PennantPark Floating Rate Capital Ltd.
Q3 2013 Earnings Call Transcript

Published: 9 Aug 2013

[Operator:]

Good morning and welcome to the PennantPark Floating Rate Capital's Third Fiscal Quarter 2013 Earnings Conference Call. At this time all participants have been in listen-only mode. The call will be open for a question-and-answer session following the speaker's remarks. (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 Penn:]

Thank you, and good morning, everyone. I'd like to welcome you to our PennantPark Floating Rate Capital's third fiscal quarter 2013 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:]

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. 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 www.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 Penn:]

Thank you, Aviv. I am going to spend a few minutes discussing current market conditions followed by a discussion of investment activity, the portfolio, the financials, our overall strategy and then open it up for Q&A. As you all know the economic signals have continued to be mixed with many economists expecting a slowly growing economy going forward. With regard to the more liquid capital markets and in particular the leveraged loan in the high yield markets those markets were extremely strong in sold units this year as cash flows in the high yield funds, leveraged loan funds and CLOs has been strong. As fears of fed tightening surfaced in June, the liquid market saw some turbulence, but has since bounced back. Risk reward in the middle market has generally remained attractive as the overall supply of middle market companies who needs financing exceeds the relative demand of applicable lending capacity. As debt investors and lenders a slow growth economy is fine as long as we have underwritten capital structures prudently. A healthy current coupon with deleveraging from free cash flow overtime is a favorable outcome. That said as the more liquid capital markets rallied in the first half of 2013 that overall tone impacted the middle market. Pricing compressed and purchase price multiples and leverage multiples increased. As a result we've continue to be selective about, which investments we make in this environment. Given our strong origination network and the size of our company, we believe we can continue to prudently grow. We remained primarily focused on long-term value and making investments that will perform well over several years. We continue to set a high bar in terms of our investment parameters and remained cautious and selective about which investments we add to our portfolio. Our focus continues to be on companies and structures that are more defensive, have low leverage, strong covenants and high returns. As credit investors one of our primary goals is preservation of capital. If we preserve capital usually the upside takes care itself. As a business one of our primary goals is building long-term trust. Our focus is on building long-term trust with our portfolio companies, management teams, financial sponsors, intermediaries, our lenders and of course our shareholders. We are first call for middle market financial sponsor’s management teams and intermediaries, who want consistent credible capital. As an independent provider free of complex affiliations, we have become a trusted financial partner for our clients. Since inception PennantPark entities have financed companies backed by nearly 120 different financial sponsors. We have been active and are well positioned. For the quarter ended June 30, 2013 on a net basis, we invested $69 million with an average yield on debt of 7.5%. Net investment income was $0.31 per share. 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 is a healthy 3.5 times. This provides significant cushion to support stable investment income. Additionally at cost, the ratio of debt-to-EBIDTA on the overall portfolio was 3.6 times, another indication of prudent risk. In terms of new investments we had another active quarter investing in attractive risk adjusted returns. Our activity was driven by 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 invested $7 million in the first lien term loan of BBTS, [BlackPlus, TechStar]. BBTS is a Texas-based oil and gas company. EIG, Global Energy Partner and HM Capital are the sponsors. CBAC, Horseshoe, Baltimore is developing a gaming facility in Downtown, Baltimore. We purchased $5 million of the first lien term loan. The sponsors are Caesars and Rock Gaming. We purchased $9 million of the first lien term loan in iEnergizer Limited. iEnergizer is a publicly traded business outsourcing services company. We purchased $6 million of the first lien term loan in Life Care Holdings. Life Care is a long-term acute care hospital company. Turning to the outlook, we continue to believe that the remainder of 2013 will be active. 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:]

Thank you, Art. For the quarter ended June 30, 2013 recurring net investment income totaled $0.22 per share. In addition we have $0.05 per share of other income as well as $0.04 per share primarily from a reversal of incentive fee expenses accrued for GAAP purposes only, which will not be payable to the advisor. As a result net investment income for the quarter was $0.31 per share. Looking at some of the expense categories, management fees totaled $590,000; general and administrative expenses totaled about $535,000, and interest expenses totaled $376,000. During the quarter ended June 30th net unrealized depreciation from investments was approximately $3.3 million or $0.32 per share. Realized gains were $1.7 million or $0.16 per share. And income in excess of dividend was about $500,000 or $0.04 per share. Consequently NAV was down $0.12 per share from $14.10 to $13.98 per share. Our entire portfolio and our credit facility are mark-to-market by our Board of Directors each quarter using the exit price provided by independent valuation firms 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 is relatively low risk. It is highly diversified with 78 companies across 24 different industries. 91% is invested in first lien senior secured debt, 5% in second-lien secured debt, 4% in subordinated debt and equity. Our overall debt portfolio has a weighted average yield of 8.1%. 91% of the portfolio is floating rate, including 88% with a floor and 9% is fixed rate. The average LIBOR floor is 1.5%. Now let me turn the call back to Art.

[Arthur Penn:]

Thanks, Aviv. To conclude, we want to reiterate our mission. Our goal is a steady, stable and protective dividend stream. 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 the call to questions.

[Operator:]

Thank you, (Operator Instructions). We'll take our first question from Troy Ward with KBW.

[Troy Ward:]

Great. Good morning Art and Aviv.

[Arthur Penn:]

Good morning.

[Troy Ward:]

Hey Aviv you mentioned you gave the breakdown of the portfolio. I think you said 5% second lien and 4% in subordinate equity. Do have the coupon kind of what the average coupon on those buckets?

[Aviv Efrat:]

We don't have it off-hand; we can calculate it for you and get it back to you. Let me see if I have something on around my desk right now it. Looks like I'll give you an estimate so like the second lien averages about 10.6% and the sub debt averages 13.7%.

[Troy Ward:]

Okay. Great. And then just Art, kind of a broader question obviously we've heard a lot of the market comment over the last couple of weeks with all the BDC reporting earnings but what do you think is and what are you seeing new in the market place with regard to M&A? Do you think there is any acceleration in M&A here mid-year, do you think we've got something we've seen the fourth quarter obviously have stronger activities last couple of years but lot of that's have been driven by other events whether it's tax or government-related. How do you think the fourth quarter is shaping up?

[Arthur Penn:]

Well, it's a good question. We are sensing and we're seeing a more active landscape around M&A right now, so it feels like it's getting more active. Fourth quarter is usually the time when, if you're going to sell your company you would try to do it. So we would expect there to be a pick-up in first quarter. That said it's hard for us to pound the table here and say it's definitely going to happened, it's definitely going to be a big pipeline of opportunity. But we are feeling better in general about that.

[Troy Ward:]

And what percentage of what you’re seeing in the market place today is refinancing versus M&A?

[Arthur Penn:]

It’s about half and half M&A roughly 50% M&A and 50% refi.

[Troy Ward:]

And has that been fairly steady over the last quarter or six months?

[Arthur Penn:]

That’s more M&A focused than it was let's say a quarter ago where it was probably 60% or 70% refi oriented. So the percentage of M&A and more across strategic financing going up, which is good.

[Troy Ward:]

Great. Thanks guys.

[Arthur Penn:]

Thank you.

[Operator:]

(Operator Instructions). And at this time I’m showing we have no further questions. I’d like to turn the call back over to Mr. Penn for closing remarks.

[Arthur Penn:]

Great, we want to thank everybody for participating today. Just remind you that our next quarter is our K quarter, our 10-K quarter our annual. So we will be reporting a little bit later next quarter probably mid to late November. So we look forward to speaking to you then. Thank you very much.

[Operator:]

This does conclude today’s conference. We thank you for your participation. You may now disconnect.