PennantPark Floating Rate Capital .(PFLT) - 2019 Q3 - Earnings Call Transcript

Financial Data and Key Metrics Changes - For the quarter ended June 30, 2019, net investment income was $0.29 per share, with net unrealized appreciation among investments of approximately $12 million or $0.30 per share, and net realized losses of about $18 million or $0.47 per share [30][31] - NAV decreased from $13.24 to $13.07 per share, indicating a slight decline in the company's overall value [32] Business Line Data and Key Metrics Changes - The PennantPark Senior Secured Loan Fund (PSSL) owned a diversified pool of $470 million across 43 names, with an average yield of 7.9% [9] - The number of non-accruals decreased to two, representing only 1.4% of cost and 0.5% of the market value of the portfolio, showing improved credit quality [19][20] Market Data and Key Metrics Changes - The overall debt portfolio has a weighted average yield of 8.9%, with 99% of the portfolio being floating rate [33] - The cash interest coverage ratio remains healthy at 2.8 times, providing a significant cushion to support stable investment income [17] Company Strategy and Development Direction - The company aims for a debt-to-equity ratio of 1.4 to 1.7 times, with a gradual increase in leverage against a primarily first lien portfolio to enhance earnings [13][14] - The focus remains on financing middle-market financial sponsors, with relationships with about 400 private equity sponsors, emphasizing long-term value and defensive investment strategies [14][16] Management's Comments on Operating Environment and Future Outlook - Management indicated a strong U.S. economy with no signs of recession, and they are optimistic about the portfolio's performance [21] - The company expects continued active deal flow driven by growth and M&A financings for the remainder of 2019 [28] Other Important Information - The company has made investments totaling about $3 billion since inception, with an average yield of 8.1% and an annualized loss ratio of only about 8 basis points [20] - The company is actively considering CLO financing to help achieve its target debt-to-equity ratio, which could provide a differentiated financing source [42][43] Q&A Session Summary Question: Growth in PSSL and NII contribution - Management acknowledged a temporary reduction in PSSL due to repayments but aims to ramp it up in the coming quarters [41] Question: Spread compression and liability side opportunities - Management is actively considering CLO financing as a potential source of capital, which could provide long-term financing benefits [42][43] Question: Return on equity enhancement opportunities - Management indicated that gradual increases in leverage and fixed G&A costs would enhance return on equity as the portfolio grows [44] Question: Recovery rate on non-accruals - The recovery rate has decreased to the 80s, with management hopeful for good recoveries from equity pieces [46] Question: Increase in debt-to-EBITDA ratio - Management attributed the increase to underperforming deals but expects it to normalize back to mid-4s over time [50][53] Question: Loss assumptions and severity - Management believes they will perform better than market expectations of a 2% default rate and 80% recovery rate, citing historical performance of 8 basis points annualized loss [57][58] Question: Drivers of realized and unrealized gains and losses - New Trident was a significant driver of losses, while positive contributions came from equity co-investments like By Light [62] Question: Monetizing equity co-invests - Management indicated that private equity sponsors are considering monetizing gains, but timing is uncertain [63] Question: Thoughts on cumulative preferred dividends - Management chose not to convert to a cumulative preferred position due to underlying performance concerns [65]