PennantPark (PFLT), Truist Expands Credit Facility to $736M

PennantPark Floating Rate Capital (PFLT) has increased its credit facility from $636 million to $736 million, led by Truist Bank

• The pricing remains unchanged at SOFR plus 225 basis points

• The facility is secured by assets held by PennantPark Floating Rate Funding I, a wholly-owned subsidiary

Arthur Penn, Chairman and CEO, highlighted the significance of this expansion, stating that the increased facility will:

• Enhance the company's ability to serve middle-market sponsors and borrowers

• Provide more comprehensive senior secured solutions

• Position PFLT to capture opportunities in the core middle market

The company focuses on the core middle market, believing it can achieve attractive risk-adjusted returns characterized by:

• Higher yields

• Lower leverage

• Stronger covenants compared to the upper middle market

In a related move on December 12, 2024, PFLT also announced an expansion of its joint venture (PennantPark Senior Secured Loan Fund I LLC), increasing its total investment capacity to $1.5 billion by adding $100 million in capital.

PennantPark Floating Rate Capital (PFLT) Strategic Market Positioning & Competitive Intelligence

Facility Structure & Performance

• Base: Increased from $636M to $736M

• Pricing: Maintained at SOFR + 225bps

  • This is particularly noteworthy because earlier in 2024, core middle market first lien spreads were around 525bps, and had been over 600bps

  • Maintaining the same spread while increasing the facility suggests strong lender confidence in their portfolio quality

  • Their weighted average interest rate was 7.5-7.7% as of September 2024

  • The unchanged pricing is especially impressive given the current market dynamics where many lenders are seeing spread expansion

• Portfolio Quality: Two companies on non-accrual as of Sept 2024, representing only 0.4% and 0.2% on cost and fair value basis respectively

• Previously had just one non-accrual company in earlier quarters of 2024, showing some slight deterioration

Target Sectors & Strategy

Five key focus sectors:

1. Business services

2. Consumer

3. Government services and defense

4. Healthcare

5. Software and technology

High free cash flow conversion is a key investment criterion

First lien credit spreads in core middle market were around 5.25% early 2024, compared to 6%+ previously

Deployment Strategy

They've shown strong deployment capability: $446 million invested across 10 new and 50 existing portfolio companies

Focus on low leverage deals with meaningful covenants

Targeting companies with $10-50M EBITDA

Conservative approach: they're not chasing yield by going up-market

2024 Pipeline & Outlook

• They're seeing what they call a "strong vintage" of new loans in the core middle market

• Focus on defensive sectors that have historically performed well through cycles

• Emphasis on companies below the broadly syndicated loan market threshold

• Recently expanded their JV capacity to $1.5B, indicating strong pipeline expectations

Our Opinion

We're seeing most lenders in the middle market having to bump up their spreads by 50-75bps to attract capital. Yet here's PennantPark, not just maintaining their spread but actually increasing their facility size.

Their deployment strategy is particularly telling. Looking at that $446 million deployment across 10 new and 50 existing portfolio companies - they're both deepening relationships with existing borrowers (which suggests strong performance) while still finding attractive new opportunities.

Also, they've picked five sectors that tend to have countercyclical elements:

1. Government services/defense: Stable through economic cycles

2. Healthcare: Generally recession-resistant

3. Business services: Can adjust cost structures quickly

4. Software/technology: Often subscription-based revenues

5. Consumer: But notably, they're selective here, focusing on non-discretionary

The expansion of both their credit facility and JV (to $1.5B) suggests they're seeing something attractive in their pipeline. Lenders don't normally add capacity unless you've got a pretty good idea of how you're going to use it. The fact that they're maintaining conservative terms (remember those low non-accrual rates - just 0.4% at cost) while expanding suggests they're seeing high-quality opportunities in the core middle market.

In conclusion, this news validates the core middle market as a defensive positioning strategy, providing pricing benchmarks for similar facilities and offers portfolio construction insights.

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