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PennantPark Floating Rate Capital (NASDAQ:PFLT)

Q3 2014 Earnings Conference Call

August 7, 2014 10:00 AM ET

Executives

Arthur Penn - Chairman and CEO

Aviv Efrat - CFO

Analysts

Ryan Lynch - KBW

Hannah Kim - JMP Securities

Operator

Good morning and welcome to the PennantPark Floating Rate Capital’s Third Fiscal Quarter 2014 Earnings Conference Call. Today’s conference is being recorded. At this time, all participants have been placed in a listen only mode. The call will be open for a question-and-answer session following the speakers’ remarks (Operator Instructions). It is now my pleasure to turn the call over to Mr. 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 third fiscal quarter 2014 earnings conference call. I’m joined today by Aviv Efrat, our CFO. 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 a 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’m going to spend a few minutes discussing current market conditions, followed by discussion on the investment activity, the portfolio, the financials, our overall strategy and then open it up for Q&A.

As you all know the economic signals are moderately positive with many economists expecting a slowing growing economy going forward. With regard to the more liquid capital markets and in particular the leverage loan in our high yield markets during the quarter ended June 30, those markets have generally remained strong due to substantial cash flows and to high yield funds, leverage loan funds and COOs. Since quarter end there has been some cash outflows from high yield leverage loan funds resulting in a slightly less robust, broadly syndicated loan and liquid high yield market which helps the overall tone in the middle market.

Risk reward in the middle market has generally remained attractive as the overall supply of middle market companies (who needs) [ph] financing exceeded relative demand and applicable lending capacity, debt investors and lenders and slow growth economy is fine as long as we, on their own capital structures prudently. A healthy curve coupon with deleveraging from free cash flow over time is a favorable outcome.

We’ve continued to be selective about which investments we make in this environment. Given our strong origination outlook 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 cautious and 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 a business one of our primary goals is building long term trust, our focus is on billing long term trust with our portfolio companies, management teams, financial sponsors, intermediaries, our credit provider 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 looks for affiliations, we’ve become a trusted financing partner for our clients. Since inception PennantPark (at least) [ph] finance company backed by a 140 different financial sponsors.

We have been active and are well positioned for the quarter ended June 30, 2014 we invested 31 million with an average yield of 7.1%, net investment income was $0.29 per share. 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 cash flow exceeds cash interest expense continued to be a healthy 3.5 times. This provides significant cushion to support stable investment income, additional at cost the ratio of debt to EBITDA on the overall portfolio was 3.7 times, another indication of prudent risk.

We currently have no non-accruals on the portfolio. In terms of new investments, we had another active quarter invested in attractive risk adjusted returns; our activity was driven by a mixture of NAVs, growth financings and refinancing and virtually all these investments we’ve known these particular companies for a while have studied the industries or have a strong relationship with its sponsor.

Let’s walk through some of the highlights. We invested 5 million in the First Lien debt of Bluebird Body Company which is a manufacturer of school buses and provider of aftermarket parts and services. [indiscernible] are the sponsors, Clear Circles a professional staffing company specializing in placing advertising, created a marketing (talent) [ph]. We purchased 6 million of the first lien term loan, Morgan Stanley private equity is the sponsor.

We purchased 2 million of the first lien term loan at Curo Health Services, Curo is a pure play hospice provider in the US. GTCR is the sponsor. Fox Vico, Robert Shaw is the manufacturer of control system components for white good appliances. We invested 3 million in the first lien term loan, Sun Capital is the sponsor.

We invested 2 million in the add-on first lien term loan of the national surgical hospitals. National Surgical owns and operates surgical hospitals in ambulatory surgery centers, Aileen Place is the sponsor.

Turning to the outlook we believe that 2014 will continue to be active due to both growth and M&A driven financings, 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 us through the financial results.

Aviv Efrat

Thank you Art, for the quarter ended June 30, 2014 recurring net investment income totaled $0.28 per share. In addition we had $0.01 per share of other income.

Looking at some of the expense categories, management fees totaled $1.8 million General and Administrative and tax totaled about $600,000 and interest expense totaled $1 million.

During the quarter ended June 30, realized gains were 700,000 or $0.05 a share, net unrealized depreciation from investments was approximately $200,000 or $0.01 per share and income in excess of dividend was $300,000 or $0.02 per share. Consequently NAV was up $0.06 per share from $14.46 to $14.52 per share.

Our entire portfolio and our [indiscernible] are mark to market by our Board of Directors each quarter using the exit price provided by an independent valuation firm or independent broker dealer quotations when active markets are available under ASC 820 and 825. In cases where broker dealer's quotes are inactive we use independent valuation firms to value the investments. Our portfolio is relatively low risk, it is highly diversified with 80 companies across 28 different industries. 88% is invested in first lien senior secured debt, 8% in second lien secured debt, 4% in subordinated debt and equity.

Our debt to equity ratio is 72%. Our overall debt portfolio has already the average yield of 8.2%. 95% of our portfolio is floating rate including 93% with a floor, the average LIBOR floor is 1.3%.

Now let me turn the call back to Art.

Arthur Penn

Thank you, Aviv. To conclude we want to reiterate our mission, our goal is a steady, stable and protective 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 free cash flow of 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 dividend 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.

Question-and-Answer Session

Operator

Thank you, (Operator Instructions) we will hear first from Ryan Lynch from KBW.

Ryan Lynch - KBW

Just a couple of housekeeping questions, first. Can you provide the average LIBOR flow through your investments and also do you have the weighted average yield on portfolio investments that you exited in the quarter?

Arthur Penn

Thanks Ryan, the LIBOR floor on average is 1.3%, we do not have handy the weighted yield of the excess we can get you that after the call.

Ryan Lynch - KBW

We were not really expecting any portfolio or negative net portfolio growth in this quarter so can you just dive into that little more and give us some insight into whether that was more of a function of Pennant (floor) [ph] pulling back on originations because you weren’t seeing attractive opportunities or were there just heavy or unexpected repayments in the quarter.

Arthur Penn

You know it’s a lumpy business, week to week it could change by $10 or $20 million, it’s just kind of one of those things obviously. As you can tell from our comments we’ve been getting more skeptical over time but that said, we’re 350 to 400 million portfolio which is how we view this vehicle, it’s not hard for us to find good risk reward in the middle market in the first lien middle market, so it’s just a question of which week of the quarter it happened to end on, on a normalized basis we’re going to be hovering between this amount in terms of our AUM as well as the amount from last quarter, something in and around that zone, so it’s really to us it’s just kind of the timing of the week or the couple of weeks when the quarter ends.

Ryan Lynch - KBW

Okay and I heard you mention in your prepared remarks -- prepared comments about leverage loan outflows, we’ve also seen liquid single B bond yields widening out, of course those on the liquid market, it’s, are you seeing any of that trickle down into the middle market and maybe widening out the yields a little bit in calendar three deal.

Arthur Penn

Yes, it’s a great question I think we’re starting to see -- granted we’re only two weeks into or three weeks into it, we’re starting to see a different tone, we’re starting to see depending on the swing a little bit more in the direction of buyers which is good, so again we’re in no rush, if there’s a risk reward we’re happy to do it and again this vehicle is a relatively small vehicle relative to the enormity of the first lien middle markets, so we’re feeling pretty good and we feel credit quality is generally still pretty good in the portfolio and recorded no matter what we get, you know [indiscernible] some pieces of the portfolio to the extent we can redeploy that and better risk adjusted returns, that’s great.

Ryan Lynch - KBW

Okay, got it, and then one last one, on the $700,000 realized gain, was that gain attributed to specific portfolio company or were there several exits that created that gain?

Arthur Penn

There was not one individual particular company that drove that. It was several different credits.

Operator

We’ll hear next from Hannah Kim from JMP Securities.

Hannah Kim - JMP Securities

Hi, thank you for taking my questions, I’m actually calling in for Chris York, my first question is regarding the repayment level. I was wondering if you could comment on whether you are aware of any large repayments coming in for third quarter at the moment.

Arthur Penn

You know as you can see Hannah -- thank you for the question, as you can see our portfolio is really well diversified so there is no one single credit that we are worried about repayment or one single credit that we’re worried about default, since the portfolio is so well diversified so we feel like repayment levels in general are slowing down, they’re going to slow down even more to the extent the overall market is soft. So we’re not really worried about any individual risks.

Hannah Kim - JMP Securities

Okay great thank you, and my second question is regarding your investment in SCE Partners LLC, I realize that the valuation for, fair value for this asset actually declined a little bit this quarter and given the size of this investment. I was wondering if you could comment on the performance of the asset and any additional color would be helpful. Thank you.

Arthur Penn

Sure, that’s a good question and that is the [indiscernible] City Hard Rock, as you may know we've -- gaming is one of our industry verticals we’ve done very well on. This is a project financing to finance to [indiscernible] City Hard Rock it’s been in ramp mode, it just actually opened a few days ago, there was a little softness in the quote because there was some litigation from a competitive casino that was trying to stop the opening of the [indiscernible] City Hard Rock, that litigation appears to be going away and the [indiscernible] City Hard Rock is opened for business and its operating and we don’t really see any credit risk there. In our estimation that would be a par asset over time.

Operator

At this time I’d like to turn the call back over to Mr. Art Penn for closing comments.

Arthur Penn

Right, thanks everybody for being on the call today, we appreciate your interest in our Company. A reminder of the next call will be in mid-November, it’s our 10-K so it’ll be a week or two later in the quarter than it normally is due to the 10-K. So thank you for your interest in our company and we look forward to speaking to you then, bye-bye.

Operator

This does conclude today’s conference, we thank you for your participation.

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Source: PennantPark Floating Rate Capital's (PFLT) CEO Arthur Penn on Q3 2014 Results - Earnings Call Transcript

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