PennantPark Floating Rate Capital Ltd. - Quarter Report: 2014 June (Form 10-Q)

PennantPark Floating Rate Capital Ltd. - Quarter Report: 2014 June (Form 10-Q)

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

FOR THE QUARTER ENDED JUNE 30, 2014

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

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER: 814-00891

PENNANTPARK FLOATING RATE CAPITAL LTD.

(Exact name of registrant as specified in its charter)


MARYLAND		27-3794690
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

590 Madison Avenue, 15^th Floor, New York, N.Y.		10022
(Address of principal executive offices)		(Zip Code)

(212)-905-1000

(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨.

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act.

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

The number of shares of the issuer’s common stock, $0.001 par value, outstanding as of August 6, 2014 was 14,898,056.

PENNANTPARK FLOATING RATE CAPITAL LTD.

FORM 10-Q

FOR THE QUARTER ENDED JUNE 30, 2014

TABLE OF CONTENTS


PART I. CONSOLIDATED FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

Consolidated Statements of Assets and Liabilities as of June 30, 2014 (unaudited) and September 30, 2013			4

Consolidated Statements of Operations for the three and nine months ended June 30, 2014 and 2013 (unaudited)			5

Consolidated Statements of Changes in Net Assets for the nine months ended June 30, 2014 and 2013 (unaudited)			6

Consolidated Statements of Cash Flows for the nine months ended June 30, 2014 and 2013 (unaudited)			7

Consolidated Schedules of Investments as of June 30, 2014 (unaudited) and September 30, 2013			8

Notes to Consolidated Financial Statements (unaudited)			14

Report of Independent Registered Public Accounting Firm			24

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			25

Item 3. Quantitative And Qualitative Disclosures About Market Risk			32

Item 4. Controls and Procedures			32

PART II. OTHER INFORMATION

Item 1. Legal Proceedings			33

Item 1A. Risk Factors			33

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			33

Item 3. Defaults Upon Senior Securities			33

Item 4. Mine Safety Disclosures			33

Item 5. Other Information			33

Item 6. Exhibits			34

SIGNATURES			35

PART I—CONSOLIDATED FINANCIAL INFORMATION

We are filing this Form 10-Q, or the Report, in compliance with Rule 13a-13 promulgated by the Securities and Exchange Commission, or the SEC. In this Report, except where the context suggests otherwise, the terms “Company,” “we,” “our” or “us” refer to PennantPark Floating Rate Capital Ltd. and its consolidated subsidiary; “PennantPark Investment Advisers” or “Investment Adviser” refers to PennantPark Investment Advisers, LLC; “PennantPark Investment Administration” or “Administrator” refers to PennantPark Investment Administration, LLC; “1940 Act” refers to the Investment Company Act of 1940, as amended; “Code” refers to the Internal Revenue Code of 1986, as amended; “RIC” refers to a regulated investment company under the Code; “BDC” refers to a business development company under the 1940 Act. References to our portfolio, our investments, our senior secured revolving credit facility, as amended, or the Credit Facility, and our business include investments we make through our wholly owned consolidated subsidiary, PennantPark Floating Rate Funding I, LLC, or Funding I.

Item 1.

Consolidated Financial Statements

PENNANTPARK FLOATING RATE CAPITAL LTD. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES


	June 30, 2014 (unaudited)			September 30, 2013
Assets
Investments at fair value
Non-controlled, non-affiliated investments (cost—$362,225,391 and $319,283,468, respectively)	$	365,891,603		$	317,803,894
Cash equivalents (See Note 7)		9,940,930			4,578,249
Interest receivable		1,914,432			2,140,802
Receivable for investments sold		3,284,879			3,659,185
Prepaid expenses and other assets		575,972			619,737

Total assets		381,607,816			328,801,867

Liabilities
Distributions payable		1,340,825			1,303,580
Payable for investments purchased		2,194,497			14,021,588
Unfunded investments		2,705,882			934,555
Credit Facility payable (cost—$154,900,000 and $99,600,000, respectively) (See Notes 5 and 9)		154,900,000			99,600,000
Interest payable on Credit Facility		282,449			189,934
Management fee payable (See Note 3)		953,096			731,635
Performance-based incentive fee payable (See Note 3)		2,352,551			1,164,090
Accrued other expenses		606,450			790,091

Total liabilities		165,335,750			118,735,473

Commitments and contingencies (See Note 10)
Net assets
Common stock, 14,898,056 shares issued and outstanding. Par value $0.001 per share and 100,000,000 shares authorized.		14,898			14,898
Paid-in capital in excess of par value		207,481,368			207,481,368
(Distributions in excess of) Undistributed net investment income		(240,033	)		474,766
Accumulated net realized gain on investments		5,349,621			3,574,936
Net unrealized appreciation (depreciation) on investments		3,666,212			(1,479,574	)

Total net assets	$	216,272,066		$	210,066,394

Total liabilities and net assets	$	381,607,816		$	328,801,867

Net asset value per share	$	14.52		$	14.10

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

PENNANTPARK FLOATING RATE CAPITAL LTD. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)


	Three Months Ended June 30,						Nine Months Ended June 30,
	2014			2013			2014		2013
Investment income from:
Non-controlled, non-affiliated investments:
Interest	$	7,524,629		$	4,192,816		$	21,808,074	$	11,807,059
Other income		143,904			477,487			327,828		965,794

Total investment income		7,668,533			4,670,303			22,135,902		12,772,853

Expenses:
Base management fee (See Note 3)		953,096			548,779			2,787,848		1,464,403
Performance-based incentive fee (See Note 3)		825,796			37,709			2,926,261		1,017,929
Interest and expenses on the Credit Facility (See Note 9)		888,718			375,640			2,588,843		1,342,103
Administrative services expenses (See Note 3)		276,000			144,052			678,000		452,876
Other general and administrative expenses		241,985			317,192			766,639		956,400

Expenses before excise tax and amendment costs		3,185,595			1,423,372			9,747,591		5,233,711
Excise tax		120,000			29,355			360,000		96,768
Credit Facility amendment costs (See Notes 5 and 9)		—			—			712,930		500,000

Total expenses		3,305,595			1,452,727			10,820,521		5,830,479

Net investment income		4,362,938			3,217,576			11,315,381		6,942,374

Realized and unrealized gain (loss) on investments and Credit Facility:
Net realized gain on non-controlled, non-affiliated investments		697,831			1,659,391			1,774,685		3,206,861
Net change in unrealized (depreciation) appreciation on:
Non-controlled, non-affiliated investments		(118,995	)		(3,309,840	)		5,145,786		(3,233,442	)
Credit Facility appreciation (See Note 5)		—			—			—		(377,500	)

Net change in unrealized (depreciation) appreciation on investments and Credit Facility		(118,995	)		(3,309,840	)		5,145,786		(3,610,942	)

Net realized and unrealized gain (loss) from investments and Credit Facility		578,836			(1,650,449	)		6,920,471		(404,081	)

Net increase in net assets resulting from operations	$	4,941,774		$	1,567,127		$	18,235,852	$	6,538,293

Net increase in net assets resulting from operations per common share (See Note 6)	$	0.33		$	0.15		$	1.22	$	0.81

Net investment income per common share	$	0.29		$	0.31		$	0.76	$	0.86

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

PENNANTPARK FLOATING RATE CAPITAL LTD. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS

(Unaudited)


	Nine Months Ended June 30,
	2014			2013
Net increase in net assets from operations:
Net investment income	$	11,315,381		$	6,942,374
Net realized gain on investments		1,774,685			3,206,861
Net change in unrealized appreciation (depreciation) on investments		5,145,786			(3,233,442	)
Net change in unrealized appreciation on Credit Facility		—			(377,500	)

Net increase in net assets resulting from operations		18,235,852			6,538,293

Distributions to stockholders:		(12,030,180	)		(6,147,019	)

Capital transactions:
Public offering and distributions reinvested		—			48,357,975
Offering costs		—			(400,000	)

Net increase in net assets resulting from capital transactions		—			47,957,975

Net increase in net assets		6,205,672			48,349,249

Net assets:
Beginning of period		210,066,394			95,743,877

End of period	$	216,272,066		$	144,093,126

Distributions in excess of net investment income, end of period	$	(240,033	)	$	(517,645	)

Capital share activity:
Shares issued from public offering		—			3,450,000

Shares issued from reinvestment of distributions		—			4,025

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

PENNANTPARK FLOATING RATE CAPITAL LTD. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	Nine Months Ended June 30,
	2014			2013
Cash flows from operating activities:
Net increase in net assets resulting from operations	$	18,235,852		$	6,538,293
Adjustments to reconcile net increase in net assets resulting from operations to net cash used for operating activities:
Net change in unrealized (appreciation) depreciation on investments		(5,145,786	)		3,233,442
Net change in unrealized appreciation on Credit Facility		—			377,500
Net realized gain on investments		(1,774,685	)		(3,206,861	)
Net accretion of discount and amortization of premium		(958,309	)		(853,119	)
Purchases of investments		(184,986,373	)		(198,297,678	)
Payment-in-kind income		(220,392	)		(211,887	)
Proceeds from dispositions of investments		146,769,163			120,656,091
Decrease in interest receivable		226,370			221,786
Decrease (increase) in receivable for investments sold		374,306			(3,247,899	)
Decrease (increase) in prepaid expenses and other assets		43,765			(85,795	)
(Decrease) increase in payable for investments purchased		(11,827,091	)		27,157,500
Increase (decrease) in interest payable on Credit Facility		92,515			(11,415	)
Increase in management fee payable		221,461			124,032
Increase in performance-based incentive fee payable		1,188,461			152,231
(Decrease) increase in accrued other expenses		(183,641	)		334,587

Net cash used for operating activities		(37,944,384	)		(47,119,192	)

Cash flows from financing activities:
Public offering		—			48,300,000
Offering costs		—			(400,000	)
Deferred sales load paid		—			(2,055,000	)
Distributions paid to stockholders		(11,992,935	)		(5,735,436	)
Borrowings under Credit Facility (See Notes 5 and 9)		130,500,000			121,450,000
Repayments under Credit Facility (See Notes 5 and 9)		(75,200,000	)		(111,350,000	)

Net cash provided by financing activities		43,307,065			50,209,564

Net increase in cash equivalents		5,362,681			3,090,372
Cash equivalents, beginning of period		4,578,249			3,845,803

Cash equivalents, end of period	$	9,940,930		$	6,936,175

Supplemental disclosure of cash flow information:
Interest paid	$	2,461,328		$	1,353,513

Excise taxes paid	$	256,392		$	79,140

Distributions reinvested	$	—		$	57,975

Conversions and non-cash exchanges	$	6,902,784		$	—

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

PENNANTPARK FLOATING RATE CAPITAL LTD. AND SUBSIDIARY

CONSOLIDATED SCHEDULE OF INVESTMENTS

JUNE 30, 2014

(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—169.2% ^{(3), (4)} First Lien Secured Debt—149.0%
AKA Diversified Holdings, Inc.		04/02/2018	Retail		11.90	%		L+1,175	⁽⁹⁾		6,717,598	$	6,559,391	$	6,853,115
AKA Diversified Holdings, Inc. ⁽¹⁰⁾		04/02/2018	Retail		—			—			2,000,000		2,000,000		2,000,000
ALG USA Holdings, LLC		02/28/2019	Hotel, Gaming and Leisure		7.00	%		L+575			7,356,001		7,307,366		7,356,001
Alvogen Pharma US, Inc.		05/23/2018	Healthcare and Pharmaceuticals		7.00	%		L+575			2,764,276		2,736,864		2,812,651
AMF Bowling Centers, Inc.		06/29/2018	Retail		8.75	%		L+750			7,800,000		7,607,393		7,946,250
Ancile Solutions, Inc.		07/16/2018	High Tech Industries		6.25	%		L+500			4,812,500		4,774,793		4,818,516
AP Gaming I, LLC		12/21/2020	Hotel, Gaming and Leisure		9.25	%		L+825			1,393,000		1,353,758		1,406,930
ARC Automotive Group, Inc.		11/15/2018	Automotive		6.00	%		L+475			2,444,016		2,426,437		2,450,126
Ascend Learning, LLC		07/31/2019	Media: Broadcasting and Subscription		6.00	%		L+500			3,483,747		3,470,345		3,520,779
Aspen Dental Management, Inc.		10/06/2016	Consumer Services		7.00	%		L+550			2,925,000		2,906,557		2,934,155
ATI Holdings, Inc.		12/20/2019	Healthcare and Pharmaceuticals		5.00	%		L+400			2,955,000		2,931,066		2,980,856
Azure Midstream Energy LLC		11/15/2018	Energy: Oil and Gas		6.50	%		L+550			5,362,500		5,292,408		5,396,016
BBB Industries, LLC		03/27/2019	Automotive		5.50	%		L+425			2,812,500		2,793,620		2,810,166
BBTS Borrower LP		06/04/2019	Energy: Oil and Gas		7.75	%		L+650			7,909,975		7,851,322		7,977,209
Blue Bird Body Company		06/29/2020	Automotive		7.75	%		P+450			5,000,000		4,925,019		4,925,000
CBAC Borrower, LLC		07/02/2020	Hotel, Gaming and Leisure		8.25	%		L+700			5,000,000		4,958,338		5,175,000
Charming Charlie LLC		12/24/2019	Retail		9.00	%		L+800			4,488,750		4,425,783		4,522,416
Chicken Soup for the Soul Publishing, LLC		01/08/2019	Media: Advertising, Printing and Publishing		7.25	%		L+600			5,000,000		4,951,783		5,000,000
Creative Circle, LLC		06/25/2020	Media: Advertising, Printing and Publishing		5.50	%		L+450			6,000,000		5,940,108		5,940,000
Curo Health Services, LLC		06/08/2020	Healthcare and Pharmaceuticals		5.75	%		L+475			2,000,000		1,950,340		1,973,340
DCS Business Services, Inc.		03/19/2018	Business Services		7.25	%		L+575			3,262,078		3,223,994		3,180,526
Document Technologies, LLC		12/03/2018	Business Services		5.50	%		L+425			946,759		940,864		942,025
Edmentum, Inc.		05/17/2018	Media: Broadcasting and Subscription		5.50	%		L+450			927,318		927,318		928,087
Emerald Performance Materials, LLC		05/18/2018	Chemicals, Plastics and Rubber		6.75	%		L+550			2,451,237		2,435,293		2,451,237
eResearchTechnology, Inc.		05/02/2018	Healthcare and Pharmaceuticals		6.00	%		L+475			2,858,864		2,846,203		2,858,864
e-Rewards, Inc.		10/29/2018	High Tech Industries		6.00	%		L+500			9,875,000		9,704,101		9,825,625
FHC Health Systems, Inc.		01/09/2018	Healthcare and Pharmaceuticals		5.75	%		L+475			4,500,000		4,464,159		4,500,000
Fishnet Security, Inc.		11/30/2017	High Tech Industries		6.25	%		L+500			3,619,875		3,598,896		3,597,251
Fox US Bidco Corp.		06/17/2019	Consumer Goods: Durable		9.00	%		L+750			3,294,118		3,261,292		3,261,176
Fox US Bidco Corp.⁽¹⁰⁾		06/17/2019	Consumer Goods: Durable		—			—	⁽⁹⁾		705,882		705,882		705,882
GlobalLogic Holdings, Inc.		05/31/2019	High Tech Industries		6.25	%		L+525			3,980,000		3,942,244		3,830,750
Golden Nugget, Inc.		11/21/2019	Hotel, Gaming and Leisure		5.50	%		L+450			7,960,000		7,910,417		8,109,250
Granite Broadcasting Corporation		05/23/2018	Media: Broadcasting and Subscription		6.75	%		L+550			1,104,430		1,102,013		1,101,669
Greenway Health, LLC		11/04/2020	High Tech Industries		6.00	%		L+500			6,965,000		6,903,065		6,956,294
Help/Systems Holdings, Inc.		06/28/2019	High Tech Industries		5.50	%		L+450			4,962,500		4,919,212		4,931,484
Hostway Corporation		12/13/2019	High Tech Industries		6.00	%		L+475			4,937,500		4,893,063		4,912,812
Howard Berger Co. LLC		08/03/2017	Wholesale		7.00	%		L+575			2,566,352		2,543,088		2,412,371
IDQ Holdings, Inc. ^{(5), (8)}		03/30/2017	Automotive		11.50	%		—			2,000,000		1,975,506		2,205,000
iEnergizer Limited and Aptara, Inc.⁽⁶⁾		05/01/2019	Business Services		7.25	%		L+600			12,763,968		12,613,837		12,381,049
InfuSystem Holdings, Inc.		11/30/2016	Healthcare and Pharmaceuticals		13.07	%		P+982			1,500,000		1,500,000		1,542,370
Instant Web, LLC, Term Loan A		03/28/2019	Media: Advertising, Printing and Publishing		5.50	%		L+450			5,476,304		5,397,312		5,476,304
Instant Web, LLC, Term Loan B		03/28/2019	Media: Advertising, Printing and Publishing		12.00	%		L+1,100			4,500,000		4,434,540		4,500,000
Jackson Hewitt Tax Service Inc.		10/16/2017	Consumer Services		10.00	%		L+850			5,140,179		5,056,074		5,101,627
JHCI Acquisition, Inc.		07/11/2019	Transportation: Cargo		7.00	%		L+575			1,870,909		1,847,090		1,880,264
K2 Pure Solutions NoCal, L.P. ⁽⁸⁾		08/19/2019	Chemicals, Plastics and Rubber		10.00	%		L+900			6,157,648		6,048,089		6,100,053
Lanyon Solutions, Inc. (f/k/a The Active Network, Inc. and Lanyon, Inc.)		11/13/2020	High Tech Industries		5.50	%		L+450			1,990,002		1,981,672		1,978,818
LifeCare Holdings LLC ⁽⁸⁾		11/30/2018	Healthcare and Pharmaceuticals		6.50	%		L+525			5,940,000		5,865,356		5,806,350
Meritas Schools Holdings, LLC		06/25/2019	Consumer Services		7.00	%		L+575			2,970,000		2,944,406		2,973,713
National Surgical Hospitals, Inc.		08/01/2019	Healthcare and Pharmaceuticals		6.44	%		P+325			8,151,250		8,092,398		8,171,628
New Trident HoldCorp, Inc.		07/31/2019	Healthcare and Pharmaceuticals		6.50	%		L+525			9,925,000		9,843,385		9,915,075
Northfield Park Associates LLC		12/19/2018	Hotel, Gaming and Leisure		9.00	%		L+775			4,431,273		4,361,672		4,503,281
Old Guard Risk Services, Inc.		11/27/2018	Banking, Finance, Insurance and Real Estate		12.50	%		L+1,150			7,560,000		7,288,542		7,635,600
Packaging Coordinators, Inc.		05/11/2020	Containers, Packaging and Glass		5.50	%		L+425			2,481,250		2,471,221		2,475,047
Polyconcept Finance B.V.		06/28/2019	Consumer Goods: Non-Durable		6.00	%		L+475			7,737,766		7,669,661		7,679,733
Premier Dental Services, Inc.		11/01/2018	Consumer Services		6.00	%		L+500			8,324,176		8,201,213		8,334,581
Quality Home Brands Holdings LLC		12/17/2018	Consumer Goods: Durable		7.75	%		L+650			4,975,000		4,930,832		5,012,313
RCS Capital Corporation		04/29/2019	Banking, Finance, Insurance and Real Estate		6.50	%		L+550			5,000,000		4,951,440		5,102,100
RiverBoat Corporation of Mississippi ⁽⁸⁾		11/29/2016	Hotel, Gaming and Leisure		10.00	%		L+875			4,250,000		4,200,608		4,260,625
SCE Partners, LLC		08/14/2019	Hotel, Gaming and Leisure		8.25	%		L+725			12,000,000		11,899,493		10,920,000
Securus Technologies Holdings, Inc.		04/30/2020	Telecommunications		4.75	%		L+350			1,985,001		1,967,527		1,991,611

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

PENNANTPARK FLOATING RATE CAPITAL LTD. AND SUBSIDIARY

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

JUNE 30, 2014

(Unaudited)


Issuer Name	Maturity		Industry	Current Coupon			Basis Point Spread Above Index ⁽¹⁾		Par / Shares		Cost		Fair Value ⁽²⁾
Sotera Defense Solutions, Inc.		04/21/2017	Aerospace and Defense		10.00	%		L+850		2,601,999	$	2,587,646	$	2,354,809
St. George’s University Scholastic Services LLC		12/20/2017	Consumer Services		8.50	%		L+700		1,591,471		1,568,099		1,601,418
Surgical Specialties Corporation (US), Inc.		08/22/2018	Healthcare and Pharmaceuticals		7.25	%		L+575		3,420,000		3,391,473		3,420,000
Sutherland Global Services, Inc.		03/06/2019	Business Services		7.25	%		L+600		937,500		922,143		942,188
Systems Maintenance Services Holding, Inc.		10/18/2019	High Tech Industries		5.25	%		L+425		5,970,000		5,945,004		5,940,150
The National Underwriter Company		05/31/2018	Media: Advertising, Printing and Publishing		6.00	%		L+475		4,162,500		4,128,304		4,162,500
Therakos, Inc.		12/27/2017	Healthcare and Pharmaceuticals		7.50	%		L+625		4,843,177		4,770,019		4,861,339
UniTek Global Services, Inc. ⁽⁸⁾		04/16/2018	Telecommunications		15.00 (PIK 4.00	% %)		L+1,350		2,162,142		2,127,997		2,183,764
Virtual Radiologic Corporation ⁽⁸⁾		12/22/2016	Business Services		7.25	%		L+550		2,933,163		2,922,423		2,082,546
Wilton Brands, LLC		08/30/2018	Consumer Goods: Non-Durable		7.50	%		L+625		3,060,153		3,017,172		2,943,500
YP LLC ⁽⁸⁾		06/04/2018	Media: Advertising, Printing and Publishing		8.00	%		L+675		3,470,807		3,397,588		3,488,161
Zest Holdings, LLC		08/17/2020	Healthcare and Pharmaceuticals		6.50	%		L+550		8,932,500		8,775,593		8,932,500

Total First Lien Secured Debt												320,579,130		322,163,846

Second Lien Secured Debt—14.2%
American Gilsonite Company^{(5), (8)}		09/01/2017	Metals and Mining		11.50	%		—		1,000,000		1,000,000		1,080,000
Arsloane Acquisition, LLC		10/01/2020	Business Services		11.75	%		L+1,050		5,500,000		5,422,445		5,555,000
Cannery Casino Resorts, LLC⁽⁸⁾		10/02/2019	Hotel, Gaming and Leisure		10.00	%		L+875		1,700,000		1,674,122		1,733,150
Carolina Beverage Group, LLC ^{(5), (8)}		08/01/2018	Beverage, Food and Tobacco		10.63	%		—		3,500,000		3,500,000		3,771,250
ILC Industries, LLC		06/14/2019	High Tech Industries		11.50	%		L+1,000		2,000,000		1,926,616		1,960,000
J.A. Cosmetics Holdings, Inc. ⁽⁸⁾		07/31/2019	Consumer Goods: Durable		11.00	%		L+1,000		4,000,000		3,923,872		3,994,336
Language Line, LLC		12/20/2016	Consumer Services		10.50	%		L+875		7,100,000		7,017,396		7,059,175
Penton Media, Inc. ⁽⁸⁾		10/02/2020	Media: Diversified and Production		9.00	%		L+775		5,600,000		5,526,187		5,637,352

Total Second Lien Secured Debt												29,990,638		30,790,263

Subordinated Debt/Corporate Notes—4.8% ⁽⁸⁾
Affinion Group Holdings, Inc. ⁽⁵⁾		09/14/2018	Consumer Goods: Durable		14.50 (PIK 14.50	% %)		—		3,749,000		3,203,746		3,711,510
Affinion Investments LLC ⁽⁵⁾		08/15/2018	Consumer Goods: Durable		13.50	%		—		1,734,000		1,734,000		1,803,360
Credit Infonet, Inc.		10/26/2018	High Tech Industries		12.25	%		—		1,987,500		1,954,165		1,933,408
Vestcom International, Inc.		06/27/2019	Media: Advertising, Printing and Publishing		12.00	%		—		2,859,027		2,811,851		2,901,912

Total Subordinated Debt/Corporate Notes												9,703,762		10,350,190

Preferred Equity—0.2%^(7), (8)
J.A. Cosmetics US, Inc. (J.A. Cosmetics Holdings, Inc.)		—	Consumer Goods: Durable		8.00	%		—		400		399,704		460,266

Common Equity/Warrants—1.0% ^(7), (8)
Affinion Group Holdings, Inc., Series A (Warrants)		12/12/2023	Consumer Goods: Durable		—			—		554,715		1,186,649		1,469,996
Affinion Group Holdings, Inc., Series B (Warrants)		12/12/2023	Consumer Goods: Durable		—			—		1,135,743		—		22,715
J.A. Cosmetics US, Inc. (J.A. Cosmetics Holdings, Inc.)		—	Consumer Goods: Durable		—			—		30		296		24,040
Old Guard Risk Services, Inc. (Warrants)		11/27/2023	Banking, Finance, Insurance and Real Estate		—			—		4,175		58,241		103,094
UniTek Global Services, Inc. (Warrants)		—	Telecommunications		—			—		56,717		95,285		22,687
Vestcom Parent Holdings, Inc. (Vestcom International, Inc.)		—	Media: Advertising, Printing and Publishing		—			—		15,179		166,667		421,326
Z Wireless Holdings, Inc. (AKA Diversified Holdings, Inc.) (Warrants)		10/21/2021	Retail		—			—		463		45,019		63,180

Total Common Equity/Warrants												1,552,157		2,127,038

Total Investments in Non-Controlled, Non-Affiliated Portfolio Companies												362,225,391		365,891,603
Cash Equivalents—4.6%
BlackRock Liquidity Funds, Temp Cash and Temp Fund, Institutional Shares												9,940,930		9,940,930

Total Investments and Cash Equivalents—173.8%											$	372,166,321	$	375,832,533

Liabilities in Excess of Other Assets—(73.8)%														(159,560,467	)
Net Assets—100.0%													$	216,272,066

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

PENNANTPARK FLOATING RATE CAPITAL LTD. AND SUBSIDIARY

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

JUNE 30, 2014

(Unaudited)



(1)		Represents floating rate instruments that accrue interest at a predetermined spread relative to an index, typically the applicable London Interbank Offered Rate, or LIBOR or “L,” or Prime rate, or “P.” All securities are subject to a LIBOR or Prime rate floor where a spread is provided, unless noted. The spread provided includes payment-in-kind, or PIK, interest and other fee rates, if any.
(2)		Valued based on our accounting policy (see Note 2).
(3)		The provisions of the 1940 Act classify investments based on the level of control that we maintain in a particular portfolio company. As defined in the 1940 Act, a company is deemed as “non-controlled” when we own less than 25% of a portfolio company’s voting securities and “controlled” when we own 25% or more of a portfolio company’s voting securities.
(4)		The provisions of the 1940 Act classify investments further based on the level of ownership that we maintain in a particular portfolio company. As defined in the 1940 Act, a company is deemed as “non-affiliated” when we own less than 5% of a portfolio company’s voting securities and “affiliated” when we own 5% or more of a portfolio company’s voting securities.
(5)		Security is exempt from registration under Rule 144A promulgated under the Securities Act of 1933, as amended, or the Securities Act. The security may be resold in transactions that are exempt from registration, normally to qualified institutional buyers.
(6)		Non-U.S. company or principal place of business outside the United States.
(7)		Non-income producing securities.
(8)		The securities are not pledged as collateral under the Credit Facility. All other securities are pledged as collateral under the Credit Facility.
(9)		Coupon is not subject to a LIBOR or Prime rate floor.
(10)		Represents the purchase of a security with delayed settlement or a revolving line of credit that is currently an unfunded investment. This security does not earn a basis point spread above an index while it is unfunded.

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

PENNANTPARK FLOATING RATE CAPITAL LTD. AND SUBSIDIARY

CONSOLIDATED SCHEDULE OF INVESTMENTS

SEPTEMBER 30, 2013


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—151.3% ^{(3), (4)} First Lien Secured Debt—133.8%
AKA Diversified Holdings, Inc.	12/21/2016	Retail		12.50 (PIK 1.50	%⁽⁹⁾ %)		L+1,225		2,728,141	$	2,684,231	$	2,755,278
ALG USA Holdings, LLC	02/28/2019	Hotel, Gaming and Leisure		7.00	%		L+575		8,457,500		8,394,246		8,457,500
Alvogen Pharma US, Inc. ⁽⁸⁾	05/23/2018	Healthcare and Pharmaceuticals		7.00	%		L+575		1,995,000		1,976,374		1,980,037
AMF Bowling Centers, Inc. ⁽⁸⁾	06/29/2018	Retail		8.75	%		L+750		7,950,000		7,711,500		7,870,500
Ancile Solutions, Inc.	07/16/2018	High Tech Industries		6.25	%		L+500		5,000,000		4,951,516		4,962,500
ARC Automotive Group, Inc.	11/15/2018	Automotive		6.25	%		L+500		2,530,875		2,510,159		2,530,875
Aspen Dental Management, Inc.	10/06/2016	Consumer Services		7.00	%		L+550		2,947,500		2,916,715		2,829,600
ATI Holdings, Inc.	12/20/2019	Healthcare and Pharmaceuticals		5.75	%		L+450		2,977,500		2,951,133		2,999,831
BBB Industries, LLC	03/27/2019	Automotive		5.50	%		L+425		2,925,000		2,903,031		2,917,687
BBTS Borrower LP ⁽⁸⁾	06/04/2019	Energy: Oil and Gas		7.75	%		L+650		6,965,000		6,899,024		7,034,650
Bellisio Foods, Inc.	08/01/2019	Beverage, Food and Tobacco		5.25	%		L+425		4,237,288		4,216,574		4,216,102
Bellisio Foods, Inc. ⁽¹⁰⁾	08/01/2019	Beverage, Food and Tobacco		—	⁽⁹⁾		—		762,712		759,021		758,898
BioScrip, Inc.	07/31/2020	Healthcare and Pharmaceuticals		6.50	%		L+525		2,000,000		1,970,525		2,010,000
CBAC Borrower, LLC ⁽⁸⁾	07/02/2020	Hotel, Gaming and Leisure		8.25	%		L+700		5,000,000		4,950,774		5,137,500
Cetera Financial Group, Inc. ⁽⁸⁾	08/07/2019	Banking, Finance, Insurance and Real Estate		6.50	%		L+550		5,000,000		4,902,298		4,954,150
CPG International Inc.	09/30/2020	Construction and Building		4.75	%		L+375		5,000,000		4,975,000		4,975,000
Cydcor LLC	06/12/2017	Business Services		9.75	%		L+725		1,958,125		1,958,125		1,958,125
DCS Business Services, Inc.	03/19/2018	Business Services		7.25	%		L+575		3,603,061		3,554,898		3,603,061
Document Technologies, Inc. ⁽⁸⁾	12/03/2018	Business Services		5.50	%		L+425		961,264		954,199		961,263
EAG, Inc. ⁽⁸⁾	07/28/2017	Business Services		6.00	%		L+450		888,721		888,721		888,721
Edmentum, Inc.	05/17/2018	Media: Broadcasting and Subscription		6.00	%		L+475		938,438		938,438		941,563
EIG Investors Corp.	11/12/2019	High Tech Industries		6.25	%		L+500		2,209,435		2,191,417		2,216,350
Emerald Performance Materials, LLC	05/18/2018	Chemicals, Plastics and Rubber		6.75	%		L+550		2,469,992		2,451,906		2,482,342
eResearchtechnology, Inc.	05/02/2018	Healthcare and Pharmaceuticals		6.00	%		L+475		2,970,056		2,955,416		2,970,056
FHC Health Systems, Inc.	01/09/2018	Healthcare and Pharmaceuticals		5.75	%		L+475		4,937,500		4,890,024		4,962,187
Fishnet Security, Inc.	11/30/2017	High Tech Industries		6.25	%		L+500		3,647,438		3,623,608		3,632,228
Granite Broadcasting Corporation	05/23/2018	Media: Broadcasting and Subscription		6.75	%		L+550		2,985,000		2,978,216		2,987,478
Graton Economic Development Authority ^(5), (8)	09/02/2019	Hotel, Gaming and Leisure		9.63	%		—		3,000,000		3,000,000		3,300,000
GSE Environmental, Inc. ⁽⁸⁾	05/27/2016	Environmental Industries		8.99	%		L+750		2,934,372		2,926,116		2,567,575
GSE Environmental, Inc. ^{(8), (10)}	10/31/2013	Environmental Industries		—			—		175,657		175,657		153,700
Help/Systems Holdings, Inc. ⁽⁸⁾	06/28/2019	High Tech Industries		5.50	%		L+450		5,000,000		4,952,010		4,962,500
Howard Berger Co. LLC ⁽⁸⁾	08/03/2017	Wholesale		7.00	%		L+575		2,585,993		2,555,979		2,456,693
IDQ Holdings, Inc. ^{(5), (8)}	03/30/2017	Automotive		11.50	%		—		2,000,000		1,969,758		2,155,000
iEnergizer Limited and Aptara, Inc.⁽⁶⁾	05/01/2019	Business Services		7.25	%		L+600		8,775,000		8,632,866		8,687,250
InfuSystem Holdings, Inc.	11/30/2016	Healthcare and Pharmaceuticals		11.95	%		P+625		2,175,000		2,175,000		2,195,331
Instant Web, Inc. ⁽⁸⁾	08/07/2014	Media: Advertising, Printing and Publishing		3.55	%⁽⁹⁾		L+338		6,836,389		6,698,584		5,469,111
Jackson Hewitt Tax Service Inc.	10/16/2017	Consumer Services		10.00	%		L+850		5,521,875		5,406,642		5,439,047
JHCI Acquisition, Inc.	07/11/2019	Transportation: Cargo		7.00	%		L+575		1,995,000		1,965,824		1,981,454
K2 Pure Solutions NoCal, L.P. ⁽⁸⁾	08/19/2019	Chemicals, Plastics and Rubber		10.00	%		L+900		6,157,648		6,034,495		6,065,283
LifeCare Holdings LLC ⁽⁸⁾	11/30/2018	Healthcare and Pharmaceuticals		6.50	%		L+525		5,985,000		5,900,289		5,865,300
Meritas Schools Holdings, LLC	06/25/2019	Consumer Services		7.00	%		L+575		2,992,500		2,963,605		2,987,503
Milk Specialties Company	11/09/2018	Consumer Goods: Non-Durable		7.00	%		L+575		3,383,000		3,354,728		3,374,542
Mood Media Corporation ⁽⁶⁾	05/07/2018	Media: Diversified and Production		7.00	%		L+550		2,348,510		2,344,859		2,345,574
NAB Holdings, LLC	04/24/2018	Banking, Finance, Insurance and Real Estate		7.00	%		L+550		937,500		926,724		941,016
National Surgical Hospitals, Inc.	08/01/2019	Healthcare and Pharmaceuticals		5.75	%		L+450		6,500,000		6,436,491		6,475,625
New Trident HoldCorp, Inc.	07/31/2019	Healthcare and Pharmaceuticals		6.50	%		L+525		10,000,000		9,903,508		9,975,000
Northfield Park Associates LLC	12/19/2018	Hotel, Gaming and Leisure		9.00	%		L+775		4,500,000		4,421,591		4,635,000
OCI Beaumont LLC, Term B-1 Loan	08/20/2019	Chemicals, Plastics and Rubber		6.25	%		L+500		3,125,000		3,079,073		3,125,000
OCI Beaumont LLC, Term B-2 Loan	08/20/2019	Chemicals, Plastics and Rubber		6.25	%		L+500		5,875,000		5,788,657		5,875,000
Orbitz Worldwide, Inc., Term Loan C	03/25/2019	Transportation: Consumer		5.75	%		L+475		3,990,000		3,990,000		4,003,287
Packaging Coordinators, Inc.	05/11/2020	Containers, Packaging and Glass		5.50	%		L+425		2,500,000		2,488,883		2,500,000
Paladin Brands Holding, Inc.	08/16/2019	Capital Equipment		6.75	%		L+550		3,000,000		2,956,071		2,964,390
Pelican Products, Inc.	07/11/2018	Containers, Packaging and Glass		7.00	%		L+550		1,481,250		1,456,674		1,473,844
Penton Media, Inc.	08/01/2014	Media: Diversified and Production		6.00 (PIK 2.00	% %)		L+500		7,517,838		7,234,538		7,433,263
Polyconcept Finance B.V.	06/28/2019	Consumer Goods: Non-Durable		6.00	%		L+475		7,832,755		7,757,882		7,744,636
Premier Dental Services, Inc.	11/01/2018	Consumer Services		8.25	%		L+700		3,374,503		3,286,903		3,382,939
RiverBoat Corporation of Mississippi ⁽⁸⁾	11/29/2016	Hotel, Gaming and Leisure		10.00	%		L+875		4,250,000		4,188,136		4,250,000
Sabre Industries, Inc.	08/24/2018	Construction and Building		5.75	%		L+475		4,972,500		4,923,269		5,009,794
SCE Partners, LLC	08/14/2019	Hotel, Gaming and Leisure		8.25	%		L+725		12,000,000		11,881,935		11,880,000
Securus Technologies Holdings, Inc.	04/30/2020	Telecommunications		4.75	%		L+350		2,000,000		1,981,121		1,962,500

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

PENNANTPARK FLOATING RATE CAPITAL LTD. AND SUBSIDIARY

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

SEPTEMBER 30, 2013


Issuer Name	Maturity		Industry	Current Coupon			Basis Point Spread Above Index ⁽¹⁾		Par / Shares		Cost		Fair Value ⁽²⁾
Sotera Defense Solutions, Inc.		04/21/2017	Aerospace and Defense		7.50	%		L+600		2,646,725	$	2,629,647	$	2,382,052
St. George’s University Scholastic Services LLC		12/20/2017	Consumer Services		8.50	%		L+700		1,948,471		1,915,350		1,955,778
Surgical Specialties Corporation (US), Inc.		08/22/2018	Healthcare and Pharmaceuticals		7.25	%		L+575		3,555,000		3,520,302		3,590,550
Sutherland Global Services, Inc.		03/06/2019	Business Services		7.25	%		L+600		975,000		957,196		971,344
The National Underwriter Company		05/31/2018	Media: Advertising, Printing and Publishing		6.00	%		L+475		4,415,625		4,374,813		4,393,547
Therakos, Inc.		12/27/2017	Healthcare and Pharmaceuticals		7.50	%		L+625		2,977,500		2,899,121		2,973,778
UniTek Global Services, Inc. ⁽⁸⁾		04/16/2018	Telecommunications		15.00 (PIK 4.00	% %)		L+1,350		2,112,349		2,074,200		2,096,507
Univita Health Inc.		06/19/2017	Consumer Services		6.50	%		L+500		2,932,500		2,912,802		2,800,538
Viamedia Services Corp.		04/19/2016	Media: Advertising, Printing and Publishing		7.00	%		L+550		3,304,277		3,280,480		3,304,277
Virtual Radiologic Corporation ⁽⁸⁾		12/22/2016	Business Services		7.25	%		L+550		2,932,500		2,916,949		1,847,475
Wilton Brands, LLC ⁽⁸⁾		08/30/2018	Consumer Goods: Non-Durable		7.50	%		L+625		3,230,000		3,177,789		3,165,400
YP LLC ⁽⁸⁾		06/04/2018	Media: Advertising, Printing and Publishing		8.06	%		L+675		5,085,000		4,964,517		5,046,863
Zest Anchors, LLC		08/17/2020	Healthcare and Pharmaceuticals		6.50	%		L+550		9,000,000		8,822,056		8,887,500

Total First Lien Secured Debt												281,260,179		281,046,248

Second Lien Secured Debt—13.1%
American Gilsonite Company^{(5), (8)}		09/01/2017	Metals and Mining		11.50	%		—		3,000,000		3,000,000		3,067,500
Arsloane Acquisition, LLC		10/01/2020	Business Services		11.75	%		L+1,050		5,000,000		4,900,000		4,983,350
Brand Energy and Infrastructure Services, Inc. ⁽⁸⁾		10/23/2019	Energy: Oil and Gas		11.00	%		L+975		1,906,607		1,861,523		1,946,322
Cannery Casino Resorts, LLC⁽⁸⁾		10/02/2019	Hotel, Gaming and Leisure		10.00	%		L+875		1,700,000		1,671,746		1,576,750
Carolina Beverage Group, LLC ^(5), (8)		08/01/2018	Beverage, Food and Tobacco		10.63	%		—		3,500,000		3,500,000		3,578,750
Gastar Exploration USA, Inc.^{(5), (8)}		05/15/2018	Energy: Oil and Gas		8.63	%		—		2,000,000		2,000,000		1,890,000
ILC Industries, LLC		06/14/2019	High Tech Industries		11.50	%		L+1,000		2,000,000		1,920,000		1,840,000
Language Line, LLC		12/20/2016	Consumer Services		10.50	%		L+875		7,100,000		6,998,223		6,981,643
Seven Seas Cruises ^{(5), (6), (8)}		05/15/2019	Hotel, Gaming and Leisure		9.13	%		—		1,500,000		1,500,000		1,635,000

Total Second Lien Secured Debt												27,351,492		27,499,315

Subordinated Debt/Corporate Notes—4.3% ⁽⁸⁾
Affinion Group Holdings, Inc.		11/15/2015	Consumer Goods: Durable		11.63	%		—		4,100,000		3,873,657		2,357,500
Credit Infonet, Inc.		10/26/2018	High Tech Industries		12.25	%		—		1,987,500		1,949,883		1,997,517
Varel International Energy Mezzanine Funding Corp.		01/15/2018	Energy: Oil and Gas		14.00 (PIK 4.00	% %)		—		1,810,934		1,780,211		1,793,834
Vestcom International, Inc.		06/27/2019	Media: Advertising, Printing and Publishing		12.00	%		—		2,859,027		2,806,095		2,854,319

Total Subordinated Debt/ Corporate Notes												10,409,846		9,003,170

Common Equity/Warrants—0.1% ^(7), (8)
UniTek Global Services, Inc. (Warrants)		—	Telecommunications		—			—		56,717		95,284		66,926
Vestcom Parent Holdings, Inc. (Vestcom International, Inc.)		—	Media: Advertising, Printing and Publishing		—			—		15,179		166,667		188,235

Total Common Equity/Warrants												261,951		255,161

Total Investments in Non-Controlled, Non-Affiliated Portfolio Companies												319,283,468		317,803,894
Cash Equivalents—2.2%
BlackRock Liquidity Funds, Temp Cash, Institutional Shares												2,747,327		2,747,327
BlackRock Liquidity Funds, Temp Fund, Institutional Shares												1,830,922		1,830,922

Total Cash Equivalents												4,578,249		4,578,249

Total Investments and Cash Equivalents—153.5%											$	323,861,717	$	322,382,143

Liabilities in Excess of Other Assets—(53.5)%														(112,315,749	)
Net Assets—100.0%													$	210,066,394

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

PENNANTPARK FLOATING RATE CAPITAL LTD. AND SUBSIDIARY

CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)

SEPTEMBER 30, 2013



(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.
(2)		Valued based on our accounting policy (see Note 2).
(3)		The provisions of the 1940 Act classify investments based on the level of control that we maintain in a particular portfolio company. As defined in the 1940 Act, a company is deemed as “non-controlled” when we own less than 25% of a portfolio company’s voting securities and “controlled” when we own 25% or more of a portfolio company’s voting securities.
(4)		The provisions of the 1940 Act classify investments further based on the level of ownership that we maintain in a particular portfolio company. As defined in the 1940 Act, a company is deemed as “non-affiliated” when we own less than 5% of a portfolio company’s voting securities and “affiliated” when we own 5% or more of a portfolio company’s voting securities.
(5)		Security is exempt from registration under Rule 144A promulgated under the Securities Act. The security may be resold in transactions that are exempt from registration, normally to qualified institutional buyers.
(6)		Non-U.S. company or principal place of business outside the United States.
(7)		Non-income producing securities.
(8)		The securities are not pledged as collateral under the Credit Facility. All other securities are pledged as collateral under the Credit Facility.
(9)		Coupon is not subject to a LIBOR or Prime rate floor.
(10)		Represents the purchase of a security with delayed settlement (unfunded investment). This security does not have a basis point spread above an index.

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

PENNANTPARK FLOATING RATE CAPITAL LTD. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2014

(Unaudited)

1. ORGANIZATION

PennantPark Floating Rate Capital Ltd. was organized as a Maryland corporation in October 2010. We are a closed-end, externally managed, non-diversified investment company that has elected to be treated as a BDC under the 1940 Act.

Our investment objectives are to generate current income and capital appreciation. We seek to achieve our investment objective by investing primarily in Floating Rate Loans and other investments made to U.S. middle-market private companies whose debt is rated below investment grade. Floating Rate Loans or variable-rate investments pay interest at variable rates, which are determined periodically, on the basis of a floating base lending rate such as LIBOR, with or without a floor, plus a fixed spread. Under normal market conditions, we generally expect that at least 80% of the value of our Managed Assets, which means our net assets plus any borrowings for investment purposes, will be invested in Floating Rate Loans and other investments bearing a variable rate of interest, which may include, from time to time, variable rate derivative instruments. We generally expect that senior secured loans, or first lien loans, will represent at least 65% of our overall portfolio. We generally expect to invest up to 35% of our overall portfolio opportunistically in other types of investments, including second lien, high yield, mezzanine and distressed debt securities and, to a lesser extent, equity investments.

In April 2011, we closed our initial public offering and our common stock trades on the NASDAQ Global Select Market under the symbol “PFLT.” From inception to date, we have issued 14,889,367 shares of common stock for gross proceeds of $216.3 million, or $210.0 million after deducting the sales load and underwriting expenses paid by us.

We entered into an investment management agreement, or the Investment Management Agreement, with the Investment Adviser, an external adviser that manages our day-to-day operations. We also entered into an administration agreement, or the Administration Agreement, with the Administrator, which provides the administrative services necessary for us to operate.

Funding I, our wholly owned subsidiary and a special purpose entity, was organized in Delaware as a limited liability company in May 2011. We formed Funding I in order to establish our Credit Facility. The Investment Adviser serves as the collateral manager to Funding I and has irrevocably directed that any management fee owed with respect to such services is to be paid to us so long as the Investment Adviser remains the collateral manager. This arrangement does not increase our consolidated management fee. The five-year Credit Facility allows Funding I to borrow up to $200 million at LIBOR plus 200 basis points during the revolving period. The Credit Facility is secured by all of the assets held by Funding I. See Note 9.

2. SIGNIFICANT ACCOUNTING POLICIES

The preparation of our Consolidated Financial Statements in conformity with U.S. generally accepted accounting principles, or GAAP, requires management to make estimates and assumptions that affect the reported amount of our assets and liabilities at the date of the Consolidated Financial Statements and the reported amounts of income and expenses during the reported periods. 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 reclassified 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.

Our Consolidated Financial Statements are prepared in accordance with GAAP and pursuant to the requirements for reporting on Form 10-K/Q and Article 6 or 10 of Regulation S-X, as appropriate. In accordance with Article 6-09 of Regulation S-X, we have provided a Consolidated Statement of Changes in Net Assets in lieu of a Consolidated Statement of Changes in Stockholders’ Equity.

Our significant accounting policies consistently applied are as follows:

(a) Investment Valuations

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

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;

PENNANTPARK FLOATING RATE CAPITAL LTD. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

JUNE 30, 2014

(Unaudited)

(4)

The audit committee of our board of directors quarterly 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/dealers, if available, or otherwise from a principal market maker or a primary market dealer. The Investment Adviser assesses the source and reliability of bids from brokers or dealers. If the board of directors has a bona fide reason to believe any such market quote does not reflect the fair value of an investment, it may independently value such investments by using the valuation procedure that it uses with respect to assets for which market quotations are not readily available. Investments of sufficient credit quality purchased within 60 days of maturity are valued at cost plus accreted discount, or minus amortized premium, which approximates fair value.

(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 unamortized upfront fees and prepayment penalties. Net change in unrealized appreciation or depreciation reflects the change in the fair value of our portfolio investments and Credit Facility during the reporting period, including any reversal of previously recorded unrealized appreciation or depreciation, when gains or losses are realized.

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, 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 are capitalized, on liabilities which we do not fair value, and then accreted or amortized using the effective interest method as interest income. We record prepayment penalties on loans and debt investments as income. Dividend income, if any, is recognized on an accrual basis on the ex-dividend date to the extent that we expect to collect such amounts.

Loans are placed on non-accrual status when principal or interest payments are past due 30 days or more and/or if there is reasonable doubt that principal or interest will be collected. Accrued interest is generally reversed when a loan is placed on non-accrual status. Interest payments received on non-accrual loans may be recognized as income or applied to principal depending upon management’s judgment. Non-accrual loans are restored to accrual status when past due principal and interest is paid and, in management’s judgment, are likely to remain current.

(c) Income Taxes

We have complied with the requirements of Subchapter M of the Code and expect to be subject to taxation as a RIC. As a result, we account for income taxes using the asset liability method prescribed by ASC 740, Income Taxes. Under this method, income taxes are provided for amounts currently payable and for amounts deferred as tax assets and liabilities based on differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities. Based upon PennantPark Floating Rate Capital Ltd.’s qualification and election to be subject to tax as a RIC, we do not anticipate paying any material level of federal income taxes in the future. Although we are not subject to tax on income as a RIC, we have elected to retain a portion of our calendar year income. As a result, for the three and nine months ended June 30, 2014, we accrued estimated excise taxes of $0.1 million and $0.4 million, respectively. For the three and nine months ended June 30, 2013, we accrued estimated excise taxes of less than $0.1 million and $0.1 million, respectively.

PennantPark Floating Rate Capital Ltd. recognizes in its Consolidated Financial Statements the effect of a tax position when it is more likely than not, based on the technical merits, that the position will be sustained upon examination. We did not have any uncertain tax positions that met the recognition or measurement criteria of ASC 740-10-25, nor did we have any unrecognized tax benefits as of the periods presented herein. Although we file federal and state tax returns, our major tax jurisdiction is federal. Our tax returns for each of our federal tax years since 2011 remain subject to examination by the Internal Revenue Service.

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

(d) Distributions and Capital Transactions

Distributions to common stockholders are recorded on the ex-dividend date. The amount to be paid, if any, as a distribution is ratified by the board of directors each quarter and is generally based upon the earnings estimated by management. Net realized capital gains, if any, are distributed at least annually. The tax attributes for distributions will generally include ordinary income and capital gains, but may also include qualified dividends and/or a return of capital.

Capital transactions, in connection with our dividend reinvestment plan or through offerings of our common stock, are recorded when issued and offering costs are charged as a reduction of capital upon issuance of our common stock.

(e) Consolidation

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

PENNANTPARK FLOATING RATE CAPITAL LTD. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

JUNE 30, 2014

(Unaudited)

(f) Asset Transfers and Servicing

Asset transfers that do not meet ASC 860, Transfers and Servicing, requirements for sale accounting treatment are reflected in the Consolidated Statement of Assets and Liabilities as investments. The creditors of Funding I have received a security interest in all of Funding I’s assets and such assets are not intended to be available to the creditors of PennantPark Floating Rate Capital Ltd. or any affiliate of the Company.

(g) Recent Accounting Pronouncements

In June 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2013-08, Financial Services—Investment Companies (Topic 946): Amendments to the Scope, Measurement, and Disclosure Requirements (“ASU 2013-08”). ASU 2013-08 provides an approach to assess whether a company is an investment company, clarifies the characteristics of an investment company, and provides new measurement and disclosure requirements. ASU 2013-08 is effective for interim and annual reporting periods in fiscal years that begin after December 15, 2013. Earlier application is prohibited. We are currently evaluating ASU 2013-08 to determine the effect, if any, on our Consolidated Financial Statements and disclosures.

3. AGREEMENTS

The Investment Management Agreement with the Investment Adviser was reapproved by our board of directors, including a majority of our directors who are not interested persons of us or the Investment Adviser, in February 2014. Under the Investment Management Agreement, the Investment Adviser, subject to the overall supervision of our board of directors, manages the day-to-day operations of and provides investment advisory services to us. The Investment Adviser serves as the collateral manager to Funding I and has irrevocably directed that any management fee owed with respect to such services is to be paid to the Company so long as the Investment Adviser remains the collateral manager. This arrangement does not increase our consolidated management fee. For providing these services, the Investment Adviser receives a fee from us consisting of two components—a base management fee and an incentive fee.

The base management fee is calculated at an annual rate of 1.00% of our “average adjusted gross assets,” which equals our gross assets (net of U.S. Treasury Bills, temporary draws under any credit facility, 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 delayed draw loans, if any) and is payable quarterly in arrears. The base management fee is calculated based on the average adjusted gross assets at the end of the two most recently completed calendar quarters, and appropriately adjusted for any share issuances or repurchases during the current calendar quarter. For example, if we sold shares on the 45th day of a quarter and did not use the proceeds from the sale to repay outstanding indebtedness, our gross assets for such quarter would give effect to the net proceeds of the issuance for only 45 days of the quarter during which the additional shares were outstanding. For the three and nine months ended June 30, 2014, the Investment Adviser earned base management fees of $1.0 million and $2.8 million, respectively, from us. For the three and nine months ended June 30, 2013, the Investment Adviser earned base management fees of $0.5 million and $1.5 million, respectively, from us.

The incentive fee has two parts, as follows:

One part is calculated and payable quarterly in arrears based on our Pre-Incentive Fee Net Investment Income for the immediately preceding calendar quarter. For this purpose, Pre-Incentive Fee Net Investment Income means interest income, dividend income and any other income, including any other fees, other than fees for providing managerial assistance, such as commitment, origination, structuring, diligence and consulting fees or other fees received from portfolio companies accrued during the calendar quarter, minus our operating expenses for the quarter (including the base management fee, any expenses payable under the Administration Agreement and any interest expense and distribution paid on any issued and outstanding preferred stock, but excluding the incentive fee). Pre-Incentive Fee Net Investment Income includes, in the case of investments with a deferred interest feature (such as OID, debt instruments with PIK interest and zero coupon securities), accrued income not yet received in cash. Pre-Incentive Fee Net Investment Income does not include any realized capital gains, computed net of all realized capital losses or unrealized capital appreciation or depreciation. Pre-Incentive Fee Net Investment Income, expressed as a percentage of the value of our net assets at the end of the immediately preceding calendar quarter, is compared to the hurdle rate of 1.75% per quarter (7.00% annualized). We pay the Investment Adviser an incentive fee with respect to our Pre-Incentive Fee Net Investment Income in each calendar quarter as follows: (1) no incentive fee in any calendar quarter in which our Pre-Incentive Fee Net Investment Income does not exceed the hurdle rate of 1.75%, (2) 50% of our Pre-Incentive Fee Net Investment Income with respect to that portion of such Pre-Incentive Fee Net Investment Income, if any, that exceeds the hurdle rate but is less than 2.9167% in any calendar quarter (11.67% annualized), 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 adjusted for any share issuances or repurchases during the relevant quarter. For the three and nine months ended June 30, 2014, the Investment Adviser earned an incentive fee on net investment income as calculated under the Investment Management Agreement of $0.7 million and $1.5 million, respectively, from us. For the three and nine months ended June 30, 2013, the Investment Adviser earned an incentive fee on net investment income as calculated under the Investment Management Agreement of $0.4 million and $1.0 million, respectively, from us.

The second part of the incentive fee is determined and payable in arrears as of the end of each calendar year (or upon termination of the Investment Management Agreement, as of the termination date) and equals 20% of our realized capital gains, if any, on a cumulative basis from inception through the end of each calendar year, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis, less the aggregate amount of any previously paid capital gain incentive fees, from our inception. For the three and nine months ended June 30, 2014, the Investment Adviser earned an incentive fee on capital gains of less than $0.1 million and $0.8 million, respectively, as calculated under the Investment Management Agreement. For the three and nine months ended June 30, 2013, 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 will be realized in the future. For the three and nine months ended June 30, 2014, the Investment Adviser accrued an incentive fee on unrealized and realized capital gains as calculated under GAAP of $0.1 million and $0.6 million, respectively. For the three and nine months ended June 30, 2013, the Investment Adviser accrued an incentive fee on unrealized and realized capital gains as calculated under GAAP of $(0.3) million, representing an expense reversal, and zero, respectively.

PENNANTPARK FLOATING RATE CAPITAL LTD. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

JUNE 30, 2014

(Unaudited)

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 2014. 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 our Administration Agreement, including rent, technology systems, insurance and our allocable portion of the costs of compensation and related expenses of our Chief Compliance Officer, Chief Financial Officer and their respective staffs. The Administrator also offers, on our behalf, managerial assistance to portfolio companies to which we are required to offer such assistance. Reimbursement for certain of these costs is included in administrative services expenses in the Consolidated Statement of Operations. For the three and nine months ended June 30, 2014, the Investment Adviser was reimbursed approximately $0.1 million and $0.4 million, respectively, from us, including expenses incurred on behalf of the Administrator, for the services described above. For the three and nine months ended June 30, 2013, the Investment Adviser was reimbursed approximately $0.1 million and $0.3 million, respectively, from us, including expenses incurred on behalf of the Administrator, for the services described above.

4. INVESTMENTS

Purchases of investments, including PIK, for the three and nine months ended June 30, 2014 totaled $30.7 million and $185.2 million, respectively. For the same periods in the prior year, purchases of investments, including PIK, totaled $114.4 million and $198.5 million, respectively. Sales and repayments of investments for the three and nine months ended June 30, 2014 totaled $55.6 million and $146.8 million, respectively. For the same periods in the prior year, sales and repayments of investments totaled $46.4 million and $120.7 million, respectively.

Investments and cash equivalents consisted of the following:


	June 30, 2014				September 30, 2013
Investment Classification	Cost		Fair Value		Cost		Fair Value
First lien	$	320,579,130	$	322,163,846	$	281,260,179	$	281,046,248
Second lien		29,990,638		30,790,263		27,351,492		27,499,315
Subordinated debt / corporate notes		9,703,762		10,350,190		10,409,846		9,003,170
Preferred equity / common equity / warrants		1,951,861		2,587,304		261,951		255,161

Total investments		362,225,391		365,891,603		319,283,468		317,803,894

Cash equivalents		9,940,930		9,940,930		4,578,249		4,578,249

Total investments and cash equivalents	$	372,166,321	$	375,832,533	$	323,861,717	$	322,382,143

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


Industry Classification	June 30, 2014	September 30, 2013
Healthcare and Pharmaceuticals	16%	17%
High Tech Industries	14	6
Hotel, Gaming and Leisure	12	13
Media: Advertising, Printing and Publishing	9	7
Consumer Services	8	8
Business Services	7	8
Consumer Goods: Durable	6	1
Retail	6	3
Energy: Oil and Gas	4	4
Automotive	3	2
Banking, Finance, Insurance and Real Estate	3	2
Consumer Goods: Non-Durable	3	4
Chemicals, Plastics and Rubber	2	6
Aerospace and Defense	1	1
Beverage, Food and Tobacco	1	3
Containers, Packaging and Glass	1	1
Media: Broadcasting and Subscription	1	1
Media: Diversified and Production	1	3
Telecommunications	1	1
Construction and Building	—	3
Transportation: Consumer	—	1
All Other	1	5

Total	100%	100%

PENNANTPARK FLOATING RATE CAPITAL LTD. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

JUNE 30, 2014

(Unaudited)

5. FAIR VALUE OF FINANCIAL INSTRUMENTS

Fair value, as defined under ASC 820, is the price that we would receive upon selling an investment or pay to transfer a liability in an orderly transaction to a market participant in the principal or most advantageous market for the investment or liability. ASC 820 emphasizes that valuation techniques maximize the use of observable market inputs and minimize the use of unobservable inputs. Inputs refer broadly to the assumptions that market participants would use in pricing an asset or liability, including assumptions about risk. Inputs may be observable or unobservable. Observable inputs reflect the assumptions market participants would use in pricing an asset or liability based on market data obtained from sources independent of us. Unobservable inputs reflect the assumptions market participants would use in pricing an asset or liability based on the best information available to us on the reporting period date.

ASC 820 classifies the inputs used to measure these fair values into the following hierarchies:



Level 1:		Inputs that are quoted prices (unadjusted) in active markets for identical assets or liabilities, accessible by us at the measurement date.

Level 2:		Inputs that are quoted prices for similar assets or liabilities in active markets, or that are quoted prices for identical or similar assets or liabilities in markets that are not active and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term, if applicable, of the financial instrument.

Level 3:		Inputs that are unobservable for an asset or liability because they are based on our own assumptions about how market participants would price the asset or liability.

A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Generally, most of our investments and our Credit Facility are classified as Level 3. Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the price used in an actual transaction may be different than our valuation and those differences may be material. A review of fair value hierarchy classifications is conducted on a quarterly basis.

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

Our investments are generally structured as Floating Rate Loans, mainly senior secured loans, but also may include second lien, high yield, mezzanine and distressed debt securities and equity investments. The transaction price, excluding transaction costs, is typically the best estimate of fair value at inception. Ongoing reviews by our Investment Adviser and independent valuation firms are based on an assessment of each underlying investment, incorporating valuations that consider the evaluation of financing and sale transactions with third parties, expected cash flows and market-based information including comparable transactions, performance multiples and yields, among other factors. These non-public investments using unobservable inputs are included in Level 3 of the fair value hierarchy.

A review of fair value hierarchy classifications is conducted on a quarterly basis. Changes in our ability to observe valuation inputs may result in a reclassification for certain financial assets or liabilities. Reclassifications impacting Level 3 of the fair value hierarchy are reported as transfers in or out of the Level 3 category as of the end of the quarter in which the reclassifications occur. During the nine months ended June 30, 2014, our ability to observe valuation inputs resulted in no reclassification of assets between any levels. This compares to the nine months ended June 30, 2013, which resulted in the reclassification of one asset from Level 3 to 2 and no other transfers between levels.

In addition to using the above inputs in cash equivalents, investments and our long-term Credit Facility valuations, we employ the valuation policy approved by our board of directors that is consistent with ASC 820. Consistent with our valuation policy, we evaluate the source of inputs, including any markets in which our investments are trading, in determining fair value. See Note 2.

As outlined in the table below, some of our Level 3 investments using a market approach valuation technique are valued using the average of the bids from brokers or dealers. The bids include a disclaimer, may not have corroborating evidence and may be the result of consensus pricing. The Investment Adviser assesses the source and reliability of bids from brokers or dealers. If the board of directors has a bona fide reason to believe any such market quote does not reflect the fair value of an investment, it may independently value such investments by using the valuation procedure that it uses with respect to assets for which market quotations are not readily available.

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

PENNANTPARK FLOATING RATE CAPITAL LTD. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

JUNE 30, 2014

(Unaudited)

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


Description	Fair Value at June 30, 2014		Valuation Technique	Unobservable Input	Range of Input (Weighted Average)
Debt investments	$	301,722,773	Market Comparable	Broker/Dealer bid quotes	N/A
Debt investments		56,066,656	Market Comparable	Market Yield	6.4% – 13.9% (10.8%)
Equity investments		1,492,711	Market Comparable	Broker/Dealer bid quotes	N/A
Equity investments		1,071,906	Enterprise Market Value	EBITDA multiple	4.5x – 9.5x (8.1x)

Total Level 3 investments		360,354,046

Long-Term Credit Facility	$	154,900,000	Market Comparable	Market Yield	3.4%


Description	Fair Value at September 30, 2013		Valuation Technique	Unobservable Input	Range of Input (Weighted Average)
Debt investments	$	298,655,677	Market Comparable	Broker/Dealer bid quotes	N/A
Debt investments		14,900,556	Market Comparable	Market Yield	7.3% – 15.2% (11.7%)
Equity investments		188,235	Enterprise Market Value	EBITDA multiple	7.0x

Total Level 3 investments		313,744,468

Long-Term Credit Facility	$	99,600,000	Market Comparable	Market Yield	3.6%

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


	Fair Value at June 30, 2014
Description	Fair Value		Level 1		Level 2		Level 3
Debt investments (First lien)	$	322,163,846	$	—	$	—	$	322,163,846
Debt investments (Second lien)		30,790,263		—		—		30,790,263
Debt investments (Subordinated debt / corporate notes)		10,350,190		—		5,514,870		4,835,320
Equity investments		2,587,304		—		22,687		2,564,617

Total investments		365,891,603		—		5,537,557		360,354,046

Cash equivalents		9,940,930		9,940,930		—		—

Total investments and cash equivalents	$	375,832,533	$	9,940,930	$	5,537,557	$	360,354,046

Long-Term Credit Facility	$	154,900,000	$	—	$	—	$	154,900,000


	Fair Value at September 30, 2013
Description	Fair Value		Level 1		Level 2		Level 3
Debt investments (First lien)	$	281,046,248	$	—	$	—	$	281,046,248
Debt investments (Second lien)		27,499,315		—		1,635,000		25,864,315
Debt investments (Subordinated debt / corporate notes)		9,003,170		—		2,357,500		6,645,670
Equity investments		255,161		—		66,926		188,235

Total investments		317,803,894		—		4,059,426		313,744,468

Cash equivalents		4,578,249		4,578,249		—		—

Total investments and cash equivalents	$	322,382,143	$	4,578,249	$	4,059,426	$	313,744,468

Long-Term Credit Facility	$	99,600,000	$	—	$	—	$	99,600,000

PENNANTPARK FLOATING RATE CAPITAL LTD. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

JUNE 30, 2014

(Unaudited)

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


	Nine Months Ended June 30, 2014
Description	First Lien			Second lien, subordinated debt and equity investments			Totals
Beginning Balance	$	281,046,248		$	32,698,220		$	313,744,468
Realized gains		1,194,362			578,987			1,773,349
Unrealized appreciation		1,798,648			1,433,096			3,231,744
Purchases, PIK, net discount accretion and non-cash exchanges		171,711,192			15,019,955			186,731,147
Sales, repayments and non-cash exchanges		(133,586,604	)		(11,540,058	)		(145,126,662	)
Transfers in and/or out of Level 3		—			—			—

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

Net change in unrealized appreciation reported within the net change in unrealized appreciation on investments in our Consolidated Statement of Operations attributable to our Level 3 assets still held at the reporting date.	$	1,006,992		$	1,421,519		$	2,428,511


	Nine Months Ended June 30, 2013
Description	First Lien			Second lien, subordinated debt and equity investments			Totals
Beginning Balance	$	150,209,747		$	18,836,653		$	169,046,400
Realized gains		1,470,514			1,736,347			3,206,861
Unrealized depreciation		(1,398,938	)		(1,030,393	)		(2,429,331	)
Purchases, PIK and net discount accretion		181,863,473			17,429,350			199,292,823
Sales, repayments and non-cash exchanges		(103,617,239	)		(17,038,852	)		(120,656,091	)
Transfers in and/or out of Level 3		—			(1,586,250	)		(1,586,250	)

Ending Balance	$	228,527,557		$	18,346,855		$	246,874,412

Net change in unrealized (depreciation) reported within the net change in unrealized (depreciation) on investments in our Consolidated Statement of Operations attributable to our Level 3 assets still held at the reporting date.	$	(388,299	)	$	(2,694,643	)	$	(3,082,942	)

PENNANTPARK FLOATING RATE CAPITAL LTD. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

JUNE 30, 2014

(Unaudited)

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


	Carrying/Fair Value
	Nine Months Ended June 30,
Long-Term Credit Facility	2014			2013
Beginning Balance (cost – $99,600,000 and $75,500,000, respectively)	$	99,600,000		$	75,122,500
Total unrealized appreciation included in earnings		—			377,500
Borrowings		130,500,000			121,450,000
Repayments		(75,200,000	)		(111,350,000	)
Transfers in and/or out of Level 3		—			—

Ending Balance (cost – $154,900,000 and $85,600,000, respectively)	$	154,900,000		$	85,600,000

We adopted ASC 825-10, which provides companies with an option to report selected financial assets and liabilities at fair value, and made an irrevocable election to apply ASC 825-10 to our Credit Facility. We elected to use the fair value option for our Credit Facility to align the measurement attributes of both our assets and liabilities while mitigating volatility in earnings from using different measurement attributes. Due to that election and in accordance with GAAP, we incurred expenses of zero and $0.7 million, respectively, relating to amendment fees on the Credit Facility during the three and nine months ended June 30, 2014. For the same periods in the prior year, we incurred expenses of zero and $0.5 million, respectively. ASC 825-10 establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities and to more easily understand the effect on earnings of a company’s choice to use fair value. ASC 825-10 also requires entities to display the fair value of the selected assets and liabilities on the face of the Consolidated Statement of Assets and Liabilities and changes in fair value of the Credit Facility are reported in our Consolidated Statement of Operations. We elected not to apply ASC 825-10 to any other financial assets or liabilities. For each of the three and nine months ended June 30, 2014, our Credit Facility had a net change in unrealized appreciation of zero. For the three and nine months ended June 30, 2013, our Credit Facility had a net change in unrealized appreciation of zero and $0.4 million, respectively. As of June 30, 2014 and September 30, 2013, the Credit Facility had unrealized appreciation of zero. We use a nationally recognized independent valuation service to measure the fair value of the Credit Facility in a manner consistent with the valuation process that the board of directors uses to value our investments.

6. CHANGE IN NET ASSETS FROM OPERATIONS PER COMMON SHARE

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


	Three Months Ended June 30,				Nine Months Ended June 30,
	2014		2013		2014		2013
Numerator for net increase in net assets resulting from operations	$	4,941,774	$	1,567,127	$	18,235,852	$	6,538,293
Denominator for basic and diluted weighted average shares		14,898,056		10,302,918		14,898,056		8,067,406
Basic and diluted net increase in net assets per share resulting from operations	$	0.33	$	0.15	$	1.22	$	0.81

7. CASH EQUIVALENTS

Cash equivalents represent cash in money market funds pending investment in longer-term portfolio holdings. Our portfolio may consist of temporary investments in U.S. Treasury Bills (of varying maturities), repurchase agreements, money market funds or repurchase agreement-like treasury securities. These temporary investments with original maturities of 90 days or less are deemed cash equivalents and are included in the Consolidated Schedule of Investments. At the end of each fiscal quarter, we may take proactive steps to preserve investment flexibility for the next quarter by investing in cash equivalents, which is dependent upon the composition of our total assets at quarter-end. We may accomplish this in several ways, including purchasing U.S. Treasury Bills and closing out positions on a net cash basis after quarter-end, temporarily drawing down on the Credit Facility, or utilizing repurchase agreements or other balance sheet transactions as are deemed appropriate for this purpose. These amounts are excluded from adjusted gross assets for purposes of computing the Investment Adviser’s management fee. U.S. Treasury Bills with maturities greater than 60 days from the time of purchase are valued consistent with our valuation policy. As of June 30, 2014 and September 30, 2013, cash equivalents consisted of money market funds in the amounts of $9.9 million and $4.6 million, respectively.

PENNANTPARK FLOATING RATE CAPITAL LTD. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

JUNE 30, 2014

(Unaudited)

8. FINANCIAL HIGHLIGHTS

Below are the financial highlights:


	Nine Months Ended June 30,
	2014			2013
Per Share Data:
Net asset value, beginning of period	$	14.10		$	13.98
Net investment income⁽¹⁾		0.76			0.86
Net realized and unrealized gain (loss) ⁽¹⁾		0.46			(0.05	)

Net increase in net assets resulting from operations⁽¹⁾		1.22			0.81
Distributions to stockholders^{(1), (2)}		(0.80	)		(0.76	)
Effect of common stock issuance and offering costs		—			(0.05	)

Net asset value, end of period	$	14.52		$	13.98

Per share market value, end of period	$	14.29		$	14.14

Total return* ⁽³⁾		9.91	%		17.94	%
Shares outstanding at end of period		14,898,056			10,304,692

Ratios / Supplemental Data:**
Ratio of operating expenses to average net assets ⁽⁴⁾		4.69	%		4.70	%
Ratio of Credit Facility related expenses to average net assets ⁽⁵⁾		1.95	%		1.90	%

Ratio of total expenses to average net assets		6.64	%		6.60	%
Ratio of net investment income to average net assets ⁽⁵⁾		7.17	%		8.03	%
Net assets at end of period	$	216,272,066		$	144,093,126

Average debt outstanding	$	146,395,971		$	66,821,154

Average debt per share ⁽¹⁾	$	9.83		$	8.28
Asset coverage per unit ⁽⁶⁾	$	2,396		$	2,683
Portfolio turnover ratio		54.41	%		85.26	%

*	Not annualized for periods less than one year.

**	Annualized for periods less than one year.

⁽¹⁾	Based on the weighted average shares outstanding for the respective periods.

⁽²⁾	The tax status of distributions is calculated in accordance with income tax regulations, which may differ from amounts determined under GAAP, and reported on Form 1099-DIV each calendar year.

⁽³⁾	Based on the change in market price per share during the period and takes into account distributions, if any, reinvested in accordance with our dividend reinvestment plan.

⁽⁴⁾	Operating expenses exclude Credit Facility related costs.

⁽⁵⁾	Credit Facility amendment costs are not annualized.

⁽⁶⁾

The asset coverage ratio for a class of senior securities representing indebtedness is calculated on our consolidated total assets, less all liabilities and indebtedness not represented by senior securities, divided by the senior securities representing indebtedness. This asset coverage ratio is multiplied by $1,000 to determine the asset coverage per unit.

9. CREDIT FACILITY

Funding I’s Credit Facility with affiliates of SunTrust Bank, or the Lender, is $200 million, has an interest rate spread above LIBOR of 200 basis points, matures in May 2018 and its reinvestment period ends in May 2016. In November 2013, we expanded the Credit Facility to allow Funding I to borrow up to $200 million, up from $125 million. The Credit Facility is subject to satisfaction of certain conditions and the regulatory restrictions that the 1940 Act imposes on us as a BDC. As of June 30, 2014 and September 30, 2013, we had $154.9 million and $99.6 million of outstanding borrowings under the Credit Facility, respectively, and carried an annual interest rate of 2.16% and 2.18%, respectively, excluding the 0.375% undrawn commitment fee. The annualized weighted average cost of debt for the nine months ended June 30, 2014 and 2013, inclusive of the fee on the undrawn commitment on the Credit Facility but excluding amendment costs, was 2.36% and 2.68%, respectively.

Until May 2016, or the revolving period, the Credit Facility bears interest at LIBOR plus 200 basis points and, after the revolving period, the rate sets to LIBOR plus 425 basis points for the remaining two years, maturing in May 2018. The Credit Facility is secured by all of the assets of Funding I. Both PennantPark Floating Rate Capital Ltd. and Funding I have made customary representations and warranties and are required to comply with various covenants, reporting requirements and other customary requirements for similar credit facilities.

The Credit Facility, contains covenants including but not limited to restrictions of loan size, industry requirements, average life of loans, geographic and individual portfolio concentrations, minimum portfolio yield and loan payment frequency. Additionally, the Credit Facility requires the maintenance of a minimum equity investment in Funding I and income ratio as well as restrictions on certain payments and issuance of debt. For instance, we must maintain at least $25 million in equity and must maintain an interest coverage ratio of at least 125%. The Credit Facility compliance reporting is prepared on a basis of accounting other than GAAP.

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

Our interest in Funding I (other than the management fees) is subordinate in priority of payment to every other obligation of Funding I, and is subject to certain payment restrictions set forth in the Credit Facility. We may receive cash distributions on our equity interests in Funding I only after it has made all required payments of (1) cash interest and, if applicable, principal to the Lender, (2) administrative expenses and (3) claims of other unsecured creditors of Funding I. The Investment Adviser has irrevocably directed that any management fee owed with respect to such services is to be paid to the Company so long as the Investment Adviser remains the collateral manager.

PENNANTPARK FLOATING RATE CAPITAL LTD. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

JUNE 30, 2014

(Unaudited)

10. COMMITMENTS AND CONTINGENCIES

From time to time, we, the Investment Adviser or the Administrator may be a party to legal proceedings in the ordinary course of business, including proceedings relating to the enforcement of our rights under contracts with our portfolio companies. While the outcome of these legal proceedings cannot be predicted with certainty, we do not expect that these proceedings will have a material effect upon our financial condition or results of operations. Unfunded investments described in the Consolidated Statement of Assets and Liabilities represent unfunded delayed draws on investments and/or revolving lines of credit, if any.

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

PennantPark Floating Rate Capital Ltd. and its Subsidiary:

We have reviewed the accompanying consolidated statements of assets and liabilities of PennantPark Floating Rate Capital Ltd. and its Subsidiary (the “Company”), including the consolidated schedule of investments, as of June 30, 2014, the consolidated statements of operations for the three and nine months ended June 30, 2014 and the consolidated statements of changes in net assets, and cash flows for the nine months ended June 30, 2014. 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 consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.

LOGO

New York, New York

August 6, 2014

Item 2.

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

FORWARD-LOOKING STATEMENTS

This Report, including Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains statements that constitute forward-looking statements, which relate to us and our consolidated subsidiary regarding future events or our future performance or future financial condition. These forward-looking statements are not historical facts, but rather are based on current expectations, estimates and projections about our Company, our industry, our beliefs and our assumptions. The forward-looking statements contained in this Report involve risks and uncertainties, including statements as to:

•

our future operating results;

•

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

•

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

•

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

•

the impact of investments that we expect to make;

•

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

•

our contractual arrangements and relationships with third parties;

•

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

•

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

•

our expected financings and investments;

•

the adequacy of our cash resources and working capital;

•

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

•

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

•

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

We use words such as “anticipates,” “believes,” “expects,” “intends,” “seeks,” “plans,” “estimates” and similar expressions to identify forward-looking statements. You should not place undue influence on the forward-looking statements as our actual results could differ materially from those projected in the forward-looking statements for any reason, including the factors in “Risk Factors” and elsewhere in this Report.

Although we believe that the assumptions on which these forward-looking statements are based are reasonable, any of those assumptions could prove to be inaccurate, and as a result, the forward-looking statements based on those assumptions also could be inaccurate. Important assumptions include our ability to originate new loans and investments, certain margins and levels of profitability and the availability of additional capital. In light of these and other uncertainties, the inclusion of a projection or forward-looking statement in this Report should not be regarded as a representation by us that our plans and objectives will be achieved.

We have based the forward-looking statements included in this Report on information available to us on the date of this Report, and we assume no obligation to update any such forward-looking statements. Although we undertake no obligation to revise or update any forward-looking statements in this Report, whether as a result of new information, future events or otherwise, you are advised to consult any additional disclosures that we may make directly to you or through reports that we in the future may file with the SEC, including reports on Form 10-Q/K and current reports on Form 8-K.

You should understand that under Section 27A(b)(2)(B) of the Securities Act and Section 21E(b)(2)(B) of the Securities Exchange Act of 1934, as amended, or the Exchange Act, the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995 do not apply to statements made in periodic reports we file under the Exchange Act.

The following analysis of our financial condition and results of operations should be read in conjunction with our Consolidated Financial Statements and the related notes thereto contained elsewhere in this Report.

Overview

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

We believe that Floating Rate Loans to U.S. middle-market companies offer attractive risk adjusted returns due to a limited amount of capital available for such companies and the potential for rising interest rates. We use the term “middle-market” to refer to companies with annual revenues between $50 million and $1 billion. Our investments are typically rated below investment grade. Securities rated below investment grade are often referred to as “leveraged loans” or “high yield” securities or “junk bonds” and are often higher risk compared to debt instruments that are rated above investment grade and have speculative characteristics. However, when compared to junk bonds and other non-investment grade debt, senior secured Floating Rate Loans typically have more robust capital-preserving qualities, such as historically lower default rates than junk bonds, represent the senior source of capital in a borrower’s capital structure and often have certain of the borrower’s assets pledged as collateral. Our debt investments may generally range in maturity from three to ten years and are made to U.S. and, to a limited extent, non-U.S. corporations, partnerships and other business entities that 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 loans, or first lien loans, will represent at least 65% of our overall portfolio. We also generally expect to invest up to 35% of our overall portfolio opportunistically in other types of investments, including second-lien, high yield, mezzanine and distressed debt securities and, to a lesser extent, equity investments. Our investment size may generally range between $1 million and $15 million, on average, although we expect that this investment size will vary proportionately with the size of our capital base.

Our investment activity depends on many factors, including the amount of debt and equity capital available to middle-market companies, the level of merger and acquisition activity for such companies, the general economic environment and the competitive environment for the types of investments we make. We have used, and expect to continue to use, our Credit Facility, proceeds from the rotation of our portfolio, and proceeds from public and private offerings of securities to finance our investment objectives.

Organization and Structure of PennantPark Floating Rate Capital Ltd.

PennantPark Floating Rate Capital Ltd., a Maryland corporation organized in October 2010, is a closed-end, externally managed, non-diversified investment company that has elected to be treated as a BDC under the 1940 Act. In addition, for federal income tax purposes we elected to be treated, and intend to qualify annually, as a RIC under the Code.

Our investment activities are managed by the Investment Adviser. Under our Investment Management Agreement, we have agreed to pay our Investment Adviser an annual base management fee based on our average adjusted gross total assets as well as an incentive fee based on our investment performance. We have also entered into an Administration Agreement with the Administrator. Under our Administration Agreement, we have agreed to reimburse the Administrator for our allocable portion of overhead and other expenses incurred by the Administrator in performing its obligations under our Administration Agreement, including rent and our allocable portion of the costs of compensation and related expenses of our Chief Compliance Officer, Chief Financial Officer and their respective staffs. Our board of directors, a majority of whom are independent of us, provides overall supervision of our activities, and the Investment Adviser supervises our day-to-day activities.

Revenues

We generate revenue in the form of interest income on the debt securities we hold and capital gains and distributions, if any, on investment securities that we may acquire in portfolio companies. Our debt investments, whether in the form of senior secured loans or mezzanine debt, typically have a term of three to ten years and bear interest at a fixed or floating rate. Interest on debt securities is generally payable quarterly or semiannually. In some cases, some of our investments provide for deferred interest payments or PIK interest. The principal amount of the debt securities and any accrued but unpaid interest generally becomes due at the maturity date. In addition, we may generate revenue in the form of amendment, commitment, origination, structuring or diligence fees, fees for providing managerial assistance and possibly consulting fees. Loan origination fees, OID and market discount or premium are capitalized, and we accrete or amortize such amounts as income or expense, as applicable, using the effective interest method. We record prepayment penalties on loans and debt securities as income. Dividend income, if any, is recognized on an accrual basis on the ex-dividend date to the extent that we expect to collect such amounts.

Expenses

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

•

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

•

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

•

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

•

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

•

transfer agent and custodial fees;

•

fees and expenses associated with marketing efforts;

•

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

•

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

•

federal, state and local taxes;

•

independent directors’ fees and expenses;

•

brokerage commissions;

•

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

•

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

•

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

•

all other expenses incurred by either the Administrator or us in connection with administering our business, including payments under our Administration Agreement that will be based upon our allocable portion of overhead, and other expenses incurred by the Administrator in performing its obligations under our Administration Agreement, including rent and our allocable portion of the costs of compensation and related expenses of our Chief Compliance Officer, Chief Financial Officer and their respective staffs.

Generally, during periods of asset growth, we expect our general and administrative expenses to be relatively stable or to decline as a percentage of total assets and increase during periods of asset declines. Incentive fees, interest expense and costs relating to future offerings of securities would be additive to the expenses described above.

PORTFOLIO AND INVESTMENT ACTIVITY

As of June 30, 2014, our portfolio totaled $365.9 million and consisted of $322.2 million of senior secured loans, $30.8 million of second lien secured debt, $10.3 million of subordinated debt and $2.6 million of preferred and common equity investments. Our debt portfolio consisted of 95% variable-rate investments (including 93% with a LIBOR or prime floor) and 5% fixed-rate investments. Overall, the portfolio had unrealized appreciation of $3.7 million. Our overall portfolio consisted of 80 companies with an average investment size of $4.6 million, a weighted average yield on debt investments of 8.2%, and was invested 88% in senior secured loans, 8% in second lien secured debt and 4% in subordinated debt, preferred and common equity investments.

As of September 30, 2013, our portfolio totaled $317.8 million and consisted of $281.0 million of senior secured loans, $27.5 million of second lien secured debt and $9.3 million of subordinated debt, preferred and common equity investments. Our debt portfolio consisted of 92% variable-rate investments (including 89% with a LIBOR or prime floor) and 8% fixed-rate investments. Overall, the portfolio had net unrealized depreciation of $1.5 million. Our overall portfolio consisted of 83 companies with an average investment size of $3.8 million, had a weighted average yield on debt investments of 8.1%, and was invested 88% in senior secured loans, 9% in second lien secured debt and 3% in subordinated debt, preferred and common equity investments.

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

For the three months ended June 30, 2013, we invested $114.3 million in 26 new and five existing portfolio companies with a weighted average yield on debt investments of 7.5%. Sales and repayments of investments for the three months ended June 30, 2013 totaled $46.4 million. For the nine months ended June 30, 2013, we invested $198.3 million in 54 new and 11 existing portfolio companies with a weighted average yield on debt investments of 8.0%. Sales and repayments of investments for the nine months ended June 30, 2013 totaled $120.7 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. 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 reclassified certain prior period amounts to conform to the current period presentation. We have eliminated all intercompany balances and transactions. References to the ASC serve as a single source of accounting literature. Subsequent events are evaluated and disclosed as appropriate for events occurring through the date the Consolidated Financial Statements are issued. In addition to the discussion below, we describe our critical accounting policies in the notes to our Consolidated Financial Statements.

Valuation of Portfolio Investments

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

(1)

(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)

(5)

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

Our investments generally consist of illiquid securities, including debt and equity investments. 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/dealers, if available, or otherwise from a principal market maker or a primary market dealer. The Investment Adviser assesses the source and reliability of bids from brokers or dealers. If the board of directors has a bona fide reason to believe any such market quote does not reflect the fair value of an investment, it may independently value such investments by using the valuation procedure that it uses with respect to assets for which market quotations are not readily available. Investments of sufficient credit quality purchased within 60 days of maturity are valued at cost plus accreted discount, or minus amortized premium, which approximates fair value.

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.

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 incurred expenses of zero and $0.7 million, respectively, relating to amendment fees on the Credit Facility during the three and nine months ended June 30, 2014. For the same periods in the prior year, we incurred expenses of zero and $0.5 million, respectively. ASC 825-10 establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities and to more easily understand the effect on earnings of a company’s choice to use fair value. ASC 825-10 also requires entities to display the fair value of the selected assets and liabilities on the face of the Consolidated Statement of Assets and Liabilities and changes in fair value of the Credit Facility are reported in our Consolidated Statement of Operations. We elected not to apply ASC 825-10 to any other financial assets or liabilities. For each of the three and nine months ended June 30, 2014, our Credit Facility had a net change in unrealized appreciation of zero. For the three and nine months ended June 30, 2013, our Credit Facility had a net change in unrealized appreciation of zero and $0.4 million, respectively. As of June 30, 2014 and September 30, 2013, the Credit Facility had unrealized appreciation of zero. We use a nationally recognized independent valuation service to measure the fair value of the 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 contractual interest accrued and added to the loan balance that generally becomes due at maturity, we will generally not accrue PIK interest if 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 determine that it is probable that we will not be able to collect such interest. Loan origination fees, OID and market discount or premium are capitalized, and we then accrete or amortize such amounts as interest income or expense, as applicable, using the effective interest method. We record contractual 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 portfolio investment values during the reporting period, including any reversal of previously recorded unrealized appreciation or depreciation, when gains or losses are realized.

Payment-in-Kind Interest or PIK

We have investments in our portfolio which contain a PIK interest provision. PIK interest is added to the principal balance of the investment and is recorded as income. For us to maintain our status as a RIC, substantially all of this income must be paid out to stockholders in the form of distributions, even though we have not collected any cash with respect to interest on PIK securities.

Federal Income Taxes

We have elected to be taxed, and intend to qualify annually to maintain our election to be taxed, as a RIC under Subchapter M of the Code. To maintain our RIC tax election, we must, among other requirements, meet certain source-of-income and quarterly asset diversification requirements. We also must annually distribute at least 90% of the sum of our net ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, if any, out of the assets legally available for distribution. Although not required for us to maintain our RIC tax status, in order to preclude the imposition of a 4% nondeductible federal excise tax imposed on RICs, we must distribute during each calendar year an amount at least equal to the sum of (1) 98% of our net ordinary income for the calendar year, (2) 98.2% of the sum of our net capital gain income (i.e., the excess, if any, of capital gains over capital losses) for the one-year period ending on October 31 of the calendar year and (3) the sum of any net ordinary income plus net capital gain income for preceding years that were not distributed during such years. In addition, although we may distribute realized net capital gains (i.e., net long-term capital gains in excess of short-term capital losses), if any, at least annually, out of the assets legally available for such distributions in the manner described above, we have retained and may continue to retain such net capital gains or net ordinary income to provide us with additional liquidity.

Recent Accounting Pronouncements

In June 2013, the FASB issued ASU 2013-08. ASU 2013-08 provides an approach to assess whether a company is an investment company, clarifies the characteristics of an investment company, and provides new measurement and disclosure requirements. ASU 2013-08 is effective for interim and annual reporting periods in fiscal years that begin after December 15, 2013. Earlier application is prohibited. We are currently evaluating ASU 2013-08 to determine the effect, if any, on our Consolidated Financial Statements and disclosures.

RESULTS OF OPERATIONS

Set forth below are the results of operations for the three and nine months ended June 30, 2014 and 2013.

Investment Income

Investment income for the three and nine months ended June 30, 2014 was $7.7 million and $22.1 million, respectively, and was attributable to $6.2 million and $17.9 million from senior secured loan investments, and $1.5 million and $4.2 million from second lien secured debt and subordinated debt investments. This compares to investment income for the three and nine months ended June 30, 2013, which was $4.7 million and $12.8 million, respectively, and was attributable to $3.9 million and $10.8 million from senior secured loan investments, and $0.8 million and $2.0 million from second lien secured debt and subordinated debt investments. The increase in investment income over the prior year was primarily due to the growth of our portfolio.

Expenses

Expenses for the three and nine months ended June 30, 2014 totaled $3.3 million and $10.8 million, respectively. Base management fee for the same periods totaled $1.0 million and $2.8 million, incentive fees totaled $0.8 million (including $0.1 million on net unrealized gains accrued but not payable) and $2.9 million (including $0.6 million on net unrealized gains accrued but not payable), Credit Facility expenses totaled $0.9 million and $3.3 million (including $0.7 million of Credit Facility amendment expenses), general and administrative expenses totaled $0.5 million and $1.4 million and excise taxes were $0.1 million and $0.4 million, respectively.

This compares to expenses for the three and nine months ended June 30, 2013, which totaled $1.5 million and $5.8 million, respectively. Base management fee for the same periods totaled $0.5 million and $1.5 million, incentive fees totaled less than $0.1 million and $1.0 million, Credit Facility expenses totaled $0.4 million and $1.8 million (including $0.5 million of Credit Facility amendment expenses), general and administrative expenses totaled $0.5 million and $1.4 million and excise taxes were $0.1 million, respectively. The increase in expenses was due to the growth of our portfolio and expanding our borrowing capacity under our Credit Facility.

Net Investment Income

Net investment income totaled $4.4 million and $11.3 million, or $0.29 and $0.76 per share, for the three and nine months ended June 30, 2014, respectively. Net investment income totaled $3.2 million and $7.0 million, or $0.31 and $0.86 per share, for the three and nine months ended June 30, 2013, respectively. The increase in net investment income was due to a larger portfolio, which was partially offset by amendment costs. For the three months ended June 30, 2014, net investment income per share increased due to changes in yield environment over the prior year, whereas, for the nine months ended June 30, 2014, net investment income per share decreased over the prior year as a result of both changes in yield environment and share issuances of common stock during 2013.

Net Realized Gains or Losses

Sales and repayments of investments for the three and nine months ended June 30, 2014 totaled $55.6 million and $146.8 million and net realized gains totaled $0.7 million and $1.8 million, respectively. Sales and repayments of investments totaled $46.4 million and $120.7 million and realized gains totaled $1.7 million and $3.2 million for the three and nine months ended June 30, 2013, respectively. The decrease in realized gains was driven by fewer exits of our portfolio companies.

Unrealized Appreciation or Depreciation on Investments and Credit Facility

For the three and nine months ended June 30, 2014, we reported net unrealized (depreciation) appreciation on investments of $(0.1) million and $5.1 million, respectively. For the three and nine months ended June 30, 2013, we reported net unrealized (depreciation) on investments of $(3.3) million and $(3.2) million, respectively. As of June 30, 2014 and September 30, 2013, net unrealized appreciation (depreciation) on investments totaled $3.7 million and $(1.5) million, respectively. The change compared to September 30, 2013 was the result of changes in market values.

For each of the three and nine months ended June 30, 2014, our Credit Facility had an unrealized appreciation of zero. For the three and nine months ended June 30, 2013, our Credit Facility had an unrealized appreciation of zero and $0.4 million, respectively. As of June 30, 2014 and September 30, 2013, net unrealized appreciation on our Credit Facility totaled zero. The change compared to last year was due to changes in the capital markets.

Net Increase in Net Assets Resulting from Operations

Net increase in net assets resulting from operations totaled $4.9 million and $18.2 million, or $0.33 and $1.22 per share, respectively, for the three and nine months ended June 30, 2014. This compares to a net increase in net assets resulting from operations which totaled $1.6 million and $6.5 million, or $0.15 and $0.81 per share, respectively, for the three and nine months ended June 30, 2013. We continue to find attractive investment opportunities to grow net assets from operations.

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 Credit Facility with affiliates of SunTrust Bank, or the Lender, is $200 million, has an interest rate spread above LIBOR of 200 basis points, matures in May 2018 and its reinvestment period ends in May 2016. In November 2013, we expanded the Credit Facility to allow Funding I to borrow up to $200 million, up from $125 million. The Credit Facility is subject to satisfaction of certain conditions and the regulatory restrictions that the 1940 Act imposes on us as a BDC. As of June 30, 2014 and September 30, 2013, Funding I had $154.9 million and $99.6 million of outstanding borrowings under the Credit Facility, respectively, and carried an annual interest rate of 2.16% and 2.18%, respectively, excluding the 0.375% undrawn commitment fee. The annualized weighted average cost of debt for the nine months ended June 30, 2014 and 2013, inclusive of the fee on the undrawn commitment on the Credit Facility but excluding amendment costs, was 2.36% and 2.68%, respectively.

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 all required payments of (1) cash interest and, if applicable, principal to the Lender, (2) administrative expenses and (3) claims of other unsecured creditors of Funding I. The Investment Adviser has irrevocably directed that any management fee owed with respect to such services is to be paid to the Company so long as the Investment Adviser remains the collateral manager.

We may raise equity or debt capital through both registered offerings and private offerings of securities and by securitizing a portion of our investments among other considerations. Furthermore, our Credit Facility availability depends on various covenants and restrictions as discussed in the preceding paragraphs. The primary use of existing funds and any funds raised in the future is expected to be for repayment of indebtedness, investments in portfolio companies, cash distributions to our stockholders or for other general corporate purposes.

On June 30, 2014 and September 30, 2013, we had cash equivalents of $9.9 million and $4.6 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 $37.9 million for the nine months ended June 30, 2014, and our financing activities provided cash of $43.3 million for the same period. Our operating activities used cash primarily for our investment activities and our financing activities provided cash primarily from net draws under the Credit Facility.

Our operating activities used cash of $47.1 million for the nine months ended June 30, 2013, and our financing activities provided cash of $50.2 million for the same period. Our operating activities used cash primarily for our investment activity that was offset by our financing activities, which provided cash primarily from a public offering and net repayments under the Credit Facility.

Contractual Obligations

A summary of our significant contractual payment obligations as of June 30, 2014, 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	$	154.9	$	—	$	—	$	154.9	$	—
Unfunded investments ⁽¹⁾		2.7		—		—		2.7		—

Total contractual obligations	$	157.6	$	—	$	—	$	157.6	$	—

⁽¹⁾	Unfunded investments described in the Consolidated Statements of Assets and Liabilities represent unfunded delayed draws on investments and/or revolving lines of credit.

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 2014, PennantPark Investment Advisers serves as our Investment Adviser. Payments under our Investment Management Agreement in each reporting period are equal to (1) a base management fee equal to a percentage of the value of our gross assets and (2) an incentive fee based on our performance.

Under our Administration Agreement, which was reapproved by our board of directors, including a majority of our directors who are not interested persons of us, in February 2014, 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, technology systems, insurance 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, including any risk management of commodity pricing or other hedging practices.

Distributions

In order to qualify as a RIC and to not be subject to corporate-level tax on income, we are required, under Subchapter M of the Code, to annually distribute at least 90% of the sum of our ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, if any, out of the assets legally available for distribution. Although not required for us to maintain our RIC tax status, in order to preclude the imposition of a 4% nondeductible federal excise tax imposed on RICs, we must distribute during each calendar year an amount at least equal to the sum of (1) 98% of our net ordinary income for the calendar year, (2) 98.2% of our capital gain net income (i.e., the excess, if any, of capital gains over capital losses) for the one-year period ending on October 31 of the calendar year and (3) the sum of any net ordinary income plus capital gain net income for preceding years that were not distributed during such years. In addition, although we may distribute realized net capital gains (i.e., net long-term capital gains in excess of short-term capital losses), if any, at least annually, out of the assets legally available for such distributions in the manner described above, we have retained and may continue to retain such net capital gains or net ordinary income to provide us with additional liquidity. As a RIC, we are generally not subject to tax and have elected to retain a portion of our calendar year income. For the three and nine months ended June 30, 2014, we accrued estimated excise taxes of $0.1 million and $0.4 million, respectively. For the three and nine months ended June 30, 2013, we accrued estimated excise taxes of less than $0.1 million and $0.1 million, respectively.

During the three and nine months ended June 30, 2014, we declared to stockholders distributions of $0.270 and $0.808 per share, respectively, for total distributions of $4.0 million and $12.0 million, respectively. For the same periods in the prior year, we declared distributions of $0.263 and $0.765 per share, respectively, for total distributions of $2.7 million and $6.1 million, respectively. We monitor available net investment income to determine if a tax return of capital may occur for the fiscal year. To the extent our taxable earnings fall below the total amount of our distributions for any given fiscal year, a portion of those distributions may be deemed to be a tax return of capital to our common stockholders. Tax characteristics of distributions will be reported to stockholders on Form 1099-DIV after the end of the calendar year and in our periodic reports filed with the SEC.

We intend to continue to make monthly distributions to our stockholders. Our monthly distributions, if any, are determined by our board of directors quarterly.

We maintain an “opt out” dividend reinvestment plan for our common stockholders. As a result, if we declare a distribution, then stockholders’ cash distributions will be automatically reinvested in additional shares of our common stock, unless they specifically “opt out” of the dividend reinvestment plan so as to receive cash distributions.

We may not be able to achieve operating results that will allow us to make distributions at a specific level or to increase the amount of these distributions from time to time. In addition, we may be limited in our ability to make distributions due to the asset coverage test for borrowings applicable to us as a BDC under the 1940 Act and due to provisions in future credit facilities. If we do not distribute a certain percentage of our income annually, we will suffer adverse tax consequences, including possible loss of RIC status. We cannot assure stockholders that they will receive any distributions at a particular level.

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

Item 3.

Quantitative And Qualitative Disclosures About Market Risk

We are subject to financial market risks, including changes in interest rates. As of June 30, 2014, our debt portfolio consisted of 95% variable-rate investments (including 93% with a LIBOR or prime floor) and 5% fixed-rate investments. The variable-rate loans are usually based on a LIBOR rate and typically have durations of three months, after which they reset to current market interest rates. Variable-rate investments subject to a floor generally reset by reference to the current market index after one to nine months only if the index exceeds the floor. In regards to variable-rate instruments with a floor, we do not benefit from increases in interest rates until such rates exceed the floor and thereafter benefit from market rates above any such floor. In contrast, our cost of funds, to the extent it is not fixed, will fluctuate with changes in interest rates.

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


Change In Interest Rates	Change In Interest Income, Net Of Interest Expense (in thousands)			Per Share
Up 1%	$	(1,455	)	$	(0.10	)
Up 2%	$	71		$	0.00
Up 3%	$	2,005		$	0.14
Up 4%	$	3,938		$	0.26

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

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

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

Item 4.

Controls and Procedures

As of the period covered by this Report, we, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act). Based on that evaluation, our management, including the Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were effective and provided reasonable assurance that information required to be disclosed in our periodic filings with the SEC is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. However, in evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of such possible controls and procedures.

There have been no changes in our internal control over financial reporting that occurred during the quarter ended June 30, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1.

Legal Proceedings

Neither we nor our Investment Adviser nor our Administrator is currently subject to any material legal proceedings, nor, to our knowledge, is any material legal proceeding threatened against us, or against our Investment Adviser or Administrator. From time to time, we, our Investment Adviser or our Administrator may be a party to certain legal proceedings in the ordinary course of business, including proceedings relating to the enforcement of our rights under contracts with our portfolio companies. While the outcome of these legal proceedings cannot be predicted with certainty, we do not expect that these proceedings will have a material effect upon our financial condition or results of operations.

Item 1A.

Risk Factors

In addition to the other information set forth in this Report, you should consider carefully the factors discussed in Part I “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended September 30, 2013, which could materially affect our business, financial condition and/or operating results. The risks described in our Annual Report on Form 10-K are not the only risks facing PennantPark Floating Rate Capital Ltd. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition and/or operating results.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3.

Defaults Upon Senior Securities

None.

Item 4.

Mine Safety Disclosures

Not Applicable.

Item 5.

Other Information

None.

Item 6.

Exhibits

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


3.1		Articles of Amendment and Restatement of the Registrant (Incorporated by reference to the Registrant’s Pre-Effective Amendment No. 3 to the Registration Statement on Form N-2 (File No. 333-170243), filed on March 29, 2011).

3.2		Amended and Restated Bylaws of the Registrant (Incorporated by reference to the Registrant’s Annual Report on Form 10-K (File No. 814-00891), filed on November 14, 2013).

4.1		Form of Share Certificate (Incorporated by reference to the Registrant’s Pre-Effective Amendment No. 5 to the Registration Statement on Form N-2 (File No. 333-170243), filed on April 5, 2011).

11		Computation of Per Share Earnings (included in the notes to the Consolidated Financial Statements contained in this Report).

31.1 *		Certification of Chief Executive Officer pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended.

31.2 *		Certification of Chief Financial Officer pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended.

32.1 *		Certification of Chief Executive Officer pursuant to section 906 of The Sarbanes-Oxley Act of 2002.

32.2 *		Certification of Chief Financial Officer pursuant to section 906 of The Sarbanes-Oxley Act of 2002.

99.1		Privacy Policy of the Registrant (Incorporated by reference to the Registrant’s Annual Report on Form 10-K (File No. 814-00891), filed on November 17, 2011).

*	Filed herewith.

SIGNATURES

Pursuant to the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Report on Form 10-Q to be signed on its behalf by the undersigned, thereunto duly authorized.


	PENNANTPARK FLOATING RATE CAPITAL LTD.

Date: August 6, 2014	By:	/s/ Arthur H. Penn
		Arthur H. Penn
		Chairman of the Board of Directors and Chief Executive Officer (Principal Executive Officer)

Date: August 6, 2014	By:	/s/ Aviv Efrat
		Aviv Efrat
		Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer)

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company