PennantPark Floating Rate Capital Ltd (PFLT) 2016 Q1 法說會逐字稿

Good morning and welcome to the PennantPark Floating Rate Capital's first fiscal-quarter 2016 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, 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 first fiscal-quarter 2016 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 and include a 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 discloser 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 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 visit us at 212-905-1000. At this time, I would 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 discussion of the portfolio investment activity, the financials and then open it up for Q&A. As you all know, the economic signals have been mixed with regard to the more liquid capital markets and in particular the leverage-loan and high-yield markets. During the quarter ended December 31, those markets softened as high-yield and leverage-loan funds experienced some outflows due to expectations of Fed tightening, turmoil in the energy market and a weakening Chinese economy. This has impacted the tone of the middle market and has generally resulted in a better opportunity to invest at attractive risk reward.

As debt investors and lenders, a flat economy is fine as long as we've underwritten capital structures prudently. A healthy current coupon with deleveraging from free cash flow over time is a favorable outcome for us. We remain primarily focused on long-term value and making investments that will perform well over several years and can withstand different business cycles. Our focus continues to be on Company-owned structures that are more defensive at 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 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 over 150 different financial sponsors. We are excited to be approaching this improving investing market with substantially more capital and resources.

As a result of our merger with MCG Capital, we have nearly doubled the financial resources of PFLT. Combined with our recent investment in senior and mid-level investment professionals across different geographies, we are well positioned to 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 December 31, 2015, we invested $99 million at an average yield of 8.4%. We plan to continue to prudently and carefully invest our substantial liquidity over the coming quarters.

Core net investment income was $0.22 per share, excluding one-time costs from increasing our credit facility. We are pleased that the merger with MCG in August and the up-sizing of our low-cost LIBOR plus-200 credit facility to $350 million last October has positioned us with substantial liquidity. Our debt-to-equity ratio is only 0.26 times.

With regard to our credit facility, a reminder that there are two features that reduce overall risk to the Company. First, the facility is a securitization style facility that does not use mark-to-market accounting but instead advances are typically made against the cost of the loan, not the market value. Second, to better align the measurement of asset and liability values for both GAAP and the BDC asset-coverage test, we mark both our assets and our liabilities to market. As a result of both of these features, we have provided substantial safety to our shareholders and lenders in the event of market volatility. We have significant spill-over income that we can use as cushion to protect our dividend while we ramp the portfolio. As of September 30, our spill-over was $0.47 per share.

Subsequent to quarter end, Z Wireless, or AKA Diversified, was sold and we realized a capital gain of $900,000, or $0.03 per share, and prepayment fees of $1.3 million, or $0.05 per share, of other income. Other income is a category that we have on our income statement to represent prepayment fees or waiver and amendment fees that are not part of ongoing interest income. Other income has average $0.02 per share, per quarter over the last few years. 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 or cash flow exceeds cash interest expense, continued to be a healthy 3.8 times. This provides significant cushion to 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 nearly five years ago has been excellent. We have experienced only two non-accruals in nearly five years and currently have no non-accruals on our books. In terms of new investments, we are had another active quarter investing in attractive risk-adjusted returns. Our activity is driven by a mixture of M&A deals, growth financings and re-financings. In virtually all of these investments, we've known these particular companies for a while, have the industries, or have a strong relationship with the sponsor.

Let's walk through some of the highlights. We invested $13 million in the first-lien debt of KHC Holdings, which is a distributor of ancillary products for building automation systems. [Snow Fits] is the sponsor. LSF9 Cypress Holdings, also a foundation building materials, is a distributor of drywall and other building products. We loaned $15 million of first-lien term loan. LoanStar is the sponsor.

We invested $10 million in the first-lien term loan of US Anesthesia, which is a provider of management and administrative services to affiliated anesthesia practices. Welsh, Carson, Anderson & Stowe is the sponsor. US Farathane is a manufacturer of molded plastic components, primarily for the light vehicle auto industry. We lent an additional $6 million of first-lien term loan. Decorus Group is the sponsor.

Turning to the outlook, we believe that 2016 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 December 31, 2015, core net investment income totaled $0.22 per share and credit-facility amendment costs were $0.03 per share, resulting in GAAP net investment income of $0.19 per share. Looking at some of the expense categories, management fees totaled $1.1 million, general and administrative expenses totaled about $700,000 and interest expense totaled about $900,000.

During the quarter ended December 31, net unrealized depreciation from investments and credit facility was approximately $100,000. Net realized loss was $30.2 million, or $0.12 per share and dividend in excess of income was $2.5 million, or $0.10 per share. Consequently, NAV was down $0.22 per share, down from $13.95 to $13.73 per share. Our entire portfolio and our credit facility are mark-to-market by our Board of Directors at each quarter using the exit price provided by independent valuation firm or independent broker-dealer quotations when active markets are available, under ASC 820 and 825. In case of a broker-dealer quote are inactive, we use independent valuation firms to value the investment.

Our portfolio is relatively low risk. It is highly diversified, with 83 companies across 23 different industries. 88% is invested in first-lien center secured debt, 10% in second-lien secured debt, 2% in subordinated debt and equity. Our overall debt portfolio has a weighted average yield of 8.2%. 99% of the portfolio is floating rate, including 92% with a floor. The average LIBOR floor is 1.1%. Now let me turn the call back to Art.

Thanks, Aviv. To include, 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 conversion. We capture that 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 would like to thank our extremely talented team of professionals for their commitment and dedication. Thank you all for your time today and for your investment and confidence in us. That concludes our remarks at this time. I would like to open up the call to questions.

Thank you.

(Operator Instructions)

Our first question today comes from Ryan Lynch, KBW. Your line is open.

Hey, good morning, guys. First question, I think the biggest question right now is just the pace of your capital deployment. You are obviously sitting on a lot of capital right now. The credit markets continue to soften which creates an ever more favorable environment for deploying that capital. How should we think about the pace of capital appointment going forward?

It's a great question and you're right, Ryan, We are pleased that we have a lot of liquidity right now and the market's coming our direction. As always, we're going to take a deal by deal, quarter by quarter. The kind of pace we've been on the last quarter is easily consistent and may increase a little bit given that the market is coming our direction.

So we hope to gradually fully ramp portfolio in the coming two or three quarters. Obviously, it is most importantly, deal by deal, our underwriting has to be good.

Okay. And then what sort of yields are you guys seeing in the first and second lien loans in the market right now? Obviously, we saw your guys overall portfolio yield go up nicely quarter over quarter so what kind of yields are you seeing in the market today? What should we think about your portfolio yield going forward as you deploy this capital?

It's a great question. Look, our yields are coming up. I'd say probably in the last three to four months yields are up 50 basis points, in some cases maybe more. That's one of the nice things that we and other BDCs potentially have at our back is the ability to get higher yields.

Also importantly, when you have this kind of movement you can structure deals with lower leverage, with tighter covenants, with more upfront fees or OID. The whole package risk/reward is improving over time. So look -- and then certainly on other deals, we may be happy to get a relatively lower yield a get a really attractive low-risk deal.

So case-by-case basis but our hope and intention is that yields should be going up over the coming months. Average first lien deal we're doing today is probably around the 7% all-in yield. Again, that is probably up 50 to maybe 100 basis points over the last three, six months.

Okay thank you. And then just one more. Your guys credit quality held up pretty well this quarter, no new non-accruals. Can you maybe just touch a little bit on the high level of some of the revenue and EBITDA trends you guys are seeing in your underlying portfolio companies?

We said in the comments that we see the economy as mixed. Again, for a lender flattish or slightly up or even slightly down if we've underwritten credit well. Should be just fine for us. So we are seeing a slightly up revenue and EBITDA up to 3%, 4% on average over the course of the portfolio.

Great. Thanks for your time.

Thank you.

(Operator Instructions)

We will go next to Mickey Schleien with Ladenburg. Your line is open.

Good morning, Art and Aviv. Art, as you mentioned, PFLT is somewhat unique amongst BDCs right now in the sense that it has a significant liquidity. I'm interested to understand, given that availability, how that's affecting the quality of the looks that you're getting. In particular, are you seeing some new sponsors approach you that in the past perhaps you would have liked to have worked with but you hadn't had the opportunity?

The biggest difference is there's two or three things going on here. Number one, with a bigger bite size, we can be more important to those borrower clients, be a lead member of a club deal, drive terms a little bit more, drive yields, drive upfront OID or fees, et cetera.

The other thing is, as we said in our remarks, we have invested significant resources in beefing up our team geographically as well as throughout the senior to mid and junior levels of the team. We've got an increase team, more feet on the Street. We've got an increase buying power and the market, by the way, is coming our direction, as we said. So a lot of things are feeding into this. We're getting really nice looks, no question about it, for all of those reasons.

Art, has that translated into a wider pool of sponsors that you're working with than in the past?

Yes. Absolutely.

Okay. Just a couple of data points. Could you give us the weighted average yield on the new investments in the quarter?

I don't know if we -- do we have that? The new investments yielded -- Aviv has it here for me, 8.4%.

Okay. And could you just repeat the figures that you provided for the exit from Z Wireless?

Sure. Z Wireless exited -- we had a realized gain of $0.03 per share and another income opportunity of $0.05 per share.

And that subsequent to the quarter, right?

Subsequent to quarter end, yes.

Okay. Those are all my question. Thank you for your time.

Thanks, Mickey.

Ladies and gentlemen, with no questions remaining I'd like to turn the call back over to Mr. Penn for closing comments.

I'd just like to thank everybody for being on the call today and your interest in PennantPark Floating Rate Capital and we will talk to you next quarter.

Ladies and gentlemen, that does conclude today's conference. We thank you for your participation.