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PennantPark Floating Rate Capital: Don't Count Your Chickens Before They Hatch

James Cherry profile picture
James Cherry


  • Currently, PennantPark Floating Rate Capital is trading at $12.58, and for that reason, I believe PFLT is trading at its fair value.
  • I also believe that PFLT's investment portfolio will decrease by $8 million in 2Q21, and I estimate that this could result in a NAVPS loss of $0.2060.
  • US Bankruptcy filings are expected to increase in the second semester of 2021.
BDC concept is shown by businessman.
Photo by 8vFanI/iStock via Getty Images

I have spent the past four months working on a complicated and time-consuming project. As you could imagine, writing an article during that period was definitely out of the question. But if I had been able to write articles during that period, I would

This article was written by

James Cherry profile picture
I am the Head of Content Strategy at Sproutfi, a fintech located in Brazil that is democratizing investing in Latin America.  I have over 13 years of experience in the Food Industry, ranging from plant engineer to Corporate Development and FP&A.You, the reader, will notice that most of my articles were written about investment ideas I was researching for my investments.My alma mater is the University of Arkansas, where I graduated with a BA and an MSc in Operations Management. I served in the United States Army for six years and was deployed several times, including in Iraq. After completing my military obligation, I moved to Brazil to begin my career in Finance. I received an MBA in International Business from FIA/FEA at the University of Sao Paulo. I have passed the Level 1 and Level 2 CFA Exams. My hobbies are: playing the guitar and drums, longboarding, mountain biking, scuba diving, reading non-fiction books, and giving financial advice to low-income households.Any article in Seeking Alpha reflects my opinion and not the opinion of Sproutfi.

Analyst’s Disclosure: I am/we are long PFLT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (37)

I appreciate the effort here to be cautious, but it looks like PFLT has dodged the bullet here. From May 6 earnings call:
“We achieved another substantial increase in NAV during the quarter. Adjusted NAV increased 2.3% from $12.32 to $12.60 as our portfolio continue to improve. We have several portfolio companies in which our equity co-investments have materially appreciated in value as they are benefiting from the economic recovery. “
And only 2 loans on nonaccrual.
Still, it’s always good to stay vigilant.
James Cherry profile picture
@Scott27 please look through the most recent quarter's investment portfolio and see if you find the company Country Fresh. This company filed for chapter 11 yet is some of its loans are not classified as non-accruals. This concerns me deeply because it makes me wonder the subjectivity of the words non-accrual.

Next quarter I am going to compare the loans of country fresh to this quarters. If those loans are not in the portfolio anymore, that let's me know that PFLT is using its subjectivity to its advantage and to our disadvantage. If those loans are still there, than there is a possibility that PFLT believes it will recover a majority of the loans value via guarantees.
@James Cherry

Those first 2 First lien loans are Debtor In- Possession (DIP) loans. These are loans that are made after the Company files BK and they are approved by the BK judge. These are higher on the capital structure than what was the the top of the capital structure debt before the company filed BK. These are the new "top of the capital structure" debt and will be the first to be repaid when the company is restructured. These DIP loans will be repaid back in full, plus interest. The previous first lien debt holders have to agree to being knocked down the capital structure before the DIP loan is made. They do this because it's their best chance of getting something or a better recovery if/when the company is restructured.

The 3rd first lien loan shown is a "Super Senior Loan." I'm not sure the difference between that and the 2 DIP loans, but my guess is they are just below the DIP loans in the capital structure, but ahead of all the previous first lien debt also. This one is shown as on non accrual status so they are not receiving any interest on this loan, but they are expecting to receive all their principle back upon restructuring or liquidation of the company because of it's place on the capital structure.

The last 2 first lien loans, also shown on non accrual status, are original first lien loans made prior to this BK. Actually, I believe PFLT got these loans as part of the restructuring when the company went thru BK several years prior. The poor FV marks indicate their expected loss when the company exits BK.

The second lien loan, again shown on non accrual, is another loan they would have received as part of their recovery in the original BK. This loan is toast. It will be a total loss.

The last one is the common equity they received in the restructuring from the first BK. This will be a total loss also. The equity holders always get wiped out in a BK.

- - - - - - - - -

This is an example of how these restructured loans can go.

The first time around PFLT held a large first lien loan in Country Fresh.

In the restructuring, because they held debt high up the capital structure, they received some first & second lien debt in the restructured company, and a good chunk of equity. They also took about a $7mm realized loss in the first BK.

If Country Fresh was able to succeed post the first BK, PFLT had a chance to recoup all their realized loss from the first BK via the value of that equity increasing.

That obviously didn't happen here and Country Fresh is back court looking for protection again.

This time around PFLT will incur larger realized losses because they hold a lot of common equity and a decent sized 2nd lien loan. Those will be wiped out in this BK, and any recovery will be very poor on the first lien debt they got in the first BK because there is all is Super Senior & DIP debt in front of their first lien debt.

Why would PFLT participate in the DIP loans?

Because they know these will be paid back and the interest they will receive for the short time these loans are in place is extremely high.

They are just minimizing their losses a little bit here, but their realized losses will be appreciable this time around.
@Scott27 Today my BDCs are taking a great big dump cuz of some minor inflationary pressures. Meanwhile two of them recently RAISED their dividends. Just more WS BS today.
Marrk profile picture
After months of looking at a 30% loss in PFLT, I got out at break even when it came up. Plowed the money into T at $27.

Thanks for the article.
@Marrk Interesting. I kept waiting for T to move up with the rest of stocks last year and when it didn't, I ended up selling all my T shares from 27 to 30 and bought a lot more BDCs, PFLT was only a small buy. My reasoning I believe worked out. I am sitting on 30-80%+ gains as well as an average of 11.8% YOC on all my BDC purchases with T barely out of the starting gate. I have no doubt that T will be available at 27 -30 again and can use my BDC dividends to rebuy T shares. I was just on the opposite side of the trade on this one but believe me, I had a few losses like RDS.B last year also. Best of luck on your T shares as we are seeing some movement finally above 30 and I hope it continues.
@Marrk So now you can stop looking at the ticker for, oh, probably the next two years, until T starts to benefit from the latest combobulation, unless, of course, management manages to eff it up, which is a distinct possibility.
Chancer profile picture
@James Cherry:

I sold my very small 12 month position with a 12.8% yield for a nice gain of 96+%. No point taking any risk when I am sitting on that gain.
Ha, you published this about 10 min after I doubled my position, but I don't think it would have changed my decision.

Thanks for the article.
@James Cherry

"..........According to the company, PFLT had nine non-accrual loans at the end of 1Q20. ..................

- - - - - - - - - -- - - - - - - -

I'm not agreeing or disagreeing with your view of how PFLT will fair going forward, but I am questioning the accuracy of your statement above. This is a factual item that either is or isn't accurate, and I believe it's inaccurate.

This line below is what PFLT stated in their Q120 earnings press release:

"............... As of March 31, 2020, we had two portfolio companies on non-accrual, representing 0.6% and zero of our overall portfolio on a cost and fair value basis, respectively. .............."

- -- - - - - - - - - - - -- - - - --

So which is it?

I don't hold PFLT, but did a while back, and still follow what's going on with them.

From my own research I did find the two non accruals PFLT is referring to: Life Care holdings & Quick Weight Loss Centers, the latter of which was a combination of a second lien loan, preferred equity, and common stock. Combined the exposure to Quick Weight Loss was nominal.

I did not find the 7 additional non accruals you refer to.

I did however, compile a rather long "watch list" on loans I categorized as stressed.

I did mention I don't hold PFLT anymore, correct? Their long "watch list" gave me pause.

You do mention Country Fresh Holdings which was a non accrual a few years ago, and what we see now in their portfolio is what they received in the restructuring, a combination of debt & equity. The restructuring did not help this company and they company did file chapter 11 in Q1-21. PFLT will take an appreciable realized loss here because most of what they received in the restructuring was equity in the restructured company, and that will no doubt be worthless the second time around.

As I said, I don't hold PFLT, and I'm not defending them.

But this article lost me when you said PFLT had 9 non accruals in Q1-20 because I believe this is factually not accurate.

Can you name the 9 non accruals in Q1-20?
James Cherry profile picture
@Bekster good day, and thanks for your comments. I believe you either misunderstood what I wrote, or I didn't write it clear enough. In the 1Q20 transcript, the company informed us that it had only a total of 9 non-accrual loans out of 373 companies. In 1Q21, the transcript says that they had only 13 non-accrual loans out of 387 companies. 13-9= Four non-accrual loans occurred during 2Q20 to 1Q21. Did I clear things up? Please feel free to let me know if I need to explain further.

Below is the quote from the 1Q20 transcript found at this link: seekingalpha.com/...

"Out of 373 companies in which we have invested since inception, we've experienced only nine non-accruals."
James Cherry profile picture
I am not saying nine non-accruals occurred during 1Q20.
BartAtTheRanch profile picture
@James Cherry

Thanks for the article, but will look forward to a clear answer to Bekster's question.

Also, given the potential for a cut you foresee, why are you still holding PFLT?

I remain invested in PFLT!
Thanks for writing this on one of my holdings. However, I find the article to be kind of confusing. Are you arguing that PFLT is going to see its NAV take a drop due to Country Fresh and thus have to cut its distribution? And then, the current price will fall to match the decline in NAV as the non accruals are accounted for? It feels as if you left some big questions hanging.
James Cherry profile picture
@RealRural, I appreciate your feedback and will work hard to ensure my next articles are clearer. The investment portfolio size and interest rates are what determine the company's NII. If NII is too low for too long of a period then the company will have to cut the dividends. So they are interconnected. If the Country Fresh and Quick Weight Loss never occurred, then you would see a different scenario analysis in the DDM.
@RealRural I've stuck with PFLT because of their consistency with the div payout thru the bug era. And will continue to do so.
Buggah profile picture
So at what premium to nav would be your sell price ?
James Cherry profile picture
@Buggah Hard question to answer because I believe it depends on why you hold PFLT. Income or capital gains? For example, last year I bought PFLT for less than $6.00 and BIZD for less than $10.00 strictly because I felt the market was extremely over-pessimistic towards BDCs in general. At the time, I already owned a couple of hundred shares of PFLT that I bought in 2014/2015. A couple of weeks ago I sold the amount that I bought for capital gains purposes at 0% premium to NAV.

PFLT is very close to its reported NAV. The fact that it sells below its NAV when so many better and best of breed BDCs sell at significant premiums to NAV tells the PFLT story..... meaning not even close to better or best of breed.

PFLT attracts investors who like monthly income. There are better choices in the BDC space and looking for investments based upon being a monthly payer versus the traditional quarterly payer has almost always led to poorer investment choice availability and outcomes.
@Brucejfern The consistency of their div thru the covid thing has convinced my to stay with them until there is clear evidence it's time to move on - which has not been the case yet.
txbadonetoo profile picture
I understand your article but I don't agree with such a negative tone regarding a the NPV and eventual share price when comparing status pre Covid19 vs now and not considering the pandemic impact.
James Cherry profile picture
@txbadonetoo Thanks for your comments! I tried to write the article as neutral as possible, especially because my model gave me a neutral rating. At the same time, a small part of me believes that PFLT should have sent out a small press release when Country Fresh Filed for Chapter 11. Also, I am a little aggravated to see that PSSL is invested in a lot of the same companies as PFLT. When I first heard of PSSL, I imagined that it would help with diversification and an increase in yield.
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