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Edited Transcript of PFLT earnings conference call or presentation 21-Nov-19 3:00pm GMT

Q4 2019 PennantPark Floating Rate Capital Ltd Earnings Call

New York Nov 27, 2019 (Thomson StreetEvents) -- Edited Transcript of PennantPark Floating Rate Capital Ltd earnings conference call or presentation Thursday, November 21, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Arthur Howard Penn

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

* Aviv Efrat

PennantPark Floating Rate Capital Ltd. - Treasurer & CFO

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Conference Call Participants

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* Christopher John York

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

* Mickey Max Schleien

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

* Raymond Cheesman

Anfield Group, LLC, Asset Management Arm - Analyst

* Ryan Patrick Lynch

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

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Presentation

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Operator [1]

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Good morning, and welcome to PennantPark Floating Rate Capital's Fourth Fiscal Quarter 2019 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.

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Arthur Howard Penn, PennantPark Floating Rate Capital Ltd. - Founder, Chairman & CEO [2]

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Thank you, and good morning, everyone. I'd like to welcome you to PennantPark Floating Rate Capital's Fourth Fiscal Quarter 2019 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 of our forward-looking statements.

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Aviv Efrat, PennantPark Floating Rate Capital Ltd. - Treasurer & CFO [3]

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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 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.

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

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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 it up for Q&A.

For the quarter ended September 30, we invested $141 million in primarily first-lien senior secured assets at an average yield of 8.5%. PennantPark Senior Secured Loan Fund, or PSSL, continued to perform well. As of September 30, PSSL owned a $489 million diversified pool of 45 names with an average yield of 7.6%.

Credit quality has improved since last quarter. The number of nonaccruals on our books today is 1, down from 4 as of March 31. The 1 nonaccrual represents only 0.4% of costs and 0% of the market value of the portfolio. We are pleased with this progress.

Over the last several years, we've substantially grown our platform by adding senior and mid-level investment professionals in regional offices as well as in New York. The additional people in offices, combined with additional equity and debt capital we have raised, has significantly enhanced our deal flow. This puts 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 the gradual increase in our debt-to-equity ratio, while still maintaining a prudent debt profile. As of September 30, our spillover was $0.31 per share.

With regard to the Small Business Credit Availability Act, a reminder that our Board approved the modified asset coverage that was included in the law reducing asset coverage from 200% to 150% effective April 5, 2019. Over time, we are targeting a debt-to-equity ratio of 1.4 to 1.7x. We will not reach this target overnight. We will continue to carefully invest, and it may take us several quarters to reach the new target. As of September 30, our debt-to-equity ratio was 1.27x.

Given the seniority of our assets, in September, we completed our first CLO financing in which we raised $228 million of external financing to help achieve this new target. CLO financing is attractively priced and long term. The financing has an average cost of LIBOR plus 2.46%, has an expected average life of 7 years and a final maturity of 12 years. 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 have done business with almost 185 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 low leverage, strong covenants and high 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 healthy 2.4x. This provides significant cushion to support stable investment income.

Additionally, at costs, the ratio of debt-to-EBITDA on the overall portfolio was 4.6x, another indication of prudent risk. In our core market of companies with $15 million to $50 million of EBITDA, our capital is generally important to the borrowers and sponsors. We are still seeing attractive risk-reward, and we are receiving covenants, which help protect our capital. Our credit quality since inception over 8.5 years ago has been excellent. Out of 363 companies in which we have invested since inception, we've experienced only 9 nonaccruals. Since inception, PFLT has invested over $3 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 signs of a recession. From an experience standpoint, we are 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 was focused primarily on investing in subordinated and mezzanine debt. Prior to the onset of the global financial crisis in September of 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 the trough of 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 of 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.

On a mark-to-market basis, positive movements in the value of By Light and Montreign were offset by valuation declines of Country Fresh, Unitech and the write-off of Hollander. As discussed last quarter, Hollander filed for Chapter 11 in May. Our preferred strategy was a lender-funded reorganization, whereby the lenders would take majority control. Unfortunately, we cannot get the majority of lenders to support a lender funded transaction, and the company was sold to a third party.

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 purchased $6.5 million of first-lien term loan, $2.2 million of first-lien revolver and $1.4 million of common equity of Altamira Technologies. The company is a government services contractor focusing on the modernization of technology for the U.S. defense and intelligence communities. ClearSky is the sponsor. We purchased $19 million of first-lien term loan of Quantum Spatial. As a provider of geospatial solutions, the company gathers detailed mapping data sets, provides analysis and generates insights for its customers. Our LinkedIn Capital Partners is the sponsor. We purchased $18.3 million of first-lien term loan, $1.9 million of revolver and $4 million of delayed draw as well as $0.5 million of equity of Schlesinger Global. The company is a global market research platform that offers agencies and brands both qualitative and quantitative data collection services. Gauge Capital is the sponsor.

Turning to the outlook. We believe the rest of 2019 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 you through the financial results.

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Aviv Efrat, PennantPark Floating Rate Capital Ltd. - Treasurer & CFO [5]

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Thank you, Art. For the quarter ended September 30, 2019, net investment income was $0.29 per share. Looking at some of the expense categories, management fees totaled about $5.3 million. General and administrative expenses totaled about $1 million, and interest expense totaled about $6.3 million. We raised $228 million in external CLO debt and incurred $3.7 million of upfront costs, which we will amortize over 6 years since we do not elect to mark-to-market. The SEC staff had indicated, they prefer this position for the regulatory asset coverage test.

During the quarter ended September 30, net unrealized appreciation on investment was about $11 million or $0.27 per share. Net realized losses were about $15 million or $0.39 per share. Net unrealized appreciation on our credit facility and notes was about $0.01 per share. Net investment income exceeded the dividend by $0.01 per share. Consequently, NAV went from $13.07 to $12.97 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 an independent valuation firm, exchanges or independent broker-dealer quotations 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 95 companies across 37 different industries. 87% is invested in first-lien senior secured debt, including 11% in PSSL; 30% in second lien debt; and 10% in equity, including 5% in PSSL. Our overall debt portfolio has a weighted average yield of 8.7%. 99% of the portfolio is floating rate and our overall leverage on NAV is 1.27x.

Now let me turn the call back to Art.

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

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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 to questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we'll go first to Mickey Schleien of Landenburg.

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

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I want to start out by asking a 30,000 foot sort of question. There's been a lot of stress, obviously, in the more liquid loan markets. And I do think some of that weakness is due to fund outflows resulting from declining LIBOR, but I think the market is also realizing that deal terms have been too aggressive in some cases and fundamentals are deteriorating, in other cases. And that's resulting obviously in this bifurcation that we're seeing between credits that are perceived to be good, and those that are perceived to be weak. But as you know, sometimes, the baby gets thrown out with the bathwater. So kind of a long-winded question. But within that volatility, are there areas of the more liquid markets, where you're seeing interesting opportunities that you think perhaps the market is mispricing? And for those investments, would you be more interested in putting them on PFLT's balance sheet or the JV?

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

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That's a great question. Thank you, Mickey. We dabble in that broadly syndicated space. Occasionally, when we have really good information flow in the company, where we may have lent to it in the past, where we know the management team or we know the sponsor, and where we can buy $1 for $0.90 or $0.80 or $0.70, we occasionally will do so. We certainly did a bunch of that in 2009 and 2010, and that was a significant addition to our returns during that time period. We did some of that last December, December of 2018, when we saw some weakness, and we had companies -- or we saw companies in the broadly syndicated space that we knew that we used to finance, and we felt very strongly about it. And that was certainly a good time to dip our toe in. So it's something that we evaluate. We are always scanning for companies that we know, in industries that we like, where we think we have some -- an information in our library that could help us analyze a particular credit. So it's something that we're monitoring. Where do we put it? I think we put it wherever it is most efficiently financed. It could go into the joint venture, it could go into our new CLO, it could go kind of into the balance sheet of PFLT. So it's kind of -- it just depends kind of where it fits the best from an optimization standpoint.

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Mickey Max Schleien, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research & Supervisory Analyst [4]

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So just to make sure I understand or presently, you haven't done much of that, if any, then?

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Arthur Howard Penn, PennantPark Floating Rate Capital Ltd. - Founder, Chairman & CEO [5]

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No. At this point, no, it's something we're monitoring. We did some of that in last December 2018. We're not seeing yet the value. I mean it may take a little while. Sometimes, the first blush of a downtick is not the first time to be doing it. And a lot of the deals that were done in the broadly syndicated space last year, too. So a lot of pro forma adjustments, obviously, they're typically covenant light, the leverage is high. So we look at all of this, and out of all of that, there may be a few things that -- a few deals that might make sense for us to select for our portfolios. But we haven't done anything yet. But it's something that we're monitoring.

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Mickey Max Schleien, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research & Supervisory Analyst [6]

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Okay. If I could just switch gears. Can you give us the main drivers of the realized loss and the unrealized depreciation in the fourth quarter?

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Arthur Howard Penn, PennantPark Floating Rate Capital Ltd. - Founder, Chairman & CEO [7]

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Sure. Let's just pull it out for you. And let's see. So the deal with the big uptick were in Montreign as well as By Light, offset by Country Fresh and Hollander, where Hollander we talked about was obviously the biggest negative move and we were negatively surprised, unfortunately, by how that bankruptcy process played out. And...

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Mickey Max Schleien, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research & Supervisory Analyst [8]

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And Arthur, did you say in the case of -- in the case of Hollander, did you say that was written down completely?

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Arthur Howard Penn, PennantPark Floating Rate Capital Ltd. - Founder, Chairman & CEO [9]

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Yes, that was written down completely. We had a -- we were hoping for a lender-led reorganization where the lenders would own the company. We could not get all the lenders in the same boat. There are some people in marketing, when they have a tough deal like to push it under the carpet, not talk about it anymore. For us, the question is, what's the best thing for our investors long term. And in certain cases, we will invest more and try to drive value there. And we've had a very good track record over time doing that. Unfortunately, we couldn't get all the lenders with us this time around. So the company was sold, we got our dip loan paid back, and we wrote off our term loan. But Hollander is now done in terms of, maybe, diminishing...

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Mickey Max Schleien, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research & Supervisory Analyst [10]

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So that's obviously disappointing. But I did also notice that LifeCare was completely written down. So those are not the kind of outcomes you would like for first liens. Was there something -- was there some particular attribute about those deals that led to those outcomes?

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Arthur Howard Penn, PennantPark Floating Rate Capital Ltd. - Founder, Chairman & CEO [11]

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With all of our underperformers, and we've had 9 in about 9 years at PFLT in terms of nonaccruals, there's always an idiosyncratic -- usually an idiosyncratic reason, and I can go through each, and I can go through all of them, if you want, offline. With the healthcare deal, it was a reimbursement change. And with Hollander, they were just doing too many acquisitions too quickly. They didn't have enough kind of oversight of the company. And the last acquisition didn't work. So moving too quickly. So -- but they all have their own story. Overall, 9 nonaccruals over 9 years out of 363 deals. Pretty good track record. 9 basis points of annualized loss, over $3 billion, very good track record. We happened to, as you know, a several quarters ago, have 4 nonaccruals in that 1 quarter after having no nonaccruals for 2 straight years. So we've taken our medicine, the medicine has been taken, and I'm hoping we can go forth in strength and make PFLT boring again, which is certainly our goal.

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Mickey Max Schleien, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research & Supervisory Analyst [12]

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Okay. I appreciate that, Art. Just a couple of quick housekeeping questions. Was there any interest income recapture during the quarter or some sort of other nonrecurring item in interest income?

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Arthur Howard Penn, PennantPark Floating Rate Capital Ltd. - Founder, Chairman & CEO [13]

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No.

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Mickey Max Schleien, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research & Supervisory Analyst [14]

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Okay. And I noticed that the cash balance is relatively -- was relatively high at September. I'm sure there's a good reason probably related to the changes in the balance sheet. But can you walk us through why you are holding so much cash at the end of the quarter?

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

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I'm looking at Aviv. I believe it had something to do with our CLO.

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Aviv Efrat, PennantPark Floating Rate Capital Ltd. - Treasurer & CFO [16]

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Right. So when we got the CLO, that's exactly right. So when we financed the CLO, we got $228 million of cash. Large portion of it, obviously, we paid down our current credit facility and the rest of it we left for deals that were unsettled or for dividends. Then we need to pay it for the following day. So it ebbs and flows. It just happens to be on 9/30 to be a fairly large number. But in general, the idle cash or the cash on the balance sheet is very old.

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Mickey Max Schleien, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research & Supervisory Analyst [17]

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I understand, Aviv, but there's still a sizable balance on the credit facility. So there's a lot of moving pieces here. I guess my question is, is it reasonable to assume that cash returns back towards this sort of $30 million level, which you've been at for a few quarters?

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Aviv Efrat, PennantPark Floating Rate Capital Ltd. - Treasurer & CFO [18]

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It's a very good assumption, and I think that's kind of where we are today. Again, it ebbs and flows. You have unsettled trades that you need to prepare cash for. About $30 million is a very good assumption.

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Operator [19]

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And next, we'll go to Ryan Lynch of KBW.

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Ryan Patrick Lynch, Keefe, Bruyette, & Woods, Inc., Research Division - MD [20]

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If I look at your guides, they're focused on the right side, your balance sheet for a minute. If I go back as early as 2017, you guys had all of your liabilities on a credit facility. You guys have done a really good job of expanding your liability structure via unsecured debt and then most recently these asset-backed notes. As we look going forward, are you guys happy with the kind of the current composition of your liability structure? Or how do you see that changing, if any, going forward?

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Arthur Howard Penn, PennantPark Floating Rate Capital Ltd. - Founder, Chairman & CEO [21]

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I think we're relatively happy with it, Ryan. Thank you for the question. It's something we're always pondering and always looking at all the different markets and all the different ways to finance, obviously, with the law changing and the ability to leverage up assets like these, which are among the lowest yielding assets in the space and lowest risk assets in the space. It gave us a really nice opportunity to assess different options, including the CLO style financing, which we elected to do, which is -- can be very efficient, very long term, finance -- good financing for these kinds of assets. So something we'd look at. Obviously, we can take that style of financing and look at PSSL itself and say, could PSSL benefit from kind of the securitization. So that's something we think about. And -- but there's nothing imminent that other than maybe thinking about something there, but that's early days.

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Ryan Patrick Lynch, Keefe, Bruyette, & Woods, Inc., Research Division - MD [22]

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Okay. That's helpful. And then can you remind us, if I look at your balance sheet portfolio has about an 8.7% yield versus your portfolio in the PSSL has about a 7.6% yield, so about 100 basis points yield differential. Can you just talk about when you guys are outsourcing assets, what are the characteristics that would cause you guys to keep a loan on the balance sheet versus potentially place it into the PSSL?

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Arthur Howard Penn, PennantPark Floating Rate Capital Ltd. - Founder, Chairman & CEO [23]

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Yes. So I think the 8.7%, I'm looking at Aviv, includes our investment in PSSL, which in and of itself is a double-digit return and a large investment. So the gap may not be that large. I'd say it's probably the difference between 7.6% and 8% or 8.2%, something like that. Look, I think since PSSL, again, does have very efficient financing, if it fits in PSSL, and again, we did 87.5% of the economics. And if Kemper agrees, we'll put it there. Now with PSSL, just like PFLT, we're looking for a highly diversified portfolio. We want plenty of names, and we're looking to optimize both. So I don't think there's anything kind of massively differentiated other than that PFLT itself has a -- has an investment in PSSL, which is double digit.

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Ryan Patrick Lynch, Keefe, Bruyette, & Woods, Inc., Research Division - MD [24]

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Okay, that's helpful. And that's a good point and well taken as far as the yield on the balance sheet of the 8.7%, including the big yield for the PSSL. I know you mentioned in your prepared comments that you expect the remainder of 2019 to be strong, driven by some growth in M&A financings. As you kind of talked about with the previous question, there's definitely been a little bit of disruption in the early stages of some of the liquid markets, particularly some of the weaker credits. I'm just wondering, PFLT, obviously focuses on the middle markets. So a different market segment, but you guys focus in on hiring the capital structure, very high-quality companies. As it seems to be in some of the broadly syndicated loan market, that's where people are also trying to be drawn a little bit in some of the higher quality companies and higher up in the capital structure. Do you worry that there's going to be increased competition in kind of the markets that you play in, being middle market first lien to higher-quality companies, if we're starting to see some cracks in the more liquid markets?

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Arthur Howard Penn, PennantPark Floating Rate Capital Ltd. - Founder, Chairman & CEO [25]

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It's a good question. I think we've actually seen the opposite of some of our peers who are so large now have so much capital to deploy. They're basically disintermediating the broadly syndicated market. So if you're a very large direct lender, and you can write a big check to a bigger company that would have had an option of going to the broadly syndicated market, it's something that a lot of those guys are doing. And in some sense, they're leaving the $20 million, $30 million, $40 million EBITDA company to people like us who are kind of more moderate size. So as you see some of the Goius -- and look, there may be a secular change going on there, where for the single B, single B deal, the broadly syndicated market may be losing share to direct lenders to some of the larger direct lenders that may leave even more open terrain for folks like us who are kind of, I'll call, medium-sized and focused on the $15 million to $40 million company. Now that said, I'd just say, anecdotally, those bigger companies have a lot more leverage. The EBITDA adjustments are a lot higher. And to the extent there are covenants, in many cases there are no covenants. If there is a covenant, it's set extraordinarily wide. It's really -- not really -- it's not really a covenant. So there's a whole argument for big companies and deploying big amounts to big companies and all that. And there's a lot of truth to that. We're very content being in our space, where we can do several months of due diligence, where we can really understand what we're buying, where if there's an EBITDA adjustment, we fully diligenced it and underwrite to what we feel comfortable the EBITDA adjustment is where we can negotiate covenants that protect our risk. And should something go wrong, it's relatively easy to fix. So we like our space where we feel, in some ways, the big players are moving away from it, and that's just fine with us.

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Operator [26]

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(Operator Instructions) We'll go next to Chris York of JMP Securities.

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

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So Art, hotels, gaming and leisure is the second largest industry type in the portfolio. And it's been an industry type you've went forward for it decades. So I'm curious how you are evaluating new investment opportunities in gaming today or continuing to think about supporting an add-on in your portfolio because we're starting to hear more from investors that care about ESG from the LPs that invest in either SMAs of truck lenders or investors that invest in publicly traded BDCs.

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

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Yes, it's a great question. Certainly, ESG is important to us. We have an ESG policy. It's on our website. We take ESG into account in every one of our investments. There's a whole analysis in every one of our investment committee memos that evaluates ESG issues. So it's important for us. So I'll just say that kind of as a start. With regard to gaming, which is an area we've done well in over a long period of time. I mean I think we've deployed over $400 million in gaming and it had something like 13%, 14% IRR in the space over time. The way we think about gaming, at least in the United States is, in each case, the gaming facility is in partnership with the state. So whatever state the facility is -- and the state licenses the operator and the state usually is a substantial economic participant in the outcome of the facility and the states typically kind of disclose what they're doing with the proceeds from whatever gaming they sponsor, whether it be lotteries or other gaming type opportunity. So the way we think about it is this is all done in sponsorship with the local jurisdiction. The local jurisdiction is benefiting and it's done in a very kind of above board, clean, good fashion. So that's kind of how we think about gaming in these portfolios.

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

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Sure, it makes sense. That's good color. And then maybe for Aviv here. You've ended your fiscal year with balance sheet leverage at 1.24x. Now when do you budget meeting your target leverage?

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

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We're laughing because you're trying to get asked a question that's unanswerable. Aviv, do you want to take a shot at that?

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Aviv Efrat, PennantPark Floating Rate Capital Ltd. - Treasurer & CFO [31]

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That's fine. I mean, listen, we mentioned 1.2x, 1.3x is where we are. When we get to 1.7x we'll obviously pause. It's kind of more high level, right? That will take a quarter or 2 or 3 or 4, I mean, take a peak. We don't know. We cannot project. We cannot really say how long it's going to take. But definitely, you're going to see the leverage, and that's our hope, taking advantage of the new laws and leveraging up.

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

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That said, the balance there is we don't want to for one iota change our credit quality. So we only want to do deals that -- where we are very comfortable, where the capital preservation attributes are strong, and we're hoping to continue our very nice long-term track record over $3 billion of our 8% returns with 9 basis points of annualized loss. So we hope and anticipate that over time, we will more fully leverage, but we're not going to rush it. We'd rather do no deals than do bad deals.

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

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Got it. And I know it's a tough question to answer. Obviously, there's lumpiness in both originations and then repayments and things you cannot control there, but I do know that you need to make a budget. And just was curious on the timing to get to that 1.7x. And then a follow-up is, how do you think about your off-balance sheet leverage with PSSL in terms of that 1.7x? Is it simply just adding the full unfunded capital on the revolving credit facility to kind of get above the 1.7x or, I guess, how do you think about consolidated leverage in comparison to that 1.7x?

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

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Yes. So PFLT itself, we think, over time, we should be targeting 1.7-ish times as well. So that vehicle up to 1.7x. Again, this is the limit. We don't -- the target is 1.4 to 1.7. We may stop at 1.4 and say, enough is enough. We don't like the deal flow or we think leverage is fine for now or we want to keep dry powder. So I want to reiterate, this is a target range. We're not trying to take it necessarily the 1.7x. It's something that we think about, but it'll be based on the facts and circumstances at the time of what's going on in the market. So -- and then PSSL itself, same thing. It's fairly well optimized at this point. I think it's like 1.6 to 1. You're in the zone of kind of a portfolio optimized PSSL.

So over time, if you add them all together, you conglomerate it all together, maybe you get to -- if you were to put PSSL on balance sheet, maybe it's 2x leverage. And we compare that to what we know, and we've lived it in the CLO market, you can put these same assets into a middle market CLO, get 4:1 leverage, price it out very attractively and get basically 7-year average life financing against it. So we're not anticipating going there that we don't -- that's not for this company. But the market will take these exact assets and leverage them far more than what we're talking about.

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Christopher John York, JMP Securities LLC, Research Division - MD & Senior Research Analyst [35]

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Great. That's good color. And then last one, you talked a little bit here in the Q&A about EBITDA adjustments and add backs and it just prompted some curiosity. So is the reported debt-to-EBITDA that you provide here in the prepared remarks -- is the EBITDA number a sponsor-provided number or the PennantPark underwritten adjusted EBITDA number?

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Arthur Howard Penn, PennantPark Floating Rate Capital Ltd. - Founder, Chairman & CEO [36]

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It's a number that we diligence and we buy off-line. So we always take a somewhat frozen adjusted EBITDA direction. We will take it with a grain of salt. We will diligence and come up with a PennantPark number. And that is a number that will go into our statistics.

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Operator [37]

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And now we'll take a question from Ray Cheesman of Anfield Capital.

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

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Art, with the current share price trading below the NAV, what are your thoughts about investing back into yourself?

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

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It's a good question. It's something that we talk with the Board about every quarter. You've seen management purchases. You may see more management purchases. At this point, where we're trying to optimize leverage a little bit more, I think it's something we, at least this quarter, chose and elect not to do, but it's something that's in the mix that we talked to the Board about.

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Raymond Cheesman, Anfield Group, LLC, Asset Management Arm - Analyst [40]

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You also mentioned in your earlier comments something about covenants and protection. We've been missing covenants and protection in the middle markets for a while. Is that something that is improving for you guys or kind of steady state?

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

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Well, there's -- I guess, just to take a step back. There's different pieces of the middle market. There's the broadly syndicated market where the companies typically are north of $50 million or $60 million or $70 million of EBITDA. Typically, that's covenanted in money, that's been covenanted in life for a while. And then there's the, what we call the middle market where we participate, which is kind of $15 million to $40 million or $50 million of EBITDA. And there's been -- there's always been covenants there. I mean we get covenants in virtually all of our deals. And based off in EBITDA, again, then with our diligence and we buy off on. So in our world, where we're below the threshold of the broadly syndicated loan market, we've -- at least we've always gotten covenants.

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Raymond Cheesman, Anfield Group, LLC, Asset Management Arm - Analyst [42]

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Lastly, I had a question about the equity portfolio. I think that if I listen to the math properly, down to about 5% of the dollars are invested in equity stakes with, I know not every section of the equity market is currently hot, but it's been pretty strong this year. And I'm wondering if you think you had any golden geese hiding in the equity portfolio that we can look for in 2020 to come out and show us?

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Arthur Howard Penn, PennantPark Floating Rate Capital Ltd. - Founder, Chairman & CEO [43]

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Yes. So it's a great question, and it's all there. Name by name, you can see the mark-to-market by the independent third-party valuation firms. And you can see some names that are marked up substantially, like By Light, like Summit, like DecoPac, Kainos, Walker Edison, Dominion Holdings. There's I'm going to say 10, 12 of these types of names that I think are marked up to some extent. So if a sponsor owns a company and they see an ability to exit an attractive price, they'll do what they have to do. So it's really just a question of time in terms of when we can cash out some of those deals.

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Operator [44]

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And with that, this does conclude today's question-and-answer session. I'd like to turn the call back to Mr. Penn for any additional or closing comments.

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Arthur Howard Penn, PennantPark Floating Rate Capital Ltd. - Founder, Chairman & CEO [45]

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Great. I want to thank everybody for being on the call today. We wish everyone a happy, healthy Thanksgiving and a happy and healthy holiday season. We will talk to you next in early February. Thank you very much.

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Operator [46]

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And again, ladies and gentlemen, that does conclude today's call. We thank you again for your participation. You may now disconnect.