PennantPark Floating Rate Capital Q3 Earnings Call Highlights

Key Points

• Core net investment income was $0.26 per share, exceeding the $0.24 base dividend. PennantPark will pay an additional $0.01 per share in supplemental dividends over the next three months.
• Net asset value declined approximately 2% to $10.26 per share, primarily due to a write-down in a non-accrual investment. The company reported four non-accrual investments, representing 1% of the portfolio at cost.
• PennantPark invested $212 million during the quarter and reduced debt-to-equity to 1.5 times, within its 1.4-to-1.6 target range. Management expects its PSSL II joint venture to grow from $390 million to more than $1 billion in assets over the next 12 to 18 months.

PennantPark Floating Rate Capital NYSE: PFLT reported fiscal third-quarter core net investment income of $0.26 per share for the quarter ended June 30, exceeding its base quarterly dividend of $0.24 per share.

The business development company said it will also pay a supplemental dividend of $0.0033 per share per month over the next three months, for an aggregate $0.01 per share. Chairman and Chief Executive Officer Art Penn said the supplemental payment represents 50% of net investment income exceeding the base dividend under the company’s revised dividend policy.

Net asset value fell to $10.26 per share as of June 30 from $10.47 in the preceding quarter, a decline of about 2%. Penn said the decrease was primarily driven by a write-down in a non-accrual investment.

Portfolio Metrics and Quarterly Results

Chief Financial Officer Rick Allorto said GAAP and core net investment income both totaled $0.26 per share. Investment income included $59 million of interest income, $6.2 million of dividends from joint ventures and $0.8 million of other income.

Quarterly expenses included $25 million of interest and debt expenses, $12.9 million of base management and performance-based incentive fees, and $2.3 million of general and administrative expenses. The company recorded a $18.3 million net realized and unrealized loss on investments, including tax provisions.

Allorto said the portfolio consisted of 159 companies across 51 industries at quarter-end. The weighted average yield on debt investments was 9.8%, while approximately 99% of the debt portfolio carried floating rates.

• 89% of the portfolio was first-lien senior secured debt.
• 1% was second-lien and subordinated debt.
• 3% was equity in the PSSL and PSSL II joint ventures.
• 7% was equity co-investments.

Penn said the company held four non-accrual investments, representing 1% of the portfolio at cost and 0.4% at market value. Payment-in-kind income equaled 2.4% of total investment income, which Penn described as among the industry’s lowest levels.

During the quarter, PennantPark invested $212 million in new and existing investments at a weighted average yield of 9%. That total included $106 million across five new platform companies, whose median debt-to-EBITDA ratio was 2.3 times, interest coverage was 4.2 times and loan-to-value was 30%. The company also deployed $106 million into 18 existing platform companies.

Joint-Venture Expansion and Capital Position

Penn said PennantPark continues to expand its PSSL II joint venture in a “measured and disciplined manner.” The venture’s portfolio totaled $390 million as of the call, and the company expects it to exceed $1 billion in assets over the next 12 to 18 months, subject to maintaining its underwriting standards.

For the quarter ended June 30, PSSL II generated a cash yield on invested capital of 12.7%, according to Penn.

At quarter-end, PennantPark’s debt-to-equity ratio stood at 1.56 times. Allorto said the company subsequently reduced borrowings under its revolving credit facility, bringing debt-to-equity to 1.5 times, within its target range of 1.4 to 1.6 times.

Responding to an analyst question about capital costs and the company’s shares, Penn said the joint ventures can generate returns in the teens, which he characterized as accretive relative to bond financing costs of roughly 7%. He said the company seeks to balance return on equity with prudent leverage at the parent-company level.

Government Services Remains a Major Focus

Government services and defense represented about 18% of PennantPark’s portfolio. Penn said the company intends to maintain or potentially increase exposure over time, though he also emphasized the importance of diversification and said exposure would likely remain around its current range.

Penn cited a significant realization from an equity co-investment in defense technology company Aechelon, which was sold to Shield AI. PennantPark received approximately $45 million of proceeds from an original $3.2 million investment, representing nearly a 14-times multiple on invested capital, he said.

Since inception, Penn said the platform has invested approximately $3 billion in government services and defense, including about $1.3 billion through PFLT. Those investments were 92% first-lien senior secured and generated an overall internal rate of return of 12.2%.

Penn described the sector as historically resilient because of federal funding priorities, long-term contracts and demand tied to national-security initiatives. He said the firm focuses largely on services businesses rather than equipment providers, including companies supporting defense modernization, digital infrastructure, cyber capabilities, electronic warfare, modeling and simulation, counter-drone technologies and autonomous systems.

He acknowledged that the company considers the potential effects of tighter government spending when underwriting new investments, referencing the sequestration period during the Obama administration. Penn said PennantPark seeks to offset such risks through lower leverage and meaningful interest-coverage cushions.

Market Outlook and Credit Commentary

Penn said merger-and-acquisition activity has improved over the past six to nine months, although conditions remain uneven. The company expects elevated activity through the second half of the year, which could lead to portfolio repayments, equity co-investment monetizations and opportunities to redeploy capital into income-producing assets.

In the core middle market, Penn said pricing for high-quality first-lien term loans generally ranges from SOFR plus 500 to 550 basis points, with leverage around 4.5 times EBITDA. He said such transactions retain meaningful covenant protections compared with covenant-lite structures in the upper middle market.

The company’s software exposure was approximately 4.3% of the portfolio and consisted primarily of cash-pay, covenant-protected loans to mission-critical enterprise software businesses serving regulated markets, including defense, healthcare and financial services.

On credit performance, Penn said amendment activity has been relatively light. He attributed recent portfolio pressure primarily to a small number of investments originated during the post-COVID, near-zero-interest-rate period, particularly consumer-related investments. He estimated that investments from that vintage account for roughly 10% to 15% of the current portfolio.

Allorto said the quarter’s principal valuation declines involved non-accrual investment KNS and equity position Athletico Holdings. He added that KNS was also held in a joint venture, creating a related flow-through impact.

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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