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PFLT PennantPark Floating Rate Capital

Participants
Art Penn Chairman and Chief Executive Officer
Aviv Efrat Chief Financial Officer
Ryan Lynch KBW
Mickey Schleien Ladenburg
Chris York JMP Securities
Doug Mewhirter SunTrust
Ray Cheesman Anfield Capital
Call transcript
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Operator

Good morning and welcome to the PennantPark Floating Rate Capital’s First Fiscal Quarter 2018 Earnings Conference Call. Today’s conference is being recorded. At this time, all participants have been placed in a listen-only mode. The call will be open for a question-and-answer session following the speakers’ remarks. [Operator Instructions] It is now my pleasure to turn the call over to Mr. Chief of and Capital. Floating Chairman Penn, Executive PennantPark Officer Rate Art Mr. you conference. begin Penn, your may

Art Penn

and morning first call general you today Aviv, to discussion earnings Thank please good the call. information by PennantPark welcome like conference forward-looking by Chief about Floating and you Aviv to start Efrat, include Rate Financial am off conference Capital’s I fiscal our XXXX everyone. quarter statements. joined I Officer. would some disclosing

Aviv Efrat

numbers Today’s today’s Art obtain our like like or Chief well property our press SEC call latest would Penn. Harbor Officer, in would unauthorized To of results that refer being press to to Rate the I filings, to call that our these our conference customary and Art. Audio copies and forward-looking that recent this time, PIN forward-looking a include the not is disclosure our by this on important any at Please us be most for everyone with projections. to actual Chairman call www.pennantpark.com is as undertake back call law. you XXX-XXX-XXXX. Capital the website differ information. filings you, do our prohibited. SEC, call materially could strictly of turn to would replay and that visit note statements We will provided call at unless At Thank release we is Executive required and to cause your broadcast call factors also update forward-looking of projections earnings any telephone our available I may recorded. ask also as remind Safe of website. statements from please on to this Floating the by I form our and call that to like regarding attention PennantPark in release using

Art Penn

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

invested lien ended in Senior December to of assets quarter or first X%. million $XXX at XX, primarily Fund For Loan secured continued the PSSL Secured we grow. an average PennantPark yield senior

PSSL with average pool million As yield net diversified of Core owned an share. $XXX was investment $X.XX XX names, XX, X.X%. of December of per income

was As of our share. September XX, per spillover $X.XX

November attractive and an attractive front, In recapped of quarter, investing issued the XXX shares addition upsized of unsecured being extended right of October, million in and we side the during attractively hand with issued amended, to we priced facility our on bonds financing. active X.XX%. X entire we rate the balance the long-term at L-plus In and equity sheet also fixed credit

proceeds our and floating lien We PSSL. debt loans are structured actively of investing rate financings and and secured first well-priced into the equity into

NII that we As basis. to grow sustainable will a our more we expect invest, than on cover our dividend

of business primary has financing middle-market remained Our financial robust. sponsors

and relationships in about our have Chicago, and from the sponsors we manage London. across Los financial We Houston Angeles, elsewhere country offices New XXX that York, with

the to wide what withstand over of that invest well in. ultimately size focused value on we cycles. vehicles, we relative the several primarily be done investments have business received making can funnel long-term can to XXX perform about years Due our will We selective flow business to-date. we with extremely different deal We remain sponsors, that and of and

and low to more covenants on are continues defensive, leverage, companies high that returns. be structures strong Our and focus have

If capital, takes capital. credit goals is preservation one of upside preserve the we care As usually itself. primary investors, of of our

a trust. is As one long-term goals business, of building our primary

our teams, credit shareholders. sponsors, of with intermediaries, portfolio trust management financial our Our course, focus is on and building providers long-term companies, our

credible capital. financial first consistent, intermediaries who middle-market for want sponsors, teams We and call management are

become partner a have As an for affiliations, clients. our independent provider, trusted free or financing we of conflicts

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

clients last the Corporation. relevant subsidiary is to the additional of senior deal our benefit several Capital that including be PSSL with Kemper of launching We PFLT and merger, better low to Insurance a primarily recent defensive, the and joint venture MCG to loans them and that invest first for more secured the to larger write mid-level our have PSSL the Trinity increased more follow covenants. relevance build steps in on for and professionals lien are leverage bond could taken this in Company, few terms. strong offerings, to order equity Universal different Similar and companies of our PFLT, geographies over PSSL driving addition PSSL years sponsor flow PSSL have have across has enhanced checks together and offering.

be expect to be increase net over We income investments time. ROE the to in which on overall in PFLT the to our should investment low accretive mid-teens PSSL and

of non-qualifying. considered the is of a Although XX% a still non-qualifying basket only XX% with plenty maximum PFLT’s a since is investment cushion as in asset PSSL currently

actively We venture. considering senior joint are loan second a

coverage in cash capital amount diversification of result high quality and our expense interest volatility. income. healthy X.Xx, on keeps cushion cash portfolio companies, to EBITDA ratio, support to by continuing to and significant or flow assets cash provides this is our focus floating continue the market the a a rate be investment constructed stable withstand which seniority The structure, interest As economic

ratio Additionally, portfolio our prudent was of to cost, debt overall another EBITDA risk. the the on X.Xx, indication of

non-accruals. had December portfolio X On $X.XX in on recovered five the books far. X.X% representing XX, we since on on value basis. our non-accrual of market only those basis X.X% Of a excellent. which cost been have a the dollar and so Our on we XXX have non-accruals, one has On years credit we invested we five quality ago experienced the have inception companies

In attractive had we adjusted another investing active terms of in risk quarter investments returns. new

Our particular activity known and sponsor. of have a was for these a financings the a while or all companies strong these M&A deals, investments I growth the we And refinancings. mixture have relationship driven by with industries virtually and studied

term haircare debt first precision Let’s sub-assemblies Cadence Holdings million Tier million We walk We which We Management sponsor. $XX purchased loan million is – in Cadence through Capital Aerospace. lien a the $XX critical is sponsor. services first and a $XX sponsor. sells and Ares IT the lien provider million local state highlights. GCOM Teva components, loan. the some Software, governments. Sagewind X and of integrator manufacturer and $X is first [ph] IT Arlington equity of invested solutions software GCOM, is of produces invested of and of lend flight assemblies. Capital the in term is lien of products. for and

manufactures equipment, of $XX sponsor. parts Sentinel Enterprises distributes first the lend We lien and carwash million supplies. Sonny’s and loan. Capital term is

are due XXXX financings, sourcing Turning in and to relationships strong seeing will believe we deal active to M&A due to be growth both network flow. outlook, our the driven client active we that

the to to us over now Let call take CFO our turn through Aviv, the results. financial me

Aviv Efrat

Art. you, Thank

renewal income $X.XX the non-recurring of For million $X.XX our the had was per per upfront share. the share relating We quarter credit of unsecured our ended net core to facility December fees $XXX notes. issuance investment of XX, XXXX and

share. have per GAAP about accrued Additionally NII $X.XX but incentive of we resulted This $X.XX of share negative in per fees not payable.

incentive some at $XXX,XXX expense totaled the not expenses payable of Looking management totaled including expense totaled fees administrative $X categories, General about million. million about recurring $X.X fees. million and accrued $X.X and but that interest

excess about million $X.XX or realized net or $XX.X million losses income per or NAV share. ended $X.XX investment on was $X.X Net per $X.X per share unrealized was $X.XX of per in $X.XX appreciation quarter per was share. $XX.XX notes unrealized $X.X was $XX.XX Net and went Consequently per And During or appreciation our the share. from on share. million December million XX, to dividend share. facility credit

independent credit our under of market mark where the cases we and are broker dealer In investments. XXX our our quotes value quotations dealer exit quarter to Board facility available broker when an to each ASC markets firm independent using inactive, Our portfolio by by firms XXX. valuation active entire the price are provided use and valuation Directors or independent

subordinated relatively portfolio invested is is Our low is highly XX first in X% debt, in and equity. companies X% risk. in diversified secured debt industries, different lien with X% It across debt, senior XX% in second lien XX

Our investment in debt portfolio. whose about represents PFLT’s are XX% equity secured in of senior loan first investment underlying subordinated investments the and lien PSSL

is portfolio of Our XX% including portfolio cash. a average the overall debt yield X.X%, has floating rate weighted of

back let me turn the Now, to Art. call

Art Penn

mission. our reiterate to want we conclude To Aviv. you, Thank

to capital. goal rate In investment stable dedication. up debt today is this I middle protected with high professionals talented commitment That concludes to preservation our the flow that Our flow open like the time conversion. team remarks. Everything market is do extremely free thank risky contractual try your questions. have us. steady, stream less We for cash to aligned senior confidence in to and secured flows that of our a their time I our call capture our form payout and Thank first goal. floating of cash your primarily in all and cash for those shareholders. you dividends in closing, to the dividend and we like instruments companies would to for lien and At free would we We coupled find of

Operator

Instructions] first this [Operator And of you. Ryan we hear time at Lynch Thank KBW. will from

Ryan Lynch

on guess have a or you to you JV? questions expect I morning. timing the provide expand would when on have good first, a Hi, – I any senior front JV you second couple potentially do launch loan first updated the can

Art Penn

Ryan. Thanks

actively when a lot priority launch so is of commit it do, We not it’s a would firm taking high publicly time discussions on. having I that, to want we to of to but the are would

Ryan Lynch

I on Okay, ramp mid-teens that so was it be in up do at fair the return and just income look And by about if is the you can why but return hope when to then only type timing the they talk quarter, increased and the to fund assets to the were float this about X% was PSSL, that ROE? quarter, low income about XX% like the issue it look of for overall you quarter, to enough. up of XX% a for the only returns looks so low by the in

Art Penn

Yes.

get it a So and question, junior down. depends it facility of and credit forms still believe versus fully you capital good a a a and your draw two on again are the smaller, bit as climbing it’s byte we leverage it’s the be more you but we bigger sizes ramp ramp the little We when is can your as little much a drawdown you lower, when new byte both optimized. little portfolio how bit is a and sizes ramp can leverage little

we low cautious So to continue the in as to to careful get way, no grow going but and we ROE. a in are methodical, still vehicle target our growing, to mid-teens doubt the

Ryan Lynch

question just or million goes, of shows feels portfolio to fairly portfolio that $XXX and a the sides bite the $XXX to roughly so as forward will that at of grows PSSL’s disclosed PSSL in goes the represents you $XX for about sizes have your from concentration it fairly same expect guys stay actually portfolio? the grows you about kind the going I closer that and bite that million concentrated still that five as as my as largest Okay, shrinks do XX% are looked actually when to next as expand buy PSSL wondering it you which companies was will size I million, portfolio, far portfolio XX-Q, large, basically

Art Penn

in of i.e., majority we say X% a mean I Yes, will the over I’d names X% XX at the would big for least be position businesses are positions, to X% X% us. targeting be portfolio, time. the

Ryan Lynch

facility end there balance with noticed Okay. all was sheet? also $XXX balance million the at I that guys the the sheet, on the cash And cash of then million in – I drawn just quarter had of on you credit guess why $XXX the about

Art Penn

the from cash offering, financing are there, came a style long-term bond bond primarily facility of with pleased is fixed credit attractive our we securitization Yes, came financing. have very rate. that offering we so at the which That

we securitization XXX we reasons – style. the pay of only One it’s can

it’s So, it’s an as easy and not to the not assets that holds possible. immediately there is redeem – SPV

of be top to million be buy to cash us, way will for assets at contributed our the be do they but our our to $XXX So the held they the to an efficient of facility wave will going credit cash be or company, initially either that the parent for And just up assets. cash. SPV then and was next approval contributed that. Kemper of PSSL That or to us is the those subject once used will will to to lender

Ryan Lynch

one Yes, – you then little And sense. we that of can, first now into can about last that makes one I outlook are just just a month any over if XXXX. the month give quarter

deployment are Just capital viewing and how you guys so repayment far?

Art Penn

a the it’s our which December January there know is a deals little the seasonality is know. lot in am sure early. Typically, get of to I I you Lot slow. people business and quarter a in done and call of

activity couple in last We have pickup. see of started weeks to the

We capital we the quarter active. So, for that are going a building the we means we very want have stronger remain kind us built to of rush, but that preservation. think is our whatever and it’s The around to relationships and teams country elsewhere are normal we everyday. first goal never foremost be

excited So, to to be opportunity commercial we the over the continue time. grow portfolio very about

Ryan Lynch

Okay, thanks questions. for taking my

Art Penn

Thank you.

Operator

And we next hear from Mickey of Ladenburg. Schleien will

Mickey Schleien

morning as given money of are. but assets, Yes, I SLF have the being taken the shrink table Art, in bit this growth everyone. other markets some is quarter had SLFs off clearly a terms strong seen the how tight good

understand So, is liquid you in finding the markets like more where to SLF where the I investing? would value are

Art Penn

middle-market our lien types the going from into which Yes, so sponsors. PSSL that of are self-originated primarily is be just first deals financial clear directly PFLT, to doing are loans Mickey, same

a take been infrastructure in years have and X country with our the offices elsewhere. in we to around So investing last back, team, step our the just over

So, maintaining we we deal are still flow now actually diversification. originating more while than right the have capability

proper and problem So, write we have our could have sponsor deals for bigger middle-market we look to financial we into saying our our checks of say wish nice vehicles. diversification maintain clients We you to the us.

and So, we XX million, million can write PFLT check is XX on between out the whatever it PSSL.

portfolios fortune So, to very we what goes what nice these selective that and much PFLT. what able of into and is are similar about be of being position in into going PSSL into picky is very comes

Mickey Schleien

industries you better where are Art, moment? and seeing you at are there any particular are value targeting some perhaps the

Art Penn

where the are way leverage across believe this that We, environment very finding companies recession-resistant covenants all that we believe low, can we where be get lender are It’s getting is we we industries recession-resistant on in are and are focused industries, math. the in we an still the where important by borrower. covenants, to

are bonds our very And the country, opportunity doing more you the team by timed. credit if find to which we to the capital going into biggest ask in way the back, did advance. we channel deal that credit we why is equity facility both our companies why did is thought and to So the were around the somebody’s facility well

in lock go L-plus We a facility to long-term are XXX. and thrilled credit

and be cost the We this upfront that but one-time income will quarter, came lock-in non-recurring. X.X%. long-term to of bonds are it the paid statement We thrilled through

think really now. good right a we have So we hand really

lot have We a liquidity. of

interesting teams originating market feel are about good deal opportunity. the we and Our flow

Mickey Schleien

average think the Okay. average said PNNT’s you And of average you interested also mentioned number and EBITDA, portfolio? in yesterday I my I knowing – would numbers what in the don’t what I last is that PFLT be EBITDA question PNNT’s remember

Art Penn

Yes.

million general a would $XX do proposition. $XX almost not EBITDAs or PFLT between in On Something tend disclose say as so. we or XX the to be or probably typically I million $XX million about average million

Mickey Schleien

it similar PNNT? is and Okay

Art Penn

PNNT is pretty similar.

Mickey Schleien

Thank morning. this time your appreciate you. I Okay,

Art Penn

Mick. Thanks

Operator

JMP at And of this from Securities. Chris our comes time next question York

Chris York

taking and my morning guys Good for questions. thanks

for the of clarifying been going PSSL, on asked, was loss so have realized net Charming them focus one much to million you had how questions I $X.X Charlie? just of quarter, of most in you, was So in that

Art Penn

That Charlie. Charming was

as field, Charlie – we so So came sense the we Charming redemptions which a exit number sold that that where we bankruptcy pursue of and to got us for to decided is for us from. it out make

Chris York

it. outside Got of losses, Charming no realized additional Charlie? And

Art Penn

correct. That’s

Chris York

That’s Thanks it me. for Art.

Art Penn

you. Thank

Operator

of Our [Operator comes question Doug next Instructions] SunTrust. from Mewhirter

Doug Mewhirter

your to Hi, idea the you looks quarter, had questions good an little been a this up-tick my nice in balance have do would like sort just the little or morning. of expect portfolio? quicker grow of activity rate it I bit PSSL that with you growth to your origination sheet get up maybe that a than as on answered, growth ramp missed, you proportionally on

Art Penn

It’s given Yes. are question. a it generates. ROE higher great certainly We PSSL prioritizing the the

we – can the very grow for but is and fits deal by bite to So ROE going that company. if probably the it and they a large, the a that’s slide will together, and I’d say PSSL PSSL, it’s just have accretive smaller are

Doug Mewhirter

that. yield is for spreads in of that’s are environment not markets you are final bit, top question capital you lot on of have the a and companies talk are Thanks nice but a am middle spreads smaller for that now, tailwind mean at the seeing question, PFLT? there in the I you I doing obviously where market midmarket second these Okay. the is how spreads a affecting tightened high My more sure looking terms competitive just for and a how was structure of end of LIBOR how traditional in for markets, the

Art Penn

to terms in of roughly to, terms ordinary of flattish spreads. in Nothing experience our quarter relative last

Doug Mewhirter

Thanks. all Okay. That’s my questions.

Art Penn

Doug. Thanks

Operator

Cheesman Ray And our Anfield next question Capital. of comes from

Ray Cheesman

together is the Thank you an very while are here is down on missing? I you phone, market year the for call, want speak to give Art, taking just X.X% during we my opportunity to this question. the much what I all

Art Penn

or lock unsecured the We we expense. facility this good X.X% deals. some a for basically hand which because priced our have of upfront essentially long-term attractively right whole do our lock time opportunistically. did those side of it investment essentially, that was cost we those sheet, made one-time very think amortize to those redialing so nonrecurring the to do to that We notes quarter investments expenses one-time long-term then so over in not take those credit long-term in life expenses And balance we

also interest one, to easier model expense number the but for our to forward. it’s expenses, people So model going

Our interest at of expense amortize life is the deals. $XX.X going peers, forward million do we the our because over lower than not

impact but basis. a impact it spillover, does doesn’t GAAP it nice So, on our our taxable

credit good So the feel see they of even every to are going think though shareholders it as both going about a the results expense, one-time quarter up really company. and and we it’s forward I this the big make will bonds facility

So, a in market trades don’t to liability know side understand then put that’s we out try way we don’t trying and why lock and exactly great on financing did. is, do spend what while can we we the we it day good to deals find the and

Ray Cheesman

of without but floor, a is earlier Broader kind about I you long getting last don’t it that you year rather it question, how of that and zero of mentioned market done does, lot to am of going other current think that I I who am I LIBOR if able will this wondering XX% know floors. direction wondering you back there the again naturally I are when deals to surprised the know to are LIBOR as LIBOR people on if are hang the goes up-cycle had you the protection the type go, cycle to floor. some covenants, still think still be

couple maybe of that While they years being very make profitable. they of holding – some end won’t loans for up those

LIBOR in seeing you are what wondering floor just business? am I the So

Art Penn

that We typical getting floors so. LIBOR. loan X-month of X% typically LIBOR That’s are or do still granted, we a

yesterday X.X%. I it as of think was

if lot they Ray, have of lower downside the don’t in So case value, you right a have goes but them now, LIBOR back again. as out, point we

in them vast getting the cases. are the we majority of So,

Ray Cheesman

able able if money us. would if so is of just you any wondering had a lastly, with you BDCs that us Israel, very wondered just out creativity? just And we X.XX – see I to color give It’s to your understand I story back share many we don’t you be get are am there

Art Penn

sure. Yes,

merchant few looked the for at over attractive. Israeli on We about market been bank SEC, of real The a a looking has that investigated that. market lot talk have time We the the few the focuses to markets. industry a rating that consistent a basis, We years last with focuses it which agencies. we tapped relationship on thinking on developed the capital so that spend estate We years.

of there. capital. AA And rating and did We got some S&P would we be very attractive rated We we marketing over are thought attractive affiliate by an minus. test it a

helpful we So, the are the but item we quarter’s non-recurring income pulled with the statement, results very X.X% one-time again we like-for-like upfront income really in of and nice trigger an at average to and basis this on did going that and fees a and pleased piece are X.X that’s for accretion shareholders think will or years roadshow unsecured, on think so generate to really, time. we ongoing basis that’s an over be paper very

Ray Cheesman

perfect. wanted we Yes, for timing, your you thank was say to it

Art Penn

we mean you. Thank about feel I good our credit well that’s as redialing. facility that as

really expense core this So to quarter’s granted market through or really feel We disclosed non-recurring, we be one-time the have a in may going liquidity why non-core locking statement. that’s income of a we may turbulence fortunate where lot non-core. think some but it’s on not in NII, a bonds It’s and think facility its our but in run, and great well-timed are look back item, we were – financings. opportunistic the say very income will one-time the non-recurring capital, both the we this in shareholders taking those and and we made long long-term granted statement credit investment

Ray Cheesman

Thank much for very questions. my you

Art Penn

Thank you.

Operator

further you Mr. the the in would conference no closing for questions to are turn or there time, any additional this at now I And to Penn, like remarks. queue. back

Art Penn

you Thank much. everybody for Floating in their to Capital I’d forward very PennantPark to just we Rate in early and interest with like look speaking you thank May.

Operator

And your conclude everyone for participation. thank to would We call. our like again, that does

now disconnect. may You