Good morning, welcome to the PennantPark Floating Rate Capital's third fiscal quarter 2023 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 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 Officer 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 third fiscal quarter 2023 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. 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 the current market environment for middle-market lending, how we fared in the quarter ended June 30th, how the portfolio is positioned for upcoming quarters, a detailed review of the financials, and then open it up for Q&A. For the quarter ended June 30th, our net investment income was $0.36 per share. Core NII was $0.31 per share, and that excludes $0.05 per share for a one-time dividend income related to our equity investment in Dominion Voting Systems. Adjusted NAV, excluding the mark-to-market adjustments on our liabilities, decreased slightly to $11 per share or 0.9%. GAAP NAV decreased to $10.96 per share or 1.7%.
This was due primarily to valuation adjustments on a non-accrual investment and certain equity co-investments, partially offset by net investment income in excess of the dividend. With a debt portfolio that's 100% floating rate, we continue to benefit from the increase in base rates. As of June 30th, our weighted average yield to maturity was 12.4%, which is up from 11.8% last quarter and 8.5% last year. During the quarter, we continued to originate attractive investment opportunities and invested $80 million in new and existing portfolio companies at a weighted average yield of 12.5%. For the investments in new portfolio companies, the weighted average debt to EBITDA was 3.4x, the weighted average interest coverage was 2.5x, and the weighted average loan to value was 25%.
We continue to believe that the current vintage of middle-market directly originated loans is excellent. Leverage is lower, spreads and upfront fees and OID are higher, and covenants are tighter. We are seeing an increase in deal flow compared to the first half of 2023. We have a growing pipeline of interesting and attractive investment opportunities. Additional capital we are raising across the PennantPark platform will allow PFLT and the JV to capitalize on the attractive lending environment. As of June 30th, the JV portfolio equaled $105 million. Together with our JV partner, we continue to execute on the plan to grow the JV portfolio to approximately $1 billion of assets.
During the quarter, the JV invested $78 million in 6 new and 15 existing portfolio companies at a weighted average yield of 12.1%, including $75 million of assets purchased from PFLT. During the quarter, the JV closed its second CLO financing and the sixth CLO for the PennantPark platform. This new financing provides the JV with over $100 million of capital for new investments and will allow the JV to further diversify its assets, increase its balance sheet, and grow its return on capital. We believe that the increase in scale of the JV's balance sheet will continue to drive attractive low-to-mid-teens return on invested capital and enhance PFLT's earnings and momentum.
As detailed in the earnings release, we raised $99 million of equity capital under our ATM program. Together with additional leverage capacity, we have over $300 million of capital available for new investments at PFLT. The ATM proceeds will be used to fund additional investments into the JV, where we are earning an attractive return, as well as investments into new portfolio investments. We expect to drive growth in NII in the quarters ahead as we deploy capital into new investments and optimize the balance sheet. As we look forward, 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 provider to our borrowers. 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 technology. These sectors have also been resilient and tend to generate strong free cash flow. In our software vertical, we don't have any exposure to ARR loans.
In many cases, we are typically part of the first institutional capital into a company, and the loans that we provide are important strategic capital that fuel the growth and help that $10 million-$20 million EBITDA company grow to $30 million, $40 million, $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. Overall, for our platform, from inception through June 30th, we've invested over $403 million in equity co-investments, have generated an IRR of 26% and a multiple on invested capital of 2.2x. 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 statistics, meaningful covenants, substantial equity cushions to protect our capital, attractive upfront fees and spreads, and equity co-investment. In addition, 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 first lien loans have meaningful covenants which help protect our capital. This is a significant reason why we believe we are 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 higher recovery rate than loans to companies with higher EBITDA. We believe that the meaningful covenant protections of the core middle market, where there's more careful due diligence and tighter monitoring, have been an important part of this differentiated performance. Our credit quality since inception over 10 years ago, has been excellent. PFLT has invested $5.2 billion in 464 companies, and we have experienced only 18 nonaccruals. Since inception, PFLT's loss ratio is only 17 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 June thirtieth, net investment income was $0.36 per share, and core net investment income was $0.31 per share. Core net investment income excludes $0.05 per share of one-time dividend income received from our equity investment in Dominion Voting, net of incentive fees. Operating expenses for the quarter were as follows: interest and expenses on debt were $10 million, base management and performance-based incentive fees were $7.5 million, general and administrative expenses were $1.6 million, and provision for taxes were $150,000. For the quarter ended June thirtieth, net realized and unrealized change on investments, including provision for taxes, was a loss of $12.9 million or $0.25 per share. The unrealized appreciation on our credit facility and notes for the quarter was $5.8 million, or $0.11 per share.
As of June thirtieth, our GAAP NAV was $10.96 per share, which is down 1.7% from $11.15 per share. Adjusted NAV, excluding the mark-to-market of our liabilities, was $11 per share, down 0.9% from $11.10 per share. As of June thirtieth, our debt-to-equity ratio was 0.91 times. Our capital structure is diversified across multiple funding sources, including both secured and unsecured debt. We have sufficient liquidity in our revolving credit facility to repay the $76 million of unsecured notes maturing in December. As of June thirtieth, our key portfolio statistics were as follows: Our portfolio remains highly diversified, with 130 companies across 45 different industries.
The weighted average yield on debt investments was 12.4%, and 100% of the debt portfolio is floating rate. We had three nonaccruals out of 130 companies, which represent 1% of the portfolio at cost and 0% at market value. We did not put any new investments on nonaccrual during the quarter. The portfolio was invested in 86% first lien senior secured debt, less than 1% in second lien debt, 4% in equity of PSSL, and 10% in other equity. Debt to EBITDA on the portfolio is 5.0 times, and interest coverage was 2.2 times. The portfolio as a whole has a meaningful cushion with regard to interest coverage.
On a sensitivity basis, for overall interest coverage to decrease to 1.0 times, base rates would need to go up 200 basis points, and EBITDA would need to decrease by 35%. This analysis is based upon the current run rate interest coverage, assuming a 5.5% base rate. Now, let me turn the call back 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.
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, please press star one to ask a question. We'll pause for just a moment. We'll go to our first question from Paul Johnson with KBW.
Hey, good morning, Art. Good morning, guys. Thanks for taking my questions. Could you just kind of speak broadly, you know, on the portfolio, you know, both the PFLT and maybe also just to kind of, you know, across other funds that you guys manage, you know, what kind of the trend has been in terms of amendment activity?
Yeah. Thanks, Paul. Good question. Look, we've seen gradually increasing amendments, either due to higher in-interest coverage or because of the higher interest coverage, they're not companies are not paying down debt as quickly. You know, we have debt to EBITDA covenants, which step down. Good news, bad news, we're our, our, the interest rates that we're getting are, you know, very attractive, 12+%. And, and these companies, in some cases, you know, that's, that's taking a chunk of their cash flow out. The amendment activity has increased. I would say it's not dramatic. I would say it's not a spike, but I would say it's a gradual, gradual increase, you know, over time as the higher interest rates take hold.
Got it. Thanks. Then, in terms of like, you know, in the new investments you guys are, are seeing, obviously, we've kind of gone through sort of a lull in activity. I'm not sure if that's, you know, quite the same so much in the core middle market as it's been in the, in the upper part of the, of the middle market. In terms of the deals that you are seeing, you know, on the equity co-investment side, you know, are you guys seeing anything more interesting than you have historically, whether it be just better valuations that you're getting in at or higher or larger equity co-investments? Is there anything interesting going on with the, the deal set that you guys have?
It's a good question. You know, we haven't seen anything, materially different in the co-invest opportunities. The market, the M&A market's a little bit of a tale of two cities. There's companies that are, you know, but, you know, buyers and sellers feel very strongly about. They've got good growth parameters. They're very stable, steady growing. That's city number one, where people are, are paying fairly high multiples and leverage is, is fairly high, even in this high interest rate environment. Then you have the other city, which is kind of companies where there's not a consensus that the growth is there, or there's a little bit of concern about, you know, economic volatility. And those deals are, are tougher to get across the finish line.
Sellers may still have sugar plum, you know, sugar plums in their, in their brain about, you know, valuations that they, that they were getting a year or two ago, and the buyers, you know, aren't quite there for a variety of reasons, including higher interest rates. Nothing materially different on the equity co-invest side. We look at each one of these, you know, investments on a standalone basis, the equity versus the debt. In certain cases, we will graciously decline the equity co-invest. In other cases, we will, we will fight hard to get more equity co-invest, and, and that's kind of, that's kind of similar. You know, we do have fairly well-embedded, equity co-invest portfolios in our vehicles, PFLT, you know, among them.
As we stated, we've had a very good 16-year track record of, again, a 2.2 times MOIC on those. At times there's greater activity, at times there's less. There's been lesser activity, you know, recently. We're confident over time, those, those equity co-invests will turn into cash, which we can then, you know, reinvest. So nothing materially different, in short, in terms of the equity co-invest opportunity.
Got it. Appreciate that. That's helpful color. Kind of lastly, just on NII for the quarter, I know there's some a little bit of noise, obviously, with the one-time dividend that you guys got. I'm curious, you know, if I back out kind of that, that item, you know, we're looking at around $0.31 per share, which is, you know, lower than, than where we were. Is there anything that's kind of in the, in the quarter outside of the one-time stuff, you know, that's kind of driving NII down for the quarter? I know you guys said net repayments, maybe the deleveraging is, is part of that, along with the ATM issuance.
Yeah.
any sort of comments on what you kind of would expect, I guess, for, for NII to do after, after this quarter?
Yeah, you, you kind of hit it right, Paul. It's, it's the deleveraging and it's the ATM. We're probably the two primary drivers. You know, we obviously think, you know, although we are aware of quarterly earnings, and it's important because it's important to you and it's important to our investors, we're thinking, you know, in, out in the intermediate and long term. For us, having a, having a fortress balance sheet and having a lot of dry powder at this time, both for defensive and offensive purposes, for the intermediate to long run, we think is, is a good way to run the company and, and create long-term shareholder value. You know, you know, we continue to be so very selective.
Again, you know, in the long run, it's about credit selection. We continue to be very selective about credit. Some of our good credits have gotten, have gotten paid off, and certainly the JV continues to grow, so we're selling assets from PFLT over to the JV. The JV is generating an excellent return on capital. A combination of all these things, but we feel very good about kind of our fortress balance sheet in this vintage, and being able to, over time, achieve our target leverage of 1.5x, 1.5x debt to equity. That still remains our target. Over time, we think in this mid-end of 2023 vintage, 2024 vintage, we'll be able to fill the vehicle and the JV with high-quality loans.
Got it. Appreciate it, Art. That's all for me.
Thank you.
We'll go next to Vilas Abraham with UBS.
Hi, everybody, thanks for taking the question. Maybe just a little bit more color on the quarter-to-date ATM issuance. You know, leverage, as you just mentioned, much, much lower now, you know, below 1, the end of last quarter. Just wondering on the, you know, on the need to issue more quarter to date, is that a signal that you guys are seeing very, very strong near-term opportunities that you want to want to deploy into relatively quickly? Is it just, you know, really just kind of preparing for the longer haul?
Yeah. It's a, it's a good, there's a little mechanical issue here, which is, our ATM window closes at the end. It closed at the end of the quarter, of 6/30. The, the, the issuance that was, that we logged as done post-quarter and those trades were executed on, let's call it June 29th, June 30th, and they did not settle until, you know, early July. That's why the extra $34 million kind of, you know, post-quarter end, the trades were done kind of, you know, June 29th, June 30th. We're, we're, we're, that, that kind of wrapped up that window. We saw some interesting, incoming, you know, block demand for the stock, and we elected to, to take it, you know, in those last couple of days of, of June.
Got it. That makes sense. You mentioned the 1.5x target still, what you're thinking, you know, should we, should we think of that as, you know, as a longer-term target at this point, given where you are right now with leverage?
Yeah. Yeah, look, our goal would certainly be within the next 12 months. You know, you never know when, what the flows are gonna be, and certainly, we never wanna force it, you know, you know, kind of you wanna, you want credit, again, credit selection is the most important thing we do, so we're not gonna force it. You know, at the, at the flow that we're seeing or at the flow that we believe, certainly we think over the next several quarters to 4 quarters, you know, in, in, in the outside case, we should be able to, to achieve that target.
Okay. Then just lastly, on, you know, on sales and repayments, jumped up a little bit this quarter. You know, any thoughts on how we should think about the cadence of that over the next couple of quarters into the back half of the year here? Thank you.
Yeah, most of the sales repayments were sales to the JV. To us, that's AOK. PFLT owns 87.5% of the JV. The JV has been generating really good return on capital. Given the, given the balance sheet there, the JV has an ability to grow with the securitization CLO financing. Then we're, you know, again, because we are selecting, you know, hopefully solid credits, we have been selecting solid credits, you get repayments from time to time. Lumpy, hard to predict. As activity levels pick up, you know, by and large, you'll, you'll see both repayments, and you'll see new deals come on the balance sheet. You know, we've never had a, a really hard time ramping in general.
We have a really good origination network and great relationships, and existing incumbent portfolio of 170 some names across the platform. You know, look, one of... Again, one of the hardest things we do is, you know, select credit with balancing, you know, a desire to, you know, generate good NII and, and, and solid dividends for, for our shareholders. You know, credit quality first, keep the balance sheet strong. As part of that, be in a position to take advantage of the vintage and, and repayments come when they come.
Got it. Thanks, everyone.
Thank you.
We'll go next to Mark Hughes with Truist.
Yeah, thank you. With respect to the CLO financing, finding any change in appetite among investors for those CLOs, steady, improved? What do you see?
Yeah, you know, in terms of middle market CLOs, some, some people are trying to rebrand the phrase direct lending CLOs. Whatever you want to call it, it's not, these are not broadly syndicated. They're not CLOs filled with broadly syndicated loans. Certainly, as the market gets-- started getting choppier, post-Fed increases, the cost of liabilities went up, as well as the spread-- yields and spreads on the assets went up. There, there has been a, a gap in the cost of liabilities, as you might imagine, in the choppier market over the last 18 months. At the same time, the spreads and yields have gone up on the asset side. We had a month or two of increased uncertainty during the, the, the Silicon Valley banking turmoil, earlier this year.
That was, that only seemed to last in the CLO market a few weeks, and kind of levels kind of settled back to where they were pre. Liability levels have been kind of, you know, where they've been. We've printed several CLOs in the last 12 months in the middle market, and they still make a lot of economic sense in terms of return on invested capital for our JVs, as well as for our third-party CLOs, where there's third-party institutional investors who own the junior, who own the junior tranches. You know, it's been, it's been, you know, a good, a good source of liability, particularly for books such as ours, where it's a, it's a very solid, lower risk portfolio of, of senior secured floating rate loans.
Understood. Thank you for that. On the... You described some pretty good terms on the origination, the 3.4x EBITDA, the 25% loan-to-value. The deal flow begins picking up. What's your sense of how those, you know, the, the, the profile of those originations might change in a more active market? Do you think this will stick around for a while, or will that start to adjust as the deal flow picks up?
Yeah. Yeah, it was, you know, when you look at it, you say debt EBITDA 3.4x interest coverage with the higher base rates is 2.5x, the loan-to-value, 25%. I would agree with the implication of your question, which is that's abnormally good, and that's terrific, and we want to grab that while we can. The other implication of your question is, are things going to start to normalize? Is leverage going to go up, interest coverage come down a little bit, and loan to value stretch a little bit? The answer is: It's got to. Particularly as the markets settle down, if this whole kind of, you know, soft landing, perception becomes reality, for sure, you know, all those statistics will, normalize.
The question is, what, you know, how long will it take to normalize? You know, how much flow will there be in that normalization process? Again, one of the reasons we want to have lots of dry powder and a fortress balance sheet is, if things start normalizing and if we start to see a lot of solid core middle-market M&A flow, you know, we want to be prepared and ready to access, you know, high-quality deals, you know, that, that start to come. I don't know if I answered your question there, but a little nuanced, but I think that's kind of, kind of our view.
I think you proposed my question better than I did. We'll see. Okay. Thank you very much.
Thank you.
There are no other questions at this time.
Terrific. Just want to thank everybody for their participation today. A reminder that the September 30th quarter for us is our 10-K. It will be we're usually a few days later, due to the 10-K versus the 10-Q. We're targeting mid-November for our next quarterly earnings and conference call, and wishing everybody a healthy and enjoyable rest of the summer. Thank you very much.
This does conclude today's conference call. Thank you for your participation. You may now disconnect.