PennantPark Floating Rate Capital Ltd (PFLT) 2015 Q3 法說會逐字稿

Please stand by. We're about to begin. Good morning and welcome to the PennantPark Floating Rate Capital third fiscal quarter 2015 earnings conference call.

Today's conference is being recorded.

(Operator Instructions).

It is now my pleasure to turn the call over to Mr. Art Penn, Chairman and Chief Executive Officer of PennantPark Floating Rate Capital. Mr. Penn, you may begin your conference.

Thank you and good morning, everyone. I'd like to welcome you to PennantPark Floating Rate Capital's third fiscal quarter 2015 earnings conference call. I'm joined today by Aviv Efrat, our Chief Financial Officer.

Aviv, please start off by disclosing some general conference call information, including the discussion about forward-looking statements.

Thank you, Art.

I'd like to remind everyone that today's call is being recorded. Please note that this call is the property of PennantPark Floating Rate Capital, and that any unauthorized broadcast of this call, in any form, is strictly prohibited.

Audio replay of the call will be available by using the telephone numbers and PIN provided in our earnings press release, as well as on our website.

I'd also like to call your attention to the customary Safe Harbor discussion in our press release regarding forward-looking information. Today's conference call may also include forward-looking statements and projections, and we ask that you refer to our most recent filings with the SEC for important factors that could cause actual results to differ materially from these projections. We do not undertake to update our forward-looking statements, unless required by law.

To obtain copies of our latest SEC filings, please visit our website at www.pennantpark.com or call us at 212-905-1000.

At this time, I'd like to turn the call back to our Chairman and Chief Executive Officer, Art Penn.

Thanks, Aviv. I'm going to spend a few minutes discussing current market conditions, followed by a discussion of investment activity, the portfolio, the financials, our overall strategy, then open it up for Q&A.

As you all know, the economic signals are moderately positive, with many economists expecting a slowly growing economy going forward. With regard to the more liquid capital markets, and, in particular, the leveraged loan and high yield markets, during the quarter ended June 30th, those markets were relatively flat as high yield and leveraged loan funds experienced some outflows due to expectations of Fed tightening.

We saw and participated in a more active environment in the quarter, due to increased M&A and financing activity. We remain primarily focused on long-term value and making investments that will perform well over years and can withstand different business cycles. Our focus continues to be on companies or structures that are more defensive, have low leverage, strong covenants, and high returns.

As credit investors, one of our primary goals is preservation of capital. If we preserve capital, usually the upside takes care of itself.

As a business, one of our primary goals is building long-term trust. Our focus is on building long-term trust with our portfolio companies, management teams, financial sponsors, intermediaries, our credit providers, and, of course, our shareholders.

We are a first call for middle-market financial sponsors, management teams, and intermediaries who want consistent, credible capital. As an independent provider, free of conflicts or affiliations, we've become a trusted financing partner for our clients. Since inception, PennantPark entities have financed companies backed by 150 different financial sponsors.

We've continued to invest in our platform. We've recently hired senior investment professionals for the West Coast and Midwest regions of the United States, along with hiring additional senior and mid-level investment professionals for our New York office. With existing senior people in London and Texas, we have substantially widened our geographic footprint.

These additional resources, along with a broader overall platform resulting from our upcoming merger with MCG Capital, should drive significantly enhanced deal flow, as we get more looks and can be even more relevant to our borrower clients. We have been active and are well positioned.

For the quarter ended June 30th, 2015, we invested $76 million. Net investment income was $0.28 per share. As a result of our focus on high-quality companies, seniority in the capital structure, floating-rate assets, and continuing diversification, our portfolio is constructed to withstand market and economic volatility.

The cash interest coverage ratio, the amount by which EBITDA and cash flow exceeds cash interest expense, continued to be healthy, 3.3 times. This provides a significant cushion to support stable investment income. Additionally, at cost, the ratio of debt to EBITDA on the overall portfolio was 3.9 times, another indication of prudent risk.

Our credit quality since inception, over four years ago, has been excellent. At PFLT, as of June 30th, we had no non-accruals, and since inception, over four years ago, we had only one non-accrual.

In terms of new investments, we had another active quarter, investing in attractive risk-adjusted returns. Our activity was driven by a mixture of M&A deals, growth financings, and refinancings. In virtually all these investments, we've known these particular companies for a while, have studied the industries, or have a strong relationship with the sponsor.

Let's walk through some of the highlights. We invested in the 4 million in the first-lien debt of Alvogen Pharma. Alvogen develops, licenses, manufactures, markets, and distributes generic products. Management, CVC Capital, Temasek, and Vitera Healthcare Partners are the sponsors.

Douglas Products manufactures fumigant for post-harvest pest control applications. We purchased $5 million of the first lien, and $2 million of the second lien. Altamont Capital is the sponsor.

We invested $5 million in the first lien term debt of FHC Health System, which is a behavioral health benefits management company. Bain and Diamond Castle are the sponsors.

Interior Specialists is a provider of design center services for home builders. We purchased $7 million of the first lien term debt. Littlejohn & Company is the sponsor.

We lent $8 million to Profile Products, which is a manufacturer of branded erosion, sediment control, and related products. Platte River Equity is the sponsor.

Turning to the outlook, we believe that the remainder of 2015 will be active due to both growth and M&A-driven financings. Due to our strong sourcing network and client relationships, we are seeing active deal flow.

Let me now turn the call over to Aviv, our CFO, to take us through the financial results.

Thank you, Art. For the quarter ended June 30th, 2015, recurring net investment income totaled $0.28 per share, and other income was $0.01 per share. Additionally, we had $0.01 per share of one-time credit facility fees.

This resulted in GAAP net investment income of $0.28 per share.

Looking at some of the expense categories, management fees totaled about $1.5 million. Taxes and general and administrative expenses totaled about $550,000, and interest expense totaled about $800,000.

During the quarter ended June 30th, net unrealized appreciation from investment and credit facility was approximately $660,000 or $0.04 per share.

And dividend in excess of income was about $150,000 or $0.01 per share.

Consequently, NAV was up $0.03 per share from $14.30 to $14.33 per share.

Our entire portfolio and our credit facility are marked to market by our Board of Directors each quarter, using the exit price provided by independent valuation firms or independent broker/dealer quotes when active markets are available under ASC-820 and 825. In cases where broker/dealer quotes are inactive, we use independent valuation firms to value the investments.

Our portfolio is relatively low risk. It is highly diversified with 72 companies across 22 different industries. 85% is invested in first lien senior secured debt. 13% is second lien secured debt, and 2% in subordinated debt and equity.

Our overall debt portfolio has a weighted average yield of 8.3%. 97% of the portfolio is floating rate, including 95% with a floor. The average LIBOR floor is 1.3%.

Now let me turn the call back to Art.

Thanks, Aviv. Before we conclude, I want to address our transaction with MCG Capital. We are excited about the combination. With greater scale, we can be more relevant to our sponsor and borrower clients. Our enhanced asset base will enable greater diversification, and give us economies of scale. Our shareholders should have more liquidity, as the market capitalization will almost double.

If you have not voted yet, we ask you to please vote now.

To conclude, we want to reiterate our mission. Our goal is a steady, stable, and protected dividend stream, coupled with the preservation of capital. Everything we do is aligned to that goal. We try to find less risky, middle-market companies that have high free cash flow, primarily in first lien senior secured floating rate debt instruments, and we pay out those contractual cash flows in the form of dividends to our shareholders.

In closing, I'd like to thank our extremely talented team of professionals for their commitment and dedication. Thank you all for your time today, for your investment and confidence in us.

That concludes our remarks. At this time, I'd like to open up the call to questions.

Thank you. (Operator Instructions). Okay. It appears that we have no questions at this time. I'd like to turn the conference -- Actually, one moment.

I apologize. (Operator Instructions).

We'll take our question from Ray Cheesman with Anfield Capital.

Art, I was just wondering if you could give us some feeling for the time horizon following the closure of your transaction. How quickly can you get those assets, which I believe are coming in primarily in a liquid form, invested into interest-earning assets. Because, obviously, you're bringing in shareholders that you're paying a dividend right away to, and you're going to be a little bit in a fire drill mode.

Yes, so, that's a great question, Ray. And, look, first and foremost, we're always focused on credit quality. So, we're always loathe to give people specific deadlines about when we're going to deploy capital, because if you're forced to deploy capital, clearly, you're going to make mistakes.

So, we take it methodically. We take it thoughtfully. And we'll deploy as we see good deals. We think the market is enormous for middle-market first lien. We think we'll have no problem in an orderly timeframe to deploy the capital rationally and well. Certainly if you look at PFLT's growth over time when we've had incremental liquidity and incremental cash, we've been able to deploy capital relatively quickly.

You can see that we have an investor presentation on our website that we put on as part of the MCG transaction and you can see, historically, how we've been able to deploy capital.

So, we're balancing being methodical, thoughtful, and having credit quality as our top priority, with knowing fully well that the market for first-lien middle-market is enormous, and in an orderly basis, we shouldn't have a problem to put the money to work.

If I may, just a quick follow-up. As far as you look at the situation, did HC2 just go away, or is their proposal still out there, as well, and while I don't give it much chance, seeing how their deal is based on a stock that's dropped a lot, I mean, is there any risk in your mind that we don't close this up in a week?

We feel very good about things. If, of course, can't comment on HC2, but we feel very good about our proposal, how our stock has traded, and the investor receptivity from both sets of shareholders.

Thanks very much. Look forward to a positive press release from you guys in a couple of days, then.

Thank you very much.

And that conclude today's question-and-answer session. I'd like to turn the conference back to Mr. Penn for any additional or closing remarks.

I just want to thank everybody for their participation today. Look forward to closing the MCG transaction shortly, and we -- this is our -- the next quarter is our 10-K quarter, so, we'll be having our earnings release and call some time in the middle of November. So, a little bit more elongated than normal due to the 10-K.

Thank you very much, and we'll be talking to you soon.

And, once again, that does conclude today's conference. We thank you all for your participation.