PennantPark Floating Rate Capital Ltd (PFLT) 2017 Q1 法說會逐字稿

Good morning and welcome to the PennantPark Floating Rate Capital's first-fiscal-quarter 2017 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, please go ahead.

Thank you and good morning, everyone. I'd like to welcome you to PennantPark Floating Rate Capital's first-fiscal-quarter 2017 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 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 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 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 moderately positive 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 experienced strength as high-yield and leverage loan funds experienced some inflows due to a belief in a stronger economy and rising interest rates. The overall market is 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 financial partner to our clients. Since inception, PennantPark entities have financed companies backed by over 170 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 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 December 31, 2016, we invested $125 million in primarily first-lien senior secured assets with an average yield of 7.6%. Core net investment income was $0.28 per share. Our debt-to-equity ratio was 0.8 times.

As we continue to assess leverage levels in the market, we're exploring how to optimize our capital structure in order to potentially grow earnings. As a result, we are considering the use of additional leverage higher than 0.8 times at PFLT. Additionally, we are exploring the idea of a senior loan fund joint venture, similar to those that some of our BDC peers have pursued. We have not made definitive decisions in this regard.

We have significant spillover income that we can use as cushion to protect our dividend. As of September 30, our spillover was $0.38 per share. As a result, 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, continue to be a healthy 3.2 times. This provides significant cushion to support stable investment income. Additionally at cost, the ratio of debt to EBITDA on the overall portfolio was 3.7 times, another indication of prudent risk.

Our credit quality since inception nearly six years ago has been excellent. Out of 286 companies in which we've invested, we've only experienced four non-accruals. On those four non-accruals, we've recovered $1.11 on the dollar so far. At December 31, we had no non-accruals on our books. This credit performance has resulted in a 13-basis-point annual net gain since inception six years ago, whereas typically there is some net loss on a credit portfolio.

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 $11 million in the first-lien debt of American Auto Auction Group, which provides used-car re-marketing services to auto dealers. Huron Capital is the sponsor. IGM Chemicals is a manufacturer of specialty chemicals. We loaned $18 million of first-lien term loan. Arsenal Capital is the sponsor.

We invested $11 million in the first-lien term debt of Impact Sales, which is a sales and marketing agency that consumer-products companies and retailers use. CI Capital Partners is the sponsor. Infosoft Group is a provider of local job board and federal contractor compliance services. We invested $15 million in the first-lien term loan and about $1 million in the equity. Gauge Capital is the sponsor.

Turning to the outlook, we believe that the remainder of 2017 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. At the quarter ended December 31, 2016, recurring net investment income totaled $0.26 per share. We also had $0.02 of other income, net of incentive fee, which resulted in core net investment income of $0.28 per share. In addition, we had $0.02 per share for incentive fees accrued but not payable. As a result, GAAP net investment income was $0.26 per share.

Looking at some of the expense categories, management fees payable in cash totaled $2.5 million. General and administrative expenses totaled about $900,000, and interest expense totaled about $1.8 million.

During the quarter ended December 31, net unrealized appreciation on investment was $2.5 million, or $0.10 per share. And unrealized appreciation on the credit facility was approximately $1.1 million, or $0.04 per share. Net realized gain was about $500,000, or $0.02 per share, and dividends in excess of income was $800,000, or $0.03 per share. Consequently, NAV was up from $14.06 to $14.11 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 98 companies across 24 different industries. 91% is invested in first-lien senior secured debt, 6% in second-lien secured debt, 3% in subordinated debt and equity. Our overall debt portfolio has a weighted-average yield of 7.9%. 98% of the portfolio is floating rate, including 91% 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 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 would like to open up the call to questions.

Thank you, Mr. Penn.

(Operator instructions)

Peter Milliken, Outreach Capital.

Good morning, Art. Could you venture to guess when you will start covering the dividend with recurring net investment income time-wise?

We think we are there at this point. As we've ramped the portfolio to $660 million as of 12/31, as we continue to optimize both in terms of slightly higher leverage, as we rotate out of lower-yielding investments into higher-yielding investments and as we consider the use of a senior loan fund JV again, those decisions have been made. We think we are at the point or covering and then over-covering the dividend in a relatively short period of time here.

Okay. Thank you.

Ray Cheesman, Anfield Capital.

Good morning, Art. I am wondering if you would -- think off the top of your head, I know we don't know what is going to come on the new administration on a tax policy base, but if the companies that you see deal-flow from are going to be looking potentially at different rules for interest deductibility, do you think that will affect the market that you participate in? And might it change the underlying value of those companies as their capital structures adjust to future rules?

That's a great question, Ray, and it's really hard to assess until we know if and what it is. In our experience, the kind of debt that we're providing these companies is mostly driven because they financial sponsors who are buying the companies see a higher ROE, whether or not the interest is tax deductible.

They're trying to get a 20% or 30% IRR on their equity. If they can borrow first lien it's 6% to 8% or stretching your second lien to 8%-plus. It's still accretive for their equity. So we still think we're going to have plenty of opportunity.

The other legislation that's out there which has been out there for a while is BDC legislation, which hopefully this administration is more positive to. And it that goes through, that's going to help PFLT a lot. It's going to help other BDCs. It'll particularly help PFLT because with a first-lien portfolio being up to leverage 2 to1, you can certainly leverage this type of portfolio and still be very safe at a 2-to-1 leverage. And the ROE should, for our shareholders, go up quite substantially.

So we're optimistic. It's hard to say if and when any of this stuff gets done. But as they say, someone said the world's second oldest profession is lending. They found some tablets from ancient Samaria showing transactions at an interest rate. So we think no matter what happens, we have an opportunity in the marketplace to lend our capital at attractive risk-adjusted returns.

Thanks very much.

That's all the time we have for questions today, Mr. Penn. I'll turn the conference back to you for additional or closing remarks.

Want to thank everybody for being on the call today. We're here to answer any other questions today or through the quarter. And we look forward to speaking to everybody next quarter.

And that does conclude our conference today. Thank you all for your participation.