PennantPark Floating Rate Capital Ltd. 2026 Q3 Earnings Call

Thank you, and good morning, everyone. Welcome to PennantPark Floating Rate Capital's third fiscal quarter 2026 earnings conference call. I am joined today by Rick Allorto, our Chief Financial Officer. Rick, please start off by disclosing some general conference call information and include a discussion about forward-looking statements.

Thank you, Art. I would like to remind everyone that today's call is being recorded and is the property of PennantPark Floating Rate Capital. Any unauthorized broadcast of this call in any form is strictly prohibited. An audio replay of the call will be available on our website. I would also like to call your attention to the customary safe harbor disclosure in our press release regarding forward-looking information. Our remarks today may also include forward-looking statements and projections. Please refer to our most recent SEC filing 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 would like to turn the call back to our Chairman and Chief Executive Officer, Art Penn.

Thanks, Rick. I will begin with an overview of our third quarter results, including the continued expansion of our PSSL II joint venture. I will then discuss the current market environment and how we believe PFLT is positioned going forward. Rick Allorto will follow up with a detailed review of our financial results, after which we will open up the call for questions. For the quarter ended June 30th, our core net investment income per share was $0.26. This exceeded our current base dividend of $0.08 per share per month or $0.24 per share for the quarter. In accordance with our revised dividend policy, PFLT will pay a supplemental dividend of $0.0033 per share over the next three months for an aggregate supplemental dividend of $0.01 per share. The supplemental dividend represents 50% of the excess of net investment income above the base dividend.

As of June 30th, our NAV per share was $10.26, which is down approximately 2% from the prior quarter. The portfolio continues to perform well. The decline in NAV was primarily attributable to a write-down in one of our non-accrual investments. Our portfolio remains highly diversified and conservatively positioned. Median debt to EBITDA was 4.6 times, median interest coverage of 2.1 times, and a loan to value was 44%. PIK income equaled just 2.4% of total investment income, among the lowest levels in the industry. We ended the quarter with four non-accrual investments, representing just 1% of the portfolio at cost and 0.4% at market value. These portfolio metrics reflect the consistency of our underwriting process and our disciplined approach to credit selection. During the quarter, we invested $212 million in both new and existing investments at a weighted average yield of 9%.

We invested $106 million into five new platform portfolio companies with a median debt-to-EBITDA ratio of 2.3 times, interest coverage of 4.2 times, and a loan-to-value of 30%. Our existing portfolio continues to generate attractive deal flow. During the quarter, we invested an additional $106 million across 18 existing platform companies with credit metrics that were similarly attractive to our new investments. We remain focused on scaling PSSL II in a measured and disciplined manner. As of today, the portfolio totaled $390 million. Over time, we expect to grow the joint venture to more than $1 billion of assets consistent with our existing joint venture. Based upon the current conditions, we expect this expansion to occur over the next 12 to 18 months while maintaining our disciplined underwriting standards. For the quarter ended June 30th, PSSL II has generated a cash yield on invested capital of 12.7%.

During the quarter, we generated a meaningful realization from the equity co-investment in the leading defense technology company. We received approximately $45 million in proceeds on our original $3.2 million investment, representing nearly a 14 times multiple on invested capital. Government services and defense continues to be one of our highest conviction investment sectors and has consistently been among our best-performing verticals. Since inception, we have invested approximately $3 billion across this sector, including roughly $1.3 billion through PFLT. These investments are 92% first-lien senior secured and generated an overall IRR of 12.2%, demonstrating our ability to identify businesses operating in strategically important markets. We remain highly constructive on the long-term outlook for government services and defense because the sector possesses several characteristics that align well with our investment philosophy. Demand has historically been supported by durable federal funding priorities and long-term contracts that provide meaningful revenue visibility and stability.

Many of these businesses exhibit resilient cash flow profiles, variable cost structures, and are generally less sensitive to broader economic cycles than many commercial industries. In addition, the sector continues to benefit from active M&A markets and strong valuation support, thereby providing multiple avenues for value creation. Our portfolio is concentrated in businesses supporting the Department of Defense and other mission-critical government agencies. We focus on companies addressing high-priority national security initiatives, including modernization of defense systems and digital infrastructure, cyber and electronic warfare capabilities, modeling and simulation, counter-drone technologies, and next-generation autonomous systems. We believe these priorities will remain central to U.S. defense spending for years to come, creating a favorable backdrop for continued investment opportunities. Today, government services and defense represents approximately 18% of PFLT's portfolio, and given our experience, sourcing capabilities, and the attractive opportunity set, we intend to maintain or increase that exposure over time.

Software remains an area of focus for market participants. Our exposure is limited to approximately 4.3% of the portfolio and is structured consistently with our core middle market strategy. These investments are primarily cash-pay, covenant-protected loans with moderate leverage, relatively short durations as well. They are concentrated on mission-critical enterprise software businesses serving regulated end markets, including defense, healthcare, and financial services. Let me turn to the broader market environment. M&A activity has increased over the last six to nine months, although overall conditions remain uneven. Private equity sponsors remain active, and we are seeing a growing pipeline of attractive opportunities across both new originations and add-on investments. We are optimistic that activity levels will remain elevated throughout the back half of this year. We expect increased transaction activity to drive repayments across the portfolio, including opportunities to monetize equity co-investments and redeploy that capital into income-generating investments.

In the core middle market, the pricing for high-quality first lien term loans remains attractive, typically ranging from SOFR plus 500 to 550 basis points, with leverage of approximately 4.5x EBITDA. Importantly, these structures continue to include meaningful covenant protections in contrast to the covenant-like structures prevalent in the upper middle market. We believe the current market environment favors lenders with established private equity sponsor relationships, consistent access to deal flow, and disciplined underwriting, and these are long-standing strengths of our platform. We continue to believe that the core middle market offers attractive risk-adjusted opportunities. Companies in this segment generally have EBITDA of $10 million to $50 million and often operate below the practical threshold of the broadly syndicated loan and high-yield markets.

As a result, lenders can typically conduct extensive diligence, negotiate meaningful financial covenants, structure transactions with appropriate leverage and equity cushions, and maintain regular access to company financial information. Our credit quality since our inception over 14 years ago has been excellent. PFLT has invested $9.2 billion in 556 companies, and we've experienced only 27 non-accruals. Since inception, our loss ratio on invested capital is only 13 basis points annually. As a provider of strategic capital, we fuel the growth of our portfolio companies. In many cases, we participate in the upside of the company by making an equity co-investment. Our returns on these equity co-investments have been excellent over time. Overall, for our platform from inception through June 30th, we've invested over $629 million in equity co-investments, have generated an IRR of 25%, and have generated a multiple on invested capital of 2x.

Looking ahead, our experienced team and broad origination platform position us well to generate attractive deal flow. Our mission remains consistent: to deliver a stable and well-covered dividend while preserving capital. Everything we do is aligned to that objective. We continue to focus on investing in high-quality middle market companies with strong free cash flow generation. We capture that value through first-lien senior secured loans, and we pay out those contractual cash flows in the form of dividends to our shareholders. With that overview, I'll turn it over to Rick for a more detailed review of our financial results.

Thank you, Art. For the quarter ending June 30th, GAAP and core net investment income was $0.26 per share. Investment income was comprised of $59 million in interest income, $6.2 million in dividends from our joint ventures, and $0.8 million in other income. Our operating expenses for the quarter were as follows. Interest and expenses on debt were $25 million. Base management and performance-based incentive fees were $12.9 million. General and administrative expenses were $2.3 million, and provision for taxes was less than $0.1 million. Net realized and unrealized change on investments, including provision for taxes, was a loss of $18.3 million for the quarter. As of June 30th, NAV was $10.26 per share, compared to $10.47 per share last quarter. At quarter end, our debt-to-equity ratio was 1.56 times, and our capital structure is diversified across multiple funding sources, including both secured and unsecured debt.