PennantPark Floating Rate Capital Ltd (PFLT) 2016 Q2 法說會逐字稿

Good morning, and welcome to the PennantPark Floating Rate Capital second-fiscal-quarter 2016 earnings conference call. Today's conference is being recorded.

(Operator Instructions)

It's 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 second-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. Only a 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 would 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 filing with the SEC for important factors that could cause actual results to differ materially from these questions. 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 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 a discussion of the portfolio, investment activity, the financials, 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 March 31, those markets experienced volatility, 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 impacted the tone of the middle market and generally resulted in a better opportunity to invest in attractive risk reward.

Recently, the market has stabilized and remains attractive. As debt investors and lenders, a flat economy is fine, as long as we have 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 companies and 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 have 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've nearly doubled the financial resources at 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 March 31, 2016, we invested $57 million, at an average yield of 8.7%. The quarter ended March 31 is typically a slow quarter for the middle market. Since quarter end, we have invested about $45 million. We plan to continue to prudently and carefully invest our substantial liquidity over the coming quarters.

Net investment income was $0.27 per share. Our debt-to-equity ratio is only 0.35 times, leaving us with substantial liquidity. We have significant spillover income that we can use as a cushion to protect our dividend while we ramp the portfolio. As of last September 30, our spillover was $0.47 per share. Z Wireless at Aka Diversified was sold, and we realized a capital gain of over $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 averaged $0.03 per share per quarter over the last few years. The IRR on the Z Wireless debt and equity positions was 24%.

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, continue to be healthy, 3.6 times. This provides substantial cushion to support stable investment income. Additionally, at cost, the ratio of debt to EBITDA on the overall portfolio was 3.8 times, another indication of prudent risk.

Our credit quality since inception over five years ago has been excellent. Out of have 254 companies we have invested in over five years, we've experienced only three non-accruals, and currently have one non-accrual on our books, representing only 1.3% of the portfolio at cost. 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 of 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 $10 million in the first lien debt of Lago Resort and Casino, which is a new casino project, located in Tyre, New York; Peninsula Gaming and Wilmorite are the sponsors. LSF9 Atlantis Holdings, A2Z Wireless is a Verizon Wireless premium distributor, who we lent $14 million of first-lien term loan; LoanStar is the sponsor. We invested $12 million in the first-lien term debt of Marketplace Events, which is an organizer of consumer remodeling home decor and gardening shows in North America; Sentinel Capital is the sponsor.

Turning to the outlook, we believe that 2016 will continue to 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 March 31, 2016, net investment income totaled $0.27 per share. Looking at some of the expense categories, Management fees totaled $2 million; general and administrative expenses totaled about $900,000; and interest expense totaled about $1.1 million.

During the quarter ended March 31, net unrealized depreciation from investment and credit facility was approximately $5.9 million, or $0.22 per share. Net realized gain was $1.1 million, or $0.04 per share. And dividend in excess of income was $400,000 or $0.01 per share. Consequently, NAV was down $0.19 per share, from $13.73 to $13.54 per share.

Our entire portfolio, and our credit facility, are mark to market by our Board of Directors 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 ASC 825.

In cases where broker-dealer quotes are inactive, we use independent valuation firms to value the investment. Our portfolio is relatively low risk. It is highly diversified, with 86 companies across 23 different industries. 88% is invested in first-lien senior secured debt, 10% in second-lien secured debt, 2% in subordinated debt and equity. Our overall debt portfolio has a weighted-average yield of 8.1%. 94% of the portfolio is floating rate, including 93% with a floor. The average LIBOR floor is 1.1%.

Now, let me turn the call back to Art.

Thanks, Aviv. 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 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)

Okay, operator, it does not look like we have any questions in the queue for this quarter. We appreciate everyone's attendance on the call, and we look forward to speaking with you next quarter.

This does conclude today's presentation. Thank you all for your participation.