

“We clearly want to position ourselves as a prudent, stable BDC,” Penn said during the question-and-answer portion of the call. He said the adjustment was intended to “align the dividend comfortably to the NII” while allowing the company to avoid forcing investments in a muted merger-and-acquisition market.

Penn said management still believes the company can earn more than $0.30 per share per quarter over time as its second joint venture, PSSL II, ramps. However, he said the company is taking a measured approach as market activity remains below the unusually strong levels seen in 2024.

PSSL II joint venture continues to scale

During the quarter, PennantPark Floating Rate Capital continued building PSSL II, investing $148 million in new and existing investments through the joint venture. At quarter-end, the PSSL II portfolio totaled $340 million.

Penn said management remains focused on scaling PSSL II to more than $1 billion of assets, consistent with the company’s existing joint venture. Based on current market conditions, he said the ramp is expected to take place over the next 12 to 18 months while maintaining underwriting discipline.

Overall, the company invested $295 million during the quarter at a weighted average yield of 9.3%. That included $117 million invested in six new platform portfolio companies. Penn said those new investments had a median debt-to-EBITDA ratio of 3.0 times, interest coverage of 3.4 times and loan-to-value of 44%.

Portfolio metrics remain conservative

Senior Partner José Briones said the portfolio was diversified across 162 companies in 51 industries as of March 31. The weighted average yield on debt investments was 9.8%, and approximately 99% of the debt portfolio was floating rate.

The portfolio was composed of 87% first-lien senior secured debt, 1% second-lien and subordinated debt, 3% equity in PSSL I and PSSL II, and 9% equity co-investments. Briones said debt-to-EBITDA across the portfolio was 4.6 times, while interest coverage was 2.0 times.

Penn highlighted several other portfolio quality indicators, including last-12-months payment-in-kind interest of 2.2% of total interest income. He said non-accrual investments stood at 0.8% of the portfolio at cost and 0.5% at market value. The company ended the quarter with three non-accrual investments.

The company also emphasized its limited software exposure, which Penn said was approximately 4.3% of the portfolio. He said those investments are primarily cash-pay, covenant-protected loans tied to mission-critical enterprise software serving regulated industries such as defense, healthcare and financial institutions.

Echelon investment expected to generate large proceeds

Penn said the company expects a meaningful realization from its equity co-investment in Echelon, a defense technology company sponsored by Sagewind Capital. Echelon has agreed to be acquired by Shield AI, another defense technology company.

Upon closing, PennantPark Floating Rate Capital expects its $3.2 million equity co-investment to generate approximately $47 million in total proceeds, consisting of $40 million in cash and $7 million of value in Shield AI stock. Penn said that would represent nearly a 15-times multiple on invested capital and demonstrates the value of the company’s equity co-investment program.

Penn noted that approximately 20% of the portfolio is exposed to government services and defense. In response to an analyst question from Brian McKenna of Citizens, Penn said the Echelon investment was a major factor supporting the company’s stable NAV in the quarter. He also cited other equity co-investments, including Guild Garage, which he said had already been exited.

Market activity improving but still uneven

Penn said M&A activity has increased over the past six to nine months, though overall conditions remain uneven and activity remains below 2024 levels. He said private equity sponsors remain active, creating a growing pipeline of potential new originations and add-on investments.

In the core middle market, Penn said pricing for high-quality first-lien term loans typically ranges from SOFR plus 500 to 550 basis points, with leverage around 4.5 times EBITDA. He said those transactions continue to include meaningful covenant protections, unlike many upper-middle-market loans.

Briones said the company is seeing opportunities in defense and government services, healthcare and business services. Penn added that healthcare remains a significant area for the company, but said PennantPark focuses on lower leverage levels to preserve downside protection.

Briones said operating expenses for the quarter included $24.1 million of interest expense, $12.8 million of base management and performance-based incentive fees, $2.1 million of general and administrative expenses, $1.1 million of credit facility amendment and debt issuance costs and less than $0.1 million of tax provision. Net realized and unrealized change on investments, including taxes, was a gain of $3 million.

As of March 31, the company’s debt-to-equity ratio was 1.6 times. Briones said that subsequent to quarter-end, PennantPark Floating Rate Capital paid down its revolving credit facility and reduced debt-to-equity to 1.5 times, within its target range of 1.4 to 1.6 times.

Asked by Christopher Nolan of Ladenburg Thalmann about broader credit conditions for business development companies, Penn said PennantPark Floating Rate Capital’s non-accruals remained below 1%. He said some industry credit issues are tied to the post-COVID 2021 and 2022 vintage of deals, when capital was abundant and some companies benefiting from pandemic-era trends later reverted toward more normal performance.

About PennantPark Floating Rate Capital NYSE: PFLT

PennantPark Floating Rate Capital Ltd. is a business development company. It seeks to make secondary direct, debt, equity, and loan investments. The fund seeks to invest through floating rate loans in private or thinly traded or small market-cap, public middle market companies. It primarily invests in the United States and to a limited extent non-U.S. companies. The fund typically invests between $2 million and $20 million. The fund also invests in equity securities, such as preferred stock, common stock, warrants or options received in connection with debt investments or through direct investments.

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