PennantPark (PFLT) Earnings Call Transcript

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DATE

Tuesday, Feb. 10, 2026 at 9 a.m. ET

CALL PARTICIPANTS

• Chairman and Chief Executive Officer — Arthur Penn
• Chief Financial Officer — Richard Allorto

TAKEAWAYS

• Core Net Investment Income -- $0.27 per share for the period, as reported by management.
• PSSL2 Joint Venture Launch -- $197 million invested during the period, with an additional $133 million invested after quarter end, totaling $326 million; management disclosed a $100 million increase to the credit facility, now totaling $250 million, with an accordion feature allowing expansion to $350 million.
• Net Asset Value (NAV) -- $10.49 per share, down 3.1% from the prior period NAV of $10.83.
• Debt-to-Equity Ratio -- 1.57x at period end, with a subsequent reduction to 1.5x after portfolio sales, maintaining a target range between 1.4x and 1.6x.
• Non‑Accrual Investments -- Four non-accrual investments equal to 0.5% of portfolio cost and 0.1% of market value at period end.
• Portfolio Yield -- Weighted average yield on debt investments was 9.9%; approximately 99% of the debt portfolio is floating rate.
• Interest Income Composition -- Payment‑in‑kind (PIK) interest represented 2.5% of total interest income, among the lowest in the industry according to management.
• Investment Composition -- Portfolio contained 89% first lien senior secured debt, less than 1% second lien and subordinated debt, 4% equity in joint ventures, and 7% equity co‑investments.
• Portfolio Diversification -- Holdings spread across 160 companies and 50 industries as of period end.
• Credit Quality -- Median leverage was 4.5x EBITDA with median interest coverage ratio at 2.1x.
• New Investments -- Four new platform investments originated with a median debt/EBITDA ratio of 4.0x, interest coverage of 2.9x, and loan‑to‑value ratio of 43%.
• Software Sector Exposure -- Software accounted for 4.4% of the overall portfolio, with loans structured as “all cash pay,” covenanted, at 5.3x leverage, and 3.4 years’ average maturity.
• Realized and Unrealized Losses -- Net realized and unrealized change on investments, including provision for taxes, was reported as a $30 million loss for the period.
• Operating Expenses -- Interest and debt expenses were $27.2 million, base management and performance‑based incentive fees were $13.5 million, general and administrative expenses were $2.1 million, provision for taxes was $0.2 million, and credit facility amendment costs were $0.5 million.
• Subsequent Asset Sales -- $27 million of assets were sold to the PSSL1 joint venture and $133 million to PSSL2, with proceeds used to pay down the revolving credit facility and reduce leverage.
• Equity Co‑Investment Performance -- Since inception, $615 million invested in equity co‑investments has produced a 25% IRR and a 1.9x multiple on invested capital as disclosed by management.
• New and Existing Portfolio Investment -- $31 million invested in new opportunities at a weighted average 10% yield, $95 million invested in new portfolio companies, and $206 million invested in existing companies (not summing due to categorization overlap).

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RISKS

• Net asset value declined 3.1% due to $30 million in net realized and unrealized losses, with management citing mark‑to‑market headwinds concentrated in “post COVID vintage” sectors including apparel, marketing services, and specialty car wash businesses.

SUMMARY

PennantPark Floating Rate Capital (NYSE:PFLT) announced successful deployment activities in its newly launched joint venture, PSSL2, and indicated progress toward scaling the platform with an expanded credit facility and portfolio investments. Management emphasized disciplined positioning in the core middle market, maintaining conservative exposure to software sector loans and preserving rigorous underwriting standards in contrast to less restrictive upper market practices. The portfolio's composition as of period end remained predominantly in first lien, floating‑rate, senior secured debt, while NAV per share fell to $10.49, reflecting both realized and unrealized losses attributed to certain segments of the portfolio. Leverage was proactively managed following quarter end as asset sales to joint ventures contributed to a reduction in the debt‑to‑equity ratio, supporting balance sheet flexibility for future investment opportunities.

• Management stated that “run rate NII is projected to cover our current dividend as we ramp that portfolio.” but clarified dividend coverage may not be immediate and will depend on JV asset growth and broader M&A market activity.
• Arthur Penn described the joint venture ramp‑up timeline as potentially spanning “twelve to twenty four months,” with M&A conditions as the key determinant of pacing.
• Richard Allorto confirmed that the reported $0.5 million credit facility amendment cost was a nonrecurring charge for the period.
• Principal software exposures were confined to “enterprise software that is to the customer's businesses, the vast majority of which is focused on heavily regulated industries such as defense, health care, and financial institutions.”
• Since inception, the firm has reported only 26 non‑accruals out of 545 company investments and an annual loss ratio of 13 basis points.

INDUSTRY GLOSSARY

• PIK (Payment-In-Kind) Interest: A form of interest where payment is made in additional securities rather than in cash.
• First Lien Senior Secured Debt: Debt that holds the highest claim on assets in the event of default, secured by borrower collateral.
• Accordion Feature (Credit Facility): A provision permitting an increase in a credit facility’s committed amount under certain established terms.
• Equity Co-Investment: A direct equity investment in a portfolio company made alongside primary or debt investment transactions.
• SOFR: Secured Overnight Financing Rate, a benchmark interest rate for dollar-denominated derivatives and loans.

Full Conference Call Transcript

Operator: Please stand by. Good morning, and welcome to the PennantPark Floating Rate Capital's First 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 speakers' remarks. Press star one on your telephone keypad. If you would like to withdraw your question, press star two on your telephone keypad. It is now my pleasure to turn the call over to Mr. Arthur 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. Welcome to PennantPark Floating Rate Capital's First Fiscal Quarter 2026 Earnings Conference Call. I'm joined today by Richard 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'd like to remind everyone that today's call is being recorded.

Richard Allorto: 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'd 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 filings 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, Arthur Penn.

Arthur Penn: Thanks, Rick. I'll begin with an overview of our first quarter results and recent strategic initiative. The launch of our new joint venture, PSSL2, which commenced investment activities during the quarter. I will then share our perspective on the current market environment and how PFLT is positioned for continued growth. Rick will follow-up with a detailed review of the financials and then we will open up the call for questions. For the quarter ended December 31, core net investment income for the quarter was $0.27 per share. During the quarter, we began investing in our new joint venture PSSL2. PSSL2 invested $197 million during the quarter, and an additional $133 million after quarter end.

Its total portfolio is currently $326 million. PSSL2 recently closed on an additional $100 million commitment to the credit facility, bringing the total to $250 million, and the credit facility has an accordion feature to increase commitments to $350 million. Our objective is to scale PSSL2 to over $1 billion in assets consistent with our existing joint ventures. Our run rate NII is projected to cover our current dividend as we ramp that portfolio. Turning to the market environment, we are seeing an increase in M&A transactions activity across the private middle market. This trend is expanding our pipeline of new investment opportunities.

We also expect that this increase in M&A activity will drive repayments of our existing portfolio investments, including opportunities to exit some of our equity co-investments and rotate that capital into new current income-producing investments. We continue to believe that the current environment favors lenders with strong private equity sponsor relationships and disciplined underwriting. Areas where we have a clear competitive advantage. In the core middle market, the pricing on high-quality first lien term loans remains attractive. Typically ranging from SOFR plus 475 to 525 basis points with leverage of approximately 4.5x EBITDA. Importantly, we continue to get meaningful covenant protections in contrast to the covenant-light structures prevalent in the upper middle market. Our portfolio remains conservatively structured.

As of December 31, PIK interest represented just 2.5% of total interest income among the lowest levels in the industry. Median leverage across the portfolio is 4.5 times with median interest coverage of 2.1 times. During the quarter, we originated four new platform investments with a median debt to EBITDA ratio of four times, interest coverage of 2.9 times, and the loan to value ratio of 43%. With regard to the software risk that has been a recent market focus, we have stuck to our knitting. Only 4.4% of the overall portfolio is software, and that 4.4% is structured consistently with how we invest in the core middle market.

Primarily, all cash pay loans with covenants with leverage of 5.3 times and matures in only 3.4 years on average. It's enterprise software that is to the customer's businesses, the vast majority of which is focused on heavily regulated industries such as defense, health care, and financial institutions where safety, security, and data are paramount, and where change will be slower. Peers typically invested much larger percentage of their portfolios in software, 20 to 30% and much higher leverage seven times plus or loans against revenue, not EBITDA, with substantial PIC covenant light and long maturities. This story is a significant differentiator from our peers.

We ended the quarter with four non-accrual investments representing only 0.5% of the portfolio at cost, and 0.1% at market value. These results reflect the rigor of our underwriting process and the discipline of our investment approach. We continue to believe that our focus on core middle market provides us with attractive investment opportunities, we provide important strategic capital to our borrowers. Core middle market companies, typically those with $10 to $50 million of EBITDA, operate below the threshold of the broadly syndicated loan or high yield markets. 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, equity co-investment. Additionally, from a monitoring perspective, receive monthly financial statements to help us stay informed on the performance of our portfolio companies. Regarding covenant protections, while the upper market has seen significant erosion, our originated first lien loans consistently include meaningful covenants that safeguard our capital. Our credit quality since inception over fourteen years ago has been excellent. PFLT has invested $8.7 billion in 545 companies and we have experienced only 26 non-accruals. Since inception, our loss ratio on invested capital is only 13 basis points annually. As a provider of strategic capital, he 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 part for our platform from inception through December 31, we've invested over $615 million in equity co-investments, and have generated an IRR of 25% and a multiple on invested capital of 1.9 times. During the quarter, we continued to originate attractive investment opportunities and invested $31 million at a weighted average yield of 10%. $95 million was invested in new portfolio companies and $206 million was invested in existing portfolio companies.

From an outlook perspective, our experienced and talented team and our wide origination funnel are well positioned to generate strong deal flow. Our mission and goal are a steady, stable and protected dividend stream coupled with the preservation of capital. Everything we do is aligned to that goal. We seek to find investment opportunities in growing middle market companies that have high free cash flow conversion. We capture that free cash flow primarily in first lien senior secured instruments 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.

Richard Allorto: Thank you, Art. For the quarter ended December 31, GAAP net investment income and core net investment income were both $0.27 per share. Our operating expenses for the quarter were as follows: interest and expenses on debt were $27.2 million, base management and performance-based incentive fees were $13.5 million, general and administrative expenses were $2.1 million, provision for taxes was $200,000, and credit facility amendment costs were $500,000. For the quarter ended December 31, net realized and unrealized change on investments including provision for taxes, was a loss of $30 million. As of December 31, NAV was $10.49 per share which is down 3.1% from $10.83 per share last quarter.

As of December 31, our debt to equity ratio was 1.57 times and our capital structure is diversified across multiple funding sources including both secured and unsecured debt. Subsequent to quarter end, we sold $27 million of assets to the PSSL1 joint venture and $133 million of assets to the PSSL2 joint venture. We used the net proceeds from these sales to pay down our revolving credit facility and reduce our debt to equity ratio to 1.5 times which is within our target range of 1.4 to 1.6 times. As of December 31, our key portfolio statistics were as follows: The portfolio remains well diversified comprising 160 companies across 50 industries.

The weighted average yield on our debt investments was 9.9% and approximately 99% of the debt portfolio is floating rate. Take income equaled only 2.5% of total interest income. The portfolio is comprised of 89% first lien senior secured debt, less than 1% in second lien and subordinated debt, 4% in equity of PSSL1 and PSSL2, and 7% in equity co-investments. The debt to EBITDA on the portfolio is 4.5x, and interest coverage was 2.1 times. With that, I'll turn the call back to Art for closing remarks.

Arthur Penn: Thanks, Rick. 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 our stakeholders. That concludes our remarks. At this time, I would like to open up the call to questions. Thank you.

Operator: If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow the signal to reach our equipment. Again, press star 1 to ask a question. We'll pause for just a moment to assemble the queue. We will take our first question from Paul Johnson with KBW.

Paul Johnson: Yes, good morning. Thanks for taking my questions. Interesting to hear that you guys have what I would consider an underweight software exposure in the portfolio. I know you've mentioned software as a defensive sector in the past. You've obviously done loans there in the past. I'm just curious why is software such a low exposure within the portfolio? Was that a strategic investment decision you guys have made? Or is there anything else driving that?

Arthur Penn: Thanks, Paul. It's a good question. We basically just kind of stick to our knitting, which is cash flow loans at a reasonable multiple. Where we think there's great defensibility, where we can get covenants, where we can get cash interest. And, you know, we saw obviously, we saw this massive parade of software loans come by, and much of them were marching at seven times leverage, eight times leverage, leverage against revenues, ARR loans. We saw many of them, covenant light. Or PIC. And for us, that was not those were not comfortable loans for us to make.

So we have done some software, about 4% of the portfolio where you know, with their reasonable multiples of cash flow, where we get our maintenance tests, where they're you know, we feel safe as enterprise software that's integral to their customers' lives and in industries that are heavily regulated. Where data privacy, safety, and security mean that any change that may happen will be yeah. It will take some time. So that's kinda military. That's health care. That's financial services. And, you know, we have maturities today at about three years, an average maturity of about three years on you know, that 4% of the of the portfolio that's software related. So we feel very safe and comfortable.

And so we basically just stuck to our knitting and didn't didn't, you know, chase, the supply that was coming through.

Paul Johnson: Got it. Very helpful. Then last question I would just have is just on the NII this quarter. Mostly in relation to the to the new JV. You guys have that you expect to cover the dividend and I believe most of the plug there was from ramping the second JV. So I'm curious when you're when you when you say that you expect to ultimately cover the distribution with NII, does that assume essentially the JV at you know, the $1 billion asset target and, you know, generating sort of a run rate earnings from the JV.

So essentially full optimization there or does it not necessarily assume, you know, full deployment within the JV as well as, I would ask assume Fed rate cuts in the meantime? About, the Fed cut, the Fed rate cut. Does that

Arthur Penn: Yeah. No. That's a it's a great question. So look and you can look at it, it's all public information. We have JV one and PFLT, PSSL1 with Kemper. We have a JV over PNNT with Pantheon. And so this is our third. You can look at those two as models in terms of ramp, in terms of income generation, you know, and percentages of the vehicle that each BDC owns. You know? So, basically, when the way the way we look at it is once you get up to about a billion dollars you know, with our 75% ownership, you know, we should be we should be covering should be covering that dividend. When is that gonna happen?

It's not gonna be next quarter. But we're we're off to a good start. We're over you know, we're at about $330 million now from a standing start last quarter. A lot of it will depend on M&A, and M&A is obviously the feedstock that will populate this JV. But we feel pretty good about it. You know, helping us cover that dividend. That does not include any equity rotation. We do expect if M&A happens, which we think it will, will not only populate the JV, it will also imply some equity rotation. On the existing portfolio, which will be helpful.

And then you model in whatever base rate, you know, decrease you'd like 50 basis points, a 100 basis points. You know, we can go you know, Rick can go through the model with you at some other time or a model with you. But, you know, there's a bunch of offsets, but we feel we feel like we're we're well set up to have a pathway to cover that dividend.

Paul Johnson: Got it. Appreciate it, Art. That's all the questions for me. Thank you very much.

Arthur Penn: Thank you.

Operator: We will take our next question from Robert Dodd with Raymond James.

Robert Dodd: Hi, guys. On the software question, right? I mean, your portfolio is just a fraction over 4% in terms of software where I understand right, that's where software is the product of the business. Can you give us any thought? I mean, how much of the portfolio is kind of software exposed. I mean, where it's not producing software, but it might be in the business of implementing software. For the government or anybody else or where software is a core part of the business but the business is not producing software itself.

Arthur Penn: Yeah. It's a great question, which is, you know, kinda how you define it and where you draw the line. And assuming out to the bigger picture, the bigger picture question is, is how does AI impact you know, every company and every and every portfolio. Right? So it's that's a we that's above our pay grade for sure. You know, what the difference the difference here is software is the main product. That's how we define it. You know? And I think that's it's pretty, you know, kind of including where software is a is a is a big, big element of the company.

A lot of our almost all of our companies use software in some way, shape, or form. AI can be a help or it could be a hindrance. But we tried to really hone in on where, you know, it was the product itself. Where there's a human being attached to it where we feel very good that AI is not going to impact the human nature of the job anytime soon. You know, that did not that did not you know, we have we have a bunch of do have service businesses, you know, We have we have a bunch of home service businesses where you're it's you know, HVAC repair and plumbing and okay.

That's probably not that impacted by AI. AI could be a be a help. So that's one that's one end of the spectrum. And then you have, you know, kind of you know, we do have a lot of military defense, government services exposure, you know, a, that's less likely for safety security, and privacy reasons to move to AI quickly, it could adopt AI but, you know, requires human analysis. Like, there's a lot of government services that ultimately human being needs to be needs to analyze needs to synthesize AI could very well help those companies. So I don't know.

I mean, it's all it's we're all grappling with, you know, how you define it and what is in the bucket and what isn't. And where AI you know, kind of impacts portfolios. So we tried to be with this 4.4% or whatever, we tried to be, you know, really pure as to what our software really was know, the product. And I know I'm rambling, but I don't know if I gave you any color there, Robert.

Robert Dodd: No. No. No. That was really that was really helpful. Thank you. So, yeah, I mean, it's it's it's a difficult topic. Just the next one, can on kinda copy and pull. On the JV, you know, like you said, I mean, you've gotten up to north of $300 million already from kind of a standing start. Now some of that, I do think you've kind of had in a sense, pre stocked the on balance sheet portfolio that so that you could you could drop things down. And, obviously, you've you've done it post quarter end as well. So, you know, that the initial ramp was possibly faster than we should expect on, you know, a quarterly basis.

Would be my guess. I mean, if the market is normal, good luck defining that, how long you know, what's what's plausible to get to a billion? Is it another is it three or four quarters, or is it eight to twelve?

Arthur Penn: I would just to throw it out there because it gives me a lot of range, because this is going be largely driven by M&A, right? Yep. Right? Which you know, last year, meteor struck in the M&A market called Liberation Day. M&A was, you know, spiked for most of the rest of the year. It feels like it's coming back here. You know, we had the JNF and PNNT. That was an ex that's a an early indication that maybe you know, maybe this time this time, it happens. We are feeling it. We're seeing it in our backlog of deals that we're looking at.

So I'll throw out eighteen months just as a big broad, you know, kind of numbered, which gives me a lot of wiggle room on either side of the know, twelve to twenty four months. You wanna do a range. You wanna do, you know, twenty four months out outside case. You can model that in. But quite frankly, it's gonna be driven by M&A.

Robert Dodd: Got it. Thank you.

Operator: We will take our next question from Brian McKenna with Citizens.

Brian McKenna: Thanks. Good morning, everyone. Sorry if I missed this, but can you walk through the drivers of the unrealized marks in the quarter? And then when you look across the portfolio and the watch list today, are there any additional markdowns coming over the next quarter or two? I'm just trying to think through some of the puts and takes and what that means for the trajectory of NAV moving forward.

Arthur Penn: Yeah. Yeah. Most of the markdowns I'll I'll call are and good question, Brian. Most of the markdowns I'll call are and we have a little bit of this, we'll call 2021 vintage, which was the post COVID vintage where, you know, people thought, you know, that consumers were not going into stores again. Where, you know, logistics and supply chain stuff was really doing very well. So we have a little bit of that. Thankfully, it's not that large, and that is kinda what is working its way through the pipeline here of markdowns. I'll point out a company called PL Acquisition. It stands for Pink Lily, which is a direct to consumer women's apparel business.

I'll point out Research Now or Dynata is a marketing services business, which has been softer. And I'll point out in the JV, a company called Wash and Wax which is a car wash company known as Zips, c I p s, People were doing a lot of car washing post COVID. So think they're washing their cars again with all the bad weather in the in the North in the last couple weeks. So seeing a little bit of bounce in car washing, but, you know, I'd say that's generally the theme you've seen much bigger movements with some other BDCs that have reported you know, NAV diminution due to, you know, Amazon relationships and home furnishing stuff.

So we've got a little bit of that here. It's kinda working its way through. We don't really see much more, quite frankly, in that. It's kind of here we are five years later. And I think with M&A starting to move hopefully, we're going to start to see some upside in equity and some equity rotation to offset what I'll call a little bit of this 2021 vintage.

Brian McKenna: Got it. That's helpful. And then just to follow-up there, you know, if you look at your portfolio today, what's the mix of loans just by the vintage year? And I'm curious how much of your portfolio has turned over since 2021?

Arthur Penn: Know, I we don't have that handy right now. Let us do some work and we can chat at a convenient time. And then, look, presumably, the data is in there. You know, anyone we and you could sit there and look at the origination date of these of the portfolio. But I think it might be some good work for a research analyst to do. Just an idea.

Brian McKenna: Sounds great. I'll leave it there. Thanks, guys.

Operator: We will take our next question from Christopher Nolan with Ladenburg Thalmann.

Christopher Nolan: Hey guys. Rick, a $3.6 million charge related to the credit amendment and debt issuance cost. I presume that's nonrecurring. And is that related to the $75 million debt issuance in January.

Richard Allorto: Sure. The first part, for PFLT, it was about $500,000 not 3.6 And yes, that is a one-time item. And, no, it was not related to Again, the $75 million that was raised was, was at PNNT.

Christopher Nolan: Thank you. Okay. My press release is and, also, just as a follow-up, on the M&A comments, what is the is there a there a lot of activity around the software sector? I'm just kinda curious. Given everything going on with AI. Whether or not software is

Arthur Penn: is

Richard Allorto: is

Arthur Penn: Yeah. You know, we have we you know, we're as you could tell, we're not one of the big software lenders. So we're probably not the best party to ask around M&A and the software sector. My presumption would be you know, when you have times of kind of like this where the market's trying to figure things out in the sector, my assumption would be M&A would be lower for a while as things settle down and people revalue both equity and debt in the space. But, again, we're we're probably not the best people to ask.

Christopher Nolan: Great. That's it for me, and apologies for confusing companies there.

Richard Allorto: Thanks.

Arthur Penn: No problem. We the good news is, in noon, you have an opportunity to ask the same questions again. Yeah. That's right. Thanks.

Operator: And gentlemen, there are no further questions at this time. I will now turn the conference back over to Mr. Penn for any additional or closing remarks.

Arthur Penn: Thanks, everybody, for your participation this morning. We look forward to speaking with you next in early May. Have a great day.

Operator: This concludes today's call. Thank you for your participation. You may now disconnect.

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