PennantPark Floating Rate Capital Ltd. (NYSE:PFLT) Q1 2025 Earnings Call Transcript

PennantPark Floating Rate Capital Ltd. (NYSE:PFLT) Q1 2025 Earnings Call Transcript February 11, 2025

Operator: Good morning, and welcome to the PennantPark Floating Rate Capital’s First Fiscal Quarter 2025 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 those speakers’ remarks. If you would like to ask a question at this time, simply press star one 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: Thank you, and good morning, everyone. I’d like to welcome you to PennantPark Floating Rate Capital’s first fiscal quarter 2025 earnings conference call. I’m 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’d like to remind everyone that today’s call is being recorded.

Richard Allorto: 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. 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. 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 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.

Art Penn: Thanks, Rick. We’re going to spend a few minutes discussing the current market environment for private middle market lending, how we fared in the quarter ended December 31st, how the portfolio is positioned for the upcoming quarters, a detailed review of the financials, and open it up for Q&A. For the quarter ended December 31st, our GAAP net investment income was $0.37 per share and our core net investment income was $0.33 per share. As of December 31st, our portfolio grew to $2.2 billion or 11% from the prior quarter. During the quarter, we continued to originate attractive investment opportunities and invested $607 million in eleven new and fifty-eight existing investments at a weighted average yield of 10.3%. During the quarter, we completed the successful exit of our investment in Marketplace Events.

Marketplace Events is a leader in business-to-consumer home goods shows. These events were shut down during COVID, and EBITDA went to zero. We led the lender group in a restructuring and took control of the company in 2020. We worked with the company’s excellent management team to turn around the company. We generated a 2.6 times multiple on our invested capital and a 19% annualized return over four years. We utilized our experience in challenging situations to navigate a complex restructuring and create significant value for our shareholders through operational expertise and strategic execution. We continue to see an attractive vintage in the core middle market. During the quarter, for investments in new portfolio companies, the weighted average debt to EBITDA was 3.7 times, weighted average interest coverage was 2.1 times, and the weighted average loan to value was 53%.

Subsequent to quarter end, we continue to remain active, have a robust pipeline, and expect to be able to continue to deploy capital into attractive new portfolio companies. In the core middle market, the market yield of first lien term loans appears to have stabilized in the SOFR plus 500 to 550 range. As the credit statistics just highlighted indicate, we continue to believe that the current vintage of core middle market directly originated loans is excellent. In the core middle market, leverage is lower, spreads are higher, and covenants are tighter than in the upper middle market. We continue to get meaningful covenant protection. Pay-in-kind or PIK income is only 2.3% of our overall interest income. This is among the lowest in the industry and is a testament to the quality of our underwriting and our portfolio versus our peers.

As of December 31st, our debt to equity ratio was 1.4 times to one, and with the target ratio of 1.5 to one, we believe that we are well-positioned to generate stable and growing NII going forward. We expect continued stability in net investment income in part due to our investment in the PSS joint venture. As of December 31st, the JV portfolio totaled $1.1 billion and the JV remained active during the quarter and invested $225 million in seventeen new and eight existing portfolio companies at a weighted average yield of 10.3%, including $188 million of assets purchased from PFLT. Last quarter, we announced that PFLT and our JV partner committed an additional $100 million of capital to the JV. Our share is $87.5 million, which is consistent with the existing economic ownership percentage.

This additional capital will allow the JV portfolio to grow to approximately $1.5 billion of assets.

Richard Allorto: We believe that the increase in scale of the JV’s balance sheet will continue to drive attractive mid-teens returns on invested capital and enhance PFLT’s earnings momentum. Also during the quarter, we grew the Truist revolving credit facility by $100 million, resulting in total commitments of $736 million with no changes to the terms of the facility, and our interest rate on the facility is SOFR plus 225. Additionally, securitization financing continues to be a good match for our lower-risk first lien assets. Last week, we priced a new financing that we expect to close by early March. The new financing is a $361 million term debt securitization transaction with a weighted average spread of 1.59%, a four-year reinvestment period, and a twelve-year final maturity.

The weighted average spread of 1.59% is a decrease of thirty basis points from an existing securitization financing that we refinanced in July of 2024. The main contributor to this decrease was a favorable market environment in which the AAA portion of the structure priced at an attractive weighted average spread of 1.49%. The ratio of external debt to PFLT’s junior capital was 3.2 times to one, which creates plenty of liquidity for the company. We believe securitizations are attractive financing structures as they have a twelve-year stated maturity and generally have four to five-year reinvestment periods. They are governed by an indenture similar to other bond instruments, as opposed to other secured financings where you may have a bank credit officer on the other side of the table.

For securitizations, the indenture prescribes how the securitization deals with credit deterioration, which means there is no risk of irrational behavior from our counterparties. It’s important to note that securitizations are non-mark-to-market financings and that assets are held to par regardless of broader market volatility. The only time an asset can be marked to market would be if there are defaults or if we experience CCC downgrades that would cause an excess CCC concentration whereby the excess CCC collateral is marked to market. Once again, this is all prescribed via the indenture and importantly, our securitization vehicles are managed with attractive CCC and over-collateralization cushions, further mitigating any financing risk. Our securitization issued in September of 2019 was managed through the depths of COVID, and the financing worked exactly how we expected.

This has driven our confidence and our belief that securitizations are extraordinarily attractive. With our lower-risk, lower-leveraged first lien portfolio, securitizations provide an attractive cost of capital that is well-matched to the portfolio. Equally important, they provide a downside mitigation tool given the stable and consistent long-term nature of the financing. GAAP and adjusted NAV increased 0.3% to $11.34 per share from $11.31 per share. The increase in NAV for the quarter was due primarily to one-time net investment income from a realization of Marketplace Events. Credit quality of the portfolios remains strong. We didn’t add any new investments to non-accrual status, and non-accruals represent only 0.4% of the portfolio at cost and 0.1% at market value.

As of December 31st, the portfolio’s weighted average leverage ratio through our debt security was 4.3 times, and the portfolio’s weighted average interest coverage was 2.2 times.

Art Penn: We believe this is one of the most conservatively structured portfolios in the direct lending industry and is a testament to our focus on the core middle market. We like being positioned for capital preservation as a senior secured first lien lender focused on the United States. We continue to believe that our focus on the core middle market provides the company with attractive investment opportunities where we provide important strategic capital to our borrowers. We have a long-term track record of generating value by successfully financing growing middle market companies in five key sectors: business services, consumer, government services and defense, healthcare, and software technology. These sectors have also been resilient and tend to generate strong free cash flow.

In the core middle market, which we define as companies with $10 to $50 million of EBITDA, is below the threshold and does not compete with the broadly syndicated loan or high yield markets unlike our peers in the upper market. In this 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 due diligence with care. We thoughtfully structure transactions with sensible credit stats, 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 on top of the companies. With regard to covenants, unlike the erosion in the upper middle market, virtually all of our originated first lien loans have meaningful covenants which help protect our capital.

This is a significant reason why we believe we’re well-positioned in this environment. Many of our peers who focus on the upper middle market state that these bigger companies are less risky. That may make some intuitive sense, but the reality is different. According to S&P, loans to companies with less than $50 million of EBITDA have a lower default rate and a higher recovery rate than loans to companies with higher EBITDA. We believe that the meaningful covenant protections of core middle market loans, more careful diligence, and tighter monitoring have been an important part of this differentiated performance. Our credit quality since inception over thirteen years ago has been excellent. PFLT has invested $7.3 billion over five hundred companies, and we have experienced only twenty non-accruals.

Since inception, our loss ratio on invested capital is only ten basis points annually. As a provider of strategic capital, it fuels the growth of our portfolio companies, and 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 December 31st, we have invested over $563 million in equity co-investments and have generated an IRR of 26% and a multiple on invested capital of two times. Our experienced and talented team and our wide origination funnel are producing active deal flow. Our continued focus remains on capital preservation and being patient investors. 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. Capture that free cash flow primarily in first lien senior secured instruments, we pay out those contractual cash flows in the form of dividends to our shareholders. Let me turn the call over to Rick, our CFO, to take us through the financial results in more detail.

Richard Allorto: Thank you, Art. For the quarter ended December 31st, GAAP net investment income was $0.37 per share and core net investment income was $0.33 per share. Core net investment income excludes $0.04 per share of accelerated accretion income net of the impact on incentive fees related to the realization of our investment in Marketplace Events. Operating expenses for the quarter were as follows: interest and expenses on debt were $22.4 million, base management and performance-based incentive fees were $12.8 million, general and administrative expenses were $1.7 million for the quarter, and provision for taxes was $0.2 million. For the quarter ended December 31st, net realized and unrealized change on investments, including provision for taxes, was a loss of $1.6 million.

As of December 31st, both GAAP NAV and adjusted NAV were $11.34, which is up 0.3% from $11.31 per share last quarter. As of December 31st, our debt to equity ratio was 1.4 times, and our capital structure is diversified across multiple funding sources, including both secured and unsecured debt. As of December 31st, our key portfolio statistics were as follows: our portfolio remains highly diversified with 159 companies across 49 different industries. The weighted average yield on our debt investments was 10.6%, and approximately 100% of the debt portfolio is floating rate. PIK income equaled only 2.3% of total interest income. We had two non-accruals, which represent 0.4% of the portfolio at cost and 0.1% at market value. The portfolio is comprised of 90% first lien senior secured debt, less than 1% in second lien debt, 2% in equity of PSSL, and 8% in other equity.

Our debt to EBITDA on the portfolio is 4.3 times, and interest coverage was 2.2 times. Now let me turn the call back to Art.

Art Penn: Thanks, Rick. In closing, I’d like to thank our dedicated and talented team of professionals for their continued commitment to PFLT and its shareholders. 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 up the call to questions.

Q&A Session

Operator: We will now open the Q&A portion of our call. If you would like to ask a question, please do so by pressing star one on your telephone keypad. If you’re 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. And our first question is going to come from Brian or I’m sorry, Robert Dodd from Raymond James. Please go ahead.

Robert Dodd: Hi. Hi, guys. On the securitization since you mentioned it, right, so you said it’s not mark-to-market facilities. So, you know, there’s been there’ll be a shadow rating. Otherwise, the triple C bucket could come into it. So who controls the shadow ratings inside the securitization, and under what circumstances can those change? Obviously, you said it doesn’t mark to market unless there’s a default. But how does the shadow ratings change if at all?

Art Penn: Yeah. Thanks, Robert. Each loan gets an annual update. And if there’s an event during the year, we go to S&P in this case, and we share the event with them to re-rate. So these are not BSL loans, broadly syndicated loans where they’re automatically have their finger on the pulse. It’s up to us to do so when there’s an event, either good or not so good.

Robert Dodd: Yeah. Right. Yeah. Fair enough. And then just but how, I mean, obviously, they have a very good structure for you. I don’t know. There’s a lower spread on that than on the revolver. So it’s pretty attractive. How much of your debt stack would you be comfortable having in securitizations versus the revolver or unsecured, however you want to talk about it?

Art Penn: Yeah. So versus the revolver, we’d like having both. Revolvers are flexible. It can fund. It can, you know, we view kind of securitization as a term out of the revolver. It’s kind of like a term loan for us. So the revolver is good to take care of, you know, kind of funding needs that are more immediate. And also, it’s good to have a revolver to manage that triple C bucket. Right? If you get some triple C’s, the revolvers will give you a borrowing base in certain cases that’s better than the securitization. So having and we’re a believer in unsecured debt too. So we believe in having diversified funding sources, being able to move things around if need be to optimize the outcome. So we like having a revolver, we like having securitization in our mind. It’s a term out of the revolver. We like having unsecured in the capital stack.

Robert Dodd: Got it. Thank you. Congratulations on Marketplace. So one of the questions, are you seeing more appetite? I mean, obviously, you’ve got some equity in the portfolio. Are you seeing more movement from, obviously, Marketplace Events you can control that. So you’ve got to pick where, right? Are you seeing more movement on, you know, owners of equity that might have the decision power versus you in terms of wanting to monetize this year on the equity side or any color on how that’s shaking out? Because obviously, you’ve got a pretty nice return on Marketplace.

Art Penn: Yeah. Yeah. Look, it’s a good time to assess M&A options, and we’ve seen it in both cases like Marketplace Events where we do have an ownership stake as well as when we’re more passive as an equity co-invest. We do believe 2025 will be active. It is time for these private equity sponsors to generate liquidity. Interest rates may not be as low as they would have liked. We’re kind of in a higher for longer environment, it seems like. But we do think it’s time, you know, after many years of kind of it’s coming, it’s coming, kind of this year being the year. That said, in the middle market, as you can see, it’s different than the upper market. The upper market’s been a lot more dormant than the core middle market. We’ve been very active, and you know, we still think in our core, there are companies that do ten, fifteen, twenty million where the entrepreneur wants a liquidity solution and those companies have some runway to grow and to add on acquisitions.

So we think on the buy side, we’re going to continue to be active. We also believe that 2025 will be active on the exit side. You know, PFLT’s got a, as we said, about a 9% equity co-invest portfolio. We think that’ll rotate nicely here in 2025.

Robert Dodd: Okay. One more if I can. On the JV, I mean, obviously, you have capacity up to $1.5 billion. Really nice return. So, I mean, how fast, yeah, if 2025 is active, do you think you’re going to fill that $1.5 billion by, say, year-end, or is it a longer-term? I mean, yeah. Lots of assets on. So

Art Penn: Yeah. Look. That to us, it’s all comprehensive. It’s all one ecosystem, PFLT, and the JV. So, you know, we obviously put assets in PFLT initially. We season them for a little while, then if applicable, they move over to the JV if it makes sense. So look, to the prior comment, we think 2025 will be busy. So we think that we’ll be able to get to the $1.5 billion in the JV, you know, in the next nine to twelve months.

Robert Dodd: Got it. Thank you. Appreciate it.

Art Penn: Thank you.

Operator: And our next question is going to come from Brian McKenna from Citizens JMP. Please go ahead.

Brian McKenna: Alright. Thanks. Good morning, guys. So question on deployment to start. Clearly, it was a robust quarter with $100 million plus of originations. You have a bit more capacity on leverage. So how should we think about the pace of originations over the next few quarters?

Art Penn: Look. It was an unusually active quarter ended December. Calendar quarter one, which we’re in at this point, is a little slower. And that’s a typical seasonal movement. People always want to close deals by December. They come up for air in January, and it takes a little slower. So right now, it’s a little bit slower than it was in December, and we are getting some repayments along the way. So again, to my prior comments, I think 2025 overall will be busy, but we think it’s kind of in ramp mode right now with kind of Q1 calendar quarter one through February 11th today. Relatively modest. So it’ll be time to reload, get some refis, you know, look for deals for both the balance sheet and the JV and look to try to, most importantly, remain selective.

I mean, you can see the new loans that we’re doing are cash pay. PIK is only 2% of this portfolio. That’s kind of four times or less debt to EBITDA, two times or more interest coverage, loan to value of 50%. That’s our strike zone, and we’re going to stick to it, and we’re not going to lose our minds. There’s no software in this portfolio. There’s no ARR loans. We’re going to try to keep, you know, a cautious and conservative posture at, you know, the new loan level, and then we will try to optimize our financing the way we’ve been talking about it through securitizations, through revolvers, and through the JV.

Brian McKenna: Yep. That’s helpful. And then, you know, just to follow up on originations. You know, how should we think about the mix of new investments versus add-ons? You know, clearly, it’s been more weighted to add-ons. So what’s the expectation here, you know, over the next, you know, twelve months, call it, and then, you know, we’ll see exactly the trajectory of kind of new deals in M&A, you know, broadly. But, you know, does this split start to become more balanced kind of over time?

Art Penn: Yeah. We think it’ll be more balanced. Look, one of the nice things about the way we do things is our prototypical deals, and we’ll start with a ten to fifteen to twenty million dollar EBITDA company with a game plan by the sponsor to grow that company to do add-on acquisitions. So we will set up, in many cases, some substantial delayed draw term loans which are kind of built-in flow in companies that we know and we like where we’re a strategic partner, where it’s not about the last basis point where we do have a co-invest and we can benefit from those delayed draws. So, you know, if you set it up right to begin with, which is kind of how we try to do it, the flow comes, and it’s kind of, in some way, shooting fish in a barrel because you know you kind of know exactly what you’re getting.

Brian McKenna: Okay. That’s great. And then, you know, just one last one for me, Art, you know, just a bigger picture question. You know, you’ve clearly built a great business here. The broader PennantPark platform, I believe, manages about $10 billion of AUM. So I’m curious. I mean, where does the platform go longer term, you know, just kind of thinking about growth or even the trajectory of AUM? And then as you reach greater levels of scale over time, you know, what does that ultimately mean for PFLT?

Art Penn: Yeah. Look, the mission of PFLT, which is to provide senior secured floating rate capital in a conservative fashion to middle market private equity sponsors. You know, there really aren’t that many people who are left in that space like us who will take a company literally from ten of EBITDA up to fifty and can do it all in-house. We can now do that. We couldn’t always do that, but with the growth of the platform to the AUM that you talked about, we’re one of only a few who can, who’s willing to start at a ten of EBITDA and can say we got you up until forty, fifty million, and you only need to talk to us. That’s a nice place to be. We’re below the radar of the big, you know, massive branded direct lenders who seem to have no interest in this kind of below-the-radar space.

So we think we’ve got a lot of runway. And there’s, you know, it’s a great thing about the American economy. There’s all kinds of interesting companies out there that could use this capital. It’s one of the best parts about our job is that every day we’re learning about new companies, new industries. We’re meeting new entrepreneurs, new financial sponsors, and we get to learn and we get to select, you know, which of these companies and sponsors and management teams we want to back. So it’s a real joy to come to work every day and see the American economy, you know, in all these different areas. And we’re really excited about it. We said to be direct, we think there’s a lot of runway for what we’re doing, you know, for a long period of time.

Brian McKenna: Super helpful. Thanks, Art.

Operator: And our next question is gonna come from Mark Hughes from Tris. Please go ahead.

Mark Hughes: Yeah. Thank you. Good morning. Art, anything, the economic topics of the day around the DOGE or tariff as you look at your portfolio, how do you think you’re positioned relative to some of these dynamics?

Art Penn: Yeah. So, thankfully, on tariffs, there’s very limited exposure. You know, those tariffs are usually around, you know, offshore manufacturing. It’s a little bit of it, but it’s not really that material. And given the tariff maneuvers during the prior Trump administration, many of those companies already kind of proactively moved to Vietnam or India or Mexico or other places outside of, you know, the Far East. So tariffs are kind of, you know, back again, but many of our companies, you know, kind of took proactive action, and those companies are a relatively small part of the portfolio. Our two biggest industry groups are healthcare, number one, and government contracting and defense, number two. Healthcare is the largest piece of the US economy.

It’s over 20% of the US economy. It’s the largest piece of our portfolio. As you know, we tend to focus on companies in healthcare that are on the right side of providing cost savings. Because if you’re, you know, reimbursement risk is always a risk in healthcare. So one way you deal with that is you back companies that are delivering cost savings and still delivering high-quality care. So we think we’re well-positioned there to weather anything that is thrown at us because we’re backing companies that are reducing costs, they’re gonna win. Same thing on government contracting. You know, a lot of the government contracting are, I’d call them people businesses where people walk into offices, they sit behind computers, and they could be doing cybersecurity.

They could be doing satellites. They could be doing intelligence. It’s not very much in, you know, tanks and missiles and things of that nature. And again, most of these companies are on the right side of either technology upgrades and or reducing costs. To drill down further, there’s generally two types of contracts in government contracting. There’s the cost-plus where the government’s reimbursing for the cost of the team plus a margin. And in those cases, those EBITDA margins are typically under 10%. So it’s not like any of those companies are making, you know, exorbitant profit margins in the cost-plus side. And then you have fixed-price contracts, which I think is where the world’s probably headed. Where the risk is on the contractor to provide the service at a fixed price.

And if they do it well, if they operate well, they’re gonna make higher margins. And, obviously, if they don’t operate well, they’re gonna make lower margins or lose money. The piece of the portfolio that has fixed-price, you know, we believe are excellent operators. They’re making very good margins because they’re really excellent operators and are not gonna price a fixed-price contract unless they make sure it’s judicious and careful. And also providing value to the government. So that’s a long-winded answer, and we can go into more detail offline if you like. But largely, we think we’re well-positioned. But we’re watchful. And, of course, as taxpayers, we want the government to spend its taxpayers’ dollars efficiently. So, you know, time will tell, but we believe we’re on top of it.

Mark Hughes: Understood. And then what kind of visibility or what should we anticipate in terms of just the portfolio shifts from PFLT to PSSL? It is a meaningful move this quarter. How should we think about the coming quarters?

Art Penn: Yeah. It ebbs and flows. It depends on, you know, kind of where we are in that cycle of ramping up and securing, you know, I say to the earlier question, we kind of use securitizations and PSSL as kind of a term out kind of thing. So as we build the PFLT balance sheet, we’ll then sell assets, you know, upon approval of our JV partner. Remember, our JV partner has to approve every transfer. Upon approval of the JV partner, the asset will move over, and then we’ll try to finance it efficiently over in the joint venture. So it ebbs and flows. It really just depends on deal flow and refinancing and also financing needs. You know, to do a securitization, you need to have kind of at least $100 million of assets in one place to do a medium securitization or small securitization. So, you know, when facilities, when credit facilities get ramped up to $300 or $350 or $400 million, it’s a good time for us to think about doing a securitization.

Mark Hughes: Thank you.

Art Penn: Thanks, Mark.

Operator: And our next question is gonna come from Mickey Schleien from Ladenburg. Please go ahead.

Mickey Schleien: Yeah. Good morning, everyone. Art, you mentioned that we finally saw some stabilization of spreads in the market this quarter. I’d like to understand what you think were the trends behind that and what is your outlook for spreads this year?

Art Penn: Yeah. You know, good question. Spreads have stabilized in the 500. For us, 500 to 550 spread over SOFR for this core middle market. Occasionally, you’ll see a 475, you know, when a particular lender, you know, kind of loves, loves, loves the scenario. What drove it was just kind of math. You know, a certain level on the core middle market, you know, it just doesn’t make sense. So I think the math was helpful. People want to feel good about delivering a double-digit unlevered return to their investors. You know, leverage can obviously enhance that and all that. But I think kind of both the absolute spread and the relative spread, and then also relative to the broadly syndicated loan market, which has compressed. So for now, it’s stable.

I think supply-demand could impact, if there’s a lot of supply, which we hope, perhaps spreads will widen. If there’s limited supply, they may tighten. What goes on in the geopolitical sphere? What goes on with Washington with tariffs? All this, the Fed, all of this will certainly play into it. But at least at this point in time, for the next quarter or two, we sense some stability.

Mickey Schleien: That’s good to hear. The senior loan fund is generating really strong ROE, which is great. But your equity investment is now valued at less than 50% of cost. Could you just give us a high-level sense of what’s driving those markdowns, which have sort of persisted quarter after quarter for quite a while?

Art Penn: Yeah. I mean, look, as you know, Mickey, and you cover the industry and you also cover the CLO industry. Not all deals perform well. And the JV does not take equity co-invest. Right? So the equity co-invest is retained in PFLT. So that investment that might have some upside, which are the co-invest, is not part of the JV. Our JV partner did not want to co-invest. So when there’s markdowns or when there’s a default, the JV will participate in that, you know, 26% two times MOIC upside opportunity that we have in the BDC, the PFLT balance sheet. So that’s kind of, you know, so if you can look, it’s on the markdowns, the JV participates in the markdowns but does not have the benefit of the markups. And that’s really because our JV partner at the time we set up was not interested in participating in the co-invest.

Mickey Schleien: Yeah. I understand. I didn’t realize that was the case, and that makes sense. Couple of sort of more housekeeping questions. What proportion of your unfunded commitments, which are almost $700 million, are at your discretion versus your borrower’s discretion?

Art Penn: Yeah. Let me see if I have some data for you. And Rick Allorto, you can chime in. There’s two types of commitments. Generally, there’s the revolver which is at their sway. I think it’s about $437 million to be exact. It’s $238 million. Revolver. So that’s at their discretion. And if you go back to COVID, which was kind of when certain people drew the revolver, I’d say about 40% of revolvers were drawn during COVID. Many people did not. And then the delayed draws are a little bit more at our discretion because we’re doing diligence. We’re making sure that the companies are meeting their covenants and meeting their commitments, and that’s a little over $437 million to be exact, in delayed draws by and large. So that’s a little bit more in our sway.

And the nice thing about these two elements is they kind of are never happening at the same time. You go back to COVID, people drew their revolvers to some extent. The delayed draw activity went to zero because there was no deal flow and everyone kind of pulled back. On the other hand, when economic times are good, people do not draw revolvers, and the delayed draw activity tends to be a little bit more active.

Mickey Schleien: Yeah. Understood. So liquidity looks fine. And lastly, just in terms of the balance sheet, I know from time to time, the external manager subsidizes to some extent ATM issuance. So you’re not issuing below NAV. Can you just give us a sense of how much of a subsidy, you know, the external manager is willing to absorb? You know, for example, would you issue stock at this current price relative to $10.80?

Art Penn: You know, we don’t disclose that. We disclose the ATM activity obviously every quarter. In certain cases, depending, I think a lot of it depends on deal flow and activity levels and vintage. Right? So if you think you’re capturing a good vintage, think that vintage is gonna be accretive for shareholders, you may look to subsidize. If you think if you’re slower or the vintage is a little less attractive, you may not. So a case-by-case basis. Every day is a new day with what’s going on with our flow, and then what’s obviously going on with the stock market and the price. Look, we’ll consider things that are accretive for shareholders. Going back to a long time ago, PFLT bought a busted BDC called MCG Capital. And the manager of the company wrote a pretty big check to do that deal, and that was very accretive for the company.

It added a lot of heft. It added a lot of liquidity. And it ended up being, you know, a really, really good deal. And we wrote a big check at that point. And some ways, these little ATMs are smaller versions of that. It just depends on the facts and circumstances at that point in time.

Mickey Schleien: I understand. That’s it for me this morning. Thanks for taking my questions.

Art Penn: Thanks, Mickey.

Operator: And we have one more question from Paul Johnson. Please go ahead.

Paul Johnson: Yeah. Thanks. Good morning. Does the Marketplace Events exit trigger any sort of special dividend potentially over the course of the year?

Art Penn: You know, I’ll kick it over to Rick. It certainly increases our spillover amount. You know, we tend not to pay out special dividends. We tend to use spillover versus cushion for dividends. We can certainly talk offline all you want about dividend policy and the right dividend policy or the wrong dividend policy and supplementals, and we’re always learning from others as to how to best think about that. But, you know, kind of in general, we use it to increase spillover, which increases, you know, cushion for a steady, stable dividend, which is one of our highest goals is to provide a steady, stable dividend.

Paul Johnson: Thanks, Art. And just one last question on credit at a higher level. You know, non-accruals were obviously stable quarter over quarter. It seems like another good quarter for credit. But how would you, I guess, describe any sort of, you know, amendment activity you might have seen during the quarter or, you know, here to start the year? And, you know, if any sort of, you know, broader maybe credit migrations just within the portfolio.

Art Penn: Yeah. There’s nothing abnormal going on. There’s always a, you know, we have 159 companies in PFLT. So there’s always a handful of companies that, you know, the covenants may be an issue or they may be underperforming, including the non-accrual. So nothing abnormal. But as you’d imagine, it’s one of the reasons we like being so diversified with 159 companies is no one company can really kind of bring you down. So I’d say it’s normal activity. There’s nothing abnormal, but we’re always watchful and we’re always on top of it. And, hey, if you have an average debt to EBITDA of 4.3 times and an average interest coverage of 2.2 times, hopefully, we’ve built in substantial cushion, you know, even if there were some curveballs thrown against this portfolio.

Paul Johnson: Yep. That’s all for me. Thank you.

Operator: Alright. Thank you so much. That concludes today’s question and answer session. I’d now like to turn the conference back over to Art Penn for any additional or closing remarks.

Art Penn: Thank you, everybody, for being on the call today. We look forward to speaking with you next in early May when we’ll be talking about the 3/31 financial results. In the meantime, wishing everybody a great rest of the winter, and we’ll speak to you, you know, kind of in the early spring.

Operator: And this concludes today’s call. Thank you for your participation. You may now disconnect.