PennantPark Floating Rate Capital (PFLT) Q4 2020 Earnings Call Transcript

Transcript

Speaker 0

Good morning, and welcome to the Parent Portfolio Group Capital Fourth Fiscal Quarter twenty twenty 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 opened for question and answer session following the speakers' remarks. It is now my pleasure to turn the call over to Mr.

Otten, Chairman and Chief Executive Officer of PennantPark Floating Rate Capital. Mr. Otten, you may begin your conference.

Speaker 1

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

I'd like to remind everyone that today's call is being recorded. Please note that this call is the property of Tenepal Flooring Capital and that any unauthorized broadcast of this call is informed is strictly prohibited. Audio replay of the call will be available using the telephone numbers and PIN provided in our earnings press release as well as on our website. I'd also like to call your attention to the customary Safe Harbor disclosure in our press release regarding forward looking information. Today's conference call may also include forward looking statements and projections, and we ask that you refer to our most recent filings with the SEC for important factors that could cause actual results to differ materially from these projections.

We do not undertake to update our forward looking statements unless required by law. To see a copy of our latest SEC filings, please visit our website at pennantop.com or call us at (212) 905-1000. At this time, I'd like to turn the call back to our chairman and chief executive officer, Art Penn. Thanks, Aviv. First, we hope that you, your families and those you work with are staying healthy.

I'm going to spend a few minutes discussing how we fared in the quarter ended September 30, how the portfolio is positioned for the upcoming quarters, our capital structure and liquidity, the financials, then open it up for Q and A. Despite the challenging economic conditions brought on by the pandemic, we are pleased with our performance this past quarter. We achieved a 3.2% increase in adjusted NAV as our portfolios continued to improve during the quarter. We have several portfolio companies in which we have substantial equity positions who are benefiting from the K shaped recovery. This is solidifying and bolstering NAV.

Over time, rotation of that equity into debt instruments should help grow DFLT's income. We will highlight those companies in a few minutes. Additionally, we have been pleased with the stable performance of our long term securitization CLO financing through COVID. That financing has continued to perform well and is well matched to finance our senior debt positions, which we believe are among the lowest risk in the industry. As a result, we are exploring using the same type of financing to grow.

Speaker 0

Good morning, and welcome to the PennantPark Holding Group Capital's Fourth Fiscal Quarter twenty twenty 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 the speakers' remarks. It is now my pleasure to turn the call over to Mr.

Art Ken, Chairman and Chief Executive Officer of PennantPark Floating Rate Capital. Mr. Otten, you may begin your conference.

Speaker 1

Thank you, and good morning, everyone. I'd like to welcome you to PennantPark Floating Rate Capital's Fourth Fiscal Quarter twenty twenty Earnings Conference Call. I'm joined today by Aviv Efrat, our Chief Financial Officer. Aviv, please start off by disclosing some general conference call information and include a discussion about forward looking statements. Thank you, Art.

I'd like to remind everyone that today's call is being recorded. Please note that this call is the property of Tenepal Flooring Capital and that any unauthorized broadcast of this call is being formed is strictly prohibited. Audio replay of the call will be available using the telephone numbers and PIN provided in our earnings press release as well as on our website. I'd also like to call your attention to the customary Safe Harbor disclosure in our press release regarding forward looking information. Today's conference call may also include forward looking statements and projections, and we ask that you refer to our most recent filings with the SEC for important factors that define actual results to differ materially from these projections.

We do not undertake to update our forward looking statements unless required by law. To see a copy of our latest SEC filings, please visit our website at genocide.com or call us at (212) 905-1000. At this time, I'd like to turn the call to our Chairman and Chief Executive Officer, Paul? Thanks, Aviv. First, we hope that you, your families and those you work with are staying healthy.

I'm going to spend a few minutes discussing how we fared in the quarter ended September 30, how the portfolio is positioned for the upcoming quarters, our capital structure and liquidity, the financials and then open it up for Q and A. Despite the challenging economic conditions brought on by the pandemic, we are pleased with our performance this past quarter. We achieved a 3.2% increase in adjusted NAV as our portfolios continued to improve during the quarter. We have several portfolio companies in which we have substantial equity positions who are benefiting from the K shaped recovery. This is solidifying and bolstering NAV.

The combination of potential income growth from equity rotation and the larger and more efficiently financed PSSL should help grow PFLT's net investment income relative to the dividend over time. Those factors, combined with strong portfolio performance through COVID and a $0.22 spillover have led us to conclude that we will be keeping our dividend steady at this point. Although we never predicted a global pandemic, as you may know, we have been preparing for an eventual recession for some time. Prior to the COVID-nineteen crisis, we proactively positioned the portfolio as defensively as possible. Since inception, we have had a portfolio that was among the lowest risk in the direct lending industry.

As of September 30, average debt to EBITDA on the portfolio was 4.2x and average interest coverage ratio, the amount by which cash interest exceeds cash interest expense, was 2.9x. This provides significant cushion to support stable investment income. These statistics are among the most conservative in our industry. We have only three non accruals out of 105 different names in PFLT and PSSL. This represents only 2.1% of the portfolio at cost and 1.8% at market value.

We have largely avoided some of the sectors that have been hurt the most by the pandemic, such as retail, restaurants, health clubs, apparel and airlines. PFLT also has no exposure to oil and gas. The portfolio is highly diversified with 102 companies in 44 different industries. Our credit quality since inception over nine years ago has been excellent. Out of three eighty two companies in which we have invested since inception, we have only experienced 12 nonaccruals.

Since inception, PFLT has invested over $3,700,000,000 at an average yield of 8.1%. This compares to an annualized realized loss ratio of only 10 basis points annually. If we include both realized and unrealized losses, the annualized loss ratio is only 19 basis points annually. We are one of the few middle market direct lenders who is in business prior to the global financial crisis and have a strong underwriting track record during that time. Although PFLP was not in existence back then, PennantPark as an organization was investing at that time.

During that recession, the weighted average EBITDA of our underlying portfolio companies declined by 7.2% at the bottom of the recession. This compares to the average EBITDA decline of the Bloomberg North America high yield index of down 42%. We are proud of this downside case track record in the prior recession. Based on tracking EBITDA of our underlying companies through COVID so far, we believe that our EBITDA decline will be substantially less than it was during the global financial crisis. Now let's turn to the outlook ahead in the coming quarters and how our portfolio is positioned.

As mentioned previously, we are gratified that our historical investment focus has protected us from some of the worst hit areas of the economy, such as retail, restaurants, health clubs, apparel, airlines and energy. We've been pleased with the way our portfolio companies have moved to rapidly adjust costs and are focused on shoring up liquidity. Looking forward to the quarter ended December 30 and beyond, where things stand today, our analysis suggests that the vast majority of the companies in our portfolio are in a strong position to perform well in the coming quarters. Many of our portfolio companies are in businesses such as government services, healthcare, software, communications and cybersecurity, which collectively comprise a substantial portion of our portfolio and are less impacted by COVID. Additionally, alongside the debt investments we make in many companies, we invest in the equity, usually as a co investor with a financial sponsor.

Our returns on these equity co investments have been excellent over time. Overall for our platform from inception through September 30, our $2.00 $9,000,000 of equity co invests have generated an IRR of 25.3% and a multiple on invested capital of 2.3 times. We believe that we are experiencing a K shaped recovery with some companies and industries being large beneficiaries of the environment. We are pleased that we have attracted debt and significant equity investments in three of these companies, which can substantially move the needle in both NAV and over time, net investment income. I would like to highlight those three companies.

The three companies are Canno, Walker Edison and Bylight. Cano Health is a national leader in primary health care who is leading the way in transforming health care to provide high quality care at a reasonable cost to a large population. Our equity position has a cost and fair market value on September 30 of 700 and $66,000 and $2,300,000 respectively. Has been experiencing rapid growth with revenues quintupling and EBITDA more than tripling over the last three years. We believe there is a massive market opportunity for Cano to grow in the years ahead with the Medicare Advantage program.

Based on the recently announced transaction with Charles acquisition and where Charles is trading, that position would be valued at approximately $9,000,000 About 12% of that value is in cash that we will receive before and at consummation of the deal in early twenty twenty one, and the rest is in shares of Jaws acquisition. Our shares are locked up in a limited partnership controlled by the financial sponsor and will likely be valued by the independent valuation firm at a discount to the traded value. Walker Edison is a leading e commerce platform focused on selling furniture exclusively online through top e commerce companies. Since our investment was made in 2018, sales have more than tripled and EBITDA is up almost 4x. Our position has a cost of $1,400,000 and a fair market value of $8,700,000 as of September 30.

Skylight is a leading software, hardware and engineering solutions company focused on national security challenges across modeling and simulation, cyber and global defense networks. Since our initial investment was made nearly four years ago, sales have gone up 1.5 times and EBITDA has more than doubled. Our position has a cost of $2,200,000 and a fair market value of $7,600,000 as of September 30. All three of these companies are gaining financial momentum in this environment, and our NAV should be solidified and bolstered from these substantial equity investments as their momentum continues. Over time, we would expect to exit these positions and rotate those proceeds into debt instruments to increase income at PSLP.

As we discussed earlier, our securitization financing has performed well during COVID. We think this type of financing is well matched to our lower risk assets. As a result, we are exploring using the same type of financing at PSSL to help grow and efficiently finance the vehicle. We would hope that doing so would increase NII at PFLT. With regard to our gaming portfolio, it has proven to be extremely resilient and continues to perform well.

With the repayment of Peninsula Pacific Colonial Downs since quarter end, our gaming exposure is now 4.2 of our portfolio, down from 5.1% as of September 30. We exited Peninsula Pacific Colonial Downs with an 11% IRR. Our regional properties such as Fantasy Springs and Kentucky Downs have experienced strong performance since reopening after periods of closure due to COVID. We expect the strong performance to continue. The outlook for new financings is attractive.

We believe that middle market lending is a vintage business. This upcoming vintage of loans is likely to be the most attractive we've seen since the 02/2012 time period. Leverage levels are lower, equity cushion is higher, yields are higher and the package of protections, including covenants, are tighter. After incurring about five years of late cycle market for middle market lending, it's refreshing to have an attractive risk reward available to us. Let me now turn the call over to Aviv, our CFO, to take us through the financial results in more detail.

Thank you, Art. For the quarter ended September 30, net investment income was 27¢ per share. Looking at some other expense categories, the management fees totaled about 4,800,000.0 million dollars. Taxes, general and administrative expenses totaled about $1,100,000 and interest expense totaled about $5,500,000 During the quarter ended September 30, net unrealized depreciation on investments was about $20,000,000 or $0.51 per share. Net realized losses were about $4,700,000 or $0.12 per share.

Unrealized depreciation on our credit facility and notes was $0.22 per share. Net interest income was lower than the dividend by $02 per share. Consequently, GAAP NAV went from $12.62 to $12.81 per share. Adjusted NAV, excluding the mark to market of our liabilities, was $11.81 per share, up 3.2% from $11.44 per share last quarter. Our entire portfolio, our credit facility and notes were mark to market by our Board of Directors each quarter using the equity price provided by any kind of valuation firm, exchange or independent portfolio provisions when active markets are available under ASC eight twenty and eight twenty five.

This is where the consumer codes are inactive to use instant evaluation cards to value your investments. Our spillover as of September 30 was 22¢ this year. We have doubled liquidity and are prudently leveraged. Our GAAP debt to equity ratio was 1.4 times, down from one fifty. As we discussed earlier, our securitization financing has performed well during COVID.

We think this type of financing is well matched to our lower risk assets. As a result, we are exploring using the same type of financing at PSSL to help grow and efficiently finance the vehicle. We would hope that doing so would increase NII at PFLT. With regard to our gaming portfolio, it is proving to be extremely resilient and continues to perform well. With the repayment of Peninsula Pacific Colonial Downs since quarter end, our gaming exposure is now 4.2% of our portfolio, down from 5.1% as of September 30.

We exited Peninsula Pacific Colonial Downs with an 11% IRR. Our regional properties such as Fantasy Springs and Kentucky Downs have experienced strong performance since reopening after periods of closure due to COVID. We expect the strong performance to continue. The outlook for new financings is attractive. We believe that middle market lending is a vintage business.

This upcoming vintage of loans is likely to be the most attractive we've seen since the 02/2012 time period. Leverage levels are lower, equity cushion is higher, yields are higher and the package of protections, including covenants, are tighter. After entering about five years of late cycle market for middle market lending, it's refreshing to have an attractive risk reward available to us. Let me now turn the call over to Aviv, our CFO, to take us through the financial results in more detail. Thank you, Art.

For the quarter ended September 30, net investment income was 27¢ per share. Looking at some other expense categories, the management fees totaled about $4,800,000 taxes, general and administrative expenses totaled about $1,100,000 and interest expense totaled about $5,500,000 During the quarter ended September 30, net unrealized depreciation on investments was about $20,000,000 or $0.51 per share. Net realized losses was about $4,700,000 or $0.12 per share. Unrealized depreciation on our credit facility and notes was 22¢ per share. Net interest income was lower than the dividend by 2¢ per share.

Consequently, GAAP NAV went from $12.62 to $12.81 per share. Adjusted NAV, excluding the mark to market of our liabilities, was $11.81 per share, up 3.2% from $11.44 per share last quarter. Our entire portfolio, our credit facility and notes are mark to market by our Board of Directors each quarter using the credit price provided by any kind of valuation term, exchange or independent of the dealer coefficients when active markets are available under ASC eight twenty and eight twenty five. If this is where the consumer codes are inactive, we use independent valuation cards to value investments. Our spillover as of September 30 was 22¢ this year.

We have ample liquidity and are prudently leveraged. Our GAAP debt to equity ratio was 1.2 times, down from 1.5 times last quarter. While GAAP net debt to equity after subtracting cash was 1.2x, down from 1.3x last quarter. Our regulatory to equity ratio was 1.5x, down from 1.6x last quarter, and our regulatory net debt to equity ratio after subtraction cash was 1.4x, down from 1.5x last quarter. Going back to our leverage, we have been targeting a debt to equity ratio of 1.4 to 1.7 times.

Our net of cash regulatory asset coverage ratio of 1.4 times was at the low end of our range this past quarter. This was primarily due to rebound from borrowers, selected asset sales and an increase in the market mix of our portfolio. We have ample liquidity to fund revolver draws and we're in compliance with all of our facilities as of September 30. We have readily available borrowing capacity and capacity to support our. We're looking to carefully manage our leverage over time.

We expect to stay in compliance with both regulatory requirements and targets under our credit facilities. We have a strong capital structure with diversified funding sources and no near term maturities. We have 570,000,000 revolving credit maturity maturing in 2023 with Pacifica eleven banks with $3.00 9,000,000 from as of September 30. 139,000,000 of unsecured senior notes maturing in 2023 and $228,000,000 of unsecured debt associated with current cost CLO1 due to the current one. We have been in consistent dialogue with our members and are thankful for their support.

Our portfolio remains highly diversified with a 102 companies across 34 different industries. 89% is invested in first lien senior secured debt, including 11% in PSFL, 3% in second lien debt and 8% in equity, including 4% in PSFL. Our portfolio has a weighted average yield of 7.3%. 99% of the portfolio is loan grade and 86% of the portfolio has a LIBOR floor. The average LIBOR floor is 1%.

Now let me turn the call back to Art. Thanks, Aviv. To conclude, we want to reiterate our mission. Our goal is a steady, stable and protected dividend stream coupled with the preservation of capital. Everything we do is aligned to that goal.

We try to find less risky 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. In closing, I'd like to thank our extremely talented team of professionals for their commitment and dedication. Thank you all for your time today and for your investment and confidence in us. That concludes our remarks.

At this time, I would like to open up the call to questions. Thank you. While GAAP net debt to equity ratio was 1.5 times, down from 1.6 times last quarter. And our regulatory net debt to equity ratio after the tax charge was 1.4 times, down from 1.5 times last quarter. Looking back to our leverage, we have been targeting a debt to equity ratio of 1.4x to 1.7x.

Our net of cash regulatory asset coverage ratio of 1.4x was at the low end of our range this past quarter. This was primarily due to rebound from borrowers, selected asset sales and an increase in the market of our portfolio. We have ample opportunity to fund revolver draws and we're in compliance with all of our facilities as of September 30. We have readily available borrowing capacity and cash liquidity to support our commitments. We're looking to carefully manage our leverage over time.

It's best to stay in compliance with both regulatory requirements and partners under our credit facilities. We have a strong capital structure with diversified funding sources and low near term maturities. We have $520,000,000 revolving credit maturity maturing in 2023 with the syndicate of 11 banks, with $3.00 9,000,000 from September 30. A 149,000,000 for unsecured senior notes maturing in 2023 and $228,000,000 for unsecured debt associated with common stock CLO one due to 2021. We have been in consistent dialogue with our members and are thankful for their support.

Our portfolio remains highly diversified with a 102 companies across 44 different industries. 89% is invested in first lien senior secured debt, including 11% in PSFL, 3% in second lien debt and 8% in equity, including 4% in PSFL. Our overall portfolio has a weighted average yield of 7.3%. 99% of the portfolio is floating rate and 86% of the portfolio has a LIBOR floor. The average LIBOR floor is 1%.

At this time, I would like to open up the call to questions. Thank

Speaker 0

We take our first question from Paul Johnson at KBW.

Speaker 2

Congratulations on the health acquisition. It's obviously very positive news yesterday. But I'm just kinda asking few questions here today. And over the last few quarters, you know, investments have obviously been fairly, you know, new investments. Originations have been fairly muted, understandably.

Speaker 1

I'm just kind curious, so now you're back sort of

Speaker 2

within the leverage range target, what is sort of your outlook for new investments going forward? Can we expect to see, you know, maybe more active origination? And then also on that, for any sort of new investments that you are looking at today, what what is the environment that you're seeing? Are you still able to, you know, extract the same sort of covenants that you were and terms that you were before? Has that diminished?

But any commentary on that would be very helpful.

Speaker 1

Perfect. Thanks. Thanks, Paul. Yeah. Look, we for the last couple of quarters, we've been evaluating the economy and our portfolio, and we are indeed back actively originating deals for both P.

F. L. P. And P. S.

S. L. We also are getting repayments, of course, as part of that. So the wheels of commerce are are starting to to to move again. And, you know, we're out there actively, you know, looking at doing deals.

So, you know, Target leverage is still kind of in one and a half times loan debt to equity. You know, as as as we as we say, we think our portfolio, you know, is among the lowest risk in the industry. You can see it in the yields, you know, know, kind of that first lien typically is a lower yielding first lien, maybe more of a classic first lien than than some of the others, which means we believe that we can comfortably, you know, be in that one and a half times leverage zone and feel very safe and feel like it's prudently capitalized and judicious in terms of debt to equity ratio because the risk we're taking is lower than most and lower than the industry. In terms of, you know, kind of the the risk reward we're seeing, again, remember, another definitional thing, we tend to focus on companies with between fifteen and fifty in EBITDA. Average, you know, EBITDA is 20 to 30,000,000 in this portfolio.

We like staying away from the fray of the broadly syndicated loan market, which has bounced back very dramatically where it's all covenant light, where yields are low, where EBITDA adjustments are are back, and where leverage is high. And, you know, some of our bigger brethren who have to write bigger checks in the bigger companies competing against the broadly syndicated loan market and accepting lower covenants, lower lower yields, more EBITDA adjustments, etcetera. With us, we we always got covenants even pre COVID. We're getting tighter covenants now. We're getting fewer EBITDA adjustments.

The EBITDA adjustments, if we accept them, are, you know, thoroughly diligent. We're seeing more equity from our sponsors. We're seeing more yield. So the whole package of risk adjusted return that we're seeing today versus pre COVID is is is better and much better, which is why we we say we like this vintage. You know, we think this vintage over the next year two or three where we play in the middle market is is we think it's gonna be similar to 2009 to 02/2012.

You know, I don't think it's gonna be as good as 02/2009, where we had expected the balance 3.2 times. Our central bank and and the the principal parties made sure that we weren't gonna repeat 2009 again. But we think that the 20 vintage will look a lot like 2009 to 02/2012. So we're excited about, you know, what we're seeing and and we're active.

Speaker 2

That's good. That's very good to hear. Do you ever see a time where, obviously, you guys are very, you know, you know, high quality, you know, more conservative, you know, like you said, traditional first lien portfolio. But in that environment that you sort of described, do you see any opportunity or do you have any thoughts around potentially getting slightly more aggressive to enhance sort of the the portfolio yield or top line return. I'm talking about, you know, potentially doing maybe slightly more aggressive deals or more second lien.

Do you have any thoughts on that?

Speaker 1

Yeah. Look, I think we're gonna stay away from second lien in this portfolio, and I think we're gonna be cautious about, you know, stretchy or senior. You know, for us, as you can see in T. F. L.

T. Itself, we would prefer to have a lower risk, lower reward portfolio and maybe leverage a little bit higher than one and a half time from some of our some of our brethren. So I think that's the way we think about it. Every once in while, of course, we'll we'll we'll if we think we have a real angle, the real edge, just special situation, you know, we we may be a little bit more of a stretch senior from time to time in unitranche. But I think we're gonna specifically stay away from second lien and mezz in this particular portfolio.

Speaker 2

Okay. And then, on the J. V, I I think quarter over quarter, I think you guys have been taking a leverage down actually for the past few quarters in this inside of J. V. I noticed the return this quarter is what was paid out to the BDC.

It's relatively stable from last quarter, maybe slightly. Is that kind of return we can expect going forward in terms of, you know, where the leverage is at in the J. V. And and what return it's it's spinning out? Or do you guys have any other plans as far as the J.

V. Goes?

Speaker 1

Yeah. So, you know, I'm a highlight of this try to highlight this in the script, so let me let me be clear. We, again, same thing with P. F. L.

T. The last actually, number of quarters, we've been, you know, wanting to see how the economy did, wanting to see how how our portfolio did. And one of the nice things out of all this is that our securitization C. L. O.

Financing with P. F. L. T. Has been have been terrific.

It's been a great way to finance these lower risk assets. And we're going to explore over P. S. S. L.

Using the same type of financing, and we're going to explore growing P. S. S. L. From where this business 400,000,000 to something like $550,000,000, maybe $600,000,000 of total portfolio utilizing, you know, the securitization for financing that.

Speaker 0

Voice on keypad. We take our first question from Paul Johnson at KBW.

Speaker 2

Hey. Good morning. You guys thanks for taking my questions. Congratulations on the, you know, health acquisition. It's obviously very positive news yesterday.

But I'm just kinda asking few questions here today. And over the last few quarters, you know, investments have obviously been fairly, you know, new investments. Originations have been fairly muted, understandably. So I'm

Speaker 1

just kinda curious. So now you're back sort

Speaker 2

of within the leverage range target. What is sort of your outlook for new investments going forward? Can we expect to see, you know, maybe more active origination? And then also on that, for any sort of new investments that you are looking at today, what what is the environment that you're seeing? Are you still able to, you know, extract the same sort covenants that you were and terms that you were before?

Has that diminished? But, yeah, any commentary on that would be

Speaker 1

very helpful. Perfect. Thanks. Thanks, Paul. Yeah.

Look, we for the last couple of quarters, we've been evaluating the economy and our portfolio, and we are indeed back actively originating deals for both P. F. L. P. And P.

S. S. L. We also are getting repayments, of course, as part of that. So the wheels of commerce are are starting to to to move again.

And, you know, we're out there actively, you know, looking at doing deals. So, you know, Target leverage is still kind of in one and a half times loan debt to equity. You know, as as as we as we say, we think our portfolio, know, is among the lowest risk in the industry. You can see it in the yields, you know, you know, from our first lien typically is a lower yielding first lien, maybe more of a classic first lien than than some of the others, which means we believe that we can comfortably, you know, be in that one and a half times leverage zone and feel very safe and feel like it's prudently capitalized and judicious in terms of the book to equity ratio because the risk we're taking is lower than most and lower than the industry. In terms of, you know, kind of the the risk reward we're seeing, again, remember, another definitional thing, we tend to focus on companies with between fifteen and fifty in EBITDA.

Average, you know, EBITDA is 20 to 30,000,000 in this portfolio. We like staying away from the fray of the broadly syndicated loan market, which has bounced back very dramatically where it's all covenant light, where yields are low, where EBITDA adjustments are are back, and where leverage is high. And, you know, some of our bigger brethren who have to write bigger checks for the bigger companies competing against the broadly syndicated loan market and accepting lower covenants, lower yields, more EBITDA adjustments, etcetera. With us, we always got covenants even pre COVID. We're getting tighter covenants now.

We're getting fewer EBITDA adjustments. EBITDA adjustments, if we accept them, are, you know, thoroughly diligent. We're seeing more equity from our sponsors. We're seeing more yield. So the whole package of risk adjusted return that we're seeing today versus pre COVID is is is better, and much better, which is why we we say we like this vintage.

You know, we think this vintage, over the next year, two or three, where we play in the middle market is is we think it's gonna be similar to 2009 to 02/2012. You know, I don't think it's gonna be as good as 02/2009, where we added 15,003.3 times. This our central bank and and the the parties made sure that we weren't gonna repeat 2009 again. But we think that this is lot like 2009 to 02/2012. So we're excited about, you know, what we're seeing and we're active.

Speaker 2

That's good. That's very good to hear. Do you ever see a time where, obviously, you guys have built in very, you know, you know, high quality, you know, more conservative, you know, like you said, traditional first lien portfolio. But in that environment that you sort of described, do you see any opportunity or do you have any thoughts around potentially getting slightly more aggressive to enhance sort of the the portfolio yield or top line return? I'm talking about, you know, potentially doing maybe slightly more aggressive deals or, more second lien.

Do you have any thoughts on that?

Speaker 1

Yeah. Look, I think we're gonna stay away from second lien in this portfolio. And I think we're gonna be cautious about, you know, stretchier senior. You know, for us, as you can see in P. F.

L. T. Itself, we would prefer to have a lower risk, lower reward portfolio and maybe have the leverage a little bit higher than one and a half time from some of our some of our brethren. So I think that's the way we think about it. Every once in a while, of course, we'll we'll we'll and if we think we have a real angle, a real edge, just special situation, you know, we we may be a little bit more of a stretch senior from time to time in unitranche.

Yeah. So, you know, I'm a highlight just try to highlight this in the script, so let me let me be clear. We again, same thing with P. F. L.

T. The last next number of quarters, we've been, you know, wanting to see how the economy did, wanting to see how how portfolio did. And one of the nice things out of all this is that our securitization, C. L. F.

P. S. L. T. Has been a been terrific.

It's been a great way to finance these lower risk assets. And we're going to explore over P. S. L. Using the same type of financing, and we're going to explore growing T.

S. S. L. From where this business 400,000,000 to something like $550,000,000, maybe $600,000,000 of total portfolio utilizing, you know, the securitization financing that that works so well for us at the T. F.

L. T. So, you know, in terms of, N. I. I.

Growth at T. F. L. T. Itself, and at T.

Gotcha. Thanks for that. That's that's all for me.

Speaker 1

Thank you.

Speaker 0

We'll take our next question from Mickey Schleien at Ladenburg.

Speaker 3

Good morning, Arth and Aviv. I just wanted to follow-up quickly on the senior loan fund. I calculate blended ROI taking into account the equity and the debt investments of a little bit.

Speaker 1

That works so well for us at the CFLP. So, you know, in terms of NII growth at CFLP itself And at T. F. S. L.

Got you. Thanks, Matt. That's the call for me.

Speaker 1

Thank you.

Speaker 0

We'll take our next question from Mickey Schleien at Ladenburg.

Speaker 3

Morning, Art and Aviv. I I just wanted to follow-up quickly on the senior loan fund. I calculate blended ROI taking into account the equity and the debt investments of a little north of 9%. Are you satisfied with that level of return? Or are you looking for, you know, something higher than that with more leverage on that balance sheet?

Yeah.

Speaker 1

It's it's a great question, Mickey. Obviously, over the last few quarters, we specifically wanted, again, to see how our portfolio did, see how the economy went, which is why we are looking to, you know, grow P. S. S. L.

Well, it's well, that's part of an overall mix. And as we look at P. S. S. L, and we look to grow P.

S. S. L, it could be part of the overall mix of P. S. S.

L. And the P. S. L. P, along with credit facilities and along with bonds occasionally.

So we believe in diversified financial tools. We're just saying kind of here we are kind of eight or nine months into COVID, and we did our C. L. Over P. F.

L. T, in September, and then COVID hit in March, it's it's performed very very well. So we're taking that as a data point and hope that's really interesting for us. Maybe we should use that technology over P. S.

S. L.

Speaker 3

I understand. And just in terms of the mechanics, I I I haven't done the math, but I imagine most of of the senior loan fund assets are borrowing base for the credit facility. Right? So how do you extract those assets and form the C. O?

Speaker 1

You know, it's just it's just very efficient, it's low cost, and it's it's not permanent financing. Not permanent permanent, but it's long term financing, and there's a box, you know. And there's no individual you need to talk to. There's no credit guys who may have a sleepless night or two. It's just the box.

And it's it's more comfortable in in our underwriting, which we are. We're we like that box, you know, for for what we're what we're doing in this portfolio, the lower risk or reward deals. You know, as we looked at, you know, the amount of triple Cs that we got through this time period, it was very low. You know, very low. I think if you looked at the equity return on that, you know, granted the the C.

L. L. In this case, 50 is owned by P. S. L.

T. I think that's something like a 20% return on the equity because of the strength of the underwriting in the underlying box. So

Speaker 3

That's that's a very solid number relative to what I see elsewhere. Yeah.

Speaker 1

You know, the the triple c basket in the card, we have up to 17 and a half percent in middle market. I think, you know, we're at, like, 8%, you know, something like that. So it's you know, for us, because our underwriting works, it's a very good one.

Speaker 3

Or if I could paraphrase, are you suggesting that it's just perhaps an easier piece of capital to manage from your perspective?

Speaker 1

It's well, that's part of an overall mix. And as we look at P. S. S. L, and we look to grow P.

S. S. L, it could be part of the overall mix of P. S. S.

L. And the P. S. L. T, along with credit facilities and along with bonds occasionally.

So we believe in diversified financial tools. We're just saying kind of here we are kind of eight or nine months into COVID, and we did our C. L. O. Over T.

F. L. T. In the September, and then COVID hit in March. It's it's performed very, very well.

So we're taking that as a data point and hope that's really interesting for us. Maybe we should use that technology over P. S. S. Though.

Speaker 3

I understand. And just in terms

Speaker 1

of the

Speaker 3

mechanics, I I haven't done the math, but I imagine most of of the senior loan fund assets are in borrowing base for the new credit facility. Right? So how do you extract those assets and form the C. L. O?

And and what is

Speaker 1

the timing of all of that? Yeah. It's a great question. We're starting to explore it now. You know, we don't have a a firm answer, but, obviously, the banks, you are our partners and we're talking to them into partnering on, you know, kinda growing P.

So Marketplace Events is finalizing its restructuring as we speak. So, hopefully, by next quarter I'm pretty sure by next quarter, restructuring will be done and that will move off the amount of coal. In that particular, name, the lenders are going be taking control of company, injecting, you know, capital to be able to get the company through to the other side. When, events inevitably start coming back. So, like, it's it's always there as much today when events start coming back, but, events will come back, and, we think that's a really great company, in the space and more.

We're actually happy to make that that equity investment in marketplace events. T. R. A. Is an event planning company, again, events related.

That is in in restructuring talks right now as we speak. Again, that probably comes off non accrual next quarter. Looks like it's purchasing something equity in in that one to help that company. So those are that's two of the three non accruals. You know, two of both of them are kind of an easy space.

In terms of outlook, it's we think it's gonna be relatively light. Of course, there's gonna be non accruals from time to time, you know, that that hit this portfolio. But we don't think there's anything particularly abnormal. You know, we think that the COVID impact, to the extent there were, has been identified, have been or are being dealt with and and, you know, are are kind of already big into the into the body here. Yep.

Okay. Terrific. I will leave it there

Speaker 2

if my other questions were asked. But thank you, and look forward to checking out soon.

Speaker 1

Thanks, Kevin. And it

Speaker 0

appears there are no further questions at this time. Mister Ken, I would like to turn the call back to you for any initial or closing remarks.

Speaker 1

I just wanna thank everybody for being on the call today. We appreciate it. And we will, you know, because we had a late reporting period this quarter, it's only only a relatively short time. So I really don't do it when we have our next caller's number. So looking forward to to speak with everybody again.

Thank you very much.

Speaker 0

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

Pennantpark Floating Rate Capital - Earnings Call - Q4 2020

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