Pennantpark Floating Rate Capital - Earnings Call - Q1 2025

Executive Summary

• Q1 2025 delivered solid growth and stable credit: investment income rose to $67.0M, GAAP NII was $$30.0M ($$0.37 per share), and NAV per share increased 0.3% to $$11.34, aided by a realized exit (Marketplace Events) and strong originations.
• Financing cost tailwinds: PFLT priced a new $361M securitization at a weighted average spread of 1.59% (30 bps tighter vs July 2024), and subsequently closed a $474.6M CLO, achieving its lowest spread financing in company history; the Truist credit facility was upsized to $736M.
• Platform scale and earnings drivers: portfolio grew 11% q/q to $$2.19B with 100% floating-rate debt investments, while PSSL JV capacity is expanding to ~$1.5B; management reiterated a 1.5x debt-to-equity target, positioning for continued stability in NII.
• Street consensus not available for Q1: SPGI data fetch failed due to rate limits, so beat/miss vs estimates cannot be assessed; monitor revisions as liquidity actions and JV scale support earnings power (attempted SPGI retrieval; unavailable)

What Went Well and What Went Wrong

What Went Well

• “Another quarter of solid performance” with NAV up 0.3% to $$11.34 and GAAP NII of $$0.37 per share; core NII was $$0.33 after excluding accelerated accretion and incentive fee impact.
• Value creation from Marketplace Events exit (2.6x MOIC, 19% IRR over 4 years), contributing one-time income and supporting NAV build.
• Best-in-class financing execution: $361M securitization at 1.59% spread and subsequent $474.6M CLO at lowest spreads in company history, reducing cost of capital and increasing liquidity.

What Went Wrong

• Weighted average yield on debt investments decreased to 10.6% (from 11.5% in Q4), reflecting spread compression versus 2024 levels, consistent with management’s comments on a tighter spread environment.
• Net change in unrealized depreciation on investments was $(29.0)M in Q1, offsetting realized gains, driven by portfolio company performance and market conditions.
• Street estimate context is unavailable this quarter (SPGI rate-limit error), limiting ability to frame headline beat/miss and near-term narrative shifts (attempted SPGI retrieval; unavailable).

Transcript

Operator (participant)

Good morning and welcome to the PennantPark Floating Rate Capital's First Fiscal Quarter 2025 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 question-and-answer session following those speakers' remarks. If you would like to ask a question at this time, simply press star one on your telephone keypad.

If you would like to withdraw your question, press star two on your telephone keypad. 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.

Art Penn (Chairman and CEO)

Thank you and good morning, everyone. I'd like to welcome you to PennantPark Floating Rate Capital's First Fiscal Quarter 2025 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 (CFO)

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.

Art Penn (Chairman and CEO)

Thanks, Ric. 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 December 31st, how the portfolio is positioned for the upcoming quarters, a detailed review of the financials, then open it up for Q&A. For the quarter ended December 31st, our GAAP net investment income was $0.37 per share, and our core net investment income was $0.33 per share. As of December 31st, our portfolio grew to $2.2 billion, or 11% from the prior quarter.

During the quarter, we continued to originate attractive investment opportunities and invested $607 million in 11 new and 58 existing portfolio companies at a weighted average yield of 10.3%. During the quarter, we completed the successful exit of our investment in Marketplace Events. Marketplace Events is a leader in business-to-consumer home goods shows.

These events were shut down during COVID, and EBITDA went to zero. We led the lender group into restructuring and took control of the company in 2020. We worked with the company's excellent management team to turn around the company. The exit generated a 2.6 times multiple on our invested capital and a 19% annualized return over four years. We utilized our experience in challenged situations to navigate a complex restructuring and create significant value for our shareholders through operational expertise and strategic execution.

We continue to see an attractive vintage in the core middle market. During the quarter, for investments in new portfolio companies, the weighted average debt to EBITDA was 3.7 times, the weighted average interest coverage was 2.1 times, and the weighted average loan-to-value was 53%.

Subsequent to quarter end, we continue to remain active, have a robust pipeline, and expect to be able to continue to deploy capital into attractive new portfolio companies. In the core middle market, the market yield on first-lien term loans appears to have stabilized in the SOFR plus 500-550 range. 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. We continue to get meaningful covenant protection. Payment-in-kind or PIK income is only 2.3% of our overall interest income. This is among the lowest in the industry and is a testament to the quality of our underwriting and our portfolio versus our peers.

As of December 31st, our debt to equity ratio was 1.4 times to 1, and with a target ratio of 1.5 to 1, we believe that we are well positioned to generate stable and growing NII going forward. We expect continued stability in net investment income, in part due to our investment in the PSSL joint venture.

As of December 31st, the JV portfolio totaled $1.1 billion, and the JV remained active during the quarter and invested $225 million in 17 new and 8 existing portfolio companies at a weighted average yield of 10.3%, including $188 million of assets purchased from PFLT. Last quarter, we announced that PFLT and our JV partner committed an additional $100 million of capital to the JV. Our share is $87.5 million, which is consistent with the existing economic ownership percentage.

This additional capital will allow the JV portfolio to grow to approximately $1.5 billion of assets. We believe that the increase in scale of the JV's balance sheet will continue to drive attractive mid-teens returns on invested capital and enhance PFLT's earnings momentum. Also, during the quarter, we grew the Truist Revolving Credit Facility by $100 million, resulting in total commitments of $736 million. There were no changes to the terms of the facility, and our interest rate on the facility is SOFR plus 225.

Additionally, securitization financing continues to be a good match for our lower-risk first-lien assets. Last week, we priced a new financing that we expect to close by early March. The new financing is a $361 million term debt securitization transaction with a weighted average spread of 1.59%, a four-year reinvestment period, and a 12-year final maturity.

The weighted average spread of 1.59% is a decrease of 30 basis points from an existing securitization financing that we refinanced in July of 2024. 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 1.49%. The ratio of external debt to PFLT's junior capital was 3.2 times to 1, which creates plenty of liquidity for the company. We believe securitizations are attractive financing structures as they have a 12-year stated maturity and generally have four to five-year reinvestment periods.

They are governed by an indenture similar to other bond instruments, as opposed to other secured financings where you may have a bank credit officer on the other side of the table. For securitizations, the indenture prescribes how the securitization deals with credit deterioration, which means there is no risk of irrational behavior from our counterparties. It's important to note that securitizations are non-mark-to-market financings and that assets are held at par regardless of broader market volatility.

The only time an asset gets mark-to-market would be if there are defaults or if we experience CCC downgrades that will cause an excess CCC concentration, whereby the excess CCC collateral is mark-to-market. Once again, this is all prescribed via the indenture, and importantly, our securitization vehicles are managed with attractive CCC and over-collateralization cushions, which further mitigate any financing risk. Our securitization issued in September of 2019.

We managed that securitization through the depths of COVID, and the financing worked exactly how we expected. This has driven our confidence and our belief that securitizations are an extraordinarily attractive financing structure for our vehicles.

With our lower-risk, lower-leveraged first-lien portfolio, securitizations provide an attractive cost of capital that is well-matched to the portfolio. Equally important, they provide a downside mitigation tool given the stable and consistent long-term nature of the financing. GAAP and adjusted NAV increased 0.3% to $11.34 per share from $11.31 per share. The increase in NAV for the quarter was due primarily to one-time net investment income from our realization of Marketplace Events. Credit quality of the portfolios remained strong.

We didn't add any new investments to non-accrual status, and non-accruals represent only 0.4% of the portfolio cost and 0.1% at market value. As of December 31st, the portfolio's weighted average leverage ratio through our debt security was 4.3 times, and the portfolio's weighted average interest coverage was 2.2 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 technology. These sectors have also been resilient and tend to generate strong free cash flow.

In the core middle market, which we define as companies with 10-50 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 market. In this 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 due diligence with care.

We thoughtfully structure transactions with sensible credit status, meaningful covenants, substantial equity cushions to protect our capital, attractive spreads, and equity co-investment. Additionally, from a monitoring perspective, we receive 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 have meaningful covenants which help protect our capital.

This is a significant reason why we believe we're well positioned in this environment. Many of our peers who focus on the upper middle market state that these bigger companies or 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 a higher recovery rate than loans to 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 $7.3 billion in over 500 companies, and we have experienced only 20 non-accruals. Since inception, our loss ratio on invested capital is only 10 basis points annually.

As a provider of strategic capital who 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 December 31st, we have invested over $563 million in equity co-investments and have generated an IRR of 26% and a multiple on invested capital of two 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 a 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 turn the call over to Rick, our CFO, to take us through the financial results in more detail.

Richard Allorto (CFO)

Thank you, Art. For the quarter ended December 31st, GAAP net investment income was $0.37 per share, and core net investment income was $0.33 per share. Core net investment income excludes $0.04 per share of accelerated accretion income net of the impact on incentive fees related to the realization of our investment in Marketplace Events.

Operating expenses for the quarter were as follows. Interest and expenses on debt were $22.4 million. Base management and performance-based incentive fees were $12.8 million. General and administrative expenses were $1.7 million, and provision for taxes were $0.2 million.

For the quarter ended December 31st, net realized and unrealized change on investments, including provision for taxes, was a loss of $1.6 million. As of December 31st, both GAAP NAV and adjusted NAV were $11.34, which is up 0.3% from $11.31 per share last quarter. As of December 31st, our debt to equity ratio was 1.4 times, and our capital structure is diversified across multiple funding sources, including both secured and unsecured debt.

As of December 31st, our key portfolio statistics were as follows. Our portfolio remains highly diversified with 159 companies across 49 different industries. The weighted average yield on our debt investments was 10.6%, and approximately 100% of the debt portfolio is floating rate. PIK income equaled only 2.3% of total interest income. We had two non-accruals, which represent 0.4% of the portfolio at cost and 0.1% at market value.

The portfolio is comprised of 90% first-lien senior secured debt, less than 1% in second-lien debt, 2% in equity of PSSL, and 8% in other equity. Our debt to EBITDA on the portfolio is 4.3 times, and interest coverage was 2.2 times. Now, let me turn the call back to Art.

Art Penn (Chairman and CEO)

Thanks, Ric. In closing, I'd like to thank our dedicated and talented team of professionals for their continued commitment to PFLT and its shareholders. 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 (participant)

We will now open the Q&A portion of our call. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star one to ask a question, and our first question is going to come from Robert or, I'm sorry, Robert Dodd from Raymond James. Please go ahead.

Robert Dodd (Director)

Hi, guys. On the securitization, since you on the rating, right, so you said it's not mark-to-market facility. So there's going to be, I presume, a shadow rating. Otherwise, the CCC bucket can come into it. So who controls the shadow ratings inside the securitization, and what are the circumstances when those can change? Obviously, you said it doesn't mark-to-market unless there's a default. But how do the shadow ratings change, if at all?

Art Penn (Chairman and CEO)

Yeah. Thanks, Robert. Each loan gets an annual update. And if there's an event during the year, we go to S&P in this case, and we share the event with them to re-rate. So these are not BSL loans, broadly syndicated loans where they automatically have their finger on the pulse. It's up to us to do so when there's an event. Either good or not so good.

Robert Dodd (Director)

Yeah. Fair enough. And then just how I mean, obviously, they have a very good structure for you. I mean, there's a lower spread on that than on the revolver. So it's pretty attractive. How much of your debt stack would you be comfortable having in securitization versus revolver unsecured, however you want to chop it up?

Art Penn (Chairman and CEO)

Yeah. So versus revolver, we'd like having both. Revolver's flexible. It can fund. We view kind of securitization as a term out of revolver. It's kind of like a term loan for us. So revolver is good to take care of kind of funding needs that are more immediate. And also, it's good to have a revolver to manage that CCC bucket, right?

If you get some CCCs, the revolvers will give you a borrowing base in certain cases that's better than the securitization. And we're a believer in unsecured debt too. So we believe in having diversified funding sources, being able to move things around if need be to optimize the outcome. So we like having a revolver. We like having securitization in our mind. It's a term out of the revolver. And we like having unsecured in the capital stack.

Robert Dodd (Director)

Got it. Thank you. Congratulations on Marketplace Events. So one of the questions: are you seeing more appetite? I mean, obviously, you've got some equity in the portfolio. Are you seeing more movement from, obviously, Marketplace Events?

You can kind of your lenders control that. So you've got to pick where, right? Are you seeing more movement on owners of equity that might have the decision power versus you in terms of wanting to monetize this year on the equity side or any color on how that's shaking out? Because obviously, you've just had a pretty nice return on Marketplace there.

Art Penn (Chairman and CEO)

Yeah. Yeah. Look, it's a good time to assess M&A options, and we've seen it both in cases like Marketplace Events where we do have an ownership stake as well as when we're more passive as an equity co-invest. We do believe 2025 will be active. It is time for these private equity sponsors to generate liquidity. Interest rates may not be as low as they would have liked. We're kind of in a higher-for-longer environment, it seems like.

But we do think it's time after many years of kind of, "It's coming. It's coming," kind of this year as being the year. That said, in the middle market, as you can see, it's different than the upper market. Upper market's been a lot more dormant than the core middle market. We've been very active. And we still think in our core, there's companies that do 10, 15, 20 million where the entrepreneur wants a liquidity solution, and those companies have some runway to grow and do add-on acquisitions.

So we think on the buy side, we're going to continue to be active. And we also believe that 2025 will be active on the exit side. PFLT's got a, as we said, about a 9% equity co-invest portfolio. We think that'll rotate nicely here in 2025.

Robert Dodd (Director)

Okay. One more, if I can. On the JV, I mean, obviously, now we've got capacity up to a billion and a half, a really nice return. So I mean, how fast, if 2025 is active, do you think you're going to fill that 1.5 by, say, year-end, or is it a longer term? I mean, you've been putting quite a lot of assets on, so.

Art Penn (Chairman and CEO)

Yeah. Look, to us, it's all comprehensive. It's all one ecosystem, PFLT and the JV. So we obviously put assets in PFLT on the initial. We season them for a little while. Then, when applicable, they move over to the JV if it makes sense. So look, to the prior comment, we think 2025 will be busy. So we think that we'll be able to get to the 1.5 billion in the JV in the next 9 to 12 months.

Robert Dodd (Director)

Got it. Thank you. Appreciate it. Thank you.

Operator (participant)

And our next question is going to come from Brian McKenna from Citizens JMP. Please go ahead.

Brian McKenna (Director)

All right. Thanks. Good morning, guys. So a question on deployment to start. Clearly, it was a robust quarter with $600 million plus of originations. You have a bit more capacity on leverage. So how should we think about the pace of originations over the next few quarters?

Art Penn (Chairman and CEO)

Look, it was an unusually active quarter ended December. Calendar quarter one, which we're in at this point, is a little slower. And that's a typical seasonal movement. People always want to close deals by December. They come up for air in January. It takes a little slower. So right now, it's a little bit slower than it was in December. And we are getting some repayments along the way.

So again, to my prior comments, I think '25 overall will be busy, but we think it's kind of in ramp mode right now with kind of Q1, Q calendar, quarter one through February 11th today, relatively modest. So it'll be time to reload, get some refis, look for deals for both the balance sheet and the JV, and look to try to, most importantly, remain selective. I mean, you can see the new loans that we're doing are cash pay.

PIK is only 2% of this portfolio, kind of four times or less debt deep, a two times or more interest coverage, loan to value of 50%. That's our strike zone. And we're going to stick to it. And we're not going to lose our minds where there's no software in this portfolio. There's no ARR loans.

We're going to try to keep a cautious and conservative posture at the new loan level. And then we will try to optimize our financing the way we've been talking about it through securitization, through revolvers, and through the JV. Yep.

Brian McKenna (Director)

That's helpful. And then just to follow up on originations, how should we think about the mix of new investments versus add-ons? Clearly, it's been more weighted to add-ons. So what's the expectation here over the next 12 months, call it? And then we'll see exactly the trajectory of kind of new deals in M&A broadly. But does this split start to become more balanced kind of over time?

Art Penn (Chairman and CEO)

Yeah. We think it'll be more balanced. Look, one of the nice things about the way we do things is our prototypical deal is we'll start with a $10 million to $15 million to $20 million EBITDA company with a game plan by the sponsor to grow that company, to do add-on acquisitions.

So we will set up, in many cases, some substantial delayed draw term loans, which are kind of built-in flow in companies that we know and we like where we're a strategic partner, where it's not about the last basis point, where we do have a co-invest and we can benefit from those delayed draws. So if you set it up right to begin with, which is kind of how we try to do it, the flow comes, and it's kind of in some ways shooting fish in a barrel because you kind of know exactly what you're getting.

Brian McKenna (Director)

Okay. That's great. And then just one last one for me, just a bigger picture question. You've clearly built a great business here. The broader PennantPark Platform, I believe, manages about $10 billion of AUM. So I'm curious, I mean, where does the platform go longer term, just kind of thinking about growth or even the trajectory of AUM? And then as you reach greater levels of scale over time, what does that ultimately mean for PFLT?

Art Penn (Chairman and CEO)

Yeah. Look, the mission of PFLT, which is to provide senior secured floating rate capital in a conservative fashion to middle market private equity sponsors. There really aren't that many people who are left in that space like us who will take a company literally from 10 of EBITDA up to 50 and can do it all in-house. We can now do that. We couldn't always do that.

With the growth of the platform to the AUM that you talked about, we're one of only a few who's willing to start out at $10 million of EBITDA and can say, "We got you up until $40-$50 million, and you only need to talk to us." That's a nice place to be. We're below the radar of the big massive branded direct lenders who seem to have no interest in this kind of below-the-radar space.

We think we've got a lot of runway. It's the great thing about the American economy. There's all kinds of interesting companies out there that could use this capital. It's one of the best parts about our job is that every day we're learning about new companies, new industries. We're meeting new entrepreneurs, new financial sponsors.

And we get to learn, and we get to select which of these companies and sponsors and management teams we want to back. So it's a real joy to come to work every day and see the American economy in all these different areas. And we're really excited about it. To be direct, we think there's a lot of runway for what we're doing for a long period of time.

Brian McKenna (Director)

Super helpful. Thanks, Art.

Operator (participant)

And our next question is going to come from Mark Hughes from Truist. Please go ahead.

Mark Hughes (Analyst)

Yeah. Thank you. Good morning. Art, anything the economic topics of the day around DOGE or tariffs? As you look at your portfolio, how do you think you're positioned relative to some of these dynamics?

Art Penn (Chairman and CEO)

Yeah. So thankfully, on tariffs, there's very limited exposure. Those tariffs are usually around offshore manufacturing. It's a little bit of it, but it's not really that material, and given the tariff maneuvers during the prior Trump administration, many of those companies already kind of proactively moved to Vietnam or India or Mexico or elsewhere, well, Mexico is also a place, but other places outside of the Far East, so tariffs is kind of back again, but many of our companies kind of took proactive action, and those companies are a relatively small part of the portfolio.

Our two biggest industry groups are healthcare, number one, and government contracting and defense, number two. Healthcare is the largest piece of the U.S. economy. It's over 20% of the U.S. economy. It's the largest piece of our portfolio. As you know, we tend to focus on companies in healthcare that are on the right side of providing cost savings because reimbursement risk is always a risk in healthcare.

So one way you deal with that is you back companies that are delivering cost savings and still delivering high-quality care. So we think we're well positioned there to weather anything that is thrown at us because we're backing companies that are reducing costs. They're going to win. Same thing on government contracting. A lot of the government contracting are, I call them people businesses, where people walk into offices. They sit behind computers, and they could be doing cybersecurity. They could be doing satellites.

They could be doing intelligence. It's not very much in tanks and missiles and things of that nature. And again, most of these companies are on the right side of either technology upgrades and/or reducing costs. To drill down further, there's generally two types of contracts in government contracting. There's the cost-plus, where the government's reimbursing for the cost of the team plus a margin.

And in those cases, those EBITDA margins are typically under 10%. So it's not like any of those companies are making exorbitant profit margins in the cost-plus side. And then you have fixed-price contracts, which I think is where the world's probably headed, where the risk is on the contractor to provide the service at a fixed price. And if they do it well, if they operate well, they're going to make higher margins. And obviously, if they don't operate well, they're going to make lower margins or lose money.

The piece of the portfolio that has fixed price, we believe are excellent operators. They're making very good margins because they're really excellent operators and are not going to price a fixed-price contract unless they make sure it's judicious and careful and also providing value to the government. So that's a long-winded answer.

We can go into more detail offline if you like. By and large, we think we're well positioned, and we're watchful. Of course, as taxpayers, we want the government to spend its taxpayers' dollars, our taxpayers' dollars efficiently. Time will tell, but we believe we're on top of it.

Mark Hughes (Analyst)

Understood. Then what kind of visibility or what should we anticipate in terms of just the portfolio shifts from PFLT to PSSL, some meaningful moves this quarter? How should we think about the coming quarter, so?

Art Penn (Chairman and CEO)

Yeah. It ebbs and it flows. It depends on kind of where we are in that cycle of ramping up and securitizing. To the earlier question, we kind of use securitizations. PSSL is kind of a term-out kind of thing. As we build the PFLT balance sheet, we'll then sell assets upon approval of our JV partner.

Remember, our JV partner has to approve every transfer. Upon approval of the JV partner, the asset will move over, and then we'll try to finance it efficiently over in the joint venture. So it ebbs and it flows. It really just depends on deal flow and refinancing and also financing needs. To do a securitization, you need to have kind of at least $300 million of assets in one place to do a medium securitization or small securitization. So when credit facilities get ramped up to $300 or $350 or $400 million, that's a good time for us to think about doing a securitization.

Mark Hughes (Analyst)

Thank you.

Art Penn (Chairman and CEO)

Thanks, Mark.

Operator (participant)

And our next question is going to come from Mickey Schleien from Ladenburg. Please go ahead.

Mickey Schleien (Managing Director)

Yeah. Good morning, everyone. Art, you mentioned that we finally saw some stabilization of spreads in the market this quarter. I'd like to understand what you think were the trends behind that and what is your outlook for spreads this year?

Art Penn (Chairman and CEO)

Yeah. Good question. Spreads have stabilized in the 500 for us, 500 to 550 spread over SOFR for this core middle market. Occasionally, you'll see a 475 when a particular lender kind of loves, loves, loves the scenario. What your offer was just kind of math. At a certain level in the core middle market, it just doesn't make sense.

So I think the math was helpful. I think people want to feel good about delivering a double-digit unlevered return to their investors. Leverage can obviously enhance that and all of that. But I think kind of both the absolute spread and of a double-digit and a relative spread, and then also relative to the broadly syndicated loan market, which has compressed. So for now, it's stable.

I think supply-demand could impact if there's a lot of supply, which we hope. Perhaps spreads will widen. If there's limited supply, they may tighten. What goes on in the geopolitical sphere, what goes on with Washington, with tariffs, the Fed, all of this will certainly play into it. But at least at this point in time, for the next quarter or two, we sense some stability.

Mickey Schleien (Managing Director)

That's good to hear. Art, the senior loan fund is generating really strong ROE, which is great. But your equity investment is now valued at less than 50% of cost. Could you just give us a high-level sense of what's driving those markdowns, which has sort of persisted quarter after quarter for quite a while?

Art Penn (Chairman and CEO)

Yeah. I mean, look, as you know, Mickey, and you cover the industry, and you also cover the CLO industry, not all deals perform well. And the JV does not take equity co-invest, right? So the equity co-invest is retained in PFLT. So that investment that might have some upside, which the co-invest is not part of the JV, our JV partner did not want to co-invest.

So when there's markdowns or when there's a default, the JV will participate in that and not have the opportunity to participate in that 26%, two times MOIC upside opportunity that we have in the BDC, the PFLT balance sheet. So that's kind of so if you look at some of the markdowns, the JV participates in the markdowns but does not have the benefit of the markups. And that's really because our JV partner, at the time we set up, was not interested in participating in the co-invest.

Mickey Schleien (Managing Director)

Yeah. I understand. I didn't realize that was the case, and that makes sense. A couple of sort of more housekeeping questions. What proportion of your unfunded commitments, which are almost $700 million, are at your discretion versus your borrower's discretion?

Art Penn (Chairman and CEO)

Yeah. Let me see if I have some data for you. And Rick Allorto, you can chime in. There's two types of commitments. Generally, there's the revolver, which is at their say. I think it's about $437 million to be exact $428 million of revolver. So that's at their discretion.

And if you go back to COVID, which was kind of when certain people drew the revolver, I'd say about 40% of revolvers were drawn during COVID. Many people did not. And then the delayed draws are a little bit more at our discretion because we're doing diligence. We're making sure that the companies are meeting their covenants and meeting their commitments.

That's a little over $400 million, $437 million to be exact, in delayed draws, by and large. That's a little bit more in our sway. The nice thing about these two elements is they kind of are never happening at the same time. You go back to COVID, people drew their revolvers to some extent. The delayed draw activity went to zero because there was no deal flow, and everyone kind of pulled back. On the other hand, when economic times are good, people do not draw revolvers, and the delayed draw activity tends to be a little bit more active.

Mickey Schleien (Managing Director)

Yeah. Understood. Liquidity looks fine. Lastly, just in terms of the balance sheet, I know from time to time the external manager subsidizes to some extent ATM issuance, so you're not issuing below NAV. Can you just give us a sense of how much of a subsidy the external manager is willing to absorb? For example, would you issue stock at this current price relative to NAV?

Art Penn (Chairman and CEO)

We don't disclose that. We disclose the ATM activity, obviously, every quarter. At certain cases, I think a lot of it depends on deal flow and activity levels and vintage, right? So if you think you're capturing a good vintage and you think that vintage is going to be accretive for shareholders, you may look to subsidize. If you think you're slower or the vintage is a little less attractive, you may not. So it's a case-by-case basis. Every day is a new day with what's going on with our flow and then what's obviously going on with the stock market and the price. Look, we will consider things that are accretive for shareholders.

Going back to a long time ago, PFLT bought a busted BDC called MCG Capital. And the management company wrote a pretty big check to do that deal. And that was very accretive for the company. It added a lot of heft. It added a lot of liquidity. And it ended up being a really, really good deal. And we wrote a big check at that point. And in some ways, these little ATMs are smaller versions of that. It just depends on the facts and circumstances at that point in time.

Mickey Schleien (Managing Director)

I understand. That's it for me this morning. Thanks for taking my questions.

Art Penn (Chairman and CEO)

Thanks, Mickey.

Operator (participant)

And we have one more question from Paul Johnson. Please go ahead.

Yeah. Thanks. Good morning. Does the Marketplace Events exit, does that trigger any sort of special dividend potentially over the course of the year?

Art Penn (Chairman and CEO)

I'll kick it over to Ric.

Richard Allorto (CFO)

It certainly increases our spillover amount. We tend not to pay out special dividends. We tend to use spillover as cushion for dividends. We can certainly talk offline all you want about dividend policy and the right dividend policy or the wrong dividend policy and supplementals. And we're always learning from others as to how to best think about that. But kind of in general, we use it to increase spillover, which increases cushion for a steady, stable dividend, which is one of our highest goals, is to provide a steady, stable dividend.

Thanks, Art. And just one last question on credit, high level. Non-accruals were obviously stable quarter over quarter. It seems like another good quarter for credit. But how would you, I guess, describe any sort of amendment activity you might have seen during the quarter or here to start the year? And if any sort of broader maybe credit migrations just within the portfolio?

Art Penn (Chairman and CEO)

Yeah. There's nothing abnormal going on. There's always a handful. We have 159 companies in PFLT. So there's always a handful of companies that the covenants may be an issue or they may be underperforming, including the non-accruals. So nothing abnormal. But as you'd imagine, it's one of the reasons we like being so diversified with 159 companies is no one company can really kind of bring you down. So I'd say it's normal activity.

There's nothing abnormal. But we're always watchful, and we're always on top of it. And hey, if you have an average debt to EBITDA of 4.3 times and an average interest coverage of 2.2 times, hopefully, we've built in substantial cushion even if there were some curveballs thrown against this portfolio.

Operator (participant)

And Paul, will that be the last question?

Yep. That's all for me. Thank you.

All right. Thank you so much. That concludes today's question and answer session. I'd now like to turn the conference back over to Art Penn for any additional or closing remarks.

Art Penn (Chairman and CEO)

Thank you, everybody, for being on the call today. We look forward to speaking with you next in early May when we'll be talking about the First Quarter Financial Results. In the meantime, wishing everybody a great rest of the winter, and we'll speak to you kind of in the early spring.

Operator (participant)

And this concludes today's call. Thank you for your participation. You may now disconnect.