497
Table of Contents

Filed Pursuant to Rule 497
File No. 333-215111

 

Prospectus Supplement

To the Prospectus dated January 19, 2017

 

LOGO

5,000,000 Shares

Common Stock

$13.62 Per Share

We are offering for sale 5,000,000 shares of our common stock. Our common stock is traded on the NASDAQ Global Select Market under the symbol “PFLT.” The last reported closing sale price for our common stock on February 13, 2017 was $14.01 per share. The net asset value of our common stock on December 31, 2016 was $14.11 per share.

PennantPark Floating Rate Capital Ltd., a Maryland corporation, is a closed-end, externally managed, non-diversified investment company that has elected to be treated as a business development company under the Investment Company Act of 1940, as amended.

Our investment objectives are to generate current income and capital appreciation while seeking to preserve capital by investing primarily in loans bearing a variable-rate of interest, or Floating Rate Loans, and other investments made to U.S. middle-market companies. 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 the London Interbank Offered Rate, or LIBOR, with or without a floor plus a fixed spread. We can offer no assurances that we will achieve our investment objectives.

We are managed by PennantPark Investment Advisers, LLC. PennantPark Investment Administration, LLC provides the administrative services necessary for us to operate.

This prospectus supplement and the accompanying prospectus contain important information you should know before investing in our securities. Please read them before you invest in our securities and keep them for future reference. We file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission, or the SEC. You may also obtain such information free of charge or make stockholder inquiries by contacting us in writing at 590 Madison Avenue, New York, NY 10022, by calling us collect at (212) 905-1000 or by visiting our website at www.pennantpark.com. The information on our website is not incorporated by reference into this prospectus supplement or the accompanying prospectus. The SEC also maintains a website at www.sec.gov that contains such information free of charge.

 

 

Investing in our securities involves a high degree of risk, including the risk of leverage. Before buying any shares of our common stock, you should read the discussion of the material risks of investing in us in “Risk Factors” beginning on page 8 of the accompanying prospectus.

Neither the SEC nor any state securities commission has approved or disapproved of these securities or determined if this prospectus supplement or the accompanying prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

     Per Share      Total  

Public offering price

   $ 13.6200       $ 68,100,000   

Underwriting discounts and commissions (sales load) (1)

   $ —         $ —     

Additional supplemental payment to the underwriters by PennantPark Investment Advisers, LLC(2)

   $ 0.4646       $ 2,323,000   

Proceeds to PennantPark Floating Rate Capital, Ltd. (before estimated expenses of $470,000)

   $ 14.0846       $ 70,423,000   

 

(1) PennantPark Investment Advisers, LLC has agreed to pay all of the underwriting commissions to the underwriters of approximately $2.0 million, or $0.41 per share (or approximately $2.3 million, or $0.41 per share if the option to purchase additional shares is fully exercised) in connection with this offering, which amount is not reflected in the above table. All other expenses of the offering will be borne by us.
(2) PennantPark Investment Advisers, LLC has agreed to pay the underwriters an additional supplemental payment of approximately $2.3 million, or $0.46 per share (or approximately $2.7 million, or $0.46 per share if the option to purchase additional shares is fully exercised), which reflects the difference between the offering price and the proceeds per share received by us in this offering.

 

 

The underwriters may also purchase up to an additional 750,000 shares from us at the public offering price, within 30 days from the date of this prospectus supplement. If the underwriters exercise this option in full, the total public offering price will be approximately $78.3 million, the underwriting commissions (sales load) paid by PennantPark Investment Advisers, LLC will be approximately $2.3 million, the additional supplemental payment to the underwriters paid by PennantPark Investment Advisers, LLC will be approximately $2.7 million and our total proceeds, before estimated expenses, will be approximately $81.0 million.

The underwriters expect to deliver the shares on or about February 17, 2017.

 

 

Joint Bookrunners

Morgan Stanley   Goldman, Sachs & Co.   J.P. Morgan   Keefe, Bruyette & Woods   RBC Capital Markets   SunTrust Robinson Humphrey
                                           A Stifel Company    

Co-Managers

 

Comerica Securities   Janney Montgomery Scott   JMP Securities   Ladenburg Thalmann   Maxim Group LLC

The date of this prospectus supplement is February 14, 2017.


Table of Contents

You should rely only on the information contained in this prospectus supplement and the accompanying prospectus when considering whether to purchase any securities offered by this prospectus supplement. We have not authorized anyone to provide you with additional information, or information different from that contained in this prospectus supplement and the accompanying prospectus. If anyone provides you with different or additional information, you should not rely on it. We are offering to sell, and seeking offers to buy, securities only in jurisdictions where offers are permitted. The information contained in or incorporated by reference in this prospectus supplement and the accompanying prospectus is accurate only as of the date of this prospectus supplement and the accompanying prospectus. Our business, financial condition, results of operations and prospects may have changed since then. We will update these documents to reflect material changes only as required by law.

TABLE OF CONTENTS

PROSPECTUS SUPPLEMENT

 

SUPPLEMENTAL PROSPECTUS SUMMARY

     S-1   

FEES AND EXPENSES

     S-6   

FORWARD-LOOKING STATEMENTS

     S-8   

USE OF PROCEEDS

     S-9   

CAPITALIZATION

     S-10   

PRICE RANGE OF COMMON STOCK

     S-11   

SELECTED FINANCIAL DATA

     S-12   

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     S-14   

UNDERWRITING

     S-23   

LEGAL MATTERS

     S-27   

INDEX TO FINANCIAL STATEMENTS

     S-28   

PROSPECTUS

 

     Page  

PROSPECTUS SUMMARY

     1   

FEES AND EXPENSES

     6   

RISK FACTORS

     8   

FORWARD-LOOKING STATEMENTS

     31   

USE OF PROCEEDS

     32   

SELECTED FINANCIAL DATA

     33   

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     35   

SENIOR SECURITIES

     47   

PRICE RANGE OF COMMON STOCK

     48   

SALES OF COMMON STOCK BELOW NET ASSET VALUE

     49   

DISTRIBUTIONS

     54   

BUSINESS

     56   

INVESTMENT OBJECTIVES AND POLICIES

     60   

PORTFOLIO COMPANIES

     66   

MANAGEMENT

     74   

CONTROL PERSONS AND PRINCIPAL STOCKHOLDERS

     80   

CERTAIN RELATIONSHIPS AND TRANSACTIONS

     82   

DETERMINATION OF NET ASSET VALUE

     88   

DIVIDEND REINVESTMENT PLAN

     90   

DESCRIPTION OF OUR CAPITAL STOCK

     91   

DESCRIPTION OF OUR PREFERRED STOCK

     96   

DESCRIPTION OF OUR WARRANTS

     97   

DESCRIPTION OF OUR SUBSCRIPTION RIGHTS

     98   

DESCRIPTION OF OUR DEBT SECURITIES

     99   

REGULATION

     110   

BROKERAGE ALLOCATIONS AND OTHER PRACTICES

     114   

MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS

     115   

PLAN OF DISTRIBUTION

     121   

SUB-ADMINISTRATOR, CUSTODIAN, TRANSFER AGENT AND TRUSTEE

     122   

LEGAL MATTERS

     122   

INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

     122   

INDEX TO FINANCIAL STATEMENTS

     F-1   


Table of Contents

SUPPLEMENTAL PROSPECTUS SUMMARY

This summary highlights some of the information in this prospectus supplement and the accompanying prospectus. It is not complete and may not contain all of the information that you may want to consider in making an investment decision. References to our portfolio, our investments and our business include investments we make through our consolidated subsidiaries. Some of the statements in this prospectus supplement and accompanying prospectus constitute forward-looking statements, which apply to both us and our consolidated subsidiaries, as applicable, and relate to future events, future performance or future financial condition. The forward-looking statements involve risks and uncertainties on a consolidated basis and actual results could differ materially from those projected in the forward-looking statements for many reasons, including those factors discussed in “Risk Factors” and elsewhere in this prospectus supplement and accompanying prospectus. You should read carefully the more detailed information set forth under “Risk Factors” and the other information included in this prospectus supplement and accompanying prospectus. In this prospectus supplement and the accompanying prospectus except where the context suggests otherwise: the terms “we,” “us,” “our” and “Company” refer to PennantPark Floating Rate Capital Ltd. and its wholly-owned consolidated subsidiaries; “Funding I” refers to PennantPark Floating Rate Funding I, LLC; “Taxable Subsidiary” refers to PFLT Investment Holdings, LLC; “PennantPark Investment Advisers” or “Investment Adviser” refers to PennantPark Investment Advisers, LLC; “PennantPark Investment Administration” or “Administrator” refers to PennantPark Investment Administration, LLC; “Code” refers to the Internal Revenue Code of 1986, as amended; “RIC” refers to a regulated investment company under the Code; “1940 Act” refers to the Investment Company Act of 1940, as amended; “BDC” refers to a business development company under the 1940 Act; “MCG” refers to MCG Capital Corporation; and “Credit Facility” refers to our multi-currency senior secured revolving credit facility, as amended and restated with SunTrust Bank and other lenders, or the Lenders.

General Business of PennantPark Floating Rate Capital Ltd.

PennantPark Floating Rate Capital Ltd. is a BDC whose objectives are to generate current income and capital appreciation while seeking to preserve capital by investing primarily in Floating Rate Loans and other investments made to U.S. middle-market companies.

We believe that Floating Rate Loans to U.S. middle-market companies offer attractive risk-reward to investors due to a limited amount of capital available for such companies 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 geographic regions.

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. We generally expect that senior secured debt, 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 mezzanine securities and, to a lesser extent, equity investments. We seek to create a diversified portfolio by generally targeting an investment size between $3 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. For a description of our Credit Facility, please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations— Liquidity and Capital Resources.”

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 have elected to be treated, and intend to qualify annually, as a RIC under the Code.

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.

 

S-1


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In August 2015, we completed the acquisition of MCG pursuant to the Agreement and Plan of Merger, or the Merger Agreement, by and among MCG, our Investment Adviser and the Company. As a result of the transactions completed by the Merger Agreement, MCG was ultimately merged with and into PFLT Funding II, LLC with PFLT Funding II, LLC as the surviving company.

Our Investment Adviser and Administrator

We utilize the investing experience and contacts of PennantPark Investment Advisers in developing what we believe is an attractive and diversified portfolio. The senior investment professionals of the Investment Adviser have worked together for many years and average over 25 years of experience in the senior lending, mezzanine lending, leveraged finance, distressed debt and private equity businesses. In addition, our senior investment professionals have been involved in originating, structuring, negotiating, managing and monitoring investments in each of these businesses across changing economic and market cycles. We believe this experience and history has resulted in a strong reputation with financial sponsors, management teams, investment bankers, attorneys and accountants, which provides us with access to substantial investment opportunities across the capital markets. Our Investment Adviser has a rigorous investment approach, which is based upon intensive financial analysis with a focus on capital preservation, diversification and active management. Since our Investment Adviser’s inception in 2007, it has raised about $3.0 billion in debt and equity capital and has invested $6.0 billion in 430 companies with over 170 different financial sponsors through its managed funds.

Our Administrator has experienced professionals with substantial backgrounds in finance and administration of registered investment companies. In addition to furnishing us with clerical, bookkeeping and record keeping services, the Administrator also oversees our financial records as well as the preparation of our reports to stockholders and reports filed with the SEC. The Administrator assists in the determination and publication of our net asset value, or NAV, oversees the preparation and filing of our tax returns, and monitors the payment of our expenses as well as the performance of administrative and professional services rendered to us by others. Furthermore, our Administrator provides, on our behalf, managerial assistance to those portfolio companies to which we are required to offer such assistance. See “Risk Factors—Risks Relating to our Business and Structure—There are significant potential conflicts of interest which could impact our investment returns” in the accompanying prospectus for more information.

Market Opportunity

We believe that the limited amount of capital available to the middle-market companies, coupled with the desire of these companies for flexible sources of capital, creates an attractive investment environment for us.

 

    We believe middle-market companies have faced difficulty in raising debt through the capital markets. Many middle-market companies look to raise funds by issuing high-yield bonds. We believe this approach to financing becomes difficult at times when institutional investors seek to invest in larger, more liquid offerings. We believe this has made it harder for middle-market companies to raise funds by issuing high-yield securities from time to time.

 

    We believe middle-market companies have faced difficulty raising debt in private markets. From time to time, banks, finance companies, hedge funds and collateralized loan obligation, or CLO, funds have withdrawn, and may again withdraw, capital from the middle-market, resulting in opportunities for alternative funding sources.

 

    We believe that credit market dislocation for middle-market companies improves the risk-reward on our investments. From time to time, market participants have reduced lending to middle-market and non-investment grade borrowers. As a result, we believe there is less competition in our market, more conservative capital structures, higher yields and stronger covenants.

 

    We believe there is a large pool of uninvested private equity capital likely to seek to combine their capital with sources of debt capital to complete private investments. We expect that private equity firms will continue to be active investors in middle-market companies. These private equity funds generally seek to leverage their investments by combining their capital with senior secured debt and/or mezzanine debt provided by other sources, and we believe that our capital is well-positioned to partner with such equity investors.

 

    We believe there is substantial supply of opportunities resulting from maturing loans that seek refinancing. A high volume of financings will come due in the next few years. Additionally, we believe that demand for debt financing from middle-market companies will remain strong because these companies will continue to require credit to refinance existing debt, to support growth initiatives and to finance acquisitions. We believe the combination of strong demand by middle-market companies and from time to time the reduced supply of credit described above should increase lending opportunities for us. We believe this supply of opportunities coupled with a lack of demand offers attractive risk-reward to investors.

 

S-2


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Competitive Advantages

We believe that we have the following competitive advantages over other capital providers to middle-market companies:

a. Experienced Management Team

The senior investment professionals of our Investment Adviser have worked together for many years and average over 25 years of experience in senior lending, mezzanine lending, leveraged finance, distressed debt and private equity businesses. These senior investment professionals have been involved in originating, structuring, negotiating, managing and monitoring investments in each of these businesses across changing economic and market cycles. We believe this extensive experience and history has resulted in a strong reputation across the capital markets.

Lending to middle-market companies requires in-depth diligence, credit expertise, restructuring experience and active portfolio management. For example, lending to middle-market companies in the United States is generally more labor intensive than lending to larger companies due to the smaller size of each investment and the fragmented nature of the information available with respect to such companies. We are able to provide value-added customized solutions to middle-market companies as a result of specialized due diligence, underwriting capabilities and more extensive ongoing monitoring required as lenders.

b. Disciplined Investment Approach with Strong Value Orientation

We employ a disciplined approach in selecting investments that meet the long-standing, consistent value-oriented investment selection criteria employed by our Investment Adviser. Our value-oriented investment philosophy focuses on preserving capital and ensuring that our investments have an appropriate return profile in relation to risk. When market conditions make it difficult for us to invest according to our criteria, we are highly selective in deploying our capital. We believe this approach continues to enable us to build an attractive investment portfolio that meets our return and value criteria over the long-term.

We believe it is critical to conduct extensive due diligence on investment targets. In evaluating new investments we, through our Investment Adviser, conduct a rigorous due diligence process that draws from our Investment Adviser’s experience, industry expertise and network of contacts. Among other things, our due diligence is designed to ensure that each prospective portfolio company will be able to meet its debt service obligations. See “Investment Objectives and Policies—Investment Selection Criteria” in the accompanying prospectus for more information.

In addition to engaging in extensive due diligence, our Investment Adviser seeks to reduce risk by focusing on businesses with:

 

    strong competitive positions;

 

    positive cash flow that is steady and stable;

 

    experienced management teams with strong track records;

 

    potential for growth and viable exit strategies; and

 

    capital structures offering appropriate risk-adjusted terms and covenants.

c. Ability to Source and Evaluate Transactions through our Investment Adviser’s Research Capability and Established Network

The management team of the Investment Adviser has long-term relationships with financial sponsors, management consultants and management teams that we believe enable us to evaluate investment opportunities effectively in numerous industries, as well as provide us access to substantial information concerning those industries. We identify potential investments both through active origination and through dialogue with numerous financial sponsors, management teams, members of the financial community and corporate partners with whom the professionals of our Investment Adviser have long-term relationships.

d. Flexible Transaction Structuring

We are flexible in structuring investments and tailor investments to meet the needs of a portfolio company while also generating attractive risk-adjusted returns. We can invest in all parts of a capital structure and our Investment Adviser has extensive experience in a wide variety of securities for leveraged companies throughout economic and market cycles.

Our Investment Adviser seeks to minimize the risk of capital loss without foregoing potential for capital appreciation. In making investment decisions, we seek to invest in companies that we believe can generate consistent positive risk-adjusted returns.

We believe that the in-depth experience of our Investment Adviser will enable us to invest throughout various stages of the economic and market cycles and to provide us with ongoing market insights in addition to a significant investment opportunity.

 

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Competition

Our primary competitors provide financing to middle-market companies and include other BDCs, commercial and investment banks, commercial finance companies, CLO funds and, to the extent they provide an alternative form of financing, private equity funds. Additionally, alternative investment vehicles, such as hedge funds, frequently invest in middle-market companies. As a result, competition for investment opportunities in middle-market companies can be intense. However, we believe that from time to time there has been a reduction in the amount of debt capital available to middle-market companies, which we believe has resulted in a less competitive environment for making new investments.

Many of our competitors are substantially larger and have considerably greater financial, technical and marketing resources than we do. For example, we believe some competitors have a lower cost of funds and access to funding sources that are not available to us. In addition, some of our competitors have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of investments and establish more relationships than us. Furthermore, many of our competitors are not subject to the regulatory restrictions that the 1940 Act imposes on us as a BDC. See “Risk Factors—Risks Relating to our Business and Structure—We operate in a highly competitive market for investment opportunities” in the accompanying prospectus for more information.

Leverage

As of December 31, 2016 and September 30, 2016, we maintained a $350 million Credit Facility, which matures in August 2020, with the Lenders. During the Credit Facility’s revolving period, which extends to August 2018, it 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. The Credit Facility is secured by all of the assets held by Funding I, under which we had $299.3 million and $232.9 million outstanding as of December 31, 2016 and September 30, 2016, respectively. The Credit Facility had an interest rate of 2.74% and 2.57%, as of December 31, 2016 and September 30, 2016, respectively, excluding the undrawn commitment fees of 0.375%. The annualized weighted average cost of debt for the three months ended December 31, 2016 and 2015, inclusive of the fee on the undrawn commitment on the Credit Facility but excluding amendment costs, was 2.91% and 5.95%, respectively. As of December 31, 2016 and September 30, 2016, we had $50.7 million and $117.1 million of unused borrowing capacity under our Credit Facility, respectively, subject to the regulatory restrictions. We believe that our capital resources provide us with the flexibility to take advantage of market opportunities when they arise. Our use of leverage, as calculated under the asset coverage ratio of the 1940 Act, may generally range between 70% and 90% of our net assets, or 40% to 50% of our Managed Assets. We cannot assure investors that our leverage will remain within the range. The amount of leverage that we employ will depend on our assessment of the market and other factors at the time of any proposed borrowing. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this prospectus supplement and in the accompanying prospectus for more information.

Operating and Regulatory Structure

Our investment activities are managed by PennantPark Investment Advisers. 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. Under our investment management agreement, or the Investment Management Agreement, we have agreed to pay our Investment Adviser an annual base management fee based on our average adjusted gross assets as well as an incentive fee based on our investment performance. See “Certain Relationships and Transactions—Investment Management Agreement” in the accompanying prospectus for more information.

We have also entered into an administration agreement, or the 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. See “Certain Relationships and Transactions—Administration Agreement” in the accompanying prospectus for more information.

As a BDC, we are required to comply with certain regulatory requirements. Also, while we are permitted to finance investments using debt, our ability to use debt is limited in certain significant respects. See “Regulation” in the accompanying prospectus for more information. We have elected to be treated, and intend to qualify annually to maintain our election to be treated, as a RIC under Subchapter M of the Code. See “Material U.S. Federal Income Tax Considerations” in the accompanying prospectus for more information.

Use of Proceeds

We may use the net proceeds from selling securities pursuant to this prospectus supplement to reduce outstanding debt obligations, to invest in new or existing portfolio companies, to capitalize a subsidiary or for other general corporate or strategic purposes. See “Use of Proceeds” in this prospectus supplement for information regarding our outstanding borrowings as of December 31, 2016, the corresponding interest rate charged on such borrowings as of that date and the length of time that it may take us to invest any proceeds in new or existing portfolio companies.

 

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Distributions on Common Stock

We intend to continue making monthly distributions to our stockholders. Our monthly distributions, if any, are ratified by the board of directors. See “Distributions” in the accompanying prospectus and “Price Range of Common Stock” in this prospectus supplement for more information.

Dividend Reinvestment Plan

We have adopted an “opt-out” dividend reinvestment plan that provides for reinvestment of our distributions on behalf of our stockholders unless a stockholder elects to receive cash. As a result, if our board of directors authorizes, and we declare, a cash distribution, then our stockholders who have not ‘opted out’ of our dividend reinvestment plan will have their cash distributions automatically reinvested in additional shares of our common stock rather than receiving the cash distribution. Registered stockholders must notify our transfer agent in writing if they wish to ‘opt-out’ of the dividend reinvestment plan. See “Dividend Reinvestment Plan” in the accompanying prospectus for more information.

Our Corporate Information

Our administrative and principal executive offices are located at 590 Madison Avenue, 15th Floor, New York, NY 10022. Our common stock is quoted on the NASDAQ Global Select Market under the symbol “PFLT.” Our phone number is (212) 905-1000, and our Internet website address is www.pennantpark.com. Information contained on our website is not incorporated by reference into this prospectus supplement or the accompanying prospectus, and you should not consider information contained on our website to be part of this prospectus supplement or accompanying prospectus. We file periodic reports, proxy statements and other information with the SEC and make such reports available on our website free of charge as soon as reasonably practicable. You may read and copy the materials that we file with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an internet site at www.sec.gov that contains material that we file with the SEC on the EDGAR Database.

 

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FEES AND EXPENSES

The following table will assist you in understanding the various costs and expenses that an investor in shares of our common stock will bear directly or indirectly. However, we caution you that some of the percentages indicated in the table below are estimates and may vary from actual results. The following table should not be considered a representation of our future expenses. Actual expenses may be greater or less than amounts shown below. Except where the context suggests otherwise, whenever this prospectus supplement and the accompanying prospectus contains a reference to fees or expenses paid by “you” or “us” or that “we” will pay, stockholders will indirectly bear such fees or expenses as investors in us.

 

Stockholder transaction expenses (as a percentage of offering price)

  

Sales load

     —   %(1) 

Offering expenses

     0.69 %(2) 
  

 

 

 

Total stockholder expenses

     0.69

Estimated annual expenses (as a percentage of average net assets attributable to common shares) (3)

  

Management fees

     1.62 %(4) 

Incentive fees

     1.47 %(5) 

Interest on borrowed funds

     1.80 %(6) 

Other expenses

     0.94 %(7) 
  

 

 

 

Total estimated annual expenses

     5.83 %(8) 

 

(1) Our Investment Adviser has agreed to pay all of the underwriting discounts and commissions (sales load), which is not reflected in the above table. We are not obligated to repay the sales load paid by our Investment Adviser.
(2) Amount reflects the estimated offering costs of $470,000 and is based on the offering of 5,000,000 shares in this offering at the offering price of $13.62 per share.
(3) Net assets attributable to common shares equals average net assets as of December 31, 2016, plus net proceeds anticipated from this offering but excluding the underwriters’ option to purchase additional shares.
(4) The contractual management fee is calculated at an annual rate of 1.00% of our average adjusted gross assets. See “Certain Relationships and Transactions—Investment Management Agreement” in the accompanying prospectus for more information.
(5) The portion of incentive fees paid with respect to net investment income and capital gain, if any, is based on actual amounts incurred during the three months ended December 31, 2016, annualized for a full year. Such incentive fees are based on performance, vary from period to period and are not paid unless our performance exceeds specified thresholds. Incentive fees in respect of net investment income do not include incentive fees in respect of net capital gains. The portion of our incentive fee paid in respect of net capital gains 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 20.0% 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 purposes of this chart and our Consolidated Financial Statements, our incentive fees on capital gains are calculated in accordance with U.S. generally accepted accounting principles, or GAAP. As we cannot predict our future net investment income or capital gains, the incentive fee paid in future years, if any, may be substantially different than the fee earned during the three months ended December 31, 2016. See “Certain Relationships and Transactions—Investment Management Agreement” in the accompanying prospectus for more information.
(6) As of December 31, 2016, we had $50.7 million unused borrowing capacity, subject to maintenance of the applicable total assets to debt ratio, under the 1940 Act, and $299.3 million in borrowings outstanding under our $350 million Credit Facility. We may use the net proceeds of this offering to repay outstanding obligations under our Credit Facility. After completing this offering, we may continue to borrow under our Credit Facility to finance our investment objectives. We have estimated the annual interest expense on borrowed funds and caution you that our actual interest expense will depend on prevailing interest rates and our rate of borrowing, which may be substantially higher than the estimate provided in this table. See “Risk Factors—Risks Relating To Our Business and Structure—We currently use borrowed funds to make investments and are exposed to the typical risks associated with leverage” in the accompanying prospectus for more information.
(7) “Other expenses” includes our general and administrative expenses, professional fees, directors’ fees, insurance costs, expenses of our dividend reinvestment plan, the expenses of the Investment Adviser reimbursable under our Investment Management Agreement and of the Administrator reimbursable under our Administration Agreement. Such expenses are based on actual other expenses for the three months ended December 31, 2016 annualized for a full year. See the Consolidated Statement of Operations in our Consolidated Financial Statements in this prospectus supplement and in the accompanying prospectus for more information.
(8) “Total estimated annual expenses” as a percentage of average net assets attributable to common shares, to the extent we borrow money to make investments, will be higher than the total annual expenses percentage for a company that is not leveraged. We may borrow money to leverage our net assets and increase our total assets. The SEC requires that the “total estimated annual expenses” percentage be calculated as a percentage of net assets (defined as total assets less liabilities) rather than total assets, which include assets that have been funded with borrowed money.

 

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Example

The following example illustrates the projected dollar amount of total cumulative expenses that you would pay on a $1,000 hypothetical investment in common shares, assuming (1) no sales load (underwriting discounts and commissions) (see note 1 above) and included offering expenses totaling 0.69%, (2) total net estimated annual expenses of 4.36% of average net assets attributable to common shares as set forth in the table above (other than performance-based incentive fees) and (3) a 5% annual return:

 

You would pay the following expenses on a $1,000 common stock investment

   1 Year      3 Years      5 Years      10 Years  

Assuming a 5% annual return (assumes no return from net realized capital gains or net unrealized capital appreciation)

   $ 50       $ 138       $ 227       $ 454   

Assuming a 5% annual return (assumes return from only realized capital gains and thus subject to the capital gains incentive fee)

   $ 60       $ 166       $ 271       $ 530   

This example and the expenses in the table above should not be considered a representation of our future expenses. Actual expenses may be greater or less than those assumed. The table above is to assist you in understanding the various costs and expenses that an investor in our common stock will bear directly or indirectly. While the example assumes, as required by the SEC, a 5% annual return, our performance will vary and may result in a return greater or less than 5%. If we were to earn an annual return equal to or less than 5% from net investment income, the incentive fee under our Investment Management Agreement would not be earned or payable. If our returns on our investments, including the realized capital gains, result in an incentive fee, then our expenses would be higher. The example assumes that all distributions are reinvested at NAV. Reinvestment of distributions under our dividend reinvestment plan may occur at a price per share that differs from NAV. See “Distributions” and “Dividend Reinvestment Plan” in the accompanying prospectus for more information.

 

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FORWARD-LOOKING STATEMENTS

This prospectus supplement 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 prospectus supplement 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 our 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; and

 

    the impact of European sovereign debt, Brexit and other world economic and political 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 set forth in the accompanying prospectus under “Risk Factors” and elsewhere in this prospectus supplement and the accompanying prospectus.

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 prospectus supplement 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 prospectus supplement on information available to us on the date of this prospectus supplement, 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 prospectus supplement, 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-K/Q and current reports on Form 8-K.

You should understand that under Section 27A(b)(2)(B) of the Securities Act of 1933, as amended, or 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 connection with any offering of securities pursuant to this prospectus supplement or in periodic reports we file under the Exchange Act.

 

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USE OF PROCEEDS

We estimate that net proceeds we will receive from the sale of 5,000,000 shares of our common stock in this offering will be approximately $70.0 million (or approximately $80.5 million if the underwriters fully exercise their option to purchase additional shares), in each case based on proceeds to us of approximately $13.99 per share, representing a public offering price of approximately $13.62 per share, including the additional supplemental payment of approximately $0.46 per share that the Investment Adviser has agreed to pay to the underwriters which reflects the difference between the public offering price and the proceeds per share received by us in this offering, and also including estimated offering expenses of $470,000 payable by us, but excluding the underwriting commissions of approximately $2.0 million (or approximately $2.3 million if the underwriters fully exercise their option to purchase additional shares). The Investment Adviser has agreed to pay all of the underwriting discounts and commissions in connection with this offering.

We expect to use the net proceeds from selling securities pursuant to this prospectus supplement to reduce outstanding obligations under our Credit Facility, to invest in new or existing portfolio companies, to capitalize a subsidiary or for other general corporate or strategic purposes. Affiliates of certain of the underwriters serve as lenders under our Credit Facility and thereby may receive proceeds from this offering that are used to reduce our outstanding obligations under our Credit Facility.

As of December 31, 2016, we had $50.7 million of unused borrowing capacity, subject to maintenance of the applicable total assets to debt ratio, as set forth in the 1940 Act, and $299.3 million in borrowings outstanding under our $350 million Credit Facility. Borrowings under our Credit Facility bear interest at an annual rate equal to LIBOR plus 200 basis points per annum during the revolving period, and the rate resets to LIBOR plus 425 points per annum for the remaining two years. At December 31, 2016, the interest rate on the Credit Facility was 2.74%, excluding the undrawn commitment fee of 0.375%. The Credit Facility is a revolving facility maturing in August 2020 and is secured by all of the assets of Funding I. Amounts repaid under our Credit Facility remain available for future borrowings during the revolving period. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this prospectus supplement and the accompanying prospectus for more information.

We may invest the proceeds from an offering of securities in new or existing portfolio companies, and such investments may take up to a year from the closing of such offering, in part because privately negotiated investments in illiquid securities or private middle-market companies require substantial due diligence and structuring. During this period, we may use the net proceeds from our offering to reduce then-outstanding obligations under our Credit Facility or to invest such proceeds in cash equivalents, U.S. government securities and other high-quality debt investments that mature in one year or less. We expect to earn yields on such investments, if any, that are lower than the interest income that we anticipate receiving in respect of investments in non-temporary investments. As a result, any distributions we make during this investment period may be lower than the distributions that we would expect to pay when such proceeds are fully invested in non-temporary investments. See “Regulation—Temporary Investments” in the accompanying prospectus for more information.

 

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CAPITALIZATION

The following table sets forth our cash and capitalization on December 31, 2016 (1) on an actual basis and (2) on an as-adjusted basis to reflect the effects of the sale of 5,000,000 shares of common stock in this offering based on proceeds to us of approximately $13.99 per share, representing a public offering price of approximately $13.62 per share, including the additional supplemental payment of approximately $0.46 per share that the Investment Adviser has agreed to pay to the underwriters which reflects the difference between the public offering price and the proceeds per share received by us in this offering, and also including estimated offering expenses of $470,000 payable by us, but excluding the underwriting discounts and commissions of approximately $2.0 million. The as-adjusted information is illustrative only; our capitalization following the completion of this offering is subject to further adjustments. You should read this table together with “Use of Proceeds” set forth in this prospectus supplement and in the accompanying prospectus for more information. You should also read this table with our Consolidated Financial Statements and related notes thereto, in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this prospectus supplement and in the accompanying prospectus for more information.

 

     As of December 31, 2016
(unaudited)
 
     Actual      As-adjusted for
the offering  (1)
 

Cash and cash equivalents

   $ 24,203,565       $ 94,156,565   

Total assets

     696,607,247         766,560,247   

Borrowings under the Credit Facility (cost—$299,309,500)

     299,859,712         299,859,712   

Stockholders’ Equity

     

Common stock, 26,730,074 and 31,730,074 shares, as-adjusted, are issued and outstanding, respectively. Par value is $0.001 per share and 100,000,000 shares are authorized.

     26,730         31,730   

Paid in capital in excess of par value

     371,194,366         441,142,366   

Undistributed net investment income

     3,763,272         3,763,272   

Accumulated net realized loss on investments

     (827,387 )      (827,387

Net unrealized appreciation on investments

     3,530,897         3,530,897   

Net unrealized appreciation on Credit Facility

     (550,212      (550,212
  

 

 

    

 

 

 

Total net assets

     377,137,666         447,090,666   

Total capitalization

   $ 676,997,378       $ 746,950,378   

 

(1) Does not include the underwriters’ option to purchase additional shares in connection with this offering and any shares issued pursuant to our dividend reinvestment plan. Assumes the net proceeds from this offering are invested in cash and cash equivalents.

 

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PRICE RANGE OF COMMON STOCK

Our common stock is traded on the NASDAQ Global Select Market under the symbol “PFLT.” The following table lists the high and low closing sale price for our common stock, the closing sale prices as a premium or (discount) to our NAV per share and distributions per quarter per share since October 1, 2014. On February 13, 2017, the last reported closing sale price of our common stock was $14.01 per share.

 

     NAV (1)      Closing Sales Price      Premium / (Discount)
of High Sales

Price to NAV (2)
    Premium / (Discount)
of Low Sales

Price to NAV (2)
    Distributions
Declared
 
              

Period

      High      Low         

Fiscal Year Ending September 30, 2017

               

Second quarter (through February 13, 2017)

   $ N/A       $ 14.17       $ 13.99         N/A     N/A   $ 0.1900 (3) 

First quarter

     14.11         14.17         12.44         —          (12     0.2850   

Fiscal Year Ended September 30, 2016

               

Fourth quarter

     14.06         13.26         12.54         (6     (11 )     0.2850   

Third quarter

     13.75         12.51         11.58         (9 )     (16 )     0.2850   

Second quarter

     13.54         11.70         10.09         (14 )     (25 )     0.2850   

First quarter

     13.73         12.42         10.79         (10 )     (21 )     0.2850   

Fiscal Year Ended September 30, 2015

               

Fourth quarter

     13.95         14.30         11.35         3        (19 )     0.2850   

Third quarter

     14.33         14.48         13.88         1        (3     0.2850   

Second quarter

     14.30         14.16         13.25         (1 )     (7 )     0.2750   

First quarter

     14.16         14.23         12.98         —          (8 )     0.2700   

 

(1) NAV per share is determined as of the last day in the relevant quarter and therefore may not reflect the NAV per share on the date of the high and low sales prices. The NAVs shown are based on outstanding shares at the end of each period. See “Determination of Net Asset Value” in the accompanying prospectus for more information.
(2) Calculated as of the respective high or low closing sales price less NAV per share, divided by the quarter-end NAV per share.
(3) Includes a distribution of $0.0950 per share payable on March 1, 2017 to stockholders of record on February 17, 2017. Investors in this offering will be entitled to this distribution.

Shares of BDCs may trade at a market price both above and below the NAV that is attributable to those shares. Our shares have traded above and below our NAV. Our shares closed on the NASDAQ Global Select Market at $14.11 and $13.23 on December 31, 2016 and September 30, 2016, respectively. Our NAV per share was $14.11 and $14.06 for the same periods. The possibility that our shares of common stock will trade at a discount from NAV or at a premium that is unsustainable over the long term is separate and distinct from the risk that our NAV will decrease. It is not possible to predict whether our shares will trade at, above or below our NAV in the future.

 

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SELECTED FINANCIAL DATA

We have derived the data below from our audited and unaudited financial data. The Consolidated Statement of Operations data, Per share data, Consolidated Statement of Assets and Liabilities data and Total returns data presented are derived from our audited and unaudited Consolidated Financial Statements. These selected financial data should be read in conjunction with our Consolidated Financial Statements and related notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in both this prospectus supplement and the accompanying prospectus.

 

     (unaudited)
For the Three Months
Ended December 31,
    (audited)
For the Years Ended September 30,
 
     2016     2015     2016     2015     2014     2013     2012  
                                      
(Dollar amounts in thousands, except per share data)                                           

Consolidated Statement of Operations data:

              

Total investment income

   $ 12,631      $ 8,756      $ 46,301      $ 30,355      $ 30,357      $ 18,867      $ 12,099   

Total expenses

     5,809        3,670        18,965        12,695        13,721        8,344        5,789   

Net investment income

     6,822        5,086        27,336        17,660        16,636        10,523        6,310   

Net realized and unrealized gain (loss)

     2,027        (3,339     6,153        (5,156     3,878        1,461        5,651   

Net increase in net assets resulting from operations

     8,849        1,747        33,489        12,504        20,514        11,985        11,961   

Per share data:

        

Net asset value

     14.11        13.73        14.06        13.95        14.40        14.10        13.98   

Net investment income (1)

     0.26        0.19        1.02        1.08        1.12        1.10        0.92   

Net realized and unrealized gain (loss) (1)

     0.07        (0.12     0.23        (0.31     0.26        0.15        0.83   

Net increase in net assets resulting from operations (1)

     0.33        0.07        1.25        0.77        1.38        1.25        1.75   

Distributions declared (1),(2)

     0.28        0.29        1.14        1.16        1.08        1.05        0.91   

Consolidated Statements of Assets and Liabilities data:

          

Total assets

     696,607        477,856        631,420        416,120        372,874        328,802        178,367   

Total investment portfolio

     656,869        460,066        598,888        391,312        348,428        317,804        171,834   

Credit Facility payable (3)

     299,860        95,698        232,389        29,600        146,949        99,600        75,123   

Total net asset value

     377,138        367,019        375,907        372,890        214,528        210,066        95,744   

Other data:

        

Total return (4)

     8.90     (3.48 )%      21.77     (6.01 )%      8.05     17.17 %     29.43

Number of portfolio companies (5)

     98        83        98        76        72        83        61   

Yield on debt portfolio (5)

     7.9     8.2     7.8 %     7.9     8.2     8.1 %     8.6

 

(1) Based on the weighted average shares outstanding for the respective periods.
(2) The tax status of our distributions is calculated in accordance with income tax regulations, which may differ from amounts determined under GAAP and is reported on Form 1099-DIV each calendar year.
(3) At fair value.
(4) Not annualized for periods of less than a year. Based on change in market price per share during the periods and takes into account distributions, if any, reinvested in accordance with our dividend reinvestment plan.
(5) Unaudited.

 

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Selected Quarterly Data (Unaudited)

(dollar amounts in thousands, except per share data)

 

     2017  
     Q1  

Total investment income

   $ 12,631   

Net investment income

   $ 6,822   

Net realized and unrealized gain

   $ 2,027   

Net increase in net assets resulting from operations

   $ 8,849   

Net increase in net assets resulting from operations per common share*

   $ 0.33   

Net asset value per share at the end of the quarter

   $ 14.11   

Market value per share at the end of the quarter

   $ 14.11   

 

     2016  
     Q4      Q3      Q2      Q1  

Total investment income

   $ 15,396       $ 10,803       $ 11,346       $ 8,756   

Net investment income

   $ 8,155       $ 6,830       $ 7,265       $ 5,086   

Net realized and unrealized gain (loss)

   $ 7,732       $ 6,589       $ (4,829    $ (3,339

Net increase in net assets resulting from operations

   $ 15,887       $ 13,419       $ 2,436       $ 1,747   

Net increase in net assets resulting from operations per common share*

   $ 0.59       $ 0.50       $ 0.09       $ 0.07   

Net asset value per share at the end of the quarter

   $ 14.06       $ 13.75       $ 13.54       $ 13.73   

Market value per share at the end of the quarter

   $ 13.23       $ 12.40       $ 11.70       $ 11.25   
     2015  
     Q4      Q3      Q2      Q1  

Total investment income

   $ 7,791       $ 7,104       $ 7,983       $ 7,477   

Net investment income

   $ 3,639       $ 4,097       $ 4,456       $ 5,468   

Net realized and unrealized (loss) gain

   $ (2,424 )    $ 630       $ 1,668       $ (5,030 )

Net increase in net assets resulting from operations

   $ 1,215       $ 4,727       $ 6,124       $ 438   

Net increase in net assets resulting from operations per common share*

   $ 0.06       $ 0.32       $ 0.41       $ 0.03   

Net asset value per share at the end of the quarter

   $ 13.95       $ 14.33       $ 14.30       $ 14.16   

Market value per share at the end of the quarter

   $ 11.94       $ 13.88       $ 14.03       $ 13.73   
     2014  
     Q4      Q3      Q2      Q1  

Total investment income

   $ 8,221       $ 7,669       $ 7,623       $ 6,844   

Net investment income

   $ 5,320       $ 4,363       $ 3,725       $ 3,228   

Net realized and unrealized (loss) gain

   $ (3,043    $ 579       $ 3,513       $ 2,829   

Net increase in net assets resulting from operations

   $ 2,278       $ 4,942       $ 7,237       $ 6,057   

Net increase in net assets resulting from operations per common share*

   $ 0.15       $ 0.33       $ 0.49       $ 0.41   

Net asset value per share at the end of the quarter

   $ 14.40       $ 14.52       $ 14.46       $ 14.24   

Market value per share at the end of the quarter

   $ 13.78       $ 14.29       $ 13.82       $ 13.73   

* Based on weighted average shares outstanding for the respective periods.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

PennantPark Floating Rate Capital Ltd. is a BDC whose objectives are to generate current income and capital appreciation while seeking to preserve capital by investing primarily in Floating Rate Loans and other investments made to U.S. middle-market companies.

We believe that Floating Rate Loans to U.S. middle-market companies offer attractive risk-reward to investors due to a limited amount of capital available for such companies 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.

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 debt, 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 mezzanine debt and, to a lesser extent, equity investments. We seek to create a diversified portfolio by generally targeting an investment size between $3 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 debt 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, our investments provide for deferred interest payments or payment-in-kind, 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, original issue discount, or OID, market discount or premium are capitalized and accreted or amortized using the effective interest method as interest income or, in the case of deferred financing costs, as interest expense. 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.

 

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Expenses

Our primary operating expenses include the payment of a management fee and the payment of an incentive fee to our Investment Adviser, if any, our allocable portion of overhead under our Administration Agreement and other operating costs as detailed below. Our management fee compensates our Investment Adviser for its work in identifying, evaluating, negotiating, consummating and monitoring our investments. Additionally, we pay interest expense on the outstanding debt and unused commitment fees on undrawn amounts, under our Credit Facility. We bear all other direct or indirect costs and expenses of our operations and transactions, including:

 

    the cost of calculating our NAV, 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, local taxes and foreign 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.

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 December 31, 2016, our portfolio totaled $656.9 million and consisted of $600.1 million of senior secured debt, $36.9 million of second lien secured debt and $19.9 million of subordinated debt, preferred and common equity. Our debt portfolio consisted of 98% variable-rate investments (including 95% with a floor) and 2% fixed-rate investments. As of December 31, 2016, we had no companies on non-accrual. Overall, the portfolio had net unrealized appreciation of $3.5 million. Our overall portfolio consisted of 98 companies with an average investment size of $6.7 million, had a weighted average yield on debt investments of 7.9%, and was invested 91% in senior secured debt, 6% in second lien secured debt and 3% in subordinated debt, preferred and common equity.

As of September 30, 2016, our portfolio totaled $598.9 million and consisted of $548.4 million of senior secured debt, $36.6 million of second lien secured debt and $13.9 million of subordinated debt, preferred and common equity. Our debt portfolio consisted of 99% variable-rate investments (including 94% with a floor) and 1% fixed-rate investments. As of September 30, 2016, we had one company on non-accrual, representing 0.2% and 0.1% of our overall portfolio on a cost and fair value basis, respectively. Overall, the portfolio had net unrealized appreciation of $1.0 million. Our overall portfolio consisted of 98 companies with an average investment size of $6.1 million, had a weighted average yield on debt investments of 7.8%, and was invested 92% in senior secured debt, 6% in second lien secured debt and 2% in subordinated debt, preferred and common equity.

 

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For the three months ended December 31, 2016, we invested $124.8 million in 12 new and 13 existing portfolio companies with a weighted average yield on debt investments of 7.6%. Sales and repayments of investments for the three months ended December 31, 2016 totaled $70.4 million.

For the three months ended December 31, 2015, we invested $99.2 million in ten new and five existing portfolio companies with a weighted average yield on debt investments of 8.4%. Sales and repayments of investments for the three months ended December 31, 2015 totaled $26.9 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 Accounting Standards Codification, 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. In addition to the discussion below, we describe our critical accounting policies in the notes to our Consolidated Financial Statements.

Investment Valuations

We expect that there may not be readily available market values for many of the investments which are or will be in our portfolio, and we value such investments at fair value as determined in good faith by or under the direction of our board of directors using a documented valuation policy and a consistently applied valuation process, as described in this prospectus supplement. 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 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 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 our 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 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.

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 zero and $0.9 million, respectively, relating to amendment fees on the Credit Facility during the three months ended December 31, 2016 and 2015. 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 months ended December 31, 2016 and 2015, our Credit Facility had a net change in unrealized (appreciation) depreciation of $(1.1) million and $0.6 million, respectively. As of December 31, 2016 and September 30, 2016, the net unrealized (appreciation) depreciation on our Credit Facility totaled $(0.6) 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 or, in the case of deferred financing costs, as interest expense. We record prepayment penalties on loans and debt investments as income. Dividend income, if any, is recognized on an accrual basis on the ex-dividend date to the extent that we expect to collect such amounts.

Net Realized Gains or Losses and Net Change in Unrealized Appreciation or Depreciation

We measure realized gains or losses by the difference between the net proceeds from the repayment or sale and the amortized cost basis of the investment, using the specific identification method, without regard to unrealized appreciation or depreciation previously recognized, but considering unamortized upfront fees and prepayment penalties. Net change in unrealized appreciation or depreciation reflects the change in the fair values of our portfolio investments and Credit Facility during the reporting period, including any reversal of previously recorded unrealized appreciation or depreciation, when gains or losses are realized.

 

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Foreign Currency Translation

Our books and records are maintained in U.S. dollars. Any foreign currency amounts are translated into U.S. dollars on the following basis:

1. Fair value of investment securities, other assets and liabilities—at the exchange rates prevailing at the end of the applicable period; and

2. Purchases and sales of investment securities, income and expenses—at the exchange rates prevailing on the respective dates of such transactions.

Although net assets and fair values are presented based on the applicable foreign exchange rates described above, we do not isolate that portion of the results of operations due to changes in foreign exchange rates on investments, other assets and debt from the fluctuations arising from changes in fair values of investments and liabilities held. Such fluctuations are included with the net realized and unrealized gain or loss from investments and liabilities.

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. In order for us to maintain our ability to be treated as a RIC for federal income tax purposes, substantially all of this income must be paid out to stockholders in the form of dividends for U.S. federal income tax purposes, even though we have not collected any cash with respect to interest on PIK securities.

Federal Income Taxes

We have elected to be treated, and intend to qualify annually to maintain our election to be treated, as a RIC under Subchapter M of the Code. To maintain our RIC tax election, we must, among other requirements, meet certain annual source-of-income and quarterly asset diversification requirements. We also must annually distribute dividends for U.S. federal income tax purposes to our stockholders out of the assets legally available for distribution of an amount generally at least equal to 90% of the sum of our net ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, or investment company taxable income, determined without regard to any deduction for dividends paid.

Although not required for us to maintain our RIC tax status, in order to preclude the imposition of a 4% nondeductible federal excise tax imposed on RICs, we must distribute dividends for U.S. federal income tax purposes to our stockholders in respect of each calendar year of an amount at least equal to the sum of (1) 98% of our net ordinary income (subject to certain deferrals and elections) for the calendar year, (2) 98.2% of the excess, if any, of our capital gains over our capital losses, or capital gain net income (adjusted for certain ordinary losses) for the one-year period ending on October 31 of the calendar year plus (3) the sum of any net ordinary income plus capital gain net income for preceding years that was not distributed during such years and on which we did not incur any federal income tax. In addition, although we may distribute realized net capital gains (i.e., net long-term capital gains in excess of net short-term capital losses), if any, at least annually, out of the assets legally available for such distributions in the manner described above, we have retained and may continue to retain such net capital gains or investment company taxable income, contingent on maintaining our ability to be subject to tax as a RIC, in order to provide us with additional liquidity.

Because federal income tax regulations differ from GAAP, distributions in accordance with tax regulations may differ from net investment income and net realized gain recognized for financial reporting purposes. Differences between tax regulations and GAAP may be permanent or temporary. Permanent differences are reclassified among capital accounts in the Consolidated Financial Statements to reflect their appropriate tax character. Temporary differences arise when certain items of income, expense, gain or loss are recognized at some time in the future.

We have formed and expect to continue to form certain taxable subsidiaries, including the Taxable Subsidiary, which are subject to tax as corporations. The Taxable Subsidiary allows us to hold equity securities of certain portfolio companies treated as pass-through entities for U.S. federal income tax purposes while allowing us to maintain our ability to qualify as a RIC under the Code.

RESULTS OF OPERATIONS

Set forth below are the results of operations for the three months ended December 31, 2016 and 2015.

Investment Income

Investment income for the three months ended December 31, 2016 was $12.6 million and was attributable to $11.2 million from senior secured debt and $1.4 million from second lien secured debt and subordinated debt, respectively. Investment income for the three months ended December 31, 2015 was $8.8 million and was attributable to $7.3 million from senior secured debt and $1.5 million from second lien secured debt and subordinated debt, respectively. The increase in investment income compared to the same period in the prior year was primarily due to the growth of our portfolio.

 

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Expenses

Expenses for the three months ended December 31, 2016 totaled $5.8 million. Base management fee for the same period totaled $1.6 million, incentive fee totaled $1.5 million (including $0.6 million on unrealized gains accrued but not payable), Credit Facility expenses totaled $1.8 million and general and administrative expenses totaled $0.9 million. Expenses for the three months ended December 31, 2015 totaled $3.7 million. Base management fee for the same period totaled $1.1 million, incentive fee totaled zero, Credit Facility expenses totaled $1.8 million (including $0.9 million of Credit Facility amendment expenses) and general and administrative expenses totaled $0.8 million. The increase in expenses compared with the same period in the prior year was primarily due to increases in base management and incentive fees as a result of the growth of our portfolio.

Net Investment Income

Net investment income totaled $6.8 million, or $0.26 per share, for the three months ended December 31, 2016, and $5.1 million, or $0.19 per share, for the three months ended December 31, 2015. The increase in net investment income compared to the same period in the prior year was primarily due to the growth of our portfolio.

Net Realized Gains or Losses

Sales and repayments of investments for the three months ended December 31, 2016 totaled $70.4 million and realized gains totaled $0.5 million. Sales and repayments of investments totaled $26.9 million and realized losses totaled $3.2 million for the three months ended December 31, 2015. The change in realized gains/losses was primarily due to changes in the market conditions of our investments and the values at which they were realized.

Unrealized Appreciation or Depreciation on Investments and Credit Facility

For the three months ended December 31, 2016 and 2015, we reported net unrealized appreciation (depreciation) on investments of $2.5 million and $(0.7) million, respectively. As of December 31, 2016 and September 30, 2016, our net unrealized appreciation on investments totaled $3.5 million and $1.0 million, respectively. The net change in unrealized appreciation on our investments was driven primarily by changes in capital market conditions, the financial performance of certain portfolio companies and the reversal of unrealized depreciation (appreciation) on investments that were sold.

For the three months ended December 31, 2016 and 2015, we reported net unrealized (appreciation) depreciation on our Credit Facility of $(1.1) million and $0.6 million, respectively. The change 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 $8.8 million, or $0.33 per share, for the three months ended December 31, 2016. This compares to a net change in net assets resulting from operations of $1.7 million, or $0.07 per share, for the three months ended December 31, 2015. The increase in the net change in net assets from operations compared to the same period in the prior year reflects the change in portfolio investment valuation during the reporting period and the change in net realized losses during the current period.

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 the Lenders was $350.0 million as of December 31, 2016, 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 August 2020 and a revolving period that ends in August 2018. As of December 31, 2016 and September 30, 2016, Funding I had $299.3 million and $232.9 million of outstanding borrowings under the Credit Facility, respectively. The Credit Facility had an interest rate of 2.74% and 2.57%, as of December 31, 2016 and September 30, 2016, respectively, excluding the undrawn commitment fees of 0.375%. The annualized weighted average cost of debt for the three months ended December 31, 2016 and 2015, inclusive of the fee on the undrawn commitment on the Credit Facility but excluding amendment costs, was 2.91% and 5.95%, respectively. As of December 31, 2016 and September 30, 2016, we had $50.7 million and $117.1 million of unused borrowing capacity under our Credit Facility, respectively, subject to the regulatory restrictions.

 

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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 August 2020. 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 December 31, 2016, 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.

Our interest in Funding I (other than the management fee) is subordinate in priority of payment to every other obligation of Funding I and is subject to certain payment restrictions set forth in the Credit Facility. We may receive cash distributions on our equity interests in Funding I only after it has made (1) all required cash interest and, if applicable, principal payments to the Lenders, (2) required administrative expenses and (3) claims of other unsecured creditors of Funding I. We cannot assure you that there will be sufficient funds available to make any distributions to us or that such distributions will meet our expectations from Funding I. The Investment Adviser has irrevocably directed that the management fee owed with respect to such services is to be paid to the Company so long as the Investment Adviser remains the collateral manager.

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

At December 31, 2016 and September 30, 2016, we had cash equivalents of $24.2 million and $28.9 million, respectively, available for investing and general corporate purposes. We believe our liquidity and capital resources are sufficient to take advantage of market opportunities.

Our operating activities used cash of $63.5 million for the three months ended December 31, 2016, and our financing activities provided cash of $58.8 million for the same period. Our operating activities used cash primarily for our investment activities and our financing activities provided cash primarily from net borrowings under the Credit Facility.

Our operating activities used cash of $66.5 million for the three months ended December 31, 2015, and our financing activities provided cash of $59.1 million for the same period. Our operating activities used cash primarily for our investment activities and our financing activities provided cash primarily from net borrowings under the Credit Facility.

Contractual Obligations

A summary of our significant contractual payment obligations at cost as of December 31, 2016, 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

   $ 299.3       $ —         $ —         $ 299.3       $ —     

Unfunded investments (1)

     34.2         —           3.9         17.7         12.6   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total contractual obligations

   $ 333.5       $ —         $ 3.9       $ 317.0       $ 12.6   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Unfunded investments are disclosed in the Consolidated Schedule of Investments and Note 10 of our Consolidated Financial Statements.

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 2017, 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.

 

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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 2017, 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 be treated as a RIC for federal income tax purposes and to not be subject to corporate-level tax on undistributed income or gains, we are required, under Subchapter M of the Code, to annually distribute dividends for U.S. federal income tax purposes to our stockholders out of the assets legally available for distribution of an amount generally at least equal to 90% of our investment company taxable income, determined without regard to any deduction for dividends paid.

Although not required for us to maintain our RIC tax status, in order to preclude the imposition of a 4% nondeductible federal excise tax imposed on RICs, we must distribute dividends for U.S. federal income tax purposes to our stockholders in respect of each calendar year of an amount at least equal to the sum of (1) 98% of our net ordinary income (subject to certain deferrals and elections) for the calendar year, (2) 98.2% of the excess, if any, of our capital gains over our capital losses, or capital gain net income (adjusted for certain ordinary losses) for the one-year period ending on October 31 of the calendar year plus (3) the sum of any net ordinary income plus capital gain net income for preceding years that was not distributed during such years and on which we did not incur any federal income tax. In addition, although we may distribute realized net capital gains (i.e., net long-term capital gains in excess of net short-term capital losses), if any, at least annually, out of the assets legally available for such distributions in the manner described above, we have retained and may continue to retain such net capital gains or investment company taxable income, contingent on maintaining our ability to be subject to tax as a RIC, in order to provide us with additional liquidity.

During the three months ended December 31, 2016 and 2015, we declared distributions of $0.285 and $0.285 per share, respectively, for total distributions of $7.6 million and $7.6 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, common stockholders will be notified of the portion of those distributions deemed to be a tax return of capital. Tax characteristics of all distributions will be reported to stockholders subject to information reporting on Form 1099-DIV after the end of 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 ratified by the 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 ratio for borrowings applicable to us as a BDC under the 1940 Act and/or 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 our ability to be subject to tax as a RIC. We cannot assure stockholders that they will receive any distributions at a particular level.

 

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Quantitative And Qualitative Disclosures About Market Risk

We are subject to financial market risks, including changes in interest rates. As of December 31, 2016, our debt portfolio consisted of 98% variable-rate investments (including 95% with a floor) and 2% 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 since it has no floor.

Assuming that the most recent Consolidated Statements of Assets and Liabilities was to remain constant, and no actions were taken to alter the existing interest rate sensitivity, the following table shows the annualized impact of hypothetical base rate changes in interest rates:

 

Change In Interest Rates

   Change In Interest Income,
Net Of Interest Expense
(In Thousands)
     Change In Interest Income,
Net Of Interest Expense
Per Share
 

Up 1%

   $ 1,435       $ 0.05   

Up 2%

   $ 4,916       $ 0.18   

Up 3%

   $ 8,397       $ 0.31   

Up 4%

   $ 11,878       $ 0.44   

Although management believes that this measure is indicative of our sensitivity to interest rate changes, it does not adjust for potential changes in the credit market, credit quality, size and composition of the assets on the Consolidated Statements of Assets and Liabilities and other business developments that could affect net increase in net assets resulting from operations or net investment income. Accordingly, no assurances can be given that actual results would not differ materially from those shown above.

Because we borrow money to make investments, our net investment income is dependent upon the difference between the rate at which we borrow funds and the rate at which we invest these funds, as well as our level of leverage. As a result, there can be no assurance that a significant change in market interest rates will not have a material adverse effect on our net investment income or net assets.

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

 

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UNDERWRITING

We intend to offer the shares through the underwriters named in the table below. Morgan Stanley & Co. LLC, Goldman, Sachs & Co., J.P. Morgan Securities LLC, Keefe, Bruyette & Woods, Inc., RBC Capital Markets, LLC and SunTrust Robinson Humphrey, Inc. are acting as joint bookrunners and representatives of the several underwriters. Subject to the terms and conditions described in an underwriting agreement among us and the underwriters, we have agreed to sell to the underwriters, and each underwriter has severally agreed to purchase from us, the number of shares set forth opposite the underwriter’s name.

 

Underwriter Names

   Number of
Shares
 

Morgan Stanley & Co. LLC

     1,650,000   

Goldman, Sachs & Co.

     575,000   

J.P. Morgan Securities LLC

     575,000   

Keefe, Bruyette & Woods, Inc.

     575,000   

RBC Capital Markets, LLC

     575,000   

SunTrust Robinson Humphrey, Inc.

     550,000   

Comerica Securities, Inc.

     100,000   

Janney Montgomery Scott LLC

     100,000   

JMP Securities LLC

     100,000   

Ladenburg Thalmann & Co. Inc.

     100,000   

Maxim Group LLC

     100,000   
  

 

 

 

Total

     5,000,000   
  

 

 

 

The underwriting agreement provides that the obligations of the underwriters to purchase the shares included in this offering are subject to certain conditions precedent, including the absence of any material adverse change in our business and the receipt of certain certificates, opinions and letters from us, our counsel and our independent registered public accounting firm. The underwriters are committed to purchase all shares included in this offering, other than those shares covered by the option to purchase additional shares described below, if they purchase any of the shares. The underwriters reserve the right to withdraw, cancel or modify offers to the public and to reject orders in whole or in part.

We have agreed to indemnify the several underwriters against certain liabilities, including liabilities under the Securities Act, or to contribute to payments the underwriters may be required to make in respect of those liabilities.

Commissions and Discounts

The underwriters have advised us that they propose initially to offer the shares to the public at the public offering price on the cover page of this prospectus supplement and to certain other Financial Industry Regulatory Authority (FINRA) members at that price less a concession not in excess of $0.25 per share. After the public offering, the public offering price, concession and discount may be changed. No such change shall change the amount of proceeds to be received by us as set forth on the cover page of this prospectus supplement.

The following table shows the per share and total underwriting discounts and commissions we will pay to the underwriters assuming both no exercise and full exercise of the underwriters’ option to purchase up to an additional 750,000 shares.

 

     Per Share      Without Option      With Option  

Public offering price

   $ 13.6200       $ 68,100,000       $ 78,315,000   

Underwriting discounts and commissions (sales load) (1)

   $ —         $ —         $ —     

Additional supplemental payment to the underwriters by Investment Adviser(2)

   $ 0.4646       $ 2,323,000       $ 2,671,450   

Proceeds to PennantPark Floating Rate Capital Ltd. (before offering expenses of $470,000)

   $ 14.0846       $ 70,423,000       $ 80,986,450   

 

(1) Our Investment Adviser has agreed to pay all of the underwriting commissions to the underwriters of approximately $2.0 million, or $0.41 per share (or approximately $2.3 million, or $0.41 per share if the option to purchase additional shares is fully exercised) in connection with this offering, which amount is not reflected in the above table. All other expenses of the offering will be borne by us.
(2) Our Investment Adviser has agreed to pay the underwriters an additional supplemental payment of approximately $2.3 million, or $0.46 per share (or approximately $2.7 million, or $0.46 per share if the option to purchase additional shares is fully exercised), which reflects the difference between the offering price and the proceeds per share received by us in this offering.

 

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Option to Purchase Additional Shares

We have granted an option to the underwriters to purchase up to 750,000 additional shares at the public offering price less the underwriting discount. The underwriters may exercise this option for 30 days from the date of this prospectus supplement. If the underwriters exercise this option, each will be obligated, subject to conditions contained in the underwriting agreement, to purchase the additional shares approximately proportionate to that underwriter’s initial purchase commitment.

No Sales of Similar Securities

We have agreed, with exceptions, not to sell or transfer any shares for 90 days after the date of this prospectus supplement without first obtaining the written consent of Morgan Stanley & Co. LLC.

Our executive officers and directors, PennantPark Investment Advisers, and Pennant Park Investment Administration have agreed, with exceptions, not to sell or transfer any common stock for 90 days after the date of this prospectus supplement without first obtaining the written consent of Morgan Stanley & Co. LLC. Specifically, we and these other individuals and entities have agreed not to directly or indirectly:

 

    offer, pledge, sell or contract to sell any common stock;

 

    sell any option or contract to purchase any common stock;

 

    purchase any option or contract to sell any common stock;

 

    grant any option, right or warrant for the sale of any common stock;

 

    lend or otherwise dispose of or transfer any common stock;

 

    request or demand that we file a registration statement related to the common stock; or

 

    enter into any swap or other agreement that transfers, in whole or in part, the economic consequence of ownership of any common stock whether any such swap or transaction is to be settled by delivery of common stock or other securities, in cash or otherwise.

This lockup provision applies to common stock and to securities convertible into or exchangeable or exercisable for or repayable with common stock. It also applies to common stock owned now or acquired later by the person executing the agreement or for which the person executing the agreement later acquires the power of disposition.

Quotation on the NASDAQ Global Select Market

Our common stock is quoted on the NASDAQ Global Select Market under the symbol “PFLT.”

Price Stabilization and Short Positions

Until the distribution of the shares is completed, SEC rules may limit the underwriters from bidding for and purchasing our common stock. However, the underwriters may engage in transactions that stabilize the price of the common stock, such as bids or purchases to peg, fix or maintain that price.

If the underwriters create a short position in the common stock in connection with the offering (i.e., if they sell more shares than are listed on the cover of this prospectus supplement), the underwriters may reduce that short position by purchasing shares in the open market. The underwriters may also elect to reduce any short position by exercising all or part of the option to purchase additional shares as described above. In making this determination, the underwriters will consider, among other things, the price of shares available for purchase in the open market compared to the price at which the underwriters may purchase shares through the option to purchase additional shares. Purchases of the common stock to stabilize its price or to reduce a short position may cause the price of the common stock to be higher than it might be in the absence of such purchases.

The underwriters may also impose a penalty bid. This occurs when a particular underwriter repays to the underwriters a portion of the underwriting discount received by it because the representatives have repurchased shares sold by or for the account of such underwriter in stabilizing or short covering transactions.

Neither we nor any of the underwriters make any representation or prediction as to the magnitude of any effect that the transactions described above may have on the price of the common stock. In addition, neither we nor any of the underwriters make any representation that the underwriters will engage in these transactions or that these transactions, once commenced, will not be discontinued without notice.

 

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Electronic Delivery

The underwriters may make prospectuses available in electronic (PDF) format. A prospectus in electronic (PDF) format may be made available on a web site maintained by the underwriters, and the underwriters may distribute such prospectuses electronically. The underwriters may allocate a limited number of shares for sale to their online brokerage customers.

Other Relationships

The underwriters and their respective affiliates are full service financial institutions engaged in various activities, which may include securities trading, commercial and investment banking, financial advisory, investment management, investment research, principal investment, hedging, financing and brokerage activities. The underwriters and their affiliates have provided in the past to the Company and may provide from time to time in the future in the ordinary course of their business certain commercial banking, financial advisory, investment banking and other services to us for which they will be entitled to receive customary fees and expenses. In particular, the underwriters or their affiliates may execute transactions with or on behalf of the Company. In addition, the underwriters or their affiliates may act as arrangers, underwriters or placement agents for companies whose securities are sold to us.

In the ordinary course of their various business activities, the underwriters or their affiliates may also trade in our securities, securities of our portfolio companies or other related financial instruments for their own accounts or for the account of others and may extend loans or financing directly or through derivative transactions to us or any of the portfolio companies. The underwriters and their respective affiliates may also make investment recommendations and/or publish or express independent research views in respect of such securities or instruments and may at the time hold, or recommend to clients that they acquire, long and/or short positions in such securities and instruments.

We may purchase securities of third parties from the underwriters or their affiliates after the offering. However, we have not entered into any agreement or arrangement regarding the acquisition of any such securities, and we may not purchase any such securities. We would only purchase any such securities if, among other things, we identified securities that satisfied our investment needs and completed our due diligence review of such securities.

After the date of this prospectus supplement, the underwriters and their affiliates may from time to time obtain information regarding specific portfolio companies or us that may not be available to the general public. Any such information is obtained by the underwriters and their affiliates in the ordinary course of its business and not in connection with the offering of the common stock. In addition, after the offering period for the sale of our shares, the underwriters or their affiliates may develop analyses or opinions related to PennantPark Floating Rate Capital Ltd. or our portfolio companies and buy or sell interests in one or more of our portfolio companies on behalf of their proprietary or client accounts and may engage in competitive activities. There is no obligation on behalf of these parties to disclose their respective analyses, opinions or purchase and sale activities regarding any portfolio company or regarding PennantPark Floating Rate Capital Ltd. to our stockholders.

Affiliates of certain of the underwriters serve as lenders under our Credit Facility and may serve as lenders under any future credit facilities. Some of the underwriters and their affiliates were underwriters in connection with our initial public offerings and follow-on public offering for which they received customary fees. Affiliates of the underwriters may receive part of the proceeds of the offering by reason of the repayment of certain amounts outstanding under our Credit Facility.

The principal business addresses of the underwriters are: Morgan Stanley & Co. LLC, 180 Varick Street, 2nd Floor, New York, NY 10014; Goldman, Sachs & Co., 200 West Street, New York, NY 10282; J.P. Morgan Securities LLC, 383 Madison Avenue, New York, NY 10179; Keefe, Bruyette & Woods, Inc., 787 Seventh Avenue, New York, NY 10019; RBC Capital Markets, LLC, 200 Vesey Street, New York, NY 10281; and SunTrust Robinson Humphrey, Inc., 3333 Peachtree Road NE, Atlanta, GA 30326.

 

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Notice to Prospective Investors in Singapore

This Prospectus has not been registered as a prospectus with the Monetary Authority of Singapore. Accordingly, this Prospectus and any other document or material in connection with the offer or sale, or invitation for subscription or purchase, of the shares may not be circulated or distributed, nor may the shares be offered or sold, or be made the subject of an invitation for subscription or purchase, whether directly or indirectly, to persons in Singapore other than (i) to an institutional investor under Section 274 of the Securities and Futures Act, Chapter 289 of Singapore (the “SFA”), (ii) to a relevant person pursuant to Section 275(1)), or any person pursuant to Section 275(1A), and in accordance with the conditions specified in Section 275, of the SFA, or (iii) otherwise pursuant to, and in accordance with the conditions of, any other applicable provision of the SFA.

Where the shares are subscribed or purchased under Section 275 of the SFA by a relevant person which is:

 

  (a) a corporation (which is not an accredited investor (as defined in Section 4A of the SFA)) the sole business of which is to hold investments and the entire share capital of which is owned by one or more individuals, each of whom is an accredited investor; or

 

  (b) a trust (where the trustee is not an accredited investor) whose sole purpose is to hold investments and each beneficiary of the trust is an individual who is an accredited investor,

securities (as defined in Section 239(1) of the SFA) of that corporation or the beneficiaries’ rights and interest (howsoever described) in that trust shall not be transferred within six months after that corporation or that trust has acquired the shares pursuant to an offer made under Section 275 of the SFA except:

 

  (1) to an institutional investor or to a relevant person defined in Section 275(2) of the SFA, or to any person arising from an offer referred to in Section 275(1A) or Section 276(4)(i)(B) of the SFA;

 

  (2) where no consideration is or will be given for the transfer;

 

  (3) where the transfer is by operation of law;

 

  (4) as specified in Section 276(7) of the SFA; or

 

  (5) as specified in Regulation 32 of the Securities and Futures (Offers of Investments) (Shares and Debentures) Regulations 2005 of Singapore.”

Notice to Prospective Investors in Hong Kong

The shares have not been offered or sold and will not be offered or sold in Hong Kong, by means of any document, other than (a) to “professional investors” as defined in the Securities and Futures Ordinance (Cap. 571) of Hong Kong and any rules made under that Ordinance; or (b) in other circumstances which do not result in the document being a “prospectus” as defined in the Companies Ordinance (Cap. 32) of Hong Kong or which do not constitute an offer to the public within the meaning of that Ordinance. No advertisement, invitation or document relating to the notes has been or may be issued or has been or may be in the possession of any person for the purposes of issue, whether in Hong Kong or elsewhere, which is directed at, or the contents of which are likely to be accessed or read by, the public of Hong Kong (except if permitted to do so under the securities laws of Hong Kong) other than with respect to shares which are or are intended to be disposed of only to persons outside Hong Kong or only to “professional investors” as defined in the Securities and Futures Ordinance and any rules made under that Ordinance.

 

 

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LEGAL MATTERS

Certain legal matters regarding the securities offered by this prospectus supplement will be passed upon for PennantPark Floating Rate Capital Ltd. by Dechert LLP, Washington, D.C., and Venable LLP, Baltimore, Maryland. Dechert LLP has from time to time represented the underwriters, PennantPark Floating Rate Capital Ltd. and the Investment Adviser on unrelated matters. Certain legal matters in connection with the offering will be passed upon for the underwriters by Freshfields Bruckhaus Deringer US LLP, New York, NY.

 

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Interim Financial Statements

 

Report of Independent Registered Public Accounting Firm

     S-29   

Consolidated Statements of Assets and Liabilities as of December  31, 2016 (unaudited) and September 30, 2016

     S-30   

Consolidated Statements of Operations for the three months ended December 31, 2016 and 2015 (unaudited)

     S-31   

Consolidated Statements of Changes in Net Assets for the three months ended December 31, 2016 and 2015 (unaudited)

     S-32   

Consolidated Statements of Cash Flows for the three months ended December 31, 2016 and 2015 (unaudited)

     S-33   

Consolidated Schedules of Investments as of December  31, 2016 (unaudited) and September 30, 2016

     S-34   

Notes to the Consolidated Financial Statements (unaudited)

     S-40   

 

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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 statements of assets and liabilities of PennantPark Floating Rate Capital Ltd. and its Subsidiaries (collectively referred to as the “Company”), including the consolidated schedule of investments, as of December 31, 2016, and the consolidated statements of operations, changes in net assets and cash flows for the three months ended December 31, 2016 and 2015. These consolidated financial statements are the responsibility of the Company’s management.

We conducted our review 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 review, 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, 2016, 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 22, 2016, we expressed an unqualified opinion on those financial statements. In our opinion, the information set forth in the accompanying consolidated statements of assets and liabilities as of December 31, 2016, is fairly stated, in all material respects, in relation to the consolidated statements of assets and liabilities.

/s/ RSM US LLP

New York, New York

February 9, 2017

 

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PENNANTPARK FLOATING RATE CAPITAL LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES

 

     December 31, 2016
(unaudited)
    September 30, 2016  

Assets

    

Investments at fair value

    

Non-controlled, non-affiliated investments (cost—$653,340,297 and $597,910,267, respectively)

   $ 656,868,887      $ 598,887,525   

Cash and cash equivalents (cost—$24,201,258 and $28,903,359, respectively)

     24,203,565        28,910,973   

Interest receivable

     3,088,719        2,480,406   

Receivable for investments sold

     11,357,601        —     

Prepaid expenses and other assets

     1,088,475        1,141,191   
  

 

 

   

 

 

 

Total assets

     696,607,247        631,420,095   
  

 

 

   

 

 

 

Liabilities

    

Distributions payable

     2,539,357        2,539,357   

Payable for investments purchased

     11,827,362        14,935,970   

Credit Facility payable (cost—$299,309,500 and $232,907,500, respectively) (See Notes 5 and 9)

     299,859,712        232,389,498   

Interest payable on Credit Facility

     672,625        531,926   

Management fee payable (See Note 3)

     1,595,726        1,458,625   

Performance-based incentive fee payable (See Note 3)

     2,602,140        3,454,914   

Accrued other expenses

     372,659        202,977   
  

 

 

   

 

 

 

Total liabilities

     319,469,581        255,513,267   
  

 

 

   

 

 

 

Commitments and contingencies (See Note 10)

    

Net assets

    

Common stock, 26,730,074 shares issued and outstanding Par value $0.001 per share and 100,000,000 shares authorized

     26,730        26,730   

Paid-in capital in excess of par value

     371,194,366        371,194,366   

Undistributed net investment income

     3,763,272        4,559,646   

Accumulated net realized loss on investments

     (827,387     (1,376,788

Net unrealized appreciation on investments

     3,530,897        984,872   

Net unrealized (appreciation) depreciation on Credit Facility

     (550,212     518,002   
  

 

 

   

 

 

 

Total net assets

   $ 377,137,666      $ 375,906,828   
  

 

 

   

 

 

 

Total liabilities and net assets

   $ 696,607,247      $ 631,420,095   
  

 

 

   

 

 

 

Net asset value per share

   $ 14.11      $ 14.06   
  

 

 

   

 

 

 

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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PENNANTPARK FLOATING RATE CAPITAL LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

     Three Months Ended December 31,  
     2016        2015  

Investment income:

       

From non-controlled, non-affiliated investments:

       

Interest

   $ 11,951,835         $ 8,612,862   

Other income

     679,433           102,685   

From controlled, affiliated investments:

       

Interest

     —             40,933   
  

 

 

      

 

 

 

Total investment income

     12,631,268           8,756,480   
  

 

 

      

 

 

 

Expenses:

       

Base management fee (See Note 3)

     1,595,727           1,077,741   

Performance-based incentive fee (See Note 3)

     1,469,369           (2,936

Interest and expenses on Credit Facility (See Note 9)

     1,800,725           939,682   

Administrative services expenses (See Note 3)

     561,250           200,000   

Other general and administrative expenses

     357,500           548,313   
  

 

 

      

 

 

 

Expenses before provision for taxes and amendment costs

     5,784,571           2,762,800   

Provision for taxes

     25,000           —     

Credit Facility amendment costs (See Notes 5 and 9)

     —             907,722   
  

 

 

      

 

 

 

Total expenses

     5,809,571           3,670,522   
  

 

 

      

 

 

 

Net investment income

     6,821,697           5,085,958   
  

 

 

      

 

 

 

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

       

Net realized gain (loss) on investments

     549,401           (3,232,008

Net change in unrealized appreciation (depreciation) on:

       

Non-controlled, non-affiliated investments

     2,546,025           (708,946

Credit Facility (appreciation) depreciation (See Notes 5 and 9)

     (1,068,214        601,875   
  

 

 

      

 

 

 

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

     1,477,811           (107,071
  

 

 

      

 

 

 

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

     2,027,212           (3,339,079
  

 

 

      

 

 

 

Net increase in net assets resulting from operations

   $ 8,848,909         $ 1,746,879   
  

 

 

      

 

 

 

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

   $ 0.33         $ 0.07   
  

 

 

      

 

 

 

Net investment income per common share

   $ 0.26         $ 0.19   
  

 

 

      

 

 

 

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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PENNANTPARK FLOATING RATE CAPITAL LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS

(Unaudited)

 

     Three Months Ended December 31,  
     2016        2015  

Net increase in net assets from operations:

       

Net investment income

   $ 6,821,697         $ 5,085,958   

Net realized gain (loss) on investments

     549,401           (3,232,008

Net change in unrealized appreciation (depreciation) on investments

     2,546,025           (708,946

Net change in unrealized (appreciation) depreciation on Credit Facility

     (1,068,214        601,875   
  

 

 

      

 

 

 

Net increase in net assets resulting from operations

     8,848,909           1,746,879   
  

 

 

      

 

 

 

Distributions to stockholders

     (7,618,071        (7,618,071
  

 

 

      

 

 

 

Net increase (decrease) in net assets

     1,230,838           (5,871,192
  

 

 

      

 

 

 

Net assets:

       

Beginning of period

     375,906,828           372,890,449   
  

 

 

      

 

 

 

End of period

   $ 377,137,666         $ 367,019,257   
  

 

 

      

 

 

 

Undistributed net investment income, end of period

   $ 3,763,272         $ 4,459,360   
  

 

 

      

 

 

 

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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PENNANTPARK FLOATING RATE CAPITAL LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

     Three Months Ended December 31,  
     2016      2015  

Cash flows from operating activities:

     

Net increase in net assets resulting from operations

   $ 8,848,909       $ 1,746,879   

Adjustments to reconcile net increase in net assets resulting from operations to net cash used in operating activities:

     

Net change in unrealized (appreciation) depreciation on investments

     (2,546,025      708,946   

Net change in unrealized appreciation (depreciation) on Credit Facility

     1,068,214         (601,875

Net realized (gain) loss on investments

     (549,401      3,232,008   

Net accretion of discount and amortization of premium

     (425,722      (337,666

Purchases of investments

     (124,826,238      (99,199,653

Payment-in-kind interest

     (39,085      (18,135

Proceeds from dispositions of investments

     70,405,217         26,860,815   

Increase in interest receivable

     (608,313      (314,572

Increase in receivable for investments sold

     (11,357,601      —     

Decrease (increase) in prepaid expenses and other assets

     52,716         (59,486

(Decrease) increase in payable for investments purchased

     (3,108,608      1,435,162   

Increase in interest payable on Credit Facility

     140,699         115,221   

Increase in management fee payable

     137,101         121,626   

Decrease in performance-based incentive fee payable

     (852,774      (2,936

Increase (decrease) in accrued other expenses

     169,682         (160,831
  

 

 

    

 

 

 

Net cash used in operating activities

     (63,491,229      (66,474,497
  

 

 

    

 

 

 

Cash flows from financing activities:

     

Distributions paid to stockholders

     (7,618,071      (7,618,071

Borrowings under Credit Facility (See Notes 5 and 9)

     91,902,000         69,300,000   

Repayments under Credit Facility (See Notes 5 and 9)

     (25,500,000      (2,600,000
  

 

 

    

 

 

 

Net cash provided by financing activities

     58,783,929         59,081,929   
  

 

 

    

 

 

 

Net decrease in cash equivalents

     (4,707,300      (7,392,568

Effect of exchange rate changes on cash

     (108      —     

Cash and cash equivalents, beginning of period

     28,910,973         21,428,514   
  

 

 

    

 

 

 

Cash and cash equivalents, end of period

   $ 24,203,565       $ 14,035,946   
  

 

 

    

 

 

 

Supplemental disclosure of cash flow information:

     

Interest paid

   $ 1,660,026       $ 824,461   
  

 

 

    

 

 

 

Taxes paid

   $ —         $ 1,190   
  

 

 

    

 

 

 

Non-cash exchanges and conversions

   $ 709,685       $ 4,547,934   
  

 

 

    

 

 

 

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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PENNANTPARK FLOATING RATE CAPITAL LTD. AND SUBSIDIARIES

CONSOLIDATED SCHEDULE OF INVESTMENTS

DECEMBER 31, 2016

(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—174.2% (3), (4)

  

First Lien Secured Debt—159.1%

  

Advanced Cable Communications, LLC

  08/09/2021    Telecommunications      6.75     L+575         12,468,750       $     12,236,628       $     12,344,063   

Advanced Cable Communications, LLC (8), (10)

  08/09/2021    Telecommunications                     4,000,000                 (40,000

Alera Group Holdings, Inc.

  12/30/2022    Banking, Finance, Insurance and Real
Estate
     8.25     P+450         8,696,374         8,609,642         8,609,410   

Alera Group Holdings, Inc. (Revolver) (10)

  12/30/2021    Banking, Finance, Insurance and Real
Estate
                    1,771,962                   

Alera Group Holdings, Inc. (10)

  12/30/2022    Banking, Finance, Insurance and Real
Estate
                    3,510,000                   

ALG USA Holdings, LLC

  02/28/2019    Hotel, Gaming and Leisure      7.00     L+575         12,064,454         12,041,216         12,064,454   

Alvogen Pharma US, Inc. (6), (11)

  04/04/2022    Healthcare and Pharmaceuticals      6.00     L+500         3,890,867         3,873,800         3,754,686   

American Auto Auction Group, LLC

  11/30/2021    Transportation: Consumer      6.25     L+525         11,000,000         10,838,502         10,835,000   

American Bath Group, LLC

  10/02/2023    Consumer Goods: Durable      6.75     L+575         2,992,500         2,963,304         2,988,759   

American Gilsonite Company (8)

  12/31/2021    Metals and Mining     

 

15.00

(PIK 5.00


%) 

            128,248         124,139         128,248   

American Scaffold

  03/31/2022    Aerospace and Defense      7.50     L+650         4,906,250         4,838,361         4,857,188   

American Teleconferencing Services, Ltd.

  12/08/2021    Telecommunications      7.50     L+650         6,997,280         6,787,362         6,809,263   

AMF Bowling Centers, Inc.

  09/19/2023    Retail      6.00     L+500         14,962,500         14,818,503         14,915,817   

Anesthesia Consulting & Management, LP

  10/31/2022    Healthcare and Pharmaceuticals      6.00     L+500         4,000,000         3,960,604         3,970,000   

Anesthesia Consulting & Management, LP (8), (10)

  10/31/2022    Healthcare and Pharmaceuticals                     1,000,000                 (7,500

AP Gaming I, LLC

  12/21/2020    Hotel, Gaming and Leisure      9.25     L+825         6,518,078         6,444,893         6,474,603   

API Technologies Corp.

  04/22/2022    Aerospace and Defense      7.50     L+650         9,950,000         9,770,591         9,800,750   

Broder Bros., Co., Tranche A

  06/03/2021    Consumer Goods: Non-Durable      7.00     L+575         2,425,000         2,384,579         2,425,000   

Broder Bros., Co., Tranche B

  06/03/2021    Consumer Goods: Non-Durable      13.50     L+1,225         2,450,000         2,407,862         2,450,000   

Camin Cargo Control, Inc.

  06/30/2021    Transportation: Cargo      5.75     L+475         2,462,500         2,442,994         2,364,000   

Cardenas Markets LLC

  11/29/2023    Beverage, Food and Tobacco      6.75     L+575         7,500,000         7,425,830         7,500,000   

CBAC Borrower, LLC (8)

  07/02/2020    Hotel, Gaming and Leisure      8.25     L+700         4,950,000         4,921,411         4,950,000   

CD&R TZ Purchaser, Inc.

  07/21/2023    Consumer Goods: Durable      7.00     L+600         12,468,750         12,158,895         12,531,094   

Charming Charlie LLC

  12/24/2019    Retail      9.00     L+800         3,948,750         3,916,040         3,474,900   

Chicken Soup for the Soul Publishing, LLC

  01/08/2019    Media: Advertising, Printing and
Publishing
     7.50     L+625         4,757,143         4,732,576         4,566,857   

Corfin Industries LLC                

  11/25/2020    Aerospace and Defense      10.75     L+975         6,256,800         6,153,773         6,256,800   

Corfin Industries LLC (Revolver) (8), (10)

  11/25/2020    Aerospace and Defense                     518,033                   

CRGT Inc.

  12/21/2020    High Tech Industries      7.50     L+650         9,712,731         9,642,729         9,688,450   

Curo Health Services Holdings, Inc.

  02/07/2022    Healthcare and Pharmaceuticals      6.50     L+550         1,965,000         1,949,694         1,974,825   

DBI Holding LLC

  08/02/2021    Business Services      6.25     L+525         9,975,000         9,879,526         9,975,000   

DCS Business Services, Inc.

  03/19/2018    Business Services      8.75     L+725         1,971,104         1,962,737         1,971,104   

DISA Global Solutions, Inc.

  12/09/2020    Business Services      5.50     L+450         4,912,500         4,878,704         4,863,375   

Digital Room LLC

  11/21/2022    Media: Advertising, Printing and
Publishing
     7.00     L+600         7,000,000         6,861,733         6,860,000   

Douglas Products and Packaging Company LLC

  06/30/2020    Chemicals, Plastics and Rubber      5.75     L+475         4,625,000         4,598,277         4,625,000   

Driven Performance Brands, Inc. (8)

  09/10/2020    Consumer Goods: Durable      5.75     L+475         8,437,500         8,403,778         8,437,500   

Driven Performance Brands, Inc. (Revolver) (8), (10)

  09/10/2020    Consumer Goods: Durable                     1,000,000                   

Education Networks of America, Inc.

  05/06/2021    Telecommunications      8.00     L+700         8,586,957         8,546,784         8,544,021   

Education Networks of America, Inc. (Revolver) (8), (10)

  05/06/2021    Telecommunications                     1,304,348                   

Efficient Collaborative Retail Marketing Company, LLC

  06/15/2022    Media: Diversified and Production      7.75     L+675         10,548,335         10,449,705         10,548,336   

Emerging Markets Communications, LLC

  07/01/2021    Telecommunications      6.75     L+575         4,925,000         4,866,496         4,801,875   

FHC Health Systems, Inc.

  12/23/2021    Healthcare and Pharmaceuticals      5.00     L+400         2,917,576         2,894,365         2,830,049   

Greenway Health, LLC

  11/04/2020    High Tech Industries      6.00     L+500         6,618,092         6,577,992         6,551,911   

GTCR Valor Companies, Inc.

  06/16/2023    Media: Broadcasting and Subscription      7.00     L+600         7,462,500         7,182,715         7,376,234   

Highline Aftermarket Acquisition, LLC

  04/01/2022    Wholesale      5.75     L+475         7,218,750         7,154,171         7,236,797   

Hollander Sleep Products, LLC

  10/21/2020    Consumer Goods: Non-Durable      9.00     L+800         1,165,886         1,153,558         1,142,569   

Hostway Corporation

  12/13/2019    High Tech Industries      8.00     L+675         2,587,871         2,573,570         2,208,572   

Hunter Defense Technologies, Inc. (8)

  08/05/2019    Aerospace and Defense      7.00     L+600         6,125,000         6,093,462         5,512,500   

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

  11/04/2020    Construction and Building      7.25     L+625         6,208,320         6,121,045         6,208,320   

Idera, Inc.

  04/09/2021    High Tech Industries      6.50     L+550         7,922,492         7,305,337         7,902,685   

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

  05/01/2019    Business Services      7.25     L+600         8,321,542         8,268,965         7,988,680   

IGM RFE1 B.V. (6), (11), (12)

  10/12/2021    Chemicals, Plastics and Rubber      8.00     E+000       17,390,625         18,075,816         18,342,797   

Imagine! Print Solutions, LLC

  03/30/2022    Media: Advertising, Printing and
Publishing
     7.00     L+600         5,959,975         5,902,236         6,049,375   

Impact Sales, LLC

  12/30/2021    Wholesale      8.00     L+700         11,250,000         11,250,000         11,250,000   

Impact Sales, LLC (10)

  12/31/2018    Wholesale                     3,750,000                   

Instant Web, LLC, Term Loan A

  03/28/2019    Media: Advertising, Printing and
Publishing
     5.50     L+450         5,256,439         5,218,146         5,256,439   

Instant Web, LLC, Term Loan B

  03/28/2019    Media: Advertising, Printing and
Publishing
     12.00     L+1,100         4,500,000         4,464,349         4,500,000   

Interior Specialists, Inc.

  06/30/2020    Construction and Building      9.00     L+800         6,628,398         6,579,255         6,628,398   

Inventus Power, Inc.

  04/30/2020    Consumer Goods: Durable      6.50     L+550         4,882,266         4,849,446         4,638,153   

Jackson Hewitt Inc.

  07/30/2020    Consumer Services      8.00     L+700         4,900,000         4,825,770         4,697,875   

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

  02/19/2021    Chemicals, Plastics and Rubber      10.00     L+900         4,002,471         3,934,894         3,927,550   

Kendra Scott, LLC

  07/17/2020    Retail      7.00     L+600         2,812,500         2,791,567         2,784,375   

KHC Holdings, Inc.

  10/31/2022    Wholesale      7.00     L+600         12,375,000         12,186,813         12,375,000   

 

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

S-34


Table of Contents

PENNANTPARK FLOATING RATE CAPITAL LTD. AND SUBSIDIARIES

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

DECEMBER 31, 2016

(Unaudited)

 

Issuer Name

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

KHC Holdings, Inc. (Revolver) (8), (10)

  10/30/2020    Wholesale                    1,209,677       $       $   

Lago Resort & Casino, LLC

  03/07/2022    Hotel, Gaming and Leisure      10.50     L+950        10,200,000         10,017,217         10,200,000   

LifeCare Holdings LLC (8)

  11/30/2018    Healthcare and Pharmaceuticals      6.50     L+525        5,392,148         5,356,439         5,203,422   

Lombart Brothers, Inc.

  04/13/2022    Capital Equipment      7.50     L+650        5,970,000         5,889,619         5,970,000   

Lombart Brothers, Inc. (Revolver) (8), (10)

  04/13/2022    Capital Equipment                    1,238,938                   

Long’s Drugs Incorporated

  08/19/2021    Healthcare and Pharmaceuticals      6.25     L+525        4,987,500         4,941,570         4,937,625   

LSF9 Atlantis Holdings, LLC

  01/15/2021    Retail      10.00     L+900        9,420,054         9,301,704         9,420,054   

Marketplace Events LLC

  01/27/2021    Media: Diversified and Production      6.25     L+525        3,402,920         3,353,135         3,385,905   

Marketplace Events LLC (12)

  01/27/2021    Media: Diversified and Production      6.25     P+275      C$ 17,200,829         12,043,641         12,762,251   

Marketplace Events LLC (Revolver) (8), (10)

  01/27/2021    Media: Diversified and Production                    1,703,163                   

Mission Critical Electronics, Inc. (8)

  09/28/2022    Capital Equipment      6.00     L+500        4,106,316         4,067,156         4,072,029   

Mission Critical Electronics, Inc. (Revolver) (8), (10)

  09/28/2021    Capital Equipment                    883,392                 (11,793

New Trident HoldCorp, Inc.

  07/31/2019    Healthcare and Pharmaceuticals      7.00     L+575        8,792,647         8,748,099         7,895,797   

Pathway Partners Vet Management Company LLC (8)

  08/19/2022    Healthcare and Pharmaceuticals      6.00     L+500        6,463,433         6,402,888         6,463,433   

Pathway Partners Vet Management Company LLC (8), (10)

  08/19/2022    Healthcare and Pharmaceuticals                    3,520,896                   

Polycom, Inc.

  09/27/2023    Telecommunications      7.50     L+650        5,802,500         5,575,908         5,824,259   

Precyse Acquisition Corp.

  10/20/2022    Healthcare and Pharmaceuticals      6.50     L+550        4,977,494         4,910,610         5,033,491   

Premier Dental Services, Inc.

  11/01/2018    Consumer Services      7.50     L+650        7,528,230         7,474,965         7,471,768   

Profile Products LLC

  05/20/2021    Environmental Industries      5.75     L+475        7,234,631         7,178,888         7,234,631   

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

  05/20/2020    Environmental Industries                    2,459,016                   

PT Network, LLC

  11/30/2021    Healthcare and Pharmaceuticals      7.50     L+650        7,800,000         7,723,967         7,722,000   

PT Network, LLC (8), (10)

  11/30/2021    Healthcare and Pharmaceuticals                    3,000,000                 (30,000

Quick Weight Loss Centers, LLC

  08/23/2021    Beverage, Food and Tobacco      5.75     L+475        10,000,000         9,858,256         9,950,000   

Research Now Group, Inc.

  03/18/2021    High Tech Industries      5.50     L+450        6,877,500         6,851,967         6,774,338   

Robertshaw US Holding Corp.    

  06/18/2019    Consumer Goods: Durable      8.50     L+700        4,245,684         4,228,328         4,189,615   

Ryan, LLC

  08/07/2020    Business Services      6.75     L+575        4,162,500         4,114,022         4,123,497   

Snak Club, LLC

  07/19/2021    Beverage, Food and Tobacco      6.00     L+500        4,937,495         4,868,948         4,912,808   

Snak Club, LLC (Revolver) (8)

  07/19/2021    Beverage, Food and Tobacco      6.00     L+500        350,000         350,000         350,000   

Snak Club, LLC (Revolver) (8), (10)

  07/19/2021    Beverage, Food and Tobacco                    150,000                   

Softvision, LLC (f/k/a Software Paradigms International Group, LLC)

  05/21/2021    High Tech Industries      6.50     L+550        9,750,000         9,661,870         9,701,250   

Sotera Defense Solutions, Inc.

  04/21/2017    Aerospace and Defense      9.00     L+750        5,668,843         5,639,737         5,527,122   

Sundial Group Holdings LLC

  10/19/2021    Consumer Goods: Non-Durable      7.25     L+625        7,218,750         7,112,700         7,290,938   

Survey Sampling International, LLC

  12/16/2020    Business Services      6.00     L+500        7,427,655         7,379,369         7,390,517   

Tensar Corporation

  07/09/2021    Construction and Building      5.75     L+475        4,822,723         4,788,808         4,340,451   

The Infosoft Group, LLC

  12/02/2021    Media: Broadcasting and Subscription      6.25     L+525        15,000,000         14,853,374         14,850,000   

The Original Cakerie, Co. (6), (11)

  07/20/2021    Consumer Goods: Non-Durable      6.50     L+550        3,084,564         3,056,154         3,084,564   

The Original Cakerie Ltd. (6), (11)

  07/20/2021    Consumer Goods: Non-Durable      6.00     L+500        5,971,037         5,916,117         5,971,037   

The Original Cakerie Ltd. (Revolver) (6), (8), (10), (11)

  07/20/2021    Consumer Goods: Non-Durable                    1,418,484                   

TOMS Shoes, LLC

  11/02/2020    Consumer Goods: Non-Durable      6.50     L+550        1,965,000         1,828,667         1,434,450   

Triad Manufacturing, Inc.

  12/28/2020    Capital Equipment      12.02     L+1,125 (9)      9,655,810         9,493,124         9,655,810   

UniTek Global Services, Inc. (8)

  01/14/2019    Telecommunications     

 

9.50

(PIK 1.00

%

%) 

    L+850        257,621         257,621         257,621   

UniTek Global Services, Inc. (8)

  01/14/2019    Telecommunications      8.50     L+750        599,702         566,344         599,702   

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

  01/14/2019    Telecommunications                    151,090                   

Universal Fiber Systems, LLC

  10/04/2021    Chemicals, Plastics and Rubber      6.50     L+550        8,939,921         8,889,413         8,939,921   

U.S. Anesthesia Partners, Inc.

  12/31/2019    Healthcare and Pharmaceuticals      6.00     L+500        12,368,750         12,268,500         12,306,906   

US Med Acquisition, Inc. (8)

  08/13/2021    Healthcare and Pharmaceuticals      10.00     L+900        3,082,031         3,082,031         3,082,031   

Vistage Worldwide, Inc.

  08/19/2021    Media: Broadcasting and Subscription      6.50     L+550        5,092,831         5,051,051         5,105,563   

Winchester Electronics Corporation

  06/30/2022    Capital Equipment      7.50     L+650        7,754,100         7,686,604         7,817,225   

Winchester Electronics Corporation (8), (10)

  06/30/2022    Capital Equipment                    708,333                 5,767   

Worley Claims Services, LLC

  10/30/2020    Banking, Finance, Insurance and
Real Estate
     9.00     L+800        7,297,877         7,243,917         7,115,431   
              

 

 

    

 

 

 

Total First Lien Secured Debt

                  599,327,868          600,052,593   
              

 

 

    

 

 

 

Second Lien Secured Debt—9.8%

                 

Affinion Group, Inc. (8)

  10/31/2018    Consumer Goods: Durable      8.50     L+700        1,000,000         948,800         969,000   

Douglas Products and Packaging Company LLC

  12/31/2020    Chemicals, Plastics and Rubber      11.34     L+1,050 (9)      2,000,000         1,972,437         2,020,000   

Howard Berger Co. LLC

  09/30/2020    Wholesale      11.00     L+1,000        11,000,000         10,537,088         9,790,000   

MailSouth, Inc.

  10/22/2021    Media: Advertising, Printing and
Publishing
     11.50     L+1,050        3,775,000         3,706,653         3,775,000   

Novitex Acquisition, LLC

  07/07/2021    Business Services      12.25     L+1,100        11,900,000         11,763,956         11,900,000   

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

  08/01/2017    Energy: Oil and Gas      12.50            2,812,500         2,772,451         1,575,000   

VT Buyer Acquisition Corp.

  01/30/2023    Business Services      10.75     L+975        1,837,500         1,778,941         1,837,500   

WD Wolverine Holdings, LLC (8)

  10/17/2024    Healthcare and Pharmaceuticals      10.50     L+950        5,250,000         5,040,000         5,046,563   
              

 

 

    

 

 

 

Total Second Lien Secured Debt

                 38,520,326         36,913,063   
              

 

 

    

 

 

 

 

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

S-35


Table of Contents

PENNANTPARK FLOATING RATE CAPITAL LTD. AND SUBSIDIARIES

CONSOLIDATED SCHEDULE OF INVESTMENST—(Continued)

DECEMBER 31, 2016

(Unaudited)

 

Issuer Name

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

Subordinated Debt/Corporate Notes—2.2% (8)

  

         

Affinion International Holdings Limited (5), (6), (11)

    07/30/2018        Consumer Goods: Durable       

 

7.50

(PIK 4.00


%) 

           1,157,978      $ 1,067,044      $ 1,111,659   

American Gilsonite Company (5)

    12/31/2021        Metals and Mining       

 

17.00

(PIK 17.00


%) 

           370,370        370,370        370,370   

Credit Infonet, Inc.

    10/26/2018        High Tech Industries       

 

13.25

(PIK 2.00


%) 

           2,079,296        2,039,546        2,023,013   

Sonny’s Enterprises, LLC

    06/01/2023        Capital Equipment        11.00            4,750,000        4,656,141        4,655,000   

UniTek Global Services, Inc.  

    07/15/2019        Telecommunications       

 

15.00

(PIK 15.00


%) 

           152,509        152,509        154,797   
           

 

 

   

 

 

 

Total Subordinated Debt/Corporate Notes

  

              8,285,610            8,314,839   
           

 

 

   

 

 

 

Preferred Equity—0.4% (7), (8)

             

UniTek Global Services, Inc.

           Telecommunications        13.50            1,047,317        670,283        1,364,841   
           

 

 

   

 

 

 

Common Equity/Warrants—2.7% (7), (8)

             

Affinion Group Holdings, Inc.

           Consumer Goods: Durable                      99,029        3,514,572        3,889,552   

Affinion Group Holdings, Inc., Series C and Series D

           Consumer Goods: Durable                      4,298        1,186,649        28,641   

American Gilsonite Company

           Metals and Mining                      1,000        215,182        215,182   

Corfin InvestCo, L.P.

           Aerospace and Defense                      3,000        300,000        694,987   

Corfin InvestCo, L.P. (10)

           Aerospace and Defense                      3,000                 

e.l.f. Beauty, Inc.

           Consumer Goods: Durable                      110,399        295,670        3,102,473   

Faraday Holdings, LLC
(Interior Specialists, Inc.)

           Construction and Building                      1,141        58,044        110,766   

Gauge InfosoftCoInvest, LLC
(The Infosoft Group, LLC)

           Media: Broadcasting and Subscription                      500        500,000        500,000   

Patriot National, Inc.

          
 
Banking, Finance,
Insurance and Real Estate
  
  
                  11,867        27,995        55,182   

TPC Broadband Investors, LP
(Advanced Cable Communications, LLC) (13)

           Telecommunications                      438,098        438,098        438,098   

TPC Broadband Investors, LP
(Advanced Cable Communications, LLC) (10), (13)

           Telecommunications                      561,902                 

UniTek Global Services, Inc.

           Telecommunications                      149,617               1,188,670   
           

 

 

   

 

 

 

Total Common Equity/Warrants

              6,536,210        10,223,551   
           

 

 

   

 

 

 

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

  

          653,340,297        656,868,887   
           

 

 

   

 

 

 

Cash and Cash Equivalents—6.4%

             

BlackRock Federal FD Instl 30

              22,526,563        22,526,563   

BNY Mellon Cash

              1,674,695        1,677,002   
           

 

 

   

 

 

 

Total Cash and Cash Equivalents

              24,201,258        24,203,565   
           

 

 

   

 

 

 

Total Investments and Cash Equivalents—180.6%

  

        $  677,541,555      $ 681,072,452   
           

 

 

   

 

 

 

Liabilities in Excess of Other Assets—(80.6)%

                (303,934,786

Net Assets—100.0%

              $ 377,137,666   
             

 

 

 

 

(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,” the Euro Interbank Offered Rate, or EURIBOR or “E,” 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 generally presumed to be “non-controlled” when we own 25% or less of the portfolio company’s voting securities and “controlled” when we own more than 25% of the 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 generally 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, or a portion thereof, 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.
(12) Par amount is denominated in Canadian Dollars (C$) or in Euros (€) as denoted.
(13) Investment is held through our Taxable Subsidiary (See Note 1).

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

S-36


Table of Contents

PENNANTPARK FLOATING RATE CAPITAL LTD. AND SUBSIDIARIES

CONSOLIDATED SCHEDULE OF INVESTMENTS

SEPTEMBER 30, 2016

 

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—159.3% (3), (4)

  

First Lien Secured Debt—145.9%

  

Advanced Cable Communications, LLC

    08/09/2021      Telecommunications     6.75     L+575        12,500,000      $ 12,255,990      $ 12,250,000   

Advanced Cable Communications, LLC (10)

    08/09/2021      Telecommunications                   4,000,000               (80,000

ALG USA Holdings, LLC

    02/28/2019      Hotel, Gaming and Leisure     7.00     L+575        12,064,454        12,037,105        12,064,454   

Alvogen Pharma US, Inc. (6), (11)

    04/04/2022      Healthcare and Pharmaceuticals     6.00     L+500        3,943,925        3,925,777        3,946,410   

American Bath Group, LLC

    10/02/2023      Consumer Goods: Durable     6.75     L+575        3,000,000        2,970,000        2,992,500   

American Scaffold

    03/31/2022      Aerospace and Defense     7.50     L+650        4,937,500        4,866,801        4,888,125   

AMF Bowling Centers, Inc.

    09/19/2023      Retail     6.00     L+500        15,000,000        14,850,608        14,931,300   

AP Gaming I, LLC

    12/21/2020      Hotel, Gaming and Leisure     9.25     L+825        6,534,878        6,462,308        6,220,419   

API Technologies Corp.

    04/22/2022      Aerospace and Defense     7.50     L+650        9,975,000        9,787,810        9,825,375   

Azure Midstream Energy LLC

    11/15/2018      Energy: Oil and Gas     7.50     L+650        5,125,684        5,042,414        4,228,689   

Blue Bird Body Company

    06/29/2020      Automotive     6.50     L+550        3,498,670        3,462,806        3,498,670   

Broder Bros., Co., Tranche A

    06/03/2021      Consumer Goods: Non-Durable     7.00     L+575        2,440,000        2,397,229        2,422,820   

Broder Bros., Co., Tranche B

    06/03/2021      Consumer Goods: Non-Durable     13.50     L+1,225        2,460,000        2,415,653        2,442,679   

Camin Cargo Control, Inc.

    06/30/2021      Transportation: Cargo     5.75     L+475        2,468,750        2,448,157        2,370,000   

CareCentrix, Inc.

    07/08/2021      Healthcare and Pharmaceuticals     6.00     L+500        4,950,000        4,847,215        4,863,375   

CBAC Borrower, LLC (8)

    07/02/2020      Hotel, Gaming and Leisure     8.25     L+700        4,962,500        4,930,912        4,850,844   

CD&R TZ Purchaser, Inc.

    07/21/2023      Consumer Goods: Durable     7.00     L+600        12,500,000        12,179,928        12,343,750   

Charming Charlie LLC

    12/24/2019      Retail     9.00     L+800        4,098,750        4,061,551        3,750,357   

Chicken Soup for the Soul Publishing, LLC

    01/08/2019      Media: Advertising, Printing and
Publishing
    7.50     L+625        4,828,571        4,801,254        4,732,000   

Corfin Industries LLC                

    11/25/2020      Aerospace and Defense     10.75     L+975        6,272,600        6,163,749        6,272,600   

Corfin Industries LLC (Revolver) (10)

    11/25/2020      Aerospace and Defense                   518,033                 

CRGT Inc.

    12/21/2020      High Tech Industries     7.50     L+650        10,531,671        10,451,145        10,505,342   

Curo Health Services Holdings, Inc.

    02/07/2022      Healthcare and Pharmaceuticals     6.50     L+550        1,970,000        1,953,997        1,970,000   

DBI Holding LLC

    08/02/2021      Business Services     6.25     L+525        10,000,000        9,900,163        9,900,000   

DCS Business Services, Inc.

    03/19/2018      Business Services     8.75     L+725        2,237,139        2,225,615        2,237,139   

DISA Global Solutions, Inc.

    12/09/2020      Business Services     5.50     L+450        4,925,000        4,889,096        4,875,750   

Douglas Products and Packaging Company LLC

    06/30/2020      Chemicals, Plastics and Rubber     5.75     L+475        4,687,500        4,659,016        4,687,500   

Driven Performance Brands, Inc. (8)

    09/10/2020      Consumer Goods: Durable     5.75     L+475        8,550,000        8,513,835        8,507,250   

Driven Performance Brands, Inc. (Revolver) (8), (10)

    09/10/2020      Consumer Goods: Durable                   1,000,000                 

Education Networks of America, Inc.

    05/06/2021      Telecommunications     8.00     L+700        8,641,304        8,599,431        8,598,098   

Education Networks of America, Inc. (Revolver)

    05/06/2021      Telecommunications     8.00     L+700        434,783        434,783        434,783   

Education Networks of America, Inc. (Revolver) (10)

    05/06/2021      Telecommunications                   869,565                 

Efficient Collaborative Retail Marketing Company, LLC

    06/15/2022      Media: Diversified and Production     7.75     L+675        10,972,500        10,864,398        10,972,500   

Emerging Markets Communications, LLC

    07/01/2021      Telecommunications     6.75     L+575        4,937,500        4,875,844        4,702,969   

FHC Health Systems, Inc.

    12/23/2021      Healthcare and Pharmaceuticals     5.00     L+400        4,925,000        4,884,041        4,798,821   

GlobalLogic Holdings, Inc.

    05/31/2019      High Tech Industries     6.25     L+525        3,890,000        3,867,640        3,880,275   

Greenway Health, LLC

    11/04/2020      High Tech Industries     6.00     L+500        6,807,500        6,765,938        6,620,294   

GTCR Valor Companies, Inc.

    06/16/2023      Media: Broadcasting and Subscription     7.00     L+600        7,481,250        7,191,975        7,116,539   

Harbortouch Payments, LLC

    05/31/2022      Banking, Finance, Insurance and
Real Estate
    7.00     L+600        6,956,250        6,889,369        7,025,812   

Highline Aftermarket Acquisition, LLC (f/k/a DYK
Prime Acquisition, LLC)

    04/01/2022      Wholesale     5.75     L+475        7,312,500        7,244,146        7,275,937   

Hollander Sleep Products, LLC

    10/21/2020      Consumer Goods: Non-Durable     9.00     L+800        1,165,886        1,153,016        1,142,569   

Hostway Corporation

    12/13/2019      High Tech Industries     6.00     L+475        2,624,730        2,610,592        2,183,890   

Hunter Defense Technologies, Inc. (8)

    08/05/2019      Aerospace and Defense     7.00     L+600        6,256,250        6,218,559        5,505,500   

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

    11/04/2020      Construction and Building     7.25     L+625        6,225,820        6,133,990        6,225,820   

Idera, Inc.

    04/09/2021      High Tech Industries     6.50     L+550        7,942,494        7,293,179        7,684,363   

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

    05/01/2019      Business Services     7.25     L+600        8,676,097        8,614,521        8,242,292   

Imagine! Print Solutions, LLC

    03/30/2022      Media: Advertising, Printing and
Publishing
    7.00     L+600        5,974,987        5,914,562        6,027,269   

Instant Web, LLC, Term Loan A

    03/28/2019      Media: Advertising, Printing and
Publishing
    5.50     L+450        5,277,938        5,235,239        5,277,938   

Instant Web, LLC, Term Loan B

    03/28/2019      Media: Advertising, Printing and
Publishing
    12.00     L+1,100        4,500,000        4,460,571        4,500,000   

Interior Specialists, Inc.

    06/30/2020      Construction and Building     9.00     L+800        6,662,719        6,609,864        6,662,719   

Inventus Power, Inc. (f/k/a ICC-Nexergy, Inc.)

    04/30/2020      Consumer Goods: Durable     6.50     L+550        4,882,266        4,846,935        4,686,976   

Jackson Hewitt Inc.

    07/30/2020      Consumer Services     8.00     L+700        4,900,000        4,820,995        4,753,000   

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

    02/19/2021      Chemicals, Plastics and Rubber     10.00     L+900        4,002,471        3,932,760        3,925,841   

Kendra Scott, LLC

    07/17/2020      Retail     7.00     L+600        2,850,000        2,827,307        2,821,500   

KHC Holdings, Inc.

    10/31/2022      Wholesale     7.00     L+600        12,406,250        12,210,683        12,344,219   

KHC Holdings, Inc. (Revolver) (8), (10)

    10/30/2020      Wholesale                   1,209,677                 

Lago Resort & Casino, LLC

    03/07/2022      Hotel, Gaming and Leisure     10.50     L+950        10,174,500        9,984,965        9,971,010   

Lanyon Solutions, Inc.

    11/13/2020      High Tech Industries     5.50     L+450        1,945,020        1,940,066        1,930,432   

LifeCare Holdings LLC (8)

    11/30/2018      Healthcare and Pharmaceuticals     6.50     L+525        5,407,864        5,371,524        5,272,668   

Lindblad Expeditions, Inc. (6), (11)

    05/10/2021      Hotel, Gaming and Leisure     5.50     L+450        2,186,607        2,177,539        2,186,607   

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

    05/10/2021      Hotel, Gaming and Leisure     5.50     L+450        282,143        280,973        282,143   

Lombart Brothers, Inc.

    04/13/2022      Capital Equipment     7.75     L+675        5,985,000        5,901,046        6,014,925   

Lombart Brothers, Inc. (Revolver) (8)

    04/13/2022      Capital Equipment     7.75     L+675        176,991                176,991                176,991   

 

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

S-37


Table of Contents

PENNANTPARK FLOATING RATE CAPITAL LTD. AND SUBSIDIARIES

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

SEPTEMBER 30, 2016

 

Issuer Name

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

Lombart Brothers, Inc. (Revolver) (8), (10)  

    04/13/2022        Capital Equipment                      1,061,947      $      $   

Long’s Drugs Incorporated

    08/19/2021        Healthcare and Pharmaceuticals        6.25     L+525        5,000,000        4,951,874        4,950,000   

LSF9 Atlantis Holdings, LLC

    01/15/2021        Retail        10.00     L+900        9,542,392        9,417,467        9,542,392   

LTI Holdings, Inc.

    04/18/2022        Chemicals, Plastics and Rubber        5.25     L+425        5,431,250        4,973,326        5,254,734   

Marketplace Events LLC

    01/27/2021        Media: Diversified and Production        6.25     L+525        1,362,530        1,342,162        1,342,092   

Marketplace Events LLC (12)

    01/27/2021        Media: Diversified and Production        6.25     P+275      C$ 17,244,188        12,065,652        13,078,215   

Marketplace Events LLC (Revolver) (8)

    01/27/2021        Media: Diversified and Production        6.25     P+275        1,090,024        1,090,024        1,090,024   

Marketplace Events LLC (Revolver) (8), (10)

    01/27/2021        Media: Diversified and Production                      613,139                 

Mission Critical Electronics, Inc. (8)

    09/28/2022        Capital Equipment        6.00     L+500        4,116,608        4,075,499        4,075,442   

Mission Critical Electronics, Inc. (Revolver) (8), (10)

    09/28/2021        Capital Equipment                      883,392                 

New Trident HoldCorp, Inc.

    07/31/2019        Healthcare and Pharmaceuticals        6.50     L+525        8,817,647        8,767,669        8,288,588   

Pathway Partners Vet Management Company LLC (8)

    08/19/2022        Healthcare and Pharmaceuticals        6.00     L+500        6,268,657        6,205,970        6,205,970   

Pathway Partners Vet Management Company LLC (8), (10)

    08/19/2022        Healthcare and Pharmaceuticals                      3,731,343                 

Polycom, Inc.

    09/27/2023        Telecommunications        7.50     L+650        6,000,000        5,760,000        5,775,000   

Precyse Acquisition Corp.

    10/20/2022        Healthcare and Pharmaceuticals        6.50     L+550        3,990,000        3,932,956        4,014,938   

Premier Dental Services, Inc.

    11/01/2018        Consumer Services        7.50     L+650        7,528,230        7,473,587        7,490,588   

Profile Products LLC

    05/20/2021        Environmental Industries        5.75     L+475        7,281,762        7,222,561        7,281,762   

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

    05/20/2020        Environmental Industries                      2,459,016                 

Quick Weight Loss Centers, LLC

    08/23/2021        Beverage, Food and Tobacco        5.75     L+475        10,000,000        9,852,456        9,900,000   

Research Now Group, Inc.

    03/18/2021        High Tech Industries        5.50     L+450        6,895,000        6,867,800        6,688,150   

Robertshaw US Holding Corp.    

    06/18/2019        Consumer Goods: Durable        8.50     L+700        4,252,830        4,233,671        4,258,699   

Ryan, LLC

    08/07/2020        Business Services        6.75     L+575        4,218,750        4,166,413        4,163,400   

Sensus USA, Inc.

    04/05/2023        Utilities: Water        6.50     L+550        9,975,000        9,692,511        9,999,938   

Snak Club, LLC

    07/19/2021        Beverage, Food and Tobacco        6.00     L+500        4,968,748        4,896,623        4,919,060   

Snak Club, LLC (Revolver) (10)

    07/19/2021        Beverage, Food and Tobacco                      500,000                 

Software Paradigms International Group, LLC

    05/21/2021        High Tech Industries        6.50     L+550        9,875,000        9,781,596        9,825,625   

Sotera Defense Solutions, Inc.

    04/21/2017        Aerospace and Defense        9.00     L+750        5,668,843        5,614,696        5,640,499   

Sundial Group Holdings LLC

    10/19/2021        Consumer Goods: Non-Durable        7.25     L+625        7,312,500        7,200,786        7,312,500   

Survey Sampling International, LLC

    12/16/2020        Business Services        6.00     L+500        7,446,562        7,395,200        7,409,329   

Systems Maintenance Services Holding, Inc.

    10/18/2019        High Tech Industries        5.00     L+400        5,850,000        5,834,217        5,733,000   

Tensar Corporation

    07/09/2021        Construction and Building        5.75     L+475        4,822,723        4,786,985        4,071,198   

The Original Cakerie, Co. (6), (11)

    07/20/2021        Consumer Goods: Non-Durable        6.50     L+550        3,092,295        3,062,366        3,061,372   

The Original Cakerie Ltd. (6), (11)

    07/20/2021        Consumer Goods: Non-Durable        6.00     L+500        5,986,002        5,928,120        5,926,142   

The Original Cakerie Ltd. (Revolver) (6), (8), (10), (11)

    07/20/2021        Consumer Goods: Non-Durable                      1,418,484               (7,092

TOMS Shoes, LLC

    11/02/2020        Consumer Goods: Non-Durable        6.50     L+550        1,970,000        1,825,559        1,576,000   

Triad Manufacturing, Inc.

    12/28/2020        Capital Equipment        11.27     L+1,075 (9)      10,306,936        10,124,477        10,306,936   

UniTek Global Services, Inc. (8)

    01/14/2019        Telecommunications       

 

9.50

(PIK 1.00


%) 

    L+850        256,971        256,971        256,971   

UniTek Global Services, Inc. (8)

    01/14/2019        Telecommunications        8.50     L+750        599,702        562,432        590,706   

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

    01/14/2019        Telecommunications                      151,090                 

Universal Fiber Systems, LLC

    10/04/2021        Chemicals, Plastics and Rubber        6.50     L+550        4,962,500        4,919,423        4,937,688   

U.S. Anesthesia Partners, Inc.

    12/31/2019        Healthcare and Pharmaceuticals        6.00     L+500        9,900,000        9,818,407        9,850,500   

US Med Acquisition, Inc. (8)

    08/13/2021        Healthcare and Pharmaceuticals        10.00     L+900        3,089,844        3,089,844        3,089,844   

Vistage Worldwide, Inc.

    08/19/2021        Media: Broadcasting and Subscription        6.50     L+550        4,792,831        4,752,002        4,792,831   

Winchester Electronics Corporation

    06/30/2022        Capital Equipment        7.50     L+650        7,773,579        7,703,094        7,668,171   

Winchester Electronics Corporation (10)

    06/30/2022        Capital Equipment                      708,333               (9,605

Worley Claims Services, LLC

    10/30/2020       
 
Banking, Finance, Insurance and Real
Estate
  
  
    9.00     L+800        7,316,440        7,259,010        7,316,440   
           

 

 

   

 

 

 

Total First Lien Secured Debt

              549,736,982        548,410,095   
           

 

 

   

 

 

 

Second Lien Secured Debt—9.7%

             

Affinion Group, Inc. (8)

    10/31/2018        Consumer Goods: Durable        8.50     L+700        1,000,000        942,276        879,170   

American Gilsonite Company (5), (8)

    09/01/2017        Metals and Mining        (7)             1,000,000        1,000,000        700,000   

Douglas Products and Packaging Company LLC

    12/31/2020        Chemicals, Plastics and Rubber        11.34     L+1,050 (9)      2,000,000        1,971,030        2,020,000   

Howard Berger Co. LLC

    09/30/2020        Wholesale        11.00     L+1,000        11,000,000        10,511,818        9,900,000   

MailSouth, Inc.

    10/22/2021       
 
Media: Advertising, Printing and
Publishing
  
  
    11.50     L+1,050        3,775,000        3,703,724        3,775,000   

Novitex Acquisition, LLC

    07/07/2021        Business Services        12.25     L+1,100        11,000,000        10,914,618        11,000,000   

Penton Media, Inc. (8)

    10/02/2020        Media: Diversified and Production        9.00     L+775        4,872,042        4,826,926        4,853,772   

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

    08/01/2017        Energy: Oil and Gas        12.50            2,812,500        2,756,732        1,631,250   

VT Buyer Acquisition Corp.

    01/30/2023        Business Services        10.75     L+975        1,837,500        1,777,304        1,837,500   
           

 

 

   

 

 

 

Total Second Lien Secured Debt

              38,404,428        36,596,692   
           

 

 

   

 

 

 

 

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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PENNANTPARK FLOATING RATE CAPITAL LTD. AND SUBSIDIARIES

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

SEPTEMBER 30, 2016

 

Issuer Name

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

Subordinated Debt/Corporate Notes—0.8% (8)

             

Affinion International Holdings Limited (5), (6), (11)

    07/30/2018        Consumer Goods: Durable       

 

7.50

(PIK 4.00


%) 

           1,135,273      $ 1,030,320      $ 1,035,937   

Credit Infonet, Inc.

    10/26/2018        High Tech Industries       

 

13.00

(PIK 1.75


%) 

           2,069,078        2,050,767        1,975,969   

UniTek Global Services, Inc.

    07/15/2019        Telecommunications       

 

15.00

(PIK 15.00


%) 

           146,996        146,996        148,466   
           

 

 

   

 

 

 

Total Subordinated Debt/Corporate Notes

              3,228,083        3,160,372   
           

 

 

   

 

 

 

Preferred Equity—0.4% (7), (8)

             

UniTek Global Services, Inc.

           Telecommunications        13.50            1,047,317        670,283        1,319,308   
           

 

 

   

 

 

 

Common Equity/Warrants—2.5% (7), (8)

             

Affinion Group Holdings, Inc.

           Consumer Goods: Durable                      99,029        3,514,572        3,700,216   

Affinion Group Holdings, Inc., Series C and Series D

           Consumer Goods: Durable                      4,298        1,186,649        20,096   

Corfin InvestCo, L.P.

           Aerospace and Defense                      3,000        300,000        621,550   

Corfin InvestCo, L.P. (10)

           Aerospace and Defense                      3,000                 

e.l.f. Beauty, Inc. (f/k/a J.A. Cosmetics US, Inc.)

           Consumer Goods: Durable                      110,399        295,670        2,957,767   

Faraday Holdings, LLC
(Interior Specialists, Inc.)

           Construction and Building                      1,141        58,044        94,560   

Patriot National, Inc.

          
 
Banking, Finance,
Insurance and Real Estate
 
  
                  11,867        27,995        106,922   

TPC Broadband Investors, LP
(Advanced Cable Communications, LLC)

           Telecommunications                      430,666        430,666        430,666   

TPC Broadband Investors, LP
(Advanced Cable Communications, LLC) (10)

           Telecommunications                      569,334                 

UniTek Global Services, Inc.

           Telecommunications                      149,617               892,276   

Vestcom Parent Holdings, Inc.

          
 
Media: Advertising,
Printing and Publishing
 
  
                  15,179        56,895        577,005   
           

 

 

   

 

 

 

Total Common Equity/Warrants

              5,870,491        9,401,058   
 

 

 

   

 

 

 

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

  

    597,910,267        598,887,525   
 

 

 

   

 

 

 

Cash and Cash Equivalents—7.7%

             

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

  

    28,212,041        28,212,041   

BNY Mellon Cash Reserve and Cash

              691,318        698,932   
 

 

 

   

 

 

 

Total Cash and Cash Equivalents

              28,903,359        28,910,973   
 

 

 

   

 

 

 

Total Investments and Cash Equivalents—167.0%

            $    626,813,626      $ 627,798,498   
 

 

 

   

 

 

 

Liabilities in Excess of Other Assets—(67.0)%

                (251,891,670

Net Assets—100.0%

              $ 375,906,828   
 

 

 

 

 

(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 generally presumed to be “non-controlled” when we own 25% or less of the portfolio company’s voting securities and “controlled” when we own more than 25% of the 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 generally 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, or a portion thereof, 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.
(12) Par amount is denominated in Canadian Dollars.

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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PENNANTPARK FLOATING RATE CAPITAL LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2016

(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 while seeking to preserve capital. We seek to achieve our investment objective by investing primarily in loans bearing a variable-rate of interest, or Floating Rate Loans, and other investments made to U.S. middle-market companies whose debt is rated below investment grade. Floating Rate Loans pay interest at variable rates, which are determined periodically, on the basis of a floating base lending rate such as LIBOR, with or without a floor, plus a fixed spread. Under normal market conditions, we generally expect that at least 80% of the value of our Managed Assets, 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 debt, 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 mezzanine debt, which we define as second lien secured and subordinated debt, 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 the management fee owed with respect to such services is to be paid to us so long as the Investment Adviser remains the collateral manager. This arrangement does not increase our consolidated management fee. The Credit Facility allows Funding I to borrow up to $350 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.

We have formed and expect to continue to form certain taxable subsidiaries, including the Taxable Subsidiary, which are subject to tax as corporations. The Taxable Subsidiary allows us to hold equity securities of certain portfolio companies treated as pass-through entities for U.S. federal income tax purposes while allowing us to maintain our ability to qualify as a RIC under the Code.

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.

 

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PENNANTPARK FLOATING RATE CAPITAL LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

DECEMBER 31, 2016

(Unaudited)

 

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 and a consistently applied valuation process, as described in this Report. With respect to investments for which there is no readily available market value, the factors that the board of directors may take into account in pricing our investments at fair value include, as relevant, the nature and realizable value of any collateral, the portfolio company’s ability to make payments and its earnings and discounted cash flow, the markets in which the portfolio company does business, comparison to publicly traded securities and other relevant factors. When an external event such as a purchase transaction, public offering or subsequent equity sale occurs, we consider the pricing indicated by the external event to corroborate or revise our valuation. Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the price used in an actual transaction may be different than our valuation and the difference may be material. See Note 5.

Our portfolio generally consists of illiquid securities, including debt and equity investments. With respect to investments for which market quotations are not readily available, or for which market quotations are deemed not reflective of the fair value, our board of directors undertakes a multi-step valuation process each quarter, as described below:

 

  (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;

 

  (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 our board of directors has a bona fide reason to believe any such market quote does not reflect the fair value of an investment, it may independently value such investments by using the valuation procedure that it uses with respect to assets for which market quotations are not readily available.

(b) Security Transactions, Revenue Recognition, and Realized/Unrealized Gains or Losses

Security transactions are recorded on a trade-date basis. We measure realized gains or losses by the difference between the net proceeds from the repayment or sale and the amortized cost basis of the investment, using the specific identification method, without regard to unrealized appreciation or depreciation previously recognized, but considering prepayment penalties. Net change in unrealized appreciation or depreciation reflects the change in the fair values of our portfolio investments and Credit Facility during the reporting period, including any reversal of previously recorded unrealized appreciation or depreciation, when gains or losses are realized.

 

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PENNANTPARK FLOATING RATE CAPITAL LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

DECEMBER 31, 2016

(Unaudited)

 

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 or, in the case of deferred financing costs, as interest expense. We record prepayment penalties on loans and debt investments as income. Dividend income, if any, is recognized on an accrual basis on the ex-dividend date to the extent that we expect to collect such amounts.

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 treated as a RIC for federal income tax purposes. As a result, we account for income taxes using the asset and 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 our qualification and election to be treated as a RIC for federal income tax purposes, we typically do not incur any material level of federal income taxes. Although we generally do not incur federal income taxes as a RIC, we may elect to retain a portion of our calendar year income, which may result in an excise tax or we may incur taxes through our taxable subsidiaries. For the three months ended December 31, 2016 and 2015, we recorded a provision for taxes of less than $0.1 million and zero, respectively.

We recognize the effect of a tax position in our Consolidated Financial Statements when it is more likely than not, based on the technical merits, that the position will be sustained upon examination by the applicable tax authority. Tax positions not considered to satisfy the “more-likely-than-not” threshold would be recorded as a tax expense or benefit. We did not have any material uncertain tax positions or any unrecognized tax benefits that met the recognition or measurement criteria of ASC 740-10-25 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 net realized gain recognized for financial reporting purposes. Differences between tax regulations and GAAP may be permanent or temporary. Permanent differences are reclassified among capital accounts in the Consolidated Financial Statements to reflect their 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) Foreign Currency Translation

Our books and records are maintained in U.S. dollars. Any foreign currency amounts are translated into U.S. dollars on the following basis:

 

  1. Fair value of investment securities, other assets and liabilities – at the exchange rates prevailing at the end of the applicable period; and

 

  2. Purchases and sales of investment securities, income and expenses – at the exchange rates prevailing on the respective dates of such transactions.

 

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PENNANTPARK FLOATING RATE CAPITAL LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

DECEMBER 31, 2016

(Unaudited)

 

Although net assets and fair values are presented based on the applicable foreign exchange rates described above, we do not isolate that portion of the results of operations due to changes in foreign exchange rates on investments, other assets and debt from the fluctuations arising from changes in fair values of investments and liabilities held. Such fluctuations are included with the net realized and unrealized gain or loss from investments and liabilities.

Foreign security and currency translations may involve certain considerations and risks not typically associated with investing in U.S. companies and U.S. government securities. These risks include, but are not limited to, currency fluctuations and revaluations and future adverse political, social and economic developments, which could cause investments in foreign markets to be less liquid and prices to be more volatile than those of comparable U.S. companies or U.S. government securities.

(f) Consolidation

As permitted under Regulation S-X and as explained by ASC 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 our taxable subsidiaries in our Consolidated Financial Statements.

(g) 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.

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 2017. 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 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. 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 commitments, if any) and is payable quarterly in arrears. The base management fee is calculated based on the average adjusted gross assets at the end of the two most recently completed calendar quarters, and appropriately adjusted for any share issuances or repurchases during the current calendar quarter. For example, if we sold shares on the 45th day of a quarter and did not use the proceeds from the sale to repay outstanding indebtedness, our gross assets for such quarter would give effect to the net proceeds of the issuance for only 45 days of the quarter during which the additional shares were outstanding. For the three months ended December 31, 2016 and 2015, the Investment Adviser earned a base management fee of $1.6 million and $1.1 million, respectively, from us.

 

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PENNANTPARK FLOATING RATE CAPITAL LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

DECEMBER 31, 2016

(Unaudited)

 

The incentive fee has two parts, as follows:

One part is calculated and payable quarterly in arrears based on our Pre-Incentive Fee Net Investment Income for the immediately preceding calendar quarter. For this purpose, Pre-Incentive Fee Net Investment Income means interest income, dividend income and any other income, including any other fees (other than fees for providing managerial assistance), such as amendment, commitment, origination, prepayment penalties, structuring, diligence and consulting fees or other fees received from portfolio companies, accrued during the calendar quarter, minus our operating expenses for the quarter (including the base management fee, any expenses payable under the Administration Agreement and any interest expense or amendment fees under any credit facility and distribution paid on any issued and outstanding preferred stock, but excluding the incentive fee). Pre-Incentive Fee Net Investment Income includes, in the case of investments with a deferred interest feature (such as OID, debt instruments with PIK interest and zero coupon securities), accrued income not yet received in cash. Pre-Incentive Fee Net Investment Income does not include any realized capital gains, computed net of all realized capital losses or unrealized capital appreciation or depreciation. Pre-Incentive Fee Net Investment Income, expressed as a percentage of the value of our net assets at the end of the immediately preceding calendar quarter, is compared to the hurdle rate of 1.75% per quarter (7.00% annualized). We pay the Investment Adviser an incentive fee with respect to our Pre-Incentive Fee Net Investment Income in each calendar quarter as follows: (1) no incentive fee in any calendar quarter in which our Pre-Incentive Fee Net Investment Income does not exceed the hurdle rate of 1.75%, (2) 50% of our Pre-Incentive Fee Net Investment Income with respect to that portion of such Pre-Incentive Fee Net Investment Income, if any, that exceeds the hurdle rate but is less than 2.9167% in any calendar quarter (11.67% annualized) (we refer to this portion of our Pre-Incentive Fee Net Investment Income (which exceeds the hurdle but is less than 2.9167%) as the “catch-up,” which is meant to provide our Investment Adviser with 20% of our Pre-Incentive Fee Net Investment Income, as if a hurdle did not apply, if this net investment income exceeds 2.9167% in any calendar quarter), and (3) 20% of the amount of our Pre-Incentive Fee Net Investment Income, if any, that exceeds 2.9167% in any calendar quarter. These calculations are pro-rated for any share issuances or repurchases during the relevant quarter, if applicable. For the three months ended December 31, 2016 and 2015, the Investment Adviser earned $0.9 million and zero, respectively, in incentive fees on net investment income from us.

The second part of the incentive fee is determined and payable in arrears as of the end of each calendar year (or upon termination of the Investment Management Agreement, as of the termination date) and equals 20% of our realized capital gains, if any, on a cumulative basis from inception through the end of each calendar year, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis, less the aggregate amount of any previously paid capital gain incentive fees. For the three months ended December 31, 2016 and 2015, the Investment Adviser did not earn an incentive fee on capital gains as calculated under the Investment Management Agreement (as described above).

Under GAAP, we are required to accrue a capital gains incentive fee based upon net realized capital gains and net unrealized capital appreciation and depreciation on investments held at the end of each period. In calculating the capital gains incentive fee accrual, we considered the cumulative aggregate unrealized capital appreciation in the calculation, as a capital gains incentive fee would be payable if such unrealized capital appreciation were realized, even though such unrealized capital appreciation is not permitted to be considered in calculating the fee actually payable under the Investment Management Agreement. This accrual is calculated using the aggregate cumulative realized capital gains and losses and cumulative unrealized capital appreciation or depreciation. If such amount is positive at the end of a period, then we record a capital gains incentive fee equal to 20% of such amount, less the aggregate amount of actual capital gains related 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, if any, will be realized in the future. The incentive fee accrued for under GAAP on our unrealized and realized capital gains for the three months ended December 31, 2016 and 2015 was $0.6 million and zero, 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 2017. 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 Statements of Operations. For the three months ended December 31, 2016 and 2015, the Investment Adviser was reimbursed approximately $0.3 million and $0.1 million, respectively, from us, including expenses the Investment Adviser incurred on behalf of the Administrator, for services described above.

 

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PENNANTPARK FLOATING RATE CAPITAL LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

DECEMBER 31, 2016

(Unaudited)

 

4. INVESTMENTS

Purchases of investments, including PIK interest, for the three months ended December 31, 2016 and 2015 totaled $124.9 million and $99.2 million, respectively. Sales and repayments of investments for the same periods totaled $70.4 million and $26.9 million, respectively. For the three months ended December 31, 2016, the Company sold $5.0 million in total investments to an affiliated fund managed by our Investment Adviser in accordance with, and pursuant to procedures adopted under, Rule 17a-7 of the 1940 Act. Realized gain on that transaction amounted to less than $0.1 million.

Investments, cash and cash equivalents consisted of the following:

 

     December 31, 2016      September 30, 2016  

Investment Classification

   Cost      Fair Value      Cost      Fair Value  

First lien

   $ 599,327,868       $ 600,052,593       $ 549,736,982       $ 548,410,095   

Second lien

     38,520,326         36,913,063         38,404,428         36,596,692   

Subordinated debt / corporate notes

     8,285,610         8,314,839         3,228,083         3,160,372   

Equity

     7,206,493         11,588,392         6,540,774         10,720,366   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investments

     653,340,297         656,868,887         597,910,267         598,887,525   
  

 

 

    

 

 

    

 

 

    

 

 

 

Cash and cash equivalents

     24,201,258         24,203,565         28,903,359         28,910,973   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investments, cash and cash equivalents

   $ 677,541,555       $ 681,072,452       $ 626,813,626       $ 627,798,498   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

 

Industry Classification

   December 31, 2016     September 30, 2016  

Healthcare and Pharmaceuticals

     11     10

Business Services

     8        8   

High Tech Industries

     7        10   

Chemicals, Plastics and Rubber

     6        3   

Consumer Goods: Durable

     6        7   

Telecommunications

     6        6   

Wholesale

     6        5   

Aerospace and Defense

     5        5   

Capital Equipment

     5        5   

Hotel, Gaming and Leisure

     5        6   

Media: Advertising, Printing and Publishing

     5        4   

Retail

     5        5   

Consumer Goods: Non-Durable

     4        4   

Media: Broadcasting and Subscription

     4        2   

Media: Diversified and Production

     4        5   

Beverage, Food and Tobacco

     3        2   

Construction and Building

     3        3   

Banking, Finance, Insurance and Real Estate

     2        2   

Consumer Services

     2        2   

Utilities: Water

            2   

All Other

     3        4   
  

 

 

   

 

 

 

Total

     100     100
  

 

 

   

 

 

 

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 date.

 

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PENNANTPARK FLOATING RATE CAPITAL LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

DECEMBER 31, 2016

(Unaudited)

 

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.

The inputs into the determination of fair value may require significant management judgment or estimation. Even if observable market data is available, such information may be the result of consensus pricing information, disorderly transactions or broker quotes which include a disclaimer that the broker would not be held to such a price in an actual transaction. The non-binding nature of consensus pricing and/or quotes accompanied by disclaimer would result in classification as Level 3 information, assuming no additional corroborating evidence was available. Corroborating evidence that would result in classifying these non-binding broker/dealer bids as a Level 2 asset includes observable orderly market-based transactions for the same or similar assets or other relevant observable market-based inputs that may be used in pricing an asset.

Our investments are generally structured as Floating Rate Loans, mainly senior secured debt, 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 valued using unobservable inputs are included in Level 3 of the fair value hierarchy.

A review of fair value hierarchy classifications is conducted on a quarterly basis. Changes in our ability to observe valuation inputs may result in a reclassification for certain financial assets or liabilities. 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. During the three months ended December 31, 2016 and 2015, our ability to observe valuation inputs resulted in no reclassifications and one reclassification of an asset from Level 2 to 1, respectively.

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 typically include a disclaimer, may not have corroborating evidence, may be the result of a disorderly transaction and may be the result of consensus pricing. The Investment Adviser assesses the source and reliability of bids from brokers or dealers. If the board of directors has a bona fide reason to believe any such 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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PENNANTPARK FLOATING RATE CAPITAL LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

DECEMBER 31, 2016

(Unaudited)

 

The remainder of our portfolio and our long-term Credit Facility are valued using a market comparable or an enterprise market value technique. With respect to investments for which there is no readily available market value, the factors that the board of directors may take into account in pricing our investments at fair value include, as relevant, the nature and realizable value of any collateral, the portfolio company’s ability to make payments, its earnings and discounted cash flow, the markets in which the portfolio company does business, comparison to publicly traded securities and other relevant factors. When an external event such as a purchase transaction, public offering or subsequent equity sale occurs, the pricing indicated by the external event, excluding transaction costs, is used to corroborate the valuation. When using earnings multiples to value a portfolio company, the multiple used requires the use of judgment and estimates in determining how a market participant would price such an asset. These non-public investments using unobservable inputs are included in Level 3 of the fair value hierarchy. Generally, the sensitivity of unobservable inputs or combination of inputs such as industry comparable companies, market outlook, consistency, discount rates and reliability of earnings and prospects for growth, or lack thereof, affects the multiple used in pricing an investment. As a result, any change in any one of those factors may have a significant impact on the valuation of an investment. Generally, an increase in a market yield will result in a decrease in the valuation of a debt investment, while a decrease in a market yield will have the opposite effect. Generally, an increase in an EBITDA multiple will result in an increase in the valuation of an investment, while a decrease in an EBITDA will have the opposite effect.

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

 

Asset Category

   Fair Value at
December 31, 2016
     Valuation Technique      Unobservable Input      Range of Input
(Weighted Average)
 

First lien

   $ 284,513,256         Market Comparable         Broker/Dealer bids or quotes         N/A   

Second lien

     7,590,563         Market Comparable         Broker/Dealer bids or quotes         N/A   

Subordinated debt / corporate notes

     1,111,659         Market Comparable         Broker/Dealer bids or quotes         N/A   

First lien

     315,539,337         Market Comparable         Market Yield         5.3% – 16.4% (8.5%)   

Second lien

     29,322,500         Market Comparable         Market Yield         12.2% – 17.0% (14.5%)   

Subordinated debt / corporate notes

     7,203,180         Market Comparable         Market Yield         12.1% – 18.6% (13.4%)   

Equity

     8,430,737         Enterprise Market Value         EBITDA multiple         4.5x – 11.5x (7.5x)   
  

 

 

          

Total Level 3 investments

   $ 653,711,232            
  

 

 

          

Long-Term Credit Facility

   $ 299,859,712         Market Comparable         Market Yield         3.2%   
  

 

 

          

Asset Category

   Fair Value at
September 30, 2016
     Valuation Technique      Unobservable Input      Range of Input
(Weighted Average)
 

First lien

   $ 264,299,729         Market Comparable         Broker/Dealer bids or quotes         N/A   

Second lien

     8,064,192         Market Comparable         Broker/Dealer bids or quotes         N/A   

Subordinated debt / corporate notes

     1,035,937         Market Comparable         Broker/Dealer bids or quotes         N/A   

First lien

     284,110,366         Market Comparable         Market Yield         5.3% – 13.9% (8.3%)   

Second lien

     28,532,500         Market Comparable         Market Yield         10.2% – 15.9% (13.7%)   

Subordinated debt / corporate notes

     2,124,435         Market Comparable         Market Yield         15.7% – 16.5% (15.8%)   

Equity

     7,655,677         Enterprise Market Value         EBITDA multiple         4.3x – 9.0x (7.2x)   
  

 

 

          

Total Level 3 investments

   $ 595,822,836            
  

 

 

          

Long-Term Credit Facility

   $ 232,389,498         Market Comparable         Market Yield         3.4%   
  

 

 

          

 

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PENNANTPARK FLOATING RATE CAPITAL LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

DECEMBER 31, 2016

(Unaudited)

 

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

 

     Fair Value Measurements at December 31, 2016  

Description

   Fair Value      Level 1      Level 2      Level 3  

First lien

   $ 600,052,593       $ —         $ —         $ 600,052,593   

Second lien

     36,913,063         —           —           36,913,063   

Subordinated debt / corporate notes

     8,314,839         —           —           8,314,839   

Equity

     11,588,392         55,182         3,102,473         8,430,737   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investments

     656,868,887         55,182         3,102,473         653,711,232   
  

 

 

    

 

 

    

 

 

    

 

 

 

Cash and cash equivalents

     24,203,565         24,203,565         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investments, cash and cash equivalents

   $ 681,072,452       $ 24,258,747       $ 3,102,473       $ 653,711,232   
  

 

 

    

 

 

    

 

 

    

 

 

 

Long-Term Credit Facility

   $ 299,859,712       $ —         $ —         $ 299,859,712   
  

 

 

    

 

 

    

 

 

    

 

 

 
     Fair Value Measurements at September 30, 2016  

Description

   Fair Value      Level 1      Level 2      Level 3  

First lien

   $ 548,410,095       $ —         $ —         $ 548,410,095   

Second lien

     36,596,692         —           —           36,596,692   

Subordinated debt / corporate notes

     3,160,372         —           —           3,160,372   

Equity

     10,720,366         106,922         2,957,767         7,655,677   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investments

     598,887,525         106,922         2,957,767         595,822,836   
  

 

 

    

 

 

    

 

 

    

 

 

 

Cash and cash equivalents

     28,910,973         28,910,973         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investments, cash and cash equivalents

   $ 627,798,498       $ 29,017,895       $ 2,957,757       $ 595,822,836   
  

 

 

    

 

 

    

 

 

    

 

 

 

Long-Term Credit Facility

   $ 232,389,498       $ —         $ —         $ 232,389,498   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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PENNANTPARK FLOATING RATE CAPITAL LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

DECEMBER 31, 2016

(Unaudited)

 

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

 

     Three Months Ended December 31, 2016  

Description

   First Lien      Second lien,
subordinated debt
and equity investments
     Totals  

Beginning Balance

   $ 548,410,095       $ 47,412,741       $ 595,822,836   

Net realized gains

     280,208         263,993         544,201   

Net unrealized appreciation

     2,051,612         406,754         2,458,366   

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

     109,256,025         16,035,021         125,291,046   

Sales, repayments and non-cash exchanges

     (59,945,347      (10,459,870      (70,405,217

Transfers in and/or out of Level 3

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Ending Balance

   $ 600,052,593       $ 53,658,639       $ 653,711,232   
  

 

 

    

 

 

    

 

 

 

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

   $ 1,927,211       $ 653,710       $ 2,580,921   
  

 

 

    

 

 

    

 

 

 
     Three Months Ended December 31, 2015  

Description

   First Lien      Second lien,
subordinated debt
and equity investments
     Totals  

Beginning Balance

   $ 334,957,341       $ 56,163,940       $ 391,121,281   

Net realized gains (losses)

     53,300         (3,285,308      (3,232,008

Net unrealized (depreciation) appreciation

     (2,864,750      2,266,779         (597,971

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

     97,970,469         1,584,985         99,555,454   

Sales, repayments and non-cash exchanges

     (26,887,251      26,442         (26,860,809

Transfers in and/or out of Level 3

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Ending Balance

   $ 403,229,109       $ 56,756,838       $ 459,985,947   
  

 

 

    

 

 

    

 

 

 

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

   $ (2,963,079    $ (758,129    $ (3,721,208
  

 

 

    

 

 

    

 

 

 

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

 

     Three Months Ended December 31,  

Long-Term Credit Facility (1)

   2016      2015  

Beginning Balance (cost – $232,907,500 and $29,600,000, respectively)

   $ 232,389,498       $ 29,600,000   

Net change in unrealized appreciation (depreciation) included in earnings

     1,068,214         (601,875

Borrowings

     91,902,000         69,300,000   

Repayments

     (25,500,000      (2,600,000

Transfers in and/or out of Level 3

     —           —     
  

 

 

    

 

 

 

Ending Balance (cost – $299,309,500 and $96,300,000, respectively)

   $ 299,859,712       $ 95,698,125   
  

 

 

    

 

 

 

 

(1) The carrying value of our consolidated financial liabilities approximates fair value.

 

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PENNANTPARK FLOATING RATE CAPITAL LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

DECEMBER 31, 2016

(Unaudited)

 

As of December 31, 2016, we had outstanding non-U.S. dollar borrowings on our Credit Facility. Net change in fair value from foreign currency translation on outstanding borrowings is listed below:

 

Foreign Currency

   Amount Borrowed      Borrowing Cost      Current Value      Reset Date      Change in Fair
Value
 

Canadian Dollar

   C$ 17,500,000       $ 12,407,501       $ 13,049,470         January 3, 2017       $ 641,969   

Euro

   18,000,000         18,702,000         18,985,536         January 3, 2017         283,536   
     

 

 

    

 

 

       

 

 

 
      $ 31,109,501       $ 32,035,006          $ 925,505   
     

 

 

    

 

 

       

 

 

 

As of September 30, 2016, we had outstanding non-U.S. dollar borrowings on our Credit Facility. Net change in fair value from foreign currency translation on outstanding borrowings is listed below:

 

Foreign Currency

   Amount Borrowed      Borrowing Cost      Current Value      Reset Date      Change in Fair
Value
 

Canadian Dollar

   C$ 17,500,000       $ 12,407,501       $ 13,338,920         October 3, 2016