Thank you, and good morning, everyone. Welcome to PennantPark Floating Rate Capital's first fiscal quarter 2026 earnings conference call.

I'm joined today by Rick Allorto, our Chief Financial Officer. Rick, please start off by disclosing some general conference call information and include a discussion about forward-looking statements.

Thank you, Art. I'd like to remind everyone that today's call is being recorded and is the property of PennantPark Floating Rate Capital.

Any unauthorized broadcast of this call in any form is strictly prohibited. An audio replay of the call will be available on our website.

I'd also like to call your attention to the customary safe harbor disclosure in our press release regarding forward-looking information. Our remarks today may also include forward-looking statements and projections.

Please refer to our most recent SEC filings for important factors that could cause actual results to differ materially from these projections. We do not undertake to update our forward-looking statements unless required by law.

To obtain copies of our latest SEC filings, please visit our website at pennantpark.com or call us at 212-905-1000. At this time, I'd like to turn the call back to our Chairman and Chief Executive Officer, Art Penn.

Thanks, Rick. I'll begin with an overview of our first quarter results and recent strategic initiative, the launch of our new joint venture, PSSL 2, which commenced investment activities during the quarter.

I will then share our perspective on the current market environment and how PFLT is positioned for continued growth. Rick will follow up with a detailed review of the financials, and then we will open up the call for questions.

For the quarter ended December 31st, core net investment income for the quarter was 27 cents per share. During the quarter, we began investing in our new joint venture, PSSL 2.

PSSL 2 invested $197 million during the quarter and an additional $133 million after quarter end. Its total portfolio is currently $326 million.

PSSL 2 recently closed on an additional $100 million commitment to the credit facility, bringing the total to $250 million, and the credit facility has an accordion feature to increase commitments to $350 million. Our objective is to scale PSSL 2 to over $1 billion in assets, consistent with our existing joint ventures.

Our run rate NII is projected to cover our current dividend as we ramp that portfolio. Turning to the market environment, we are seeing an increase in M&A transaction activity across the private middle market.

This trend is expanding our pipeline of new investment opportunities. We also expect that this increase in M&A activity will drive repayments of our existing portfolio investments, including opportunities to exit some of our equity co-investments and rotate that capital into new current income-producing investments.

We continue to believe that the current environment favors lenders with strong private equity sponsor relationships and disciplined underwriting, areas where we have a clear competitive advantage. In the core middle market, the pricing on high-quality first lien term loans remains attractive, typically ranging from SOFR plus 475 to 525 basis points with leverage of approximately 4.5 times EBITDA.

Importantly, we continue to get meaningful covenant protections in contrast to the covenant-lite structures prevalent in the upper middle market. Our portfolio remains conservatively structured.

As of December 31st, PIK interest represented just 2.5% of total interest income, among the lowest levels in the industry. Median leverage across the portfolio is 4.5 times with median interest coverage of 2.1 times.

During the quarter, we originated four new platform investments with a median debt-to-EBITDA ratio of 4 times, interest coverage of 2.9 times, and a loan-to-value ratio of 43%. With regard to the software risk that has been a recent market focus, we have stuck to our knitting.

Only 4.4% of the overall portfolio is software, and that 4.4% is structured consistently with how we invest in the core middle market: primarily all-cash pay loans, with covenants, with leverage of 5.3 times, and matures in only 3.4 years on average. It's enterprise software that is integral to the customers' businesses, the vast majority of which is focused on heavily regulated industries such as defense, healthcare, and financial institutions, where safety, security, and data privacy are paramount, and where change will be slower.

Peers typically invested much larger percentages of their portfolios in software, 20% to 30%, at much higher leverage, 7 times plus, or loans against revenue, not EBITDA, with substantial PIK, covenant-lite, and long maturities. This story is a significant differentiator from our peers.

We ended the quarter with four non-accrual investments, representing only 0.5% of the portfolio at cost and 0.1% at market value. These results reflect the rigor of our underwriting process and the discipline of our investment approach.

We continue to believe that our focus on core middle market provides us with attractive investment opportunities where we provide important strategic capital to our borrowers. Core middle market companies, typically those with $10 million to $50 million of EBITDA, operate below the threshold of the broadly syndicated loan or high-yield markets.

In the core middle market, because we are an important strategic lending partner, the process and package of terms we receive is attractive. We have many weeks to do our diligence, we thoughtfully structure transactions with sensible leverage, meaningful covenants, substantial equity cushions to protect our capital, attractive spreads, and equity co-investment.

Additionally, from a monitoring perspective, we receive monthly financial statements to help us stay informed on the performance of our portfolio companies. Regarding covenant protections, while the upper market has seen significant erosion, our originated first lien loans consistently include meaningful covenants that safeguard our capital.

Our credit quality since inception over 14 years ago has been excellent. PFLT has invested $8.7 billion in 545 companies, and we have experienced only 26 non-accruals.

Since inception, our loss ratio on invested capital is only 13 basis points annually. As a provider of strategic capital who fuels the growth of our portfolio companies, in many cases, we participate in the upside of the company by making an equity co-investment.

Our returns on these equity co-investments have been excellent over time. Overall for our platform, from inception through December 31st, we've invested over $615 million in equity co-investments and have generated an IRR of 25% and a multiple on invested capital of 1.9 times.

During the quarter, we continued to originate attractive investment opportunities and invested $301 million at a weighted average yield of 10%. $95 million was invested in new portfolio companies and $206 million was invested in existing portfolio companies.

From an outlook perspective, our experienced and talented team and our wide origination funnel are well positioned to generate strong deal flow. Our mission and goal are a steady, stable, and protected dividend stream coupled with the preservation of capital.

Everything we do is aligned to that goal. We seek to find investment opportunities in growing middle market companies that have high free cash flow conversion.

We capture that free cash flow primarily in first lien senior secured instruments, and we pay out those contractual cash flows in the form of dividends to our shareholders. With that overview, I'll turn it over to Rick for a more detailed review of our financial results.

Thank you, Art. For the quarter ended December 31st, GAAP net investment income and core net investment income were both 27 cents per share.

Our operating expenses for the quarter were as follows: interest and expenses on debt were $27.2 million, base management and performance-based incentive fees were $13.5 million, general and administrative expenses were $2.1 million, provision for taxes was $0.2 million, and credit facility amendment costs were $0.5 million. For the quarter ended December 31st, net realized and unrealized change on investments, including provision for taxes, was a loss of $30 million.

As of December 31st, NAV was $10.49 per share, which is down 3.1% from $10.83 per share last quarter. As of December 31st, our debt-to-equity ratio was 1.57 times, and our capital structure is diversified across multiple funding sources, including both secured and unsecured debt.

Subsequent to quarter end, we sold $27 million of assets to the PSSL 1 joint venture and $133 million of assets to the PSSL 2 joint venture. We used the net proceeds from these sales to pay down our revolving credit facility and reduce our debt-to-equity ratio to 1.5 times, which is within our target range of 1.4 to 1.6 times.

As of December 31st, our key portfolio statistics were as follows: the portfolio remains well diversified, comprising 160 companies across 50 industries. The weighted average yield on our debt investments was 9.9%, and approximately 99% of the debt portfolio is floating rate.

PIK income equaled only 2.5% of total interest income. The portfolio is comprised of 89% first lien senior secured debt, less than 1% in second lien and subordinated debt, 4% in equity of PSSL 1 and PSSL 2, and 7% in equity co-investments.

The debt-to-EBITDA on the portfolio is 4.5 times, and interest coverage was 2.1 times. With that, I'll turn the call back to Art for closing remarks.

Thanks, Rick. In conclusion, I'd like to thank our exceptional team for their continued dedication, and our shareholders for their trust and partnership.

We remain focused on delivering durable earnings, preserving capital, and creating long-term value for our stakeholders. That concludes our remarks.

At this time, I would like to open up the call to questions.

Good morning. Thanks for taking my questions.

Interesting to hear that you guys have what I would consider an underweight software exposure in the portfolio. I know you've mentioned software as a defensive sector in the past.

You've obviously done loans there in the past. I'm just curious why is software such a low exposure within the portfolio?

Was that a strategic investment decision you guys have made, or is there anything else driving that?

Thanks, Paul. It's a good question.

We basically just kind of stick to our knitting, which is cash flow loans at a reasonable multiple where we think there's great defensibility, where we can get covenants, where we can get cash interest. Obviously, we saw this massive parade of software loans come by, and much of them were marching at 7 times leverage, 8 times leverage, leverage against revenues, ARR loans.

We saw many of them covenant-lite or PIK. For us, those were not comfortable loans for us to make.

We have done some software, about 4% of the portfolio, with a reasonable multiples of cash flow, where we get our maintenance tests, where we feel safe as enterprise software that's integral to their customers' lives and in industries that are heavily regulated, where data privacy, safety, and security mean that any change that may happen it will take some time. That's kind of military, that's healthcare, that's financial services.

We have maturities today about 3 years, an average maturity of about 3 years on that 4% of the portfolio that's software-related. We feel very safe and comfortable.

We basically just stuck to our knitting and didn't chase the supply that was coming through.

Got it. Very helpful.

Then last question I would just have on the NII this quarter, mostly in relation to the new JV. You guys had mentioned that you expect to cover the dividend, and I believe most of the plug there was from ramping the second JV.

I'm curious, when you say that you expect to ultimately cover the distribution with NII, does that assume, essentially, the JV at the $1 billion asset target and generating sort of run rate earnings from the JV, essentially full optimization there, or does that not necessarily assume full deployment within the JV? As well as I would ask about the Fed rate cuts, does that assume Fed rate cuts in the meantime?

Yeah. No, it's a great question.

Look, and you can look at it. It's all public information.

We have JV 1 in PFLT, PSSL 1 with Kemper. We have a JV over at PNNT with Pantheon.

This is our third. You can look at those two as models in terms of ramp, in terms of income generation, and percentages of the vehicle that each BDC owns.

Basically, the way we look at it is once you get up to about a billion dollars, with our 75% ownership, we should be covering that dividend. When is that going to happen?

It's not going to be next quarter. We're off to a good start.

We're at about $330 million now from a standing start last quarter. A lot of it will depend on M&A, and M&A is obviously the feedstock that will populate this JV.

We feel pretty good about it helping us cover that dividend. That does not include any equity rotation.

We do expect if M&A happens, which we think it will, it will not only populate the JV, it will also imply some equity rotation on the existing portfolio, which will be helpful. Then you model in whatever base rate decrease you'd like, 50 basis points, 100 basis points.

Rick can go through the model with you at some other time, or a model with you. There's a bunch of offsets, but we feel like we're well set up to have a pathway to cover that dividend.

Got it. Appreciate it, Art.

That's all the questions for me. Thanks very much.

Thank you.

Hi, guys. On the software question, right, your portfolio is just a fraction over 4% in terms of software where if I understand right, that's where software is the product of the business.

Can you give us any thought, how much of the portfolio is kind of software-exposed, where it's not producing software, but it might be in the business of implementing software for the government or anybody else, or where software is a core part of the business, but the business is not producing software itself?

Yeah. It's a great question, which is kind of how you define it and where you draw the line.

Zooming out to the bigger picture, the bigger picture question is how does AI impact every company in every portfolio, right? That's above our pay grade for sure.

The difference here is software is the main product, that's how we defined it. I think it's pretty, kind of including where software is a big, big element of the company.

Almost all of our companies use software in some way, shape, or form. AI can be a help or it could be a hindrance.

We try to really hone in on where it was the product itself, where there is a human being attached to it where we feel very good that AI is not going to impact the human nature of the job anytime soon. We do have service businesses.

We have a bunch of home service businesses where it's HVAC repair and plumbing and okay, that's probably not that impacted by AI. AI could be a help.

That's one end of the spectrum. Then we do have a lot of military, defense, government services exposure.

A, that's less likely for safety, security, and privacy reasons to move to AI quickly. It could adopt AI, but requires human analysis.

Like there's a lot of government services that ultimately a human being needs to analyze, needs to synthesize. AI could very well help those companies.

I don't know. We're all grappling with how you define it and what is in the bucket and what isn't, and where AI kind of impacts portfolios.

We tried to be with this 4.4% or whatever, we tried to be really pure as to where software really was the product. I know I'm rambling, but I don't know if I gave you any color there, Robert.

No, no, no. That was really helpful.

Thank you. It's a difficult topic.

On just next one if I can, on kind of Cartier Import, on the JV, like you said, you've gotten up to north of $300 million already from kind of a standing start. Now, some of that, I do think you kind of had in a sense pre-stocked the on-balance-sheet portfolio so that you could drop things down, and obviously you've done it post quarter end as well.

The initial ramp was possibly faster than we should expect on a quarterly basis would be my guess. If the market is normal, good luck with finding that, what's plausible to get to a billion?

Is it three or four quarters, or is it 8

to 12? Just to throw it out there because it gives me a lot of range because this is going to be a lot driven by M&A, right?

Right, which last year a meteor struck the M&A market called Liberation Day. M&A was spiked for most of the rest of the year.

It feels like it's coming back here. We had JNF and PNNT.

That's an early indication that maybe this time it happens. We are feeling it.

We're seeing it in our backlog of deals that we're looking at. I'll throw out 18 months just as a big, broad, kind of number, which gives me a lot of wiggle room on either side of the 12 to 24 months.

You want to do a range, you want to do a 24 months outside case, you can model that in. Quite frankly, it's going to be driven by M&A.

Got it. Thank you.

Thanks. Good morning, everyone.

Sorry if I missed this, but can you walk through the drivers of the unrealized marks in the quarter? Then when you look across the portfolio and the watch list today, are there any additional markdowns coming over the next quarter or two?

I'm just trying to think through some of the puts and takes and what that means for the trajectory of NAV moving forward.

Yeah. Good question, Brian.

Most of the markdowns I'll call are, and we have a little bit of this, what we call the 2021 vintage, which was the post-COVID vintage, where people thought that consumers were not going into stores again, where logistics and supply chain stuff was really doing very well. We have a little bit of that.

Thankfully, it's not that large, and that is kind of what is working its way through the pipeline here of markdowns. I'll point out a company called PL Acquisition, that stands for Pink Lily, which is a direct-to-consumer women's apparel business.

I'll point out Research Now or Dynata, which is a marketing services business which has been softer. I'll point out in the JV a company called Wash and Wax, which is a car wash company known as Zips, Z-I-P-S.

People were doing a lot of car washing post-COVID. I think they're washing their cars again with all the bad weather in the North in the last couple weeks.

Seen a little bit of bounce in car washing. I'd say that's generally the theme.

You've seen much bigger movements with some other BDCs that have reported NAV diminution due to Amazon relationships and home furnishing stuff. We've got a little bit of that here.

It's kind of working its way through. We don't really see much more quite frankly in that.

It's kind of here we are 5 years later. I think with M&A starting to move, hopefully we're going to start to see some upside in equity and some equity rotation to offset what I'll call a little bit of this 2021 vintage.

Got it.

That's helpful. Then just a follow-up there.

If you look at your portfolio today, what's the mix of loans just by the vintage year? I'm curious how much of your portfolio has turned over since 2021?

We don't have that handy right now. Let us do some work, and we can chat at a convenient time.

Then look, presumably that is in there, we and you could sit there and look at the origination date of the portfolio. I think it might be some good work for a research analyst to do.

Just an idea.

Sounds great. I'll leave it there.

Thanks, guys.

Hey, guys. Rick, the $3.6 million charge related to the credit amendment and debt issuance costs, I presume that's non-recurring.

Is that related to the $75 million debt issuance in January?

Sure. The first part, for PFLT, it was about $500,000, not $3.6.

Yes, that is a one-time item. No, again, the $75 million that was raised was at PNNT.

Thank you. My press releases.

Also, just as a follow-up, on the M&A comments, is there a lot of activity around the software sector? I'm just kind of curious, given everything going on with AI, whether or not software is sitting out.

Yeah. As you can tell, we're not one of the big software lenders, we're probably not the best party to ask around M&A in the software sector.

My presumption would be, when you have times of kind of like this where the market is trying to figure things out in the sector, my assumption would be M&A would be lower for a while as things settle down and people revalue both equity and debt in the space. Again, we're probably not the best people to ask.

Great. That's it for me, and apologies for confusing companies there.

Thanks.

No problem. Good news is at noon, you have an opportunity to ask the same questions again.

That's right. Thanks.

Thanks, everybody, for your participation this morning. We look forward to speaking with you next in early May.

Have a great day.