PennantPark Floating Rate Capital Ltd (PFLT) 2016 Q4 法說會逐字稿

Good morning, and welcome to the PennantPark Floating Rate Capital's fourth 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 fourth 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 your 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 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 filing, 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 the portfolio, investment activity, the financials, and open it up for Q&A. As you all know, the economic signals have been moderately positive. With regard to the more liquid capital markets, and in particular the leveraged-loan and high-yield markets, during the quarter ended September 30 those markets experienced strength as high-yield and leveraged-loan funds experienced some inflows due to a continuing benign interest-rate environment and 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 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've 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've been approaching this investing market with substantially more capital and resources. As a result of our merger with MCG Capital last year, we've nearly doubled the financial resources of PFLT. Combined with our recent investment in senior and mid-level investment professionals across different geographies, we're driving significantly enhanced deal flow as we get more looks, and even more relevant to our borrower clients.

The industrial logic of the MCG merger has been validated. Prior to the merger more than 70% of our investments, we were only a participant in a transaction. For the quarter ended September 30, in about 70% of our transactions we had a leadership role as a sole lender, club lead, club member, or anchor awarder.

We've been active and are well positioned. For the quarter ended September 30, 2016, we've invested $107 million in primarily first-lien senior secured assets, at an average yield of 7%. Since quarter end we have invested about $50 million, and believe that the rest of the quarter will be active. Net investment income was $0.31 per share. Our run rate income, excluding other income, is $0.27 per share. Our debt-to-equity ratio is only 0.6 times, leaving us with substantial liquidity. We have significant spillover income that can be used as cushion to protect our dividend while we ramp the portfolio. As of September 30, our spillover was $0.38 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. Net Other income has averaged $0.02 per share per quarter over the last couple years. For the quarter ended September 30, Other income of $0.14 per share was exceptionally high, primarily due to litigation settlements 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's constructed to withstand market and economic volatility. The cash interest coverage ratio, the amount by which EBITDA or cash flow exceeds cash interest expense, continues to be healthy, 3.4 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 over 270 companies in which we've invested in over five years, we've experienced only four non-accruals. On this four non-accruals, we've recovered $1.06 on $1 so far. At September 30, we have one non-accrual on our books, representing only 0.2% 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, gross financings, and refinancings. In virtually all these investments we've known this particular companies for awhile, have studied the industry, so we have a strong relationship with the sponsor.

Let's walk through some of the highlights. We invested $12 million in the first-lien debt and common equity of Advanced Cable Communications, which is a cable company that provides television, internet, and phone service to customers in Florida. Twin Point Capital is the sponsor. CD& R, [a TZ Purchaser], is a provider of direct-to-consumer sales and marketing solutions for insurance carriers. We won $12 million of the first-lien term loan. Clayton, Dubilier & Rice is the sponsor.

We invested $10 million in the first-lien term debt of DBI Holdings, which is a provider of transportation infrastructure operation and maintenance services. Sterling Partners is the sponsor. Efficient Collaborative Retail Marketing Company hosts events to facilitate the purchase of products between consumer product goods manufacturers and retailers. We invested $11 million in the first-lien term loan. Snow Phipps is the sponsor. We invested $10 million in the first-lien term loan of Quick Weight Loss Centers, which operates weight-loss centers and sells nutritional foods. Sentinel Capital is the sponsor.

Turning to the outlook, we believe that the remainder of 2016 will continue to be active through the 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 September 30, 2016, recurring net investment income totaled $0.27 per share. We also had $0.08 per share of Other income, net of incentive fees, as well as $0.04 per share charged for incentive fees accrued but not payable. As a result, net investment income was $0.31 per share.

Looking at some of the expense categories, management fees payable in cash totaled $3.8 million. General and administrative expenses totaled about $700,000 and interest expense totaled about $1.6 million.

During the quarter ended September 30, net unrealized appreciation from investments and credit facility was approximately $7.1 million, or $0.27 per share. Net realized gains was about $600,000, or $0.02 per share. And income in excess of dividend was about $500,000, or $0.02 per share. Consequently, NAV was up $0.31 per share, from $13.75 to $14.06 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 ASC820 and 825. In cases where broker-dealer quotes are inactive, we are using independent valuation firms to value these investments.

Our portfolio's relatively low risk. It is highly diversified, with 98 companies across 25 different industries. 92% is invested in first-lien senior secured debt, 6% in second-lien secured debt, 2% in subordinated debt and equity. Our overall debt portfolio has a weighted-average yield of 7.8%. 99% of the portfolio is floating rate, including 94% 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 with 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'd 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'd like to open up the call to questions.

Thank you.

(Operator Instructions)

Well take our first question from Paul Johnson with KBW.

Yes, good morning guys. Thanks for taking my question. I just wanted to ask a question, and forgive me, I think you may have mentioned this on the call, but I just wanted to make sure I'm thinking about this correctly.

I'm trying to get a sense of what NII would have been without the impact of the one-time settlement fees of $3.3 million. Because when I (technical difficulties) my calculation, I'm getting closer to the $0.24, $0.25 range. But I was hoping that maybe you guys could provide a little more insight into that?

Yes. So as of September 30, excluding any new investments we've made since then, our recurring run rate was $0.27 a share.

Okay. So $0.27 a share. And then I had another question. The other question I had was a little bit more general.

But I was hoping maybe you guys could provide a little bit of color into the potential for the average floor to go up over time? I think looking back over the last 4 or 5 years or so, I know it was a little bit closer than 1.5%, I think as high as 1.7% range, if that's possible or if we're just sort of in an environment where it's at where it's at and it's not likely to see that?

Yes. So it's interesting a little historical context. LIBOR floors came into being in the 2008/2009/2010 time period when LIBOR plummeted. When we got in business about 10 years ago LIBOR was about 5%. Here we are, what was it about a year ago, or not even that long ago? It was basically 25 basis points.

So when LIBOR plummeted in the 2008/2009 time period, that's when LIBOR floors came in. When they first came in we were in the throes of a credit crunch and they were more like 1.5% on average. You saw a couple at 2%. And the average LIBOR floor over the last few years has kind of solidified around 1%, which is kind of where the average LIBOR floor and PFLT portfolio is today.

Interesting, if you believe interest rates are going up, the 1%, we're kind of almost at 1% right now. So these portfolios should benefit from upside. I think, if I had to guess, and we don't know, we don't have any particular insight, we'd probably say that average floor of 1% is going to stay kind of in existence going forward unless we have another year plummet on one hand or we have a credit crunch on the other hand allowing that floor to be renegotiated.

Okay, yes. So do you have maybe an idea of like a range where you'd like to see LIBOR kind of get to, to possibly get that to start going up?

Look, I mean, for our BDCs as well as for the industry, given the industry is mostly LIBOR oriented or floating rate oriented, PFLT's 99% floating rate. LIBOR going up is a big positive. Be a big positive for PFLT. We outlined it in our financial statements, as does every other BDC. So that would be a nice event for us.

We've been waiting a long time for that to happen. It's been -- people have been talking about interest rates going up now for 5, 6 years. And they are just starting to. So it would be a positive. We would hope it would happen at some point, and we would all be the beneficiary of that.

Okay, great. Well, thanks for taking my question. And have a great Thanksgiving.

Thanks, Paul. Okay -- any other questions?

No further questions at this time.

All right, everybody. Thank you very much for listening in today. Wishing everybody a great Thanksgiving. And we will be talking to you in early February at our next quarterly call. Talk to you soon.

Once again, that does conclude today's conference. Thank you for your participation. You may now disconnect.