Good morning, welcome to the PennantPark Floating Rate Capital's first fiscal quarter 2021 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. If you would like to ask a question at that time, simply 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. Art Penn, Chairman and Chief Executive Officer of PennantPark Floating Rate Capital. Mr. Penn, you may begin your conference.
Thank you, and good morning, everyone. I'd like to welcome you to PennantPark Floating Rate Capital's first fiscal quarter 2021 earnings conference call. I'm joined today by Aviv Efrat, our Chief Financial Officer. Aviv, 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. Please note that this call is a property of PennantPark Floating Rate Capital, and that any unauthorized broadcast of this call in any form is strictly prohibited. Audio replay of the call will be available by using the telephone numbers and PIN provided in our earnings press release, as well as 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. We ask that you refer to our most recent filing 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.
Thanks, Aviv. First, we hope that you, your families, and those you work with are staying healthy. I'm going to spend a few minutes discussing how we fared in the quarter ended December 31st, how the portfolio is positioned for the upcoming quarters, our capital structure and liquidity, the financials, and then open it up for Q&A. Despite the challenging economic conditions brought on by the pandemic, we are pleased with our performance this past quarter. We achieved another substantial increase in NAV during the quarter. Adjusted NAV increased 4.3%, from $11.81- $12.32, as our portfolio continued to improve during the quarter. We have several portfolio companies in which our equity co-investments have materially appreciated in value, and we are benefiting from the K-shaped recovery. This is solidifying and bolstering our NAV. At the time, rotation of that equity into debt instruments should help grow PFLT's income.
We will highlight those companies in a few minutes. As part of our business model, alongside the debt investments we make, we selectively choose to co-invest in the equity side by side with the financial sponsor. Our returns on these equity co-investments have been excellent over time. Overall for our platform from inception through December 31st, our $217 million of equity co-investments have generated an IRR of 28% and a multiple on invested capital of 2.9x . In a world where investors may want to understand differentiation among middle-market lenders, our long-term returns on our equity co-investment program are a clear differentiator. Additionally, in late December, we priced a CLO financing in our PSSL JV, which closed in late January. We've been pleased with the stable performance of PFLT's long-term, low-cost securitization CLO financing through COVID.
This type of financing is well-matched to finance our senior debt positions, which we believe are among the lowest risk in the industry. As a result of the completion of this CLO financing with PSSL, we can efficiently grow the venture, which should generate additional income for PFLT. The combination of potential income growth from equity rotation, a larger and more efficiently financed PSSL, and a growing, more optimized PFLT balance sheet should help grow the company's net investment income relative to its dividend over time. Those factors, combined with strong portfolio performance through COVID and our $0.22 spillover as of September 30th, have led us to conclude that we will be keeping our dividend steady at this point. Although we never predicted a global pandemic, as you may know, we have been preparing for an eventual recession for some time.
Prior to the COVID-19 crisis, we proactively positioned the portfolio as defensively as possible. Since inception, we have had a portfolio that was among the lowest risk in the direct lending industry. As of December 31st, average debt EBITDA in the portfolio was 4x, and the average interest coverage ratio, the amount by which cash income exceeds cash interest expense, was 2.9x . This provides significant cushion to support stable investment income. These statistics are among the most conservative in the direct lending industry. We have only two non-accruals out of 105 different names in PFLT and PSSL. This represents only 2.2% of the portfolio at cost and 1.9% at market value. We've largely avoided some of the sectors that have been hurt the most by the pandemic, such as retail, restaurant, health clubs, apparel, and airlines. PFLT also has no exposure to oil and gas.
The portfolio is highly diversified with 100 companies in 42 different industries. Our credit quality since inception over nine years ago has been excellent. Out of 387 companies in which we have invested since inception, we have experienced only 13 non-accruals. Since inception, PFLT has invested over $3.7 billion at an average yield of 8.1%. This compares to an annualized realized loss ratio of only 10 basis points annually. If we include both realized and unrealized losses, the annualized loss ratio is only 12 basis points annually. We are one of the few middle market direct lenders who was in business prior to the global financial crisis and have a strong underwriting track record during that time. Although PFLT was not in existence back then, PennantPark as an organization was investing at that time.
During that recession, the weighted average EBITDA of our underlying portfolio companies declined by 7.2% at the bottom of the recession. This compares to the average EBITDA decline of the Bloomberg North America High Yield Index of -42%. We are proud of this downside risk track record in the prior recession. Based on tracking EBITDA of our underlying companies through COVID so far, we believe that our EBITDA decline will be substantially less than it was during the global financial crisis. Looking forward to 2021, where it can stand today, our analysis suggests that the vast majority of the companies in our portfolio are in a strong position to perform well in the coming quarters.
Many of our portfolio companies are in industries such as government services, defense, healthcare, technology, software, business services, and select consumer companies that are less impacted by COVID-19 and where we have meaningful domain expertise. We believe that we are experiencing K-shaped recovery with some companies and industries being large beneficiaries of the environment. We are pleased that we have significant equity investments in three of these companies, which can substantially move the needle on both NAV and over time, net investment income. I would like to highlight those three companies. The three companies are Cano, Walker Edison, and By Light. Cano Health is a national leader in primary healthcare who is leading the way in transforming healthcare to provide high-quality care at a reasonable cost to a large population. Our equity position has a cost and fair market value on December 31st of $431,000 and $9.1 million respectively.
Cano has been experiencing rapid growth with revenues nearly quintupling and EBITDA more than tripling over the last 3 years. We believe that there is a massive market opportunity for Cano to grow in the years ahead with the Medicare Advantage program. During the quarter ending December 31st, we received $200,000 of cash as a return of capital. The merger with Jaws Acquisition Corp. is scheduled to close at the end of March or early April. At that time, we will receive another $800,000 of cash and own 825,274 shares of Cano Health in a limited partnership controlled by a financial sponsor, where the sponsor will own 20% of the exit proceeds. The shares will be locked up for six months. From a valuation perspective, due to the lockup, the independent valuation firm valued the position with a 7% illiquidity discount to the traded values on December 31st.
Walker Edison is a leading e-commerce platform focused on selling furniture exclusively online through top e-commerce companies. Since our investment was made in 2018, sales have more than tripled, and EBITDA is up almost four times. Our position has a cost of $1.4 million and a fair market value of $11.1 million as of December 31st. By Light is a leading software, hardware, and engineering solutions company focused on national security challenges across modeling and simulation, cyber, and global defense networks. Since our initial investment was made nearly four years ago, sales have gone up 1.5x and EBITDA has more than doubled. Our position has a cost of $2.2 million and a fair market value of $10.8 million as of December 31st.
All three of these companies are gaining financial momentum in this environment, and our NAV should be solidified and bolstered from these substantial equity investments as their momentum continues. Over time, we expect to exit these positions and rotate those proceeds into debt instruments to increase income at PFLT. We were active this past quarter making new loans. I'll walk through some of the highlights. We purchased $15 million of the first lien term loan of the AEgis Technologies Group. The company is a government contractor providing differentiated solutions across space superiority, directed energy, and missile defense. Arlington Capital Partners is the sponsor. Applied Technical Services is a provider of non-destructive testing, calibration lab, and consulting engineering services. We purchased $9.5 million of first lien term loans and co-invested $504,000 of common equity. IFC Investment Partners is the sponsor.
Hancock Claims Consultants is a leading insurance claims services company focused on the residential roofing market on behalf of carriers. We purchased $6 million of the term loan and $450,000 of equity. Century Equity Partners is the sponsor. Rancho Health is a primary care provider in Southern California that is focused on offering value-based primary care. We purchased $3.7 million of first lien term loans and co-invested $1.1 million of common equity. Lake Bay Capital is the sponsor. Sigma Defense Systems is a leading IT services provider and systems integrator of satellite communication equipment for mission-critical airborne surveillance programs. We purchased $7.5 million of first lien term loans and purchased $642,000 in common equity for Sigma Defense Systems. Sagewind Capital is the sponsor. The outlook for new loans is attractive. We believe that middle market lending is a vintage business.
This upcoming vintage of loans is likely to be the most attractive we've seen since the 2009-2012 time period. Leverage levels are lower, equity cushion is higher, yields are higher, and the package of protections, including covenants, are tighter. After enduring about five years in a late-cycle market in the middle market lending, it is refreshing to have attractive risk-reward available to us. Let me now turn the call over to Aviv, our CFO, to take us through the financial results in more detail.
Thank you, Art. For the quarter ended December 31st, net income was $0.26 per share. Looking at some of the expense categories, management fees totaled about $4.5 million. Taxes, general, and administrative expenses totaled about $800,000, and interest expense totaled $5.3 million. During the quarter ended December 31st, net unrealized appreciation on investment was $23 million, or $0.58 per share. Net realized losses were about $2.7 million, or $0.07 per share. Net unrealized depreciation of our credit facility and notes was $0.10 per share. Net investment income was lower than the dividend by $0.02 per share. Consequently, GAAP NAV went from $12.31- $12.07 per share. Adjusted NAV, excluding the mark-to-market of our liability, was $12.32 per share, up 4.3% from $11.81 per share.
Our entire portfolio, our credit facility, and notes are marked to market by our board of directors each quarter using the exit price provided by an independent valuation firm, exchanges, or independent broker-dealer quotes when active markets are available under ASC 820 and ASC 825. In cases where broker-dealer quotes are inactive, we use independent valuation firms to value the investments. Our spillover as of September 30th was $0.22 per share. We have ample liquidity and are prudently levered. Our GAAP debt-to-equity ratio was 1.2x , down from 1.4x last quarter, while GAAP net debt-to-equity after subtracting cash was 1.1 x, down from 1.3x last quarter. Regulatory debt-to-equity ratio was 1.3x , down from 1.5x last quarter, and our regulatory net debt-to-equity ratio after subtracting cash was 1.2x , down from 1.4x last Quarter.
With regard to leverage, we have been targeting a debt-to-equity ratio of 1.4x-1.6x . Our net book cash regulatory asset coverage ratio of 1.2x was well below the low end of our range this past quarter. We had ample liquidity to fund revolver draws and were in compliance with all of our facilities at December 31st. We have readily available borrowing capacity and cash liquidity to support our commitments. We have a strong capital structure with diversified funding sources and no near-term maturities. We have $400 billion in revolving credit facility maturing in 2023 with a syndicate of 11 banks with $257 million drawn as of December 31st. $119 million of unsecured senior secured notes maturing 2023, and $228 million of asset-backed debt associated with PennantPark [inaudible] due 2031.
Our portfolio remains highly diversified with 100 companies across 42 different industries. 87% is invested in first lien senior secured debt, including 12% in PSSL, 3% in second lien debt, and 10% in equity, including 4% in PSSL. Our overall debt portfolio has a weighted average yield of 7.5%. 98% of the portfolio is floating rate, and 86% of the portfolio has a LIBOR floor. The average LIBOR floor is 1%. Now let me turn the call back to Art.
Thanks, Aviv. To conclude, we want to reiterate our mission. Our goal is a steady, stable, and protected dividend stream coupled with the preservation of capital. Everything we do is aligned to that goal. We try to find less risky middle-market companies that have high free cash flow conversion. We 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. In closing, I'd like to thank our extremely talented team of professionals for their commitment and dedication. 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.
Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal through to our equipment. Again, press star one to ask a question. We can go ahead and take our first question from Kevin Fultz with JMP Securities.
Good morning. Thank you for taking my question. First, looking at non-accrual, the mail stop second lien and PRA events certainly removed from non-accrual during the quarter. Can you provide some color around why those investments were removed from non-accrual by the management team?
Sure. Thanks, Kevin. PRA, the sponsor injected more equity. As part of that deal, we agreed to a formula where the sponsor put in more equity and we put them on back on non-accrual. That company's moving forward with a much better liquidity position. Marketplace Events, we went through a full restructuring, where our original second lien was converted to equity. We and the other second lien holders put in an additional second lien. We have an agreement with the first lien player to give the company a couple of years of room to rebound. The company's done quite nicely since the restructuring. It seems to be rebounding quite nicely.
Okay. Appreciate that color. Now that PSSL has completed the CLO financing, can you discuss the level of growth we can expect from the JV moving forward?
Sure. PSSL can, with leverage, get up to, I don't know, $550 million of total assets or so. That's something, we look to achieve thoughtfully and carefully in all the coming quarters.
Okay. Thank you. Lastly, just touching on prepayments. What visibility do you have around that kind of prepayments, and then just the level of prepayments quarter to date so far?
Yeah. It's a good question about what level of transparency we have around prepayments. Usually, we have pretty good transparency. We typically are getting monthly financial statements. We're typically talking to the management sponsor at all times. So far, prepayments have been somewhat muted so far this quarter. Frankly, with the portfolio performing so well, which ultimately is, for us, the most important thing, we could have more prepayments. I'd say we're going back into a more normalized environment. A more normalized environment for us is where the portfolio rotates 25%-33% a year on the debt side. We need to replace it and, as we said, in the prepared remarks, potentially grow. I'd say we're back to a more normalized environment.
Okay. That's it from me, and I appreciate you taking my questions.
Thanks, Kevin.
All right. We will go ahead and take our next question from Ryan Lynch with KBW. Ryan, please go ahead.
Hey, good morning. Thanks for taking my questions. First one, Art, you mentioned the outlook for new loans being pretty attractive as far as lower leverage levels, higher protection, and some higher yields. I'm just wondering, have you been seeing, though, that the quality and some of the benefits of those deals, are you seeing those start to shrink, and return to sort of pre-COVID levels? Certainly, we've seen the liquid markets, in terms of structures, have kind of reverted pretty close, if not all the way back to kind of pre-COVID levels. In the market that you're playing in, are you starting to see those sort of revert back to those levels? If so, how long are you expecting it to be still seeing better deals versus pre-COVID levels?
That's a terrific question, Ryan. First, it's a definitional question, which is what market do we play in, and where are we playing? Where are some of our peers playing? We focus on what we call the core middle market. The core middle market, which is companies with $15 million- $50 million of EBITDA, which is kind of below the fray of competing with the broadly syndicated loan market or the high-yield market. Many of our very large peers who manage $10 billion, $20 billion and $30 billion of assets really do compete on a day-in and day-out basis with the broadly syndicated loan market. They're in the business of writing big checks to big companies. Where you have to make quick decisions. Deal flow is quick. They're only getting financial statements every three months. It's covenant-lite or covenant-wide .
There's a lot of velocity in that space because there's less of an opportunity for due diligence. We compete in the $15 million-$50 million space, what we call core middle market. These deals take longer to gestate. We are doing many weeks of due diligence. We are negotiating multiple covenants, so much more labor- intensive and slower process. As part of this, we also get the equity co-invest, which we've had a very nice track record on with a 2.9x MOIC track record. It's a different world. It's a slower-moving world. As a result, it's taking longer for the bounce back. If we were competing with the broadly syndicated loan market or the high-yield market, which is back to where it was pre-COVID, we basically have to move to that level.
In our world, it certainly has bounced back somewhat since the bottom of COVID, but certainly nowhere all the way back. We kind of like where we're positioned. We like this $15 million-$50 million core middle market. We think we can get really attractive risk-adjusted returns. I think we've come through COVID. I think it's kind of improved through COVID. We've had very [minimal defaults in the equity co-invested side]. A lot of return. If you look at our senior private credit vehicle, which is a private version of PSSL, we had kind of a net return of 18% for 2020, which is kind of ridiculous when you think about COVID happened in 2020. We had an 18% net return for a vehicle that looks a lot like PSSL.
Our Credit Ops vehicle, which looks a lot like PNNT, we had a 29% net return for 2020. A combination of low defaults, the equity co-invest really positioned us well during COVID.
Okay. That's helpful and good color on the market. I know in the past, prior to COVID-19, you as well as a lot of other direct lenders talked about late-cycle investing. Of course, PFLT targets that in general as far as being high up the capital structure and more recession-resistant businesses. I'm just wondering, though, now that we're coming out of the downturn or pandemic, do you intend or do you have any appetite to shift the investment focus of PFLT at all, maybe taking on more risks since we just kind of ran through a down scenario? Or is it going to be kind of steady as you all have been kind of invested in kind of your target markets, whether that's where you are in the capital structure or where you are as far as industry exposure?
Yeah. Look, PFLT has always been positioned from day one as what we hope and think has been your grandmother's BDC with a lower risk, lower reward, lower expense structure. Our yields are among the lowest in the industry. Our leverage at four times is among the lowest in the industry. Our expenses are among the lowest in the industry. For PFLT, we're not intending to veer off that. I think one of our key focuses going forward, though, is we have these kind of five key sectors where we've developed a really meaningful domain expertise, where we can be among the smartest people in the room when deals come in. I think that's where we're digging deeper, and that's kind of government services, defense, healthcare, technology and software, business services, and consumer.
Where when a deal comes in, we know the right questions to ask. We're really prepared, and in those areas where we think we have real domain expertise we're going to play.
Okay. I just had one last one. In January, PennantPark as a platform, you closed PennantPark Credit Opportunities Fund III. I'm just curious, is the investment strategy of that fund similar to PFLT's, or is it more similar to PNNT's? Is there any ability to co-invest, PFLT to co-invest across that fund, or does that have any sort of impact on PNNT or PennantPark as a platform's ability to sort of speak to those? Can you just talk a little about that? That'd be helpful.
No, we have a growing private business. Overall, at PennantPark, we have two separate strategies. We have opportunistic, which is a blend of highly yielding first lien, second lien notes and equity co-invest, and we have senior debt. Basically, senior and stretched senior as well as equity co-invest. PFLT is a senior debt vehicle, and we have private vehicles that look a lot like PFLT but are private. As I said, those vehicles had an 18% net return in 2020 due to very minimal non-accruals and the strong equity co-invest track record. On the other side of the equation is our opportunistic strategy, which looks a lot like PNNT excluding the energy. You know PNNT, we have it all there. Energy has been a challenge for PNNT. Our credit ops business, which looks a lot like PNNT without the energy.
With that focus in, that's a fund we closed. Again, had a 29% net return in 2020 due to very minimal defaults and these equity co-invests which have been doing so well. PennantPark writ large, two strategies, opportunistic and senior debt, and our BDCs kind of mimic that. Although PNNT, we're hoping to get out of energy at some point and move in strength going forward, and I think we're making good progress. Maybe we'll talk about that later.
Okay. Got it. That's helpful clarification on that private fund strategy and where it fits. Those are all my questions. I really appreciate the time today.
Thank you.
All right, we'll go ahead and take our next question from Mickey Schleien in Ladenburg. Mickey, please go ahead.
Thank you. Good morning, Art and Aviv. Hope you're well. Art, I wanted to ask about a little bit of a query on the pandemic. When we think about the pace of vaccinations and the virus' mutations, it certainly looks like the pandemic will go on longer than we had hoped, and that will obviously continue to stress some companies and some industries, like event planning, where I see that you injected additional capital in one of your borrowers. My question is, how significant do you think the need is to continue to inject capital in these sort of specific situations, and how willing are your private equity partners to write additional checks to support those borrowers and get them through to the other side?
That's a great question. It's one we've grappled with in some of these companies. I think first, all these companies have done a really good job maintaining liquidity, and they're all in a very liquid position, and we feel good about their liquidity. However long this takes, our underwriting case does not assume a bounce back in the spring or the summer. Our underwriting case assumes bounces back later in 2021 and 2022. We weren't counting on any kind of bounce back in the spring or summer. We may or may not have any bounce back in the spring or summer, but we do not underwrite that way. We've been counting on it, and we've made sure all these companies are very liquid, which they are. Really good management teams.
These are what you would've called, and which we do call, good companies, which just happen to be hit by COVID. Really solid management teams and done the right things, whether the management teams or the sponsors. We feel they're as well-positioned as they can be to deal with an elongated vaccination schedule, which we may do that.
Thank you for that, Art. Looking at the portfolios in the fourth quarter, and fourth calendar quarter was strong for middle market M&A, but I noticed that both PFLT on balance sheet and the senior loan funds portfolio both shrank, and fee income was up particularly high for the company. Could you just discuss the backdrop for that trend in terms of the market opportunity and your pipeline and were prepayments higher than you had expected? Just some background on that would be helpful.
Yeah. It's a great question, and I think a lot of the repayments were earlier in the quarter, including Tana. We had a big position in Tana, which got repaid and taken out of the public syndicated loan that was done by a large investment bank. Then we got really busy towards the back end of the quarter. I think we had a bunch of deals closing between Christmas and New Year's. Our real teams seem to be very, very busy, so we think we're motoring along again. In this core middle market, the deals are more handcrafted and more tailored. They take longer. They're diligent. They take longer to negotiate. We think the package of risk-adjusted return, including the current investors, is really attractive, and in some cases, better. It takes a little while to get the engines going again.
Like I said, things are busy, we're looking at a lot of deals, and we've learned the hard way. Sometimes you shouldn't rush it. We do believe that this vintage is a really great vintage for some really large companies to buy and large. We want to be very thoughtful and methodical and careful about what we put in these portfolios. We will ramp in the appropriate, judicious fashion we always have. We've never had a problem ramping. If you look at our history and the moves, either our BDCs or our private funds, we've never had a problem ramping. It's a question of what exactly is the timing, how many quarters, and just making sure that the deals that we put in the vehicles are really strong deals.
Yeah, I understand. Thank you for that, Art. Just a couple of more sort of housekeeping questions. Was the Marketplace Events restructuring the main driver of the realized loss, or was there something else causing that result?
Yeah. No. That as well as Marketplace Events. You realize the gains or losses when there's losses, in this case, when there's restructuring. When there's restructurings, you realize the loss.
Okay. Lastly, administrative expenses continued to decline. Was that due to some sort of change in the agreement with the advisor, or was it due to the relative size of PFLT to the overall platform or something else?
The main driver is our growing private fund business. We have a finance and ops team, and we have fixed G&A, and that gets allocated pro rata around our platform. To the extent as our private fund business is growing, which it is, and we think in turn it'll continue to grow, it really helps the BDCs and lowers the G&A.
Okay. It was a relative size. That's it from me. Thank you for your time. Take care.
Thank you.
All right. It appears there are no further questions. I'd like to turn the conference back to the speakers for any additional or closing remarks.
Thanks everybody for your interest in PFLT. We look forward to speaking with you in early May as we review the March results. Thank you. Stay safe and healthy. Have a good day.
This concludes today's call. Thank you for your participation. You may now disconnect.