PennantPark Floating Rate Capital Ltd. (NASDAQ:PFLT) Q3 2016 Earnings Conference Call August 10, 2016 10:00 AM ET
Art Penn - CEO
Aviv Efrat - CFO
Troy Ward - Ares Management
Good morning, and welcome to the PennantPark Floating Rate Capital's Third Fiscal Quarter 2016 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.
Thank you and good morning, everyone. I'd like to welcome you to PennantPark Floating Rate Capital's third fiscal quarter 2016 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 included 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 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, as well as on our Web site.
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.
Thanks, Aviv. I'm going to spend a few minutes discussing current market conditions, followed by a discussion of the portfolio, investment activity, the financials, and then open it up for Q&A. As you all know, the economic signals have been mixed. With regard to the more liquid capital markets and in particular the leverage loan and high yield markets, during the quarter ended June 30th, those markets experienced strength, as high yield and leverage loan funds experienced some inflows due to expectations of the Fed keeping rates lower for longer as well as stability in the energy markets.
The overall market has strengthened and remains attractive. As debt investors and lenders, a flat economy is fine, as long as we have underwritten capital structures prudently. A healthy current coupon with deleveraging from free cash flow overtime is a favorable outcome for us.
We remain primarily focused on long-term value and making investments that will perform well over several years and can withstand different business cycles. Our focus continues to be on companies and 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 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 over a 160 different financial sponsors. We are pleased that we've been approaching this investing market with substantially more capital and resources. As a result of our merger with MCG Capital last year, we've nearly doubled the financial resources of PFLT. Combined with our recent investment in senior and mid-level investment professionals across different geographies, we are driving significantly enhanced deal flow, as we get more luxe and be even more relevant to our borrower clients. We have been active and are well-positioned.
For the quarter ended June 30, 2016, we invested 101 million in primarily first lien senior secured assets at an average yield of 7.4%. Since quarter end we've invested about $64 million. We plan to continue to prudently and carefully invest our substantial liquidity over the coming quarters. Net investment income was $0.26 per share. Our run rate income excluding other income is $0.27 per share. Our debt-to-equity ratio is only 0.5 times, leaving us with substantial liquidity. We have significant spillover income that we can use as cushion to protect our dividend, while we ramp the portfolio. As of last September 30th, our spillover was $0.47 per share.
Other income is a category that we have on our income statement to represent prepayment fees or waiver amendment fees that are not part of ongoing interest income. Other income has averaged $0.03 per share per quarter over the last few years. Since quarter end we've generated $0.05 per share of other income related to a partial litigation settlement related to a former portfolio company of MCG. 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 continue to be healthy 3.3 times. This provide significant cushion and supports stable investment income.
Additionally, at cost, the ratio of debt-to-EBITDA on the overall portfolio was 3.8 times, another indication of prudent risk. Our credit quality since inception over five years ago has been excellent. Out of 268 companies in which we've invested in over five years, we've experienced only three non-accruals. On these three non-accruals we've recovered $0.93 from the dollar so far. At June 30th we had one non-accrual on our books representing only 1.2% of the portfolio at cost. Since quarter end our one investment is now back on accrual and paying us interest. In terms of new investments, we had another active quarter investing in attractive risk-adjusted returns. Our activity was driven by a mixture of M&A deals, growth financings and refinancings. In virtually all of these investments, we've known these particular companies for a while; have studied the industries or have a strong relationship with the sponsor.
Let's walk through some of the highlights. We invested 10 million in the first lien debt of API Technologies, which is a provider of electronic components and subsystems in the radio frequency and microwave market; J. F. Lehman is the sponsor. Education Networks of America provides public schools with internet access and phones services; we lend $9 million of our first lien term loan; Zelnick Media is the sponsor.
We invested $6 million in the first lien term debt of Lombard Brothers; Lombard is the distributor of ophthalmic equipment; Atlantic Street is the sponsor. Software Paradigms is an outsourced application and software development company; we invested $10 million in the first lien term loan; Power Arch is the sponsor. We invested $10 million in the first lien term loan of the Original Cakerie; which is the manufacturer of dessert products; Gryphon Investors is the sponsor.
Turning to the outlook, we believe that 2016 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.
Thank you, Art. For the quarter ended June 30, 2016, net investment income totaled $0.26 per share. Looking at some of the expense categories, management fees totaled $1.8 million, general and administrative expenses totaled about $900,000 and interest expense totaled about $1.3 million. During the quarter ended June 30th, net unrealized appreciation from investments and credit facility was approximately $6.4 million or $0.23 per share. Net realized gain was $200,000 or $0.01 per share and dividend in excess of income was $800,000 or $0.03 per share.
Consequently, NAV was up $0.21 per share from $13.54 to $13.75 per share. Our entire portfolio and our credit facility are mark-to-market by our Board of Directors each quarter using the EBIT price provided by an independent valuation firm or independent broker-dealer quotations when active markets are available under ASC 820 and 825. In case our broker-dealer quote are inactive, we use independent valuation firms to value the investment.
Our portfolio is relatively low risk. It is highly diversified with 92 companies across 23 different industries. 89% is invested in first lien senior secured debt, 9% in second lien secured debt, 2% in subordinated debt and equity. Our overall debt portfolio has a weighted average yield of 8%. 99% of the portfolio is floating rate, including 94% with a floor and 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 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 up the call.
Thank you [Operator Instructions]. And we'll take our first question from Troy Ward from Ares Management.
Art can you talk a little bit about what you're seeing regarding volumes in the overall markets and kind of year-to-date what do you think has kind of been the bottleneck with regards to market volume and the ability to get deals done and what do you think can move [ph] that up as we move through the year?
Great question Troy and thank you for asking it. Kind of for PFLT and what I characterize its position in the middle of the middle market. As you can see we've been seeing reasonable deal flow, kind of a 100 million quarter ended June, 60 million or so quarter-to-date. So, in the middle of the middle market relative to the PFLT size, it's been just fine.
I think on the overall market you started the year with kind of the soft environment and that led to people to step away from doing deals. And then, and at the beginning of the year you also have the normal seasonality kind of early in the year deal flow being light. So I think we're starting to see more of a pickup in deal flow and certainly with regard to PFLT we're seeing ample deal flow relative to PFLT size that fits kind of our investment parameters.
Overall in the middle market Art, do you think you'll see more activity as we move through the second half of the year than we did in the first half?
Yes, we think as kind of the market is stabilizing, the equity markets have stabilized, the credit market have stabilized, energy seems to be stabilized, that will allow we think more M&A transactions to happen which will drive more deal flow as we get towards the back half of the year here. That's what we expect. We could be wrong, but we're all just -- it’s had some strange cross-currents going on right now. Who would have thought that Brexit would have led to pretty big market rally over the course of the last month or two, which is kind of what's happened.
So, we think it's going to be pretty busy, we certainly with regard PSLT and PNNT, both of whom are positioned in the middle of the middle market. Deal flow is just fine. On the upper end of the middle market where some of the bigger guys play there competing a little bit more with a broadly syndicated and high yield market which has been on the tear recently I think maybe harder to get attractive risk adjusted returns there. And so -- but kind of where we're positioned, we feel like actively should be decent.
[Operator Instructions] And there no further questions in queue. I'd like to turn it back over to Mr. Penn for any additional or closing remarks.
Thanks everybody for being on the call today. A reminder that the next time we do our quarterly call will be in mid-November or so, it's a little later than normal because it's our 10-K time period, so it takes us another week or two more than normal to prepare those filings. But we look forward to speaking to you in mid-November.
And this concludes today's conference. Thank you for your participation. You may disconnect.
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.