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US direct lending trust looks to pour 6.5% yield for investors

US direct lending trust looks to pour 6.5% yield for investors
 

Lender PennantPark is seeking £150 million for a new trust that will provide loans to ‘middle market’ US companies.

The PennantPark Income Trust, which hopes to have the ticker PINT, will target a yield of 4.5% per annum net of fees and expenses during its first year, rising to 6.5% thereafter. It aims to pay out dividends on a quarterly basis.

According to marketing material seen by Citywire, New York-based PennantPark specialises in lending to middle market businesses, typically with annual revenues between $10 million and $1 billion. Since launch in 2007 to April 2017, it has provided $6 billion of funding to 438 companies.

The business runs a number of funds, including the $4.2 billion Nasdaq-listed PennantPark Investment Corporation. This closed-ended fund makes loans to middle market companies and can invest in ‘non-control equity’, such as preference shares.

Over the past year, its share price has risen by 14.15%. However, its share price is down by 24% over five years.

PennantPark Income will have an annual management fee of 1% of net assets per annum, dropping to 0.9% for assets over £500 million. A quarter of the fee will be paid in shares, held for rolling three-year periods. No fee will be levied on cash that hasn’t been deployed until 90% of the proceeds have been invested. The company plans to invest the proceeds within six months.

The team will allocate a minimum of 70% of assets in senior secured and ‘unitranche’ debt - the latter combining senior and subordinated debt. They can allocate up to 5% of assets to equity.

A minimum of 80% will be in loans to US-based companies with dollar-denominated debt. The same minimum percentage will be in floating rate notes, whose coupons track movements in interest rates. 

The trust will only make loans to companies based in countries that have investment grade ratings.

PennantPark’s investment team includes portfolio manager Whitbridge Williams, who prior to joining the business in 2007 was a managing director in UBS’s leveraged finance group. He is joined by Jose Briones, formerly a partner at Apollo Investment Management, alongside Salvatore Giannetti, who previously held managing director positions at Deutsche Bank USA and UBS.

After three years, the board will consider buying back up to 10% of the shares in issue if the trust is trading on a significant discount. Buybacks will be capped at 14.99% of shares. The team can also borrow up to 25% of the net asset value.

PennantPark plans to issue the prospectus in June, with Stifel Nicolaus Europe acting as the sponsor and bookrunner. If the initial public offer (IPO) goes ahead, shares will be listed on the premium segment of the London Stock Exchange’s main market. A continuation vote will take place every three years. 

Ranger Direct Lending (RDL), which has a market cap of £140 million, could be seen as a competitor. The fund currently offers loans to small and medium-sized businesses, mostly in the US, with close to three quarters of the fund in secured loans. However, its shares trade on a discount of 23.8% to net asset value after its portfolio was hit by the writedown of loans to Arjent Credit. This suggests some investor disenchantment that could provide an opening for PennantPark unless the scepticism is broader with the sector.

In its annual results this week Seneca Global Income and Growth (SIGT) revealed Ranger was one of two direct lending companies it sold last year due to concerns over its asset quality. 

Over the year to 14 June, its share price is down 0.9%, which compares to an average gain of 16.7% in the AIC’s specialist debt sector. Its net asset value has fared better, up 20.7% over the same period.

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