PennantPark Floating Rate Capital Ltd. — Form 10-Q
Reporting period: Quarter ended December 31, 2022 (the company’s fiscal first quarter of 2023). Filed February 8, 2023. PennantPark is an externally managed business development company investing primarily in floating-rate loans to middle-market companies.
Financial results and position
| Metric | Quarter ended Dec. 31, 2022 | Quarter ended Dec. 31, 2021 / comparison |
|---|---|---|
| Investment income | $31.3 million | $26.3 million |
| Total expenses | $17.6 million | $13.6 million |
| Net investment income | $13.7 million; $0.30 per share | $12.7 million; $0.33 per share |
| Net realized investment gains | $0.1 million | $3.1 million |
| Net change in unrealized investment depreciation | $16.8 million | $3.5 million |
| Net change in unrealized debt appreciation | $2.1 million | $3.6 million |
| Net result from operations | Loss of $1.6 million; $(0.04) per share | Income of $14.4 million; $0.37 per share |
| Cash from operating activities | $7.8 million provided | $82.4 million used |
At December 31, total assets were $1.227 billion, total investments at fair value were $1.151 billion, cash and cash equivalents were $52.9 million, and net assets were $513.5 million. NAV was $11.30 per share, down from $11.62 at September 30, 2022.
Debt carrying value totaled approximately $680.3 million: $197.7 million under the Credit Facility, $73.8 million of 2023 Notes, $182.5 million of 2026 Notes and $226.3 million of 2031 asset-backed debt. Statutory asset coverage was 173%, compared with 178% at September 30. The Credit Facility had a $366 million commitment and reported unused capacity of approximately $166 million, subject to borrowing-base and leverage restrictions. The filing gives slightly different unused-capacity figures in different sections.
The company distributed $0.285 per share during the quarter, totaling $12.9 million. Weighted-average debt cost was reported as 5.8% in the debt note and 5.7% in MD&A; the filing does not reconcile this difference.
Portfolio and material changes
- The $1.151 billion portfolio comprised 126 companies, with an average investment size of $9.1 million and a weighted-average debt yield of 11.3%, versus 10.0% at September 30.
- All debt investments were variable-rate; 87% of the portfolio was first-lien secured debt, less than 1% second-lien debt, and 13% preferred and common equity. The company’s stated normal-market objectives are at least 80% variable-rate investments and at least 65% first-lien debt.
- Three portfolio companies were on non-accrual, representing 1.9% of portfolio cost and 0.6% of fair value. At September 30, two companies were on non-accrual, representing 0.9% of cost and no fair value.
- Net unrealized depreciation on investments widened to $29.9 million from $13.1 million at September 30. Management attributed the quarter’s depreciation to capital-market conditions and investment valuations.
- Quarterly investment purchases were $65.6 million, down from $335.1 million a year earlier; sales and repayments were $63.0 million, versus $238.4 million. The quarter included investments in four new and 29 existing portfolio companies.
- Investment income rose mainly because of higher debt-portfolio yields. Higher financing costs contributed to the increase in expenses, including debt interest and expenses of $9.9 million versus $6.6 million a year earlier.
Outlook, risks and other notable items
- Management said liquidity and capital resources were sufficient to pursue market opportunities. The filing provides no numerical earnings or distribution guidance and cautions that future distributions are not assured.
- The company’s interest-rate sensitivity estimate indicates that, holding the balance sheet constant, a 1% rate decrease would reduce annualized net interest income by approximately $6.1 million ($0.14 per share); a 1% increase would add approximately $6.5 million ($0.14 per share). The analysis excludes changes in credit quality, portfolio composition and market conditions.
- Fair values are particularly estimation-sensitive: most investments are Level 3, and the filing states that actual transaction prices may differ materially from reported values. Portfolio fair values also reflect significant unobservable valuation inputs.
- Commitments to fund investments were $151.4 million at quarter end; the company separately disclosed $15.3 million of unfunded commitments to PSSL. PSSL is an unconsolidated joint venture in which PennantPark holds 87.5% of the debt and equity interests; PSSL reported a $2.4 million quarterly operating loss, compared with $1.0 million of income in the prior-year quarter.
- The company reported compliance with Credit Facility covenants. It also disclosed that Funding I’s distributions to the company are subject to payment priorities and restrictions, potentially affecting liquidity and the ability to meet RIC distribution requirements.
- After quarter end, a January 23, 2023 public offering issued approximately 4.3 million shares for about $47.6 million in net proceeds, excluding offering expenses. The adviser agreed to pay the underwriters’ sales load and a supplemental amount; the company states it is not required to repay those amounts.
- A previously identified material weakness concerned timely delivery of portfolio-company financial information to independent valuation providers. Management described remediation steps and concluded disclosure controls were effective for the quarter. The auditor performed an interim review, not an audit, and reported no material modifications needed.
- No material legal proceedings were reported. The company cautioned about leverage, credit and valuation risk, interest-rate and foreign-exchange movements, inflation, market liquidity, portfolio-company performance and broader economic and geopolitical conditions.
Investor facts to verify
- Changes in the three non-accrual positions, borrower payment performance and any subsequent valuation or restructuring developments.
- Support for Level 3 portfolio marks, especially material equity valuations and investments with substantial unrealized depreciation.
- Actual Credit Facility availability under borrowing-base restrictions, upcoming debt maturities and headroom above the 150% asset-coverage minimum.
- Sustainability and tax character of distributions, including the effect of PIK income, RIC requirements and restricted subsidiary cash flows.
- Post-quarter share count and dilution from the January offering, and confirmation of the adviser-paid offering costs and supplemental payment.
- Progress in remediating the valuation-information control weakness and the reported inconsistencies in unused borrowing capacity and weighted-average debt cost.