PennantPark Floating Rate Capital Ltd (PFLT) 2016 Q3 法說會逐字稿

Good morning, and welcome to the PennantPark Floating Rate Capital third-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, 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 2016 earnings conference call. I'm joined today by a 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 disclosure in our press release regarding forward-looking information. Today's conference call may also include forward-looking statements and projections and we as 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.

Thank you, 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 June 30 those markets experienced trend as high-yield and leverage loan funds experienced some inflows due to expectations of the Fed keeping rates lower for longer as well as stability in the energy markets.

The overall market has strengthened and remains attractive. As debt investors and lenders, a flat economy is fine as long as we've underwritten capital structures prudently. The healthy current coupon with deleveraging from free cash flow over time is a favorable outcome for us. We remain primarily focus 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 a companies and structures are more defensive, have low leverage, strong covenants and high returns.

As credit investors, one of our primary goals as preservation of capital. If we perverse 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 have become a trusted financing partner for our clients.

Since inception, PennantPark entities have financed companies backed by over 160 different financial sponsors. We are pleased that we have been approaching this investing market with substantially more capital and resources. As a result of our merger with MCG capital last year, 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 driving significantly enhanced deal flow as we get more looks and are even more relevant to our borrower clients.

We have been active and are well positioned. For the quarter ended June 30, 2016, we invested $101 million in primarily first lien senior secured assets at an average yield of 7.4%. Since quarter end we've invested about $64 million. We plan to continue to prudently and carefully invest our substantial liquidity over the coming quarters.

Net investment income was $0.26 per share. Our run rate income, excluding other income, is $0.27 per share. Our debt-to-equity ratio is only 0.5 times, leaving us with substantial liquidity.

We have significant spillover income that we can use as cushion to protect our dividend while we ramp the portfolio. As of last September 30, our spillover was $0.47 per share. Other income is a category that we have on our income statement to represent prepayment fees or waiver amendment fees that are not part of our ongoing interest income. Other income has averaged $0.03 per share per quarter over the last few years. Since quarter end, we've generated $0.05 per share of other income related a partial litigation settlement related to a former portfolio company of MCG.

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 healthy 3.3 times. This provides significant 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 268 companies in which we have invested over five years, we've experienced only three nonaccruals. On the three nonaccruals we've recovered $0.93 on the dollar so far. At June 30 we had one nonaccrual on our books, representing only 1.2% of the portfolio at cost. Since quarter end, that one investment is now back on accrual and paying us interest.

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 API Technologies, which is a provider of electronic components and subsystems in the radio frequency and microwave market. JF Lehman is the sponsor.

Education Networks of America provides public schools with Internet access and phone services. We lent $9 million of a first lien term loan. Zelnick Media is the sponsor. We invested $6 million in the first lien term debt of Lumbar Brothers. Lumbar is a distributer of ophthalmolic equipment. Atlantic Street is the sponsor.

Software Paradigms is outsourced application and software development company. We invested $10 million in the first lien term loan. Tower Arch is the sponsor. Invested $10 million in the first lien term loan of the Original Cakerie, which is a manufacturer of desert product. Griffin Investors 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 June 30, 2016, net investment income totaled $0.26 per share. Looking at some of the expense categories, management fees totaled $1.8 million. General and administrative excesses totaled about $900,000. Interest expense totaled about $1.3 million.

During the quarter ended June 30, net unrealized appreciation from investment and credit facility was approximately $6.4 million, or $0.23 per share. Net realized gain was $200,000, or $0.01 per share. Dividend in excess of income was $800,000, or $0.03 per share. Consequently, NAV was up $0.21 per share from $13.54 to $13.75 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 an independent valuation firm, or independent broker-dealer quotations 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 92 companies across 23 different industries. 89% is invested in first lien senior secured debt, 9% in second lien secured debt, 2% in subordinated debt and equity. Our overall debt portfolio has a weighted average yield of 8%. 99% of the portfolio is floating rate, including 84% with a floor. The average LIBOR floor is 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 flow in the form of dividends to our shareholders.

In closing, I would like to think our externally 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.

(Operator Instructions)

Troy Ward, Ares Management.

Thank you. Thanks for taking my question this morning. Art, can you talk a little bit about what you're seeing regarding volumes in the overall markets? (Technical difficulty) year to date what do you think has been the bottleneck with regard to market volume and the ability to get deals done? What do you think can move that up as you move through the year?

Great question, Troy, and thank you for asking it. For PFLT and what I would characterize as positioned in the middle of the middle market. As you can see, we have in seeing reasonable deal flow. $100 million quarter ended June, $60 million or so quarter to date.

The middle of the middle market relative to PFLT size, it's been just fine. I think on the overall market, you started the year with kind of a soft environment and that led people to step away from doing deals.

At the beginning of the year you also have the normal seasonality of kind of early in the year deal flow being light. I think we are starting to see more of a pickup in deal flow and certainly with regard to PFLT, we are seeing ample deal flow relative to PFLT size if it's kind of our investment parameters.

Overall the middle market, Art, do you think we'll see more activity as we move through the second half of the year than we did the first half?

Yes. We think as kind of the market is stabilizing, the equity markets have stabilized, the credit markets have stabilized, energy seems to be stabilized. That will allow, we think, more M&A transactions to happen, which will drive more deal flow as we get towards the back half of the year here.

That is what we expect. We could be wrong, but we're all just -- kind of has some strange cross currents going on right now. Who would have thought that Brexit would have led to a pretty big market rally over the course of the last month or two, which is kind of what has happened.

We think it is going to be pretty busy. We certainly think with regard to PFLT and PNNT, both of whom are positioned in the middle of the middle market, deal flow is just fine. On the upper end of the middle market where some of the bigger guys play, they are competing a little bit more with the broadly syndicated and high-yield market, which has been on a terror recently. It may be harder to get attractive risk-adjusted returns there. Kind of where we are positioned, we feel like activity should be decent.

Great. Appreciate the color.

(Operator Instructions)

There are no further questions in queue. I would like to turn it back over to Mr. Penn for any additional or closing remarks.

Thanks, everybody, for being on the call today. A reminder that the next time we do our quarterly call will be in mid-November or so. It's a little later than normal because it is our 10-K time period so it takes us another week or two more than normal to prepare those filings. We look forward to speaking to you in mid- November.

This concludes today's conference. Thank you for your participation. You may disconnect.