U.S. Markets closed

Edited Transcript of PFLT earnings conference call or presentation 6-Feb-20 3:00pm GMT

Q1 2020 PennantPark Floating Rate Capital Ltd Earnings Call

New York Feb 11, 2020 (Thomson StreetEvents) -- Edited Transcript of PennantPark Floating Rate Capital Ltd earnings conference call or presentation Thursday, February 6, 2020 at 3:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Arthur Howard Penn

PennantPark Floating Rate Capital Ltd. - Founder, Chairman & CEO

* Aviv Efrat

PennantPark Floating Rate Capital Ltd. - Treasurer & CFO

================================================================================

Conference Call Participants

================================================================================

* Christopher John York

JMP Securities LLC, Research Division - MD & Senior Research Analyst

* Michael John Ramirez

SunTrust Robinson Humphrey, Inc., Research Division - Associate

* Mickey Max Schleien

Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research & Supervisory Analyst

* Paul Conrad Johnson

Keefe, Bruyette, & Woods, Inc., Research Division - Associate

* Raymond Cheesman

Anfield Group, LLC, Asset Management Arm - Analyst

================================================================================

Presentation

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

Operator [1]

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

Good morning, and welcome to the PennantPark Floating Rate Capital's First Fiscal Quarter 2020 Earnings Conference Call. Today's conference is being recorded. (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 Howard Penn, PennantPark Floating Rate Capital Ltd. - Founder, Chairman & CEO [2]

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

Thank you, and good morning, everyone. I'd like to welcome you to PennantPark Floating Rate Capital's First Fiscal Quarter 2020 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, PennantPark Floating Rate Capital Ltd. - Treasurer & CFO [3]

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

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 as well as on our website.

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 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 Howard Penn, PennantPark Floating Rate Capital Ltd. - Founder, Chairman & CEO [4]

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

Thanks, Aviv. I'm going to spend a few minutes discussing financial highlights, followed by a discussion of the portfolio, investment activity, the financials and then open up for Q&A.

We were active in the quarter ended December 31, we invested $239 million in primarily first lien senior secured assets with an average yield of 8.2%. PennantPark's Senior Secured Loan Fund, or PSSL, continued to perform well. As of December 31, PSSL owned a $493 million diversified pool of 49 names with an average yield of 7.4%. We have only 1 nonaccrual, which represents only 0.4% of the cost and 0% of the market value of the portfolio.

Over the past 12 months, about 75% of our investments were in existing borrowers. These were generally cases where we had an option to continue to finance an existing borrower or could opt out. To us, this incumbency is the best of both worlds. Staying with solid credits, with reduced competition or choosing to exit. In a market where investors are asking about differentiation among middle-market direct lenders, the value of incumbency can't be overstated. With 135 borrowers in our overall platform, we are deriving substantial benefits of incumbency. Our growing team, capital resources and incumbency put us in a position to be both active and selective. Today, we are only investing in approximately 4% of the opportunities that we are shown.

Net investment income was $0.29 per share. Due to our activity level and the maturation of PSSL, we are pleased that our current run rate net investment income covers our dividend. Our earnings stream should have a nice tailwind based on a gradual increase in our debt-to-equity ratio, while still maintaining a prudent debt profile. As of last fiscal year, our spillover was $0.31 per share. As of December 31, our debt-to-equity ratio was 1.4x. We are targeting a debt-to-equity ratio of 1.4 to 1.7x. We will carefully continue to invest and optimize our leverage over time. A careful and prudent increase in leverage against a primarily first-lien portfolio should lead to higher earnings.

Our primary business of financing middle-market financial sponsors has remained robust. We have relationships with about 400 private equity sponsors across the country and elsewhere that we manage from our offices in New York, Los Angeles, Chicago and Houston. We've done business with about 190 sponsors to date. Due to the wide funnel of deal flow that we receive relative to the size of our vehicles, we can be extremely selective in our investments. We remain primarily focused on long-term value and making investments that will perform well over several years and can withstand changing business cycles.

Our focus continues to be on companies and structures that are more defensive, have reasonable leverage, covenant protections and attractive returns. We continue to be 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 are a trusted financing partner for our clients.

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, continued to be a healthy 2.4x, this provides significant cushion to support stable investment income. Additionally, at cost, the ratio of debt-to-EBITDA on the overall portfolio was 4.2x, another indication of prudent risk. And our core market of compass was $15 million to $50 million of EBITDA. Our capital is generally important to the borrowers and sponsors. We are still seeing attractive risk rewards. We are receiving covenants, which help protect our capital.

Our credit quality since inception nearly 9 years ago has been excellent. Out of 373 companies in which we have invested since inception, we have experienced only 9 nonaccruals. Since inception, PFLT has invested over $3.5 billion, at an average yield of 8.1%, this compares to an annualized loss ratio, including both realized and unrealized losses of approximately 9 basis points annually. With regard to the economy and the credit cycle, at this point, our underlying portfolio indicates a strong U.S. economy and no sign of a recession. From an experience standpoint, we're one of the few middle-market direct lenders who was in business prior to the global financial crisis, and have a strong underwriting track record during that time.

Although, PFLT was not in existence back then, PennantPark as an organization was, and at that time, we focused primarily on investing in subordinated and mezzanine debt. Prior to the onset of the global financial crisis in September 2008, we initiated investments which ultimately aggregated $480 million, again primarily in subordinated debt.

During the recession, the weighted average EBITDA of those underlying portfolio companies declined by 7.2% at trough for the recession. This compares to the average EBITDA decline of the Bloomberg North American high-yield index of down 42%. As a result, the IRR on those underlying investments was 8%, even though they were made prior to the financial crisis and recession. We are proud of this downside case track record on primarily subordinated debt.

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 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 purchased $5 million DRS Holdings, Dr. Scholl's first-lien term loan and committed about $1 million of revolver. Dr. Scholl's is a leading brand in the foot care category in North America, including insoles, skin treatments and orthotics. Yellow Wood is the sponsor.

ECM is a provider of broad range of tools and consumables for electrical and harsh environmental applications under highly regarded brands. We purchased $5.1 million of ECM Industries first-lien term loan as well as about $1 million of revolver in common equity. Sentinel Partners is the sponsor.

We purchased $21.7 million of the first-lien term loan of Smartronix, Trident Technologies. The government -- is a government contractor -- The company is a government contractor, providing IT modernization, cloud services, defense systems, engineering, and intelligence, surveillance and reconnaissance solutions, OceanSound Partners is the sponsor.

Sales Benchmark Index is a management consulting firm that exclusively focuses on helping its clients strive sales. We purchased $14 million of the first-lien term loan, delayed draw term loan, revolver and equity of the company. CIP Capital is the sponsor.

STV Group, Inc. provides specialized consulting services and engineering and architectural design as well as project management primarily for transportation infrastructure. We purchased $19.8 million of the first lien term loan. The Pritzker organization is the sponsor.

Turning to the outlook. We believe that rest of 2020 will 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, PennantPark Floating Rate Capital Ltd. - Treasurer & CFO [5]

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

Thank you, Art. For the quarter ended December 31, 2019, net investment income was $0.29 per share. Looking at some of the expense categories, management fees totaled about $5.1 million, general and administrative expenses totaled about $1 million, and interest expense totaled about $7.3 million.

During the quarter ended December 31, net unrealized depreciation on investment was about $3.5 million or $0.09 per share. Net realized gains was about $1 million or $0.03 per share. Net unrealized appreciation on our credit facility and notes was $0.04 per share. Net investment income equaled the dividends. Consequently, NAV went from $12.97 to $12.95 per share. Our entire portfolio, our credit facility and notes are mark-to-market by our Board of Directors each quarter using the exit price provided by independent valuation firms, exchanges or independent broker-dealer quotes 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 remains highly diversified with 102 companies across 43 different industries. 89% is invested in first-lien senior secured debt, including 10% in PSSL, 3% in second lien debt and 8% in equity, including 4% in PSSL. Our overall debt portfolio has a weighted average yield of 8.4%. 99% of the portfolio is floating rate.

Now let me turn the call back to Art.

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

Arthur Howard Penn, PennantPark Floating Rate Capital Ltd. - Founder, Chairman & CEO [6]

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

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 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 to questions.

================================================================================

Questions and Answers

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

Operator [1]

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

(Operator Instructions) And we'll take our first question from Mickey Schleien with Ladenburg.

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

Mickey Max Schleien, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research & Supervisory Analyst [2]

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

Your platform has extensive experience in oil and gas investments. And I'm interested to understand how you may be leveraging that into alternative energy? Are there borrowers in that space, which meet your investment criteria? And how do you see the opportunity in that segment developing?

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

Arthur Howard Penn, PennantPark Floating Rate Capital Ltd. - Founder, Chairman & CEO [3]

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

Yes. It's a good question, Mickey, it's the alternative side is something we haven't done much in, if anything. We are focused, particularly today on kind of sponsor-driven businesses, where there's a lot of equity underneath us. Our loan-to-value is strong. We have very good coverage and where there's cash flow to pay us down. So we haven't really seen much in the alternative energy space coming out of the middle market sponsor arena.

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

Operator [4]

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

And we'll take our next question from Michael Ramirez with SunTrust.

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

Michael John Ramirez, SunTrust Robinson Humphrey, Inc., Research Division - Associate [5]

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

I guess regarding your investment activity, just looking at the exits and repayments, it seems like they've averaged roughly, say, 13% of the total portfolio on a quarterly basis over the last year. So while we understand repayments are difficult to predict. Do you think this trend should continue through the calendar year 2020? Or are you seeing like other indications that the portfolio could possibly see a faster or slower turnover within next year?

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

Arthur Howard Penn, PennantPark Floating Rate Capital Ltd. - Founder, Chairman & CEO [6]

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

It's a great question. And obviously, it's hard to predict, Michael. We think there's going to be a lot of deal activity between now and the election. We think people are going to want to do deals, preelection. So we think we are going to be active. That could also mean there's repayments coming out of that. And this is why we kind of talked about incumbency is, in certain cases, there's going to be companies sold out of our portfolio, where we'll have an option to stay in or an option to exit, and that's the best position to be in because these will obviously be credits where we have almost perfect due diligence on. So hard to predict the amount of repayments, but we do think we will be active both on the buy side and perhaps on the sell-side as deals get to between now and November.

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

Michael John Ramirez, SunTrust Robinson Humphrey, Inc., Research Division - Associate [7]

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

Okay. Great. And I appreciate that. Just another one on the investment portfolio. We just heard of you talk about how you have investments in 43 industries if I recall correctly, last quarter it was 37. Is this just new classifications or are you guys entering new industries?

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

Arthur Howard Penn, PennantPark Floating Rate Capital Ltd. - Founder, Chairman & CEO [8]

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

Yes. These classifications are from one of the rating agencies. I think it's either Moody's or S&P. And when the deal comes in, we try as best we can to map to whatever bucket there is within those categories. We had a very active December quarter. As you saw, $239 million deployed, which was high we think a lot of people wanted to get deals done before year-end. We think people want to get deals done before the election, and we were pleased with the flow. We were pleased importantly, that we can maintain very high credit standards. We talked about how the deals we're doing is kind of debt-to-EBITDA in the mid-4s to low 4s, still getting over an 8% yield on average, that's very attractive risk-adjusted return for us.

These deals are primarily, if not all, first-lien top of the capital structure, no more than 50% loan-to-value. So sponsors are putting a lot of equity in these deals. And we're in a position where we can be very, very selective about what comes into the portfolio and still be active. And that's where the team we've built over the last number of years around the country, the incumbency from 135 different names we have in the portfolio, gives us a really good opportunity to review what's in the market and only pick those credits where we feel very safe where we're getting covenants and where we feel protected in this environment.

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

Michael John Ramirez, SunTrust Robinson Humphrey, Inc., Research Division - Associate [9]

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

Okay. Great. And if I may, on the balance sheet. It looks like the payables for investments purchased line increased over about $70 million from the prior quarter. I guess is the -- does this mean some of the new investments are back-end loaded in the quarter? And if yes, say, for example, if we took this new investment, it was like more [prudent] towards the beginning of the quarter, how much would that have contributed to investment income?

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

Arthur Howard Penn, PennantPark Floating Rate Capital Ltd. - Founder, Chairman & CEO [10]

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

It's a good question. I think the vast majority is trades that were done just prior to year-end that we were going to close in the first week or 2 of the year. So that's a big chunk of it. Look, you can do the model. We're 1.4x leverage as of quarter end. We say we have a target up to 1.7. We're going to work to optimize within that. And we're also going to work to optimize our joint venture with Kemper PSSL, which is not fully optimized yet. And I think if we optimize both the PFLT balance sheet as well as the PSSL balance sheet over the coming quarters, we're going to pick up $0.02, $0.03 per share per quarter.

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

Michael John Ramirez, SunTrust Robinson Humphrey, Inc., Research Division - Associate [11]

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

Okay. Great. And one last one, if I may, more macro, I guess. On the regulatory front, could you please give us your thoughts on the coalition for business development, we're drawing its AFFE rules application to the SEC. And actually, additionally, do you believe there's another path to relief from AFFE?

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

Arthur Howard Penn, PennantPark Floating Rate Capital Ltd. - Founder, Chairman & CEO [12]

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

It's a good question. We're not on the forefront of that. We are involved in the SBIA. From what we hear from the experts who are involved, they're still optimistic that something can happen, kind of either through discussions with the SEC or through legislative areas. I'm -- We're not that close to kind of those discussions we're involved and obviously have supported and allocating time and resources to it, but we're not -- there's others who are better positioned to answer that question.

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

Operator [13]

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

And we'll take our next question from Paul Johnson with KBW.

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

Paul Conrad Johnson, Keefe, Bruyette, & Woods, Inc., Research Division - Associate [14]

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

The first question was around just sort of your optimal leverage range. Earnings today cover the dividend pretty well. Obviously, the yield outlook has decreased quite a bit with LIBOR moving lower. I'm just wondering, is there a point or any point where you probably start to hold back on growth, perhaps tap the brakes a little bit on originations, just given the lower yield outlook and probably the limited increase in earnings that you would get from higher leverage?

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

Arthur Howard Penn, PennantPark Floating Rate Capital Ltd. - Founder, Chairman & CEO [15]

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

It's a good question. It's something we think about a lot, Paul, and it's always a debate. Look, I think in general, the kind of risk-adjusted returns we're getting today, where we're getting low to mid-4s debt-to-EBITDA and now we're averaging 8% on that. In general, we think that's going to weather any kind of storm and still generate a safe return for our shareholders. We did a CLO within PFLT last quarter. And as you know, CLOs take the same exact collateral and can leverage it 3 or 4 to 1 and still be safe, and feel safe that they're leveraging the same collateral 3 or 4 to 1. We're not suggesting that here. But we are suggesting that as long as we can underwrite really solid deals, we can operate within our target.

The target is still less than the regulatory constraint of 2 to 1. Our target is 1.4 to 1.7. So even if we go to the high end of our target, we still have cushion relative to the regulatory constraints. And now we have this PSSL joint venture with Kemper, which has had very nice returns and is now $500 million and is not really quite optimized. So we could, and we are thinking about how we get higher returns from that entity and get a little higher ROE, which obviously since PFLT owns 87.5% of it enhances the earnings at PFLT. So we're optimistic that, number one, the deals that we're doing today will stand the test of time and will play well in any environment, given the leverage, the covenants, where we are in the capital stack, that can be leveraged reasonably within certainly our target and the regulatory constraints. And we think we can, over time, get to north of $0.30, maybe as high as $0.31 or $0.32, and as we optimize these tools.

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

Paul Conrad Johnson, Keefe, Bruyette, & Woods, Inc., Research Division - Associate [16]

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

Okay. Great. And my second question is -- has to do with LIBOR and loan spreads in the market today. Obviously, there's been a pretty meaningful move lower in LIBOR. But last year, while LIBOR was moving higher. We saw spreads kind of tighten along the way. I'm wondering, are you seeing any of the decline in LIBOR today being offset by perhaps higher spreads in the middle market?

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

Arthur Howard Penn, PennantPark Floating Rate Capital Ltd. - Founder, Chairman & CEO [17]

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

What we can say -- I could say for sure that spreads have not been coming down, and we have seen select cases in new financing, where spreads are widening a touch. I would not call it a major trend at this point. I would not pound the table and say it's happening. But I would say there's perhaps some green shoots in that regard recently, where the spreads have widened a little bit. So hard to say. We'll see what happens. But for sure, we're not seeing tightening at this point.

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

Paul Conrad Johnson, Keefe, Bruyette, & Woods, Inc., Research Division - Associate [18]

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

Okay. And my last question just has to do with deal flow. You talked about having a pretty active fourth quarter, closing decent number of deals. Do you believe -- I'm sorry, I'm talking about calendar fourth quarter, obviously. But do you believe that because of that active quarter that you -- that pull forward of deals essentially, would that potentially affect any of the first quarter of 2020 originations?

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

Arthur Howard Penn, PennantPark Floating Rate Capital Ltd. - Founder, Chairman & CEO [19]

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

It's a good question. Usually, you could say there's a seasonality to our business, where people want to get deals closed by December 31 of calendar fourth quarter. And then usually, there's a lull in the first calendar quarter of the year. Here we are a month and 5, 6 days into it, hard for me to pound the table either way on that. As I said, I think the overall umbrella is that people want to get deals done before November, which is the election. So we believe we will have an active 9, 10 months going into the election. I can't, with precision, tell you what's going to close on either side of March 31 at this point, Paul. We're busy. We're looking at a lot of stuff. It's a lot of deals in the market. It's hard to tell you with certainty what this first calendar quarter is going to look like, unfortunately.

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

Operator [20]

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

And our next question comes from Chris York with JMP Securities.

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

Christopher John York, JMP Securities LLC, Research Division - MD & Senior Research Analyst [21]

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

First is on PSSL. So the net investment income declined sequentially and is now below the distribution -- the dividend distribution to PennantPark for the first time in, I think, about 2 years. So is this quarterly level of roughly $1.6 million sustainable to PennantPark?

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

Arthur Howard Penn, PennantPark Floating Rate Capital Ltd. - Founder, Chairman & CEO [22]

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

It's a great question. What happened was, intra-quarter PSSL shrunk. And by quarter end, PSSL is now above where it was the prior quarter. And sitting down with Kemper and talking about the game plan for PSSL. We intend to grow PSSL. So that's all you saw was a temporary shrinkage of PSSL and we believe PSSL is going to grow. That's our game plan. And thereby not only covering the dividend to PFLT, hopefully, generating some upside above and beyond that.

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

Christopher John York, JMP Securities LLC, Research Division - MD & Senior Research Analyst [23]

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

Got it. And then second question is, the weighted average leverage that you provided here on the call this morning for your portfolio companies declined from 4.6% to 4.2%? Or is that a function of amortization, EBITDA growth or maybe even investment activity in the quarter?

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

Arthur Howard Penn, PennantPark Floating Rate Capital Ltd. - Founder, Chairman & CEO [24]

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

Yes, it's a great question. It's a little of all of the above. We've had good performance. Our portfolio is clean, it's been clean for a while. It's been clean for as far as I can say, and I'll down the table little bit 9 years. We had a spasm about a year ago where we had a few nonaccruals. But prior to that, we had no nonaccruals for 2 years. It's been about a year since we've had some nonaccrual. So portfolio is solid, deleveraging nicely. The new deals are coming in. We're keeping our standards high. And kind of staying in the mid-4s in terms of new yields. And we're pleased with the -- what's going on. I mean in an environment where people are wondering where the best risk-adjusted return is and what should they be doing, and are we at the beginning or end of the cycle and what's going on in this that and the other.

I mean senior secured loans with 50% loan-to-value, mid-4s debt-to-EBITDA at 8%, it's a really good place to be, we think. It's a really good place, we think, kind of defensive solid yield. It's well protected with equity cushion. So we're beating the drum on the asset class and certainly on the kinds of deals we're doing.

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

Christopher John York, JMP Securities LLC, Research Division - MD & Senior Research Analyst [25]

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

I beat that drum on the asset class as well. So I share that sentiment. Secondly, on maybe just talking about the portfolio. So I noticed you wrote down the recently restructured equity in both Country Fresh and Quick Weight Loss. So could you update us on the performance of both of those portfolio companies? And then your confidence in the debt for them being paid back?

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

Arthur Howard Penn, PennantPark Floating Rate Capital Ltd. - Founder, Chairman & CEO [26]

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

Good question. Clearly, both of those companies, by definition of the write-down have been underperforming. So we're working on both of them. I think Country Fresh has some nice ups. They're just getting their act together post their restructuring. Quick Weight Loss, we'll see. Quick Weight Loss jury is out. It's a relatively small piece of the portfolio. I will also comment that we have a number quite a few equity co-invest in the portfolio. And by design, we have those equity co-invests, and you can see a bunch of them are marked up, Chris, to help offset declines that we have from time to time and problems we have. So you've pointed out 2 areas of historical weakness of both Country Fresh and Quick Weight Loss.

You can look at our equity co-invest portfolio and there's a lot of different names that are performing very well. And have been valued at higher levels, and that's what we're supposed to be doing from a portfolio management standpoint is having some of that to help offset those losses.

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

Christopher John York, JMP Securities LLC, Research Division - MD & Senior Research Analyst [27]

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

Got it. And just to reiterate, it seems to me you feel more confident about Country Fresh than Quick Weight Loss. Is that fair?

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

Arthur Howard Penn, PennantPark Floating Rate Capital Ltd. - Founder, Chairman & CEO [28]

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

Well, we're right in the middle of weight loss season here in February. So post-Christmas is weight loss season. So I'll have a lot more color for you next quarter on that one.

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

Christopher John York, JMP Securities LLC, Research Division - MD & Senior Research Analyst [29]

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

Fair enough. And then in light of changes in the direct lending market over the last couple of years, what do you think you guys have the greatest competitive advantage today that results in the sponsor making PennantPark the platform being the first call today to be a partner?

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

Arthur Howard Penn, PennantPark Floating Rate Capital Ltd. - Founder, Chairman & CEO [30]

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

Well, it's a great question. We've been doing this a long time as we continually reiterate, we are well-known, we are well-liked, our financial sponsor clients give us a first call, and we like to think we get a last look because of that. So that allows us to participate and win deals or get big chunks of deals if we want to, but also allows us to pull back when we don't really want to play. So that what we'll call -- we call it incumbency where we have 135 existing borrowers, but it's also been 13 years at PennantPark and decades before that. One thing I will point out, which I think plays to our strength today is with the rise of very, very large direct lending peers, you see more and more of those direct lending peers do.

They're doing very, very large direct loans that would have gone to the broadly syndicated market. And I saw one a couple of weeks to $1.4 billion "direct to loan" from one of our peers or as a group of our peers, some of the mega funds and God bless, but the last thing we would want to be doing is competing with a broadly syndicated loan market, where leverage is high, there are no covenants. And kind of -- you're kind of pricing for the last basis point. So we're very pleased that some of those folks are vacating, what I'll call the traditional middle market, which is where we play in the $15 million to $50 million, $15 million to $40 million.

If you want to hone in on, it's $15 million to $30 million EBITDA companies that are just too small for these guys to focus on anymore. And where we can be important to the borrower, drive up -- drive covenant protections, drive yields, drive upfront fees and deliver a very nice package. What you're seeing in our results, where we can deliver debt-to-EBITDA in the mid-4s with covenants and an 8% yield. So to me, that's very positive for where we are positioned. And the last thing I would want to be doing is competing with a broadly syndicated loan market.

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

Christopher John York, JMP Securities LLC, Research Division - MD & Senior Research Analyst [31]

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

That's great color. In light of some of those comments, especially on the size, what do you think is the largest deal size, you would want to hold at PennantPark Floating today? And then maybe originate at the platform? And then one of the reasons why I asked because I've noticed some maybe you follow-on investment activity at P Float where it seems like your largest size is maybe $35 million. So any update there could be helpful.

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

Arthur Howard Penn, PennantPark Floating Rate Capital Ltd. - Founder, Chairman & CEO [32]

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

Yes. It's a great question and it's something we obviously think about because diversification is a key attribute. We're searching for -- PFLT has many, many, many names, it's probably too diversified. But it's -- we want to be very, very diversified. So -- and we have a bunch of vehicles that are growing outside of the BDCs and we have a bunch of limited partner relationships who want to see flow from the platform. So I think today, we have a name that's $120 million between our vehicles and our close limited partners. I mean that's kind of where we are today, but that ebbs and flows depending on the capital we have at the various vehicles and the LP relationships, but it's significant. And for companies in that $15 million to $30 million zone, that can solve a lot of problems.

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

Christopher John York, JMP Securities LLC, Research Division - MD & Senior Research Analyst [33]

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

It's in McKennie. Last one is, any changes at the platform or addition to the platform that are relevant. You mentioned some other funds that could be beneficial to PennantPark Floating?

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

Arthur Howard Penn, PennantPark Floating Rate Capital Ltd. - Founder, Chairman & CEO [34]

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

Yes. So I think we made a press release maybe 6 months ago about closing on additional capital, and we've got other funds in the market. I want to be careful. I don't want to use a conference call to market private funds. So just to be clear, I'm not marketing private funds here. But we have other vehicles in the market, and other relationships that we're developing into managed accounts. And there's a variety of different things going on. And then this whole theme that we've been talking about, where you can derive very good risk-adjusted returns and senior debt that plays in the market. And we also have a very strong track record and opportunistic, which is slightly higher-yielding stuff. You see that playing out in PNNT, in higher-yielding first-lien, occasional second lien, occasional as equity co-investment occasionals and secondary opportunities. That can be very attractive for people as well.

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

Operator [35]

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

And we'll take our next question from the Ray Cheesman with Anfield Capital.

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

Raymond Cheesman, Anfield Group, LLC, Asset Management Arm - Analyst [36]

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

Art, this is really more of a high-level macro question. Over the last year, you've done what you said you were going to do. You deliver us low leverage, solid credit, good dividend, well-covered, and yet the market trades you at slightly under 94% of your NAV. While in the background, we see FS and KKR get together and their stock rise. ARCC and American Capital get together, their stock rise. Golub sallows its sister fund and their stock rise. Where is the place that you'd like to put PFLT, so that it would get credit from investors for its strengths without, and I totally understand, competing with that crazy place where the people don't get any coverage of their money and savage each other for increasingly less spread. How do you see that in the future?

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

Arthur Howard Penn, PennantPark Floating Rate Capital Ltd. - Founder, Chairman & CEO [37]

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

Look, we can control. We can still question rate. We think about a lot. We can control, we can control, we can choose our investments, which we look to choose wisely, we can manage our capital structure. And the different facilities and leverage some joint ventures. We cannot control the stock price. That's clear. We've been buying the stock personally as management, but we cannot control the stock price. We are not pleased with where our stock is trading, clearly, relative to the performance. When you think about the 9 years we've been in business. And the rock-solid performance we've had over that period of time.

So look, we're all ears, Ray and others if people have suggestions about how we can better articulate the story to the marketplace, meet investors, kind of position things, we are all ears. Ultimately, we want to deliver a safe and steady cash flow stream to our shareholders. We think we're doing that. There's no change in that strategy. And we're hoping that, at some point, the market recognizes its value proposition.

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

Raymond Cheesman, Anfield Group, LLC, Asset Management Arm - Analyst [38]

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

Thanks for delivering value to us who have faith.

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

Arthur Howard Penn, PennantPark Floating Rate Capital Ltd. - Founder, Chairman & CEO [39]

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

Thanks, Ray.

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

Operator [40]

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

And there are currently no other questions in the queue at this time.

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

Arthur Howard Penn, PennantPark Floating Rate Capital Ltd. - Founder, Chairman & CEO [41]

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

Great. I want to thank everybody for participating today. We really appreciate your interest in the company. And we will talk to you next quarter, that will be in early May, that will be our next quarterly conference call. Thank you very much. Bye-bye.

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

Operator [42]

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

And that does conclude today's conference. Thank you for your participation. You may now disconnect.