PennantPark Floating Rate Capital Ltd (PFLT) 2017 Q4 法說會逐字稿

Good morning, and welcome to PennantPark Floating Rate Capital's Fourth Fiscal Quarter 2017 Earnings Conference Call. (Operator Instructions) It's now my pleasure to turn the call over to 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 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 a 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 back to our Chairman and Chief Executive Officer, Art Penn.

Thanks, Aviv. I'm going to spend a few minutes discussing financial highlights, followed by a discussion of the portfolio, investment activity, the financials, then opening it up for Q&A.

For the quarter ended September 30, we invested about $100 million, primarily in first lien secured assets at an average yield of 7.2%. PennantPark Senior Secured Loan Fund or PSSL continue to grow. As of September 30, PSSL owned $100 million diversified pool of 18 names with an average yield of 7.2%.

Net investment income was $0.32 per share. This includes $0.07 per share of a net litigation settlement related to a former portfolio company of MCG Capital. We have significant spillover income that we can use as cushion to protect our dividend, while we ramp the portfolio. As of September 30, our spillover was $0.45 per share.

In addition to being active on the investing front, after quarter end, we've been active with our balance sheet. On October 27, we issued 6 million shares of equity. On November 9, we amended, extended and upsized our credit facility. We are gratified in the support we received from our lenders who supported our long-term, attractively-priced L+200 facility. On November 21, we priced an institutional offering of about $139 million of long-term senior unsecured notes in Israel. We are pleased to be able to lock in long-term fixed rate unsecured notes at an attractive coupon of 3.83%.

Our primary business of financing middle-market financials sponsors has remained robust. We have relationships with about 400 financial sponsors across the country and elsewhere that we manage from our offices in New York, Los Angeles, Chicago, Houston and London. We've done business with about 180 sponsors to date. Due to the wide funnel of deal flow that we receive relative to the size of our vehicles, we can be extremely selective about what we ultimately invest in.

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 it's been, it's 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 of free of conflicts or affiliations, we've become a trusted financing partner for our clients.

We are pleased that we've been approaching this investing market with substantially more capital and resources in order to drive significantly enhanced self-originated deal flow. This enhanced deal flow has meant that we can get more looks and be even more relevant to our borrower clients. Being more relevant means that we can be increasingly selective about which investments we make as well as giving us the ability to be an important leader in transactions who can drive terms.

We've taken several steps in order to build this increased relevance over the last few years, including the MCG Capital merger, the addition of senior and mid-level professionals across different geographies, 2 follow-on equity offerings, the launching of PSSL and our recent bond offering.

PSSL is our joint venture with Trinity Universal Insurance Company, a subsidiary of Kemper Corporation. Similar to PFLT, PSSL invests primarily in first lien secured loans for companies that are more defensive, have low leverage and have strong covenants. PSSL has the additional benefit that PFLT and PSSL can together write larger checks for our sponsor clients and be more relevant to them, driving enhanced deal flow and better terms.

We expect the ROE on our overall investments in PSSL to be in the low- to mid-teens, which should be accretive to PFLT and increase net investment income over time. Although PFLT's investment in PSSL is considered as a nonqualifying asset, we still have plenty of cushion since only 13% of the maximum 30% basket is currently nonqualifying. We are actively considering a second senior loan joint venture.

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, clash flow exceeds, cash interest expense, continue to be a healthy 3.2x. This provides significant cushion to support stable investment income.

Additionally, at cost, the ratio of debt-to-EBITDA on the overall portfolio was 3.9x, another indication of prudent risk. Our credit quality since inception 6.5 years ago has been excellent. Out of 300 companies in which we have invested, we have experienced only 5 nonaccruals. On those 5 nonaccruals, we've recovered $1.04 on the dollar so far. On September 30, we had 1 nonaccrual on our books, representing 0.4% of the portfolio on a cost basis and 0.2% on a market value basis.

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. And virtually, all these investments, we've known these particular companies for a while, have studied the industries, are of a strong relationship with the sponsor.

Let's walk through some of the highlights. We've invested $20 million in first lien debt of Country Fresh. Country Fresh is a leading provider of fresh-cut fruit; Kainos Capital is the sponsor. DecoPac is a supplier/marketer of cake decorating solutions for bakeries and cake decorating enthusiasts. We purchased $15 million of second lien term loan and $2 million of common equity; Snow Phipps is the sponsor. We have $8 million of first lien term loan to LEAP Legal Software, an Australian-based provider of cloud-based software services primarily for law firms. McAfee provides cybersecurity software to consumers and enterprises. We invested $7.5 million in the first lien and $2.5 million in the second lien term loans; TPG 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. For the quarter ended September 30, 2017, net investment income was $0.32 per share, including $0.07 per share of litigation settlement proceeds.

Looking at some of the expense categories. Management fees totaled $4.6 million, including $400,000 of accrued, but not payable incentive fees. General and administrative expenses totaled about $1.2 million and interest expense totaled about $2.1 million.

During the quarter ended September 30, net unrealized appreciation on investment was about $600,000 or $0.02 per share. Net realized gain was about $400,000 or $0.01 per share. Net unrealized appreciation on our credit facility was $600,000 or $0.02 per share. And income in excess of dividend was about $1.2 million or $0.04 per share. Consequently, NAV went from $14.05 per share to $14.10 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 82 companies across 24 different industries. 86% is invested in first lien senior secured debt, 5% in second lien debt, 5% in subordinated debt and 4% in equity. Our investment in PSSL, whose underlying investments are first lien senior secured loans, represents about 70% of the subordinated debt and equity investment in the PFLT portfolio. Our overall debt portfolio has a weighted average yield of 8%. 99% of the portfolio is floating rate.

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 a preservation of capital. Everything we do is aligned in that goal. We try to find less risky middle-market companies that have a 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.

(Operator Instructions) I see no questions in queue. I'll turn it to Mr. Penn for closing remarks.

Okay. Everybody, thank you for being on the call today. We will be here to the extent anybody has any questions, and we'll be talking to you in early February. Thank you very much.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes your program. You may now disconnect. Everyone, have a great day.