s
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)r
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2023
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 814-00891
PENNANTPARK FLOATING RATE CAPITAL LTD.
(Exact name of registrant as specified in its charter)
MARYLAND
27-3794690
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
1691 Michigan Avenue
Miami Beach, Florida
33139
(Address of principal executive offices)
(Zip Code)
(786) 297-9500
(Registrant’s Telephone Number, Including Area Code)
None
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Trading Symbol(s)
Name of Each Exchange on Which Registered
Common Stock, par value $0.001 per share
PFLT
The New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
☑
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The number of shares of the registrant’s common stock, $0.001 par value per share, outstanding as of August 9, 2023 was 58,734,702.
FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2023
TABLE OF CONTENTS
PART I. CONSOLIDATED FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Statements of Assets and Liabilities as of June 30, 2023 (unaudited) and September 30, 2022
4
Consolidated Statements of Operations for the three and nine months ended June 30, 2023 and 2022 (unaudited)
5
Consolidated Statements of Changes in Net Assets for the three and nine months ended June 30, 2023 and 2022 (unaudited)
6
Consolidated Statements of Cash Flows for the nine months ended June 30, 2023 and 2022 (unaudited)
7
Consolidated Schedules of Investments as of June 30, 2023 (unaudited) and September 30, 2022
8
Notes to Consolidated Financial Statements (unaudited)
19
Report of Independent Registered Public Accounting Firm (PCAOB ID 49)
38
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
40
Item 3. Quantitative and Qualitative Disclosures About Market Risk
54
Item 4. Controls and Procedures
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
55
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
56
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
57
SIGNATURES
58
2
PART I—CONSOLIDATED FINANCIAL INFORMATION
We are filing this Quarterly Report on Form 10-Q, or the Report, in compliance with Rule 13a-13 as promulgated by the Securities and Exchange Commission, or the SEC, under the Securities Exchange Act of 1934, as amended, or the Exchange Act. In this Report, except where the context suggests otherwise, the terms “Company,” “we,” “our” or “us” refers to PennantPark Floating Rate Capital Ltd. and its wholly-owned consolidated subsidiaries; “Funding I” refers to PennantPark Floating Rate Funding I, LLC; “Taxable Subsidiary” refers to PFLT Investment Holdings, LLC; “PSSL” refers to PennantPark Senior Secured Loan Fund I LLC, an unconsolidated joint venture; “PTSF” refers to PennantPark-TSO Senior Loan Fund, LP, an unconsolidated limited partnership; “PennantPark Investment Advisers” or “Investment Adviser” refer to PennantPark Investment Advisers, LLC; “PennantPark Investment Administration” or “Administrator” refers to PennantPark Investment Administration, LLC; “2023 Notes” refers to our 4.3% Series A notes due 2023; “2026 Notes” refers to our 4.25% Notes due 2026; “1940 Act” refers to the Investment Company Act of 1940, as amended; “SBCAA” refers to the Small Business Credit Availability Act; “Code” refers to the Internal Revenue Code of 1986, as amended; “RIC” refers to a regulated investment company under the Code; “BDC” refers to a business development company under the 1940 Act; “Prior Credit Facility” refers to our multi-currency senior secured revolving credit facility, as amended and restated with Truist Bank (formerly SunTrust Bank) and other lenders, originally entered into on June 23, 2011 and terminated on August 12, 2021; “Credit Facility” refers to our multi-currency senior secured revolving credit facility, as amended from time to time, with Truist Bank and other lenders, or the “Lenders,” entered into on August 12, 2021; “Securitization Issuer” refers to PennantPark CLO I, Ltd.; “Securitization Issuers” refers to the Securitization Issuer and PennantPark CLO I, LLC; “Debt Securitization” refers to the $301.4 million term debt securitization completed by the Securitization Issuers; “2031 Asset-Backed Debt” refers to (i) the issuance of the Class A-1 Senior Secured Floating Rate Notes due 2031, the Class A-2 Senior Secured Fixed Rate Notes due 2031, the Class B-1 Senior Secured Floating Rate Notes due 2031, the Class B-2 Senior Secured Fixed Rate Notes due 2031, the Class C-1 Secured Deferrable Floating Rate Notes due 2031, the Class C-2 Notes Secured Deferrable Fixed Rate Notes due 2031, and the Class D Secured Deferrable Floating Notes due 2031 and (ii) the borrowing of the Class A‑1 Senior Secured Floating Rate Notes due 2031 by the Securitization Issuers in connection with the Debt Securitization; and “Depositor” refers to PennantPark CLO I Depositor, LLC. References to our portfolio, our investments, our multi-currency, senior secured revolving credit facility, as amended and restated, or the Credit Facility, and our business include investments we make through our subsidiaries.
3
PENNANTPARK FLOATING RATE CAPITAL LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES
(in thousands, except share and per share data)
June 30, 2023
September 30, 2022
(unaudited)
Assets
Investments at fair value
Non-controlled, non-affiliated investments (amortized cost— $816,166 and $882,570, respectively)
$
814,608
893,249
Controlled, affiliated investments (amortized cost— $324,267 and $294,787, respectively)
290,657
271,005
Total investments (cost— $1,140,433 and $1,177,357, respectively)
1,105,265
1,164,254
Cash and cash equivalents (cost— $59,092 and $47,916, respectively)
59,092
47,880
Interest receivable
10,005
7,543
Receivable for investments sold
7,352
3,441
Distributions receivable
692
—
Prepaid expenses and other assets
817
748
Total assets
1,183,223
1,223,866
Liabilities
Distributions payable
5,499
4,308
Credit Facility payable, at fair value (cost— $64,400 and $169,654, respectively) (See Notes 5 and 10)
63,917
167,563
2023 Notes payable, at fair value (par—$76,219 and $97,006, respectively) (See Notes 5 and 10)
79,260
96,812
2026 Notes payable, net (par—$185,000) (See Notes 5 and 10)
182,860
182,276
2031 Asset-Backed Debt, net (par—$228,000) (See Notes 5 and 10)
226,601
226,128
Interest payable on debt
6,138
8,163
Base management fee payable (See Note 3)
2,840
3,027
Incentive fee payable (See Note 3)
4,625
3,164
Deferred tax liability
1,640
4,568
Accounts payable and accrued expenses
1,416
765
Total liabilities
574,796
696,774
Commitments and contingencies (See Note 11)
Net assets
Common stock, 55,537,299 and 45,345,638 shares issued and outstanding, respectively Par value $0.001 per share and 100,000,000 shares authorized
45
Paid-in capital in excess of par value
730,528
618,028
Accumulated deficit
(122,157
)
(90,981
Total net assets
608,427
527,092
Total liabilities and net assets
Net asset value per share
10.96
11.62
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
Three Months Ended June 30,
Nine Months Ended June 30,
2023
2022
Investment income:
From non-controlled, non-affiliated investments:
Interest
21,988
16,701
65,440
49,753
Dividend
4,390
577
5,602
1,731
Other income
734
285
1,460
3,795
From non-controlled, affiliated investments:
112
From controlled, affiliated investments:
8,151
4,228
22,701
10,633
2,450
3,938
8,400
10,675
Total investment income
37,713
25,729
103,603
76,699
Expenses:
Base management fee (See Note 3)
3,062
8,643
8,904
Performance-based incentive fee (See Note 3)
2,576
12,245
8,461
Interest and expenses on debt (See Note 10)
9,985
7,369
29,595
20,713
Administrative services expenses (See Note 3)
477
144
764
431
General and administrative expenses
1,134
655
2,545
1,964
Expenses before provision for taxes
19,061
13,806
53,792
40,473
Provision for taxes on net investment income
150
100
834
300
Total expenses
19,211
13,906
54,626
40,773
Net investment income
18,502
11,823
48,977
35,926
Realized and unrealized gain (loss) on investments and debt:
Net realized gain (loss) on:
Non-controlled, non-affiliated investments
(6,065
701
(13,520
10,694
Non-controlled and controlled, affiliated investments
(22,315
Provision for taxes on realized gain on investments
(300
Net realized gain (loss) on investments
(13,820
(11,621
Net change in unrealized appreciation (depreciation) on:
3,051
(11,204
(12,204
(12,243
Controlled and non-controlled, affiliated investments
(4,143
(6,431
(9,825
8,597
Provision for taxes on unrealized appreciation (depreciation) on investments
2,929
(5,340
Debt (appreciation) depreciation (See Note 5 and 10)
(5,752
26
(4,842
1,273
Net change in unrealized appreciation (depreciation) on investments and debt
(6,844
(17,609
(23,942
(7,713
Net realized and unrealized gain (loss) from investments and debt
(12,909
(16,908
(37,762
(19,334
Net increase (decrease) in net assets resulting from operations
5,593
(5,085
11,215
16,592
Net increase (decrease) in net assets resulting from operations per common share (See Note 7)
0.11
(0.12
0.23
0.42
Net investment income per common share
0.36
0.29
1.02
0.90
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS
(in thousands, except share issue data)
Net increase (decrease) in net assets from operations:
Net change in unrealized appreciation (depreciation) on investments
(1,092
(17,635
(22,029
(3,646
Net change in provision for taxes on unrealized appreciation (depreciation) on investments
Net provision for taxes on realized gain on investments
Net change in unrealized depreciation on debt
Distributions to stockholders:
Distribution of net investment income
(15,445
(11,780
(42,390
(34,141
Total distributions to stockholders
Capital transactions
Public offering (See Note 1)
64,060
1,820
113,215
32,336
Offering costs
(450
(28
(705
(485
Net increase in net assets resulting from capital transactions
63,610
1,792
112,510
31,851
Net increase (decrease) in net assets
53,758
(15,073
81,335
14,301
Net assets:
Beginning of period
554,669
519,986
490,611
End of period
504,913
Capital share activity:
Shares issued from public offering
5,805,484
136,072
10,191,661
2,464,910
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Nine months ended June 30,
Cash flows from operating activities:
Net increase in net assets resulting from operations
16,593
Adjustments to reconcile net increase in net assets resulting from operations to net cash provided by (used in) operating activities:
22,029
3,645
Net change in unrealized (appreciation) depreciation on debt
4,842
(1,273
Net realized (gain) loss on investments
13,520
11,621
Net accretion of discount and amortization of premium
(3,741
(2,920
Purchases of investments
(231,001
(553,106
Payment-in-kind interest
(471
(1,203
Proceeds from dispositions of investments
258,075
397,184
Accretion (amortization) of deferred financing costs
1,056
385
(Increase) Decrease in:
(2,462
(1,913
Distribution receivable
(692
(3,911
27,357
(69
(10,127
Increase or (Decrease) in:
Payable for investments purchased
(3,746
(2,025
(955
Base management fee payable
(187
355
Incentive fee payable
1,461
1,952
(2,928
5,340
Account payable and accrued expenses
651
(768
Net cash provided by (used in) operating activities
65,362
(111,579
Cash flows from financing activities:
Proceeds from public offering
113,214
Distributions paid to stockholders
(41,200
(33,904
Repayment of 2023 notes payable (See Notes 5 and 10)
(20,787
Proceeds from 2026 notes issuance (See Notes 5 and 10)
84,333
Borrowings under Credit Facility (See Notes 5 and 10)
65,000
147,254
Repayments under Credit Facility (See Notes 5 and 10)
(169,709
(107,000
Net cash provided by (used in) financing activities
(54,187
101,747
Net increase (decrease) in cash and cash equivalents
11,175
(9,832
Effect of exchange rate changes on cash
37
622
Cash and cash equivalents, beginning of period
49,826
Cash and cash equivalents, end of period
40,616
Supplemental disclosures:
Interest paid
30,564
20,610
Taxes paid
530
2,557
Non-cash exchanges and conversions
3,393
50,352
CONSOLIDATED SCHEDULE OF INVESTMENTS
JUNE 30, 2023
(in thousands, except share data)
Issuer Name
Maturity
Industry
Current Coupon
Basis Point Spread Above Index (1)
Par / Shares
Cost
Fair Value (2)
Investments in Non-Controlled, Non-Affiliated Portfolio Companies—133.9% (3), (4)
First Lien Secured Debt—116.7%
A1 Garage Merger Sub, LLC
12/22/2028
Commercial Services & Supplies
11.79
%
3M L+660
1,524
1,502
1,508
A1 Garage Merger Sub, LLC - Unfunded Term Loan
528
A1 Garage Merger Sub, LLC LLC (Revolver) (7), (9)
(7
Ad.net Acquisition, LLC
05/07/2026
Media
11.50
3M L+600
4,900
4,855
4,863
Ad.net Acquisition, LLC (Revolver) (7)
871
865
Ad.net Acquisition, LLC (Revolver) (7), (9)
373
(3
Altamira Technologies, LLC
07/24/2025
IT Services
10.70
4,441
4,415
Altamira Technologies, LLC (Revolver) (7)
10.89
575
Altamira Technologies, LLC (Revolver) (7), (9)
1,581
Amsive Holding Corporation (f/k/a Vision Purchaser Corporation)
06/10/2025
11.64
3M L+625
13,995
13,882
13,715
Anteriad, LLC (f/k/a MeritDirect, LLC)
05/23/2024
3M L+550
13,982
13,938
13,632
Anteriad, LLC (f/k/a MeritDirect, LLC) - Incremental Term Loan
11.89
3M L+650
2,240
2,205
2,206
Anteriad, LLC (f/k/a MeritDirect, LLC) (Revolver) (7), (9)
2,869
(72
Any Hour Services
07/21/2027
Energy Equipment and Services
10.90
3M L+525
6,411
6,342
6,235
Any Hour Services (Revolver) (7), (9)
1,147
(32
Apex Service Partners, LLC
07/31/2025
Diversified Consumer Services
10.52
1M L+525
6,160
6,129
Apex Service Partners, LLC Term Loan B
10.75
1M L+550
294
293
Apex Service Partners, LLC Term Loan C
10.50
12,826
12,782
12,761
Apex Service Partners, LLC (Revolver) (7), (9)
1,845
(9
API Holding III Corp.
05/11/2026
Electronic Equipment, Instruments, and Components
9.75
1M L+425
5,760
5,744
3,936
Applied Technical Services, LLC
12/29/2026
11.13
3M L+575
8,133
8,030
7,971
Applied Technical Services, LLC (Unfunded Term Loan)
04/21/2023
197
(2
Applied Technical Services, LLC (Revolver) (7)
12.94
3M L+475
1,082
1,060
Applied Technical Services, LLC (Revolver) (7), (9)
191
(4
Arcfield Acquisition Corp. (Revolver) (9)
03/07/2028
Aerospace and Defense
887
Beta Plus Technologies, Inc.
07/01/2029
Internet Software and Services
10.99
1M L+575
4,963
4,871
4,541
BioDerm, Inc. (Revolver) (9)
01/31/2028
Healthcare Equipment and Supplies
1,071
(16
Blackhawk Industrial Distribution, Inc.
09/17/2026
Distributors
11.47
632
629
616
Blackhawk Industrial Distribution, Inc. (7),(9)
2,624
(52
Blackhawk Industrial Distribution, Inc. (9)
2,744
Broder Bros., Co.
12/04/2025
Textiles, Apparel and Luxury Goods
11.16
3,346
By Light Professional IT Services, LLC
05/16/2024
High Tech Industries
12.30
3M L+688
25,955
25,851
25,501
By Light Professional IT Services, LLC (Revolver) (7)(9)
0.00
3,507
(61
Cadence Aerospace, LLC (7)
11/14/2023
13.91
3M L+850
976
975
(PIK 9.50%)
Cartessa Aesthetics, LLC
06/14/2028
11.24
1M L+600
13,109
12,901
13,044
Cartessa Aesthetics, LLC (Revolver) (7)
511
508
Cartessa Aesthetics, LLC (Revolver) (7)(9)
927
(5
CF512, Inc.
08/20/2026
5,995
5,939
5,935
CF512, Inc. (Revolver) (7), (9)
955
(10
CHA Holdings, Inc.
04/10/2025
Environmental Industries
10.00
3M L+450
1,569
1,565
Challenger Performance Optimization, Inc. (Revolver) (7)
08/31/2023
Business Services
11.85
3M L+675
22
21
Challenger Performance Optimization, Inc. (Revolver) (7), (9)
690
(24
Compex Legal Services, Inc.
02/09/2026
Professional Services
10.78
7,976
7,954
Compex Legal Services, Inc. (Revolver) (7)
02/07/2025
10.79
984
Compex Legal Services, Inc. (Revolver) (7), (9)
422
Connatix Buyer, Inc.
07/13/2027
10.65
3,825
3,769
3,672
Connatix Buyer, Inc. (7), (9)
07/14/2023
2,105
(63
1,234
(49
Crane 1 Services, Inc.
08/16/2027
884
872
876
Crane 1 Services, Inc. (Revolver) (7)
179
178
157
Dr. Squatch, LLC
08/31/2027
Personal Products
11.09
4,394
4,335
4,351
Dr. Squatch, LLC (Revolver) (7), (9)
3,353
(34
DRS Holdings III, Inc.
11/03/2025
Chemicals, Plastics and Rubber
11.63
3M L+640
16,444
16,305
16,000
DRS Holdings III, Inc. (Revolver) (7), (9)
1,426
(39
Duraco Specialty Tapes LLC
06/30/2024
Containers and Packaging
11.75
3,454
3,403
3,395
ECL Entertainment, LLC
05/01/2028
Hotels, Restaurants and Leisure
12.72
1M L+750
3,659
3,628
3,668
eCommission Financial Services, Inc. (10)
10/05/2023
Banking, Finance, Insurance & Real Estate
10.20
1M L+500
4,909
eCommission Financial Services, Inc. (Revolver) (7), (9), (10)
5,000
EDS Buyer, LLC - Unfunded Term Loan
01/10/2029
6,750
(84
EDS Buyer, LLC. (Revolver) (7), (9)
2,025
(51
Efficient Collaborative Retail Marketing Company, LLC
06/15/2024
Media: Diversified and Production
14.50
3M L+900
7,147
7,144
5,288
ETE Intermediate II, LLC - Revolver
05/25/2029
11.69
552
536
ETE Intermediate II, LLC (Revolver) (9)
1,104
(33
Exigo Intermediate II, LLC (9)
03/15/2024
Software
2,758
Exigo Intermediate II, LLC (Revolver) (9)
03/15/2027
689
(14
CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)
Five Star Buyer, Inc.
02/23/2028
12.09
3M L+710
4,615
4,530
4,523
Five Star Buyer, Inc. - DDTL B Unfunded
837
-
(17
Five Star Buyer, Inc. (Revolver) (9)
741
(15
Gantech Acquisition Corp.
05/14/2026
1M L+625
21,644
21,359
20,887
Gantech Acquisition Corp. (Revolver) (7)
3,733
3,603
Global Holdings InterCo LLC
03/16/2026
Diversified Financial Services
11.76
3,288
3,258
3,115
Graffiti Buyer, Inc.
08/10/2027
Trading Companies & Distributors
499
494
Graffiti Buyer, Inc. (7), (9)
08/10/2023
570
Graffiti Buyer, Inc. (Revolver) (7)
11.30
334
331
Graffiti Buyer, Inc. (Revolver) (7), (9)
531
Hancock Roofing and Construction L.L.C.
12/31/2026
Insurance
10.74
4,172
4,108
4,089
Hancock Roofing and Construction L.L.C. (Revolver) (7)
335
328
Hancock Roofing and Construction L.L.C. (Revolver) (7), (9)
415
(8
Holdco Sands Intermediate, LLC
11/23/2028
11.21
4,925
4,844
4,876
Holdco Sands Intermediate, LLC (Revolver) (9)
11/23/2027
1,791
(18
HPA SPQ Merger Sub, Inc.
06/15/2029
11.52
3,758
3,683
HPA SPQ Merger Sub, Inc. - Unfunded Term Loan
1,146
HPA SPQ Merger Sub, Inc (Revolver) (7), (9)
860
HW Holdco, LLC
12/10/2024
1M L+585
9,000
8,967
8,865
HW Holdco, LLC (Revolver) (7), (9)
1,452
(22
IDC Infusion Services, Inc.
12/30/2026
12.13
3M L+700
5,680
5,579
IDC Infusion Services, Inc. (Revolver) (9)
4,167
IG Investments Holdings, LLC (7)
09/22/2028
11.17
4,439
4,364
4,373
IG Investments Holdings, LLC (Revolver) (7), (9)
09/22/2027
Imagine Acquisitionco, LLC (9)
11/15/2027
1,657
(25
Imagine Acquisitionco, LLC (Revolver) (9)
1,193
(30
Inception Fertility Ventures, LLC
12/31/2024
Healthcare Providers and Services
12.50
3M L+715
14,866
14,685
14,717
Infinity Home Services Holdco, Inc.
12/28/2028
11.98
3M L+685
1,751
Infinity Home Services Holdco, Inc. - Unfunded Term Loan
12/28/2023
1,477
Infinity Home Services Holdco, Inc. (Revolver)
14.00
65
Infinity Home Services Holdco, Inc. (Revolver) (9)
1,227
Infolinks Media Buyco, LLC
11/01/2026
3,186
3,145
Infolinks Media Buyco, LLC (9)
11/01/2023
387
Integrative Nutrition, LLC
09/29/2023
Consumer Services
12.39
15,485
15,476
14,711
Integrity Marketing Acquisition, LLC (7)
08/27/2025
11.41
SOFR+550
15,705
15,608
15,548
ITI Holdings, Inc. (Revolver)
03/03/2028
11.92
3M L+560
553
539
ITI Holdings, Inc. (Revolver) (9)
Inventus Power, Inc.
06/30/2025
3M L+761
13,267
13,002
Inventus Power, Inc. (Revolver) (7), (9)
1,729
K2 Pure Solutions NoCal, L.P. (Revolver) (7), (9)
12/20/2023
1,429
Kinetic Purchaser, LLC
11/10/2027
11.39
17,297
17,029
17,037
Kinetic Purchaser, LLC - (Revolver)
11/10/2026
3,091
3,045
Kinetic Purchaser, LLC - (Revolver) (9)
343
Lash OpCo, LLC
02/18/2027
1M L+700
10,431
10,279
10,274
Lash OpCo, LLC (Revolver) (7)
08/16/2026
12.17
1,272
1,253
Lash OpCo, LLC (Revolver) (7), (9)
648
LAV Gear Holdings, Inc.
10/31/2024
Capital Equipment
11.68
7,563
7,554
7,464
(PIK 5.50%)
LAV Gear Holdings, Inc. (Revolver) (7)
1M L+565
1,721
1,698
Ledge Lounger, Inc.
11/09/2026
Leisure Products
3,719
3,678
3,644
Ledge Lounger, Inc. (Revolver) (9)
789
Lightspeed Buyer Inc.
02/03/2026
Healthcare Technology
10.45
22,601
22,316
22,262
Lightspeed Buyer Inc. (Revolver) (7) (9)
2,499
(37
LJ Avalon Holdings, LLC - Unfunded Term Loan
07/31/2024
Construction & Engineering
2,824
LJ Avalon Holdings, LLC (Revolver) (9)
01/31/2030
1,130
(23
Loving Tan Intermediate II, Inc.
05/31/2028
12.26
19,311
18,928
18,925
Loving Tan Intermediate II, Inc. (Revolver)(7)(9)
3,384
(68
Lucky Bucks, LLC (6)
07/20/2027
4,489
4,210
1,194
Lucky Bucks, LLC - DIP
10/20/2023
15.15
3M L+1000
115
102
101
MAG DS Corp.
04/01/2027
10.84
3,684
3,566
3,453
Mars Acquisition Holdings Corp.
8,750
8,628
8,662
Mars Acquisition Holdings Corp. (Revolver)(7)(9)
2,435
MBS Holdings, Inc. (Revolver)
04/16/2027
10.93
185
183
MBS Holdings, Inc. (Revolver)(7)(9)
972
MDI Buyer, Inc.
07/25/2028
Commodity Chemicals
2,046
2,007
2,002
MDI Buyer, inc. (Revolver) (7)
11.00
361
353
MDI Buyer, inc. (Revolver) (9)
412
Meadowlark Acquirer, LLC
12/10/2027
1,983
1,965
1,944
Meadowlark Acquirer, LLC - Term Loan I (9)
1,103
(11
Meadowlark Acquirer, LLC - Term Loan II (9)
9,483
(95
Meadowlark Acquirer, LLC (Revolver) (9)
1,693
Mission Critical Electronics, Inc.
03/28/2024
10.29
SOFR +500
3,589
3,571
3,560
Mission Critical Electronics, Inc. (9)
707
Mission Critical Electronics, Inc. (Revolver) (7), (9)
1,325
Municipal Emergency Services, Inc.
10/01/2027
10.86
1,184
1,145
1,142
Municipal Emergency Services, Inc. - Unfunded Term Loan A
06/16/2023
Municipal Emergency Services, Inc. - Unfunded Term Loan B
12/16/2024
1,264
(44
Municipal Emergency Services, Inc. (Revolver) (7)
3M L+615
568
548
Municipal Emergency Services, Inc. (Revolver) (7), (9)
379
(13
Neptune Flood Incorporated - Revolver Unfunded
05/09/2029
541
NBH Group LLC (Revolver) (7), (9)
08/19/2026
1,677
9
One Stop Mailing, LLC
05/07/2027
Air Freight and Logistics
11.44
8,538
8,413
ORL Acquisition, Inc. (7)
09/03/2027
Consumer Finance
4,913
4,837
4,667
ORL Acquisition, Inc. (Revolver) (7), (9)
861
(43
Output Services Group, Inc. (6)
06/27/2026
4,904
4,469
1,226
Owl Acquisition, LLC
02/04/2028
10.80
3,893
3,793
3,815
Ox Two, LLC
05/18/2026
Construction and Building
12.75
1M L+725
22,736
22,495
22,282
Ox Two, LLC (Revolver) (7)
12.76
1,549
Ox Two, LLC (Revolver) (9)
1,806
(36
Pequod Merger Sub, Inc. - Unfunded Term Loan
12/02/2026
2,847
(57
Pequod Merger Sub, Inc (Revolver) (9)
757
PL Acquisitionco, LLC
11/09/2027
12.20
5,562
5,485
5,062
PL Acquisitionco, LLC - (Revolver) (9)
2,290
(206
PlayPower, Inc.
05/08/2026
10.57
3,411
3,394
3,189
Pragmatic Institute, LLC - Unfunded Term Loan
07/06/2028
Pragmatic Institute, LLC (Revolver)
11.01
305
301
Pragmatic Institute, LLC (Revolver) (9)
1,221
Quantic Electronics, LLC
11/19/2026
11.22
6,664
6,589
6,564
Quantic Electronics, LLC - Unfunded Term Loan
783
Quantic Electronics, LLC (Revolver) (7)
670
660
Questex, LLC
09/09/2024
10.51
3M L+500
7,069
7,036
7,033
Questex, LLC (Revolver) (7), (9)
1,197
(6
Rancho Health MSO, Inc. (Revolver) (7), (9)
12/18/2025
525
Recteq, LLC
01/29/2026
1,466
1,450
1,408
Recteq, LLC (Revolver) (7), (9)
1,296
Research Now Group, Inc. and Dynata, LLC
12/20/2024
17,007
16,902
11,995
Riverpoint Medical, LLC
06/20/2025
10.11
7,960
7,918
7,816
Riverpoint Medical, LLC (Revolver) (7)
10.19
91
89
Riverpoint Medical, LLC (Revolver) (7), (9)
818
Riverside Assessments, LLC
03/10/2025
11.14
15,238
15,095
15,010
Sales Benchmark Index LLC
01/03/2025
2,596
2,578
2,583
Sales Benchmark Index LLC (Revolver) (7), (9)
1,293
Sargent & Greenleaf Inc.
12.77
3,467
3,451
3,416
Sargent & Greenleaf Inc. (Revolver)
437
Sargent & Greenleaf Inc. (Revolver) (9)
642
Schlesinger Global, Inc.
07/14/2025
SOFR + 700
14,515
14,445
13,970
Schlesinger Global, Inc. (Revolver)
1,494
1,438
Schlesinger Global, Inc. (Revolver) (7), (9)
377
Seaway Buyer, LLC
06/13/2029
1,925
1,899
1,877
Sigma Defense Systems, LLC
13.87
10,757
10,580
10,569
Sigma Defense Systems, LLC (Revolver) (7)
13.89
1,966
1,931
Sigma Defense Systems, LLC (Revolver) (7), (9)
Signature Systems Holding Company
05/03/2024
1M L+650
9,870
9,842
Signature Systems Holding Company (Revolver) (9)
1,747
Smile Brands Inc.
10/14/2025
Healthcare and Pharmaceuticals
9.66
1M L+450
2,444
2,247
Smile Brands Inc. (Revolver)
10.01
1,509
1,387
Smile Brands Inc. LC (Revolver) (7), (9)
108
Solutionreach, Inc.
01/17/2024
4,657
4,645
4,611
Solutionreach, Inc. (Revolver) (7), (9)
1,665
Spendmend Holdings LLC
03/01/2028
10.87
SOFR + 575
2,067
2,041
2,011
Spendmend Holdings LLC - Unfunded Term Loan
03/01/2024
1,707
Spendmend Holdings LLC (Revolver)
357
347
Spendmend Holdings LLC (Revolver) (9)
535
STV Group Incorporated
12/11/2026
4,752
4,722
4,728
System Planning and Analysis, Inc. (f/k/a Management Consulting & Research, LLC)
SOFR+600
18,420
18,141
18,070
System Planning and Analysis, Inc. (Revolver) (f/k/a Management Consulting & Research, LLC)
11.05
2,224
2,181
System Planning and Analysis, Inc. (Revolver) (9) (f/k/a Management Consulting & Research, LLC)
2,965
(56
Teneo Holdings LLC
07/18/2025
5,748
5,692
5,734
The Aegis Technologies Group, LLC
10/31/2025
11.86
5,435
5,383
5,327
The Bluebird Group LLC
07/28/2026
12.64
2,379
2,339
2,360
The Bluebird Group LLC (Revolver) (7), (9)
862
The Vertex Companies, LLC (7)
08/30/2027
10.44
2,143
2,110
2,104
The Vertex Companies, LLC (7), (9)
573
The Vertex Companies, LLC (Revolver)
The Vertex Companies, LLC (Revolver) (7), (9)
606
TPC Canada Parent, Inc. and TPC US Parent, LLC (5), (10)
11/24/2025
Food Products
10.68
4,825
4,803
4,787
TVC Enterprises, LLC
03/26/2026
10.95
24,144
23,859
23,782
TVC Enterprises, LLC (Revolver) (7), (9)
661
TWS Acquisition Corporation
06/16/2025
11.65
5,468
5,415
TWS Acquisition Corporation (Revolver) (7), (9)
2,628
Tyto Athene, LLC
04/01/2028
10.54
11,928
11,797
11,022
Tyto Athene, LLC (Revolver) (7), (9)
04/01/2026
1,040
(81
UBEO, LLC
04/03/2024
9.95
3M L+490
17,733
17,700
17,290
UBEO, LLC (Revolver)
12.00
3M L+375
235
234
229
UBEO, LLC (Revolver) (9)
2,699
(70
10
Walker Edison Furniture, LLC - Term Loan
03/31/2027
Wholesale
12.02
3M L+635
3,363
Walker Edison Furniture Company, LLC - Funded Junior Revolver
1,667
1,666
Walker Edison Furniture Company, LLC - Unfunded Term Loan
333
Wildcat Buyerco, Inc.
02/27/2026
7,666
7,592
7,493
Wildcat Buyerco, Inc. (Revolver) (9)
534
(12
Zips Car Wash, LLC
Automobiles
12.45
3M L+725
13,326
13,257
13,027
Total First Lien Secured Debt
734,151
709,802
Second Lien Secured Debt—0.0%
Mailsouth Inc. (7)
04/23/2025
Media: Advertising, Printing and Publishing
(6)
1,120
965
QuantiTech LLC
02/04/2027
15.32
3M L+1,000
148
149
Total Second Lien Secured Debt
1,113
Preferred Equity— 2.1% (6)
Ad.net Holdings, Inc. (7)
6,720
672
787
Anteriad Holdings, LP (f/k/a MeritDirect Holdings, LP) (7), (8)
2,018
2,689
Cartessa Aesthetics, LLC (Preferred) (8)
1,437,500
1,889
Gauge Lash Coinvest LLC (Preferred)
108,546
586
1,319
Gauge Schlesinger Coinvest LLC (Preferred Equity)
64
42
Imagine Topco, LP
8.00
1,236,027
1,236
1,218
Mars Intermediate Holdings II, Inc. (7)
835
1,081
NXOF Holdings, Inc. (Tyto Athene, LLC) (7)
733
895
ORL Holdco, Inc. (7)
1,327
133
67
PL Acquisitionco, LLC (Preferred Equity)
61
62
Signature CR Intermediate Holdco, Inc. (7)
1,323
2,095
TPC Holding Company, LP (5), (7), (8), (10)
409
583
TWD Parent Holdings, LLC (The Vertex Companies, LLC) (7)
35
UniTek Global Services, Inc. -
Telecommunications
20.00
343,861
344
161
Super Senior Preferred Equity (7)
UniTek Global Services, Inc. - Senior Preferred Equity (7)
19.00
448,851
449
UniTek Global Services, Inc. (7)
13.50
1,047,317
Total Preferred Equity
11,006
12,930
Common Equity/Warrants— 15.1% (6)
A1 Garage Equity, LLC (8)
647,943
652
7,467
75
Affinion Group Holdings, Inc. (Warrants)
04/10/2024
Consumer Goods: Durable
8,893
245
AG Investco LP (7), (8)
805,164
805
1,085
AG Investco LP (7), (8), (9)
194,836
Altamira Intermediate Company II, Inc. (7)
1,437
1,439
28
Athletico Holdings, LLC (8)
4,678
4,286
BioDerm Holdings, LP
1,313
1,482
Burgess Point Holdings, LP
Auto Components
By Light Investco LP (7), (8)
22,789
888
11,976
Connatix Parent, LLC (7)
38,278
421
280
Crane 1 Acquisition Parent Holdings, L.P. (7)
130
120
184
Delta InvestCo LP (Sigma Defense Systems, LLC) (7), (8)
615,484
602
Delta InvestCo LP (Sigma Defense Systems, LLC) (7), (8),(9)
389,386
eCommission Holding Corporation (7), (10)
20
251
443
EDS Topco, LP
1,125,000
1,125
942
Exigo, LLC
541,667
542
600
Express Wash Topco, LLC
20,000
27
FedHC InvestCo LP (7),(8)
21,665
727
FedHC InvestCo LP (7),(8),(9)
7,566
Five Star Parent Holdings, LLC
655,714
656
721
Gauge ETE Blocker, LLC
589,363
589
Gauge Lash Coinvest LLC (7)
1,485,953
227
6,734
Gauge Loving Tan, LP
2,481,781
2,482
Gauge Schlesinger Coinvest LLC (7)
465
476
Gauge TVC Coinvest, LLC (TVC Enterprises, LLC) (7)
391,144
1,734
GCOM InvestCo LP (7),(8)
19,184
3,342
2,605
Go Dawgs Capital III, LP
Building Products
324,675
325
799
(American Insulated Glass, LLC) (7), (8)
Hancock Claims Consultants Investors, LLC (7), (8)
450,000
448
HPA SPQ Aggregator LP
750,399
750
HV Watterson Holdings, LLC
100,000
85
Icon Partners V C, L.P.
1,863,863
1,864
1,794
Icon Partners V C, L.P. (7), (9)
636,137
IIN Group Holdings, LLC
1,000
(Integrative Nutrition, LLC) (7), (8)
Imagine Topco, LP (Common)
IHS Parent Holdngs, L.P.
1,218,045
1,467
Ironclad Holdco, LLC (Applied Technical Services, LLC) (7), (8)
5,811
713
ITC Infusion Co-invest, LP (8)
116,032
1,160
1,219
ITC Rumba, LLC (Cano Health, LLC) (7),(8)
46,763
117
11
Kentucky Racing Holdco, LLC (8)
87,345
883
1,734,775
1,735
2,502
KL Stockton Co-Invest LP (Any Hour Services) (7),(8)
382,353
382
1,111
Lightspeed Investment Holdco LLC (7)
585,587
1,359
LJ Avalon, LP
1,638,043
1,638
275
MDI Aggregator, LP
10,761
1,077
1,199
Meadowlark Title, LLC (8)
819,231
MSpark, LLC
3,988
1,287
Municipal Emergency Services, Inc. (7)
1,973,370
2,005
1,829
NEPRT Parent Holdings, LLC (Recteq, LLC) (7), (8)
1,448
North Haven Saints Equity Holdings, LP (8)
223,602
224
250
14,960
15
OceanSound Discovery Equity, LP (Holdco Sands Intermediate, LLC) (7), (8)
173,638
1,659
3,556
OHCP V BC COI, L.P.
743,750
744
711
OHCP V BC COI, L.P. (8) (9)
506,250
1,474
PennantPark-TSO Senior Loan Fund, LP (7)
Financial Services
11,167,847
11,168
8,902
LEP Pequod Holdings, LP
350
Pink Lily Holdco, LLC (PL Acquisitions, LLC) (8)
Pragmatic Institute, LLC
610,583
611
414
Quad (U.S.) Co-Invest, L.P.
266,864
267
304
QuantiTech InvestCo LP (7), (8)
712
68
QuantiTech InvestCo LP (7), (8), (9)
QuantiTech InvestCo II LP (7), (8),
24
30
RFMG Parent, LP (Rancho Health MSO, Inc.) (7)
1,050,000
1,050
SBI Holdings Investments LLC (Sales Benchmark Index LLC) (7), (8)
64,634
646
649
Seaway Topco, LP
296
277
70
1,126
SP L2 Holdings, LLC (Ledge Lounger, Inc.)
360,103
360
221
SSC Dominion Holdings, LLC
1,375
Class B (US Dominion, Inc.) (7)
StellPen Holdings, LLC (CF512, Inc.) (7)
161,538
187
TAC LifePort Holdings, LLC (7),(8)
533,833
664
Tower Arch Infolinks Media, LP (Infolinks Media Buyco, LLC)(8)
219,056
206
444
Tower Arch Infolinks Media, LP (Infolinks Media Buyco, LLC)(8) (9)
146,550
21,527
126
749
1
213,739
UniVista Insurance (7),(8)
400
374
Urology Partners Co., L.P.
694,444
694
777
Walker Edison Holdco LLC
36,458
2,437
WCP IvyRehab QP CF Feeder, LP(8)
3,715,012
3,753
4,322
WCP IvyRehab QP CF Feeder, LP (8), (9)
284,988
Wildcat Parent, LP (Wildcat Buyerco, Inc.) (7)
704
Total Common Equity/Warrants
69,896
91,727
Total Investments in Non-Controlled, Non-Affiliated Portfolio Companies
816,166
Investments in Controlled, Affiliated Portfolio Companies—47.8% (3), (4)
First Lien Secured Debt—39.5%
Marketplace Events, LLC - Super Priority First Lien Term Loan (7)
09/30/2025
10.43
3,582
(PIK 5.25%)
Marketplace Events, LLC - Super Priority First Lien (7), (9)
3,261
Marketplace Events, LLC
09/30/2026
26,771
20,559
PennantPark Senior Secured Loan Fund I LLC (7), (9), (10)
05/06/2024
13.24
3M L+800
210,088
234,229
240,441
Equity Interests—8.3%
New MPE Holdings, LLC (Marketplace Events, LLC) (7),(8)
349
2,275
90,038
47,941
Total Equity Interests
50,216
Total Investments in Controlled, Affiliated Portfolio Companies
324,267
Total Investments—181.7%
1,140,433
Cash and Cash Equivalents—9.7%
Money Market - BlackRock Federal FD Institutional 30
43,994
Non-Money Market Cash
15,098
Total Cash and Cash Equivalents
Total Investments and Cash Equivalents—191.4%
1,199,525
1,164,357
Liabilities in Excess of Other Assets—(91.4)%
(555,930
Net Assets—100.0%
—————
12
13
Investments in Non-Controlled, Non-Affiliated Portfolio Companies—169.5% (3), (4)
First Lien Secured Debt—149.7%
05/06/2026
9.67
4,938
4,882
1,244
10.81
4,794
4,756
4,626
11.67
555
(55
American Insulated Glass, LLC
12/21/2023
7.79
7,601
7,559
American Teleconferencing Services, Ltd.(7)
06/08/2023
0.00%
7,986
7,915
90
American Teleconferencing Services, Ltd. (Revolver) (7)
12/08/2022
1,656
1,642
17
9.85
14,104
13,951
13,892
9.17
14,568
14,486
7.43
10,536
10,432
10,326
6.72
6,208
6,166
6,177
295
7.75
12,906
12,814
12,841
7.92
5,805
5,785
5,050
9.42
7,040
6,968
2,298
10.25
255
248
1,018
7.76
4,901
09/17/2024
8.33
25
3,232
(40
Blackhawk Industrial Distribution, Inc. (Revolver) (7)
8.87
549
533
2,195
(62
12/02/2022
7.39
3,405
9.26
27,533
27,331
27,257
By Light Professional IT Services, LLC (Revolver)
3M L+663
877
868
By Light Professional IT Services, LLC (Revolver) (9)
11.31
3,033
3,024
3,003
05/13/2028
9.55
16,459
16,143
16,212
503
9.28
8,098
7,988
CF512, Inc. (7), (9)
(1
8.17
1,577
9.27
1M L+675
346
356
8.83
8,038
8,010
8.92
773
633
8.42
3,907
3,841
3,810
01/13/2023
9.39
891
885
882
222
Douglas Products and Packaging Company LLC
10/19/2022
6,477
6,476
Douglas Products and Packaging Company LLC (Revolver)
P+475
2,627
Douglas Products and Packaging Company LLC (Revolver) (9)
3,425
Douglas Sewer Intermediate, LLC
3,920
4,428
4,356
4,362
Dr. Squatch, LLC (Revolver) (7)
8.95
1,118
1,101
2,236
17,111
16,993
16,564
(46
8.62
3,247
3,208
3,169
10.62
5,203
5,158
5,125
ECM Industries, LLC (Revolver)
12/23/2025
1M L+475
514
490
ECM Industries, LLC (Revolver) (9)
(19
7.63
5,837
eCommission Financial Services, Inc. (Revolver) (7), (10)
2,500
10.42
7,150
7,123
6,936
(41
Exigo Intermediate II, LLC (Revolver)
138
135
Findex Group Limited (5)(10)(11)
05/31/2024
7.17
AUD 10,000
7,399
6,430
14
9.37
21,982
21,632
21,322
249
241
Gantech Acquisition Corp. (Revolver) (7), (9)
3,484
(105
8.74
3,427
3,388
3,273
418
401
447
8.67
4,378
4,374
Hancock Roofing and Construction L.L.C. (7), (9)
12/31/2022
7.82
270
266
480
10.17
4,872
6.00
8,457
8,416
8,352
HW Holdco, LLC (9)
1,686
5,723
5,616
5,506
(188
9.45
4,473
4,429
Imagine Acquisitionco, LLC
3,979
3,909
3,879
12/07/2023
10.13
14,954
14,804
2,625
2,581
969
15,636
15,600
15,323
Integrative Nutrition, LLC (Revolver) (7), (9)
7.58
15,825
15,697
15,667
8.25
532
17,428
17,120
17,079
3,435
3,366
10,511
10,323
10,300
9.38
599
587
1,321
(26
9,565
9,542
9,345
1,681
9.92
3,747
3,691
24,357
24,065
23,566
Lightspeed Buyer Inc. (Revolver) (7)
1,083
1,048
Lucky Bucks, LLC
8.31
4,331
4,258
3,183
3,714
3,576
3,379
6,052
5,958
6,022
1,624
1,157
MDI Buyer, Inc. - Unfunded Term Loan
1,804
1,306
1,305
1,782
8.03
3,430
3,389
Mission Critical Electronics, Inc. (Revolver) (7)
6.67
557
550
769
09/28/2027
354
351
Municipal Emergency Services, Inc. (7), (9)
592
(29
142
134
(47
OIS Management Services, LLC
07/09/2026
1,975
1,951
OIS Management Services, LLC (Revolver) (7), (9)
8,759
8,612
8,496
7,195
Output Services Group, Inc.
03/27/2024
9.80
4,874
4,592
3,704
8.41
3,990
3,874
3,890
9.81
25,772
25,440
25,257
2,484
2,434
903
9.62
6,110
6,015
Plant Health Intermediate, Inc.
637
3,440
3,419
3,078
PRA Events, Inc.
08/07/2025
14.17
1M L+1,050
3,323
2,903
(PIK 10.50%)
9.30
302
4,706
4,632
4,612
9.51
268
263
Quantic Electronics, LLC (Revolver) (7), (9)
402
7.45
7,200
7,146
7,056
Rancho Health MSO, Inc. (7)
1,478
1,457
Recteq, LLC (Revolver) (7)
936
8.84
17,142
16,985
15,406
8.65
7,980
7,924
7,781
909
15,356
15,201
15,049
7,105
7,034
3,487
3,462
3,452
8.28
1,037
10.27
14,560
14,467
14,196
10.14
1,487
9.41
6,940
6,836
10,969
10,742
10,750
996
1,625
10,358
10,301
10,280
7.42
2,462
2,370
Smile Brands Inc. (Revolver) (7), (9)
5,740
5,705
Spear Education, LLC
02/26/2025
14,747
14,642
8.63
3,216
3,179
3,126
Spendmend Holdings LLC (9)
03/01/2023
1,771
119
116
772
8.37
4,718
4,704
8.73
18,560
18,237
18,263
5,188
(83
8.38
5,793
5,718
5,455
4,921
4,868
07/27/2026
10.67
6,265
6,162
6,328
The Infosoft Group, LLC
09/16/2024
Media: Broadcasting and Subscription
8.51
15,229
15,120
15,115
8.18
2,159
2,122
2,148
8.26
182
181
729
7.78
4,834
4,717
24,721
24,378
24,103
8.76
5,398
5,441
12,644
12,487
11,746
(74
7.60
17,926
17,860
17,657
9.00
3M L+275
578
2,347
(35
Unique Indoor Comfort, LLC
05/24/2027
3M L + 525
9,217
9,126
9,014
Unique Indoor Comfort, LLC Term Loan (7)
10,760
(129
Unique Indoor Comfort, LLC (Revolver) (7), (9)
2,000
Walker Edison Furniture Company LLC
12.42
1M L+875
12,684
12,434
8,474
9,853
9,717
9,532
10.30
13,428
13,284
13,092
815,742
789,107
Second Lien Secured Debt—0%
1,001
(PIK 15.00%)
12.68
147
Preferred Equity— 1.6% (6)
Ad.net Holdings, Inc. (7),(8)
747
1,499
1,170
16
2,537
1,042
1,674
TPC Holding Company, LP (5), (7), (10)
10,297
9,945
Common Equity/Warrants— 18.1% (6)
98
Affinion Group Holdings, Inc. (Warrants)(7)
1,127
906
Athletico Holdings, LLC
4,758
22,090
193
18,085
By Light Investco LP (7), (8), (9)
3,223
CI (Allied) Investment Holdings, LLC
120,962
1,243
1,651
(PRA Events, Inc.) (7), (8)
459
140
1,255
ECM Investors, LLC (7), (8)
295,982
348
478
21,083
2,142
9,488
Gauge InfosoftCoInvest, LLC
500
2,471
(The Infosoft Group, LLC) (7)
7,030
496
1,558
450
87
1,851,852
1,852
1,989
648,148
754
ITC Infusion Co-invest, LP
81,313
813
857
5,232
JWC-WE Holdings, L.P.
1,948
(Walker Edison Furniture Company LLC) (7), (8)
2,458
643
Kentucky Racing Holdco, LLC (Warrants) (7), (8)
961
800
668,747
669
Meadowlark Title, LLC
819
901
1,288
1,505
279
North Haven Saints Equity Holdings, LP
237
310
2,917
636
(73
Oral Surgery (ITC) Holdings, LLC (7),(8)
3,872
83
231
261
9,892
Pink Lily Holdco, LLC (PL Acquisitions, LLC)
914
352
1,091
634
680
Class A (US Dominion, Inc.) (7)
1,463
162
160
488,372
488
621
Tower Arch Infolinks Media, LP (Infolinks Media Buyco, LLC)
216,925
209
366
148,681
UniTek Global Services, Inc. (Warrants) (7)
23,889
378
454
WCP IvyRehab QP CF Feeder, LP
3,762,257
3,762
WCP IvyRehab QP CF Feeder, LP (9)
237,743
Wildcat Parent, LP (Wildcat Buyerco, Inc.) (7), (8)
596
55,418
94,050
882,570
Investments in Controlled, Affiliated Portfolio Companies—51.4% (3), (4)
First Lien Secured Debt—41.8%
8.19
19,518
10.71
190,181
190,182
213,281
220,535
Equity Interests—9.6%
1,036
81,506
49,434
50,470
294,787
Total Investments—220.9%
1,177,357
Cash and Cash Equivalents—9.1%
BlackRock Federal FD Institutional 30
38,209
BNY Mellon Cash
9,707
9,671
47,916
Total Investments and Cash Equivalents—230.0%
1,225,273
1,212,134
Liabilities in Excess of Other Assets—(130.0)%
(685,042
18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
PennantPark Floating Rate Capital Ltd. was organized as a Maryland corporation in October 2010. We are a closed-end, externally managed, non-diversified investment company that has elected to be treated as a BDC under the 1940 Act.
Our investment objectives are to generate both current income and capital appreciation while seeking to preserve capital. We seek to achieve our investment objective by investing primarily in floating rate loans, and other investments made to U.S. middle-market private companies whose debt is rated below investment grade. Floating rate loans pay interest at variable rates, which are determined periodically, on the basis of a floating base lending rate such as LIBOR, with or without a floor, plus a fixed spread. Under normal market conditions, we generally expect that at least 80% of the value of our managed assets will be invested in floating rate loans and other investments bearing a variable rate of interest, which may include, from time to time, variable rate derivative instruments. We generally expect that first lien secured debt will represent at least 65% of our overall portfolio. We generally expect to invest up to 35% of our overall portfolio opportunistically in other types of investments, including second lien secured debt, subordinated debt, and, to a lesser extent, equity investments.
We have entered into an investment management agreement, or the Investment Management Agreement, with the Investment Adviser, an external adviser that manages our day-to-day operations. We have also entered into an administration agreement, or the Administration Agreement, with the Administrator, which provides the administrative services necessary for us to operate.
Funding I, our wholly-owned subsidiary and a special purpose entity, was organized in Delaware as a limited liability company in May 2011. We formed Funding I in order to establish the Credit Facility. The Investment Adviser serves as the collateral manager to Funding I and has irrevocably directed that any management fee owed with respect to such services is to be paid to us so long as the Investment Adviser remains the collateral manager. This arrangement does not increase our consolidated management fee. The Credit Facility allows Funding I to borrow up to $366 million (increased from $300 million in September 2022) at SOFR (or an alternative risk-free floating interest rate index) plus 225 basis points during the revolving period. The Credit Facility is secured by all of the assets held by Funding I. See Note 10.
We have formed and expect to continue to form certain taxable subsidiaries, including the Taxable Subsidiary, which are subject to tax as corporations. These taxable subsidiaries allow us to hold equity securities of certain portfolio companies treated as pass-through entities for U.S. federal income tax purposes while facilitating our ability to qualify as a RIC under the Code.
On April 14, 2022, listing and trading of the Company's common stock commenced on the New York Stock Exchange after the Company voluntarily withdrew the principal listing of its common stock from the Nasdaq Stock Market LLC effective at market close on April 13, 2022.
In May 2017, we and a subsidiary of Kemper Corporation (NYSE: KMPR), Trinity Universal Insurance Company, or Kemper, formed PSSL, an unconsolidated joint venture. PSSL invests primarily in middle-market and other corporate debt securities consistent with our strategy. PSSL was formed as a Delaware limited liability company. See Note 4.
In November 2017, we issued $138.6 million of our 2023 Notes. The principal on the 2023 Notes will be payable in four annual installments as follows: 15% of the original principal amount on December 15, 2020, 15% of the original principal amount on December 15, 2021, 15% of the original principal amount on December 15, 2022 and 55% on December 15, 2023. The 2023 Notes are general, unsecured obligations and rank equal in right of payment with all of our existing and future senior unsecured indebtedness. The 2023 Notes are listed on the TASE. In connection with this offering, we have dual listed our common stock on the TASE.
In September 2019, the Securitization Issuers completed the Debt Securitization. The 2031 Asset-Backed Debt is secured by a diversified portfolio of the Securitization Issuer consisting primarily of middle market loans and participation interests in middle market loans. The 2031 Asset-Backed Debt is scheduled to mature on October 15, 2031. On the closing date of the Debt Securitization, in consideration of our transfer to the Securitization Issuer of the initial closing date loan portfolio, which included loans distributed to us by certain of our wholly-owned subsidiaries, the Securitization Issuer transferred to us 100% of the Preferred Shares of the Securitization Issuer, 100% of the Class D Secured Deferrable Floating Rate Notes issued by the Securitization Issuer, and a portion of the net cash proceeds received from the sale of the 2031 Asset-Backed Debt. See Note 10.
In April 2021, we formed PennantPark-TSO Senior Loan Fund LP ("PTSF"), an unconsolidated limited partnership, organized as a Delaware limited liability partnership. We sold $81.4 million in investments to a wholly-owned subsidiary of PTSF in exchange for cash in the amount of $69.5 million and an $11.9 million equity interest in PTSF representing 23.08% of the total outstanding Class A Units of PTSF. We recognized $0.4 million of realized gain upon the formation of PTSF. As of June 30, 2023, our capital commitment of $15.3 million is fully funded and we hold 23.08% of the total outstanding Class A Units of PTSF and a 4.99% voting interest in the general partner which manages PTSF.
We are operated by a person who has claimed an exclusion from the definition of the term “commodity pool operator” under the Commodity Exchange Act of 1936, as amended, or the Commodity Exchange Act, and therefore, is not subject to registration or regulation as a commodity pool operator under the Commodity Exchange Act.
2. SIGNIFICANT ACCOUNTING POLICIES
The preparation of our Consolidated Financial Statements, in conformity with U.S. generally accepted accounting principles, or GAAP, requires management to make estimates and assumptions that affect the reported amount of our assets and liabilities at the date of the Consolidated Financial Statements and the reported amounts of income and expenses during the reported periods. In the opinion of management, all adjustments, which are of a normal recurring nature, considered necessary for the fair presentation of financial statements have been included. Changes in the economic and regulatory environment, financial markets, the credit worthiness of our portfolio companies, and any other parameters used in determining these estimates and assumptions could cause actual results to differ from these estimates and assumptions. We may reclassify certain prior period amounts to conform to the current period presentation. We have eliminated all intercompany balances and transactions. References to the Financial Accounting Standards Board’s, or FASB’s, Accounting Standards Codification, as amended, or ASC, serve as a single source of accounting literature. Subsequent events are evaluated and disclosed as appropriate for events occurring through the date the Consolidated Financial Statements are issued.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Our Consolidated Financial Statements are prepared in accordance with GAAP, consistent with ASC Topic 946, Financial Services – Investment Companies, and pursuant to the requirements for reporting on Form 10-K/Q and Articles 6, 10 and 12 of Regulation S-X, as appropriate. In accordance with Article 6-09 of Regulation S-X, we have provided a Consolidated Statement of Changes in Net Assets in lieu of a Consolidated Statement of Changes in Stockholders’ Equity.
Our significant accounting policies consistently applied are as follows:
(a) Investment Valuations
We expect that there may not be readily available market values for many of the investments, which are or will be in our portfolio, and we value such investments at fair value as determined in good faith by or under the direction of our board of directors using a documented valuation policy and a consistently applied valuation process, as described in this Report. With respect to investments for which there is no readily available market value, the factors that the board of directors may take into account in pricing our investments at fair value include, as relevant, the nature and realizable value of any collateral, the portfolio company’s ability to make payments and its earnings and discounted cash flow, the markets in which the portfolio company does business, comparison to publicly traded securities and other relevant factors. When an external event such as a purchase transaction, public offering or subsequent equity sale occurs, we consider the pricing indicated by the external event to corroborate or revise our valuation. Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the price used in an actual transaction may be different than our valuation and the difference may be material. See Note 5.
Our portfolio generally consists of illiquid securities, including debt and equity investments. With respect to investments for which market quotations are not readily available, or for which market quotations are deemed not reflective of the fair value, our board of directors undertakes a multi-step valuation process each quarter, as described below:
Our board of directors generally uses market quotations to assess the value of our investments for which market quotations are readily available. We obtain these market values from independent pricing services or at bid prices obtained from at least two brokers or dealers, if available, or otherwise from a principal market maker or a primary market dealer. The Investment Adviser assesses the source and reliability of bids from brokers or dealers. If the board of directors has a bona fide reason to believe any such market quote does not reflect the fair value of an investment, it may independently value such investments by using the valuation procedure that it uses with respect to assets for which market quotations are not readily available.
(b) Security Transactions, Revenue Recognition, and Realized/Unrealized Gains or Losses
Security transactions are recorded on a trade-date basis. We measure realized gains or losses by the difference between the net proceeds from the repayment or sale and the amortized cost basis of the investment, using the specific identification method, without regard to unrealized appreciation or depreciation previously recognized, but considering prepayment penalties. Net change in unrealized appreciation or depreciation reflects the change in the fair values of our portfolio investments, the Credit Facility and the 2023 Notes during the reporting period, including any reversal of previously recorded unrealized appreciation or depreciation, when gains or losses are realized.
We record interest income on an accrual basis to the extent that we expect to collect such amounts. For loans and debt investments with contractual PIK interest, which represents interest accrued and added to the loan balance that generally becomes due at maturity, we will generally not accrue PIK interest when the portfolio company valuation indicates that such PIK interest is not collectable. We do not accrue as a receivable interest on loans and debt investments if we have reason to doubt our ability to collect such interest. Loan origination fees, original issue discount, or OID, market discount or premium and deferred financing costs on liabilities, which we do not fair value, are capitalized and then accreted or amortized using the effective interest method as interest income or, in the case of deferred financing costs, as interest expense. We record prepayment penalties earned on loans and debt investments as income. Dividend income, if any, is recognized on an accrual basis on the ex-dividend date to the extent that we expect to collect such amounts. From time to time, the Company receives certain fees from portfolio companies, which are non-recurring in nature. Such fees include loan prepayment penalties, structuring fees and amendment fees, and are recorded as other investment income when earned. Litigation settlements are accounted for in accordance with the gain contingency provisions of ASC Subtopic 450-30, Gain Contingencies, or ASC 450-30.
Loans are placed on non-accrual status when principal or interest payments are past due 30 days or more and/or if there is reasonable doubt that principal or interest will be collected. Accrued interest is generally reversed when a loan is placed on non-accrual status. Interest payments received on non-accrual loans may be recognized as income or applied to principal depending upon management’s judgment. Non-accrual loans are restored to accrual status when past due principal and interest is paid and, in management’s judgment, are likely to remain current. As of June 30, 2023, we had three portfolio companies on non-accrual, representing 1% and zero of our overall portfolio on a cost and fair value basis, respectively. As of September 30, 2022, we had two portfolio companies on non-accrual, representing 0.9% and zero of our overall portfolio on a cost and fair value basis, respectively.
(c) Income Taxes
We have complied with the requirements of Subchapter M of the Code and have qualified to be treated as a RIC for federal income tax purposes. In this regard, we account for income taxes using the asset and liability method prescribed by ASC Topic 740, Income Taxes, or ASC 740. Under this method, income taxes are provided for
amounts currently payable and for amounts deferred as tax assets and liabilities based on differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities. Based upon our qualification and election to be treated as a RIC for U.S. federal income tax purposes, we typically do not incur material U.S. federal income taxes. However, we may choose to retain a portion of our calendar year income, which may result in the imposition of a federal excise tax, or we may incur taxes through our taxable subsidiaries, including the Taxable Subsidiary. For the three and nine months ended June 30, 2023, we recorded a provision for taxes on net investment income of $0.2 million and $0.8 million, respectively, pertaining to federal excise tax. For the three and nine months ended June 30, 2022, we recorded a provision for taxes on net investment income of $0.1 million and $0.3 million, respectively, pertaining to federal excise tax.
We recognize the effect of a tax position in our Consolidated Financial Statements in accordance with ASC 740 when it is more likely than not, based on the technical merits, that the position will be sustained upon examination by the applicable tax authority. Tax positions not considered to satisfy the “more-likely-than-not” threshold would be recorded as a tax expense or benefit. Penalties or interest, if applicable, that may be assessed relating to income taxes would be classified as other operating expenses in the financial statements. There were no tax accruals relating to uncertain tax positions and no amounts accrued for any related interest or penalties with respect to the periods presented herein. The Company’s determinations regarding ASC 740 may be subject to review and adjustment at a later date based upon factors including, but not limited to, an ongoing analysis of tax laws, regulations and interpretations thereof. Although the Company files both federal and state income tax returns, the Company’s major tax jurisdiction is federal.
The Taxable Subsidiary (PFLT Investment Holdings, LLC, a second tier wholly-owned subsidiary of the Company), is subject to U.S. federal, state and local corporate income taxes. The income tax expense and related tax liabilities of the Taxable Subsidiary are reflected in the Company’s consolidated financial statements.
For the three and nine months ended June 30, 2023, the Company recognized a provision reduction for taxes of zero and $2.9 million, respectively, on unrealized appreciation (depreciation) on investments by the Taxable Subsidiary. For the three and nine months ended June 30, 2022 the Company recognized a provision for taxes of zero and $(5.3) million, respectively, on unrealized appreciation (depreciation) on investments by the Taxable Subsidiary. The provision for taxes on unrealized appreciation (depreciation) on investments is the result of netting (i) the expected tax liability on gains from sales of investments and (ii) the expected tax benefit from the use of losses in the current year. As of June 30, 2023 and September 30, 2022, $1.6 million and $4.6 million, respectively, was accrued as a deferred tax liability on the Consolidated Statements of Assets and Liabilities relating to unrealized gain on investments held by the Taxable Subsidiary. As of June 30, 2023 and September 30, 2022, $0.3 million and zero, respectively, was accrued as a provision for taxes on the Consolidated Statements of Operations relating to realized gain on investments held by the Taxable Subsidiary. During the three and nine months ended June 30, 2023, the Company paid $0.5 million and $0.5 million, respectively, in taxes on realized gains on the sale of investments held by the Taxable Subsidiary, resulting in a $1.2 million prepaid tax asset as of June 30, 2023 included under prepaid expenses and other assets in the Consolidated Statement of Assets and Liabilities.
We operate in a manner to maintain our election to be subject to tax as a RIC and to eliminate corporate-level U.S. federal income tax (other than the 4% excise tax) by distributing sufficient investment company taxable income and capital gain net income (if any). As a result, we will have an effective tax rate equal to 0% before the excise tax and income taxes incurred by the Taxable Subsidiary. As such, a reconciliation of the differences between our reported income tax expense and its tax expense at the federal statutory rate of 21% is not meaningful.
Because federal income tax regulations differ from GAAP, distributions in accordance with tax regulations may differ from net investment income and net realized gains recognized for financial reporting purposes. Differences between tax regulations and GAAP may be permanent or temporary. Permanent differences are reclassified among capital accounts in the consolidated financial statements of assets and liabilities to reflect their tax character. Temporary differences arise when certain items of income, expense, gain or loss are recognized at some time in the future.
(d) Distributions and Capital Transactions
Distributions to common stockholders are recorded on the ex-dividend date. The amount to be paid, if any, as a distribution is determined by the board of directors each quarter and is generally based upon the earnings estimated by management. Net realized capital gains, if any, may be distributed at least annually. The tax attributes for distributions will generally include ordinary income and capital gains but may also include certain tax-qualified dividends and/or a return of capital.
Capital transactions through offerings of our common stock are recorded when issued and offering costs are charged as a reduction of capital upon issuance of our common stock.
On August 20, 2021, we entered into equity distribution agreements with each of JMP Securities LLC and Raymond James & Associates, Inc., as the sales agents, in connection with the sale of shares of our common stock, with an aggregate offering of up to $75 million under an at-the-market offering (“ATM Program”). The equity distribution agreements provide that we may offer and sell shares of our common stock from time to time through a sales agent in amounts and at times to be determined by us. On May 5, 2022, we amended the equity distribution agreements to update references from NASDAQ to NYSE and reflect that the agents are now represented by Kirkland & Ellis LLP. On March 27, 2023 we terminated the equity distribution agreements and entered into new equity distribution agreements with JMP Securities LLC, Raymond James & Associates, Inc. and Truist Securities, Inc. (together, the "Equity Distribution Agreements"), as sales agents in connection with the sale of shares of our common stock, with an aggregate offering of up to $100 million under an ATM Program. The equity distribution agreements, provide that we may offer and sell shares of our common stock from time to time through a sales agent in amounts and at times to be determined by us. Actual sales will depend on a variety of factors to be determined by us from time to time, including, market conditions and the trading price of our common stock. The Investment Adviser may, from time to time, in its sole discretion, pay some or all of the commissions payable under the equity distribution agreements or make additional supplemental payments to ensure that the sales price per share of our common stock in connection with all of the offerings made hereunder will not be less than our current NAV per share. Any such payments made by the Investment Adviser will not be subject to reimbursement by us.
During the three months ended June 30, 2023, we issued 5,805,484 shares of common stock through the ATM Program at an average price of $11.03 per share, raising $64.1 million of net proceeds after commissions to the sales agents and inclusive of proceeds from the Investment Adviser to ensure that all shares were sold at or above NAV. In connection with the share issuance, we expensed $0.5 million of deferred offering costs incurred related to establishing the ATM Program to additional paid in capital.
During the nine months ended June 30, 2023, we issued 5,891,661 shares of common stock through the ATM Program at an average price of $11.04 per share, raising $65.1 million of net proceeds after commissions to the sales agents and inclusive of proceeds from the Investment Adviser to ensure that all shares were sold at or above NAV.
(e) Foreign Currency Translation
Our books and records are maintained in U.S. dollars. Any foreign currency amounts are translated into U.S. dollars on the following basis:
Although net assets and fair values are presented based on the applicable foreign exchange rates described above, we do not isolate that portion of the results of operations due to changes in foreign exchange rates on investments, other assets and debt from the fluctuations arising from changes in fair value of investments and liabilities held. Such fluctuations are included with the net realized and unrealized gain or loss from investments and liabilities.
Foreign security and currency translations may involve certain considerations and risks not typically associated with investing in U.S. companies and U.S. government securities. These risks include, but are not limited to, currency fluctuations and revaluations and future adverse political, social and economic developments, which could cause investments in foreign markets to be less liquid and prices to be more volatile than those of comparable U.S. companies or U.S. government securities.
(f) Consolidation
As permitted under Regulation S-X and as explained by ASC paragraph 946-810-45-3, PennantPark Floating Rate Capital Ltd. will generally not consolidate its investment in a company other than an investment company wholly-owned subsidiary or a controlled operating company whose business consists of providing services to us. Accordingly, we have consolidated the results of our taxable subsidiaries, including the Taxable Subsidiary, Funding I and the Securitization Issuer in our Consolidated Financial Statements. We do not consolidate our non-controlling interest in PSSL or PTSF. See further description of our investment in PSSL in Note 4.
(g) Asset Transfers and Servicing
Asset transfers that do not meet ASC Topic 860, Transfers and Servicing, requirements for sale accounting treatment are reflected in the Consolidated Statements of Assets and Liabilities and the Consolidated Schedules of Investments as investments. The creditors of Funding I have received a security interest in all of its assets and such assets are not intended to be available to the creditors of PennantPark Floating Rate Capital Ltd. or any of its affiliates.
(h) Recent Accounting Pronouncements
In March 2020, the FASB issued Accounting Standards Update, or ASU, No. 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” The guidance provides optional expedients and exceptions for applying GAAP to contract modifications, hedging relationships and other transactions, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued because of the reference rate reform. ASU 2020-04 is effective for all entities as of March 12, 2020 through December 31, 2022. The FASB approved an (optional) two year extension to December 31, 2024, for transitioning away from LIBOR. The Company utilized the optional expedients and exceptions provided by ASU 2020-04 during the year ended September 30, 2022, the effect of which was not material to the consolidated financial statements and the notes thereto.
In March 2022, the FASB issued ASU No. 2022-02, “Financial Instruments - Credit Losses (Topic 326)”, which is intended to address issues identified during the post-implementation review of ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”. The amendment, among other things, eliminates the accounting guidance for troubled debt restructurings by creditors in Subtopic 310-40, “Receivables - Troubled Debt Restructurings by Creditors”, while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. The new guidance is effective for interim and annual periods beginning after December 15, 2022. The Company has adopted the new accounting standard implementing appropriate controls and procedures, the effect of which was not material to the consolidated financial statements and the notes thereto.
In June 2022, the FASB issued ASU 2022-03, Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions, or ASU 2022-03, which changed the fair value measurement disclosure requirements of ASC Topic 820, Fair Value Measurements and Disclosures, or ASC 820. The amendments clarify that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value. The amendments also clarify that an entity cannot, as a separate unit of account, recognize and measure a contractual sale restriction. The new guidance is effective for fiscal years beginning after December 15, 2023, including interim periods therein. Early application is permitted. The Company is currently evaluating the impact the adoption of this new accounting standard will have on its consolidated financial statements, but the impact of the adoption is not expected to be material.
3. AGREEMENTS AND RELATED PARTY TRANSACTIONS
(a) Investment Management Agreement
The Investment Management Agreement with the Investment Adviser was reapproved by our board of directors, including a majority of our directors who are not interested persons of us or the Investment Adviser, in February 2023. Under the Investment Management Agreement, the Investment Adviser, subject to the overall supervision of our board of directors, manages the day-to-day operations of and provides investment advisory services to us. The Investment Adviser serves as the collateral manager to Funding I and has irrevocably directed that any management fee owed with respect to such services is to be paid to the Company so long as the Investment Adviser remains the collateral manager. This arrangement does not increase our consolidated management fee. For providing these services, the Investment Adviser receives a fee from us consisting of two components— a base management fee and an incentive fee.
Base Management Fee
The base management fee is calculated at an annual rate of 1.00% of our “average adjusted gross assets,” which equals our gross assets (net of U.S. Treasury Bills, temporary draws under any credit facility, cash and cash equivalents, repurchase agreements or other balance sheet transactions undertaken at the end of a fiscal quarter for purposes of preserving investment flexibility for the next quarter and unfunded commitments, if any) and is payable quarterly in arrears. The base management fee is calculated based on the average adjusted gross assets at the end of the two most recently completed calendar quarters, and appropriately adjusted for any share issuances or repurchases during the current calendar quarter. For example, if we sold shares on the 45th day of a quarter and did not use the proceeds from the sale to repay outstanding indebtedness, our gross assets for such quarter would give effect to the net proceeds of the issuance for only 45 days of the quarter during which the additional shares were outstanding. For the three and nine months ended June 30, 2023 the Investment Adviser earned a base management fee of $2.8 million and $8.6 million respectively, from us. For the three and nine months ended June 30, 2022 the Investment Adviser earned a base management fee of $3.1 million and $8.9 million respectively, from us.
Incentive Fee
The incentive fee has two parts, as follows:
One part is calculated and payable quarterly in arrears based on our Pre-Incentive Fee Net Investment Income for the immediately preceding calendar quarter. For this purpose, Pre-Incentive Fee Net Investment Income means interest income, dividend income and any other income, including any other fees (other than fees for providing managerial assistance), such as amendment, commitment, origination, prepayment penalties, structuring, diligence and consulting fees or other fees received from portfolio companies, accrued during the calendar quarter, minus our operating expenses for the quarter (including the base management fee, any expenses payable under the Administration Agreement and any interest expense or amendment fees under any credit facility and distribution paid on any issued and outstanding preferred stock, but excluding the incentive fee). Pre-Incentive Fee Net Investment Income includes, in the case of investments with a deferred interest feature (such as OID, debt instruments with PIK interest and zero-coupon securities), accrued income not yet received in cash. Pre-Incentive Fee Net Investment Income does not include any realized capital gains, computed net of all realized capital losses or unrealized capital appreciation or depreciation. Pre-Incentive Fee Net Investment Income, expressed as a percentage of the value of our net assets at the end of the immediately preceding calendar quarter, is compared to the hurdle rate of 1.75% per quarter (7.00% annualized). We pay the Investment Adviser an incentive fee with respect to our Pre-Incentive Fee Net Investment Income in each calendar quarter as follows: (1) no incentive fee in any calendar quarter in which our Pre-Incentive Fee Net Investment Income does not exceed the hurdle rate of 1.75%, (2) 50% of our Pre-Incentive Fee Net Investment Income with respect to that portion of such Pre-Incentive Fee Net Investment Income, if any, that exceeds the hurdle rate but is less than 2.9167% in any calendar quarter (11.67% annualized) (we refer to this portion of our Pre-Incentive Fee Net Investment Income (which exceeds the hurdle but is less than 2.9167%) as the “catch-up,” which is meant to provide our Investment Adviser with 20% of our Pre-Incentive Fee Net Investment Income, as if a hurdle did not apply, if this net investment income exceeds 2.9167% in any calendar quarter), and (3) 20% of the amount of our Pre-Incentive Fee Net Investment Income, if any, that exceeds 2.9167% in any calendar quarter. These calculations are pro-rated for any share issuances or repurchases during the relevant quarter, if applicable. For the three and nine months ended June 30, 2023, the Investment Adviser earned $4.6 million and $12.2 million, respectively, in incentive fees on net investment income from us. For three and nine months ended June 30, 2022, the Investment Adviser earned $2.6 million and $8.5 million, respectively, in incentive fees on net investment income from us.
The second part of the incentive fee is determined and payable in arrears as of the end of each calendar year (or upon termination of the Investment Management Agreement, as of the termination date) and equals 20% of our realized capital gains, if any, on a cumulative basis from inception through the end of each calendar year, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis, less the aggregate amount of any previously paid capital gain incentive fees. For the three and nine months ended June 30, 2023 and 2022, the Investment Adviser did not accrue an incentive fee on capital gains, as calculated under the Investment Management Agreement (as described above).
Under GAAP, we are required to accrue a capital gains incentive fee based upon net realized capital gains and net unrealized capital appreciation and depreciation on investments held at the end of each period. In calculating the capital gains incentive fee accrual, we considered the cumulative aggregate unrealized capital appreciation in the calculation, as a capital gains incentive fee would be payable if such unrealized capital appreciation were realized, even though such unrealized capital appreciation is not permitted to be considered in calculating the fee actually payable under the Investment Management Agreement. This accrual is calculated using the aggregate cumulative realized capital gains and losses and cumulative unrealized capital appreciation or depreciation. If such amount is positive at the end of a period, then we record a capital gains incentive fee equal to 20% of such amount, less the aggregate amount of actual capital gains related to incentive fees paid in all prior years. If such amount is negative, then there is no accrual for such year. There can be no assurance that such unrealized capital appreciation will be realized in the future. The incentive fee accrued for, but not payable, under GAAP on our unrealized and realized capital gains for the three and nine months ended June 30, 2023 and 2022, was zero, respectively.
(b) Administration Agreement
The Administration Agreement with the Administrator was reapproved by our board of directors, including a majority of the directors who are not interested persons of us, in February 2023. Under the Administration Agreement, the Administrator provides administrative services and office facilities to us. For providing these services, facilities and personnel, we have agreed to reimburse the Administrator for its allocable portion of overhead and other expenses incurred by the Administrator in performing its obligations under the Administration Agreement, including rent and our allocable portion of the costs of compensation and related expenses of our Chief Compliance Officer, Chief Financial Officer, Corporate Counsel and their respective staffs. The amount billed by the Administrator may include credits related to its administrative agreement with PSSL. The Administrator also offers, on our behalf, significant managerial assistance to portfolio companies to which we are required to offer such assistance. Reimbursement for certain of these costs is included in administrative services expenses in the Consolidated Statements of Operations. For the three and nine months ended June 30, 2023, we recorded administrative expenses of approximately $0.5 million and $0.8 million, respectively, including expenses the Administrator incurred for services described above. For the three and nine months ended June 30, 2022, we recorded adminstrative expenses of approximately $0.1 million and $0.4 million, respectively, including expenses the Administrator incurred for services described above.
On July 1, 2022, the Administration Agreement with the Administrator was amended to clarify that the Administrator may be reimbursed by the Company for certain (i) tax and general legal advice and/or services provided to the Company by in-house professionals of the Administrator related to ongoing operations of the Company; and (ii) transactional legal advice and/or services provided to the Company or portfolio companies by in-house professionals of the Administrator or its affiliates on matters related to potential or actual investments and transactions, including tax structuring and/or due diligence.
(c) Other Related Party Transactions
There were no transactions subject to Rule 17a-7 under the 1940 Act during each of the three and nine months ended June 30, 2023 and 2022.
For the three and nine months ended June 30, 2023, we sold $75.3 million and $121.2 million in investments to PSSL at fair value, respectively, and recognized $(0.2) million and $(0.2) million of net realized losses, respectively. For the three and nine months ended June 30, 2022, we sold $16.8 million and $197.2 million in investments to PSSL at fair value, respectively, and recognized $(0.1) million and $(0.6) million of net realized losses, respectively.
For the three and nine months ended June 30, 2023 and 2022, we sold no investments to PTSF.
4. INVESTMENTS
For the three and nine months ended June 30, 2023 purchases of investments, including PIK interest totaled $80.3 million and $231.5 million, respectively. For the same periods in the prior year, purchases of investments, including PIK interest, totaled $105.1 million and $554.3 million, respectively. For the three and nine months ended June 30, 2023 sales and repayments of investments totaled $132.4 million and $258.1 million, respectively. For the same periods in the prior year, sales and repayments of investments totaled $55.0 million and $397.2 million, respectively.
23
Investments and cash and cash equivalents consisted of the following:
($ in thousands)
Investment Classification
Fair Value
First lien
758,292
740,156
838,842
819,461
First lien in PSSL
Second lien
Equity
80,903
106,931
65,715
105,031
Equity interests in PSSL
Total investments
1,140,434
Cash and cash equivalents
47,917
Total investments and cash and cash equivalents
1,199,526
1,225,274
The table below describes investments by industry classification and enumerates the percentage, by fair value, of the total portfolio assets (excluding cash and cash equivalents) in such industries:
Industry Classification
June 30, 2023 (1)
September 30, 2022 (1)
All Other
Total
PennantPark Senior Secured Loan Fund I LLC
In May 2017, we and Kemper formed PSSL, an unconsolidated joint venture. PSSL invests primarily in middle-market and other corporate debt securities consistent with our strategy. PSSL was formed as a Delaware limited liability company. As of June 30, 2023 and September 30, 2022, PSSL had total assets of $848.4 million and $796.8 million, respectively, and its investment portfolio consisted of debt investments in 105 and 95 portfolio companies, respectively. As of June 30, 2023, at fair value, the largest investment in a single portfolio company in PSSL was $17.7 million and the five largest investments totaled $83.7 million. As of September 30, 2022, at fair value, the largest investment in a single portfolio company in PSSL was $19.3 million and the five largest investments totaled $86.9 million. PSSL invests in portfolio companies in the same industries in which we may directly invest.
We and Kemper provide capital to PSSL in the form of first lien secured debt and equity interests. As of June 30, 2023 and September 30, 2022, we and Kemper owned 87.5% and 12.5%, respectively, of each of the outstanding first lien secured debt and equity interests. As of the same dates, our investment in PSSL consisted of first lien secured debt of $210.1 million (zero remaining unfunded) and $190.2 million (additional $19.9 million unfunded), respectively, and equity interests of $90.0 million (zero remaining unfunded) and $81.5 million (additional $8.5 million unfunded), respectively.
We and Kemper each appointed two members to PSSL’s four-person board of directors and investment committee. All material decisions with respect to PSSL, including those involving its investment portfolio, require unanimous approval of a quorum of the board of directors or investment committee. Quorum is defined as (i) the
presence of two members of the board of directors or investment committee, provided that at least one individual is present that was elected, designated or appointed by each member; (ii) the presence of three members of the board of directors or investment committee, provided that the individual that was elected, designated or appointed by the member with only one individual present shall be entitled to cast two votes on each matter; and (iii) the presence of four members of the board of directors or investment committee shall constitute a quorum, provided that two individuals are present that were elected, designated or appointed by each member.
In May 2022 PSSL entered into a $325.0 million (increased from $225.0 million in May 2022) senior secured revolving credit facility which bears interest at daily simple SOFR plus 260 basis points (including a spread adjustment) with Ally Bank through its wholly-owned subsidiary, PennantPark Senior Secured Loan Facility LLC II, or PSSL Subsidiary II, subject to leverage and borrowing base restrictions.
In January 2021, PSSL completed a $300.7 million debt securitization in the form of a collateralized loan obligation, or the “2032 Asset-Backed Debt”. The 2032 Asset-Backed Debt is secured by a diversified portfolio of PennantPark CLO II, Ltd., a wholly-owned and consolidated subsidiary of PSSL, consisting primarily of middle market loans and participation interests in middle market loans. The 2032 Asset-Backed Debt is scheduled to mature in January 2032. On the closing date of the transaction, in consideration of PSSL’s transfer to PennantPark CLO II, Ltd. of the initial closing date loan portfolio, which included loans distributed to PSSL by certain of its wholly owned subsidiaries and us, PennantPark CLO II, Ltd. transferred to PSSL 100% of the Preferred Shares of PennantPark CLO II, Ltd. and 100% of the Class E Notes issued by PennantPark CLO II, Ltd.
In April 2023, PSSL completed a $297.8 million debt securitization in the form of a collateralized loan obligation, or the “2035 Asset-Backed Debt”. The 2035 Asset-Backed Debt is secured by a diversified portfolio of PennantPark CLO VI, LLC, a wholly-owned and consolidated subsidiary of PSSL, consisting primarily of middle market loans and participation interests in middle market loans. The 2035 Asset-Backed Debt is scheduled to mature in April 2035. On the closing date of the transaction, in consideration of PSSL’s transfer to PennantPark CLO VI, LLC of the initial closing date loan portfolio, which included loans distributed to PSSL by certain of its wholly owned subsidiaries and us, PennantPark CLO VI, LLC transferred to PSSL 100% of the Subordinated Notes CLO VI, LLC
Below is a summary of PSSL’s portfolio at fair value:
805,217
754,722
Weighted average cost yield on income producing investments
12.0
9.6
Number of portfolio companies in PSSL
105
95
Largest portfolio company investment
17,697
19,250
Total of five largest portfolio company investments
83,746
86,872
Below is a listing of PSSL’s individual investments as of June 30, 2023 (Par and $ in thousands):
Basis PointSpread AboveIndex (1)
Par
First Lien Secured Debt - 1,464.6%
11.84
SOFR+650
2,940
2,885
2,910
5/7/2026
8,820
8,739
8,754
Alpine Acquisition Corp II
11/30/2026
11.07
12,885
12,548
12,370
7/24/2025
4,841
5/23/2024
Media: Advertising, Printing & Publishing
5,072
5,030
4,945
Anteriad Holdings Inc (fka MeritDirect) March 2023 Lot
4,857
7/21/2027
10.77
SOFR+525
7,529
7,359
7,322
7/31/2025
1,002
997
2,187
2,176
11,013
10,966
10,958
SOFR+575
9,409
9,301
9,221
Arcfield Acquisition Corp.
3/7/2028
4,641
4,559
4,595
7/1/2029
4,873
BioDerm, Inc.
1/31/2028
8,894
9/17/2024
SOFR+500
15,171
14,963
14,792
12/2/2022
Consumer Products
2,364
Burgess Point Purchaser Corporation
9/26/2029
Automotive
424
5/16/2024
SOFR+625
13,973
13,947
13,728
Cadence Aerospace, LLC
SOFR+850
3,994
3,991
(PIK 2.00%)
6/14/2028
9,661
9,528
9,612
8/20/2026
6,838
6,733
6,769
4/10/2025
Construction and Engineering
SOFR+450
5,513
5,463
Challenger Performance Optimization, Inc.
8/31/2023
12.01
SOFR+675
9,147
9,142
8,827
(PIK 1.00%)
7/13/2027
8/16/2027
10.41
2,094
2,071
2,073
8/31/2027
14,750
14,518
14,602
DRI Holding Inc.
12/21/2028
2,634
2,418
2,357
11/3/2025
14,586
14,527
14,193
6/30/2024
10,933
10,847
10,747
5/1/2028
SOFR+750
7,588
7,567
7,607
EDS Buyer, LLC
1/10/2029
11.49
8,978
8,851
8,753
Electro Rent Corporation
1/17/2024
10.83
2,225
2,190
2,128
Exigo Intermediate II, LLC
3/15/2027
12,708
12,524
12,453
ETE Intermediate II, LLC - Term Loan
5/29/2029
12,404
12,160
12,031
Fairbanks Morse Defense
6/17/2028
SOFR+475
10,221
10,167
9,940
5/14/2026
14,413
14,241
13,909
3/16/2026
3,746
3,549
8/10/2027
11.04
2,351
2,317
2,327
2,250
2,214
4,847
3,014
2,983
2,968
Icon Partners III, LP
5/11/2028
9.77
2,310
2,016
1,528
9,875
9,685
9,272
9,085
9,040
12/7/2023
12.51
SOFR+700
16,537
16,309
16,371
SOFR+685
6,106
5,990
9/29/2023
11,079
11,075
10,525
Integrity Marketing Acquisition, LLC
8/27/2025
5,921
5,860
5,862
ITI Holdings, Inc.
3/3/2028
10.58
3,950
3,894
3,851
K2 Pure Solutions NoCal, L.P.
13.20
SOFR+800
17,643
16,704
16,372
16,453
2/18/2027
14,246
14,008
14,033
15,168
15,113
14,971
2/3/2026
12,087
11,924
11,905
LJ Avalon Holdings, LLC
1/31/2030
11.51
SOFR+665
2,592
2,542
2,540
5/28/2028
7,500
7,350
Lucky Bucks, LLC (4)
7/20/2027
Hotel, Gaming and Leisure
4,207
Lucky Bucks. LLC - OpCo DIP Loans
SOFR+1000
Magenta Buyer, LLC
7/31/2028
10.03
2,845
2,259
Marketplace Events, LLC - Super Priority First Lien Term Loan
9/30/2025
647
Marketplace Events, LLC - Super Priority First Lien Unfunded Term Loan
9/30/2026
3,715
11,617
11,494
11,501
MBS Holdings, Inc.
4/16/2027
7,255
7,277
7/25/2028
6,396
6,283
6,260
2,378
2,340
2,330
3/28/2024
10.39
5,794
5,787
9/28/2027
3,439
3,387
3,318
NBH Group LLC
8/19/2026
Healthcare, Education & Childcare
10,738
10,590
10,631
Neptune Flood Incorporated - Term Loan
5/9/2029
11.57
5,235
5,157
New Milani Group LLC
6/6/2024
Consumer Goods: Non-Durable
14,250
14,227
14,179
5/7/2027
10.24
15,895
15,620
ORL Acquisitions, Inc.
9/3/2027
2,228
2,207
2,117
Output Services Group, Inc. (4)
6/27/2026
7,729
7,689
1,932
2/4/2028
3,830
5/18/2026
SOFR+725
4,345
4,303
Peaquod Merger Sub, Inc.
12/2/2026
SOFR+640
11,503
11,282
11,273
PH Beauty Holdings III, Inc.
9/29/2025
10.48
9,518
9,268
7,638
11/9/2027
7,499
7,396
6,824
5/8/2026
2,565
2,399
7/6/2028
Education
11,166
10,998
2,811
2,775
2,768
Quantic Electronics, LLC - Unfunded Term Loan (3)
Rancho Health MSO, Inc.
10.94
1,032
Reception Purchaser, LLC
2/28/2028
1/29/2026
4,888
4,833
4,692
Research Now Group, LLC and Dynata, LLC
12,647
12,329
8,791
1/3/2025
9,522
9,465
9,475
5,211
5,187
5,133
7/14/2025
11,810
11,796
11,368
(PIK 0.50%)
6/13/2029
SOFR+605
4,895
4,838
14,432
9.65
11,826
11,734
10,873
4,582
4,574
4,536
3/1/2028
4,122
4,055
4,011
9,075
9,021
9,030
Summit Behavioral Healthcare, LLC
11/24/2028
1,697
14,775
14,561
14,494
Team Services Group, LLC
336
7/18/2025
2,268
2,266
2,263
5,570
5,504
7/27/2026
5,427
5,355
The Vertex Companies, LLC
8/30/2027
5,536
5,450
5,436
TPC Canada Parent, Inc. and TPC US Parent, LLC
10.76
8,677
8,569
8,608
3/26/2026
14,604
14,492
14,385
6/16/2025
Tyto Athene, LLC (New Issue)
4/1/2028
14,670
14,562
13,555
4/3/2024
17,204
17,162
16,774
Urology Management Holdings, Inc.
6/15/2026
11.36
6,910
6,783
6,768
3/31/2027
SOFR+635
3,331
Walker Edison Furniture Company LLC - Junior Revolving Credit Facility
Walker Edison Furniture Company LLC - DDTL - Unfunded (3)
2/27/2026
10,592
10,354
3/1/2024
16,830
16,714
16,452
823,714
802,474
Equity Securities - 0.4%
New MPE Holdings, LLC
306
Walker Edison Furniture - Common Equity
36
Total Equity Securities
2,743
Total Investments - 1,469.6%
827,107
Cash and Cash Equivalents - 69.3%
37,943
Total Investments and Cash Equivalents —1,329.0%
865,050
843,161
Liabilities in Excess of Other Assets — (1,229.0)%
(788,371
Members' Equity—100.0%
54,790
cash a
Below is a listing of PSSL’s individual investments as of September 30, 2022 (Par and $ in thousands)
First Lien Secured Debt - 1,330.4%
5/6/2026
8,888
8,788
8,821
8.22
9,975
9,790
9,576
5,225
5,113
5,042
4,883
4,851
5,284
5,208
3,510
1,010
1,005
2,202
2,191
7.86
11,115
11,050
11,059
8,421
8,317
8,211
8.99
4,677
4,588
4,583
SOFR + 525
4,903
SOFR + 500
15,293
15,102
14,956
2,417
9.20
1M L+662
14,822
14,771
14,674
3M L+325
12,412
12,385
12,288
(PIK 11.31%)
5/13/2028
SOFR + 600
6,484
6,359
6,386
9.08
4,950
4,866
5,557
5,487
9,271
9,247
8,993
3,842
2,084
2,089
8,655
8,653
7,248
7,246
14,862
14,610
14,639
1,832
1,680
1,643
15,179
15,103
14,693
10,278
10,151
10,031
3M L+750
2,621
2,598
ECM Industries, LLC
4,974
4,738
12,935
12,759
8.39
10,238
14,638
14,427
14,199
3,904
3,888
3,728
2,369
2,320
2,274
2,392
2,356
6M L+575
3,052
3,006
7.55
1,997
1,701
9,950
9,833
9,502
5,364
5,261
5,230
8.55
16,620
16,454
11,187
10,963
5,966
5,885
5,906
SOFR + 550
3,980
3,917
3,900
11.12
1M L+800
19,103
16,451
16,494
14,355
14,074
14,068
9.70
10,578
10,539
10,335
9.04
10,598
10,428
10,254
7.87
2,695
2,539
2,425
Marketplace Events, LLC - Super Priority First Lien Unfunded Term Loan (3)
3,527
9,900
9,782
9,851
8.56
7,406
7,296
7,332
8.98
4,902
2,396
2,353
2,372
8.70
5,829
5,817
5,759
3,465
3,264
7.80
10,820
10,641
14,363
14,319
14,111
7/9/2026
8.40
5,060
4,991
14,598
14,353
14,160
3/27/2024
3M L+425
7,682
7,676
5,838
3,918
4,827
8.07
9,593
9,234
7,674
8,238
8,111
8,032
1,562
1,561
2,580
2,309
11,250
11,056
11,138
4,845
4,755
4,729
1,888
9.13
4,975
4,751
4,856
4,753
12,564
12,354
11,291
5,013
4,960
5,240
5,202
11,847
11,829
11,551
1M L+850
14,716
14,411
14,421
7.05
11,917
11,807
11,470
5,647
5,625
5,511
2,956
2,916
2,873
9,011
8,985
14,888
14,623
14,649
2,786
2,757
2,623
5,659
5,600
5,603
1,679
1,724
9/16/2024
8.47
12,957
12,952
12,859
5,578
5,479
5,550
8.30
8,744
8,604
8,482
14,952
14,871
14,578
15,550
15,421
14,446
17,390
17,305
17,129
5/24/2027
Home and Office Furnishings, Housewares
4,880
12,438
8,473
(PIK 3.0%)
8,546
8,506
8,261
10.35
16,957
16,711
16,536
767,316
751,628
Second Lien Secured Debt - 5.2%
9/29/2024
3,000
2,963
2,955
Equity Securities - 0.3%
139
Total Investments - 1,335.9%
770,280
Cash and Cash Equivalents - 59.7%
33,725
33,705
Total Investments and Cash Equivalents —1,395.6%
804,005
788,427
Liabilities in Excess of Other Assets — (1,295.6)%
(731,931
56,496
Below are the consolidated statements of assets and liabilities for PSSL ($ in thousands):
Investments at fair value (amortized cost—$827,107 and $770,280, respectively)
Cash and cash equivalents (cost—$37,943 and $33,725, respectively)
4,556
3,025
Receivable for investment sold
3,637
724
1,722
848,440
796,811
Credit facility payable
41,300
259,500
2032 Asset-backed debt, net (par—$246,000)
243,821
243,365
2035 Asset-backed debt, net (par—$246,000)
243,370
Notes payable to members
240,100
217,350
8,950
10,414
Interest payable on notes to members
6,363
4,719
Interest payable on Credit facility and asset backed debt
3,817
Accrued expenses
746
1,150
793,650
740,315
Commitments and contingencies(1)
Members' equity
Total liabilities and members' equity
29
Below are the consolidated statements of operations for PSSL ($ in thousands):
Three months ended June 30,
23,373
13,535
64,282
36,467
930
1,084
23,746
13,600
65,212
37,551
Interest and expense on credit facility and asset-backed debt
12,094
30,413
11,514
Interest expense on notes to members
4,510
22,159
11,704
Administration fees
529
1,553
900
289
867
20,802
9,766
54,898
24,985
2,944
3,834
10,314
12,566
Realized and unrealized gain (loss) on investments and credit facility foreign currency translation:
Investments
93
(5,852
(14,956
Credit facility foreign currency translation
(4,442
(5,232
(6,308
6,325
Net change in unrealized appreciation (depreciation) on investments and credit facility foreign currency translation
Net realized and unrealized gain (loss) from investments and credit facility foreign currency translation
(4,349
(5,256
(12,170
(8,631
Net increase (decrease) in members' equity resulting from operations
(1,405
(1,422
(1,856
3,935
(*) No management or incentive fees are payable by PSSL. If any fees were to be charged, they would be separately disclosed in the Statement of Operations.
5. FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value, as defined under ASC 820, is the price that we would receive upon selling an investment or pay to transfer a liability in an orderly transaction to a market participant in the principal or most advantageous market for the investment or liability. ASC 820 emphasizes that valuation techniques maximize the use of observable market inputs and minimize the use of unobservable inputs. Inputs refer broadly to the assumptions that market participants would use in pricing an asset or liability, including assumptions about risk. Inputs may be observable or unobservable. Observable inputs reflect the assumptions market participants would use in pricing an asset or liability based on market data obtained from sources independent of us. Unobservable inputs reflect the assumptions market participants would use in pricing an asset or liability based on the best information available to us on the reporting period date.
ASC 820 classifies the inputs used to measure these fair values into the following hierarchies:
Level 1:
Inputs that are quoted prices (unadjusted) in active markets for identical assets or liabilities, accessible by us at the measurement date.
Level 2:
Inputs that are quoted prices for similar assets or liabilities in active markets, or that are quoted prices for identical or similar assets or liabilities in markets that are not active and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term, if applicable, of the financial instrument.
Level 3:
Inputs that are unobservable for an asset or liability because they are based on our own assumptions about how market participants would price the asset or liability.
A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Generally, most of our investments, our 2031 Asset-Backed Debt and our Credit Facility are classified as Level 3. Our 2026 Notes are classified as Level 2 as they are financial instruments with readily observable market inputs. Our 2023 Notes are classified as Level 1, as they were valued using the closing price from the primary exchange. Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the price used in an actual transaction may be different than our valuation and those differences may be material.
The inputs into the determination of fair value may require significant management judgment or estimation. Even if observable market data is available, such information may be the result of consensus pricing information, disorderly transactions or broker quotes which include a disclaimer that the broker would not be held to such a price in an actual transaction. The non-binding nature of consensus pricing and/or quotes accompanied by disclaimer would result in classification as Level 3 information, assuming no additional corroborating evidence were available. Corroborating evidence that would result in classifying these non-binding broker/dealer bids as a Level 2 asset includes observable orderly market-based transactions for the same or similar assets or other relevant observable market-based inputs that may be used in pricing an asset.
Our investments are generally structured as floating rate loans, mainly first lien secured debt, but also may include second lien secured debt, subordinated debt and equity investments. The transaction price, excluding transaction costs, is typically the best estimate of fair value at inception. Ongoing reviews by our Investment Adviser and independent valuation firms are based on an assessment of each underlying investment, incorporating valuations that consider the evaluation of financing and sale transactions with third parties, expected cash flows and market-based information including comparable transactions, performance multiples and yields, among other factors. These non-public investments valued using unobservable inputs are included in Level 3 of the fair value hierarchy.
A review of fair value hierarchy classifications is conducted on a quarterly basis. Changes in our ability to observe valuation inputs may result in a reclassification for certain financial assets or liabilities.
In addition to using the above inputs to value cash equivalents, investments, our 2023 Notes, our 2026 Notes, our 2031 Asset-Backed Debt and our Credit Facility, we employ the valuation policy approved by our board of directors that is consistent with ASC 820. Consistent with our valuation policy, we evaluate the source of inputs, including any markets in which our investments are trading, in determining fair value. See Note 2.
As outlined in the table below, some of our Level 3 investments using a market approach valuation technique are valued using the average of the bids from brokers or dealers. The bids include a disclaimer, may not have corroborating evidence, may be the result of a disorderly transaction and may be the result of consensus pricing. The Investment Adviser assesses the source and reliability of bids from brokers or dealers. If the board of directors has a bona fide reason to believe any such bids do not reflect the fair value of an investment, it may independently value such investment by using the valuation procedure that it uses with respect to assets for which market quotations are not readily available. In accordance with ASC 820, we do not categorize any investments for which fair value is measured using the net asset value per share as a practical expedient within the fair value hierarchy.
The remainder of our investment portfolio and our long-term Credit Facility are valued using a market comparable or an enterprise market value technique. With respect to investments for which there is no readily available market value, the factors that the board of directors may take into account in pricing our investments at fair value include, as relevant, the nature and realizable value of any collateral, the portfolio company’s ability to make payments, its earnings and discounted cash flow, the markets in which the portfolio company does business, comparison to publicly traded securities, discounted for lack of marketability and other relevant factors. When an external event such as a purchase transaction, public offering or subsequent equity sale occurs, the pricing indicated by the external event, excluding transaction costs, is used to corroborate the valuation. When using earnings multiples to value a portfolio company, the multiple used requires the use of judgment and estimates in determining how a market participant would price such an asset. These non-public investments using unobservable inputs are included in Level 3 of the fair value hierarchy. Generally, the sensitivity of unobservable inputs or combination of inputs such as industry comparable companies, market outlook, consistency, discount rates and reliability of earnings and prospects for growth, or lack thereof, affects the multiple used in pricing an investment. As a result, any change in any one of those factors may have a significant impact on the valuation of an investment. Generally, an increase in a market yield will result in a decrease in the valuation of a debt investment, while a decrease in a market yield will have the opposite effect. Generally, an increase in an earnings before interest, taxes, depreciation and amortization, or EBITDA, multiple will result in an increase in the valuation of an investment, while a decrease in an EBITDA multiple will have the opposite effect.
Our Level 3 valuation techniques, unobservable inputs and ranges were categorized as follows for ASC 820 purposes ($ in thousands):
Asset Category
Fair value at June 30, 2023
Valuation Technique
Unobservable Input
Range of Input(Weighted Average) (1)
52,268
Market Comparable
Broker/Dealer bids or quotes
N/A
897,976
Market yield
8.8% - 18.5% (11.6%)
14.2%
97,211
Enterprise Market Value
EBITDA multiple
.3x - 18.8x (11.9x)
DLOM(2)
21.7%
Total Level 3 investments
1,048,422
Debt Category
Long-Term Credit Facility
Market Yield
2.5%
____________________________________________
Fair value at September 30, 2022
70,363
930,806
8.2% - 21% (10.9%)
14.0x
14.7%
89,906
3.3x - 21.4x (12.5x)
11.8%
1,104,927
31
Our investments, cash and cash equivalents, Credit Facility or Prior Credit Facility, as applicable, 2023 Notes, 2026 Notes and 2031 Asset-Backed Debt were categorized as follows in the fair value hierarchy for ASC 820 purposes ($ in thousands):
Fair Value at June 30, 2023
Description
Level 1
Level 2
Level 3
Measured at NetAsset Value (1)
950,244
154,872
98,029
56,843
1,149,259
Credit Facility payable
2023 Notes payable
2026 Notes payable (2)
2031 Asset-Backed Debt(2)
Total debt
552,638
290,518
Fair Value at September 30, 2022
1,009,642
154,465
95,138
59,327
672,779
393,691
The tables below show a reconciliation of the beginning and ending balances for fair valued investments measured using significant unobservable inputs (Level 3)
($ in thousands):
Nine Months Ended June 30,2023
First Lien
Second lien,subordinateddebt and equityinvestments
Totals
Beginning Balance
95,285
Net realized gain (loss)
(16,268
2,203
(14,065
Net change in unrealized depreciation
1,245
(12,296
(11,051
Purchases, PIK interest, net discount accretion and non-cash exchanges
208,709
17,977
226,686
Sales, repayments and non-cash exchanges
(253,084
(4,991
(258,075
Transfers in and/or out of Level 3
Ending Balance
98,178
Net change in unrealized depreciation reported within the net change in unrealized depreciation on investments in our Consolidated Statements of Operations attributable to our Level 3 assets still held at the reporting date.
(13,491
(9,234
(22,725
32
Nine Months Ended June 30,2022
934,418
86,771
1,021,189
Net realized losses
1,124
(13,106
(11,982
(7,553
12,411
4,858
539,028
25,045
564,073
(404,635
(16,368
(421,003
1,062,382
94,753
1,157,135
(5,627
12,170
6,543
The table below shows a reconciliation of the beginning and ending balances for liabilities recognized at fair value and measured using significant unobservable inputs (Level 3)($ in thousands):
Beginning Balance (cost – $169,654 and $219,400, respectively)
218,852
Net change in unrealized (depreciation) appreciation included in earnings
1,607
(5,663
Borrowings
Repayments
Net realized (gain) loss
(544
Ending Balance (cost – $64,400 and $259,277, respectively)
253,443
As of June 30, 2023, we did not have any outstanding non-U.S. dollar borrowings on our Credit Facility.
As of September 30, 2022 we had outstanding non-U.S. dollar borrowings on our Credit Facility. Net change in fair value from currency translation on outstanding borrowings is listed below ($ in thousands):
Foreign Currency
AmountBorrowed
Borrowing Cost
Current Value
Reset Date
Change in FairValue
Australian Dollar
10,000
7,254
10/1/22
(824
Generally, the carrying value of our consolidated financial liabilities approximates fair value. We have adopted the principles under ASC Subtopic 825-10, Financial Instruments, or ASC 825-10, which provides companies with an option to report selected financial assets and liabilities at fair value, and made an irrevocable election to apply ASC 825-10 to the Credit Facility and the 2023 Notes. We elected to use the fair value option for the Credit Facility and the 2023 Notes to align the measurement attributes of both our assets and liabilities while mitigating volatility in earnings from using different measurement attributes. Due to that election and in accordance with GAAP, we did not incur any expenses relating to amendment costs on the Credit Facility during both the three and nine months ended June 30, 2023 and 2022. ASC 825-10 establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities and to more easily understand the effect on earnings of a company’s choice to use fair value. ASC 825-10 also requires entities to display the fair value of the selected assets and liabilities on the face of the Consolidated Statements of Assets and Liabilities and changes in fair value of the Credit Facility and the 2023 Notes are reported in our Consolidated Statements of Operations. We elected not to apply ASC 825-10 to any other financial assets or liabilities, including our 2026 Notes and the 2031 Asset-Backed Debt.
For the three and nine months ended June 30, 2023, the Credit Facility and the 2023 Notes had a net change in unrealized appreciation (depreciation) of $(5.8) million and $(4.8) million, respectively. For the three and nine months ended June 30, 2022, the Credit Facility and the 2023 Notes had a net change in unrealized appreciation (depreciation) of less than $(0.1) million and $(1.3) million, respectively. As of June 30, 2023 and September 30, 2022, the net unrealized appreciation (depreciation) on the Credit Facility and the 2023 Notes totaled $2.6 million and $(1.5) million, respectively. We use a nationally recognized independent valuation service to measure the fair value of the Credit Facility in a manner consistent with the valuation process that our board of directors uses to value our investments. Our 2023 Notes trade on the TASE and we use the closing price on the exchange to determine the fair value.
33
6. TRANSACTIONS WITH AFFILIATED COMPANIES
An affiliated portfolio company is a company in which we have ownership of 5% or more of its voting securities. A portfolio company is generally presumed to be a non-controlled affiliate when we own at least 5% but less than 25% of its voting securities and a controlled affiliate generally when we own more than 25% of its voting securities. Transactions related to our funded investments with both controlled and non-controlled affiliates for the nine months ended June 30, 2023 were as follows ($ in thousands):
Name of Investment
Gross Additions
Sale of/ Distribution from Affiliates
Net Change inUnrealizedAppreciation(Depreciation)
Interest Income
Dividend/Other Income
Net RealizedGains (Losses)
Controlled Affiliates
$31,389
$1,041
$—
$198
$32,628
$3,312
PennantPark Senior Secured
Loan Fund I LLC *
239,614
28,438
(10,023)
258,029
19,389
Total Controlled Affiliates
$271,003
$29,479
$(9,825)
$290,657
$22,701
$8,400
* We and Kemper are the members of PSSL, a joint venture formed as a Delaware limited liability company that is not consolidated by us for financial reporting purposes. The members of PSSL make investments in PSSL in the form of first lien secured debt and equity interests, and all portfolio and other material decisions regarding PSSL must be submitted to PSSL’s board of directors or investment committee, both of which are comprised of two members appointed by each of us and Kemper. Because management of PSSL is shared equally between us and Kemper, we do not believe we control PSSL for purposes of the 1940 Act or otherwise.
7. CHANGE IN NET ASSETS FROM OPERATIONS PER COMMON SHARE
The following information sets forth the computation of basic and diluted per share net increase (decrease) in net assets resulting from operations
($ in thousands, except per share data):
Numerator for net increase in net assets resulting from operations
Denominator for basic and diluted weighted average shares
50,799,353
41,334,234
48,220,835
39,940,832
Basic and diluted net increase in net assets per share resulting from operations
8. CASH AND CASH EQUIVALENTS
Cash equivalents represent cash in money market funds pending investment in longer-term portfolio holdings. Our portfolio may consist of temporary investments in U.S. Treasury Bills (of varying maturities), repurchase agreements, money market funds or repurchase agreement-like treasury securities. These temporary investments with original maturities of 90 days or less are deemed cash equivalents and are included in the Consolidated Schedule of Investments. At the end of each fiscal quarter, we may take proactive steps to preserve investment flexibility for the next quarter by investing in cash equivalents, which is dependent upon the composition of our total assets at quarter-end. We may accomplish this in several ways, including purchasing U.S. Treasury Bills and closing out positions on a net cash basis after quarter-end, temporarily drawing down on the Credit Facility, or utilizing repurchase agreements or other balance sheet transactions as are deemed appropriate for this purpose. These amounts are excluded from average adjusted gross assets for purposes of computing the Investment Adviser’s management fee. U.S. Treasury Bills with maturities greater than 60 days from the time of purchase are valued consistent with our valuation policy. As of June 30, 2023 and September 30, 2022, cash and cash equivalents in the amounts of $59.1 million of which $44.0 million consisted of money market funds and $47.9 million of money market funds at fair value, respectively.
34
9. FINANCIAL HIGHLIGHTS
Below are the financial highlights ($ in thousands, except per share data):
Per Share Data:
Net asset value, beginning of period
12.62
Net investment income (1)
Net change in realized and unrealized (loss) gain (1)
(0.79
(0.48
Net increase in net assets resulting from operations (1)
Distributions to stockholders (1), (2)
(0.87
(0.86
Accretive (Dilutive) effect of common stock issuance
(0.02
0.03
Net asset value, end of period
12.21
Per share market value, end of period
11.48
Total return *(3)
20.17
(4.08%)
Shares outstanding at end of period
55,537,299
41,345,638
Ratios** / Supplemental Data:
Ratio of operating expenses to average net assets** (4)
6.04
5.33
Ratio of debt related expenses to average net assets (5)
7.20
5.50
Ratio of total expenses to average net assets** (5)
Ratio of net investment income to average net assets** (5)
11.73
9.54
Net assets at end of period
Weighted average debt outstanding
649,677
762,376
Weighted average debt per share (1)
13.47
19.09
Asset coverage per unit (6)
2,097
Portfolio turnover rate*
17.67
33.07
* Not annualized for periods less than one year.
** Re-occuring investment income and expenses included in these ratios are annualized for periods less than one year
10. DEBT
The annualized weighted average cost of debt for the nine months ended June 30, 2023 and 2022, inclusive of the fee on the undrawn commitment on the Credit Facility or the Prior Credit Facility, as applicable, amendment costs and debt issuance costs, was 6.1% and 3.7%, respectively. As of June 30, 2023, in accordance with the 1940 Act, with certain limited exceptions, we are only allowed to borrow amounts such that we are in compliance with a 150% asset coverage ratio requirement after such borrowing.
On April 5, 2018, our board of directors approved the application of the modified asset coverage requirements set forth in Section 61(a)(2) of the 1940 Act, as amended by the Consolidated Appropriations Act of 2018 (which includes the Small Business Credit Availability Act, or SBCAA). As a result, the asset coverage requirement applicable to us for senior securities was reduced from 200% (i.e., $1 of debt outstanding for each $1 of equity) to 150% (i.e., $2 of debt outstanding for each $1 of equity), effective as of April 5, 2019, subject to compliance with certain disclosure requirements. As of June 30, 2023 and September 30, 2022, our asset coverage ratio, as computed in accordance with the 1940 Act, was 210% and 178%, respectively.
Credit Facility
Funding I’s multi-currency Credit Facility with affiliates of Truist Bank (formerly SunTrust Bank), or the Lenders, was $366.0 million as of June 30, 2023, subject to satisfaction of certain conditions and the regulatory restrictions that the 1940 Act imposes on us as a BDC, has an interest rate spread above SOFR (or an alternative risk-free floating interest rate index) of 236 basis points, a maturity date of August 2026 and a revolving period that ends in August 2024. As of June 30, 2023 and September 30, 2022, Funding I had $64.4 million and $169.7 million of outstanding borrowings under the Credit Facility, respectively. The Credit Facility had a weighted average interest rate of 7.5% and 4.9%, exclusive of the fee on undrawn commitments as of June 30, 2023 and September 30, 2022, respectively. As of June 30, 2023 and September 30, 2022, we had $301.6 million and $196.3 million of unused borrowing capacity under the Credit Facility, respectively, subject to leverage and borrowing base restrictions.
During the revolving period, the Credit Facility bears interest at SOFR (or an alternative risk-free floating interest rate index) plus 236 basis points and, after the revolving period, the rate will reset to Base Rate (or an alternative risk-free floating interest rate index) plus 250 basis points for the remaining two years, maturing in August 2026. The Credit Facility is secured by all of the assets of Funding I. Both we and Funding I have made customary representations and warranties and are required to comply with various covenants, reporting requirements and other customary requirements for similar credit facilities.
The Credit Facility contains covenants, including, but not limited to, restrictions of loan size, industry requirements, average life of loans, geographic and individual portfolio concentrations, minimum portfolio yield and loan payment frequency. Additionally, the Credit Facility requires the maintenance of a minimum equity investment in Funding I and income ratio as well as restrictions on certain payments and issuance of debt. The Credit Facility compliance reporting is prepared on a basis of accounting other than GAAP. As of June 30, 2023, we were in compliance with the covenants relating to the Credit Facility.
We own 100% of the equity interest in Funding I and treat the indebtedness of Funding I as our leverage. Our Investment Adviser serves as collateral manager to Funding I under the Credit Facility.
Our interest in Funding I (other than the management fee) is subordinate in priority of payment to every other obligation of Funding I and is subject to certain payment restrictions set forth in the Credit Facility. We may receive cash distributions on our equity interests in Funding I only after it has made all required payments of (1) cash
interest and, if applicable, principal to the Lenders, (2) administrative expenses and (3) claims of other unsecured creditors of Funding I. The Investment Adviser has irrevocably directed that any management fee owed with respect to such services is to be paid to the Company so long as the Investment Adviser remains the collateral manager.
2023 Notes
In November 2017, we issued $138.6 million of our 2023 Notes of which $76.2 million and $97.0 million were outstanding as of June 30, 2023 and September 30, 2022, respectively. The 2023 Notes were issued pursuant to a deed of trust between the Company and Mishmeret Trust Company, Ltd., as trustee, in November 2017
The 2023 Notes pay interest at a rate of 4.3% per year. As a result of the downgrade of the 2023 Notes from “ilA+” to “ilA-” in March 2020, the interest rate of the 2023 Notes was increased to 4.3% from 3.8%. Interest on the 2023 Notes is payable semi-annually in arrears on June 15 and December 15 of each year, commencing June 15, 2018. The principal on the 2023 Notes will be payable in four annual installments as follows: 15% of the original principal amount on December 15, 2020, 15% of the original principal amount on December 15, 2021, 15% of the original principal amount on December 15, 2022 and 55% of the original principal amount on December 15, 2023.
The 2023 Notes are general, unsecured obligations, rank equal in right of payment with all of PennantPark Floating Rate Capital Ltd.'s existing and future senior unsecured indebtedness and are generally redeemable at our option. The deed of trust governing the 2023 Notes includes certain customary covenants, including minimum equity requirements, and events of default. Please refer to the deed of trust filed as Exhibit (d)(8) to our post-effective amendment filed on December 13, 2017 for more information. The 2023 Notes are rated ilA- by S&P Global Ratings Maalot Ltd. and are listed on the TASE. In connection with this offering, we have dual listed our common stock on the TASE.
The 2023 Notes have not been and will not be registered under the Securities Act and may not be offered or sold in the United States absent registration under the Securities Act or in transactions exempt from, or not subject to, such registration requirements.
2026 Notes
In March 2021 and in October 2021, we issued $100.0 million and $85.0 million, respectively, in aggregate principal amount of $185.0 million of our 2026 Notes at a public offering price per note of 99.4% and 101.5%, respectively. Interest on the 2026 Notes is paid semi-annually on April 1 and October 1 of each year, at a rate of 4.25% per year, commencing October 1, 2021. The 2026 Notes mature on April 1, 2026 and may be redeemed in whole or in part at our option subject to a make-whole premium if redeemed more than three months prior to maturity. The 2026 Notes are our general, unsecured obligations and rank equal in right of payment with all of our existing and future senior unsecured indebtedness. The 2026 Notes are effectively subordinated to all of our existing and future secured indebtedness to the extent of the value of the assets securing such indebtedness and structurally subordinated to all of our existing and future indebtedness and other obligations of any of our subsidiaries, financing vehicles, or similar facilities. We do not intend to list the 2026 Notes on any securities exchange or automated dealer quotation system.
2031 Asset-Backed Debt
In September 2019, the Company completed the $301.4 million term debt securitization. Term debt securitizations, also known as CLOs, are a form of secured financing incurred by the Company, which is consolidated by the Company and subject to the Company’s asset coverage requirements. The 2031 Asset-Backed Debt was issued by the Securitization Issuer. The 2031 Asset-Backed Debt is secured by the middle market loans, participation interests in middle market loans and other assets of the Securitization Issuer. The Debt Securitization was executed through (A) a private placement of: (i) $78.5 million Class A-1 Senior Secured Floating Rate Loans maturing 2031, which bear interest at the three-month LIBOR plus 1.8%, (ii) $15.0 million Class A-2 Senior Secured Fixed Rate Notes due 2031, which bear interest at 3.7%, (iii) $14.0 million Class B-1 Senior Secured Floating Rate Notes due 2031, which bear interest at the three-month LIBOR plus 2.9%, (iv) $16.0 million Class B-2 Senior Secured Fixed Rate Notes due 2031, which bear interest at 4.3%, (v) $19.0 million Class C‑1 Secured Deferrable Floating Rate Notes due 2031, which bear interest at the three-month LIBOR plus 4.0%, (vi) $8.0 million Class C-2 Secured Deferrable Fixed Rate Notes due 2031, which bear interest at 5.4%, and (vii) $18.0 million Class D Secured Deferrable Floating Rate Loans due 2031, which bear interest at the three-month LIBOR plus 4.8% and (B) the borrowing of $77.5 million Class A‑1 Senior Secured Floating Rate Notes due 2031, which bear interest at the three-month LIBOR plus 1.8%, under a credit agreement by and among the Securitization Issuers, as borrowers, various financial institutions, as lenders, and U.S. Bank National Association, as collateral agent and as loan agent. The annualized interest on the 2031 Asset-Backed Debt will be paid, to the extent of funds available. The reinvestment period of the Debt Securitization ends on October 15, 2023 and the 2031 Asset-Backed Debt is scheduled to mature on October 15, 2031.
On the closing date of the Debt Securitization, in consideration of our transfer to the Securitization Issuer of the initial closing date loan portfolio, which included loans distributed to us by certain of our wholly-owned subsidiaries, the Securitization Issuer transferred to us 100% of the Preferred Shares of the Securitization Issuer, 100% of the Class D Secured Deferrable Floating Rate Notes issued by the Securitization Issuer, and a portion of the net cash proceeds received from the sale of the 2031 Asset-Backed Debt. The Preferred Shares of the Securitization Issuer do not bear interest and had a stated value of approximately $55.4 million at the closing of the Debt Securitization.
The 2031 Asset-Backed Debt is included in the Consolidated Statement of Assets and Liabilities as debt of the Company and the Class D Secured Deferrable Floating Rate Notes and the Preferred Shares of the Securitization Issuer were eliminated in consolidation. As of both June 30, 2023 and September 30, 2022, the Company had $228.0 million of 2031 Asset-Backed Debt outstanding with a weighted average interest rate of 6.8% and 4.6%, respectively. As of June 30, 2023 and September 30, 2022, the unamortized fees on the 2031 Asset-Backed Debt were $1.4 million and $1.9 million, respectively.
Our Investment Adviser serves as collateral manager to the Securitization Issuer pursuant to the Collateral Management Agreement. For so long as our Investment Adviser serves as collateral manager, it will elect to irrevocably waive any collateral management fee to which it may be entitled under the Collateral Management Agreement.
11. COMMITMENTS AND CONTINGENCIES
From time to time, we may be a party to legal proceedings, including proceedings relating to the enforcement of our rights under contracts with our portfolio companies. While the outcome of these legal proceedings cannot be predicted with certainty, we do not expect that these proceedings will have a material effect upon our financial condition or results of operations. Unfunded debt and equity investments, if any, are disclosed in the Consolidated Schedules of Investments. As of June 30, 2023 and September 30, 2022, we had $150.3 million and $150.6 million, respectively, in commitments to fund investments. Additionally, as described in Note 4, the Company had unfunded commitments of zero and $28.4 million to PSSL as of June 30, 2023 and September 30, 2022, respectively, that may be contributed primarily for the purpose of funding new investments approved by the PSSL board of directors or investment committee.
12. SUBSEQUENT EVENTS
Subsequent to June 30, 2023, we issued 3,197,403 shares of common stock through the ATM Program that were sold prior to the quarter end at an average price of $11.01 per share, raising $35.2 million of net proceeds after commissions to the sales agents and inclusive of proceeds from the Investment Adviser to ensure that all shares were sold at or above NAV.
On July 31, 2023, the Credit Facility's commitment was increased by $20 million due to the inclusion of a new lender to the facility. The additional commitment increases the Credit Facility's total commitment amount to $386 million.
Report of Independent Registered Public Accounting Firma
To the Stockholders and Board of Directors of PennantPark Floating Rate Capital Ltd. and its Subsidiaries
Results of Review of Interim Financial StatementsWe have reviewed the accompanying consolidated statement of assets and liabilities of PennantPark Floating Rate Capital Ltd. and its Subsidiaries (collectively referred to as the Company), including the consolidated schedule of investments, as of June 30, 2023, the related consolidated statements of operations and changes in net assets for the three-month and nine-month periods ended June 30, 2023 and 2022 and cash flows for the nine-month periods ended June, 2023 and 2022, and the related notes to the consolidated financial statements (collectively, the interim financial statements). Based on our reviews, we are not aware of any material modifications that should be made to the consolidated financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated statement of assets and liabilities of the Company, including the consolidated schedule of investments, as of September 30, 2022, and the related consolidated statements of operations, changes in net assets, and cash flows for the year then ended (not presented herein); and in our report dated November 17, 2022, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated statement of assets and liabilities, including the consolidated schedule of investments, as of September 30, 2022, is fairly stated, in all material respects, in relation to the consolidated statement of assets and liabilities, including the consolidated schedule of investments, from which it has been derived.
Basis for Review ResultsThese interim financial statements are the responsibility of the Company’s management. We conducted our reviews in accordance with the standards of the PCAOB. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
/s/ RSM US LLP
New York, New York
August 9, 2023
Awareness Letter of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of PennantPark Floating Rate Capital Ltd. and its Subsidiaries
We have reviewed, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the unaudited interim financial information of PennantPark Floating Rate Capital Ltd. for the periods ended June 30, 2023 and 2022, as indicated in our report dated August 9, 2023; because we did not perform an audit, we expressed no opinion on that information.
We are aware that our report referred to above, which is included in your Quarterly Report on Form 10-Q for the quarter ended June 30, 2023, is incorporated by reference in Registration Statement No.333-268813 on Form N-2.
We are also aware that the aforementioned report, pursuant to Rule 436(c) under the Securities Act of 1933, is not considered a part of the Registration Statement prepared or certified by an accountant or a report prepared or certified by an accountant within the meaning of Sections 7 and 11 of that Act.
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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This Report, including Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains statements that constitute forward-looking statements, which relate to us and our consolidated subsidiaries regarding future events or our future performance or future financial condition. These forward-looking statements are not historical facts, but rather are based on current expectations, estimates and projections about our Company, our industry, our beliefs and our assumptions. The forward-looking statements contained in this Report involve risks and uncertainties, including statements as to:
We use words such as “anticipates,” “believes,” “expects,” “intends,” “seeks,” “plans,” “estimates” and similar expressions to identify forward-looking statements. You should not place undue influence on the forward-looking statements as our actual results could differ materially from those projected in the forward-looking statements for any reason, including the factors in “Risk Factors” and elsewhere in this Report.
Although we believe that the assumptions on which these forward-looking statements are based are reasonable, any of those assumptions could prove to be inaccurate, and, as a result, the forward-looking statements based on those assumptions also could be inaccurate. Important assumptions include our ability to originate new loans and investments, certain margins and levels of profitability and the availability of additional capital. In light of these and other uncertainties, the inclusion of a projection or forward-looking statement in this Report should not be regarded as a representation by us that our plans and objectives will be achieved.
We have based the forward-looking statements included in this Report on information available to us on the date of this Report, and we assume no obligation to update any such forward-looking statements. Although we undertake no obligation to revise or update any forward-looking statements in this Report, whether as a result of new information, future events or otherwise, you are advised to consult any additional disclosures that we may make directly to you or through reports that we in the future may file with the SEC, including reports on Form 10-Q/K and current reports on Form 8-K.
You should understand that under Section 27A(b)(2)(B) of the Securities Act and Section 21E(b)(2)(B) of the Exchange Act, the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995 do not apply to forward-looking statements made in periodic reports we file under the Exchange Act.
The following analysis of our financial condition and results of operations should be read in conjunction with our Consolidated Financial Statements and the related notes thereto contained elsewhere in this Report.
Overview
PennantPark Floating Rate Capital Ltd. is a BDC whose objectives are to generate both current income and capital appreciation while seeking to preserve capital by investing primarily in floating rate loans and other investments made to U.S. middle-market companies.
We believe that floating rate loans to U.S. middle-market companies offer attractive risk-reward to investors due to a limited amount of capital available for such companies. We use the term “middle-market” to refer to companies with annual revenues between $50 million and $1 billion. Our investments are typically rated below
investment grade. Securities rated below investment grade are often referred to as “leveraged loans,” “high yield” securities or “junk bonds” and are often higher risk compared to debt instruments that are rated above investment grade and have speculative characteristics. However, when compared to junk bonds and other non-investment grade debt, senior secured floating rate loans typically have more robust capital-preserving qualities, such as historically lower default rates than junk bonds, represent the senior source of capital in a borrower’s capital structure and often have certain of the borrower’s assets pledged as collateral. Our debt investments may generally range in maturity from three to ten years and are made to U.S. and, to a limited extent, non-U.S. corporations, partnerships and other business entities which operate in various industries and geographical regions.
Under normal market conditions, we generally expect that at least 80% of the value of our managed assets will be invested in floating rate loans and other investments bearing a variable-rate of interest. We generally expect that first lien secured debt will represent at least 65% of our overall portfolio. We also generally expect to invest up to 35% of our overall portfolio opportunistically in other types of investments, including second lien secured debt and subordinated debt and, to a lesser extent, equity investments. We seek to create a diversified portfolio by generally targeting an investment size between $5 million and $30 million, on average, although we expect that this investment size will vary proportionately with the size of our capital base.
Our investment activity depends on many factors, including the amount of debt and equity capital available to middle-market companies, the level of merger and acquisition activity for such companies, the general economic environment and the competitive environment for the types of investments we make. We have used, and expect to continue to use, our debt capital, proceeds from the rotation of our portfolio and proceeds from public and private offerings of securities to finance our investment objectives.
Organization and Structure of PennantPark Floating Rate Capital Ltd.
PennantPark Floating Rate Capital Ltd., a Maryland corporation organized in October 2010, is a closed-end, externally managed, non-diversified investment company that has elected to be treated as a BDC under the 1940 Act. In addition, for federal income tax purposes we elected to be treated, and intend to qualify annually, as a RIC under the Code.
Our investment activities are managed by the Investment Adviser. Under our Investment Management Agreement, we have agreed to pay our Investment Adviser an annual base management fee based on our average adjusted gross assets as well as an incentive fee based on our investment performance. We have also entered into an Administration Agreement with the Administrator. Under our Administration Agreement, we have agreed to reimburse the Administrator for our allocable portion of overhead and other expenses incurred by the Administrator in performing its obligations under our Administration Agreement, including rent and our allocable portion of the costs of compensation and related expenses of our Chief Compliance Officer, Chief Financial Officer, Corporate Counsel and their respective staffs. Our board of directors, a majority of whom are independent of us, provides overall supervision of our activities, and the Investment Adviser supervises our day-to-day activities.
Revenues
We generate revenue in the form of interest income on the debt securities we hold and capital gains and dividends, if any, on investment securities that we may acquire in portfolio companies. Our debt investments, whether in the form of first lien secured debt, second lien secured debt or subordinated debt, typically have a term of three to ten years and bear interest at a floating or fixed rate. Interest on debt securities is generally payable quarterly or semiannually. In some cases, our investments provide for deferred interest payments or PIK interest. The principal amount of the debt securities and any accrued but unpaid interest generally becomes due at the maturity date. In addition, we may generate revenue in the form of amendment, commitment, origination, structuring or diligence fees, fees for providing significant managerial assistance and possibly consulting fees. Loan origination fees, OID and market discount or premium are capitalized and accreted or amortized using the effective interest method as interest income or, in the case of deferred financing costs, as interest expense. Dividend income, if any, is recognized on an accrual basis on the ex-dividend date to the extent that we expect to collect such amounts. From time to time, the Company receives certain fees from portfolio companies, which are non-recurring in nature. Such fees include loan prepayment penalties, structuring fees and amendment fees, and are recorded as other investment income when earned. Litigation settlements are accounted for in accordance with the gain contingency provisions of ASC Subtopic 450-30, Gain Contingencies, or ASC 450-30.
Expenses
Our primary operating expenses include the payment of a management fee and the payment of an incentive fee to our Investment Adviser, if any, our allocable portion of overhead under our Administration Agreement and other operating costs as detailed below. Our management fee compensates our Investment Adviser for its work in identifying, evaluating, negotiating, consummating and monitoring our investments. Additionally, we pay interest expense on the outstanding debt and unused commitment fees on undrawn amounts under our various debt facilities. We bear all other direct or indirect costs and expenses of our operations and transactions, including:
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Generally, during periods of asset growth, we expect our general and administrative expenses to be relatively stable or to decline as a percentage of total assets and increase during periods of asset declines. Incentive fees, interest expense and costs relating to future offerings of securities would be additive to the expenses described above.
PORTFOLIO AND INVESTMENT ACTIVITY
PennantPark Floating Rate Capital Ltd.
As of June 30, 2023, our portfolio totaled $1,105.3 million, and consisted of $950.2 million of first lien secured debt (including $210.1 million in PSSL), $0.1 million of second lien secured debt and $154.9 million of preferred and common equity (including $47.9 million in PSSL). Our debt portfolio consisted of 100% variable-rate investments. As of June 30, 2023, we had three portfolio companies on non-accrual, representing 1% and zero percent of our overall portfolio on a cost and fair value basis, respectively. As of June 30, 2023, the portfolio had net unrealized depreciation of $35.2 million. Our overall portfolio consisted of 130 companies with an average investment size of $8.5 million and had a weighted average yield on debt investments of 12.4%, and was invested 86% in first lien secured debt (including 19% in PSSL), less than 1% in second lien secured debt and 14% in preferred and common equity (including 4% in PSSL). As of June 30, 2023, 99% of the investments held by PSSL were first lien secured debt.
As of September 30, 2022, our portfolio totaled $1,164.3 million and consisted of $1,009.6 million of first lien secured debt (including $190.2 million in PSSL), $0.1 million of second lien secured debt and $154.5 million of preferred and common equity (including $49.4 million in PSSL). Our debt portfolio consisted of 100% variable-rate investments. As of September 30, 2022, we had two portfolio companies on non-accrual, representing 0.9% and zero percent of our overall portfolio on a cost and fair value basis, respectively. As of September 30, 2022, the portfolio had net unrealized depreciation of $13.1 million. Our overall portfolio consisted of 125 companies with an average investment size of $9.3 million, had a weighted average yield on debt investments of 10.0%, and was invested 87% in first lien secured debt (including 16% in PSSL), less than 1% in second lien secured debt and 13% in preferred and common equity (including 4% in PSSL). As of September 30, 2022, 99% of the investments held by PSSL were first lien secured debt.
For the three months ended June 30, 2023, we invested $80.0 million in four new and 40 existing portfolio companies at a weighted average yield on debt investments of 12.5%. For the three months ended June 30, 2023, sales and repayments of investments totaled $132.4 million, including $75.3 million of sales to PSSL. For the nine months ended June 30, 2023, we invested $231.0 million in 13 new and 63 existing portfolio companies at a weighted average yield on debt investments of 12.1%. For the nine months ended June 30, 2023 sales and repayments of investments totaled $258.1 million, including $121.2 million of sales to PSSL.
For the three months ended June 30, 2022, we invested $104.8 million in six new and 39 existing portfolio companies at a weighted average yield on debt investments of 8.1%. For the three months ended June 30, 2022 sales and repayments of investments totaled $55.0 million, including $16.8 million of sales to PSSL. For the nine months ended June 30, 2022, we invested $553.1 million in 29 new and 53 existing portfolio companies at a weighted average yield on debt investments of 7.7%. Sales and repayments of investments for the nine months ended June 30, 2022 totaled $397.2 million, including $225.2 million of sales to PSSL.
As of June 30, 2023, PSSL’s portfolio totaled $805.2 million and consisted of 105 companies with an average investment size of $7.7 million and at a weighted average yield on debt investments of 12.0%. As of September 30, 2022, PSSL’s portfolio totaled $754.7 million, consisted of 95 companies with an average investment size of $8.0 million and at a weighted average yield on debt investments of 9.6%.
For the three months ended June 30, 2023, PSSL invested $77.8 million (including $75.3 million purchased from the Company) in six new and 15 existing portfolio companies at a weighted average yield on debt investments of 12.1%. Sales and repayments of investments for the three months ended June 30, 2023 totaled $40.8 million. For the nine months ended June 30, 2023, PSSL invested $138.3 million (including $121.2 million purchased from the Company) in 17 new and 22 existing portfolio companies at a weighted average yield on debt investments of 11.8%. For the nine months ended June 30, 2023 sales and repayments of investments totaled $78.8 million.
For the three months ended June 30, 2022, PSSL invested $31.5 million (including $16.8 million purchased from the Company) in four new and seven existing portfolio companies at a weighted average yield on debt investments of 8.8%. For the three months ended June 30, 2022 sales and repayments of investments totaled $13.5 million. For the nine months ended June 30, 2022, PSSL invested $228.6 million (including $225.2 million purchased from the Company) in 25 new and 12 existing portfolio companies at a weighted average yield on debt investments of 7.9%. For the nine months ended June 30, 2022, sales and repayments of investments totaled $69.2 million.
At-the-Market Offering
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of our Consolidated Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amount of our assets and liabilities at the date of the Consolidated Financial Statements and the reported amounts of income and expenses during the reported periods. In the
opinion of management, all adjustments, which are of a normal recurring nature, considered necessary for the fair presentation of financial statements have been included. Actual results could differ from these estimates due to changes in the economic and regulatory environment, financial markets and any other parameters used in determining such estimates and assumptions. We may reclassify certain prior period amounts to conform to the current period presentation. We have eliminated all intercompany balances and transactions. References to ASC serve as a single source of accounting literature. Subsequent events are evaluated and disclosed as appropriate for events occurring through the date the Consolidated Financial Statements are issued. In addition to the discussion below, we describe our critical accounting policies in the notes to our Consolidated Financial Statements. We discuss our critical accounting estimates in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2022 Annual Report on Form 10-K. There have been no significant changes in our critical accounting estimates during the three months from those disclosed in our 2022 Annual Report on Form 10-K.
Investment Valuations
We expect that there may not be readily available market values for many of our investments which are or will be in our portfolio, and we value such investments at fair value as determined in good faith by or under the direction of our board of directors using a documented valuation policy and a consistently applied valuation process, as described in this Report. With respect to investments for which there is no readily available market value, the factors that the board of directors may take into account in pricing our investments at fair value include, as relevant, the nature and realizable value of any collateral, the portfolio company’s ability to make payments and its earnings and discounted cash flow, the markets in which the portfolio company does business, comparison to publicly traded securities and other relevant factors. When an external event such as a purchase transaction, public offering or subsequent equity sale occurs, we consider the pricing indicated by the external event to corroborate or revise our valuation. Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the price used in an actual transaction may be different than our valuation and the difference may be material.
r
Our board of directors generally uses market quotations to assess the value of our investments for which market quotations are readily available. We obtain these market values from independent pricing services or at the bid prices obtained from at least two brokers or dealers, if available, or otherwise from a principal market maker or a primary market dealer. The Investment Adviser assesses the source and reliability of bids from brokers or dealers. If the board of directors has a bona fide reason to believe any such market quote does not reflect the fair value of an investment, it may independently value such investments by using the valuation procedure that it uses with respect to assets for which market quotations are not readily available.
Level 1: Inputs that are quoted prices (unadjusted) in active markets for identical assets or liabilities, accessible by us at the measurement date.
Level 2: Inputs that are quoted prices for similar assets or liabilities in active markets, or that are quoted prices for identical or similar assets or liabilities in markets that are not active and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term, if applicable, of the financial instrument.
Level 3: Inputs that are unobservable for an asset or liability because they are based on our own assumptions about how market participants would price the asset or liability.
On December 3, 2020, the SEC adopted Rule 2a-5 under the 1940 Act, which establishes an updated regulatory framework for determining fair value in good faith for purposes of the 1940 Act. The new rule clarifies how fund boards of directors can satisfy their valuation obligations and requires, among other things, the boards of directors to periodically assess material valuation risks and take steps to manage those risks. The rule also permits boards of directors, subject to board oversight and certain other conditions, to designate the fund’s investment adviser to perform fair value determinations. The new rule went into effect on March 8, 2021 and had a compliance date of September 8, 2022. We came into compliance with Rule 2a-5 under the 1940 Act before the compliance date. While our board of directors has not elected to designate the
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Investment Adviser as the valuation designee at this time, we have adopted certain revisions to our valuation policies and procedures in order comply with the applicable requirements of Rule 2a-5 under the 1940 Act.
In addition to using the above inputs to value cash equivalents, investments, our 2023 Notes, our 2026 Notes, our 2031 Asset-Backed Debt and our Credit Facility, we employ the valuation policy approved by our board of directors that is consistent with ASC 820. Consistent with our valuation policy, we evaluate the source of inputs, including any markets in which our investments are trading, in determining fair value.
Generally, the carrying value of our consolidated financial liabilities approximates fair value. We have adopted the principles ASC Subtopic 825-10, Financial Instruments, or ASC 825-10, which provides companies with an option to report selected financial assets and liabilities at fair value, and made an irrevocable election to apply ASC 825-10 to the Credit Facility and the 2023 Notes. We elected to use the fair value option for the Credit Facility and the 2023 Notes to align the measurement attributes of both our assets and liabilities while mitigating volatility in earnings from using different measurement attributes. Due to that election and in accordance with GAAP, we did not incur any expenses relating to amendment costs on the Credit Facility and debt issuance costs on the 2023 Notes during the three and nine months ended June 30, 2023 and 2022, respectively. ASC 825-10 establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities and to more easily understand the effect on earnings of a company’s choice to use fair value. ASC 825-10 also requires entities to display the fair value of the selected assets and liabilities on the face of the Consolidated Statements of Assets and Liabilities and changes in fair value of the Credit Facility and the 2023 Notes are reported in our Consolidated Statements of Operations. We elected not to apply ASC 825-10 to any other financial assets or liabilities, including the 2026 Notes and the 2031 Asset-Backed Debt.
For the three and nine months ended June 30, 2023, the Credit Facility and the 2023 Notes had a net change in unrealized appreciation (depreciation) of $(5.8) million and $(4.8) million, respectively. For the three and nine months ended June 30, 2022, the Credit Facility and the 2023 Notes had a net change in unrealized appreciation (depreciation) of $(0.1) million and $(1.3) million, respectively. As of June 30, 2023 and September 30, 2022, the net unrealized appreciation (depreciation) on the Credit Facility as applicable, and the 2023 Notes totaled $2.6 million and $(1.5) million, respectively. We use a nationally recognized independent valuation service to measure the fair value of the Credit Facility in a manner consistent with the valuation process that our board of directors uses to value our investments. Our 2023 Notes trade on the TASE and we use the closing price on the exchange to determine the fair value.
Revenue Recognition
We record interest income on an accrual basis to the extent that we expect to collect such amounts. For loans and debt investments with contractual PIK interest, which represents interest accrued and added to the loan balance that generally becomes due at maturity, we will generally not accrue PIK interest when the portfolio company valuation indicates that such PIK interest is not collectable. We do not accrue as a receivable interest on loans and debt investments if we have reason to doubt our ability to collect such interest. Loan origination fees, OID, market discount or premium and deferred financing costs on liabilities, which we do not fair value, are capitalized and then accreted or amortized using the effective interest method as interest income or, in the case of deferred financing costs, as interest expense. We record prepayment penalties on loans and debt investments as income. Dividend income, if any, is recognized on an accrual basis on the ex-dividend date to the extent that we expect to collect such amounts. From time to time, the Company receives certain fees from portfolio companies, which are non-recurring in nature. Such fees include loan prepayment penalties, structuring fees and amendment fees, and are recorded as other investment income when earned.
Net Realized Gains or Losses and Net Change in Unrealized Appreciation or Depreciation
We measure realized gains or losses by the difference between the net proceeds from the repayment or sale and the amortized cost basis of the investment, using the specific identification method, without regard to unrealized appreciation or depreciation previously recognized, but considering unamortized upfront fees and prepayment penalties. Net change in unrealized appreciation or depreciation reflects the change in the fair values of our portfolio investments, our Credit Facility, the 2023 Notes during the reporting period, including any reversal of previously recorded unrealized appreciation or depreciation, when gains or losses are realized.
Foreign Currency Translation
Payment -in-kind, or PIK Interest
We have investments in our portfolio which contain a PIK interest provision. PIK interest is added to the principal balance of the investment and is recorded as income. In order for us to maintain our ability to be subject to tax as a RIC, substantially all of this income must be paid out to stockholders in the form of dividends for federal income tax purposes, even though we may not have collected any cash with respect to interest on PIK securities.
Federal Income Taxes
We have elected to be treated and intend to qualify annually to maintain our election to be treated, as a RIC under Subchapter M of the Code. To maintain our RIC tax election, we must, among other requirements, meet certain annual source-of-income and quarterly asset diversification requirements. We also must annually distribute dividends for federal income tax purposes to our stockholders out of the assets legally available for distribution of an amount generally at least equal to 90% of the sum of our net ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, or investment company taxable income, determined without regard to any deduction for dividends paid.
Although not required for us to maintain our RIC tax status, in order to preclude the imposition of a 4% nondeductible federal excise tax imposed on RICs, we must distribute dividends for U.S. federal income tax purposes to our stockholders in respect of each calendar year of an amount at least equal to the sum of (1) 98% of our net ordinary income (subject to certain deferrals and elections) for the calendar year, (2) 98.2% of our capital gain net income (i.e., the excess, if any, of our capital gains over capital losses), adjusted for certain ordinary losses, generally for the one-year period ending on October 31 of the calendar year plus (3) any net ordinary income or capital gain net income for the preceding years that was not distributed during such years on which we did not incur any corporate income tax, or the Excise Tax Avoidance Requirement. In addition, although we may distribute realized net capital gains (i.e., net long-term capital gains in excess of net short-term capital losses), if any, at least
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annually, out of the assets legally available for such distributions in the manner described above, we have retained and may continue to retain such net capital gains or investment company taxable income, subject to maintaining our ability to be taxed as a RIC, in order to provide us with additional liquidity.
Because federal income tax regulations differ from GAAP, distributions in accordance with tax regulations may differ from net investment income and net realized gain recognized for financial reporting purposes. Differences between tax regulations and GAAP may be permanent or temporary. Permanent differences are reclassified among capital accounts in the Consolidated Financial Statements to reflect their appropriate tax character. Temporary differences arise when certain items of income, expense, gain or loss are recognized at some time in the future.
For the three and nine months ended June 30, 2023, we recorded a provision for taxes on net investment income of $0.2 million and $0.8 million, respectively, pertaining to federal excise tax. For the three and nine months ended June 30, 2022, we recorded a provision for taxes on net investment income of $0.1 million and $0.3 million, respectively, pertaining to federal excise tax.
We have formed and expect to continue to form certain taxable subsidiaries, including the Taxable Subsidiary, which are taxed as corporations. These taxable subsidiaries allow us to hold equity securities of certain portfolio companies treated as pass-through entities for U.S. federal income tax purposes while facilitating our ability to qualify as a RIC under the Code.
RESULTS OF OPERATIONS
Set forth below are the results of operations for the three and nine months ended June 30, 2023 and 2022.
Investment Income
For the three and nine months ended June 30, 2023, investment income was $37.7 million and $103.6 million, respectively, which was attributable to $30.4 million and $88.6 million from first lien secured debt and $7.3 million and $15.0 million from other investments, respectively. For the three and nine months ended June 30, 2022, investment income was $25.7 million and $76.7 million, respectively, which was attributable to $21.1 million and $64.0 million from first lien secured debt and $4.6 million and $12.7 million from other investments, respectively. The increase in investment income compared to the same periods in the prior year was primarily due to the increase in the cost yield of our debt portfolio and a dividend related to our equity investment in Dominion Voting Systems.
For the three and nine months ended June 30, 2023, expenses totaled $19.2 million and $54.6 million, respectively and were comprised of: $10.0 million and $29.6 million of debt related interest and expenses, $2.8 million and $8.6 million of base management fees, $4.6 million and $12.2 million of performance-based incentive fees, $1.6 million and $3.3 million of general and administrative expenses and $0.2 million and $0.8 million of taxes. For the three and nine months ended June 30, 2022, expenses totaled $13.9 million and $40.8 million, respectively, and were comprised of: $7.4 and $20.7 million of debt related interest and expenses, $3.1 million and $8.9 million of base management fees, $2.6 million and $8.5 million of performance-based incentive fees, $0.8 million and $2.4 million of administrative expenses and $0.1 million and $0.3 million of taxes. The increase in expenses compared to the same periods in the prior year was primarily due to the increase in financing costs of our debt liabilities and an increase in performance-based incentive fees as a result of higher pre-incentive fee net investment income.
Net Investment Income
For the three and nine months ended June 30, 2023, net investment income totaled $18.5 million and $49.0 million or $0.36 and $1.02 per share, respectively. For the three and nine months ended June 30, 2022, net investment income totaled $11.8 million and $35.9 million, or $0.29 and $0.90 per share, respectively. The increase in net investment income was primarily due to an increase in investment income partially offset by an increase in expenses compared to the same period in the prior year.
Net Realized Gains or Losses
For the three and nine months ended June 30, 2023, net realized gains (losses) totaled $(6.1) million and $(13.8) million, respectively. For the three and nine months ended June 30, 2022, net realized gains (losses) totaled $0.7 million and $(11.6) million, respectively. The change in net realized gains (losses) compared to the same periods in the prior year was primarily due to changes in the market conditions of our investments and the values at which they were realized.
Unrealized Appreciation or Depreciation on Investments, the Credit Facility and the 2023 Notes
For the three and nine months ended June 30, 2023, we reported net change in unrealized appreciation (depreciation) on investments of $(1.1) million and $(22.0) million, respectively. For the three and nine months ended June 30, 2022, we reported net change in unrealized appreciation (depreciation) on investments of $(17.7) million and $(3.7) million, respectively. As of June 30, 2023 and September 30, 2022, our net unrealized appreciation (depreciation) on investments totaled $(35.2) million and $(13.1) million, respectively. The net change in unrealized appreciation (depreciation) on our investments compared to the same period in the prior year was primarily due to the operating performance of the portfolio companies within our portfolio and changes in the capital market conditions of our investments.
For the three and nine months ended June 30, 2023, our Credit Facility and the 2023 Notes had a net change in unrealized appreciation (depreciation) of $(5.8) million and $(4.8) million, respectively. For the three and nine months ended June 30, 2022, the Credit Facility and the 2023 Notes had a net change in unrealized appreciation (depreciation) of less than $(0.1) million and $(1.3) million, respectively. As of June 30, 2023 and September 30, 2022, the net unrealized appreciation (depreciation) on the Credit Facility and the 2023 Notes totaled $2.6 million and $(1.5) million, respectively. The net change in net unrealized appreciation or depreciation compared to the same periods in the prior year was primarily due to changes in the capital markets.
Net Increase (Decrease) in Net Assets Resulting from Operations
For the three and nine months ended June 30, 2023, net increase (decrease) in net assets resulting from operations totaled $5.6 million and $11.2 million, or $0.11 and $0.23 per share, respectively. For the three and nine months ended June 30, 2022, net increase (decrease) in net assets resulting from operations totaled $(5.1) million and $16.6 million, or $(0.12) and $0.42 per share, respectively. The net increase or decrease from operations compared to the same periods in the prior year was primarily due to operating performance of our portfolio and changes in capital market conditions of our investments along with change in cost yield of our debt portfolio and costs of financing.
LIQUIDITY AND CAPITAL RESOURCES
Our liquidity and capital resources are derived primarily from cash flows from operations, including income earned, proceeds from investment sales and repayments, and proceeds of securities offerings and debt financings. Our primary use of funds from operations includes investments in portfolio companies and payments of fees and other operating expenses we incur. We have used, and expect to continue to use, our debt capital, proceeds from our portfolio and proceeds from public and private offerings of securities to finance our investment objectives and operations. As of June 30, 2023, in accordance with the 1940 Act, with certain limited exceptions, we are only allowed to borrow amounts such that we are in compliance with a 150% asset coverage ratio requirement after such borrowing.
On April 5, 2018, our board of directors approved the application of the modified asset coverage requirements set forth in Section 61(a)(2) of the 1940 Act, as amended by the Consolidated Appropriations Act of 2018 (which includes the SBCAA). As a result, the asset coverage requirement applicable to us for senior securities was reduced from 200% (i.e., $1 of debt outstanding for each $1 of equity) to 150% (i.e., $2 of debt outstanding for each $1 of equity), effective as of April 5, 2019, subject to compliance with certain disclosure requirements. As of June 30, 2023 and September 30, 2022, our asset coverage ratio, as computed in accordance with the 1940 Act, was 210% and 178%, respectively.
For the nine months ended June 30, 2023 and 2022, the annualized weighted average cost of debt, inclusive of the fee on the undrawn commitment on the Credit Facility, amendment costs and debt issuance costs, was 6.1% and 3.7%, respectively. As of June 30, 2023 and September 30, 2022, we had $301.6 million and $196.3 million of unused borrowing capacity under the Credit Facility, as applicable, respectively, subject to leverage and borrowing base restrictions.
Funding I’s multi-currency Credit Facility with the Lenders was $366.0 million as of June 30, 2023 subject to satisfaction of certain conditions and regulatory restrictions that the 1940 Act imposes on us as a BDC, has an interest rate spread above SOFR (or an alternative risk-free floating interest rate index) of 236 basis points, a maturity date of August 2026 and a revolving period that ends in August 2024. As of June 30, 2023 and September 30, 2022, PennantPark Floating Rate Funding I, LLC, our wholly-owned subsidiary, borrowed $64.4 million and $169.7 million under the Credit Facility, respectively, and the weighted average interest rate, exclusive of the fee on undrawn commitments, was of 7.5% and 4.9%, respectively.
During the revolving period, the Credit Facility bears interest at SOFR (or an alternative risk-free floating interest rate index) plus 236 basis points and, after the revolving period, the rate will reset to Base Rate (or an alternative risk-free floating interest rate index) plus 250 basis points for the remaining two years, maturing in August 2026. The Credit Facility is secured by all of the assets of Funding I. Both PennantPark Floating Rate Capital Ltd. and Funding I have made customary representations and warranties and are required to comply with various covenants, reporting requirements and other customary requirements for similar credit facilities.
The Credit Facility contains covenants, including but not limited to, restrictions of loan size, currency types and amounts, industry requirements, average life of loans, geographic and individual portfolio concentrations, minimum portfolio yield and loan payment frequency. Additionally, the Credit Facility requires the maintenance of a minimum equity investment in Funding I and income ratio as well as restrictions on certain payments and issuance of debt. The Credit Facility compliance reporting is prepared on a basis of accounting other than GAAP. As of June 30, 2023, we were in compliance with the covenants relating to our Credit Facility.
Our interest in Funding I (other than the management fee) is subordinate in priority of payment to every other obligation of Funding I and is subject to certain payment restrictions set forth in the Credit Facility. We may receive cash distributions on our equity interests in Funding I only after it has made (1) all required cash interest and, if applicable, principal payments to the Lenders, (2) required administrative expenses and (3) claims of other unsecured creditors of Funding I. We cannot assure you that there will be sufficient funds available to make any distributions to us or that such distributions will meet our expectations from Funding I. The Investment Adviser has irrevocably directed that the management fee owed with respect to such services is to be paid to the Company so long as the Investment Adviser remains the collateral manager.
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In November 2017, we issued $138.6 million of our 2023 Notes. The 2023 Notes were issued pursuant to a deed of trust between the Company and Mishmeret Trust Company, Ltd., as trustee, of which $76.2 million and $97.0 million was outstanding as of June 30, 2023 and September 30, 2022, respectively.
The 2023 Notes pay interest at a rate of 4.3% per year. Interest on the 2023 Notes is payable semi-annually in arrears on June 15 and December 15 of each year, commencing June 15, 2018. The principal on the 2023 Notes will be payable in four annual installments as follows: 15% of the original principal amount on December 15, 2020, 15% of the original principal amount on December 15, 2021, 15% of the original principal amount on December 15, 2022 and 55% of the original principal amount on December 15, 2023.
The 2023 Notes are general, unsecured obligations, rank equal in right of payment with all of our existing and future senior unsecured indebtedness and are generally redeemable at our option. The deed of trust governing the 2023 Notes includes certain customary covenants, including minimum equity requirements, and events of default. Please refer to the deed of trust filed as Exhibit (d)(8) to our post-effective amendment filed on December 13, 2017 for more information. The 2023 Notes are rated ilA- by S&P Global Ratings Maalot Ltd. and are listed on the TASE. In connection with this offering, we have dual listed our common stock on the TASE.
In March 2021 and in October 2021, we issued $100.0 million and $85.0 million, respectively, in aggregate principal amount of our 2026 Notes at a public offering price per note of 99.4% and 101.5%, respectively. Interest on the 2026 Notes is paid semi-annually on April 1 and October 1 of each year, at a rate of 4.25% per year, commencing October 1, 2021. The 2026 Notes mature on April 1, 2026 and may be redeemed in whole or in part at our option subject to a make-whole premium if redeemed more than three months prior to maturity. The 2026 Notes are our general, unsecured obligations and rank equal in right of payment with all of our existing and future senior unsecured indebtedness. The 2026 Notes are effectively subordinated to all of our existing and future secured indebtedness to the extent of the value of the assets securing such indebtedness and structurally subordinated to all existing and future indebtedness and other obligations of any of our subsidiaries, financing vehicles, or similar facilities. We do not intend to list the 2026 Notes on any securities exchange or automated dealer quotation system.
In September 2019, the Securitization Issuers completed the Debt Securitization. The 2031 Asset-Backed Debt is secured by the middle market loans, participation interests in middle market loans and other assets of the Securitization Issuer. The Debt Securitization was executed through (A) a private placement of: (i) $78.5 million Class A-1 Senior Secured Floating Rate Notes maturing 2031, which bear interest at the three-month LIBOR plus 1.8%, (ii) $15.0 million Class A-2 Senior Secured Fixed Rate Notes due 2031, which bear interest at 3.7%, (iii) $14.0 million Class B-1 Senior Secured Floating Rate Notes due 2031, which bear interest at the three-month LIBOR plus 2.9%, (iv) $16.0 million Class B-2 Senior Secured Fixed Rate Notes due 2031, which bear interest at 4.3%, (v) $19.0 million Class C‑1 Secured Deferrable Floating Rate Notes due 2031, which bear interest at the three-month LIBOR plus 4.0%, (vi) $8.0 million Class C-2 Secured Deferrable Fixed Rate Notes due 2031, which bear interest at 5.4%, and (vii) $18.0 million Class D Secured Deferrable Floating Rate Notes due 2031, which bear interest at the three-month LIBOR plus 4.8% and (B) the borrowing of $77.5 million Class A‑1 Senior Secured Floating Rate Loans due 2031, which bear interest at the three-month LIBOR plus 1.8%, under a credit agreement by and among the Securitization Issuers, as borrowers, various financial institutions, as lenders, and U.S. Bank National Association, as collateral agent and as loan agent. The 2031 Asset-Backed Debt is scheduled to mature on October 15, 2031. As of both June 30, 2023 and September 30, 2022, the Company had $228.0 million of 2031 Asset-Backed Debt outstanding with a weighted average interest rate of 6.8% and 4.6%, respectively.
On the closing date of the Debt Securitization, in consideration of our transfer to the Securitization Issuer of the initial closing date loan portfolio, which included loans distributed to us by our wholly-owned subsidiary, the Securitization Issuer transferred to us 100% of the Preferred Shares of the Securitization Issuer, 100% of the Class D Secured Deferrable Floating Rate Notes issued by the Securitization Issuer, and a portion of the net cash proceeds received from the sale of the 2031 Asset-Backed Debt. The Preferred Shares of the Securitization Issuer do not bear interest and had a stated value of $55.4 million at the closing of the Debt Securitization.
The 2031 Asset-Backed Debt constitutes secured obligations of the Securitization Issuers, and the indenture governing the 2031 Asset-Backed Debt includes customary covenants and events of default. The 2031 Asset-Backed Debt has not been, and will not be, registered under the Securities Act or any state securities or “blue sky” laws and may not be offered or sold in the United States absent registration with the SEC or an applicable exemption from registration.
Our Investment Adviser serves as collateral manager to the Securitization Issuer pursuant to a collateral management agreement between our Investment Adviser and the Securitization Issuer, or the Collateral Management Agreement. For so long as our Investment Adviser serves as collateral manager, it will elect to irrevocably waive any collateral management fee to which it may be entitled under the Collateral Management Agreement.
We may raise equity or debt capital through both registered offerings off our shelf registration statement and private offerings of securities, securitizing a portion of our investments among other considerations or mergers and acquisitions. Furthermore, the Credit Facility availability depends on various covenants and restrictions as discussed in the preceding paragraphs. The primary use of existing funds and any funds raised in the future is expected to be for repayment of indebtedness, investments in portfolio companies, cash distributions to our stockholders or for other general corporate purposes.
We have entered into certain contracts under which we have material future commitments. Under our Investment Management Agreement, which was most recently reapproved by our board of directors, including a majority of our directors who are not interested persons of us or the Investment Adviser, in February 2023, PennantPark Investment Advisers serves as our investment adviser. Payments under our Investment Management Agreement in each reporting period are equal to (1) a management fee
47
equal to a percentage of the value of our average adjusted gross assets and (2) an incentive fee based on our performance.
Under our Administration Agreement, which was most recently reapproved by our board of directors, including a majority of our directors who are not interested persons of us, in February 2023, the Administrator furnishes us with office facilities and administrative services necessary to conduct our day-to-day operations. The Administration Agreement was amended on July 1, 2022. If requested to provide significant managerial assistance to our portfolio companies, we or the Administrator will be paid an additional amount based on the services provided. Payment under our Administration Agreement is based upon our allocable portion of the Administrator’s overhead in performing its obligations under our Administration Agreement, including rent and our allocable portion of the costs of our Chief Compliance Officer, Chief Financial Officer, Corporate Counsel and their respective staffs.
If any of our contractual obligations discussed above are terminated, our costs under new agreements that we enter into may increase. In addition, we will likely incur significant time and expense in locating alternative parties to provide the services we expect to receive under our Investment Management Agreement and our Administration Agreement. Any new investment management agreement would also be subject to approval by our stockholders.
As of June 30, 2023 and September 30, 2022, we had cash and cash equivalents of $59.1 million and $47.9 million, respectively, available for investing and general corporate purposes. We believe our liquidity and capital resources are sufficient to take advantage of market opportunities.
For the nine months ended June 30, 2023, our operating activities provided cash of $65.4 million and our financing activities used cash of $54.2 million. Our operating activities provided cash primarily realized from our investment activities and our financing activities used cash primarily due to repayments under our Credit Facility and principal repayment of our 2023 Notes, partially offset by proceeds from our equity offering.
For the nine months ended June 30, 2022, our operating activities used cash of $111.6 million and our financing activities provided cash of $101.7 million. Our operating activities used cash primarily for our investment activities and our financing activities provided cash primarily due to the issuance of $85 million of our 2026 Add-on Notes borrowings under our Credit Facility.
We and Kemper each appointed two members to PSSL’s four-person board of directors and investment committee. All material decisions with respect to PSSL, including those involving its investment portfolio, require unanimous approval of a quorum of the board of directors or investment committee. Quorum is defined as (i) the presence of two members of the board of directors or investment committee, provided that at least one individual is present that was elected, designated or appointed by each member; (ii) the presence of three members of the board of directors or investment committee, provided that the individual that was elected, designated or appointed by the member with only one individual present shall be entitled to cast two votes on each matter; and (iii) the presence of four members of the board of directors or investment committee shall constitute a quorum, provided that two individuals are present that were elected, designated or appointed by each member.
48
49
50
Below is a listing of PSSL’s individual investments as of September 30, 2022 ($ in thousands):
51
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(1)As of June 30, 2023 and September 30, 2022, PSSL had unfunded commitments to fund investments of $2.0 million and $2.5 million, respectively.
Off-Balance Sheet Arrangements
We currently engage in no off-balance sheet arrangements other than our funding requirements for the unfunded investments described above.
Distributions
In order to be treated as a RIC for federal income tax purposes and to not be subject to corporate-level tax on undistributed income or gains, we are required, under Subchapter M of the Code, to annually distribute dividends for U.S. federal income tax purposes to our stockholders out of the assets legally available for distribution of an amount generally at least equal to 90% of our investment company taxable income, determined without regard to any deduction for dividends paid.
Although not required for us to maintain our RIC tax status, in order to preclude the imposition of a 4% nondeductible federal excise tax imposed on RICs, we must distribute dividends for federal income tax purposes to our stockholders in respect of each calendar year an amount at least equal to the Excise Tax Avoidance Requirement. In addition, although we may distribute realized net capital gains (i.e., net long-term capital gains in excess of net short-term capital losses), if any, at least annually, out of the assets legally available for such distributions in the manner described above, we have retained and may continue to retain such net capital gains or investment company taxable income, subject to maintaining our ability to be taxed as a RIC, in order to provide us with additional liquidity.
During the three and nine months ended June 30, 2023, we declared distributions of $0.3025 and $0.8775 per share for total distributions of $15.4 million and $42.4 million, respectively. For the three and nine months ended June 30, 2022, we declared distributions of $0.285 and $0.855 per share for total distributions of $11.8 million and $34.1 million, respectively. We monitor available net investment income to determine if a return of capital for tax purposes may occur for the fiscal year. To the extent our taxable earnings fall below the total amount of our distributions for any given fiscal year, stockholders will be notified of the portion of those distributions deemed to be a tax return of capital. Tax characteristics of all distributions will be reported to stockholders subject to information reporting on Form 1099-DIV after the end of each calendar year and in our periodic reports filed with the SEC.
We intend to continue to make monthly distributions to our stockholders. Our monthly distributions, if any, are determined by our board of directors quarterly.
We may not be able to achieve operating results that will allow us to make distributions at a specific level or to increase the amount of these distributions from time to time. In addition, we may be limited in our ability to make distributions due to the asset coverage ratio for borrowings applicable to us as a BDC under the 1940 Act and due to provisions in future credit facilities. If we do not distribute at least a certain percentage of our income annually, we could suffer adverse tax consequences, including possible loss of our ability to be subject to tax as a RIC. We cannot assure stockholders that they will receive any distributions at a particular level.
Recent Accounting Pronouncements
In March 2022, the FASB issued ASU No. 2022-02, “Financial Instruments - Credit Losses (Topic 326)”, which is intended to address issues identified during the post-implementation review of ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”. The amendment, among other things, eliminates the accounting guidance for troubled debt restructurings by creditors in Subtopic 310-40, “Receivables - Troubled Debt Restructurings by Creditors”, while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. The
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new guidance is effective for interim and annual periods beginning after December 15, 2022. The Company has adopted the new accounting standard implementing appropriate controls and procedures, the effect of which was not material to the consolidated financial statements and the notes thereto.
RECENT DEVELOPMENTS
We are subject to financial market risks, including changes in interest rates. As of June 30, 2023, our debt portfolio consisted of 100.0% variable-rate investments. The variable-rate loans are usually based on a SOFR (or an alternative risk-free floating interest rate index) rate and typically have durations of three months, after which they reset to current market interest rates. Variable-rate investments subject to a floor generally reset by reference to the current market index after one to nine months only if the index exceeds the floor. In regards to variable-rate instruments with a floor, we do not benefit from increases in interest rates until such rates exceed the floor and thereafter benefit from market rates above any such floor. In contrast, our cost of funds, to the extent it is not fixed, will fluctuate with changes in interest rates since it has no floor.
Assuming that the most recent Consolidated Statements of Assets and Liabilities was to remain constant, and no actions were taken to alter the existing interest rate sensitivity, the following table shows the annualized impact of hypothetical base rate changes in interest rates:
Change in Interest Rates
Change in Interest Income, Net of Interest Expense(in thousands)
Change in Interest Income,Net of InterestExpense Per Share
Down 1%
(7,182
(0.13
Up 1%
7,182
0.13
Up 2%
14,364
0.26
Up 3%
21,545
0.39
Up 4%
28,741
0.52
Although management believes that this measure is indicative of our sensitivity to interest rate changes, it does not adjust for potential changes in the credit market, credit quality, size and composition of the assets on the Consolidated Statements of Assets and Liabilities and other business developments that could affect net increase in net assets resulting from operations or net investment income. Accordingly, no assurances can be given that actual results would not differ materially from those shown above.
Because we borrow money to make investments, our net investment income is dependent upon the difference between the rate at which we borrow funds and the rate at which we invest these funds, as well as our level of leverage. As a result, there can be no assurance that a significant change in market interest rates will not have a material adverse effect on our net investment income or net assets.
We may hedge against interest rate and foreign currency fluctuations by using standard hedging instruments such as futures, options and forward contracts or our Credit Facility subject to the requirements of the 1940 Act and applicable commodities laws. While hedging activities may insulate us against adverse changes in interest rates and foreign currencies, they may also limit our ability to participate in benefits of lower interest rates or higher exchange rates with respect to our portfolio of investments with fixed interest rates or investments denominated in foreign currencies. During the periods covered by this Report, we did not engage in interest rate hedging activities or foreign currency derivatives hedging activities.
As of the period covered by this Report, we, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). As disclosed in our Annual Report on Form 10-K for the fiscal year ended September 30, 2022, a material weakness was previously identified in connection with our internal control over financial reporting relating to procedures ensuring the timely transmission of portfolio company financial information to our independent valuation service providers. We have taken steps to remediate this material weakness, which steps have included (i) enhancing existing controls to ensure the timely transmission of all relevant portfolio company financial information to our independent service providers and (ii) enhancing policies and procedures to demonstrate a commitment to improving our overall control environment.
Taking the above efforts into consideration, our management, including the Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures for the quarter ended June 30, 2023 were effective and provided reasonable assurance that information required to be disclosed in our periodic filings with the SEC is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. However, in evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of such possible controls and procedures.
Other than disclosed in this Item 4, there have been no changes in our internal control over financial reporting that occurred during the quarter ended June 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II – OTHER INFORMATION
None of us, our Investment Adviser or our Administrator, is currently subject to any material legal proceedings, nor, to our knowledge, is any material legal proceeding threatened against us, or against our Investment Adviser or Administrator. From time to time, we, our Investment Adviser or Administrator, may be a party to certain legal proceedings, including proceedings relating to the enforcement of our rights under contracts with our portfolio companies. While the outcome of these and any future legal proceedings cannot be predicted with certainty, we do not expect that these proceedings will have a material effect upon our financial condition or results of operations.
In addition to the other information set forth in this Report, you should consider carefully the factors discussed below, as well as in Part I “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended September 30, 2022 filed on November 17, 2022, which could materially affect our business, financial condition and/or operating results. The risks described below, as well as in our Annual Report on Form 10-K are not the only risks facing PennantPark Floating Rate Capital Ltd. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition and/or operating results.
We and our portfolio companies may maintain cash balances at financial institutions that exceed federally insured limits and may otherwise be materially affected by adverse developments affecting the financial services industry, such as actual events or concerns involving liquidity, defaults or non-performance by financial institutions or transactional counterparties.
Our cash is held in accounts at U.S. banking institutions that we believe are of high quality. Cash held by us and by our portfolio companies in non-interest-bearing and interest-bearing operating accounts may exceed the Federal Deposit Insurance Corporation (“FDIC”) insurance limits. If such banking institutions were to fail, we or our portfolio companies could lose all or a portion of those amounts held in excess of such insurance limitations. In addition, actual events involving limited liquidity, defaults, non-performance or other adverse developments that affect financial institutions, transactional counterparties or other companies in the financial services industry or the financial services industry generally, or concerns or rumors about any events of these kinds or other similar risks, have in the past and may in the future lead to market-wide liquidity problems, which could adversely affect our and our portfolio companies’ business, financial condition, results of operations, or prospects.
Although we assess our and our portfolio companies’ banking relationships as we believe necessary or appropriate, our and our portfolio companies’ access to funding sources and other credit arrangements in amounts adequate to finance or capitalize our respective current and projected future business operations could be significantly impaired by factors that affect us or our portfolio companies, the financial institutions with which we or our portfolio companies have arrangements directly, or the financial services industry or economy in general. These factors could include, among others, events such as liquidity constraints or failures, the ability to perform obligations under various types of financial, credit or liquidity agreements or arrangements, disruptions or instability in the financial services industry or financial markets, or concerns or negative expectations about the prospects for companies in the financial services industry. These factors could involve financial institutions or financial services industry companies with which we or our portfolio companies have financial or business relationships, but could also include factors involving financial markets or the financial services industry generally. In addition, investor concerns regarding the U.S. or international financial systems could result in less favorable commercial financing terms, including higher interest rates or costs and tighter financial and operating covenants, or systemic limitations on access to credit and liquidity sources, thereby making it more difficult for us or our portfolio companies to acquire financing on acceptable terms or at all.
None.
Not applicable.
10b5-1 Disclosure
None of the officers or directors of the Company have adopted or terminated any Rule 10b5-1 trading arrangements applicable to them (if any) or the Company.
Unless specifically indicated otherwise, the following exhibits are incorporated by reference to exhibits previously filed with the SEC:
3.1
Articles of Amendment and Restatement of the Registrant (Incorporated by reference to Exhibit 99(A) to the Registrant's Pre-Effective Amendment No. 3 to the Registration Statement on Form N-2 (File No. 333-170243), filed on March 29, 2011).
3.2
Second Amended and Restated Bylaws of the Registrant (Incorporated by reference to Exhibit 3.2 to the Registrant's Quarterly Report on Form 10-Q (File No. 814-00891), filed on May 11, 2020).
4.1
Form of Share Certificate (Incorporated by reference to Exhibit 99(D) to the Registrant's Pre-Effective Amendment No. 5 to the Registration Statement on Form N-2 (File No. 333-170243), filed on April 5, 2011).
31.1*
Certification of Chief Executive Officer pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended.
31.2*
Certification of Chief Financial Officer pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended.
32.1*
Certification of Chief Executive Officer pursuant to section 906 of The Sarbanes-Oxley Act of 2002.
32.2*
Certification of Chief Financial Officer pursuant to section 906 of The Sarbanes-Oxley Act of 2002.
99.1
Privacy Policy of the Registrant (Incorporated by reference to Exhibit 99.1 to the Registrant’s Annual Report on Form 10-K (File No. 814-00891), filed on November 17, 2011).
101.INS*
Inline XBRL Instance Document
101.SCH*
Inline XBRL Taxonomy Extension Schema
101.CAL*
Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*
Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*
Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE*
Inline XBRL Taxonomy Extension Presentation Linkbase Document
104
Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)
* Filed herewith.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report on Form 10-Q to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: August 9, 2023
By:
/s/ Arthur H. Penn
Arthur H. Penn
Chief Executive Officer and Chairman of the Board of Directors
(Principal Executive Officer)
/s/ Richard T. Allorto, Jr.
Richard T. Allorto, Jr.
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)