Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Arthur Penn - Founder, Chief Executive Officer and Chairman of the Board of Directors

Aviv Efrat - Chief Financial Officer and Treasurer

Analysts

Greg Mason - KBW

J.T. Rogers - Janney Capital Market

Mickey Schleien - Ladenburg

Jim Young - West Family Investment

Ray Cheesman - Anfield Capital

PennantPark Floating Rate Capital (PFLT) F4Q 2013 (Qtr End 09/30/2013) Earnings Call November 15, 2013 10:00 AM ET

Operator

Good morning, and welcome to the PennantPark Floating Rate Capital's fourth fiscal quarter 2013 earnings conference. (Operator Instructions) It is now my pleasure to turn the call over to Mr. Art Penn, Chairman and Chief Executive Officer of PennantPark Floating Rate Capital. Mr. Penn, you may begin your conference.

Arthur Penn

Thank you, and good morning, everyone. I'd like to welcome you to PennantPark Floating Rate Capital's fourth fiscal quarter 2013 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.

Aviv Efrat

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. Audio replay of the call will be available by using the telephone numbers and PIN provided in our earnings press release.

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 www.pennantpark.com or call us at 212-905-1000.

At this time, I'd like to turn the call back to our Chairman and Chief Executive officer, Art Penn.

Arthur Penn

Thank you, Aviv. I am going to spend a few minutes discussing current market conditions followed by a discussion of investment activity, the portfolio, the financials, our overall strategy, and then open it up for Q&A.

As you all know, the economic signals have continued to be mixed with many economists expecting a slowly growing economy going forward. With regard to the more liquid capital markets and in particular the leveraged loan and high yield markets, those markets have generally been strong this year due to substantial cash flows in the high yield funds, leveraged loan funds and CLOs.

Risk reward in the middle market though has generally remained attractive, as the overall supply of middle-market companies who need financing exceeded relative demand of applicable lending capacity. As debt investors and lenders, a slow growth economy is fine, as long as we have underwritten capital structures prudently. A healthy current coupon with de-leveraging from free cash flow over time is a favorable outcome.

We have continued to be selective about which investments we make in this environment. Given our strong origination network and size of our company, we believe we can continue to prudently grow. We remain primarily focused on long-term value and making investments that will perform well over several years and can withstand different business cycles.

We continue to set a high bar in terms of our investment parameters and remain cautiously selective about which investments we add to our portfolio. Our focus continues to be on companies or structures that are more defensive, have low leverage, strong covenants and high returns.

As credit investors, one of our primary goals is preservation of capital. If we preserve capital, usually the upside takes care of itself. As of business, one of our primary goals is building long-term trust. Our focus is on building long-term trust with our portfolio companies, management teams, financial sponsors, intermediaries, our credit providers and of course our shareholders.

We are a first call for middle-market financial sponsors, management teams and intermediaries, who want consistent credible capital. As an independent provider, free of conflicts or affiliations, we've become a trusted financing partner for our clients. Since inception, PennantPark entities have financed companies, backed by a 125 different financial sponsors. We have been active and are well-positioned.

For the quarter ended September 30, 2013, on a net basis, we invested $65 million, with the average yield on our debt investments remaining at 8.1%. Core net investment income was $0.28 per share, before incentive fees that are not payable. Due to growth in the portfolio and strong performance, we recently increased our monthly dividend to $0.09 per share.

Our credit facility was recently upsized to $200 million from $125 million, showing strong lender support and also providing growth capital. As a result of our focus on high-quality companies, seniority in the capital structure, floating rate assets and continuing diversification, our portfolio is constructed to withstand market and economic volatility.

The cash interest coverage ratio, the amount by which EBITDA or cash flow exceeds cash interest expense, is a healthy 3.6x. This provides significant cushion to support stable investment income.

Additionally at cost, the ratio of debt-to-EBITDA on the overall portfolio was 3.7x, another indication of prudent risk. We currently have no non-accruals in the portfolio. In terms of new investments, we had another active quarter investing in attractive risk adjustment returns.

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

Let's walk through some of the highlights. We invested $5 million in the first lien term loan of Ancile Solutions. Ancile provide software solutions and manage an organization's and learning and performance requirements. Court Square Capital is their sponsor. FHC Health Systems is a managed care provider for fundamental and behavioral health sectors. We invested $5 million in the first lien debt. Crestview Partners is their sponsor.

We purchased $10 million of the first lien term loan of New Trident HoldCorp. New Trident provides outsourced diagnostic healthcare services to post-acute facilities and other customers in the U.S. Audax, Frazier Healthcare and Formation Capital are the sponsors. SCE Partners is developing a Hard Rock casino in Sioux City, Iowa. We purchased $12 million of the first lien term loan. Peninsula Gaming and Warner Gaming are the sponsors. We purchased $9 million of the first lien term loan in Zest Anchors. Zest develops, manufactures and supplies dental product solution. Avista Capital is the sponsor.

Turning to the outlook. We continue to believe that the remainder of 2013 will remain active. Due to our strong sourcing network and client relationships, we are seeing active deal flow.

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

Aviv Efrat

Thank you, Art. For the quarter ended September 30, 2013, recurring net investment income totaled $0.26 per share. In addition we had $0.02 per share of other income as well as $0.03 per share of incentive fee expense accrued for GAAP purposes only, which are not payable to the advisor.

As a result, net investment income for the quarter was $0.25 per share. Looking at some of the expense categories; management fees totaled to $1.2 million, general and administrative expenses totaled about $370,000 and interest expenses totaled $511,000.

During the quarter ended September 30, net unrealized depreciation from investments was approximately $1.5 million or $0.11 per share. Realized gains were about $400,000 or $0.3 per share. And dividend in excess of income was about $400,000 or $0.03 per share. And accretion for equity offering was $0.01 per share. Consequently, NAV was up $0.12 per share from $13.98 to $14.10 per share.

Our entire portfolio and our credit facility are mark-to-market by our Board of Directors each quarter, using the exit price provided by an independent valuation firms or independent broker dealer quotations, when active markets are available under ASC 820 and 825. In cases where broker dealer quotes are inactive, we use independent valuation firms to value the investments.

Our portfolio is relatively low risk. It is highly diversified with 83 companies across 25 different industries. 88% is invested in first lien senior secured debt, 9% in second-lien secured debt, 3% subordinated debt and equity.

Our overall debt portfolio has a weighted average yield of 8.1%. 92% of the portfolio is floating rate, including 89% with a floor and 8% is fixed rate. The average LIBOR floor is 1.3%.

Now, let me turn the call back to Art.

Arthur Penn

Thanks, Aviv. To conclude, we want to reiterate our mission. Our goal is a steady, stable and protected dividend stream, coupled with preservation of capital. Everything we do is in line 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 floating rate debt 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 the call to questions.

Question-and-Answer Session

Operator

(Operator Instructions) And our first question comes from Greg Mason with KBW.

Greg Mason - KBW

Could you, Art, talk a little bit about what you're seeing in the market for pipeline of new activity, both particularly what you're seeing about leverage levels and yields as we move into the fourth quarter?

Arthur Penn

Well, the overall markets as we've said continue to be aggressive, and leverage ratios continue to gradually move up and yields continue to gradually move down. We're in the good position of being relatively small compared to enormous first lien market and we're maintaining our discipline. As we said average debt-to-EBITDA on the portfolio is still around 3.7x.

In general, we're trying to keep and I think we will be successful in keeping first lien leverage below 4x on a blended basis in the portfolio. We've been successful so far, keeping average yields around 8%. So we can afford to be picky given the size of the overall market relative to the size of this vehicle. But we are, even as we've commented yesterday on for PNNT, we are generally cautious about the overall environment. We still think we can pick some good risk rewards on behalf of our PFLT shareholders.

Greg Mason - KBW

And then as we think about your available capital, can you just remind us what types of leverage you're comfortable with in this vehicle?

Arthur Penn

With a primarily first lien vehicle, we're more comfortable with higher leverage. Obviously, we still live within the SEC asset coverage constraint of one-to-one debt-to-equity. Here our range is kind of 0.7x to 0.9x. We never really want to get up to one-to-one, we want to create some cushion to manifest the SEC asset coverage test, but we can certainly with a first lien oriented portfolio live with higher leverage. So 0.7x to 0.9x is kind of the relevant zone for PFLT.

Greg Mason - KBW

If we think about the mid-point of that range of 0.8x, that's about $50 million to $60 million of available capital. Based on the pipeline that you're seeing, both the new opportunities as well as refinancings, do you expect to utilize a lot of that $50 million to $60 million of available capital in the fourth quarter?

Arthur Penn

It's hard for us to predict, given that repayments are hard to predict certainly. And new deals, as you heard yesterday, on the PNNT call are coming in nicely. That would most of those would fall under the opportunistic bucket of PFLT, so that will help fill that bucket, but we are still seeing some interesting first lien. But we're happy live within our constraints. If our constraint is 0.7x to 0.9x leverage, we'll live within that, and work to optimize the portfolio and optimize yield at the same time as we trying to keep leverage low.

And we're happy to work within that as we say, on all of our vehicles. We don't feel like our job everyday is to come in and grow, our job everyday is to come in and find good investments. So we'll continue to find good investments to live within the constraints that we have with SEC asset coverage, as well as where the market is, and just try to optimize everything for our shareholders.

Operator

And our next question comes from J.T. Rogers with Janney Capital Market.

J.T. Rogers - Janney Capital Market

I guess sort of a real quick. I mean there was a small drop, but it looks like debt-to-EBITDA on a sequential basis was down, even though it looks like that portfolio is shifted to a greater rating of second lien debt, I was just wondering what drove that?

Arthur Penn

I mean, hopefully we're underwriting credit correctly, existing names that we own, de-leverage organically over time, which is what we saw, we saw existing credits just gradually deleverage.

J.T. Rogers - Janney Capital Markets

And then, the second lien concentration picked up, it looks like that was due a lot to this repayment activity, is that correct? And just where are you seeing the best risk-reward, I guess, you touched a little bit on this in the last answer.

Arthur Penn

Look, to us risk-reward is deal-by-deal. We don't make kind of overall market prognostication. It's certainly easier to invest and serve first lien and feel safer by definition. So if you're going to do some form of subordinated debt, whether it'd be second lien or mezz, you got to really believe your underwriting, because you know it's more subordinated in the capital structure. So that's why it's relatively easier to grow PFLT in this environment, because you are in a safer, more protected part of the capital structure and that's PFLT was set up to do.

J.T. Rogers - Janney Capital Markets

And then just, it looks like you did a number of healthcare deals in the quarter. Just wondering, what you're seeing? Is this again, a deal-by-deal issue or is that market even particularly attractive right now?

Arthur Penn

No, it's a deal-by-deal. If you look at the various companies there are various flavors of healthcare as is for instance in the dental area, some are in the ambulatory area, some are in mobile diagnostic equipment, so there are various flavors of healthcare, just with kind of deals that that came in this quarter.

J.T. Rogers - Janney Capital Markets

And then just one, it looks like there were some reversals of accrued G&A expense in the fourth quarter, I was just wondering what the run rate is for PFLT now?

Aviv Efrat

So I think you'll see, at yearend, we're adjusting or truing up our budget to actual. That could be very minor adjustments. So going forward, you should take the last 12 months, and kind of, that will be a good proxy for the next 12 months.

Operator

And we'll take a follow-up question from Greg Mason with KBW.

Greg Mason - KBW

In PennantPark, you added a little bit of Instant Web in the quarter, at some pretty distressed prices, I know you have just a little bit of it here in this portfolio. Do you have any movements with that investment this quarter?

Arthur Penn

I think we have about $7 million of Instant Web in PFLT, when we brought the amount in the secondary market it was about $0.75 on $1. Given that we already have $7 million in PFLT and at that point the $0.75 by definition was a little bit of stress in the investment. We did not allocate a portion of that trade to PFLT, given PFLT's risk-reward parameters. Obviously, in high insight with that name trading up into the mid-90s, but we couldn't determinate it at that point in time when we did the trade.

Greg Mason - KBW

And then one last kind of housekeeping question. We think about the disappointment you did in the third quarter, was any of it more heavily weighted to beginning or end of the quarter. How should we think about kind of average portfolio size?

Arthur Penn

It was kind of evenly originated through this quarter.

Operator

And our next question comes from Mickey Schleien with Ladenburg.

Mickey Schleien - Ladenburg

I wanted to talk a little bit about the dividend, and I'm curious how the board thinks about PFLT's dividend, because as you've mentioned, this is deep market. It's a little bit more predictable then second lien or mezzanine or the equity markets. And you according to my calculation, there is pretty significant amount of still over taxable income into next year. But in the past, we haven't seen BDCs get a lot of credit for special dividend. So how do the board weigh a special dividend versus ramping up the regular dividend?

Arthur Penn

The board is always continually evaluating its dividend policy. It's something we talk about a lot. We can't really give you any guidance this point, other than it's nice to have a cushion in our system. We always like having cushion in our system for a number of reasons. Can't really tell you anything, Mickey, at this point about what we're going to do going forward or how we look at it.

Operator

And our next question comes from Jim Young with West Family Investment.

Jim Young - West Family Investment

Art, you had mentioned that like economists are calling this kind of a like a slow growth economy. And I was just wondering, what you're seeing specifically with your company that you've got the portfolio companies across a diverse number of industries. And I was wondering, if there is any discernible trends there, is business picking up, is it getting worse, stable, et cetera, that you really find of interest either geographically or by industry?

Arthur Penn

Our general portfolio does match the slow growth overall environment that we see. The one area of softness usually has to do with defense and aerospace related to the sequester or other areas, where we're seeing government regulation impact industries. For instance, the Consumer Financial Protection Bureau, CFPB, in the past has read the results of our companies. So just something we take into account when we're underwriting new credits to understand the ramifications of what's going on with the U.S. federal government.

Operator

Our next question comes from Ray Cheesman with Anfield Capital.

Ray Cheesman - Anfield Capital

Art, I was wondering if you could give us a little color on what you're seeing out there on repayments. Obviously, there was a enormous wave of them earlier in the year. Is the tide settle and down a little bit or do you still see a lot of that type of activity going on?

Arthur Penn

This quarter it seems, and the quarter is not over. It seems as if its abated somewhat. So we're seeing less repayment this quarter so far than we saw last quarter. But again I caution everybody that's only mid-November and we still got a chunk of time between now and quarter end. But it seems to be abating a little bit, Ray.

Ray Cheesman - Anfield Capital

I was also wondering, you mentioned that you've done deals with a 125 sponsors. And I appreciate, it's certainly one of the things we look at when we lead our investment, that you don't have to represent the marketplace, you're small enough to be picky and choosy. Do you basically feel that you are seeing continued quality flow from those sponsors or are you experimenting or investigating additional sourcing for the portfolio?

Arthur Penn

There is a twofold answer. One is, and we alluded to this in yesterday's call. We're getting some great flow from long-term relationships, who we've developed long-term trust with this quarter and we're really pleased to see that our relationships to have value or it's not just about the less basis point or people want trusted partners financing them. So that's point number one.

Point number two is, we're always looking for new opportunities. One of the great things about the job we all have is we're in the front row seat of American capitalism and we're always running it to new companies, new industries, new sponsors, new entrepreneurs and we're always on the look out.

Obviously, we want to do proper diligence and proper background checking of people we do business with who are new. But you do see some new entities and some new partners that are coming into the portfolio and we're excited about for the future.

Operator

And next we'll take a follow-up question from J.T. Rogers with Janney Capital Market.

J.T. Rogers - Janney Capital Market

Art, I was just wondering what your view is on growth? I know for the last couple of quarters, you are looking to increase the size of the company to increase the floor and spread and fixed cost over a broader base. But just given the environment and where you are now, what is your view on growing the portfolio and growing PFLT versus sort of rotating through attractive investments?

Arthur Penn

I think our answer is the same, call it our vehicles, we take the opportunities one-by-one and we grow organically with those opportunities. We do think the first lien market is an enormous market. We do think PFLT is relatively small compared to that market and that does give us the fortunate position to being really picky. And we're happy with that position. We're happy with the new credit facility that allows us to grow. We're happy with the equity offerings we done in the last twelve months.

So we're just taking a deal-by-deal, quarter-by-quarter, and we'll see where we are in a quarter or two. We do not intend to issue stock below book value, let me be clear about that. And we're working hard to generate NAV and income for our shareholders. NAV is on an upward trend. Obviously, you saw that trend on September 30. And as you look at some of the names in the portfolio like Affinion and Instant Web, which have traded up since quarter end, NAV continues to be on the rise.

J.T. Rogers - Janney Capital Market

And just in terms of your size versus the fixed cost in the business, are you at a sustainable size or do you think it'd be optimized for you a little bit larger, giving opportunity to raise capital above book value?

Arthur Penn

Look, one of the benefits of growth is that G&A is relatively fixed. So you do always get the benefit of -- hopefully you get the benefit of some accretion to earnings due to G&A being relatively fixed. But at this point, where we have this amount of debt and equity capital, we feel comfortable with the G&A. We feel like we can punch out very attractive ROEs and risk adjusted returns for shareholders. And we're okay with where we are.

Operator

And at this time, there are no further questions in the queue. Mr. Penn, I'll turn the call back to you, sir, for any additional or closing remarks.

Arthur Penn

We'd like to thank everybody for being on the call today. We're really excited about PFLT and its opportunity in the marketplace as well as the opportunity for shareholders to buy into a stock that's trading well below book value as well as stock that has an income stream and a dividend stream that secure and appears to be on the rise.

So thank you very much. We look forward to speaking with you all in early February, after our next earnings release. Thank you very much.

Operator

And ladies and gentlemen, that does conclude today's conference. We thank you for your participation.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: PennantPark Floating Rate's CEO Discusses F4Q 2013 Results - Earnings Call Transcript
This Transcript
All Transcripts