Summary
- PennantPark Floating Rate Capital yields 9.59% and pays monthly.
- The company benefits from rising interest rates - its debt portfolio is 100% floating rate.
- PennantPark's trading at a -2.5% discount to NAV, lower than the BDC industry avg. premium of 1%.
Are you familiar with the business development company industry recently? Known as BDC's, these firms lend money to privately held companies, which also have co-sponsors, such as VC groups and hedge funds.
We've covered several BDC's in our weekend articles, and this week we're covering PennantPark Floating Rate Capital Ltd. ( PFLT ), a BDC under the Pennant Park Investment Advisors Group platform.
Profile:
PFLT seeks to make secondary direct, debt, equity, and loan investments. It focuses on companies that are owned by established middle market private equity sponsors with a track record of supporting their portfolio companies. 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. It also has PSSL, a Senior Secured Loan Fund. ((PFLT site)).
Source: Yahoo Finance .
Holdings:
As of 6/30/22, PFLT's $1.23B portfolio consisted of 87% 1st Lien Senior Secured Debt,13% Preferred and Common Equity, and less than 1% in 2nd Lien Senior Secured Debt. As of 6/30/22, PSSL’s portfolio totaled $747M, and consisted of 87 companies with an average investment size of $8.4M, and had a weighted average yield on debt investments of 8.2%.PFLT's debt portfolio consists of 100% variable-rate investments.
PFLT's focus is on middle market firms, with an EBITDA range of $10 to $50M. Its 1st Lien loans range from LIBOR + 5.5% to 7.5%. With LIBOR at 2.56%, (vs. just .09% 1 year ago), that gives PFLT a current yield average of ~9%.
The company has also invested in larger firms - 29% of its investments are in $50M-plus EBITDA firms since 2015:
PFLT's portfolio held 123 different companies, as of 6/30/22, up from 119 as of 3/31/22. Professional Services, Media, High Tech, Personal Products, and IT Services are its top 5 exposures, totaling ~37.5%:
Earnings:
PFLT's fiscal year ends on 9/30.
During its fiscal 3rd quarter (period ending 6/30/22), PFLT invested $104.8M in 6 new and 39 existing portfolio companies, with a weighted average yield on debt investments of 8.1%. Sales and repayments of investments totaled $55M for the quarter. As of June 30, 2022, PFLT had 2 portfolio companies on non-accrual, representing 0.1% of its overall portfolio on a fair value basis.
Investment income for the period ending 6/30/22 was $25.7M, up 23% vs. $20.9M a year ago. NII totaled $11.8M, $.29/share, up ~5% vs. $10.3M, or $.27/share a year ago.
During the quarter ending June 30, 2022, PSSL invested $31.5M (including $16.8M purchased from PFLT), in 4 new and 7 existing portfolio companies, with a weighted average yield on debt investments of 8.8%. Sales and repayments of investments totaled $13.5M during this quarter.
PFLT has had strong growth during calendar year quarters 1-2, with total Investment Income rising ~25%, NII up ~15%, and NII/Share up 9.4%. The share count rose 6.56%.
Dividends:
At its 9/1/22 closing price of $11.89, PFLT yielded 9.59%. It has strong trailing distribution coverage of 1.23X. Its next monthly payout should go ex-dividend on 9/16/22, with a ~10/3/22 pay date.
Profitability & Leverage:
ROA and ROE improved a bit during this latest quarter, and remained above BDC industry averages, while EBIT Margin was slightly lower, but still above average. Debt/NAV leverage was 1.5X, higher than the industry's 1.26X average.
PFLT's annualized weighted average cost of debt for the nine months ended June 30, 2022 was 3.7%. It had $40.7M in cash, and $80.6M of unused borrowing capacity under the Credit Facility, as of 6/30/22. Trailing Interest coverage was steady during the quarter, at 2.76X, as was the Assets/Debt ratio:
Performance:
We covered PFLT last in late June 2022. It's up $1.07 since then, in addition to paying 2 monthly distributions.
So far in 2022, PFLT has outperformed the S&P 500, and the BDC industry by wide margins. It has also done so over the past quarter, but has had a rough time over the past month:
Analysts' Price Targets & Estimates:
At $11.89, PFLT is ~5$ below analysts' lowest price target of $12.50, and ~10% below the $13.25 average price target.
Earnings estimates have risen a bit over the past month, from $1.17 to $1.19, for fiscal year ending 9/30/22. They've risen more for PFLT's next fiscal year, ending on 9/30/23, from $1.16 to $1.21:
Valuations:
At $11.89, PFLT is selling at a -2.62% discount to its 6/30/22 NAV/share of $12.21, a bit lower than the BDC industry's average of a 1% premium to NAV. PFLT's earnings multiple, a Price/NII of 8.81X, is much lower than the 13.45X industry average, while its P/Sales and EV/EBIT are also lower than average.
Parting Thoughts:
PFLT will benefit from higher interest rates, due to its 100% floating rate business model. On the liability side, 60% of its debt is fixed rate.
Its discount to NAV isn't as deep as it was back in late June, but with the often volatile month of September getting into full swing this coming week, we could see lower prices for PFLT and many other high yield vehicles soon.
If you're interested in other high yield vehicles, we cover them every weekend in our articles.
All tables furnished by Hidden Dividend Stocks Plus, unless otherwise noted.
For further details see:
PennantPark: 9% Yield, Monthly Payer, Benefits From Rising Rates