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PFLT Has A 'Too Big' Secondary Offering

|About: PennantPark Floating Rate Capital (PFLT)

From the Prospectus:

PennantPark Floating Rate Capital (PFLT) is having a huge secondary offering. A 6 million share offering results in an 18.5% share dilution. The discount one should get on this temporary price drop should be BIG because the offering is BIG.

On the other hand, there have been several recent BDC offerings where the brokerages do not try to move all the shares in two days. When that happens, the dips on offerings are small. 

PFLT went from 14.898 million shares in Q2-15 to 19.828 million in Q3-15 to 26.730 million in Q4-15. This was due to the acquisition of another BDC - which my imperfect memory thinks was MCGC. I believe MCGC was purchased at par and that it mostly owned cash at the time.

PFLT went through 2016 and some of 2017 failing to have the NII to cover the dividend. PFLT kept telling the market that coverage was just around the corner. For the most part, the market bought that projection.

(This is lightly informed speculation) My due diligence does not go into the detail as to knowing "the height of the floors" - but we are just entering LIBOR at more than 1% territory . . or when floating loans begin to have rising rates. There is some potential that this is a unique opportunity as being the right time to grow. That assessment is above my pay grade . . . but not so high above that I can see that potential.
The MCGC experience shows that PFLT has been able to deploy new money with decent speed - unlike SUNS.
The market dropped 4.5% on the news in the after market. Given the secondary size - the drop is 'at least' logical. Given the dilution in the short term, the drop is nebulously between logical and 'not enough'.
"PennantPark Investment Advisers, LLC, has agreed to pay a portion of the underwriting discounts and/or commission in connection with this offering." This offering should be a bit under NAV. 

(More speculation) Fifth Street Floating Rate is under new management - and they may want to sell lower yielding loans. ACSF is also under new management and may want to sell existing holdings. The size of the offering does indicate "this is not business as usual". Thus something unusual NEEDS to be going on.

NOTE - I did not read the NEW 10-24-17 prospectus - yet.

Summation - This is bad news for current shareholders far at least the next two quarters. A price around $13.80 is possible - and would be a good buy.

From the Prospectus:

(On page 10 under recent developments - earnings information for calendar Q3 which has yet to be officially released)

Net investment income is estimated to have totaled between $0.30 and $0.33 per share for the quarter ended September 30, 2017. This includes amounts received in a litigation settlement related to a former portfolio company of MCG of $0.07 per share net of incentive fee payable on such amounts.

Net asset value as of September 30, 2017 is estimated to be between $14.08 and $14.11 per share.

Our and PSSL’s total investments at fair value are estimated to have increased by approximately $12 million and $29 million, respectively, during the three months ended September 30, 2017, after giving effect to purchases, sales, repayments and net change in unrealized appreciation.

Disclosure: I am/we are long PFLT.