Q4 2024 PennantPark Floating Rate Capital Ltd Earnings Call (2024)

Arthur Penn; Founder and Managing Director; PennantPark Floating Rate Capital Ltd

Richard Allorto; Chief Financial Officer; PennantPark Floating Rate Capital Ltd

Paul Johnson; Analyst; KBW

Mark Hughes; Analyst; Truist Securities

Douglas Harter; Analyst; UBS

Presentation

Operator

Good morning, and welcome to PennantPark Floating Rate Capital's fourth-fiscal quarter 2024 earnings conference call. Today's conference is being recorded. (Operator Instructions)
This is -- 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.

Arthur Penn

Thank you, and good morning, everyone. I'd like to welcome you to PennantPark Floating Rate Capital's fourth fiscal quarter 2024 earnings conference call. I'm joined today by Rick Allorto, our Chief Financial Officer.
Rick, please start off by disclosing some general conference call information and include a discussion about forward-looking statements.

Richard Allorto

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. An audio replay of the call will be available 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 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.

Arthur Penn

Thanks, Rick. We're going to spend a few minutes discussing the current market environment for private middle market lending, how we fared in the quarter ended September 30, how the portfolio is positioned for the upcoming quarters, a detailed review of the financials, and then open it up for Q&A.
For the quarter ended September 30, core net investment income was $0.32 per share. As of September 30, our portfolio grew to $2 billion or 20% from the prior quarter. During the quarter, we continue to originate attractive investment opportunities and invested $446 million in 10 new and 50 existing portfolio companies at a weighted average yield of 11%.
We continue to see an attractive vintage in the core middle market. For investments in new portfolio companies, the weighted average debt-to-EBITDA was 3.4 times, the weighted average interest coverage was 2.5 times, and the weighted average loan to value was 38%. Subsequent to quarter end, we remained active and invested over $330 million at a weighted average yield of 10.2%. Investment volume is increasing, we have a robust pipeline, and we expect the remainder of 2024 to be active.
During 2024, the market yield on first-lien term loans has tightened 50 to 75 basis points. As the credit statistics just highlighted indicate, we continue to believe that the current vintage of core middle market directly originated loans is excellent. In the core middle market, leverage is lower, spreads are higher, and covenants are tighter than in the upper middle market.
Despite covenant erosion in the upper middle market, in the core middle market, we are still getting meaningful covenant protections. As of September 30, our debt-to-equity ratio was 1.35 times to 1 with a target ratio of 1.5 times to 1, we believe that we are positioned to drive additional growth in net investment income going forward.
Securitization financing continues to be a good match for our lower risk first-lien assets. During the quarter, PFLT closed the refinancing and upsize of $351 million term debt securitization transaction with a weighted average spread of 1.89%, a four-year reinvestment period and a 12-year final maturity. The weighted average spread of 1.89% is a meaningful decrease of 50 basis points from the prior level of 2.39%.
The main contributor to this decrease was a favorable market environment in which the AAA portion of the structure priced at an attractive weighted average spread of 1.75%. The ratio of external debt to PFLT's junior capital was 3.1 times to 1, which creates plenty of liquidity for the company.
Additionally, during the quarter, we closed on an amendment and extension of the Truist revolving credit facility. The highlights of the amendment are an increase in total commitments to $636 million, a reduction in the rate to SOFR plus 225 which is down from SOFR plus 236 and an extension in the revolving period to 2027. We expect continued stability in NII in part due to our investment in the joint venture.
As of September 30, the JV portfolio totaled $913 million and the JV remained active during the quarter and invested $46 million in five new and seven existing portfolio companies at a weighted average yield of 11.3%, including $45 million of assets purchased from PFLT. GAAP and adjusted NAV decreased 0.3% to $11.31 per share from $11.34 per share. The decrease in NAV for the quarter was due primarily to the write-off of fees and expenses associated with the previously noted securitization refinancing and revolving facility amendment and extension.
Credit quality of the portfolio has remained strong. We didn't add any new investments to non-accrual status and nonaccruals represent only 0.4% of the portfolio at cost and 0.2% at market value. As of September 30, the portfolio's weighted average leverage ratio through our debt security was 4.1 times, and the portfolio's weighted average interest coverage was 2.3 times. We believe this is one of the most conservatively structured portfolios in the direct lending industry and is a testament to our focus on the core middle market.
We like being positioned for capital preservation as a senior secured first-lien lender focused on the United States. We continue to believe that our focus on the core middle market provides the company with attractive investment opportunities where we provide important strategic capital to our borrowers.
We have a long-term track record of generating value by successfully financing growing middle market companies in five key sectors. These are sectors where we have substantial domain expertise, know the right questions to ask and have an excellent track record. They are business services, consumer, government services and defense, healthcare, and software and technology. These sectors have also been resilient and tend to generate strong free cash flow.
The core middle market companies with $10 million to $50 million of EBITDA is below the threshold and does not compete with the broadly syndicated loan or high-yield markets unlike our peers in the upper middle market.
In the core middle market, because we are an important strategic lending partner, the process and package of terms we receive is attractive. We have many weeks to do our diligence with care. We thoughtfully structured transactions with sensible credit statistics, meaningful covenants, substantial equity cushions to protect our capital, attractive spreads, and an equity co-investment. Additionally, from a monitoring perspective, we received monthly financial statements to help us stay on top of the companies.
With regard to covenants, unlike the erosion in the upper middle market, virtually all of our originated first-lien loans had meaningful covenants, which help protect our capital. This is a significant reason why we believe we are well positioned in this environment. Many of our peers who focus on the upper middle market state that those bigger companies are less risky. That may make some intuitive sense, but the reality is different.
According to S&P, loans to companies with less than $50 million of EBITDA have a lower default rate and higher recovery rate than loans to the companies with higher EBITDA. We believe that the meaningful covenant protections of core middle market loans, more careful diligence and tighter monitoring have been an important part of this differentiated performance.
Our credit quality since inception over 13 years ago has been excellent. PFLT has invested $6.7 billion in over 500 companies, and we have experienced only 20 non-accruals. Since inception, PFLT's loss ratio on invested capital is only 10 basis points annually.
As a provider of strategic capital, fuels the growth of our portfolio companies, in many cases, we participate in the upside of the company by making an equity co-investment. Our returns on these equity co-investments have been excellent over time.
Overall, for our platform from inception through September 30, we have invested over $540 million in equity co-investments, have generated an IRR of 26%, and a multiple on invested capital of 2 times. Our experienced and talented team and our wide origination funnel is producing active deal flow. Our continued focus remains on capital preservation and being patient investors.
Our mission and goal are steady, stable and protected dividend stream, coupled with the preservation of capital. Everything we do is aligned to that goal. We seek to find investment opportunities in growing middle market companies that have high free cash flow conversion. We capture that free cash flow primarily in first-lien senior secured instruments, and we pay out those contractual cash flows in the form of dividends to our shareholders.
Let me now turn the call over to Rick, our CFO, to take us through the financial results in more detail.