PFLT - NYSE
PennantPark Floating Rate Capital Ltd.
PFLT·NYSE
$8.05
-3.5%Financial ServicesAsset Management
PennantPark Floating Rate Capital Ltd. is a business development company. It seeks to make secondary direct, debt, equity, and loan investments. The fund seeks to invest through floating rate loans in private or thinly traded or small market-cap, public middle market companies. It primarily invests in the United States and to a limited extent non-U.S. companies. The fund typically invests between $2 million and $20 million. The fund also invests in equity securities, such as preferred stock, common stock, warrants or options received in connection with debt investments or through direct investments. It primarily invests between $10 million and $50 million in investments in senior secured loans and mezzanine debt. It seeks to invest in companies not rated by national rating agencies. The companies if rated would be between BB and CCC under the Standard & Poor's system. The fund invests 30% is invested in non-qualifying assets like investments in public companies whose securities are not thinly traded or do not have a market capitalization of less than $250 million, securities of middle-market companies located outside of the United States, high-yield bonds, distressed debt, private equity, securities of public companies that are not thinly traded, and investment companies as defined in the 1940 Act. Under normal conditions, the fund expects atleast 80 percent of its net assets plus any borrowings for investment purposes to be invested in Floating Rate Loans and investments with similar economic characteristics, including cash equivalents invested in money market funds. It expects to represent 65 percent of its portfolio through senior secured loans. In case of floating rate loans, it holds investments for a period of three to ten years.
At a Glance
Live SnapshotMarket Cap$798.70M
EPS0.7200
P/E Ratio11.18
Earnings Date08/10/2026
Earnings Call Transcript
PFLT • 2026 • Q2
Operator
Good morning, welcome to the PennantPark Floating Rate Capital's second fiscal quarter 2026 earnings conference call. Today's conference is being recorded. At this time, all participants have been placed in a listen-only mode. The call will be open for a question and answer session following the speaker's remarks. If you'd like to ask a question at that time, simply press star one on your telephone keypad. If you'd like to withdraw your question, press star two on your telephone keypad. 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.
Art Penn
Thanks, José. I'll begin with an overview of our second quarter results, including our dividend adjustment and an outlook for net investment income. I'll discuss the current market environment and how we believe PFLT is positioned going forward. José will follow up with a detailed review of our financial results, after which we will open up the call for questions. We are pleased with the continued strong performance and quality of our portfolio in what remains a challenging market environment. The risk-reward profile of the core middle market remains meaningfully more attractive than that of the upper market. NAV was flat quarter-over-quarter. Median portfolio company leverage remains moderate at 4.6x. Last 12 months, PIK interest is only 2.2% of total interest, and non-accruals are less than 1% of the portfolio, and we do not have material software exposure.
Art Penn
The substantial growth of the PSSL II JV this past quarter provides a solid base and positions us for growth in NII over time as the JV ramps. Let me now walk through our quarterly results. For the quarter ended March 31st, core net investment income was $0.27 per share. During the quarter, we continued to scale our new joint venture, PSSL II, investing $148 million in new and existing investments. At quarter end, the portfolio totaled $340 million. We are encouraged by the pace of deployment and remain focused on methodically scaling PSSL II to over $1 billion of assets consistent with our existing joint venture. Based upon the current market environment, we expect this ramp to occur over the next 12-18 months while maintaining our disciplined underwriting standards.
Art Penn
In light of the current market dynamics and in consultation with our board, we are updating our dividend framework to better align with net investment income. Beginning with the July dividend, we will set a base monthly dividend at $0.08 per share, a level we believe is well supported by current earnings. In addition, we will introduce a variable supplemental dividend equal to 50% of the excess NII above the base dividend. The supplement will be declared and paid monthly along with the base dividend. Let me now turn to the broader market environment. M&A activity has increased over the last six to nine months, and 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.
Art Penn
However, activity levels remain below the unusually strong levels observed in 2024 as the market transitions toward a more normalized backdrop. We expect increased transaction activity to drive repayments across the portfolio, including opportunities to monetize equity co-investments and redeploy capital into income-generating investments. Notably, we expect a meaningful realization from our equity co-investment in Echelon this quarter. Echelon is a leading defense technology company sponsored by Sagewind Capital, our long-term sponsor relationship. Echelon announced that it has agreed to be acquired by Shield AI, another cutting-edge defense technology company. Upon closing, we expect our $3.2 million equity co-investment to generate approximately $47 million in total proceeds. Proceeds will consist of $40 million of cash and $7 million of value in Shield AI stock. This represents nearly a 15 times multiple on invested capital and demonstrates the value of our equity co-investment program.
Art Penn
Given the current geopolitical environment and the Echelon news, it is important to highlight that approximately 20% of our portfolio is exposed to government services and defense. In the core middle market, pricing for high quality first lien term loans remains attractive, typically ranging from SOFR+ 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-lite structures prevalent in the upper middle market. We believe that the current environment favors lenders with strong private equity sponsor relationships and disciplined underwriting, areas where we have a clear competitive advantage.
Art Penn
During the quarter, we invested $295 million at a weighted average yield of 9.3%, including $117 million invested in six new platform portfolio companies with a median debt to EBITDA ratio of 3x, interest coverage of 3.4x, and a loan to value of only 44%. Our portfolio remains conservatively positioned. PIK income represents just 2.5% of total interest income among the lowest levels in the industry. Median leverage was 4.6x, median interest coverage was 2x, and median loan to value was 44%. We ended the quarter with 3 non-accrual investments, representing just 0.8% of the portfolio at cost and 0.5% at market value. These results reflect the rigor of our underwriting process and the discipline of our investment approach.
Art Penn
Turning to software exposure, which has been an area of recent market focus, our exposure remains limited at 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 and shorter durations. Importantly, they are concentrated in mission-critical enterprise software serving regulated industries such as defense, healthcare, and financial institutions. We believe this represents a meaningful point of differentiation relative to our peers. We continue to believe that our focus on the core middle market provides us with attractive investment opportunities where we provide important strategic capital to our borrowers. Core middle market companies, those typically with 10 million-50 million of EBITDA, operate below the threshold of broadly syndicated loan or high yield markets.
Art Penn
In the core middle market, because we are an important strategic lending partner, the process and package of terms we receive is attractive. We have many weeks to do our diligence. We thoughtfully structure transactions with sensible leverage, meaningful covenants, substantial equity cushions to protect our capital, attractive spreads, and equity co-investment. Additionally, from a monitoring perspective, we receive monthly financial statements to help us stay informed on the performance of our portfolio companies. Regarding covenant protections, while the upper middle market has seen significant erosion, our originated first lien loans consistently include meaningful covenants that safeguard our capital. Our credit quality since our inception over 14 years ago has been excellent. PFLT has invested $9 billion in 551 companies, and we have experienced only 27 non-accruals. Since inception, our loss ratio on invested capital is only 12 basis points annually.
Art Penn
As a provider of strategic capital who fuels 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 March 31st, we've invested over $618 million in equity and co-investments and have generated an IRR of 25% at a multiple on invested capital of 2x. Looking ahead, our experienced team and broad origination platform position us well to generate attractive deal flow.
Art Penn
Thanks, José. In conclusion, I'd like to thank our exceptional team for their continued dedication and our shareholders for their trust and partnership. We remain focused on delivering durable earnings, preserving capital, and creating long-term value for all stakeholders. That concludes our remarks. At this time, I would like to open up the call to questions.
Operator
Thank you. If you'd like to ask a question, please signal by pressing star one on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star one to ask a question. We'll take our first question from Brian McKenna of Citizens.
Brian McKenna
Thanks. Good morning, everyone. NAV per share was roughly flat in the quarter. That's a pretty notable standout here within the group for the first quarter. What's driving the resiliency here? You do have the forthcoming, you know, pretty sizable realization event, I believe coming in the next quarter or so. I'm assuming that drove some incremental gains across the portfolio. Anything else just to note across the rest of the portfolio?
Art Penn
Yeah. Thanks, Brian, and good morning. Yes, Echelon is a big piece of the, you know, of the equation there, really showing the value of equity co-invest. We also have a few other equity co-invest that are percolating along nicely, and you'll see those in the SOI. We have one called Guild Garage, which is an equity co-invest which has already been exited. We have some others that are certainly not the size of Echelon, but are percolating along and provide us some nice singles and doubles. That's really, just to zoom out, that's really part of the reason we do equity co-invest. Many of our peers do it, some of our peers do not.
Art Penn
It's nice to have something in the portfolio that can give you some lift, that can offset, you know, the inevitable, you know, the inevitable non-accruals that you're gonna have in a, in a broadly diversified loan portfolio. You know, the program in this quarter is certainly meeting its mission and providing a stable, a stable NAV.
Brian McKenna
Got it. That's helpful. Thanks, Art. When you look at your pipeline of new originations today, I mean, where are you leaning in? Is it, you know, a lot of the same sectors? I know you've been active in defense and government services, but kind of what's the mix of the pipeline there? How do spreads compare on these transactions versus spreads that are, you know, really tied to the prepayments that have come in over the last quarter or two? Just trying to gauge where the spreads are coming in today versus maybe some of the recent prepays.
Art Penn
I'll also add in, you know, on the industry focus. Obviously, government services and defense, a big one. We also have, you know, substantial exposure to healthcare, which we think is a resilient and can be a resilient area of the economy. It's certainly a big part of the GDP. Some of our peers have stumbled a little bit in healthcare over time. Thankfully for us, by and large, we've done very well with it. It's just I think basically we keep leverage low. You know, we don't get out of our skis. We keep leverage low, keep it reasonable. I think where you've seen stumbles in healthcare, it's kind of higher leverage situations.
Art Penn
When you have higher leverage, you just don't have the cushion to be able to withstand bumps in the road. You know, we're pleased with healthcare. Obviously, we have a big business services. You know, consumer services are a big area. We've been doing quite a bit in, you know, kind of services around the home. That's been an active area. Those are kind of some of the areas where we focus.
Brian McKenna
Very helpful. Thank you, guys.
Operator
As a reminder, that is star one for questions.
Art Penn
Okay. We do have an extra question here. Please.
Operator
Yes. We'll go next to Christopher Nolan with Ladenburg Thalmann.
Christopher Nolan
Hey, guys. Apologies if I missed part of the call. Art, on your comments earlier on the dividend adjustment, should we look at that as a proxy for the run rate direction for PFLT?
Art Penn
Yeah. It's a great question. Look, we still believe that as we ramp this Joint Venture, this JV 2, that we can earn over time north of $0.30 a share per quarter. If you were to model it out, Chris, you know, I think you'd see that. Just with what was going on in the M&A market, which was not quite as robust as we would have hoped, we said, "You know, hey, let's not force it." You know, let's take our time in this more muted M&A market. You know, forcing investment usually doesn't pay off, so we said, "Look, let's take this time, adjust the dividend to be more comfortable." We clearly want to position ourselves as a prudent, you know, stable BDC.
Art Penn
BDCs today are kind of a little bit out of favor. As the market turns, and we hope they will be in favor again, we wanna come out of it well-positioned as a BDC that easily covers its dividend, comfortably covers its dividend, and also has dividend upside. This was an opportunity for us to kind of, you know, clear the table a bit, align the dividend comfortably to the NII, which is why we've chosen the $0.24 a quarter, $0.08 a month, +50% of the difference between the base and GAAP NII. We will pay that out, you know, monthly. We've already stated that for the month of July, there'll be an $0.08 per share base dividend and a $0.33 supplemental dividend for July, August, September.
Art Penn
We'll announce earnings in August. We'll be back here in a few months. We'll see what GAAP NII was, and we will, you know, adjust to the supplemental will be adjusted to whatever that was. We just thought it was a good time, given what's going on, to kind of reset the table, make sure our investors know that we can comfortably cover it and not force the issue on ramping the JV in a more muted M&A market. I hope that makes sense.
Christopher Nolan
Yeah, no, it does. I guess, you know, from a broader perspective, I mean, you guys see a lot of deals, and for this quarter, at least from my chair, it looks like non-asset quality for BDCs in general seems to be deteriorating. I'm not isolating PFLT or any PennantPark entity, but in general, where do you see us in the cycle for credit for these, you know, market companies?
Art Penn
Yeah. For us, as you missed the first part of the call, you know, our non-accruals are under 1%. For us, that's pretty good. We'll take below 1% in any environment. Let me comment on the broader picture. Obviously, those BDCs that have significant SOFR exposure, by definition, had to mark those loans down, right? Now, they still hopefully will perform well, hopefully will pay off all good, but by definition, there was a mark to market, particularly for those who have big SOFR exposure. We have very limited SOFR exposure, so we did not get hung up on that.
Art Penn
I will highlight that theory that where we do have our minimal non-accruals and where everyone in the industry has some non-accruals is, I'll call it the post-COVID vintage of 2021, 2022 deals, where, you know, right post-COVID, there was a lot of money flowing around. There was a perception that the era that we were in, for instance, consumer products were doing well, other areas of the economy that were more of an at-home economy. There was a perception by, you know, everybody that, you know, things would be kind of, you know, for the long term in that space.
Art Penn
Guess what? Here we are in 2026, there's been a reversion to the mean. Some of those companies that were doing really well in 2022 or 2023 are doing less well. For us, in our below 1% non-accruals, and you see it elsewhere in the industry, that's I kinda think that's where you're seeing some of the non-accruals hit. Does that answer your question, Chris?
Christopher Nolan
Yes, it does. Thanks for the color.
Operator
At this time, there are no further questions. I'll turn the call back to Art for any closing remarks.
Art Penn
Thank you. Thanks everybody for being on the call today. We look forward to speaking with you in early August after our next earnings release. In the meantime, we're wishing all the mothers out there a great Mother's Day. Have a great summer, and we'll speak to you in August. Thank you very much.
Transcript from May 8, 2026
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