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Summary of Operations
PennantPark Floating Rate Capital Ltd (PFLT) is both a Business Development Company (BDC) and a Regulated Investment Company (RIC) whose capital is invested by a third-party LLC, PennantPark Investment Advisors. As a BDC, it generates revenue by investing in middle-market businesses, primarily through first lien loans in private companies. About 80% of its investment portfolio consists of this, which is how PFLT prefers to operate in contrast with its sister company, PNNT. The remainder will consist of second lien secured debt and equity positions (preferred and common).
As an RIC, it avoids taxation if 90% of its earnings are paid out to shareholders (who are then taxed on the dividends). Because of this, the dividend yield is high, and very little is reinvested by PFLT. The company has consistently paid this dividend, even after the effects of COVID.
Strategy
PFLT defines the middle market as companies with EBITDA between $10 million and $50 million. Most companies here are overlooked by bigger lenders, so PFLT is uniquely positioned to leverage this unsatisfied demand into negotiating stronger covenants.
With an experienced team informed by value investing, the LLC makes each investment with research into the financial history of the company, confirmation of strong cash flows, and a clear exit strategy, in order to avoid permanent capital loss and to allow for capital appreciation. It declines most of the deals that come before it and avoids industries that are seasonal and cyclical in nature.
80% of these loans are first lien, and about 65% are floating-rate, which means that they are lower than normal rates but have the ability to rise if general rates increase without the possibility of decline.
Growth and the Future
PFLT grows by raising more capital, either by receiving its own loans or by issuing more shares. This rise in earnings tends to be balanced out by the dilution of the shares. PFLT holders can only grow their portfolio if they actively reinvest these dividends into new shares at a favorable price.
Nevertheless, the future of PFLT looks bright for those who like the dividend. It proved the strength of its portfolio in spite of the COVID lockdown/recession. Its companies were among the least affected and managed to make their interest payments. Only about 2% of the portfolio resulted in non-accrual in 2020. The dividend was maintained, which was not the case for its sister PNNT (see chart above for portfolio differences).
Valuation
Growth Assumption: 0%
Intrinsic Value Per Share: $8.70
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