Arren Cyganovich

Arren Cyganovich asked for more details on the types of deals driving the increased investment activity, including whether they are M&A-focused, follow-on acquisitions, or concentrated in specific industries.

Answer

Art Penn, Chairman and CEO, explained that investment activity is a combination of add-on delayed draw term loans for existing, well-performing companies and new platform deals. He described new deals as typically having mid-fours leverage, over two times interest coverage, and 40-50% loan-to-value.

Arren Cyganovich asked for more color on the types of deals driving the increased investment activity, specifically whether they are M&A-focused or follow-on acquisitions, and if any particular industries are seeing more activity.

Answer

Chairman and CEO Art Penn explained that investment activity is a combination of add-on delayed draw term loans for existing credits (approximately half) and new platform deals. He described new platform deals as typically having mid-fours leverage, over two times interest coverage, and 40-50% loan-to-value, with spreads of SOFR plus $475-$525.

Arren Cyganovich of Truist Securities asked for an assessment of the competitive environment in the middle market, specifically regarding pricing pressure and the stability of loan covenants.

Answer

Art Penn, Founder and Managing Partner, characterized the competitive landscape as rational, particularly in the core middle market where PennantPark operates. He stressed that they continue to secure meaningful covenants, monthly financial statements, and attractive terms, leveraging incumbency and deep relationships to source deals selectively despite the competition.

Arren Cyganovich asked for commentary on the competitive environment in the middle market, including any signs of pricing pressure or changes in covenant stability.

Answer

Art Penn, Founder and Managing Partner, described the competitive landscape as rational, particularly when compared to the upper middle market. He affirmed that PennantPark continues to secure meaningful covenants and relies on its incumbency and deep relationships, with significant deal flow originating from its existing portfolio of companies.

Arren Cyganovich asked if the current 1.4x debt-to-equity ratio, after the portfolio acquisition and subsequent asset sales, is sufficient to cover the dividend, particularly if PSSL2 is excluded. He also inquired about the strength of underlying portfolio companies and trends in average EBITDAs and revenues.

Answer

Chairman and CEO Art Penn indicated that modeling a 1.5x leverage ratio, which is the middle of their target range, and growing the JV over time, should allow them to easily cover the dividend, even with a SOFR reduction. He also mentioned that equity rotation from M&A could further assist. Regarding credit quality, Art Penn reported double-digit revenue growth and single-digit EBITDA growth across the portfolio. He acknowledged a few choppier credits, particularly in logistics and consumer-focused areas, but stated there are no systemic credit issues at this time.

Arren Cyganovich asked about the impact of the portfolio acquisition on leverage, the subsequent reduction to 1.4x, and whether this run rate covers the dividend, particularly when excluding PSSL2. He also inquired about the overall credit quality of the underlying portfolio companies and trends in average EBITDAs and revenues.

Answer

Art Penn, Founder and Managing Partner at PennantPark Investment Advisers, LLC, suggested modeling a 1.5x leverage ratio as a middle ground, stating that with the growth of the JV over time, the dividend should be easily covered, even with a SOFR reduction. He also expressed optimism for equity rotation from M&A. Regarding credit quality, Penn reported double-digit revenue growth and single-digit EBITDA growth across the portfolio, with some choppiness in logistics and consumer sectors. He noted that a handful of choppier names are expected and that there are no systemic credit issues at this time.

Arren Cyganovich of Truist Securities asked for more detail on the expected timeline for PFLT's net investment income (NII) to fully cover its dividend. He also inquired about the underlying credit quality trends within the portfolio, specifically regarding metrics like EBITDA growth at the portfolio company level.

Answer

Art Penn, Founder and Managing Partner, outlined three primary levers for NII growth: 1) increasing leverage to the target of ~1.5x, 2) fully deploying capital in the existing PSSL (Kemper) JV, and 3) ramping up the new Hamilton Lane JV. He stated that these levers should enable PFLT to more than cover the dividend over time. On credit quality, Mr. Penn noted that portfolio company EBITDA is generally growing in the mid-to-upper single digits and that overall credit metrics, like low non-accruals and leverage, remain strong.

Arren Cyganovich with Truist Securities inquired about the sustainability of the increased M&A activity into 2026, the potential for credit spread widening given high demand, and sought an update on the performance of Dental Brands, a new non-accrual investment, including its impact on unrealized and realized losses.

Answer

Co-CEO Vivek Bantwal indicated that the surge in M&A activity is likely a long-term trend, driven by private equity dry powder and a renewed risk-on sentiment. Co-CEO David Miller added that significant spread widening is not anticipated in the near term but highlighted the platform's ability to secure higher spreads on unique originations. Regarding credit quality, Mr. Miller clarified that Dental Brands is a small, legacy position now on non-accrual due to underperformance, and overall non-accruals slightly decreased, with recent write-downs primarily affecting other legacy names.

Arren Cyganovich asked for an update on the performance of Dental Brands, a new non-accrual investment, and inquired if prior non-accruals contributed to the unrealized and realized losses reported for the quarter.

Answer

Co-CEO David Miller clarified that Dental Brands, while now having a senior tranche on non-accrual, is not a new name and has been risk-rated previously due to underperformance. He noted its minimal impact on overall non-accruals (sub $800,000 exposure) and mentioned that total non-accruals slightly decreased to 1.5% of fair value. Miller added that continued write-downs were primarily on legacy names, with overall portfolio quality remaining stable.

Arren Cyganovich of Truist asked about the company's below-target leverage, questioning the outlook for increasing it in the second half of the year and the sufficiency of the investment pipeline. He also requested more detail on the specific resolutions for non-accrual investments during the quarter.

Answer

Co-CEO David Miller explained that leverage should increase as deals that slipped from Q2 begin to fund and the new deal pipeline remains strong. Miller also detailed non-accrual changes, noting one new addition (Streamline Media), two restorations to accrual status (Bayside OpCo, Lithium), and one exit (Kawah), attributing the changes to improved performance and restructurings.

Arren Cyganovich inquired about the specific drivers behind the recent increase in non-accrual investments, asking if there was a common theme among them. He also sought management's perspective on the sustainability of the observed increase in M&A activity through 2026 and the broader outlook for the investment environment.

Answer

Ted McNulty, President, clarified that the non-accruals were largely idiosyncratic, with no overarching theme, though one was tariff-impacted and another faced weakened consumer sentiment. Regarding M&A, Ted McNulty noted that ongoing demand is expected due to private equity dry powder, the need to return capital to LPs, reduced volatility from tariffs, and stabilizing financing costs as rates decline, all contributing to sustained activity.

Arren Cyganovich asked about investment expectations and pipeline activity for the second half of the year. He also questioned the recent increase in net leverage to 1.44x and inquired about the company's target leverage range.

Answer

President Ted McNulty noted that after a slow start to the year, the M&A pipeline is building, and he anticipates an active second half. Both McNulty and CEO Tanner Powell addressed leverage, explaining that the company intentionally operated at a slightly higher level in anticipation of the Merx paydown and that the pro forma leverage is within their target range, which is at the lower end of their stated capacity.

Arren Cyganovich inquired about the guideposts Ares Capital Corporation monitors for stricter underwriting, such as underlying EBITDA growth, sector trends, and overall access to capital, and also asked about the dynamics behind the slight rise in first lien spreads despite increased market activity.

Answer

CEO Kort Schnabel explained that key guideposts include underlying EBITDA growth (which remains strong at double-digits), sector-specific trends, and overall access to capital. He noted no current signs of weakness or nearing the end of any cycle, particularly with the M&A market showing early signs of a new cycle. Mr. Schnabel attributed the stable to slightly rising spreads on new originations to Ares' broad origination funnel and competitive advantages, allowing for selective investment in a competitive environment.

Arren Cyganovich inquired about the guideposts Ares Capital Corporation uses for stricter underwriting, given current positive trends, and the dynamics behind stable/rising first lien spreads despite increased September activity.

Answer

Kort Schnabel (CEO) explained that ARCC monitors underlying EBITDA growth, sector-specific trends, and overall access to capital, noting no signs of a cycle end and an M&A market that suggests a new cycle beginning. He attributed the stable/rising spreads amidst increased activity to Ares Management's broad origination funnel, which allows for capitalizing on diverse deals and achieving favorable investing metrics.

Arren Cyganovich of Truist Financial Corporation asked if the strong deal activity seen in the upper middle market was broadening to the core and lower middle markets. He also followed up on the company's leverage, asking for the rationale behind operating at a lower level than peers.

Answer

CEO Kort Schnabel confirmed that deal activity is indeed broadening out across all market segments, which is a positive sign for momentum in the second half of the year. Regarding leverage, he reiterated that operating at the lower end of their stated 0.9x to 1.25x range provides significant flexibility to capitalize on future opportunities without needing to increase leverage to support earnings, as the dividend is already well-covered.

Arren Cyganovich (Truist Securities) asked about the cost implications of the company's investment initiatives within its transformation plan, specifically whether they would lead to a step-up in costs or if efficiencies would offset further investments.

Answer

Jorge García, EVP and CFO, reiterated the goal to invest and generate efficiencies to slow the overall rate of expense growth. Javier Ferrer, President and CEO, acknowledged an initial disconnect between investments and results but stressed that investments are rational and necessary for technology competition. Jorge García further explained that with over 80 ongoing projects, many are in "dual expense mode" (paying for new and old systems), but cost avoidances from turning off old systems create buffers for reinvestment, allowing for reallocation of expenses and savings to improve the business and add shareholder value.

Arren Cyganovich asked about the investment initiatives within Popular Inc.'s transformation plan, inquiring whether these would result in a step-up in costs or if anticipated efficiencies would help offset further investment as the plan progresses.

Answer

Jorge García, EVP and CFO, reiterated that the goal is to continue investing while generating efficiencies to slow the overall rate of expense growth. Javier Ferrer, President and CEO, acknowledged that there might be an initial disconnect between investments and results but emphasized that the program is rational, aiming to fund transformation through savings generated in other parts of the bank. Jorge García further explained that many projects are in a 'dual expense mode' (paying for both new and old systems) but will eventually generate cost avoidances, allowing for continued reinvestment based on business case and value-add analysis.

Arren Cyganovich asked about the outlook for loan growth into the fourth quarter, the expected cadence of share repurchases under the new program, and the current challenges or opportunities for mainland M&A, particularly in Florida.

Answer

Aurelio Alemán, CEO, reiterated the full-year loan growth guidance of 3-4%, driven by mortgage and commercial pipelines offsetting the auto slowdown. He stated the company remains opportunistic with share repurchases, with a base assumption of $50 million per quarter through 2026, and flexibility. Regarding M&A, he acknowledged that opportunities come and go, and a credit cycle in the U.S. could present new prospects, emphasizing that deals are always about timing.

Arren Cyganovich inquired about the modest increase in deposit costs during the quarter, seeking clarification on whether it was driven by competitive pressures or other dynamics. He also asked for an update on commercial loan originations, specifically addressing paydowns on lines of credit and the outlook for future commercial loan growth.

Answer

José Rafael Fernández, Chief Executive Officer and Chairman of the Board of Directors, explained that the higher deposit cost was a strategic outcome of their Libre and Elite accounts, designed to attract mass affluent clients with slightly higher rates for long-term relationship deepening, enhanced by unique AI-driven insights. Regarding commercial loans, Mr. Fernández confirmed that Q3 paydowns were primarily from lines of credit drawn in Q2, expressing confidence in a solid commercial pipeline and strong business activity in Puerto Rico for Q4 and 2026.

Arren Cyganovich asked about the modest increase in deposit costs during the quarter, inquiring if it was driven by the competitive environment and the dynamics impacting it. He also asked about the outlook for commercial loan growth, noting solid originations but paydowns on lines of credit.

Answer

José Rafael Fernández, CEO and Chairman of OFG Bancorp, explained that higher deposit costs were a strategic outcome of attracting mass affluent clients through the Elite account, which offers a slightly higher rate, and leveraging unique AI-driven insights. He confirmed that commercial loan balances decreased due to repayments of lines of credit drawn in the previous quarter but expressed confidence in a solid commercial pipeline for the fourth quarter and 2026 due to strong business activity.

Arren Cyganovich of Truist Securities asked about the interplay between the below-average private loan pipeline and recent spread tightening, and also inquired about the company's funding strategy for its upcoming debt maturities.

Answer

Nick Meserve, MD of the Private Credit Investment Team, explained that softer M&A activity on the private equity side is the primary driver of the slower pipeline, and that reduced deal flow increases competition, leading to spread compression. Regarding debt maturities, CFO Ryan Nelson and CEO Dwayne Hyzak emphasized the company's 'ample liquidity' and strong capital structure, which allows them to be opportunistic and not forced into refinancing if market conditions are unfavorable. They plan to monitor the markets and potentially act to de-risk the upcoming maturities.

Arren Cyganovich inquired about the drivers behind the optimistic outlook for a rebound in second-half deal activity and the company's target leverage range going forward.

Answer

CEO Craig Packer cited a noticeable pickup in sponsor engagement over the last 60 days, with potential for public-to-private deals, refinancings, and sponsor-to-sponsor sales. President Logan Nicholson addressed leverage, stating the recent reduction was intentional and the company is comfortable operating near the top end of its target range, around 1.15x to 1.20x.

Arren Cyganovich of Truist Financial Corporation inquired about the investment environment for the second half of 2025 and the company's watch list beyond the four newly designated non-accrual assets.

Answer

Daniel Pietrzak, President & Chief Investment Officer, acknowledged a challenging quarter but noted a significant increase in deal screening in Q2. He expressed cautious optimism for a pickup in M&A activity later in the year. Regarding the watch list, he pointed to assets in risk ratings 3 and 4 (approx. 7% of the portfolio) and highlighted ongoing concerns about the higher rate environment and its potential impact on certain sectors.

Arren Cyganovich from Truist Securities asked for details on the types of deals in the pipeline, such as M&A versus refinancing, and which industries are seeing the most activity. He also requested the current spillover income.

Answer

CFO Teddy Desloge noted that recent activity was concentrated in incumbent portfolio companies, while Co-CEO Brad Marshall added that a significant shift towards new M&A is underway, with August expected to be the busiest month since 2021. Teddy Desloge also confirmed the spillover income was $1.86 per share.

Arren Cyganovich of Truist Securities, Inc. inquired about the firm's view on opening retirement vehicles to private assets and requested details on a new structured credit investment.

Answer

CEO Joshua Easterly expressed mixed feelings, supporting investor access but voicing concerns about fiduciary responsibility and investor protection in the retail channel. Regarding the investment, he explained that they opportunistically invest in structured credit portfolios of corporate loans, typically rated BB or BBB, which offer competitive risk-adjusted returns and that they actively trade in and out of this market.

Arren Cyganovich of Truist Securities asked for management's perspective on opening retirement vehicles to private assets and its potential market impact. He also requested details on a new structured credit investment made during the quarter.

Answer

CEO Joshua Easterly expressed mixed feelings, supporting retail access but voicing concern about misaligned incentives and the need for strong investor protections. He explained the structured credit investment was an opportunistic purchase of a rated security backed by corporate loans, a market they have entered and exited over the years to generate attractive risk-adjusted returns.