Form 10-Q
Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2015

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.)

590 Madison Avenue,

15th Floor, New York, N.Y.

  10022
(Address of principal executive offices)   (Zip Code)

(212) 905-1000

(Registrant’s Telephone Number, Including Area Code)

 

 

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  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    Yes  ¨    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨ (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The number of shares of the registrant’s common stock, $0.001 par value per share, outstanding as of August 6, 2015 was 14,898,056.

 

 


Table of Contents

PENNANTPARK FLOATING RATE CAPITAL LTD.

FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2015

TABLE OF CONTENTS

 

PART I. CONSOLIDATED FINANCIAL INFORMATION   

Item 1. Consolidated Financial Statements

  

Consolidated Statements of Assets and Liabilities as of June 30, 2015 (unaudited) and September 30, 2014

     4   

Consolidated Statements of Operations for the three and nine months ended June 30, 2015 and 2014 (unaudited)

     5   

Consolidated Statements of Changes in Net Assets for the nine months ended June 30, 2015 and 2014 (unaudited)

     6   

Consolidated Statements of Cash Flows for the nine months ended June 30, 2015 and 2014 (unaudited)

     7   

Consolidated Schedules of Investments as of June 30, 2015 (unaudited) and September 30, 2014

     8   

Notes to Consolidated Financial Statements (unaudited)

     13   

Report of Independent Registered Public Accounting Firm

     23   

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     24   

Item 3. Quantitative And Qualitative Disclosures About Market Risk

     31   

Item 4. Controls and Procedures

     31   
PART II. OTHER INFORMATION   

Item 1. Legal Proceedings

     32   

Item 1A. Risk Factors

     32   

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

     32   

Item 3. Defaults Upon Senior Securities

     32   

Item 4. Mine Safety Disclosures

     32   

Item 5. Other Information

     32   

Item 6. Exhibits

     33   

SIGNATURES

     34   

 

2


Table of Contents

PART I—CONSOLIDATED FINANCIAL INFORMATION

We are filing this Form 10-Q, or the Report, in compliance with Rule 13a-13 promulgated by the Securities and Exchange Commission, or the SEC. In this Report, except where the context suggests otherwise, the terms “Company,” “we,” “our” or “us” refer to PennantPark Floating Rate Capital Ltd. and its wholly-owned consolidated subsidiaries; “Funding I” refers to PennantPark Floating Rate Funding I, LLC; “PennantPark Investment Advisers” or “Investment Adviser” refers to PennantPark Investment Advisers, LLC; “PennantPark Investment Administration” or “Administrator” refers to PennantPark Investment Administration, LLC; “1940 Act” refers to the Investment Company Act of 1940, as amended; “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. 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 Funding I.

 

3


Table of Contents
Item 1. Consolidated Financial Statements

PENNANTPARK FLOATING RATE CAPITAL LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES

 

           June 30, 2015         September 30, 2014  
     (unaudited)    

 

 

Assets

    

Investments at fair value

    

Non-controlled, non-affiliated investments (cost—$362,124,910 and $348,354,295, respectively)

   $ 358,819,617     $ 348,428,492   

Cash equivalents

     10,475,621       13,113,817  

Interest receivable

     1,983,723       1,773,870  

Receivable for investments sold

     1,003,750       9,001,938  

Prepaid expenses and other assets

     1,155,816       556,359  
  

 

 

   

 

 

 

Total assets

     373,438,527       372,874,476  
  

 

 

   

 

 

 

Liabilities

    

Distributions payable

     1,415,315       1,340,825  

Payable for investments purchased

     16,081,850       3,162,000  

Unfunded investments

     —          2,705,882   

Credit Facility payable (cost—$139,700,000 and $146,400,000, respectively) (See Notes 5 and 9)

     140,015,250       146,949,000  

Interest payable on Credit Facility

     262,251       284,906  

Management fee payable (See Note 3)

     881,953       914,978  

Performance-based incentive fee payable (See Note 3)

     1,051,174        2,180,604   

Accrued other expenses

     278,944       808,571  
  

 

 

   

 

 

 

Total liabilities

     159,986,737       158,346,766  
  

 

 

   

 

 

 

Commitments and contingencies (See Note 10)

    

Net assets

    

Common stock, 14,898,056 shares issued and outstanding.
Par value $0.001 per share and 100,000,000 shares authorized.

     14,898       14,898  

Paid-in capital in excess of par value

     207,226,615       207,226,615  

Undistributed net investment income

     6,534,376       4,878,091   

Accumulated net realized gain on investments

     3,296,444       2,882,909  

Net unrealized (depreciation) appreciation on investments

     (3,305,293     74,197   

Net unrealized appreciation on Credit Facility

     (315,250     (549,000
  

 

 

   

 

 

 

Total net assets

   $ 213,451,790     $ 214,527,710  
  

 

 

   

 

 

 

Total liabilities and net assets

   $ 373,438,527     $ 372,874,476  
  

 

 

   

 

 

 

Net asset value per share

   $ 14.33     $ 14.40  
  

 

 

   

 

 

 

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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Table of Contents

PENNANTPARK FLOATING RATE CAPITAL LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

     Three Months Ended June 30,     Nine Months Ended June 30,  
     2015     2014     2015     2014  

Investment income:

        

From non-controlled, non-affiliated investments:

        

Interest

   $ 6,940,910      $ 7,524,629     $ 21,457,084     $ 21,808,074  

Other income

     163,377        143,904       1,107,182       327,828  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total investment income

     7,104,287        7,668,533       22,564,266       22,135,902  
  

 

 

   

 

 

   

 

 

   

 

 

 

Expenses:

        

Base management fee (See Note 3)

     881,953        953,096       2,616,499       2,787,848  

Performance-based incentive fee (See Note 3)

     630,806        825,796       1,662,731       2,926,261  

Interest and expenses on the Credit Facility (See Note 9)

     785,899        888,718       2,447,632       2,588,843  

Administrative services expenses (See Note 3)

     223,500        276,000       673,000       678,000  

Other general and administrative expenses

     212,672        241,985       650,422       766,639  
  

 

 

   

 

 

   

 

 

   

 

 

 

Expenses before excise tax and amendment costs

     2,734,830        3,185,595       8,050,284       9,747,591  

Excise tax

     110,000        120,000       330,000       360,000  

Credit Facility amendment costs (See Notes 5 and 9)

     162,311        —          162,311        712,930   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     3,007,141        3,305,595       8,542,595        10,820,521  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net investment income

     4,097,146        4,362,938        14,021,671        11,315,381   
  

 

 

   

 

 

   

 

 

   

 

 

 

Realized and unrealized gain (loss) on investments and Credit Facility:

        

Net realized (loss) gain on non-controlled, non-affiliated investments

     (11,319     697,831       413,535        1,774,685  

Net change in unrealized appreciation (depreciation) on:

        

Non-controlled, non-affiliated investments

     662,950        (118,995 )     (3,379,490     5,145,786  

Credit Facility (appreciation) depreciation (See Note 5)

     (22,000     —         233,750        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net change in unrealized appreciation (depreciation) on investments and Credit Facility

     640,950        (118,995 )     (3,145,740     5,145,786  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net realized and unrealized gain (loss) from investments and Credit Facility

     629,631        578,836       (2,732,205     6,920,471  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net increase in net assets resulting from operations

   $ 4,726,777      $ 4,941,774     $   11,289,466     $   18,235,852  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net increase in net assets resulting from operations per common share (See Note 6)

   $ 0.32      $ 0.33     $ 0.76     $ 1.22  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net investment income per common share

   $ 0.28      $ 0.29     $ 0.94     $ 0.76  
  

 

 

   

 

 

   

 

 

   

 

 

 

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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Table of Contents

PENNANTPARK FLOATING RATE CAPITAL LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS

(Unaudited)

 

     Nine Months Ended June 30,  
     2015     2014  

Net increase in net assets from operations:

    

Net investment income

   $ 14,021,671      $ 11,315,381   

Net realized gain on investments

     413,535        1,774,685   

Net change in unrealized (depreciation) appreciation on investments

     (3,379,490     5,145,786   

Net change in unrealized appreciation on Credit Facility

     233,750        —     
  

 

 

   

 

 

 

Net increase in net assets resulting from operations

     11,289,466        18,235,852   
  

 

 

   

 

 

 

Distributions to stockholders

     (12,365,386     (12,030,180
  

 

 

   

 

 

 

Net (decrease) increase in net assets

     (1,075,920     6,205,672   
  

 

 

   

 

 

 

Net assets:

    

Beginning of period

     214,527,710        210,066,394   
  

 

 

   

 

 

 

End of period

   $   213,451,790      $   216,272,066   
  

 

 

   

 

 

 

Undistributed (Distributions in excess of) net investment income, end of period

   $ 6,534,376      $ (240,033
  

 

 

   

 

 

 

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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Table of Contents

PENNANTPARK FLOATING RATE CAPITAL LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

     Nine Months Ended June 30,  
     2015     2014  

Cash flows from operating activities:

    

Net increase in net assets resulting from operations

   $ 11,289,466      $ 18,235,852  

Adjustments to reconcile net increase in net assets resulting from operations to net cash provided (used) by operating activities:

    

Net change in unrealized depreciation (appreciation) on investments

     3,379,490        (5,145,786 )

Net change in unrealized appreciation on Credit Facility

     (233,750     —     

Net realized gain on investments

     (413,535     (1,774,685 )

Net accretion of discount and amortization of premium

     (919,802     (958,309 )

Purchases of investments

     (160,986,701     (184,986,373 )

Payment-in-kind interest

     (322,041     (220,392 )

Proceeds from dispositions of investments

     146,165,582        146,769,163  

(Increase) decrease in interest receivable

     (209,853     226,370  

Decrease in receivable for investments sold

     7,998,188        374,306  

(Increase) decrease in prepaid expenses and other assets

     (599,457     43,765  

Increase (decrease) in payable for investments purchased

     12,919,850        (11,827,091 )

(Decrease) increase in interest payable on Credit Facility

     (22,655     92,515  

(Decrease) increase in management fee payable

     (33,025     221,461  

(Decrease) increase in performance-based incentive fee payable

     (1,129,430     1,188,461  

Decrease in accrued other expenses

     (529,627     (183,641 )
  

 

 

   

 

 

 

Net cash provided (used) by operating activities

     16,352,700        (37,944,384 )
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Distributions paid to stockholders

     (12,290,896 )     (11,992,935 )

Borrowings under Credit Facility (See Notes 5 and 9)

     103,400,000       130,500,000  

Repayments under Credit Facility (See Notes 5 and 9)

     (110,100,000 )     (75,200,000 )
  

 

 

   

 

 

 

Net cash (used) provided by financing activities

     (18,990,896 )     43,307,065  
  

 

 

   

 

 

 

Net (decrease) increase in cash equivalents

     (2,638,196 )     5,362,681  

Cash equivalents, beginning of period

     13,113,817       4,578,249  
  

 

 

   

 

 

 

Cash equivalents, end of period

   $ 10,475,621     $ 9,940,930  
  

 

 

   

 

 

 

Supplemental disclosure of cash flow information:

    

Interest paid

   $ 2,470,287     $ 2,461,328  
  

 

 

   

 

 

 

Excise taxes paid

   $ 430,242      $ 256,392   
  

 

 

   

 

 

 

Conversions and non-cash exchanges

   $ 670,283      $ 6,902,784   
  

 

 

   

 

 

 

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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Table of Contents

PENNANTPARK FLOATING RATE CAPITAL LTD. AND SUBSIDIARIES

CONSOLIDATED SCHEDULE OF INVESTMENTS

JUNE 30, 2015

(Unaudited)

 

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—168.1% (3), (4)

  

First Lien Secured Debt—142.5%

  

AKA Diversified Holdings, Inc.

   04/02/2018    Retail      11.95     L+1,175 (9)      8,853,564       $ 8,698,333       $ 9,068,342   

AKA Diversified Holdings, Inc. (10)

   04/02/2018    Retail                    2,019,209                 48,984   

AKA Diversified Holdings, Inc. (Revolver) (10)

   04/02/2018    Retail                    1,165,725                 28,279   

ALG USA Holdings, LLC

   02/28/2019    Hotel, Gaming and Leisure      7.00     L+575        7,136,577         7,097,541         7,136,577   

Alvogen Pharma US, Inc. (11)

   04/04/2022    Healthcare and Pharmaceuticals      6.00     L+500        3,950,000         3,930,892         3,954,938   

Ancile Solutions, Inc.

   07/16/2018    High Tech Industries      6.25     L+500        3,344,319         3,324,159         3,327,597   

AP Gaming I, LLC

   12/21/2020    Hotel, Gaming and Leisure      9.25     L+825        5,368,873         5,294,079         5,335,318   

ARC Automotive Group, Inc.

   10/12/2020    Automotive      6.00     L+500        3,980,000         3,944,576         3,940,200   

Azure Midstream Energy LLC

   11/15/2018    Energy: Oil and Gas      7.50     L+650        6,789,149         6,622,194         6,738,230   

Blue Bird Body Company

   06/29/2020    Automotive      6.50     L+550        4,875,000         4,811,913         4,862,813   

Bowlmor AMF, Corp.

   09/17/2021    Retail      7.25     L+625        9,934,975         9,842,849         9,934,975   

Camin Cargo Control, Inc.

   06/30/2021    Transportation: Cargo      5.75     L+475        2,500,000         2,475,000         2,475,000   

CBAC Borrower, LLC (8)

   07/02/2020    Hotel, Gaming and Leisure      8.25     L+700        5,000,000         4,964,196         4,600,000   

Charming Charlie LLC

   12/24/2019    Retail      9.00     L+800        4,443,750         4,390,845         4,421,531   

Chicken Soup for the Soul Publishing, LLC

   01/08/2019    Media: Advertising, Printing and
Publishing
     7.25     L+600        4,950,000         4,910,011         4,950,000   

CRGT Inc.

   12/21/2020    High Tech Industries      7.50     L+650        4,937,500         4,844,994         4,838,750   

Curo Health Services Holdings, Inc.

   02/07/2022    Healthcare and Pharmaceuticals      6.50     L+550        1,995,000         1,976,223         2,008,726   

DCS Business Services, Inc.

   03/19/2018    Business Services      7.25     L+575        3,022,815         2,995,610         3,022,816  

DISA Global Solutions, Inc.

   12/09/2020    Business Services      5.50     L+450        4,987,500         4,941,977         4,912,687   

Douglas Products and Packaging Company LLC

   06/30/2020    Chemicals, Plastics and Rubber      7.00     P+375        5,000,000         4,962,510         4,962,500   

Edmentum, Inc. (8)

   05/17/2018    Media: Broadcasting and
Subscription
    
 
8.75
(PIK 2.00

%) 
    P+550        850,980         850,980         629,725   

Emerging Markets Communications, LLC

   07/01/2021    Telecommunications      6.75     L+575        5,000,000         4,925,000         4,937,500   

FHC Health Systems, Inc.

   12/23/2021    Healthcare and Pharmaceuticals      5.00     L+400        4,987,500         4,937,835         4,932,637  

GlobalLogic Holdings, Inc.

   05/31/2019    High Tech Industries      6.25     L+525        3,940,000         3,908,234         3,930,150   

Granite Broadcasting Corporation

   05/23/2018    Media: Broadcasting and
Subscription
     6.75     L+550        1,237,539         1,236,134         1,232,132   

Greenway Health, LLC

   11/04/2020    High Tech Industries      6.00     L+500        6,895,000         6,841,860         6,895,000   

Help/Systems Holdings, Inc.

   06/28/2019    High Tech Industries      5.50     L+450        4,912,500         4,876,214         4,887,937   

Hollander Sleep Products, LLC

   10/21/2020    Consumer Goods: Non-Durable      9.00     L+800        1,197,000         1,180,849         1,197,000   

Hostway Corporation

   12/13/2019    High Tech Industries      6.00     L+475        2,772,166         2,751,667         2,716,723   

Hunter Defense Technologies, Inc.

   08/05/2019    Aerospace and Defense      6.50 %     L+550        6,737,500         6,681,645         6,754,344  

ICC-Nexergy, Inc.

   04/30/2020    Consumer Goods: Durable      6.50     L+550        5,000,000         4,951,323         4,950,000   

Icynene U.S. Acquisition Corp. (6), (11)

   11/04/2020    Construction and Building      7.25     L+625        6,982,500         6,855,373         6,982,500   

iEnergizer Limited and Aptara, Inc. (6), (11)

   05/01/2019    Business Services      10.25     P+700        11,345,749         11,229,876         10,211,174   

Instant Web, LLC, Term Loan A

   03/28/2019    Media: Advertising, Printing and
Publishing
     5.50     L+450        5,388,874         5,325,695         5,388,874  

Instant Web, LLC, Term Loan B

   03/28/2019    Media: Advertising, Printing and
Publishing
     12.00     L+1,100        4,500,000         4,445,225         4,500,000   

Interior Specialists, Inc.

   06/30/2020    Construction and Building      9.00     L+800        6,800,000         6,732,017         6,732,000   

Jackson Hewitt Tax Service Inc.

   10/16/2017    Consumer Services      10.00     L+850        4,682,143         4,630,079         4,658,732   

K2 Pure Solutions NoCal, L.P. (8)

   08/19/2019    Chemicals, Plastics and Rubber      11.00     L+1,000        6,003,707         5,913,470         5,667,827  

Lanyon Solutions, Inc.

   11/13/2020    High Tech Industries      5.50     L+450        1,970,010         1,963,249         1,940,460   

LifeCare Holdings LLC (8)

   11/30/2018    Healthcare and Pharmaceuticals      6.50     L+525        5,803,874         5,745,225         5,764,001   

Lindblad Expeditions, Inc. (11)

   05/10/2021    Hotel, Gaming and Leisure      5.50     L+450        2,214,286         2,203,214         2,214,286   

Lindblad Maritime Enterprises, Ltd. (6), (11)

   05/10/2021    Hotel, Gaming and Leisure      5.50     L+450        285,714         284,286         285,714   

LTI Holdings, Inc.

   04/18/2022    Chemicals, Plastics and Rubber      5.25     L+425        2,000,000         1,990,088         2,002,500   

New Trident HoldCorp, Inc.

   07/31/2019    Healthcare and Pharmaceuticals      6.50     L+525        8,942,647         8,881,788         8,629,654   

Physiotherapy Corporation (8)

   06/04/2021    Healthcare and Pharmaceuticals      5.75     L+475        3,500,000         3,482,539         3,500,000   

PlayPower, Inc.

   06/23/2021    Construction and Building      7.00     P+375        4,000,000         3,960,014         3,970,000   

Polyconcept Finance B.V.

   06/28/2019    Consumer Goods: Non-Durable      6.00     L+475        11,482,696         11,426,494         11,453,990   

Premier Dental Services, Inc.

   11/01/2018    Consumer Services      6.00     L+500        8,240,516         8,143,914         7,457,667  

Profile Products LLC

   05/20/2021    Environmental Industries      6.00     L+500        7,517,418         7,442,975         7,517,418   

Profile Products LLC (Revolver) (8)

   05/20/2020    Environmental Industries      7.25     P+400        78,689         78,689         78,689   

Profile Products LLC (Revolver) (8) , (10)

   05/20/2020    Environmental Industries                    2,380,328                   

Quality Home Brands Holdings LLC

   12/17/2018    Consumer Goods: Durable      7.75     L+650        4,925,000         4,889,476         4,931,156   

Research Now Group, Inc.

   03/18/2021    High Tech Industries      5.50     L+450        7,000,000         6,965,855         6,982,500   

Robertshaw US Holding Corp.

   06/18/2019    Consumer Goods: Durable      9.00     L+750        3,622,139         3,595,014         3,627,131   

Robertshaw US Holding Corp. (Revolver)

   06/18/2019    Consumer Goods: Durable      9.00     L+750        84,706         84,706         84,823   

Robertshaw US Holding Corp. (Revolver) (10)

   06/18/2019    Consumer Goods: Durable                    621,176                 856   

Sotera Defense Solutions, Inc.

   04/21/2017    Aerospace and Defense      9.00     L+750        6,124,052         5,946,035         5,511,647   

St. George’s University Scholastic Services LLC (6), (11)

   08/09/2021    Consumer Services      5.75     L+475        1,194,200         1,188,887         1,200,171   

Surgical Specialties Corporation (US), Inc.

   08/22/2018    Healthcare and Pharmaceuticals      7.25     L+575        10,178,804         10,157,809         10,077,016   

Survey Sampling International, LLC

   12/16/2020    Business Services      6.00     L+500        6,250,000         6,200,517         6,242,187   

Systems Maintenance Services Holding, Inc.

   10/18/2019    High Tech Industries      5.00     L+400        5,925,000         5,904,092         5,925,000   

Tensar Corporation

   07/09/2021    Construction and Building      5.75     L+475        4,962,500         4,918,347         4,686,486   

Therakos, Inc.

   12/27/2017    Healthcare and Pharmaceuticals      7.00     L+575        4,719,954         4,666,457         4,672,754   

TOMS Shoes, LLC

   11/02/2020    Consumer Goods: Non-Durable      6.50     L+550        1,995,000         1,812,508         1,837,275   

UniTek Global Services, Inc. (8)

   01/14/2019    Telecommunications     
 
9.50
(PIK 1.00

%) 
    L+850        429,042         429,042         429,042   

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

8


Table of Contents

PENNANTPARK FLOATING RATE CAPITAL LTD. AND SUBSIDIARIES

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

JUNE 30, 2015

(Unaudited)

 

Issuer Name

   Maturity    Industry    Current
Coupon
    Basis Point
Spread
Above
Index (1)
     Par /
Shares
     Cost      Fair Value (2)  

UniTek Global Services, Inc. (8)

   01/14/2019    Telecommunications      8.50     L+750         599,702       $ 545,474       $ 569,717   

UniTek Global Services, Inc. (8), (10)

   01/14/2019    Telecommunications                     151,090                   

U.S. Farathane, LLC

   02/07/2022    Automotive      6.75     L+575         5,850,000         5,737,834         5,879,250   

Wilton Brands, LLC

   08/30/2018    Consumer Goods: Non-Durable      7.50 %     L+625         2,745,500         2,715,146         2,658,550   

Worley Claims Services, LLC

   10/30/2020    Banking, Finance, Insurance and
Real Estate
     9.00     L+800         3,582,000         3,549,681         3,617,820   

YP LLC

   06/04/2018    Media: Advertising, Printing and
Publishing
     8.01     L+675         2,541,615         2,498,513         2,547,969   
                

 

 

    

 

 

 

Total First Lien Secured Debt

                305,709,246         304,068,247   
                

 

 

    

 

 

 

Second Lien Secured Debt—21.7%

                

Affinion Group, Inc. (8)

   10/31/2018    Consumer Goods: Durable      8.50     L+700         850,000         778,175         763,938   

American Gilsonite Company (5), (8)

   09/01/2017    Metals and Mining      11.50 %             1,000,000         1,000,000         897,500   

Douglas Products and Packaging Company LLC

   12/31/2020    Chemicals, Plastics and Rubber      11.00     L+1,050         2,000,000         1,965,008         1,965,000   

Howard Berger Co. LLC

   09/30/2020    Wholesale      11.00     L+1,000         11,000,000         10,402,634         10,890,000   

J.A. Cosmetics Holdings, Inc. (8)

   07/31/2019    Consumer Goods: Durable      11.00     L+1,000         4,000,000         3,935,345         4,032,636   

Language Line, LLC

   12/20/2016    Consumer Services      10.50     L+875         9,250,000         9,188,293         9,203,750   

Novitex Acquisition, LLC

   07/07/2021    Business Services      11.75     L+1,050         11,000,000         10,899,889         10,780,000   

Penton Media, Inc. (8)

   10/02/2020    Media: Diversified and Production      9.00 %     L+775         5,252,824         5,192,674         5,252,824   

Sunshine Oilsands Ltd. (5), (6), (8), (11)

   08/01/2017    Energy: Oil and Gas      10.00             2,812,500         2,683,892         2,531,250   
                

 

 

    

 

 

 

Total Second Lien Secured Debt

                46,045,910         46,316,898   
                

 

 

    

 

 

 

Subordinated Debt/Corporate Notes—2.5% (8)

                

Affinion Group Holdings, Inc.

   09/14/2018    Consumer Goods: Durable     

 

14.50

(PIK 14.50


%) 

            4,462,922         4,013,847         2,454,607   

Affinion Investments LLC

   08/15/2018    Consumer Goods: Durable      13.50             1,734,000         1,734,000         762,960   

Credit Infonet, Inc.

   10/26/2018    High Tech Industries     

 

13.00

(PIK 1.75


%) 

           2,016,172         1,989,241         2,021,547   

UniTek Global Services, Inc.

   07/15/2019    Telecommunications     

 

15.00

(PIK 15.00


%) 

           126,259         126,259         126,259   
                

 

 

    

 

 

 

Total Subordinated Debt/Corporate Notes

                7,863,347         5,365,373   
                

 

 

    

 

 

 

Preferred Equity—0.7% (7), (8)

                

J.A. Cosmetics US, Inc.
(J.A. Cosmetics Holdings, Inc.)

      Consumer Goods: Durable      8.00 %             400         399,704         447,112   

UniTek Global Services, Inc.

      Telecommunications      13.50 %             1,047,317         670,283         1,045,327   
                

 

 

    

 

 

 

Total Preferred Equity

                1,069,987         1,492,439   
                

 

 

    

 

 

 

Common Equity/Warrants—0.7% (7), (8)

                

A2Z Wireless Holdings, Inc.

      Retail                     463         118,817         688,376   

Affinion Group Holdings, Inc., Series A (Warrants)

   12/12/2023    Consumer Goods: Durable                     554,715         1,186,649         263,490   

Affinion Group Holdings, Inc., Series B (Warrants)

   12/12/2023    Consumer Goods: Durable                     1,135,743                 22,715   

Faraday Holdings, LLC
(Interior Specialists, Inc.)

      Construction and Building                     939         45,761         45,760   

J.A. Cosmetics US, Inc.
(J.A. Cosmetics Holdings, Inc.)

      Consumer Goods: Durable                     30         296         119,089   

Patriot National, Inc. (Warrants)

   11/27/2023    Banking, Finance, Insurance and
Real Estate
                    14,484         28,002         193,072   

UniTek Global Services, Inc.

      Telecommunications                     149,617                   

Vestcom Parent Holdings, Inc.

      Media: Advertising, Printing and
Publishing
                   15,179         56,895         244,158   
                

 

 

    

 

 

 

Total Common Equity/Warrants

                1,436,420         1,576,660   
                

 

 

    

 

 

 

Total Investments in Non-Controlled, Non-Affiliated Portfolio Companies

             362,124,910         358,819,617   

Cash Equivalents—4.9%

                

BlackRock Liquidity Funds, Temp Cash and Temp Fund, Institutional Shares

             10,475,621         10,475,621   
                

 

 

    

 

 

 

Total Investments and Cash Equivalents—173.0%

              $   372,600,531       $ 369,295,238   
                

 

 

    

 

 

 

Liabilities in Excess of Other Assets—(73.0)%

                   (155,843,448

Net Assets—100.0%

                 $ 213,451,790   
                   

 

 

 

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

9


Table of Contents

PENNANTPARK FLOATING RATE CAPITAL LTD. AND SUBSIDIARIES

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

JUNE 30, 2015

(Unaudited)

 

  

 

(1)   

Represents floating rate instruments that accrue interest at a predetermined spread relative to an index, typically the applicable London Interbank Offered Rate, or LIBOR or “L,” or Prime rate, or “P.” All securities are subject to a LIBOR or Prime rate floor where a spread is provided, unless noted. The spread provided includes payment-in-kind, or PIK, interest and other fee rates, if any.

 

(2)   

Valued based on our accounting policy (see Note 2).

 

(3)   

The provisions of the 1940 Act classify investments based on the level of control that we maintain in a particular portfolio company. As defined in the 1940 Act, a company is deemed as “non-controlled” when we own less than 25% of a portfolio company’s voting securities and “controlled” when we own 25% or more of a portfolio company’s voting securities.

 

(4)   

The provisions of the 1940 Act classify investments further based on the level of ownership that we maintain in a particular portfolio company. As defined in the 1940 Act, a company is deemed as “non-affiliated” when we own less than 5% of a portfolio company’s voting securities and “affiliated” when we own 5% or more of a portfolio company’s voting securities.

 

(5)   

Security is exempt from registration under Rule 144A promulgated under the Securities Act of 1933, as amended, or the Securities Act. The security may be resold in transactions that are exempt from registration, normally to qualified institutional buyers.

 

(6)   

Non-U.S. company or principal place of business outside the United States.

 

(7)   

Non-income producing securities.

 

(8)   

The securities are not pledged as collateral under the Credit Facility. All other securities are pledged as collateral under the Credit Facility and held through Funding I.

 

(9)   

Coupon is not subject to a LIBOR or Prime rate floor.

 

(10)   

Represents the purchase of a security with delayed settlement or a revolving line of credit that is currently an unfunded investment. This security does not earn a basis point spread above an index while it is unfunded.

 

(11)   

The investment is treated as a non-qualifying asset under Section 55(a) of the 1940 Act. Under the 1940 Act, we may not acquire any non-qualifying asset unless, at the time the acquisition is made, qualifying assets represent at least 70% of our total assets.

 

 

10


Table of Contents

PENNANTPARK FLOATING RATE CAPITAL LTD. AND SUBSIDIARIES

CONSOLIDATED SCHEDULE OF INVESTMENTS

SEPTEMBER 30, 2014

 

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—162.4% (3), (4)

First Lien Secured Debt—141.0%

  

  

AKA Diversified Holdings, Inc.

   04/02/2018    Retail      11.92     L+1,175 (9)      9,060,104       $ 8,865,835       $ 9,167,028   

AKA Diversified Holdings, Inc. (10)

   04/02/2018    Retail                    2,000,000         2,000,000         2,023,603   

ALG USA Holdings, LLC

   02/28/2019    Hotel, Gaming and Leisure      7.00     L+575        7,334,751         7,289,756         7,261,403   

Alvogen Pharma US, Inc.

   05/23/2018    Healthcare and Pharmaceuticals      7.00     L+575        2,764,276         2,738,582         2,781,553   

Ancile Solutions, Inc.

   07/16/2018    High Tech Industries      6.25     L+500        4,333,333         4,299,220         4,327,917   

AP Gaming I, LLC

   12/21/2020    Hotel, Gaming and Leisure      9.25     L+825        1,389,500         1,351,463         1,396,447   

Ascend Learning, LLC

   07/31/2019    Media: Broadcasting and
Subscription
     6.00     L+500        3,476,244         3,463,094         3,479,720   

Aspen Dental Management, Inc.

   10/06/2016    Consumer Services      7.00     L+550        2,917,500         2,900,680         2,902,912  

ATI Holdings, Inc.

   12/20/2019    Healthcare and Pharmaceuticals      5.00     L+400        2,947,500         2,924,974         2,956,107  

Azure Midstream Energy LLC

   11/15/2018    Energy: Oil and Gas      6.50     L+550        5,293,750         5,228,951         5,240,812   

BBB Industries, LLC

   03/27/2019    Automotive      5.50     L+425        3,023,140         3,004,531         3,005,515   

Blue Bird Body Company

   06/29/2020    Automotive      6.50     L+550        5,000,000         4,927,548         4,925,000   

Bowlmor AMF, Corp.

   09/17/2021    Retail      7.25     L+625        8,000,000         7,880,197         7,970,000   

CBAC Borrower, LLC (8)

   07/02/2020    Hotel, Gaming and Leisure      8.25     L+700        5,000,000         4,957,132         5,087,500   

Charming Charlie LLC

   12/24/2019    Retail      9.00     L+800        4,477,500         4,416,233         4,477,500   

Chicken Soup for the Soul Publishing, LLC

   01/08/2019    Media: Advertising, Printing and
Publishing
     7.25     L+600        4,975,000         4,928,906         4,975,000   

Creative Circle, LLC

   06/25/2020    Media: Advertising, Printing and
Publishing
     5.50     L+450        5,900,000         5,843,227         5,811,500   

Curo Health Services, LLC

   06/08/2020    Healthcare and Pharmaceuticals      5.75     L+475        1,995,000         1,947,166         1,963,419   

DCS Business Services, Inc.

   03/19/2018    Business Services      7.25     L+575        3,253,740         3,218,698         3,172,396  

Edmentum, Inc.

   05/17/2018    Media: Broadcasting and
Subscription
     5.50     L+450        924,982         924,982         915,732   

eResearchTechnology, Inc.

   05/02/2018    Healthcare and Pharmaceuticals      6.00     L+475        2,858,864         2,847,367         2,855,291  

e-Rewards, Inc.

   10/29/2018    High Tech Industries      6.00     L+500        9,812,500         9,652,736         9,665,312   

FHC Health Systems, Inc.

   01/09/2018    Healthcare and Pharmaceuticals      5.75     L+475        4,258,929         4,226,747         4,258,929   

Fishnet Security, Inc.

   11/30/2017    High Tech Industries      6.25     L+500        3,610,688         3,591,818         3,592,634  

GlobalLogic Holdings, Inc.

   05/31/2019    High Tech Industries      6.25     L+525        3,970,000         3,934,577         3,840,975   

Granite Broadcasting Corporation

   05/23/2018    Media: Broadcasting and
Subscription
     6.75     L+550        1,096,930         1,094,839         1,094,188   

Greenway Health, LLC

   11/04/2020    High Tech Industries      6.00     L+500        6,947,500         6,888,768         6,912,762   

Help/Systems Holdings, Inc.

   06/28/2019    High Tech Industries      5.50     L+450        4,950,000         4,909,380         4,894,312   

Hollander Sleep Products, LLC

   10/21/2020    Consumer Goods: Non-Durable      9.00     L+800        1,200,000         1,182,000         1,182,000   

Hostway Corporation

   12/13/2019    High Tech Industries      6.00     L+475        4,906,250         4,864,869         4,881,719   

Hunter Defense Technologies, Inc.

   08/05/2019    Aerospace and Defense      6.50 %     L+550        7,000,000         6,931,037         6,912,500  

IDQ Holdings, Inc. (5), (8)

   03/30/2017    Automotive      11.50 %            2,000,000         1,977,245         2,167,500  

iEnergizer Limited and Aptara, Inc. (6)

   05/01/2019    Business Services      7.25     L+600        12,409,413         12,270,960         11,788,942   

InfuSystem Holdings, Inc.

   11/30/2016    Healthcare and Pharmaceuticals      13.16     P+992        1,500,000         1,500,000         1,535,715   

Instant Web, LLC, Term Loan A

   03/28/2019    Media: Advertising, Printing and
Publishing
     5.50     L+450        5,453,617         5,377,967         5,453,617  

Instant Web, LLC, Term Loan B

   03/28/2019    Media: Advertising, Printing and
Publishing
     12.00     L+1,100        4,500,000         4,436,038         4,500,000   

Jackson Hewitt Tax Service Inc.

   10/16/2017    Consumer Services      10.00     L+850        5,140,179         5,059,028         5,114,478   

K2 Pure Solutions NoCal, L.P. (8)

   08/19/2019    Chemicals, Plastics and Rubber      10.00     L+900        6,157,648         6,048,214         6,064,275  

Lanyon Solutions, Inc.

   11/13/2020    High Tech Industries      5.50     L+450        1,985,004         1,977,359         1,967,635   

LifeCare Holdings LLC (8)

   11/30/2018    Healthcare and Pharmaceuticals      6.50     L+525        5,925,000         5,855,212         5,821,312   

Meritas Schools Holdings, LLC

   06/25/2019    Consumer Services      7.00     L+575        2,505,285         2,484,597         2,506,864   

National Surgical Hospitals, Inc.

   08/01/2019    Healthcare and Pharmaceuticals      5.25     L+425        8,130,872         8,111,416         8,090,218   

New Trident HoldCorp, Inc.

   07/31/2019    Healthcare and Pharmaceuticals      6.50     L+525        9,900,000         9,817,130         9,809,217   

Patriot National, Inc.
(f/k/a Old Guard Risk Services, Inc.)

   11/27/2018    Banking, Finance, Insurance and
Real Estate
     12.50     L+1,150        13,293,846         12,716,069         13,426,785   

Polyconcept Finance B.V.

   06/28/2019    Consumer Goods: Non-Durable      6.00     L+475        7,717,766         7,653,621         7,669,530   

Premier Dental Services, Inc.

   11/01/2018    Consumer Services      6.00     L+500        8,303,261         8,187,838         8,220,228  

Quality Home Brands Holdings LLC

   12/17/2018    Consumer Goods: Durable      7.75     L+650        4,962,500         4,921,444         4,970,787   

RCS Capital Corporation

   04/29/2019    Banking, Finance, Insurance and
Real Estate
     6.50     L+550        4,937,500         4,891,688         4,956,016   

Robertshaw US Holding Corp.
(f/k/a Fox US Bidco Corp.)

   06/18/2019    Consumer Goods: Durable      9.00     L+750        3,294,118         3,262,700         3,288,278   

Robertshaw US Holding Corp.
(f/k/a Fox US Bidco Corp.) (10)

   06/18/2019    Consumer Goods: Durable                    705,882         705,882         704,631   

SCE Partners, LLC

   08/14/2019    Hotel, Gaming and Leisure      8.25     L+725        12,000,000         11,898,121         12,000,000   

Securus Technologies Holdings, Inc.

   04/30/2020    Telecommunications      4.75     L+350        1,980,002         1,963,277         1,955,252   

Sotera Defense Solutions, Inc.

   04/21/2017    Aerospace and Defense      9.00     L+750        6,643,409         6,382,042         5,979,068   

St. George’s University Scholastic Services LLC (6)

   08/09/2021    Consumer Services      5.75     L+475        2,000,000         1,990,000         2,002,500   

Surgical Specialties Corporation (US), Inc.

   08/22/2018    Healthcare and Pharmaceuticals      7.25     L+575        3,375,000         3,347,830         3,366,563   

Sutherland Global Services, Inc.

   03/06/2019    Business Services      7.25     L+600        925,000         910,694         922,688   

Systems Maintenance Services Holding, Inc.

   10/18/2019    High Tech Industries      5.00     L+400        5,955,000         5,931,546         5,910,338   

Tensar Corporation

   07/09/2021    Construction and Building      5.75     L+475        5,000,000         4,950,448         4,968,750   

Therakos, Inc.

   12/27/2017    Healthcare and Pharmaceuticals      7.50     L+625        4,843,177         4,775,215         4,861,339   

UniTek Global Services, Inc. (8)

   04/15/2016    Telecommunications     

 

12.25

(PIK 7.25


%)

    L+1,125        135,817         135,817         135,817   

UniTek Global Services, Inc.

   04/16/2018    Telecommunications      (7)            2,184,319         2,150,875         1,332,435   

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

11


Table of Contents

PENNANTPARK FLOATING RATE CAPITAL LTD. AND SUBSIDIARIES

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

SEPTEMBER 30, 2014

 

Issuer Name

  Maturity   Industry   Current
Coupon
    Basis Point
Spread
Above
Index (1)
    Par /
Shares
    Cost     Fair Value (2)  

Virtual Radiologic Corporation (8)

  12/22/2016   Business Services     7.26     L+550        2,925,663      $ 2,915,553      $ 2,157,677   

Wilton Brands, LLC

  08/30/2018   Consumer Goods: Non-Durable     7.50 %     L+625        3,017,653        2,977,186        2,844,138   

YP LLC

  06/04/2018   Media: Advertising, Printing and
Publishing
    8.00     L+675        3,224,845        3,160,701        3,230,907   

Zest Holdings, LLC

  08/17/2020   Healthcare and Pharmaceuticals     5.25     L+425        8,910,169        8,910,169        8,910,169   
           

 

 

   

 

 

 

Total First Lien Secured Debt

              302,889,195        302,565,355   
           

 

 

   

 

 

 

Second Lien Secured Debt—17.0%

             

American Gilsonite Company (5), (8)

  09/01/2017   Metals and Mining     11.50            1,000,000        1,000,000        1,080,000   

Cannery Casino Resorts, LLC (8)

  10/02/2019   Hotel, Gaming and Leisure     10.00 %     L+875        1,700,000        1,675,421        1,687,250   

Carolina Beverage Group, LLC (5), (8)

  08/01/2018   Beverage, Food and Tobacco     10.63            3,500,000        3,500,000        3,613,750   

J.A. Cosmetics Holdings, Inc. (8)

  07/31/2019   Consumer Goods: Durable     11.00     L+1,000        4,000,000        3,926,394        4,059,524   

Language Line, LLC

  12/20/2016   Consumer Services     10.50     L+875        7,100,000        7,026,077        7,023,107   

Novitex Acquisition, LLC

  07/07/2021   Business Services     11.75     L+1,050        11,000,000        10,893,446        10,780,000   

Penton Media, Inc. (8)

  10/02/2020   Media: Diversified and
Production
    9.00 %     L+775        5,600,000        5,527,495        5,593,000   

Sunshine Oilsands Ltd. (5), (6), (8)

  08/01/2017   Energy: Oil and Gas     10.00            2,812,500        2,645,114        2,638,153   
           

 

 

   

 

 

 

Total Second Lien Secured Debt

              36,193,947        36,474,784   
           

 

 

   

 

 

 

Subordinated Debt/Corporate Notes—3.3% (8)

             

Affinion Group Holdings, Inc. (5)

  09/14/2018   Consumer Goods: Durable    

 

14.50

(PIK 14.50


%) 

           4,161,233        3,639,478        3,537,048   

Affinion Investments LLC (5)

  08/15/2018   Consumer Goods: Durable     13.50            1,734,000        1,734,000        1,612,620   

Credit Infonet, Inc.

  10/26/2018   High Tech Industries    

 

12.50

(PIK 1.25


%) 

           1,993,762        1,961,974        1,924,017   
           

 

 

   

 

 

 

Total Subordinated Debt/Corporate Notes

              7,335,452        7,073,685   
           

 

 

   

 

 

 

Preferred Equity—0.2% (7), (8)

             

J.A. Cosmetics US, Inc.
(J.A. Cosmetics Holdings, Inc.)

    Consumer Goods: Durable     8.00            400        399,704        421,215   
           

 

 

   

 

 

 

Common Equity/Warrants—0.9% (7), (8)

             

Affinion Group Holdings, Inc., Series A (Warrants)

  12/12/2023   Consumer Goods: Durable                   554,715        1,186,649        1,040,091   

Affinion Group Holdings, Inc., Series B (Warrants)

  12/12/2023   Consumer Goods: Durable                   1,135,743               22,715   

J.A. Cosmetics US, Inc.
(J.A. Cosmetics Holdings, Inc.)

    Consumer Goods: Durable                   30        296        58,055   

Patriot National, Inc.
(f/k/a Old Guard Risk Services, Inc.) (Warrants)

  11/27/2023   Banking, Finance, Insurance and
Real Estate
                  7,403        151,853        399,833   

UniTek Global Services, Inc. (Warrants)

    Telecommunications                   56,717        95,285        6,239   

Vestcom Parent Holdings, Inc.
(Vestcom International, Inc.)

    Media: Advertising, Printing and
Publishing
                  15,179        56,895        244,631   

Z Wireless Holdings, Inc.
(AKA Diversified Holdings, Inc.) (Warrants)

  10/21/2021   Retail                   463        45,019        121,889   
           

 

 

   

 

 

 

Total Common Equity/Warrants

              1,535,997        1,893,453   
           

 

 

   

 

 

 

Total Investments in Non-Controlled, Non-Affiliated Portfolio Companies

          348,354,295        348,428,492   

Cash Equivalents—6.1%

             

BlackRock Liquidity Funds, Temp Cash and Temp Fund, Institutional Shares

          13,113,817        13,113,817   
           

 

 

   

 

 

 

Total Investments and Cash Equivalents—168.5%

            $   361,468,112      $ 361,542,309   
           

 

 

   

 

 

 

Liabilities in Excess of Other Assets—(68.5)%

                (147,014,599)   

Net Assets—100.0%

              $ 214,527,710   
             

 

 

 
  

 

(1)   

Represents floating rate instruments that accrue interest at a predetermined spread relative to an index, typically the applicable LIBOR or “L,” or Prime rate, or “P.” All securities are subject to a LIBOR or Prime rate floor where a spread is provided, unless noted. The spread provided includes PIK interest and other fee rates, if any.

 

(2)   

Valued based on our accounting policy (see Note 2).

 

(3)   

The provisions of the 1940 Act classify investments based on the level of control that we maintain in a particular portfolio company. As defined in the 1940 Act, a company is deemed as “non-controlled” when we own less than 25% of a portfolio company’s voting securities and “controlled” when we own 25% or more of a portfolio company’s voting securities.

 

(4)   

The provisions of the 1940 Act classify investments further based on the level of ownership that we maintain in a particular portfolio company. As defined in the 1940 Act, a company is deemed as “non-affiliated” when we own less than 5% of a portfolio company’s voting securities and “affiliated” when we own 5% or more of a portfolio company’s voting securities.

 

(5)   

Security is exempt from registration under Rule 144A promulgated under the Securities Act. The security may be resold in transactions that are exempt from registration, normally to qualified institutional buyers.

 

(6)   

Non-U.S. company or principal place of business outside the United States.

 

(7)   

Non-income producing securities.

 

(8)   

The securities are not pledged as collateral under the Credit Facility. All other securities are pledged as collateral under the Credit Facility.

 

(9)   

Coupon is not subject to a LIBOR or Prime rate floor.

 

(10)    Represents the purchase of a security with delayed settlement or a revolving line of credit that is currently an unfunded investment. This security does not earn a basis point spread above an index while it is unfunded.

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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Table of Contents

PENNANTPARK FLOATING RATE CAPITAL LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2015

(Unaudited)

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 current income and capital appreciation. 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 or variable-rate investments 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, which means our net assets plus any borrowings for investment purposes, 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 senior secured loans, or first lien loans, 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, high yield, mezzanine and distressed debt securities and, to a lesser extent, equity investments.

We 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 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 our 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 five-year Credit Facility allows Funding I to borrow up to $200 million at LIBOR plus 200 basis points during the revolving period. The Credit Facility is secured by all of the assets held by Funding I. See Note 9.

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. 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 the Financial Accounting Standards Board’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.

Our Consolidated Financial Statements are prepared in accordance with GAAP, consistent with ASC 946, Financial Services – Investment Companies, and pursuant to the requirements for reporting on Form 10-K/Q and Article 6 or 10 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 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, described in this Report, and a consistently applied valuation process. 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:

 

  (1) Our quarterly valuation process begins with each portfolio company or investment being initially valued by the investment professionals of our Investment Adviser responsible for the portfolio investment;

 

  (2) Preliminary valuation conclusions are then documented and discussed with the management of our Investment Adviser;

 

  (3) Our board of directors also engages independent valuation firms to conduct independent appraisals of our investments for which market quotations are not readily available or are readily available but deemed not reflective of the fair value of the investment. The independent valuation firms review management’s preliminary valuations in light of their own independent assessment and also in light of any market quotations obtained from an independent pricing service, broker, dealer or market maker;

 

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PENNANTPARK FLOATING RATE CAPITAL LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

JUNE 30, 2015

(Unaudited)

 

  (4) The audit committee of our board of directors reviews the preliminary valuations of our Investment Adviser and those of the independent valuation firms on a quarterly basis, periodically assesses the valuation methodologies of the independent valuation firms, and responds to and supplements the valuation recommendations of the independent valuation firms to reflect any comments; and

 

  (5) Our board of directors discusses these valuations and determines the fair value of each investment in our portfolio in good faith, based on the input of our Investment Adviser, the respective independent valuation firms and the audit committee.

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 value of our portfolio investments and Credit Facility 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 collectible. 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. 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.

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.

(c) Income Taxes

We have complied with the requirements of Subchapter M of the Code and expect to be subject to taxation as a RIC. As a result, we account for income taxes using the asset liability method prescribed by ASC 740, Income Taxes. 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 PennantPark Floating Rate Capital Ltd.’s qualification and election to be subject to tax as a RIC, we do not anticipate paying any material level of federal income taxes in the future. Although we are not subject to federal income taxes as a RIC, we have elected to retain a portion of our calendar year income. As a result, for the three and nine months ended June 30, 2015, we accrued estimated excise taxes of $0.1 million and $0.3 million, respectively. For the three and nine months ended June 30, 2014, we accrued estimated excise taxes of $0.1 million and $0.4 million, respectively.

PennantPark Floating Rate Capital Ltd. recognizes in its Consolidated Financial Statements the effect of a tax position when it is more likely than not, based on the technical merits, that the position will be sustained upon examination. We did not have any uncertain tax positions that met the recognition or measurement criteria of ASC 740-10-25, nor did we have any unrecognized tax benefits as of the periods presented herein.

Because federal income tax regulations differ from GAAP, distributions in accordance with tax regulations may differ from net investment income and realized gains recognized for financial reporting purposes. Differences may be permanent or temporary. Permanent differences are reclassified among capital accounts in the Consolidated Financial Statements 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 ratified by the board of directors each quarter and is generally based upon the earnings estimated by management. Net realized capital gains, if any, are distributed at least annually. The tax attributes for distributions will generally include ordinary income and capital gains, but may also include qualified dividends and/or a return of capital.

Capital transactions, in connection with our dividend reinvestment plan or 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.

(e) Consolidation

As permitted under Regulation S-X and as explained by ASC 946-810-45, PennantPark Floating Rate Capital Ltd. will generally not consolidate its investment in a company other than an investment company subsidiary or a controlled operating company whose business consists of providing services to us. Accordingly, we have consolidated the results of Funding I in our Consolidated Financial Statements.

 

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PENNANTPARK FLOATING RATE CAPITAL LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

JUNE 30, 2015

(Unaudited)

 

(f) Asset Transfers and Servicing

Asset transfers that do not meet ASC 860, Transfers and Servicing, requirements for sale accounting treatment are reflected in the Consolidated Statement of Assets and Liabilities 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.

(g) Recent Accounting Pronouncements

In April 2015, the Financial Accounting Standards Board issued Accounting Standards Update 2015-03, Interest — Imputation of Interest (Subtopic 835-30) — Simplifying the Presentation of Debt Issuance Costs. The update requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. Public companies are required to apply ASU 2015-03 retrospectively for interim and annual reporting periods beginning after December 15, 2015. Accordingly, we have evaluated ASU 2015-03 and anticipate no impact on our consolidated financial statements and disclosures.

3. AGREEMENTS

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 2015. 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.

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 adjusted to exclude cash, cash equivalents and unfunded investments, 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, 2015, the Investment Adviser earned base management fees of $0.9 million and $2.6 million, respectively, from us. For the three and nine months ended June 30, 2014, the Investment Adviser earned base management fees of $1.0 million and $2.8 million, respectively, from us.

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 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, 2015, the Investment Adviser earned an incentive fee on net investment income as calculated under the Investment Management Agreement of $0.5 million and $2.3 million, respectively, from us. For the three and nine months ended June 30, 2014, the Investment Adviser earned an incentive fee on net investment income as calculated under the Investment Management Agreement of $0.7 million and $1.5 million, respectively, 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, 2015, the Investment Adviser earned an incentive fee on capital gains of zero and $(0.4) million, respectively, as calculated under the Investment Management Agreement. For the three and nine months ended June 30, 2014, the Investment Adviser earned an incentive fee on capital gains of $0.1 million and $0.8 million, respectively, as calculated under the Investment Management Agreement (as described above).

 

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PENNANTPARK FLOATING RATE CAPITAL LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

JUNE 30, 2015

(Unaudited)

 

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 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. For the three and nine months ended June 30, 2015, the Investment Adviser accrued an incentive fee on unrealized and realized capital gains as calculated under GAAP of $0.1 million and $(0.2) million, respectively. For the three and nine months ended June 30, 2014, the Investment Adviser accrued an incentive fee on unrealized and realized capital gains as calculated under GAAP of $0.1 million and $0.6 million, respectively.

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 2015. Under the Administration Agreement, the Administrator provides administration services and office facilities to us. For providing these services, facilities and personnel, 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 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 and their respective staffs. The Administrator also offers, on our behalf, 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 Statement of Operations. For the three and nine months ended June 30, 2015, the Investment Adviser was reimbursed approximately $0.1 million and $0.5 million, respectively, from us, including expenses the Investment Adviser incurred on behalf of the Administrator, for services described above. For the three and nine months ended June 30, 2014, the Investment Adviser was reimbursed approximately $0.1 million and $0.4 million, respectively, from us, including expenses the Investment Adviser incurred on behalf of the Administrator, for services described above.

4. INVESTMENTS

Purchases of investments, including PIK interest, for the three and nine months ended June 30, 2015 totaled $75.6 million and $161.3 million, respectively. For the same periods in the prior year, purchases of investments, including PIK interest, totaled $30.7 million and $185.2 million, respectively. Sales and repayments of investments for the three and nine months ended June 30, 2015 totaled $53.2 million and $146.2 million, respectively. For the same periods in the prior year, sales and repayments of investments totaled $55.6 million and $146.8 million, respectively.

Investments and cash equivalents consisted of the following:

 

     June 30, 2015      September 30, 2014  

Investment Classification

           Cost                  Fair Value                  Cost                  Fair Value      

First lien

   $   305,709,246       $ 304,068,247       $   302,889,195       $ 302,565,355   

Second lien

     46,045,910         46,316,898         36,193,947         36,474,784   

Subordinated debt / corporate notes

     7,863,347         5,365,373         7,335,452         7,073,685   

Preferred equity / common equity / warrants

     2,506,407         3,069,099         1,935,701         2,314,668   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investments

     362,124,910         358,819,617         348,354,295         348,428,492   
  

 

 

    

 

 

    

 

 

    

 

 

 

Cash equivalents

     10,475,621         10,475,621         13,113,817         13,113,817   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investments and cash equivalents

   $   372,600,531       $ 369,295,238       $   361,468,112       $ 361,542,309   
  

 

 

    

 

 

    

 

 

    

 

 

 

The table below describes investments by industry classification and enumerates the percentage, by fair value, of the total portfolio assets (excluding cash equivalents) in such industries as of:

 

                                                             

Industry Classification

   June 30, 2015   September 30, 2014

Healthcare and Pharmaceuticals

        12%        16%

High Tech Industries

     12     14

Business Services

     10       8

Retail

       7       7

Construction and Building

       6       1

Consumer Goods: Durable

       6       6

Consumer Services

       6       8

Consumer Goods: Non-Durable

       5       3

Hotel, Gaming and Leisure

       5       8

Media: Advertising, Printing and Publishing

       5       7

Automotive

       4       3

Chemicals, Plastics and Rubber

       4       2

Aerospace and Defense

       3       4

Energy: Oil and Gas

       3       2

Wholesale

       3     —

Environmental Industries

       2     —

Telecommunications

       2       1

Banking, Finance, Insurance and Real Estate

       1       5

All Other

       4       5
  

 

 

 

Total

      100%      100%
  

 

 

 

 

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PENNANTPARK FLOATING RATE CAPITAL LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

JUNE 30, 2015

(Unaudited)

 

5. FAIR VALUE OF FINANCIAL INSTRUMENTS

Fair value, as defined under ASC 820, Fair Value Measurement, or 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 and our Credit Facility are classified as Level 3. 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. A review of fair value hierarchy classifications is conducted on a quarterly basis.

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 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 was available. Corroborating evidence that would result in classifying these non-binding broker/dealer bids as a Level 2 asset includes observable 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 senior secured loans, but also may include second lien, high yield, mezzanine and distressed debt securities 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 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. Reclassifications impacting Level 3 of the fair value hierarchy are reported as transfers in or out of the Level 3 category as of the end of the quarter in which the reclassifications occur. Our ability to observe valuation inputs resulted in one reclassification from Level 2 to 3 and one reclassification from Level 3 to 2 during the nine months ended June 30, 2015 and no reclassification of assets between levels during the nine months ended June 30, 2014.

In addition to using the above inputs in cash equivalents, investments and our Credit Facility valuations, 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 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 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.

The remainder of our portfolio, including our long-term Credit Facility, is 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 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.

 

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PENNANTPARK FLOATING RATE CAPITAL LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

JUNE 30, 2015

(Unaudited)

 

Our Level 3 valuation techniques, unobservable inputs and ranges were categorized as follows for ASC 820 purposes:

 

Asset Category

   Fair Value at
June 30, 2015
     Valuation Technique    Unobservable Input    Range of Input
(Weighted Average)

Debt investments

   $ 240,836,641       Market Comparable    Broker/Dealer bid quotes    N/A

Debt investments

     114,150,917       Market Comparable    Market Yield    6.0% – 38.5% (11.4%)

Equity investments

     286,205       Market Comparable    Broker/Dealer bid quotes    N/A

Equity investments

     2,589,822       Enterprise Market Value    EBITDA multiple    4.8x – 10.0x (6.6x)
  

 

 

          

Total Level 3 investments

   $ 357,863,585           
  

 

 

          

Long-Term Credit Facility

   $ 140,015,250       Market Comparable    Market Yield    3.2%
  

 

 

          

Asset Category

  

 

Fair Value at
September 30, 2014

     Valuation Technique    Unobservable Input    Range of Input
(Weighted Average)

Debt investments

   $ 282,659,683       Market Comparable    Broker/Dealer bid quotes    N/A

Debt investments

     58,304,473       Market Comparable    Market Yield    6.5% – 14.1% (11.6%)

Equity investments

     1,062,806       Market Comparable    Broker/Dealer bid quotes    N/A

Equity investments

     1,245,623       Enterprise Market Value    EBITDA multiple    5.0x–9.5x (7.6x)
  

 

 

          

Total Level 3 investments

   $ 343,272,585           
  

 

 

          

Long-Term Credit Facility

   $ 146,949,000       Market Comparable    Market Yield    3.6%
  

 

 

          

Our investments, cash equivalents and Credit Facility were categorized as follows in the fair value hierarchy for ASC 820 purposes:

 

     Fair Value Measurements at June 30, 2015  

Description

       Fair Value                Level 1                  Level 2                  Level 3        

Debt investments (First lien)

   $ 304,068,247      $ —         $ —         $ 304,068,247  

Debt investments (Second lien)

     46,316,898        —           —           46,316,898  

Debt investments (Subordinated debt / corporate notes)

     5,365,373        —           762,960        4,602,413  

Equity investments

     3,069,099        —           193,072        2,876,027  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investments

     358,819,617        —           956,032        357,863,585  
  

 

 

    

 

 

    

 

 

    

 

 

 

Cash equivalents

     10,475,621        10,475,621         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investments and cash equivalents

   $ 369,295,238      $ 10,475,621       $ 956,032      $ 357,863,585  
  

 

 

    

 

 

    

 

 

    

 

 

 

Long-Term Credit Facility

   $ 140,015,250      $ —         $ —         $ 140,015,250  
  

 

 

    

 

 

    

 

 

    

 

 

 
     Fair Value Measurements at September 30, 2014  

Description

   Fair Value      Level 1      Level 2      Level 3  

Debt investments (First lien)

   $ 302,565,355      $ —         $ —         $   302,565,355  

Debt investments (Second lien)

     36,474,784        —           —           36,474,784  

Debt investments (Subordinated debt / corporate notes)

     7,073,685        —           5,149,668        1,924,017  

Equity investments

     2,314,668        —           6,239        2,308,429  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investments

     348,428,492        —           5,155,907        343,272,585  
  

 

 

    

 

 

    

 

 

    

 

 

 

Cash equivalents

     13,113,817        13,113,817         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investments and cash equivalents

   $ 361,542,309      $ 13,113,817       $ 5,155,907      $ 343,272,585  
  

 

 

    

 

 

    

 

 

    

 

 

 

Long-Term Credit Facility

   $ 146,949,000      $ —         $ —         $ 146,949,000  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

PENNANTPARK FLOATING RATE CAPITAL LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

JUNE 30, 2015

(Unaudited)

 

The tables below show a reconciliation of the beginning and ending balances for fair valued investments measured using significant unobservable inputs (Level 3):

 

                                                                                                                       
     Nine Months Ended June 30, 2015  

Description

   First Lien     Second lien,
subordinated debt
and equity investments
    Totals  

Beginning Balance

   $   302,565,355     $ 40,707,230     $   343,272,585  

Net realized (losses) gains

     (97,291 )     606,110       508,819  

Net unrealized depreciation

     (1,317,159     (1,158,473     (2,475,632

Purchases, PIK interest, net discount accretion and non-cash exchanges

     142,839,788        16,658,283        159,498,071   

Sales, repayments and non-cash exchanges

     (139,922,446 )     (6,243,136 )     (146,165,582 )

Transfers in and/or out of Level 3

     —          3,225,324       3,225,324  
  

 

 

   

 

 

   

 

 

 

Ending Balance

   $ 304,068,247     $ 53,795,338     $ 357,863,585  
  

 

 

   

 

 

   

 

 

 

Net change in unrealized depreciation reported within the net change in unrealized depreciation on investments in our Consolidated Statement of Operations attributable to our Level 3 assets still held at the reporting date.

   $ (1,682,404 )   $ (1,093,227 )   $ (2,775,631 )
  

 

 

   

 

 

   

 

 

 
     Nine Months Ended June 30, 2014  

Description

   First Lien     Second lien,
subordinated debt and
equity investments
    Totals  

Beginning Balance

   $ 281,046,248     $   32,698,220     $ 313,744,468  

Net realized gains

     1,194,362       578,987       1,773,349  

Net unrealized appreciation

     1,798,648        1,433,096        3,231,744  

Purchases, PIK interest, net discount accretion and non-cash exchanges

     171,711,192        15,019,955        186,731,147  

Sales, repayments and non-cash exchanges

     (133,586,604 )     (11,540,058 )     (145,126,662 )

Transfers in and/or out of Level 3

     —          —         —     
  

 

 

   

 

 

   

 

 

 

Ending Balance

   $ 322,163,846     $ 38,190,200     $ 360,354,046  
  

 

 

   

 

 

   

 

 

 

Net change in unrealized appreciation reported within the net change in unrealized appreciation on investments in our Consolidated Statement of Operations attributable to our Level 3 assets still held at the reporting date.

   $ 1,006,992     $ 1,421,519     $ 2,428,511  
  

 

 

   

 

 

   

 

 

 

 

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PENNANTPARK FLOATING RATE CAPITAL LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

JUNE 30, 2015

(Unaudited)

 

The table below shows a reconciliation of the beginning and ending balances for fair valued liabilities measured using significant unobservable inputs (Level 3):

 

     Carrying/Fair Value
Nine Months Ended June 30,
 

Long-Term Credit Facility

   2015      2014  

Beginning Balance (cost – $146,400,000 and $99,600,000, respectively)

   $ 146,949,000      $ 99,600,000  

Net change in unrealized depreciation included in earnings

     (233,750 )      —    

Borrowings

     103,400,000        130,500,000  

Repayments

     (110,100,000      (75,200,000

Transfers in and/or out of Level 3

     —           —    
  

 

 

    

 

 

 

Ending Balance (cost – $139,700,000 and $154,900,000, respectively)

   $ 140,015,250      $   154,900,000  
  

 

 

    

 

 

 

We adopted 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 our Credit Facility. We elected to use the fair value option for our Credit Facility 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 had expenses of $0.2 million relating to amendment fees on the Credit Facility for both the three and nine months ended June 30, 2015. For the same periods in the prior year, we had expenses of zero and $0.7 million, 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 Statement of Assets and Liabilities and changes in fair value of the Credit Facility are reported in our Consolidated Statement of Operations. We elected not to apply ASC 825-10 to any other financial assets or liabilities. For the three and nine months ended June 30, 2015, our Credit Facility had a net change in unrealized (appreciation) depreciation of less than $(0.1) million and $0.2 million, respectively. For each of the three and nine months ended June 30, 2014, our Credit Facility had a net change in unrealized appreciation of zero. As of June 30, 2015 and September 30, 2014, the net unrealized appreciation on our Credit Facility totaled $0.3 million and $0.5 million, respectively. We use a nationally recognized independent valuation service to measure the fair value of our Credit Facility in a manner consistent with the valuation process that the board of directors uses to value our investments.

6. CHANGE IN NET ASSETS FROM OPERATIONS PER COMMON SHARE

The following information sets forth the computation of basic and diluted per share net increase in net assets resulting from operations:

 

     Three Months Ended June 30,      Nine Months Ended June 30,  

 

   2015      2014      2015      2014  

Numerator for net increase in net assets resulting from operations

   $ 4,726,777       $ 4,941,774       $   11,289,466       $   18,235,852   

Denominator for basic and diluted weighted average shares

     14,898,056         14,898,056         14,898,056         14,898,056   

Basic and diluted net increase in net assets per share resulting from operations

   $ 0.32       $ 0.33       $ 0.76       $ 1.22   

7. 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 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, 2015 and September 30, 2014, our cash equivalents consisted of money market funds in the amounts of $10.5 million and $13.1 million, respectively.

 

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PENNANTPARK FLOATING RATE CAPITAL LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

JUNE 30, 2015

(Unaudited)

 

8. FINANCIAL HIGHLIGHTS

Below are the financial highlights:

 

     Nine Months Ended June 30,  
     2015        2014  

Per Share Data:

       

Net asset value, beginning of period

   $ 14.40        $ 14.10  

Net investment income (1)

     0.94          0.76  

Net realized and unrealized (loss) gain (1)

     (0.18 )        0.46  
  

 

 

      

 

 

 

Net increase in net assets resulting from operations (1)

     0.76          1.22  

Distributions to stockholders (1), (2)

     (0.83        (0.80
  

 

 

      

 

 

 

Net asset value, end of period

   $ 14.33        $ 14.52  
  

 

 

      

 

 

 

Per share market value, end of period

   $ 13.88        $ 14.29  
  

 

 

      

 

 

 

Total return* (3)

     6.84 %        9.91 %

Shares outstanding at end of period

     14,898,056           14,898,056   
  

 

 

      

 

 

 

Ratios** / Supplemental Data:

       

Ratio of operating expenses to average net assets (4)

     3.72 %        4.69 %

Ratio of Credit Facility related expenses to average net assets (5)

     1.61 %        1.95 %
  

 

 

      

 

 

 

Ratio of total expenses to average net assets (5)

     5.33 %        6.64 %

Ratio of net investment income to average net assets (5)

     8.81 %        7.17 %

Net assets at end of period

   $   213,451,790        $   216,272,066  
  

 

 

      

 

 

 

Weighted average debt outstanding

   $ 131,659,707        $ 146,395,971  
  

 

 

      

 

 

 

Weighted average debt per share (1)

   $ 8.84        $ 9.83  

Asset coverage per unit (6)

   $ 2,524         $ 2,396   

Portfolio turnover ratio

     57.40 %        54.41 %

 

* Not annualized for periods less than one year.
** Annualized for periods less than one year.
(1)  Based on the weighted average shares outstanding for the respective periods.
(2)  The tax status of distributions is calculated in accordance with income tax regulations, which may differ from amounts determined under GAAP, and reported on Form 1099-DIV each calendar year.
(3)  Based on the change in market price per share during the period and takes into account distributions, if any, reinvested in accordance with our dividend reinvestment plan.
(4)  Excludes Credit Facility related costs, if any.
(5)  Credit Facility amendment costs, if any, are not annualized.
(6)  The asset coverage ratio for a class of senior securities representing indebtedness is calculated on our consolidated total assets, less all liabilities and indebtedness not represented by senior securities, divided by the senior securities representing indebtedness. This asset coverage ratio is multiplied by $1,000 to determine the asset coverage per unit.

9. CREDIT FACILITY

Funding I’s multi-currency Credit Facility with affiliates of SunTrust Bank, or the Lender, is $200 million, 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 LIBOR of 200 basis points, a maturity date of May 2018 and a revolving period that ends in May 2016. As of June 30, 2015 and September 30, 2014, Funding I had $139.7 million and $146.4 million of outstanding borrowings under the Credit Facility, respectively, and carried an interest rate of 2.19% and 2.16%, respectively, excluding the 0.375% undrawn commitment fee. The annualized weighted average cost of debt for the nine months ended June 30, 2015 and 2014, inclusive of the fee on the undrawn commitment on the Credit Facility but excluding amendment costs, was 2.48% and 2.36%, respectively.

During the revolving period, the Credit Facility bears interest at LIBOR plus 200 basis points and, after the revolving period, the rate sets to LIBOR plus 425 basis points for the remaining two years, maturing in May 2018. 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, 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. For instance, we must maintain at least $25 million in equity and must maintain an interest coverage ratio of at least 125%. The Credit Facility compliance reporting is prepared on a basis of accounting other than GAAP. As of June 30, 2015, we were in compliance with the covenants relating to our Credit Facility.

We own 100% of the equity interest in Funding I and treat the indebtedness of Funding I as our leverage. In accordance with the 1940 Act, with certain limited exceptions, we are only allowed to borrow amounts such that we are in compliance with our asset coverage ratio after such borrowing. Our Investment Adviser serves as collateral manager to Funding I under the Credit Facility.

 

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PENNANTPARK FLOATING RATE CAPITAL LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

JUNE 30, 2015

(Unaudited)

 

Our interest in Funding I (other than the management fees) 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 Lender, (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.

10. COMMITMENTS AND CONTINGENCIES

From time to time, we, the Investment Adviser or the Administrator may be a party to legal proceedings in the ordinary course of business, 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 investments, if any, are disclosed in the Consolidated Schedule of Investments. As of June 30, 2015 and September 30, 2014, we had $6.3 million and $2.7 million, respectively, in commitments to fund various revolving and delayed draw investments.

11. ACQUISITION OF MCG CAPITAL CORPORATION

On April 29, 2015, PFLT and MCG Capital Corporation (NASDAQ: MCGC), or MCG, announced that we have entered into a definitive agreement, under which we, through our wholly owned subsidiaries, PFLT Panama, LLC and PFLT Funding II, LLC, will acquire MCG in a stock and cash transaction valued at approximately $175 million, or approximately $4.75 per MCG share at closing. MCG stockholders will have the right to receive, per each share of MCG common stock, a number of shares of our common stock equal to $4.521 and $0.226 in cash (subject to an upward adjustment) paid by the Investment Adviser. At a special meeting of our stockholders to be held on August 14, 2015, our stockholders of record at the close of business on July 13, 2015 will be asked to vote on the approval of issuance of our common stock pursuant to the merger. The transaction is expected to close during the third calendar quarter of 2015.

The boards of directors of PFLT and MCG have each unanimously approved the transaction. Our board of directors unanimously recommends that our stockholders vote “FOR” approval of the issuance of our common stock to be issued pursuant to the merger agreement.

The merger will be accounted for by us under the asset acquisition method of accounting in accordance with ASC 805-50, Business Combinations—Related Issues. Under the asset acquisition method of accounting, the acquiring entity is required to fair value the assets and liabilities transferred. The cost of the group of assets acquired in an asset acquisition is allocated to the individual assets acquired or liabilities assumed based on their relative fair values other than “non-qualifying” assets (for example cash or marketable securities) and does not give rise to goodwill. Furthermore, the cost of assets recognized by the acquiring entity generally includes transaction costs incurred as part of the asset acquisition, and no gain or loss is recognized in connection with such transfer.

 

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Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

PennantPark Floating Rate Capital Ltd. and its Subsidiaries:

We have reviewed the accompanying consolidated statement of assets and liabilities of PennantPark Floating Rate Capital Ltd. and its Subsidiaries (the “Company”), including the consolidated schedule of investments, as of June 30, 2015, the consolidated statements of operations for the three and nine months ended June 30, 2015 and 2014, and the consolidated statements of changes in net assets and cash flows for the nine months ended June 30, 2015 and 2014. These consolidated financial statements are the responsibility of the Company’s management.

We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures to financial data 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 Public Company Accounting Oversight Board, 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.

Based on our reviews, we are not aware of any material modifications that should be made to the accompanying consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board, the consolidated statement of assets and liabilities of the Company, including the consolidated schedule of investments, as of September 30, 2014, 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 13, 2014, we expressed an unqualified opinion on those financial statements.

 

/s/ McGladrey LLP
New York, New York
August 6, 2015

 

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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:

 

    our future operating results;

 

    our business prospects and the prospects of our prospective portfolio companies;

 

    the dependence of our future success on the general economy and its impact on the industries in which we invest;

 

    the impact of a protracted decline in the liquidity of credit markets on our business;

 

    the impact of investments that we expect to make;

 

    the impact of fluctuations in interest rates on our business and our portfolio companies;

 

    our contractual arrangements and relationships with third parties;

 

    the valuation of our investments in portfolio companies, particularly those having no liquid trading market;

 

    the ability of our prospective portfolio companies to achieve their objectives;

 

    our expected financings and investments;

 

    the adequacy of our cash resources and working capital;

 

    the timing of cash flows, if any, from the operations of our prospective portfolio companies;

 

    the impact of price and volume fluctuations in the stock markets;

 

    the ability of the Investment Adviser to locate suitable investments for us and to monitor and administer our investments;

 

    the impact of future legislation and regulation on our business and our portfolio companies;

 

    the impact or failure of the proposed acquisition of MCG, including the failure of our stockholders or MCG’s stockholders to approve the proposed merger; and

 

    the impact of European sovereign debt issues.

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 Securities Exchange Act of 1934, as amended, or 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 current income and capital appreciation 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 adjusted returns due to a limited amount of capital available for such companies and the potential for rising interest rates. 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” or “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.

 

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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 senior secured loans, or first lien loans, 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, high yield, mezzanine and distressed debt securities and, to a lesser extent, equity investments. Our investment size may generally range between $1 million and $15 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 Credit Facility, 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 total 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 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 senior secured loans or mezzanine debt, typically have a term of three to ten years and bear interest at a fixed or floating rate. Interest on debt securities is generally payable quarterly or semiannually. In some cases, some of 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 managerial assistance and possibly consulting fees. Loan origination fees, OID and market discount or premium are capitalized, and we accrete or amortize such amounts as income or expense, as applicable, using the effective interest method. We record prepayment penalties on loans and debt securities 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.

Expenses

Our primary operating expenses include the payment of a management fee to our Investment Adviser, 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 under our Credit Facility. We bear all other direct or indirect costs and expenses of our operations and transactions, including:

 

    the cost of calculating our net asset value, including the cost of any third-party valuation services;

 

    the cost of effecting sales and repurchases of shares of our common stock and other securities;

 

    fees payable to third parties relating to, or associated with, making investments, including fees and expenses associated with performing due diligence and reviews of prospective investments or complementary businesses;

 

    expenses incurred by the Investment Adviser in performing due diligence and reviews of investments;

 

    transfer agent and custodial fees;

 

    fees and expenses associated with marketing efforts;

 

    federal and state registration fees and any stock exchange listing fees;

 

    fees and expenses associated with independent audits and outside legal costs;

 

    federal, state and local taxes;

 

    independent directors’ fees and expenses;

 

    brokerage commissions;

 

    fidelity bond, directors and officers, errors and omissions liability insurance and other insurance premiums;

 

    direct costs such as printing, mailing, long distance telephone and staff;

 

    costs associated with our reporting and compliance obligations under the 1940 Act and applicable federal and state securities laws; and

 

    all other expenses incurred by either the Administrator or us in connection with administering our business, including payments under our Administration Agreement that will be based upon 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 and their respective staffs.

 

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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

As of June 30, 2015, our portfolio totaled $358.8 million and consisted of $304.1 million of senior secured loans, $46.3 million of second lien secured debt and $8.4 million of subordinated debt, preferred and common equity. Our debt portfolio consisted of 97% variable-rate investments (including 93% with a LIBOR or prime floor) and 3% fixed-rate investments. Overall, the portfolio had net unrealized depreciation of $3.3 million. Our overall portfolio consisted of 72 companies with an average investment size of $5.0 million, had a weighted average yield on debt investments of 8.3%, and was invested 85% in senior secured loans, 13% in second lien secured debt and 2% in subordinated debt, preferred and common equity.

As of September 30, 2014, our portfolio totaled $348.4 million and consisted of $302.5 million of senior secured loans, $36.5 million of second lien secured debt and $9.4 million of subordinated debt, preferred and common equity. Our debt portfolio consisted of 95% variable-rate investments (including 92% with a LIBOR or prime floor) and 5% fixed-rate investments. As of September 30, 2014, we had one non-accrual debt investment, representing 0.6% of our overall portfolio on a cost basis. Overall, the portfolio had net unrealized appreciation of $0.1 million. Our overall portfolio consisted of 72 companies with an average investment size of $4.8 million, had a weighted average yield on debt investments of 8.2%, and was invested 87% in senior secured loans, 10% in second lien secured debt and 3% in subordinated debt, preferred and common equity.

For the three months ended June 30, 2015, we invested $75.6 million in 12 new and 12 existing portfolio companies with a weighted average yield on debt investments of 6.9%. Sales and repayments of investments for the three months ended June 30, 2015 totaled $53.2 million. For the nine months ended June 30, 2015, we invested $161.0 million in 26 new and 26 existing portfolio companies with a weighted average yield on debt investments of 7.4%. Sales and repayments of investments for the nine months ended June 30, 2015 totaled $146.2 million.

For the three months ended June 30, 2014, we invested $30.6 million in four new and seven existing portfolio companies with a weighted average yield on debt investments of 7.1%. Sales and repayments of investments for the three months ended June 30, 2014 totaled $55.6 million. For the nine months ended June 30, 2014, we invested $185.0 million in 29 new and 25 existing portfolio companies with a weighted average yield on debt investments of 7.8%. Sales and repayments of investments for the nine months ended June 30, 2014 totaled $146.8 million.

CRITICAL ACCOUNTING POLICIES

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 the 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.

Valuation of Portfolio Investments

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, described in this Report, and a consistently applied valuation process. 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.

Our investments generally consist 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:

 

  (1) Our quarterly valuation process begins with each portfolio company or investment being initially valued by the investment professionals of our Investment Adviser responsible for the portfolio investment;

 

  (2) Preliminary valuation conclusions are then documented and discussed with the management of our Investment Adviser;

 

  (3) Our board of directors also engages independent valuation firms to conduct independent appraisals of our investments for which market quotations are not readily available or are readily available but deemed not reflective of the fair value of an investment. The independent valuation firms review management’s preliminary valuations in light of its own independent assessment and also in light of any market quotations obtained from an independent pricing service, broker, dealer or market maker;

 

  (4) The audit committee of our board of directors reviews the preliminary valuations of our Investment Adviser and those of the independent valuation firms on a quarterly basis, periodically assesses the valuation methodologies of the independent valuation firms, and responds to and supplements the valuation recommendations of the independent valuation firms to reflect any comments; and

 

  (5) Our board of directors discusses these valuations and determines the fair value of each investment in our portfolio in good faith based on the input of our Investment Adviser, the respective independent valuation firms and the audit committee.

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.

 

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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 and our Credit Facility are classified as Level 3. 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. A review of fair value hierarchy classifications is conducted on a quarterly basis.

In addition to using the above inputs in cash equivalents, investments and our Credit Facility valuations, 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.

The carrying value of our consolidated financial liabilities approximates fair value. We adopted 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 our Credit Facility. We elected to use the fair value option for our Credit Facility 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 had expenses of $0.2 million relating to amendment fees on the Credit Facility for both the three and nine months ended June 30, 2015. For the same periods in the prior year, we had expenses of zero and $0.7 million, 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 are reported in our Consolidated Statements of Operations. We elected not to apply ASC 825-10 to any other financial assets or liabilities. For the three and nine months ended June 30, 2015, our Credit Facility had a net change in unrealized (appreciation) depreciation of less than $(0.1) million and $0.2 million, respectively. For each of the three and nine months ended June 30, 2014, our Credit Facility had a net change in unrealized appreciation of zero. As of June 30, 2015 and September 30, 2014, the net unrealized appreciation on our Credit Facility totaled $0.3 million and $0.5 million, respectively. We use a nationally recognized independent valuation service to measure the fair value of our Credit Facility in a manner consistent with the valuation process that the board of directors uses to value our investments.

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 collectible. 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. 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.

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 value of our portfolio investments and Credit Facility during the reporting period, including any reversal of previously recorded unrealized appreciation or depreciation, when gains or losses are realized.

Payment-in-Kind Interest or PIK

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. For us to maintain our status as a RIC, substantially all of this income must be paid out to stockholders in the form of distributions, even though we have not collected any cash with respect to interest on PIK securities.

Federal Income Taxes

We have elected to be taxed, and intend to qualify annually to maintain our election to be taxed, as a RIC under Subchapter M of the Code. To maintain our RIC tax election, we must, among other requirements, meet certain source-of-income and quarterly asset diversification requirements. We also must annually distribute at least 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, if any, out of the assets legally available for distribution. 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 during each calendar year an amount at least equal to the sum of (1) 98% of our net ordinary income for the calendar year, (2) 98.2% of the sum of our capital gain net income (i.e., the excess, if any, of capital gains over capital losses) for the one-year period ending on October 31 of the calendar year and (3) the sum of any net ordinary income plus capital gain net income for preceding years that were not distributed during such years. In addition, although we may distribute realized net capital gains (i.e., net long-term capital gains in excess of 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 net ordinary income to provide us with additional liquidity.

 

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Because federal income tax regulations differ from GAAP, distributions in accordance with tax regulations may differ from net investment income and realized gains recognized for financial reporting purposes. Differences may be permanent or temporary. Permanent differences are reclassified among capital accounts in the Consolidated Financial Statements 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.

RESULTS OF OPERATIONS

Set forth below are the results of operations for the three and nine months ended June 30, 2015 and 2014.

Investment Income

Investment income for the three and nine months ended June 30, 2015 was $7.1 million and $22.6 million, respectively, and was attributable to $5.4 million and $17.4 million from senior secured loans and $1.7 million and $5.2 million from second lien secured debt and subordinated debt. This compares to investment income for the three and nine months ended June 30, 2014, which was $7.7 million and $22.1 million, respectively, and was attributable to $6.2 million and $17.9 million from senior secured loans and $1.5 million and $4.2 million from second lien secured debt and subordinated debt. The decrease in investment income for the three months ended June 30, 2015 as compared to the same period in the prior year was due to the timing of deployment of capital during the quarter. The increase in investment income for the nine months ended June 30, 2015 compared to the same period over the prior year was primarily due to a higher yielding portfolio.

Expenses

Expenses for the three and nine months ended June 30, 2015 totaled $3.0 million and $8.5 million, respectively. Base management fee for the same periods totaled $0.9 million and $2.6 million, incentive fee totaled $0.6 million (including zero on net realized gains and $0.1 million on net unrealized gains accrued but not payable) and $1.7 million (including $(0.4) million on net realized gains and $(0.2) million on net unrealized gains accrued but not payable), Credit Facility expenses totaled $1.0 million (including $0.2 million of Credit Facility amendment expenses) and $2.6 million (including $0.2 million of Credit Facility amendment expenses), general and administrative expenses totaled $0.4 million and $1.3 million and excise taxes were $0.1 million and $0.3 million, respectively. This compares to expenses for the three and nine months ended June 30, 2014, which totaled $3.3 million and $10.8 million, respectively. Base management fee for the same periods totaled $1.0 million and $2.8 million, incentive fee totaled $0.8 million (including $0.1 million on net unrealized gains accrued but not payable) and $2.9 million (including $0.6 million on net unrealized gains accrued but not payable), Credit Facility expenses totaled $0.9 million and $3.3 million (including $0.7 million of Credit Facility amendment expenses), general and administrative expenses totaled $0.5 million and $1.4 million and excise taxes were $0.1 million and $0.4 million, respectively. The decrease in expenses compared to the same periods in the prior year was primarily due to a reduction in the accrual of incentive fees on realized and unrealized gains on the portfolio.

Net Investment Income

Net investment income totaled $4.1 million and $14.0 million, or $0.28 and $0.94 per share, for the three and nine months ended June 30, 2015, respectively. Net investment income totaled $4.4 million and $11.3 million, or $0.29 and $0.76 per share, for the three and nine months ended June 30, 2014, respectively. For the three months ended June 30, 2015, net investment income decreased over the same period in the prior year as a result of changes in the yield environment, whereas, for the nine months ended June 30, 2015, net investment income increased over the same period in the prior year due to a higher yielding portfolio, and a reduction in incentive fees on net realized and net unrealized gains on the portfolio.

Net Realized Gains or Losses

Sales and repayments of investments for the three and nine months ended June 30, 2015 totaled $53.2 million and $146.2 million and net realized gains totaled zero and $0.4 million, respectively. Sales and repayments of investments totaled $55.6 million and $146.8 million and realized gains totaled $0.7 million and $1.8 million for the three and nine months ended June 30, 2014, respectively. The change in realized gains compared to the same periods in the prior year was primarily driven by changes in market conditions for our investments.

Unrealized Appreciation or Depreciation on Investments and Credit Facility

For the three and nine months ended June 30, 2015, we reported net unrealized appreciation (depreciation) on investments of $0.7 million and $(3.4) million, respectively. For the three and nine months ended June 30, 2014, we reported net unrealized (depreciation) appreciation on investments of $(0.1) million and $5.1 million, respectively. As of June 30, 2015 and September 30, 2014, net unrealized (depreciation) appreciation on investments totaled $(3.3) million and $0.1 million, respectively. The change in net unrealized appreciation (depreciation) compared to the same periods in the prior year was primarily the result of the overall variation in the leveraged finance markets.

For the three and nine months ended June 30, 2015, our Credit Facility had an unrealized depreciation of zero and $0.2 million, respectively. For each of the three and nine months ended June 30, 2014, our Credit Facility had an unrealized appreciation of zero. As of June 30, 2015 and September 30, 2014, net unrealized appreciation on our Credit Facility totaled $0.3 million and $0.5 million, respectively. The change in net unrealized appreciation compared to the same period in the prior year was primarily due to changes in the capital markets.

Net Change in Net Assets Resulting from Operations

Net change in net assets resulting from operations totaled $4.7 million and $11.3 million, or $0.32 and $0.76 per share, respectively, for the three and nine months ended June 30, 2015. This compares to a net change in net assets resulting from operations which totaled $4.9 million and $18.2 million, or $0.33 and $1.22 per share, respectively, for the three and nine months ended June 30, 2014. The decrease in the net change in net assets from operations compared to the same periods in the prior year reflects the change in portfolio investment valuation during the reporting period.

 

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LIQUIDITY AND CAPITAL RESOURCES

Our liquidity and capital resources are derived from public offerings, our Credit Facility, cash flows from operations, including investment sales and repayments, and income earned. 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 Credit Facility, the rotation of our portfolio and proceeds from public and private offerings of securities to finance our investment objectives.

Funding I’s multi-currency Credit Facility with affiliates of SunTrust Bank, or the Lender, is $200 million, 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 LIBOR of 200 basis points, a maturity date of May 2018 and a revolving period that ends in May 2016. As of June 30, 2015 and September 30, 2014, Funding I had $139.7 million and $146.4 million of outstanding borrowings under the Credit Facility, respectively, and carried an interest rate of 2.19% and 2.16%, respectively, excluding the 0.375% undrawn commitment fee. The annualized weighted average cost of debt for the nine months ended June 30, 2015 and 2014, inclusive of the fee on the undrawn commitment on the Credit Facility but excluding amendment costs, was 2.48% and 2.36%, respectively. As of June 30, 2015 and September 30, 2014, we had $60.3 million and $53.6 million of unused borrowing capacity, respectively, subject to the regulatory restrictions that the 1940 Act imposes on us as a BDC.

During the revolving period, the Credit Facility bears interest at LIBOR plus 200 basis points and, after the revolving period, the rate sets to LIBOR plus 425 basis points for the remaining two years, maturing in May 2018. 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. For instance, we must maintain at least $25 million in equity and must maintain an interest coverage ratio of at least 125%. The Credit Facility compliance reporting is prepared on a basis of accounting other than GAAP. As of June 30, 2015, we were in compliance with the covenants relating to our Credit Facility.

We own 100% of the equity interest in Funding I and will treat the indebtedness of Funding I as our leverage. In accordance with the 1940 Act, with certain limited exceptions, we are only allowed to borrow amounts such that we are in compliance with our asset coverage ratio after such borrowing. 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 (1) all required cash interest and, if applicable, principal payments to the Lender, (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.

We may raise equity or debt capital through both registered offerings and private offerings of securities and by securitizing a portion of our investments among other considerations. Furthermore, our 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.

On June 30, 2015 and September 30, 2014, we had cash equivalents of $10.5 million and $13.1 million, respectively, available for investing and general corporate purposes. We believe our liquidity and capital resources are sufficient to take advantage of market opportunities.

Our operating activities provided cash of $16.4 million for the nine months ended June 30, 2015, and our financing activities used cash of $19.0 million for the same period. Our operating activities provided cash primarily from sales and repayments on our investment activities and our financing activities used cash primarily from net repayments under the Credit Facility.

Our operating activities used cash of $37.9 million for the nine months ended June 30, 2014, and our financing activities provided cash of $43.3 million for the same period. Our operating activities used cash primarily for our investment activities and our financing activities provided cash primarily from net draws under the Credit Facility.

Acquisition of MCG Capital Corporation

On April 29, 2015, PFLT and MCG Capital Corporation (NASDAQ: MCGC), or MCG, announced that we have entered into a definitive agreement, under which we, through our wholly owned subsidiaries, PFLT Panama, LLC and PFLT Funding II, LLC, will acquire MCG in a stock and cash transaction valued at approximately $175 million, or approximately $4.75 per MCG share at closing. MCG stockholders will have the right to receive, per each share of MCG common stock, a number of shares of our common stock equal to $4.521 and $0.226 in cash (subject to an upward adjustment) paid by the Investment Adviser. At a special meeting of our stockholders to be held on August 14, 2015, our stockholders of record at the close of business on July 13, 2015 will be asked to vote on the approval of issuance of our common stock pursuant to the merger. The transaction is expected to close during the third calendar quarter of 2015.

The boards of directors of PFLT and MCG have each unanimously approved the transaction. Our board of directors unanimously recommends that our stockholders vote “FOR” approval of the issuance of our common stock to be issued pursuant to the merger agreement.

The merger will be accounted for by us under the asset acquisition method of accounting in accordance with ASC 805-50, Business Combinations—Related Issues. Under the asset acquisition method of accounting, the acquiring entity is required to fair value the assets and liabilities transferred. The cost of the group of assets acquired in an asset acquisition is allocated to the individual assets acquired or liabilities assumed based on their relative fair values other than “non-qualifying” assets (for example cash or marketable securities) and does not give rise to goodwill. Furthermore, the cost of assets recognized by the acquiring entity generally includes transaction costs incurred as part of the asset acquisition, and no gain or loss is recognized in connection with such transfer.

 

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Contractual Obligations

A summary of our significant contractual payment obligations as of June 30, 2015, including borrowings under our Credit Facility and other contractual obligations, is as follows:

 

     Payments due by period (millions)  
             Total                  Less than    
1 year
     1-3
        years        
     3-5
        years        
         More than    
5 years
 

Credit Facility

   $ 139.7       $ —         $ 139.7      $ —         $ —     

Unfunded investments (1)

     6.3         —           3.2         3.1         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total contractual obligations

   $ 146.0       $ —         $ 142.9       $ 3.1       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)  Unfunded investments are disclosed in the Consolidated Schedule of Investments.

We have entered into certain contracts under which we have material future commitments. Under our Investment Management Agreement, which 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 2015, 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 equal to a percentage of the value of our gross assets and (2) an incentive fee based on our performance.

Under our Administration Agreement, which was reapproved by our board of directors, including a majority of our directors who are not interested persons of us, in February 2015, the Administrator furnishes us with office facilities and administrative services necessary to conduct our day-to-day operations. If requested to provide 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 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.

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 qualify as a RIC and to not be subject to corporate-level tax on income, we are required, under Subchapter M of the Code, to annually distribute at least 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, if any, out of the assets legally available for distribution. 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 during each calendar year an amount at least equal to the sum of (1) 98% of our net ordinary income for the calendar year, (2) 98.2% of our capital gain net income (i.e., the excess, if any, of capital gains over capital losses) for the one-year period ending on October 31 of the calendar year and (3) the sum of any net ordinary income plus capital gain net income for preceding years that were not distributed during such years. In addition, although we may distribute realized net capital gains (i.e., net long-term capital gains in excess of 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 net ordinary income to provide us with additional liquidity.

During the three and nine months ended June 30, 2015, we declared distributions of $0.285 and $0.830 per share, respectively, for total distributions of $4.2 million and $12.3 million, respectively. For the same periods in the prior year, we declared distributions of $0.270 and $0.808 per share, respectively, for total distributions of $4.0 million and $12.0 million, respectively. We monitor available net investment income to determine if a tax return of capital 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, a portion of those distributions may be deemed to be a tax return of capital to our common stockholders. Tax characteristics of distributions will be reported to stockholders on Form 1099-DIV after the end of the 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 maintain an “opt out” dividend reinvestment plan for our common stockholders. As a result, if we declare a distribution, then stockholders’ cash distributions will be automatically reinvested in additional shares of our common stock, unless they specifically “opt out” of the dividend reinvestment plan so as to receive cash distributions.

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 test 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 a certain percentage of our income annually, we will suffer adverse tax consequences, including possible loss of RIC status. We cannot assure stockholders that they will receive any distributions at a particular level.

We may distribute our common stock as a dividend of our taxable income and a stockholder could receive a portion of the dividends declared and distributed by us in shares of our common stock with the remaining amount in cash. A stockholder will be considered to have recognized dividend income equal to the fair market value of the stock paid by us plus cash received with respect to such dividend. We have not elected to distribute stock as a dividend but reserve the right to do so.

Recent Accounting Pronouncements

In April 2015, the Financial Accounting Standards Board issued Accounting Standards Update 2015-03, Interest — Imputation of Interest (Subtopic 835-30) — Simplifying the Presentation of Debt Issuance Costs. The update requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. Public companies are required to apply ASU 2015-03 retrospectively for interim and annual reporting periods beginning after December 15, 2015. Accordingly, we have evaluated ASU 2015-03 and anticipate no impact on our consolidated financial statements and disclosures.

 

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Item 3. Quantitative And Qualitative Disclosures About Market Risk

We are subject to financial market risks, including changes in interest rates. As of June 30, 2015, our debt portfolio consisted of 97% variable-rate investments (including 93% with a LIBOR or prime floor) and 3% fixed-rate investments. The variable-rate loans are usually based on a LIBOR 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.

Assuming that the most recent statement 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)
                Per Share              
Up 1%   $ (1,308   $ (0.09
Up 2%   $ 607      $ 0.04   
Up 3%   $ 2,734      $ 0.18   
Up 4%   $ 4,862      $ 0.33   

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 fluctuations by using standard hedging instruments such as futures, options and forward contracts subject to the requirements of the 1940 Act and applicable commodities laws. While hedging activities may insulate us against adverse changes in interest rates, they may also limit our ability to participate in the benefits of lower interest rates with respect to our portfolio of investments with fixed interest rates. During the periods covered by this Report, we did not engage in interest rate hedging activities.

 

Item 4. Controls and Procedures

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) of the Exchange Act). Based on that evaluation, our management, including the Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures 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.

There have been no changes in our internal control over financial reporting that occurred during the quarter ended June 30, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings

Neither we nor our Investment Adviser nor 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 our Administrator may be a party to certain legal proceedings in the ordinary course of business, 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.

 

Item 1A. Risk Factors

In addition to the other information set forth in this Report, you should consider carefully the factors discussed in Part I “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended September 30, 2014 and in “Risk Factors” in our Registration Statement on Form N-14, as amended, which could materially affect our business, financial condition and/or operating results. The risks described in our Annual Report on Form 10-K and in our Registration Statement on Form N-14 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.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

 

Item 3. Defaults Upon Senior Securities

None.

 

Item 4. Mine Safety Disclosures

Not Applicable.

 

Item 5. Other Information

None.

 

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Item 6. Exhibits

Unless specifically indicated otherwise, the following exhibits are incorporated by reference to exhibits previously filed with the SEC:

 

  2.1    Agreement and Plan of Merger (Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 814-00891), filed on April 29, 2015).
  3.1    Articles of Amendment and Restatement of the Registrant (Incorporated by reference 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    Amended and Restated Bylaws of the Registrant (Incorporated by reference to the Registrant’s Annual Report on Form 10-K (File No. 814-00891), filed on November 14, 2013).
  4.1    Form of Share Certificate (Incorporated by reference 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).
10.1 *    Third Amended and Restated Revolving Credit and Security Agreement, dated as of May 22, 2015, among PennantPark Floating Rate Funding I, LLC, as borrower, PennantPark Investment Advisers, LLC, as collateral manager, the lenders from time to time parties thereto, SunTrust Bank, as administrative agent, and U.S. Bank National Association, as collateral agent, as backup collateral manager, and as custodian.
11    Computation of Per Share Earnings (included in the notes to the Consolidated Financial Statements contained in this Report).
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 the Registrant’s Annual Report on Form 10-K (File No. 814-00891),

filed on November 17, 2011).

 

* Filed herewith.

 

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SIGNATURES

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.

 

  PENNANTPARK FLOATING RATE CAPITAL LTD.
Date: August 6, 2015   By:  

/s/    Arthur H. Penn        

    Arthur H. Penn
    Chief Executive Officer and Chairman of the Board of Directors (Principal Executive Officer)
Date: August 6, 2015   By:  

/s/    Aviv Efrat        

    Aviv Efrat
   

Chief Financial Officer and Treasurer

(Principal Financial and Accounting Officer)

 

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