Good morning, and welcome to the PennantPark Floating Rate Capital Fourth Fiscal Quarter 2022 Earnings Conference Call. Today's conference is being recorded. At this time, all participants are being placed in a listen-only mode. The call will be open for a Q&A session following the speaker's 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 of PennantPark Floating Rate Capital. Mr. Penn, you may begin your conference.
Thank you. Good morning, everyone. I'd like to welcome you to PennantPark Floating Rate Capital's Fourth Fiscal Quarter 2022 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. 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.
Thanks, Rick. We're going to spend a few minutes discussing how we fared in the quarter ended September 30th, how the portfolio is positioned for upcoming quarters, our capital structure and liquidity, a detailed review of the financials, then open it up for Q&A. For the quarter ended September 30th, our core net investment income was $0.30 per share, which includes $0.01 of other income and excludes $0.01 per share of one-time upfront financing costs from the $66 million increase in our revolving credit facility. The credit quality of the portfolio remained solid, and we did not have any new non-accrual investments.
As of September 30th, we had only two non-accruals out of 125 different names in PFLT. This represents only 0.9% of the portfolio at cost and 0.01% at market value. Our credit statistics remain among the most conservative in the industry, with an average debt to EBITDA on our underlying portfolio of 4.7x and interest coverage of 3x. Our NAV decreased from the prior quarter due primarily to unrealized mark-to-market adjustments tied to the overall market and not due to fundamental credit factors. GAAP NAV decreased by 4.8%, of which 3.3% was due to market-related fair value adjustments.
The remainder of the decrease in GAAP NAV was primarily due to fair value adjustments on our credit facility and notes. With a debt portfolio that's 100% floating rate, we're well-positioned to substantially grow our net investment income as base rates rise. The weighted average yield to maturity on our portfolio increased to 10% from 8.5% last quarter. Holding everything else constant in the portfolio, every 100 basis point increase in base rates translates into about $0.03 per quarter of NII. We believe that this late 2022 and 2023 vintage of middle-market directly originated loans should be excellent.
Leverage is lower, spreads and upfront fees and OID are higher, and covenants are tighter. Our capital, which we believe is always value-added, is adding even more value in this environment. During the quarter, we continued to originate attractive investment opportunities for both the PFLT portfolio as well as the JV portfolio. At quarter end, the JV portfolio was $757 million, and we will continue to execute on our plan to grow the JV portfolio to $1 billion of assets.
We believe that the increase in scale and the JV's attractive ROE will enhance PFLT's earnings and momentum. From an overall perspective in this market environment of inflation, rising interest rates, geopolitical risk, and potentially weakening economy, we believe we are well-positioned. We like being positioned for capital preservation as a senior secured first lien lender focused on the United States, where floating rates on our loans can protect against rising inflation. We continue to believe that our focus on core middle-market provides the company with attractive investment opportunities where we are an important strategic capital to our borrowers.
In times of market volatility, our direct lending strategy focuses on creating value from the dislocation in the markets. Specifically, we've been active buying first lien loans in the secondary market at discounts in companies where we believe we have differentiated institutional knowledge. It could be a company that we used to finance, in a sector where we have domain expertise or a direct relationship with the management team or financial sponsor. We have been buying loans where we think we can generate double-digit or low teens IRRs as the loans return to par in three years. We employed a similar strategy during the global financial crisis and generated excellent returns.
We have a long-term track record of generating value by successfully financing high-growth middle-market companies in five key sectors. These are sectors where we have substantial domain expertise, know the right questions to ask, and have an excellent track record. They are business services, consumer, government services and defense, healthcare, and software and technology. These sectors have been resilient and tend to generate strong free cash flow.
It's important to note that we do not have any crypto exposure in our software technology investments. In many cases, we are typically part of the first institutional capital into a company where a founder, entrepreneur or family is selling their company to a middle-market private equity firm. In these situations, there's typically a defined game plan in place with substantial equity support from the private equity firm to significantly grow the company through add-on acquisitions or organic growth.
The loans that we provide are important strategic capital that fuel the growth and help that 10-20 million-dollar EBITDA company grow to $30, $40, $50 million of EBITDA or more. We typically participate in the upside by making an equity co-investment. Our returns on these equity co-investments have been excellent over time. Our overall for our platform from inception through September 30th, our $355 million of equity co-investments have generated an IRR of 28% and a multiple on invested capital of 2.5x.
With the current volatility in the broadly syndicated loan market, we have seen more private equity sponsors tap to private credit markets. We are selectively looking at these new opportunities and believe the vintage for these loans will yield compelling returns. 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 with care. We thoughtfully structure transactions with sensible credit stats, meaningful covenants, substantial equity cushions to protect our capital, attractive upfront fees and 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, virtually all of our originated proprietary loans have meaningful covenants which help protect our capital. This is one reason why our default rate and performance during COVID was so strong and why we believe we're well positioned in this environment. This sector of the market, companies with $10 million-$50 million of EBITDA, is the core middle market.
The core middle market is below the threshold and does not compete with the broadly syndicated loan or high yield markets. Many of our peers who focus on the upper middle market state that those 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. The borrowers in our investment portfolio are generally performing well. As we said earlier, that as of September 30th, the weighted average debt-to-EBITDA in the portfolio was 4.7x, and the average interest coverage ratio, the amount by which cash income exceeds cash interest expense, was 3x. This provides significant cushion to support stable investment income even as interest rates rise.
Based on this substantial cushion, even with the 200 basis point rise in base rates and a flat EBITDA, our portfolio companies will cover their interest 2.1 times on average. These stats are among the most conservative in the direct lending industry. Our credit quality since inception over 10 years ago has been excellent. PFLT has invested $5 billion in 451 companies, and we have experienced only 15 non-accruals. Since inception, PFLT's loss ratio is only six basis points annually. Our experienced and talented team and our wide origination funnel is 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. 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. Let me now turn the call over to Rick, our CFO, to take us through the financial results in more detail.
Thank you, Art. For the quarter ended September 30th, net investment income was $0.29 per share, including $0.01 per share of other income. Operating expenses for the quarter were as follows. Management fees and performance-based incentive fees were $6.2 million, interest and credit facility expenses were $9 million, general and administrative expenses were $800,000, and provision for taxes were $100,000. Core net investment income was $0.30 per share, which excludes $0.01 per share of one-time upfront financing costs from the $66 million increase in our revolving credit facility.
For the quarter ended September 30th, net realized and unrealized change on investments, including provision for taxes, was a loss of $19.6 million or $0.45 per share. The unrealized appreciation on our credit facility and notes for the quarter was $6.2 million or $0.14 per share. As of September 30th, our GAAP NAV was $11.62, which is down 4.8% from $12.21 per share. Adjusted NAV, excluding the mark-to-market of our liabilities, was $11.59 per share, down from $12.02 last quarter. Our GAAP debt-to-equity ratio, net of cash, was 1.19x for the quarter. Our capital structure is diversified across multiple funding sources, and we do not have any near-term maturities.
During the quarter ended September 30th, we increased our revolving credit facility by $66 million at the existing spread. As of September 30th, our key portfolio statistics were as follows; o ur portfolio remains highly diversified with 125 companies across 46 different industries. The portfolio is invested in 87% first lien senior secured debt, including 16% in PSSL, less than 1% in second lien debt, and 13% in equity, including 4% in PSSL. Our overall debt portfolio has a weighted average yield of 10%, and 100% of the debt portfolio is floating rate. As of September 30th, 2022, the company had approximately $0.26 per share of spillover taxable income. I'll now turn the call back over to Art.
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.
Thank you. If you would like to ask a question, please signal 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. We will take our first question from Paul Johnson from KBW. Please go ahead.
Good morning. Thanks for taking my questions. I was wondering if you could just address one of the investments in the portfolio that's also in the JV as well. There's been some obviously developments with a company called Walker Edison post-quarter to date. I was just wondering if you could talk about any of the developments there as well as just the exposure in the portfolio as well as the JV Just wondering how much exposure I guess you guys have there?
Thanks, Paul, and good morning. We have about $12 million of Walker Edison in PFLT and about the same amount, $12 million, in the joint venture. It was marked at about $0.68 on the dollar as of 9/30. They did pay us cash interest on 9/30 or as of 9/30, so it was kept on accrual for that quarter. There are restructuring discussions going on as we speak. We hope that by the time next quarterly earnings happens in early February or as of December 31st, we'll have a little bit more color to share as to what exactly is going on. You know, the restructuring discussions going on and it could be a non-accrual as of 12/31. It may not be. We'll see when the time comes.
Got it. Thanks. Can you just speak to, I guess, the overlap with the JV and the PFLT portfolio, and just kind of like, I guess, remind me, is the intention in the JV to mirror essentially PFLT's deal flow and have a high degree of overlap there? Is there more of an objective of differentiation? I guess I'm wondering what the degree of, you know, percentage overlap of the two portfolios there is between the JV and PFLT.
That's a good question, and people use their JVs in different ways in our industry. For us in PFLT, it's really just an extension of PFLT to be able to write bigger bite sizes. You know, kind of very similar first lien senior secured floating rate portfolio. You'll see many deals, you know, that cross both the BDC and the JV. The JV does not take equity co-invest. The equity co-invest stays in the BDC. It's been, as you know, the co-invest has been good. It's been, you know, 2.5x MOIC over 16 years. The BDC retains the co-invest.
Got it. Just one question on the liabilities. I know you guys have some bonds that have been kind of gradually amortizing down and that should be maturing in 2023. I'm just curious, is there, you know, in the current market, any preference for, you know- if you were to be looking at refinancing, and that may not be the case at the moment, I understand- y ou know, between borrowing in the unsecured market versus the securitization. I'm just curious if there's still any big cost differential between the two or if that's been closed with rates moving up. I guess as well as, is the securitization, you know, even possible in this market?
Yeah, you know, we do have some unsecured bonds that are due at the end of 2023. You know, we have a bit of time to figure out, you know, capital structure options. Over the long term, we think, you know, unsecured bonds should be a substantial piece of a diversified liability stack. We like having diversified pieces. Now, that said, you know, in certain times it's better to do a regular credit facility or a securitization or bonds. You know, PSSL did do some bonds in 2021 which were very attractive.
You know, we'll evaluate the options over the course of the next year and try to figure out something. Some of the options could be kind of more long-term options, some of the options could be more short-term in nature, depending on where the markets are kind of as we get down the road here six months-nine months. I don't have a real answer for you now. Bonds are available today, they're just expensive. Securitizations, we think are available, they're just expensive.
Everything's more expensive than it was obviously six months-nine months ago. All things equal, securitization is cheaper today than long-term bonds, which, you know, you'd be locking in a high fixed yield. Push comes to shove today, I think if it were today, we'd upsize the credit facility. We just did. We just upsized this credit facility $66 million last quarter. We'd probably upsize the credit facility or look at a potential securitization. You know, we'll monitor the markets and all options are on the table over the course of next year.
Got it. Appreciate that. Two more if I may. One just being on the unrealized marks for the quarter. I know you mentioned Walker & Dunlop's obviously marked lower. That's a little bit more credit-related. The $20 million or so, obviously excluding the liability adjustments, I was wondering if you could give any sort of general idea of how much of that is just mark-to-market versus other any sort of credit issues or any other one-time issues that might be driving that.
Yeah. I mean, look, I think Walker Edison is the one, you know, outlier in terms of, you know, unrealized mark-to-market loss. I think it was about $0.11 a share. The rest of the items are very small, you know, thankfully. We would say it's just market issues and not actual credit deterioration other than in the case of Walker Edison. We feel very good about the portfolio overall. You know, having a portfolio that's kind of in the mid-fours debt-to- EBITDA does give us some nice cushion. You know, we covered kind of interest coverage and certainly interest coverage for, you know, all of the underlying companies in our industry are going down.
By definition, we're getting the benefit of higher floating rates. Interest coverages are going down. Even if you took, you know, a severe case of kind of, you know, interest rates going up, you know, by and large, our portfolio is well positioned to weather the storm, both from the standpoint of credit stats and capital structure, as well as just the industries we're in, by and large, tend to be more recession resistant, recession resilient industries.
Got it. Appreciate it. The last question from me, just on inflation and sort of EBITDA trends for your borrowers. Just curious, you know, as you're, you know, getting any sort of updated forecast or financial statements from your borrowers, where has that trended in terms of forecasts for EBITDA growth? You know, has that continued to come down? Has that been fairly stable? Alongside that, you know, inflation, I guess just, you know, company's ability to continue to pass that on. I think that's pretty much been the case as long as, you know, inflation has been going on in the economy. Have you started to see any limits to that?
Yeah. No, we haven't seen any limits on the ability for companies to pass on price increases at this point. On the other hand, I think the good news is, you know, items like container cost shipping, you know, coming over from Asia or elsewhere is going down significantly. You know, we're hopeful that as the end of 2022 rounds into 2023, you know, the supply chain costs issues, you know, are diminishing. Maybe the companies have less need for, you know, kind of price increases that they push along to their ultimate customers.
In terms of EBITDA, you know, a bunch of crosscurrents. Certainly you're not seeing it up and to the right the way you were seeing it, you know, kind of post-COVID. It's more of a slight up to the right or flattish kind of environment we're in. You know, some companies, you know, more impacted than others. By and large from a portfolio standpoint, it's kind of, I'd say slightly up into the right as opposed to way up into the right, which is kind of what you saw kind of post-COVID.
Got it. Thanks. Appreciate it. That's all for me.
Thank you.
Once again, if you would like to ask a question, please press star one. If you're using a mute button, please check your mute button. We will now take our next question from Mickey Schleien from Ladenburg Thalmann. Please go ahead.
Yes. Good morning, everyone. Art, I wanted to ask you about your view on the attractiveness of the current vintage. I mean, generally, we're hearing that folks are quite excited about it, given wider spreads and better deal terms. Your on-balance sheet portfolio declined and the SLF portfolio only grew, you know, slightly. Can I interpret that to mean maybe you're not as excited as the rest, or was there some other reason that we didn't see more portfolio growth this quarter at PFLT?
Yeah. In terms of the portfolio, we actually got some repayments. You know, kind of two. One of the big repayments was a company called Crash Champions. That was because the company was sold. That was about $35 million between the JV and the BDC. We got, you know, two deals adding up to about $17 million between the two entities, you know, where the leverage was so low, good old commercial banks came in. You know, these were companies levered around 3x. They were both able to go to a commercial bank and get very attractive financing. It's hard to complain about that. The credits were good, and we knew they were, you know, a potential refinancing candidate.
You know, kind of good, what good news credit events we are enthusiastic about, the environment. We are hopeful that there will be growth here in this quarter and the quarters thereafter in both the BDC and the JV. We're seeing, you know, the new vintage and new deals for all the reasons we've mentioned, the lower leverage, the higher yields and spreads, the higher OID, the tighter covenants, the more significant equity cushion really is shaping up to be a nice vintage.
As we said, you know, we have a nice opportunity in the secondary market where if we can buy $1 for, you know, between $0.85 and $0.95 in the secondary market in a company that we know well, perhaps we used to finance, you know, we're in one of our industry verticals, et cetera. Market's given us that opportunity where we can kind of say, "Okay, it's probably more par in a 2-3-year time period," and that ends up being a kind of teens return. We're doing a bit of that in both the JV and in the BDC. To us, that's just, you know, kind of pivoting and taking advantage of some of the softness that we see elsewhere.
Yep. I understand that. Thanks for that explanation. That's really helpful. A couple more questions from me. If I'm doing the math right, it looks like the dividend to the BDC from the PSSL declined pretty meaningfully in the fourth quarter versus the last couple of quarters. I understand that there's obviously differences between cash and tax and GAAP bookkeeping. Was there some underlying reason for that? What is the outlook for the dividend from the senior loan fund?
Yeah. You know, in fact, if you look at the income coming from the JV, including the debt investment we have in the JV, which is floating rate, the overall income is stable or up. Because we have into the JV the note which floats at a very healthy spread over LIBOR's gone up obviously. The overall income we're getting from the JV has not diminished at all. It's just of that overall income, more of it's being absorbed in the debt piece, so therefore there's less income for the equity piece. [crosstalk]
Yeah, on a return on investment, invested capital basis.
Right. Right. I also don't have a time. I hope it's pretty. That note into the JV is a pretty healthy spread over LIBOR.
Yeah. I got it. My last question. Marketplace advance first lien is marked well above cost. I think it's been like that for a couple of quarters. Does that imply that you're expecting to exit that investment relatively soon, or is there something else there?
Well, we certainly hope to exit Marketplace Events when the time is right. Company's performing well. It's a trade show business focused on, you know, home goods. They've rebounded nicely. That's reflected in the mark. Whether now is the appropriate time to sell or we give it some more time to ramp, I don't think it's a near term because we think the opportunity for that company to grow is actually very strong right now. It's a consolidator in its particular industry. You know, we're always evaluating options.
We don't think right now it's a short-term item, but kind of our intermediate to long term, we think, you know, the opportunity to build that company, therefore build the value of the company in the PFLT portfolio is pretty strong given the tailwinds it's seeing. You know, people are coming back to these trade shows. They're very popular. People like the in-person interaction. You know, for us, we're thinking holding on to it for a while and playing it straight.
Just so I make sure I understand, the mark of above cost is related to, you know, the restructuring rather than expectations of near-term exit. Is that correct?
Yeah.
Yeah.
There's equity- w e are in control of the company, so it's equity associated.
Right.
We and three other lenders are in control of the company. We're the lead lender. The mark-up is due to the valuation of the company increasing.
Okay. That's it for me this morning, Art. I appreciate your time. Thank you.
Thanks, Mickey.
Mr. Penn, I'd like to turn the conference back to you for any closing remarks.
Just wanna thank everybody for being on the call this morning. We appreciate it. Wishing everybody a terrific Thanksgiving and a great holiday season, and we look forward to speaking with you in early February at our next earnings call.
This concludes today's call. Thank you for your participation. You may now disconnect.