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spk01: Thank you. Good morning, ladies and gentlemen, and welcome to the Portman Ridge Finance Corporation conference call. An earnings press release was distributed Monday evening, November 9th. If you do not receive a copy, the release is available on the company's website at www.portmanridge.com in the investor relations section. As a reminder, this conference call is being recorded today, Tuesday, November 10th, 2020. This call is also being hosted on a live webcast which can be accessed at our company's website at www.portmanridge.com in the Investor Relations section under Events. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star, then 1 on your telephone keypad. Today's conference call includes forward-looking statements and projections, and we ask that you refer to Portman Ridge's most recent filings with the SEC for important factors that could cause actual results to differ materially from these projections. Portman Ridge Finance Corporation does not undertake to update its forward-looking statements unless required by law. I would now like to introduce your host for today's conference, Mr. Ted Goldthorpe, Chief Executive Officer of Portman Ridge Finance Corporation. Mr. Goldthorpe, you may begin.
spk05: Thank you, Operator, and welcome, everyone. Thank you for joining us. Yesterday afternoon, we reported our third quarter 2020 financial results. I am joined today by my CFO, Ted Gilpin, and my Chief Investment Officer, Patrick Schaefer. Ted Gilpin will provide additional detail on our financial results, and Patrick will do the same on the investment portfolio. I will begin by discussing Portman Ridge's performance for the third quarter and speak more on the merger with Garrison Capital, which we closed on October 28th. Overall, I am pleased to report that Portman Ridge had a solid quarter marked by significant improvement in net realized and unrealized gains of $5.6 million across our entire portfolio. While we're clearly not out of the woods with respect to COVID, we experienced improved market sentiment during the quarter as portfolio companies began to gain a better sense of near-term financial visibility on their prospects. M&A and refinancing activity began to pick up after having been quiet in the prior quarter. Net investment income per share was six cents, consistent with the past four quarters and the distribution level we have set for the past several quarters. Net asset for per share was $2.85, an increase of 5% from the net asset value per share of $2.71 as of June 30, 2020. Driving this increase in net asset value per share was a broad-based strengthening of our portfolio due to market spreads tightening throughout the quarter. M&A activity, which is a traditional source of middle market direct loans, picked up substantially towards the end of the quarter. While still at depressed levels as compared to the last several years, We experienced buyers, sellers, and lenders all returning to the market in an orderly fashion, and activity levels continue to pick up pace through the end of the quarter up to present day. Turning now to our merger with Garrison Capital, which we first announced on June 24th and subsequently closed on October 28th, we believe this merger is a truly transformational event for Portman Ridge as it represents the continued execution of our vision of the consolidation in the public BDC space. It is the third strategic transaction successfully closed by our team in less than two years. We are very excited about the benefits this merger brings to the combined company. First, the merger results in significant added scale and size, essentially doubling the size of the company. At closing, the combined company held total assets of approximately $638 million compared to Portmere Ridge at total assets of $300 million as of September 30th. As a larger company, we expect to we expect immediate savings related to overhead and public company expenses on a per-share basis, and in the longer term, increased trading liquidity of our common stock and the capability and flexibility to speak for larger deals. Based on our previously discussed target leverage range of 1.25 to 1.4 times, where we sit today, the pro forma portman would need to generate an approximately 9.5 to 10% return on its investment portfolio to cover our historical $0.06 per quarter distribution. Over the last five quarters, Portman has averaged 10.8% annual return on its investment portfolio, despite the headwinds from LIBOR declining and reduced earnings from our CLO equity portfolio. Although these estimates are subject to change in the future, Our historical ability to achieve returns on our investment portfolio in excess of what is required to sustain our distribution level should provide shareholders insight into earnings prospects going forward. Furthermore, we expect that leveraging the considerable resources, namely the access, sourcing capabilities, and industry expertise afforded by BC partners across the entire platform will be of significant benefits to all stakeholders of our combined company. Integration and repositioning efforts are already underway. As of this call, we have already sold approximately 87 million of assets originated by Garrison at a slight premium to the fair value at the time of the merger. Performed for the Garrison merger and these asset sales, Portman's leverage on a net cash basis, i.e., after the use of cash on hand to pay down debt once the debt becomes callable, is approximately 1.4 times our regulatory asset coverage of approximately 169%. We will continue to opportunistically sell assets as part of our repositioning strategy, but believe that we have significantly reduced market risk to our portfolio in a very short period of time. Over time, our goal is to maintain a portfolio of directly originated senior secured debt investments with a focus on first-lane investments, and we look forward to updating you on our progress in future quarters. With that, I will turn the call over to Ted Gilpin, our Chief Financial Officer, for a brief overview of the financial results, and then to Patrick Schaefer, our Chief Investment Officer, for review of our investment activity before concluding the call with some additional remarks. Ted?
spk02: Thank you, Ted. Good morning, everyone. As of September 30th, 2020, our NAV stood at $126 million or $2.85 per diluted share, up 5% from last quarter of $120.7 million or $2.71 per share. The increase is mainly attributable to unrealized gains across our investment portfolio including $4.6 million on our debt securities portfolio, $1.9 million in our legacy CLO equity positions, and $1.1 million on our investments in the KCAP Freedom 3 and BCP Great Lakes joint ventures. As Ted mentioned, we are beginning to observe improved market conditions, which resulted in the significant improvements in valuation. Net investment income for the third quarter of 2020 was $2.7 million, or $0.06 per share, as compared to $2.2 million and $0.06 per share in the third quarter of last year. We've generated net investment income of $0.06 per share for the past five quarters right in line with our current quarterly distribution. We announced our quarterly distribution of $0.06 per share on October 16th for shareholders of record on October 26th and to be paid on November 27th. Following this distribution, we will resume our normal declaration and payment schedule. With respect to liquidity and unfunded commitments, Our aggregate unfunded commitments stood at $26.5 million at September 30, 2020. However, only $2.4 million of this amount is subject to a unilateral draw right by the borrower, and the remaining commitments are subject to certain restrictions, such as borrowing base, use of proceeds, or leverage that must be satisfied before a borrower can draw down on the commitment. On the liability side of the balance sheet, we believe that we are in a relatively strong position and have meaningful investment and liquidity flexibility with relatively limited funding commitments. As of September 30, 2020, we had $77 million in 6.125% notes outstanding and $94 million in borrowings under our credit facility for a total of $171 million of debt. As of September 30, 2020, our debt-to-equity ratio was 1.36 times. From a regulatory perspective, our asset coverage ratio as of September 30, 2020, was 172%. which is above the statutory requirement for BDCs of 150%. Under the stock repurchase program announced in March of 2020, we continued repurchasing shares this quarter and repurchased 358,959 shares of stock at an average price of $1.27 per share. We expect to continue to evaluate opportunities to buy back shares. To further facilitate these opportunities, we entered into a 10b-5 repurchase plan on August 31st of this year. As Ted Goldthorpe mentioned, we are very pleased to complete the merger with Garrison Capital this quarter. At closing on October 28th, Garrison stockholders received a combination of $19.1 million in cash from Portman Ridge and newly issued Portman Ridge shares valued at 100% of NAV. Garrison stockholders also received an additional cash payment of $5 million from our investment advisor, Sierra Crest. As a result, Garrison stockholders received per share of Garrison stock, $1.50 in cash, and 1.917 shares of Portman Ridge stock per share. Following closing, Portman Ridge shareholders owned approximately 59% of former, and former Garrison stockholders owned 41% of the combined company. We're fully in process of integration and look forward to providing combined results next quarter. With that, I'd like to turn the call over to Patrick Schaefer, our Chief Investment Officer.
spk06: Thanks, Ted. Turning to page nine of the slide presentation, the third quarter was relatively quiet for us, given where we plan to operate from a leverage perspective and preparing for the upcoming merger with Garrison. During the quarter, we made investments into two borrowers, one of which was into the BCP Great Lakes Joint Venture, and the other of which was a brand new borrower, which was completed alongside other BC Partners entities. In aggregate, These two investments totaled $4.7 million of face value, 62% of which was a first-lane security, and the remaining 38% being net add-ons to the Great Lakes joint venture. The weighted average spread on the new investment, excluding the Great Lakes joint venture that currently remain on our balance sheet, was 625 basis points. Additionally, over the course of the quarter, we fully exited four positions, one of which was a legacy non-accrual OHAI position. In aggregate, our fully exited positions represented a carrying value of $9.4 million and resulted in a gain of approximately $65,000. All positions were sold either at or above their carrying value relative to June 30th or cost if it was acquired during the quarter. After adjusting for movements between unrealized and realized, we recognized approximately $5.6 million of unrealized gains on our portfolio. Our debt and equity securities accounted for an approximate $2.5 million unrealized gain, while CLO equity positions accounted for a $1.9 million unrealized gain, and our two joint ventures accounted for the remaining $1.1 million of unrealized gain. On an equivalent basis, as of September 30th, Portman Ridge Inc., has 226.2 million of debt securities marked at 90.4 percent of par and yielding a stated spread to LIBOR of 715 basis points on accruing debt securities. This compares to 233.3 million of debt securities marked at 88.5 percent of par and yielding a stated spread to LIBOR of 681 basis points on accruing debt securities as of June 30th, 2020. and $165.7 million of debt securities portfolio marked at a blended price of 91.9 percent afar and a stated spread to LIBOR of 658 basis points when Sierra Crest took over management of Portland Ridge on April 1st, 2019. Turning to slide 10, non-accruals as of September 30th, 2020 represented 3.2 percent of cost and 1.3 percent of fair value on the investment portfolio. as compared to 5.9% and 3.7%, respectively, as of June 30th. With that, I'll turn the call back over to Ted Goldberg.
spk05: Thank you, Patrick. In closing, we are pleased with the results in the third quarter, especially in these difficult COVID times. The business environment certainly seems to be improving compared to conditions in March in the second quarter. However, we will continue to remain vigilant as the possibility of a second wave of COVID cases continues to loom over us. We are very pleased to have successfully closed the merger with Garrison and look forward to providing more updates on the combined company next quarter. I'd like to thank all of our shareholders for your ongoing support, and I will now turn over the call to operator for any questions.
spk01: Ladies and gentlemen, as a reminder, if you'd like to ask a question at this time, please press the star, then the number one key on your touchtone telephone. To withdraw your question, press the pound key. Our first question comes from Christopher Nolan with Leidenberg Thalmann. Your line is now open.
spk03: Hey, guys. What is the ending? Following the Dick Garrison closing, what do you estimate the ending share count to be, please?
spk02: Sorry, Chris. I was on mute. We estimate the ending share count to be just under $75 million. I can give you the –
spk06: Yeah, I believe it's 74,960.
spk03: Great, and I guess a follow-up on, given where BDC land in terms of valuations is sort of hovering these days, what are your strategic thoughts in terms of once you digested Garrison, further acquisitions, or how do you plan to go forward from there?
spk05: I would say, well, I'd say a couple things. One is we continue to think the whole sector is cheap. So we're going to continue to buy back our own stock. And you'll see more of that, I think, this quarter. I think number two is, you know, obviously we're always on the lookout for additional things to add into our business, whether they're publicly traded BDCs or, you know, privately traded BDCs or other types of mechanisms. Because, again, you know, the benefits to our shareholders are just, you know, very compelling. And we've shown a track record of being able to de-risk these transactions. You know, I think it's We highlighted it on the call, but when we closed the Garrison merger, we were two times gross leverage, and we've got it down to 1.4 times net in two weeks. And so it's a very similar playbook to what we've shown. And so we've de-risked the acquisition and executed on a lot of the integration synergies we've talked about in a very short period of time. So we are always on lookout for it, but I would say these things are always hard to predict and – So we don't have anything imminent to announce. Let's put it that way.
spk03: Got it. Okay, thanks, Ted.
spk01: As a reminder, ladies and gentlemen, that is star, then one, if you'd like to ask a question at this time. Our next question comes from Paul Johnson with KBW. Your line is now open.
spk09: Yeah, hey, good morning, guys. Thanks for taking my question. You actually clarified one of the questions I wanted to ask just to make sure I heard it right. But yeah, 1.4 times proforma, Net leverage, that's, I'm assuming, after post-closing of all those asset sales, was it $87 million or so that you mentioned?
spk06: Yeah, that's right. They take a little bit to actually settle, but yes.
spk05: Yes, we lined that up, we closed it, and then there are some CELA liabilities that we've inherited from the transaction, which become callable imminently. So when those transactions settle, we'll be able to pay off debt. So that's the reason we quoted it. The reason we quoted it as net is because we're waiting for these transactions are off our books from a risk perspective but haven't settled. And when they settle, we'll be able to pay down some of our COO liabilities.
spk09: Okay. Okay. And then, yeah, post-closing that merger, that's obviously a very positive improvement, you know, very quick deal averaging that you guys already completed there, which is very positive. But going forward in the forward quarters, will the focus be to maybe first pay off some of those CLO tranches of debt or will you turn your attention maybe to some of the unsecured debt, perhaps the baby bonds that are due in 2022? Is there any sort of priority there, level for the debt capital?
spk02: I think, John, the priority is to remove the CLO liability debt first, generally speaking. But yes, we're aware that the baby bonds are coming due We do like to have a mix of secured and unsecured, so there's a possibility that we'll go back into the unsecured market for that piece. But at the end, we'll probably have a blend between the secured and unsecured and not be reliant on the on-balance sheet CLO debt.
spk09: Got you. And lastly, I just wanted to ask the higher dividend income this quarter from the JV, was that just more or less sort of a catch-up from the previous quarter, or was there anything specifically that drove a higher distribution this quarter?
spk02: You're pretty spot on. It got held up in the prior quarters. We weren't able to distribute as much as we normally do. We were able to do a catch-up this quarter. So I think if you sort of look across the last three quarters, that's pretty much this steady state.
spk09: Gotcha. And one more, if I may, actually. Just kind of broadly speaking, from the beginning of the year, how would you characterize the depreciation, again, that's happened since the beginning of this year, the remaining depreciation, about how much of that you think would be recoverable you know, going into next year. I'm looking at, I think, approximately maybe $32 million in the first quarter of net depreciation. I think this quarter was a, you know, pretty significant write-up of, you know, 5.6 or so. Do you sort of look at that remaining depreciation as recoverable, or how would you characterize that?
spk05: Why don't I take the first crack at that? I mean, I think if you look at our average, where our average debt is marked, we're still marked at a decent discount to par. So to the extent that we can continue to get non-accruals down and we don't have any surprises, there is some embedded upside in our NAV. Just between now and when we're going to realize that NAV is hard to predict. And obviously, you know, I think we're pretty cautious going into next year about just what's going to happen, not speaking about our own specific portfolio, but just in general. So it's always hard to predict, but, you know, again, where our average debt piece is marked and where our CLOs are marked vis-a-vis their, you know, cost, A, we think we're conservatively marked, and number two is, you know, if things continue to recover as they are, there should be some upside in our NAF. But, again, we really are hesitant to provide any kind of guidance or forward guidance just given, you know, the amount of uncertainty and change that's happening, you know, on a daily basis out there. I think the good news from our perspective is if you take a step back, we've been able to increase debt spreads pretty dramatically, actually, over the last two quarters. So LIBOR has been kind of like in our face, so that's been a negative. But we have been able to get additional spreads, and hopefully those spreads will stay in our books for some period of time. And then number two is you obviously saw the progress we've made on non-accruals this quarter. And, you know, the credit quality of our portfolio has actually improved over the last six months, and actually we've seen some improvement this quarter as well. So, again, hard to predict that trend continuing, just given everything happening out there. But I would say, you know, we continue to be encouraged from what we've seen on a trailing basis. Let's put it that way.
spk09: Gotcha. Okay. Thanks for that. That's good commentary, and that's all for me. Thanks.
spk01: As a reminder, ladies and gentlemen, that is star then one to ask a question. Our next question comes from Stephen Martin with Slater. Your line is now open.
spk15: Hi, guys. A couple of questions. Can you talk in a little more detail about the CLO portfolio, where it is, what it went through, and where it was, what it went through, and where it is today? and it didn't look... I thought you guys would be running more of it off, and at cost, it doesn't seem to be diminishing.
spk00: Hello?
spk05: Yeah, Ted or Patrick, do you want to address that? I can address it as well. Sure.
spk06: Yeah, I mean... Sorry, I didn't want to jump in on it. I mean, talking about where it was to where it is now, I think when you look at our serial equity portfolio, obviously, you know, we're de-emphasizing it and not continuing to invest. But we have – the portfolio is split relatively evenly, I'll say, in terms of half of our positions are kind of out of their reinvestment period and half are still in their reinvestment period. And so – as you think about what happened during March and kind of where we are today, about half of the portfolio has been able to kind of take an active management, rotate out of triple Cs, buy assets at discounts, and kind of generally refill their collateral values and things like that. And the other half of them are generally speaking in a bit of a runoff. And so I think the mix of those two things is kind of leading us to be relatively flat on an amortized cost basis. But I defer a little bit to Ted Koppen on the specific accounting of that.
spk02: So, yeah, hi, Steve. So, you know, obviously CLO goes through the effective interest method for accounting, which will determine which pieces that take down of the cost, if you will, and which recognizes income. And as those cash flows change quarterly – you'll get a different calculation as to what the applied IRR is and then what gets booked. And so typically, since they're out of the reinvestment, you would start to see the cost and the principal fees come down. But if those cash flows change significantly in a quarter, you may get a quarter where more of it is income and less of it is to bring down a principal. But generally speaking, they should continue to pay down over time And so you'll see them diminish. So you're right. That's what you'd expect to see.
spk15: Okay. And the CLO income was down this quarter, even though the CLO mark went up. Was there something in the accounting that accounted for that?
spk02: Generally speaking, yes. If they're out of the reinvestment period, you have less cash coming in over time, right? You only have some period to bring forward. So the calculation would come out that you would tend to see some of that income come down as well.
spk06: Yeah, there's also a little bit of a timing lag between the accounting and the mark of the CLO equities.
spk15: So going forward, should the CLO income – be more like this quarter or more like the last couple of quarters, or do we not know at any given point in time?
spk02: Well, it's one of the frustrating parts of CLOs, Steve. That income's not necessarily predictable, but I would say that it would tend to be relatively similar to where it is at the moment, although as they continue to pay down, I would expect that income to lessen.
spk06: Okay. Yeah, I think importantly, obviously, the accounting will move things a little bit. But importantly, none of the CLOs, you know, a couple shut off during the March period, but nothing, there's been no further degradation on actual cash coming out of the CLOs. So that's at least a decent indication that it should be relatively consistent.
spk15: Okay. How about commenting on the mark, the portfolio mark's sort of subsequent to September 30th, i.e. October, you had a mark when the – so after September 30th, you had a mark when the deal closed, you had a mark at the end of October, and obviously you haven't marked it today, but sort of where do you think that has evolved, given the markets tightening?
spk05: I would say, I mean, from my perspective, I would say, so far for the merger, there's going to be some transaction costs that roll through NAV, just, you know, legal fees and stuff to get it closed. So that's obviously a slight negative. But as you've seen, like, you know, there's been a continued tailwind in the credit markets. So, you know, hard to say, but, you know, when we set the – you know, you can back into our NAV as of the merger because you can look at – how many shares were issued at the time, so you can actually look at that. And NAV is kind of like a little bit down, like flattish, but that's just transaction costs. And so, again, it's a long-winded way of saying I don't think there's going to be a material impact on NAV as we sit here today. So, you know, a little bit of tailwinds offset by, you know, some transaction costs.
spk15: Okay, and you started to talk about cost savings leverage in the acquisition, which obviously is one of the main goals of, you know, bigger BDCs buying smaller BDCs or combining them. When you look at the cost structure, you know, what is your cost structure look like going forward versus what they had and what you had?
spk02: Yeah, so I think obviously that's one of the big reasons to combine to get a little bit bigger. And so, you know, if you look at our income statement and you look at the expense side, you know, professional fees, admin services and expenses, you know, insurance and other G&A, you know, one plus one doesn't equal two in this case. So we would expect, you know, you only have one audit, not two anymore, right? You know, your expenses will increase a little bit as you have to have, you know, some more people working on some things. But I would expect that our expenses become more in line with, sort of the rest of the industry on a percentage of assets. And so, you know, we've been a little bit high, and now you put two companies of similar size together, and those expenses should only marginally go up. So I think that's where you're going to start to pick up.
spk15: Yeah, I had heard that a lot of garrison people had left garrison, you know, before. So in big picture, you know, how many people did you bring over? Did you have to bring over space? You know, what are you going to have to do to your headcount, you know, whether in your accounting area or otherwise? Yeah, so, fortunately, space is not relevant. Fortunately, space isn't relevant during COVID. Well, that's not true. The rent expense portion of space may be relevant even if no one's using it.
spk02: Yeah, that's true. Yes, I mean, that's a good question, Steve. You know, we're not going to need to add more space. I mean, I think that we did bring over one person from Garrison as it relates to, you know, sort of the financial and accounting side. You know, we'll have to have a little bit more allocation to the fund, obviously, because it's bigger and there's more positions and there's stuff to do. But, again, it's not a big lift. I mean, we had lots of capacity.
spk05: Yeah, I mean, I would answer it that, you know, versus what Garrison was spending, we're going to spend a lot less. That's very clear. So that all drops the bottom line. Within our own business, we've taken some cost actions over the last six months to take cost of our own business, you know, across, you know, professional fees, you know, size of board, things like that. And that all, again, just drops the bottom line. So we're not only focused on cost takeouts out of the merger, we're also focused on our own business. And anything like any costs like space and all that stuff, again, we think the transaction on costs alone is about mid-single digits accretive. And then if we can take their liquid portfolio and monetize it and recycle it into the types of things that we've been doing on our origination franchise, you know, we think that's pretty accretive. So we think the accretion is going to be even higher than that. So, again, you've seen the spread pick up we've picked up in the last nine months. Some of that is spread widening in the markets, but a lot of that is monetizing, you know, some of these acquisitions, liquid assets, and recycling them into, you know, more proprietary assets that have wider spreads. So between all those things, you know, it should be mid to high single digits accretive.
spk15: Okay, one last question and or comment, which I will repeat again, and, Ted, you're probably expecting it. Have you given any further consideration to reverse merger now that your share count is bigger and you're done with this deal?
spk02: I think you meant a reverse split, stock split.
spk15: I'm sorry, reverse split, reverse split.
spk02: Yeah, yeah.
spk05: Yeah, I mean, it is obviously something we – To do that, we need a shareholder vote.
spk08: I'm ready to vote.
spk05: Well, and with mailing to private, it's something that we're focused on, and my guess is we'll do that in the next couple quarters. I mean, it just makes sense for us to do it. And so don't be surprised to see us do a reverse merger or a reverse stock split over the next couple months. I mean, I think yourself and a lot of our big shareholders have suggested the same thing, and I mean, we think it's a good idea.
spk15: So let's try to slip this in before you guys do your next acquisition.
spk07: All right, thanks a lot. Thanks, Tim.
spk01: We have a follow-up question from the line of Christopher Nolan with Leidenberg Thelman. Your line is now open.
spk03: Ted, was that mid-to-single-digit accretive to EPS, I presume?
spk04: To NII per share, yeah.
spk03: Okay, great. And then what are your thoughts in terms of lowering your funding costs, SBA debt or anything else like that?
spk05: Well, on the SBA debt, I mean, we are looking into it, but I would say, and the terms coming out of the SBA debt are very attractive. I'm not sure we can get an SBIC approved. And if we did get one approved, I think it would take us some period of time. So I wouldn't want to guide people to that. You know, I think our bigger focus is on, you know, we have, I mean, the great thing with our business now is we have a very diversified liability side between the CLO debt, our bonds, and our bank debt. And during March, when some of our peers had issues around their bank lines, you know, we're obviously very heavily skewed towards away from that now. And so, you know, I think between, you know, Ted mentioned it earlier, I think our focus is probably on tapping the unsecured markets at some point and at optimizing our CLO debt, you know, just given all this cash we're taking in. So, yeah, we are very focused on reducing funding costs. But I don't think it's realistic for us to access the SBA anytime soon.
spk03: Okay. That's it for me. Thank you.
spk01: That concludes today's question and answer session. I'd like to turn the call back to management for closing remarks.
spk05: Thank you all for joining us today. We really appreciate everybody dialing in for all the questions. And, of course, myself, Patrick, Ted, and the entire management team is always available to answer any questions or suggestions that you might have. Thank you very much for dialing in today. Thanks.
spk01: Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.
spk14: Thank you. Thank you. Music Thank you. Thank you. Thank you. you
spk01: Good morning, ladies and gentlemen, and welcome to the Portman Ridge Finance Corporation conference call. An earnings press release was distributed Monday evening, November 9th. If you do not receive a copy, the release is available on the company's website at www.portmanridge.com in the investor relations section. As a reminder, this conference call is being recorded today, Tuesday, November 10th, 2020. This call is also being hosted on a live webcast which can be accessed at our company's website at www.portmanridge.com in the Investor Relations section under Events. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star, then 1 on your telephone keypad. Today's conference call includes forward-looking statements and projections, and we ask that you refer to Portman Ridge's most recent filings with the SEC for important factors that could cause actual results to differ materially from these projections. Portman Ridge Finance Corporation does not undertake to update its forward-looking statements unless required by law. I would now like to introduce your host for today's conference, Mr. Ted Goldthorpe, Chief Executive Officer of Portman Ridge Finance Corporation. Mr. Goldthorpe, you may begin.
spk05: Thank you, Operator, and welcome, everyone. Thank you for joining us. Yesterday afternoon, we reported our third quarter 2020 financial results. I am joined today by my CFO, Ted Gilpin, and my Chief Investment Officer, Patrick Schaefer. Ted Gilpin will provide additional detail on our financial results, and Patrick will do the same on the investment portfolio. I will begin by discussing Portman Ridge's performance for the third quarter and speak more on the merger with Garrison Capital, which we closed on October 28th. Overall, I am pleased to report that Portman Ridge had a solid quarter marked by significant improvement in net realized and unrealized gains of $5.6 million across our entire portfolio. While we were clearly not out of the woods with respect to COVID, we experienced improved market sentiment during the quarter as portfolio companies began to gain a better sense of near-term financial visibility on their prospects. M&A and refinancing activity began to pick up after having been quiet in the prior quarter. Net investment income per share was $0.06, consistent with the past four quarters and the distribution level we have set for the past several quarters. Net asset for per share was $2.85, an increase of 5% from the net asset value per share of $2.71 as of June 30th, 2020. Driving this increase in net asset value per share was a broad-based strengthening of our portfolio due to market spreads tightening throughout the quarter. M&A activity, which is a traditional source of middle market direct loans, picked up substantially towards the end of the quarter. While still at depressed levels as compared to the last several years, We experienced buyers, sellers, and lenders all returning to the market in an orderly fashion, and activity levels continue to pick up pace through the end of the quarter up to present day. Turning now to our merger with Garrison Capital, which we first announced on June 24th and subsequently closed on October 28th, we believe this merger is a truly transformational event for Portman Ridge as it represents the continued execution of our vision of the consolidation in the public BDC space. It is the third strategic transaction successfully closed by our team in less than two years. We are very excited about the benefits this merger brings to the combined company. First, the merger results in significant added scale and size, essentially doubling the size of the company. At closing, the combined company held total assets of approximately $638 million compared to Portmere Ridge at total assets of $300 million as of September 30th. As a larger company, we expect to We expect immediate savings related to overhead and public company expenses on a per-share basis, and in the longer term, increased trading liquidity of our common stock and the capability and flexibility to speak for larger deals. Based on our previously discussed target leverage range of 1.25 to 1.4 times, where we sit today, the pro forma portman would need to generate an approximately 9.5% to 10% return on its investment portfolio to cover our historical $0.065 per quarter distribution. Over the last five quarters, Portman has averaged 10.8% annual return on its investment portfolio, despite the headwinds from LIBOR declining and reduced earnings from our CLO equity portfolio. Although these estimates are subject to change in the future, Our historical ability to achieve returns on our investment portfolio in excess of what is required to sustain our distribution level should provide shareholders insight into earnings prospects going forward. Furthermore, we expect that leveraging the considerable resources, namely the access, sourcing capabilities, and industry expertise afforded by BC partners across the entire platform will be of significant benefits to all stakeholders of our combined company. Integration and repositioning efforts are already underway. As of this call, we have already sold approximately 87 million of assets originated by Garrison at a slight premium to the fair value at the time of the merger. Performing for the Garrison merger and these asset sales, Portman's leverage on a net cash basis, i.e., after the use of cash on hand to pay down debt once the debt becomes callable, is approximately 1.4 times our regulatory asset coverage of approximately 169%. We will continue to opportunistically sell assets as part of our repositioning strategy, but believe that we have significantly reduced market risk to our portfolio in a very short period of time. Over time, our goal is to maintain a portfolio of directly originated senior secured debt investments with a focus on first-lane investments, and we look forward to updating you on our progress in future quarters. With that, I will turn the call over to Ted Gilpin, our Chief Financial Officer, for a brief overview of the financial results, and then to Patrick Schaefer, our Chief Investment Officer, for review of our investment activity before concluding the call with some additional remarks. Ted?
spk02: Thank you, Ted. Good morning, everyone. As of September 30th, 2020, our NAV stood at $126 million or $2.85 per diluted share, up 5% from last quarter of $120.7 million or $2.71 per share. The increase is mainly attributable to unrealized gains across our investment portfolio including $4.6 million on our debt securities portfolio, $1.9 million in our legacy CLO equity positions, and $1.1 million on our investments in the KCAP Freedom 3 and BCP Great Lakes joint ventures. As Ted mentioned, we are beginning to observe improved market conditions, which resulted in the significant improvements in valuation. Net investment income for the third quarter of 2020 was $2.7 million, or $0.06 per share, as compared to $2.2 million and six cents per share in the third quarter of last year. We've generated net investment income of six cents per share for the past five quarters, right in line with our current quarterly distribution. We announced our quarterly distribution of six cents per share on October 16th for shareholders of record on October 26th and to be paid on November 27th. Following this distribution, we will resume our normal declaration and payment schedule. With respect to liquidity and unfunded commitments, Our aggregate unfunded commitments stood at $26.5 million at September 30, 2020. However, only $2.4 million of this amount is subject to a unilateral draw right by the borrower, and the remaining commitments are subject to certain restrictions, such as borrowing base, use of proceeds, or leverage that must be satisfied before a borrower can draw down on the commitment. On the liability side of the balance sheet, we believe that we are in a relatively strong position and have meaningful investment and liquidity flexibility with relatively limited funding commitments. As of September 30, 2020, we had $77 million in 6.125% notes outstanding and $94 million in borrowings under our credit facility for a total of $171 million of debt. As of September 30, 2020, our debt-to-equity ratio was 1.36 times. From a regulatory perspective, our asset coverage ratio as of September 30, 2020, was 172%. which is above the statutory requirement for BDCs of 150%. Under the stock repurchase program announced in March of 2020, we continued repurchasing shares this quarter and repurchased 358,959 shares of stock at an average price of $1.27 per share. We expect to continue to evaluate opportunities to buy back shares. To further facilitate these opportunities, we entered into a 10b-5 repurchase plan on August 31st of this year. As Ted Goldthorpe mentioned, we are very pleased to complete the merger with Garrison Capital this quarter. At closing on October 28th, Garrison stockholders received a combination of $19.1 million in cash from Portman Ridge and newly issued Portman Ridge shares valued at 100% of NAV. Garrison stockholders also received an additional cash payment of $5 million from our investment advisor, Sierra Crest. As a result, Garrison stockholders received per share of Garrison stock, $1.50 in cash, and 1.917 shares of Portman Ridge stock per share. Following closing, Portman Ridge shareholders owned approximately 59% and former Garrison stockholders owned 41% of the combined company. We're fully in process of integration and look forward to providing combined results next quarter. With that, I'd like to turn the call over to Patrick Schaefer, our Chief Investment Officer.
spk06: Thanks, Ted. Turning to page nine of the slide presentation, the third quarter was relatively quiet for us, given where we plan to operate from a leverage perspective and preparing for the upcoming merger with Garrison. During the corner, we made investments into two borrowers, one of which was into the BCP Great Lakes Joint Venture, and the other of which was a brand new borrower, which was completed alongside other BC Partners entities. In aggregate, These two investments totaled $4.7 million of face value, 62% of which was a first-lane security, and the remaining 38% being net add-ons to the Great Lakes joint venture. The weighted average spread on the new investment, excluding the Great Lakes joint venture that currently remain on our balance sheet, was 625 basis points. Additionally, over the course of the quarter, we fully exited four positions, one of which was a legacy non-accrual OHAI position. In aggregate, our fully exited positions represented a carrying value of $9.4 million and resulted in a gain of approximately $65,000. All positions were sold either at or above their carrying value relative to June 30th or cost if it was acquired during the quarter. After adjusting for movements between unrealized and realized, we recognized approximately $5.6 million of unrealized gains on our portfolio. Our debt and equity securities accounted for an approximate $2.5 million unrealized gain, while CLO equity positions accounted for a $1.9 million unrealized gain, and our two joint ventures accounted for the remaining $1.1 million of unrealized gain. On an equivalent basis, as of September 30th, Portman Ridge Inc., has 226.2 million of debt securities marked at 90.4 percent of par and yielding a stated spread to LIBOR of 715 basis points on accruing debt securities. This compares to 233.3 million of debt securities marked at 88.5 percent of par and yielding a stated spread to LIBOR of 681 basis points on accruing debt securities as of June 30th, 2020. and $165.7 million of debt securities portfolio, marked at a blended price of 91.9 percent afar, and a stated spread to LIBOR of 658 basis points when Sierra Crest took over management of Portland Ridge on April 1, 2019. Turning to slide 10, non-accruals as of September 30, 2020, represented 3.2 percent of cost and 1.3 percent of fair value on the investment portfolio. as compared to 5.9% and 3.7%, respectively, as of June 30th. With that, I'll turn the call back over to Ted Goldberg.
spk05: Thank you, Patrick. In closing, we are pleased with the results in the third quarter, especially in these difficult COVID times. The business environment certainly seems to be improving compared to conditions in March and the second quarter. However, we will continue to remain vigilant as the possibility of a second wave of COVID cases continues to loom over us. We are very pleased to have successfully closed the merger with Garrison and look forward to providing more updates on the combined company next quarter. I'd like to thank all of our shareholders for your ongoing support, and I will now turn over the call to operator for any questions.
spk01: Ladies and gentlemen, as a reminder, if you'd like to ask a question at this time, please press the star, then the number one key on your touchtone telephone. To withdraw your question, press the pound key. Our first question comes from Christopher Nolan with Ladenburg Thalman. Your line is now open.
spk03: Hey, guys. What is the ending? Following the Dick Garrison closing, what do you estimate the ending share count to be, please?
spk02: Sorry, Chris. I was on mute. We estimate the ending share count to be just under $75 million. I can give you the –
spk06: Yeah, I believe it's 74,960. Great.
spk03: And I guess a follow-up on, given where BDC land is in terms of valuations is sort of hovering these days, what are your strategic thoughts in terms of once you digested Garrison, further acquisitions, or how do you plan to go forward from there?
spk05: I would say, well, I'll say a couple things. One is we continue to think the whole sector is cheap. So we're going to continue to buy back our own stock. And you'll see more of that, I think, this quarter. I think number two is, you know, obviously we're always on the lookout for additional things to add into our business, whether they're publicly traded BDCs or, you know, privately traded BDCs or other types of mechanisms. Because, again, you know, the benefits to our shareholders are just, you know, very compelling. And we've shown a track record of being able to de-risk these transactions. You know, I think it's We highlighted it on the call, but, you know, when we closed the Garrison merger, we were two times gross leverage, and we've got it down to 1.4 times net in two weeks. And so it's a very similar playbook to what we've shown. And so we've de-risked the acquisition and executed on a lot of the integration synergies we've talked about in a very short period of time. So we are always on lookout for it, but I would say, you know, So we don't have anything imminent to announce, let's put it that way.
spk03: Got it. Okay, thanks, Ted.
spk01: As a reminder, ladies and gentlemen, that is star, then one, if you'd like to ask a question at this time. Our next question comes from Paul Johnson with KBW. Your line is now open.
spk09: Yeah, hey, good morning, guys. Thanks for taking my question. You actually clarified one of the questions I wanted to ask, just to make sure I heard it right. But yeah, 1.4 times proforma, Net leverage, that's, I'm assuming, after post-closing of all those asset sales, was it $87 million or so that you mentioned?
spk06: Yeah, that's right. They take a little bit to actually settle, but yes.
spk05: Yes, we lined that up, we closed it, and then there are some CELA liabilities that we've inherited from the transaction, which become callable imminently. So when those transactions settle, we'll be able to pay off debt. So that's the reason we quoted it. The reason we quoted it as net is because we're waiting for these transactions are off our books from a risk perspective but haven't settled. And when they settle, we'll be able to pay down some of our CLO liabilities.
spk09: Okay. Okay, and then, yeah, post-closing that merger, that's obviously a very positive improvement, you know, very quick deal averaging that you guys already completed there, which is very positive. But going forward in the forward quarters, will the focus be to maybe first pay off some of those CLO tranches of debt or, will you turn your attention maybe to some of the unsecured debt, perhaps the baby bonds that are due in 2022? Is there any sort of priority there, level, for the debt capital?
spk02: I think, John, the priority is to remove the CLO liability debt first, generally speaking. But, yes, we're aware that the baby bonds are coming due, We do like to have a mix of secured and unsecured, so there's a possibility that we'll go back into the unsecured market for that piece. But at the end, we'll probably have a blend between the secured and unsecured and not be reliant on the on-balance sheet CLO debt.
spk09: Got you. And lastly, I just wanted to ask the higher dividend income this quarter from the GED, was that just more or less sort of a catch-up from the previous quarter, or was there anything specifically that drove a higher distribution this quarter?
spk02: You're pretty spot on. It got held up in the prior quarters. We weren't able to distribute as much as we normally do. We were able to do a catch-up this quarter. So I think if you sort of look across the last three quarters, that's pretty much this steady state.
spk09: Gotcha. And one more, if I may, actually. Just kind of broadly speaking, from the beginning of the year, how would you characterize the depreciation, again, that's happened since the beginning of this year, the remaining depreciation, about how much of that you think would be recoverable you know, going into next year. I'm looking at, I think, approximately maybe $32 million in the first quarter of net depreciation. I think this quarter was a pretty significant write-up of, you know, 5.6 or so. Do you sort of look at that remaining depreciation as recoverable, or how would you characterize that?
spk05: Why don't I take the first crack at that? I mean, I think if you look at our average, where our average debt is marked, we're still marked at a decent discount to par. So to the extent that we can continue to get non-accruals down and we don't have any surprises, there is some embedded upside in our NAV. Just between now and when we're going to realize that NAV is hard to predict. And obviously, you know, I think we're pretty cautious going into next year about just what's going to happen, not speaking about our own specific portfolio, but just in general. So it's always hard to predict, but, you know, again, where our average debt piece is marked and where our CLOs are marked vis-a-vis their, you know, cost, A, we think we're conservatively marked, and number two is, you know, if things continue to recover as they are, there should be some upside in our NAF. But again, we really are hesitant to provide any kind of guidance or forward guidance just given, you know, the amount of uncertainty and change that's happening, you know, on a daily basis out there. I think the good news from our perspective is, you know, if you take a step back, we've been able to increase debt spreads, you know, pretty dramatically, actually, over the last, you know, two quarters. So LIBOR has been kind of like in our face. So that's been a negative. But we have been able to get additional spreads, and hopefully those spreads will stay in our books for some period of time. And then number two is, you know, you obviously saw the progress we've made on non-accruals this quarter. And, you know, the credit quality of our portfolio has actually improved over the last six months, and actually we've seen some improvement this quarter as well. So, again, hard to predict that trend continuing, just given everything happening out there. But I would say, you know, we continue to be encouraged from what we've seen on a trailing basis. Let's put it that way.
spk09: Gotcha. Okay. Thanks for that. That's good commentary, and that's all for me. Thanks.
spk01: As a reminder, ladies and gentlemen, that is star then one to ask a question. Our next question comes from Stephen Martin with Slater. Your line is now open.
spk15: Hi, guys. A couple of questions. Can you talk in a little more detail about the CLO portfolio, where it is, what it went through, and where it was, what it went through, and where it is today? And it didn't look... I thought you guys would be running more of it off and at cost. It doesn't seem to be diminishing.
spk00: Hello?
spk05: Yeah, Ted or Patrick, do you want to address that? I can address it as well. Sure.
spk14: Yeah, I mean, I'll
spk06: Sorry, I didn't want to jump in on it. I mean, talking about where it was to where it is now, I think when you look at our serial equity portfolio, obviously, you know, we're de-emphasizing it and not continuing to invest. But we have – the portfolio is split relatively evenly, I'll say, in terms of half of our positions are kind of out of their reinvestment period and half are still in their reinvestment period. And so – as you think about what happened during March and kind of where we are today, about half of the portfolio has been able to kind of take an active management, rotate out of triple Cs, buy assets at discounts, and kind of generally refill their collateral values and things like that. And the other half of them are generally speaking in a bit of a runoff. And so I think the mix of those two things is kind of leading us to be relatively, you know, flat on an amortized cost basis. But I defer a little bit to Ted Kilpin on the specific accounting of that.
spk02: So, yeah, hi, Steve. So, you know, obviously CLO goes through the effective interest method for accounting, which, you know, which will determine which pieces that take down of the cost, if you will, and which recognizes income. And as those cash flows change quarterly – you'll get a different calculation as to what the applied IRR is and then what gets booked. And so, you know, typically, since they're out of the reinvestment, you would start to see the cost and the principal fees come down. But if those cash flows change, you know, significantly in a quarter, you may get a quarter where more of it is income and less of it is bringing down a principal. But generally speaking, they should continue to pay down over time And so you'll see them diminish. So you're right. That's what you'd expect to see.
spk15: Okay. And the CLO income was down this quarter, even though the CLO mark went up. Was there something in the accounting that accounted for that?
spk14: Generally speaking, yes.
spk02: If they're out of the reinvestment period, you have less cash coming in over time, right? You only have some period to bring forward. So the calculation would come out that you would tend to see some of that income come down as well.
spk06: Yeah, there's also a little bit of a timing lag between the accounting and the mark of the CLO equities.
spk15: So going forward, should the CLO income – be more like this quarter or more like the last couple of quarters, or do we not know at any given point in time?
spk02: Well, it's one of the frustrating parts of CLOs, Steve. That income is not necessarily predictable, but I would say that it would tend to be relatively similar to where it is at the moment, although as they continue to pay down, I would expect that income to lessen.
spk06: Okay. Yeah, and I think importantly, obviously, the accounting will move things a little bit, but importantly, none of the CLOs, you know, a couple shut off during the March period, but nothing, there's been no further degradation on actual cash coming out of the CLOs. So that's at least a decent indication that it should be relatively consistent.
spk15: Okay. How about commenting on the mark, the portfolio mark's sort of subsequent to September 30th, i.e. October, you had a mark when the – so after September 30th, you had a mark when the deal closed, you had a mark at the end of October, and obviously you haven't marked it today, but sort of where do you think that has evolved, given the market's tightening?
spk05: I would say, I mean, from my perspective, I would say, so far for the merger, there's going to be some transaction costs that roll through NAV, just, you know, legal fees and stuff to get it closed. So that's obviously a slight negative. But as you've seen, like, you know, there's been a continued tailwind in the credit markets. So, you know, hard to say, but, you know, when we set the – you know, you can back into our NAV as of the merger because you can look at – how many shares were issued at the time. So you can actually look at that. And NAV was kind of like a little bit down, like flattish, but that's just transaction costs. And so, again, it's a long-winded way of saying, I don't think there's going to be a material impact on NAV as we sit here today. So a little bit of tailwinds offset by some transaction costs.
spk15: Okay. And you started to talk about cost savings leverage in the acquisition, which obviously is one of the main goals of you know, bigger BDCs buying smaller BDCs or combining them. When you look at the cost structure, you know, what is your cost structure look like going forward versus what they had and what you had?
spk02: Yeah, so I think obviously that is one of the big reasons to combine to get a little bit bigger. And so, you know, if you look at our income statement and you look at the expense side, you know, professional fees, admin services and expenses, you know, insurance and other G&A, you know, one plus one doesn't equal two in this case. So we would expect, you know, you only have one audit, not two anymore, right? You know, your expenses will increase a little bit as you have to have, you know, some more people working on some things. But I would expect that our expenses become more in line with, sort of the rest of the industry on a percentage of assets. And so, you know, we've been a little bit high, and now you put two companies of similar size together, and those expenses should only marginally go up. So I think that's where you're going to start to pick up.
spk15: Yeah, I had heard that a lot of garrison people had left garrison, you know, before. So in big picture, you know, how many people did you bring over? Did you have to bring over space? You know, what are you going to have to do to your headcount, you know, whether in your accounting area or otherwise?
spk06: Yeah, so fortunately space is not relevant.
spk15: Fortunately space isn't relevant during COVID. Well, that's not true. The rent expense portion of space may be relevant even if no one's using it.
spk02: Yeah, that's true. Yes. I mean, that's a good question, Steve. You know, we're not going to need to add more space. I mean, I think that we did bring over one person from Garrison as it relates to, you know, sort of the financial and accounting side. You know, we'll have to have a little bit more allocation to the fund, obviously, because it's bigger and there's more positions and there's stuff to do. But, again, it's not a big lift. I mean, we had lots of capacity.
spk05: Yeah, I mean, I would answer it that, you know, versus what Garrison was spending, we're going to spend a lot less. That's very clear. So that all drops the bottom line. Within our own business, we've taken some cost actions over the last six months to take cost out of our own business, you know, across, you know, professional fees, you know, size of board, things like that. And that all, again, just drops the bottom line. So we're not only focused on cost takeouts out of the merger, we're also focused on our own business. And anything like any costs like space and all that stuff, again, we think the transaction on costs alone is about mid-single digits accretive. And then if we can take their liquid portfolio and monetize it and recycle it into the types of things that we've been doing on our origination franchise, you know, we think that's pretty accretive. So we think the accretion is going to be even higher than that. So, again, you've seen the spread pick up we've picked up in the last nine months. Some of that is spread widening in the markets, but a lot of that is monetizing, you know, some of these acquisitions, liquid assets, and recycling them into, you know, more proprietary assets that have wider spreads. So between all those things, you know, it should be mid to high single digits accretive.
spk15: Okay, one last question and or comment, which I will repeat again, and, Ted, you're probably expecting it. Have you given any further consideration to reverse merger now that your share count is bigger and you're done with this deal?
spk02: I think you meant a reverse split, stock split.
spk15: I'm sorry, reverse split, reverse split.
spk02: Yeah, yeah.
spk05: Yeah, I mean, it's obviously something we've done. To do that, we need a shareholder vote. I'm ready to vote. It's something that we're focused on, and my guess is we'll do that in the next couple quarters. It just makes sense for us to do it. Don't be surprised to see us do a reverse stock split over the next couple months. I think yourself and a lot of our big shareholders have suggested the same thing. We think it's a good idea.
spk15: So let's try to slip this in before you guys do your next acquisition.
spk07: All right, thanks a lot. Thanks, Tim.
spk01: We have a follow-up question from the line of Christopher Nolan with Leidenberg Thelman. Your line is now open.
spk03: Ted, was that mid-to-single-digit accretive to EPS, I presume?
spk04: To NII per share, yeah.
spk03: Okay, great. And then what are your thoughts in terms of lowering your funding costs, SBA debt or anything else like that?
spk05: Well, on the SBA debt, I mean, we are looking into it, but I would say, and the terms coming out of the SBA debt are very attractive. I'm not sure we can get an SBIC approved. And if we did get one approved, I think it would take us some period of time. So I wouldn't want to guide people to that. You know, I think our bigger focus is on, you know, we have, I mean, the great thing with our business now is we have a very diversified liability side between the CLO debt, our bonds, and our bank debt. And during March, when some of our peers had issues around their bank lines, you know, we're obviously very heavily skewed away from that now. And so, you know, I think between, you know, Ted mentioned it earlier, I think our focus is probably on tapping the unsecured markets at some point and at optimizing our CLO debt, you know, just given all this cash we're taking in. So, yeah, we are very focused on reducing funding costs. But I don't think it's realistic for us to access the SBA anytime soon.
spk03: Okay. That's it for me. Thank you.
spk01: That concludes today's question and answer session. I'd like to turn the call back to management for closing remarks.
spk05: Thank you all for joining us today. We really appreciate everybody dialing in for all the questions. And, of course, myself, Patrick, Ted, and the entire management team is always available to answer any questions or suggestions that you might have. Thank you very much for dialing in today. Thanks.
spk01: Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.
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