PennantPark Floating Rate Capital .(PFLT) - 2023 Q1 - Earnings Call Transcript

Financial Data and Key Metrics Changes - For the quarter ended December 31, net investment income was $0.30 per share, with operating expenses including interest and expenses on debt at $9.9 million, management fees at $6.4 million, general and administrative expenses at $850,000, and provision for taxes at $534,000 [30] - GAAP NAV decreased to $11.30, down 2.7% from $11.62 per share, primarily due to market-related fair value adjustments [7][47] - Adjusted NAV, excluding mark-to-market of liabilities, was $11.22 per share, down from $11.59 last quarter [31] Business Line Data and Key Metrics Changes - The portfolio remains highly diversified with 126 companies across 44 different industries, with 87% in first lien senior secured debt and 13% in equity [32] - The weighted average yield to maturity increased to 11.3%, up from 10% last quarter and 7.5% last year [46] - For the quarter, the company invested $66 million in new and existing portfolio companies at a weighted average yield of 11.2% [48] Market Data and Key Metrics Changes - The weighted average debt-to-EBITDA in the portfolio was 4.7x, with an average interest coverage ratio of 2.8x [28] - The interest expense coverage ratio, calculated using annualized interest expense and current LIBOR and SOFR base rates, was 2.2x, compared to the market average of 1.6x [29] Company Strategy and Development Direction - The company aims to grow the JV portfolio to $1 billion of assets, believing that increased scale and attractive ROE will enhance earnings momentum [2] - The focus remains on capital preservation as a senior secured first lien lender, particularly in the core middle market, which is expected to provide attractive investment opportunities [50][51] - The company has a long-term track record of financing high-growth middle market companies in five key sectors, including business services, consumer, government services, healthcare, and software and technology [51] Management's Comments on Operating Environment and Future Outlook - Management is cautious, assuming a weak economy when underwriting new deals, but notes that the consumer sector is being closely monitored due to mixed performance [10][11] - The company believes it is well-positioned in the current market environment of inflation, rising interest rates, and geopolitical risks [49] - The Board of Directors approved a 5.3% increase in the monthly distribution to $0.10 per share, indicating confidence in future net investment income growth [46] Other Important Information - Credit quality has been excellent, with only 16 non-accruals out of $5.1 billion invested in 455 companies since inception, resulting in a loss ratio of only 6 basis points annually [6] - The company has raised $48 million through the issuance of 4.25 million shares to support investment in new opportunities [49] Q&A Session Summary Question: Outlook for credit quality in the portfolio - Management assumes a soft economy when underwriting new deals, indicating a cautious approach to credit quality [56] Question: Financing options for maturing notes - The company has the capability to repay maturing notes using the revolving credit facility and is exploring refinancing options [58] Question: Impact of non-accrual on ROE and distribution rate - The non-accrual of Walker Edison is not expected to significantly affect the ROE or distribution rate from the joint venture [59] Question: Trends in deal selectivity and volume - The historical deal selectivity rate is around 5%, with a slowdown in deal activity noted recently due to seasonal factors [78] Question: Performance of portfolio sectors - The consumer sector is experiencing mixed results, while other sectors are seeing revenue and EBITDA growth of 5% to 10% year-over-year [83]