2023-09-14 15:00:41 ET
Summary
- PennantPark Floating Rate last declared a monthly cash dividend in line with its prior payment, offering an 11.3% annualized forward yield.
- PFLT's focus on floating rate loans has resulted in a boom in investment income, with dividends growing by 7.9% this year.
- The BDC's NAV per share dipped for its most recent quarter as its average diluted shares outstanding grew markedly.
PennantPark Floating Rate Capital ( PFLT ) last declared a monthly cash dividend of $0.1025 per share , in line with its prior payment and for an 11.3% annualized forward yield. The monthly dividends have been set alight since the start of this year, growing by 7.9% on the back of a Fed funds rate that currently sits at a 22-year high of 5.25% to 5.50%. PFLT provides credit to middle-market US companies with a primary focus on first lien senior secured floating rate loans. The focus on floating rate loans whose rates generally track the Fed funds rate has meant a boom in investment income for the business development company. BDCs were created in 1980 by Congress to fuel economic growth by allowing investors to funnel credit toward US private companies. Similar to REITs, they're required to distribute 90% of the income to shareholders, which has seen them become particularly potent sources of income in the current macroeconomic climate.
Income is the prize here, and PFLT's monthly distributions looked primed for further hikes as the Fed funds rate comes to a crescendo. The market is currently pricing in a 97% chance that the Fed will keep rates unchanged at its next FOMC meeting next week on September 20. This comes against a wider golden moment for private credit, as non-bank lenders are set to occupy an ever more important role in the US economy due to the spring 2023 banking failures and subsequent incoming increases to US banking capital requirements from the Basel III Endgame. BDC bears would be right to flag that this growth surge could prove to be somewhat transitory if the Fed funds rate starts to dip next year. However, with rates possibly set to stay higher for longer, the current double-digit yield could prove to be sticky.
Growth Surges On Floating Rate Loans
PFLT's portfolio held a fair value of $1.11 billion as of the end of its fiscal 2023 third quarter ending June 30, 2023. This was down sequentially from $1.16 billion in the second quarter. Critically, 86% of the portfolio is formed from first lien senior secured debt, which means that if a borrower defaults on a loan then PFLT is able to seize the collateral used to underwrite the loan to recoup its losses. This secured credit origination aggregated with a floating rate mechanism provides an almost Goldilocks structure where the BDC is able to chase growth but within a secured footing.
Total investment income for its third quarter came in at $37.7 million , up a huge 46.58% over its year-ago comp as interest income from non-controlled investments grew to reach $21.2 million. The BDC also makes investments in preferred and common equity and this formed 14% of its portfolio as of the end of the third quarter. The BDC has an equity investment in Dominion Voting, the voting equipment provider that sued Fox News for defamation and won a $787.5 million settlement, and the $4.39 million of dividend income during the quarter was mainly constituted with PFLT's proceeds from this settlement.
Higher For Longer
Net investment income for the third quarter came in at $18.5 million , around $0.36 per share, and up from $11.8 million in the year-ago period. This was as total expenses grew to reach $19.2 million from higher management fees. Core NII, which strips out the $0.05 per share one-time dividend from Dominion Voting, came in at $0.31 per share. This meant the 3-month aggregate of the monthly dividend was around 101% covered by core NII. Bears would also be right to raise that core NII dipped by around $0.03 per share sequentially from $0.34 per share in the second quarter with PFLT also underperforming consensus for core NII to come in at $0.36 per share.
NAV as of the end of the third quarter came in at $10.96 per share , a dip from $12.21 per share in its year-ago comp and from $11.15 per in the second quarter as PFLT's average diluted shares outstanding surged. Hence, whilst NAV has generally been trending up on a nominal basis, it's been declining on a per-share basis to pose a headwind to price returns with the commons down 10.25% over the last year. The BDC did invest $80 million in four new and 40 existing portfolio companies at a weighted average yield on debt investments of 12.5% during the third quarter. This came as only three portfolio companies, around 3% of its portfolio at cost and 0% at market value, were on non-accrual status. The tight coverage combined with the dip in NAV on a per share basis has kept me away from the commons but the ticker remains a hold.
For further details see:
PennantPark Floating Rate: A Fat 11.3% Yield