Portman Ridge Finance Corporation

Good day and thank you for standing by. Welcome to the Portman Ridge fourth quarter 2021 financial results conference call. At this time, all participants are in listen only mode. After the presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star then one on your telephone keypad. Please be advised today's conference may be recorded. If you require operator assistance during the call, please press star then zero. I'd now like to hand the conference over to your host today, Serena Ligi. Please go ahead.

Thank you. Good morning and welcome to Portman Ridge Finance Corporation's full year 2021 earnings conference call. An earnings press release was distributed yesterday, March 10th, after market close. A copy of the release along with an earnings presentation is available on the company's website at www.portmanridge.com. in the investor relations section and should be reviewed in conjunction with the company's form 10-K filed yesterday with the FCC. As a reminder, this conference call is being recorded for replay purposes. Please note that today's conference call may contain forward-looking statements which are not guarantees of future performance or results and involve a number of risks and uncertainties. Actual results may differ materially from those in the forward-looking statements as a result of a number of factors, including those described in the company's filings with the SEC. Portman Ridge Finance Corporation assumes no obligation to update any such forward-looking statements unless required by law. With that, I would like to now turn the call over to Ted Goldthorpe, Chief Executive Officer of Portman Ridge. Please go ahead, Ted.

Thank you. Good morning, and thanks, everyone, for joining our full-year 2021 earnings call. I'm joined today by our Chief Financial Officer, Jason Ruse, and our Chief Investment Officer, Patrick Schaefer. I'll provide brief highlights on the company's performance and activities for 2021, and Patrick will provide commentary on our investment portfolio and our markets. Jason will then discuss our operating results and financial condition in greater detail. Yesterday afternoon, Portman Ridge announced its full year 2021 results. We are pleased to report a very strong year of earnings portfolio performance, and investment activity. For 2021, our net investment income increased to $42 million, or $4.92 per share. Our core net investment income increased to $25.4 million, or $2.97 per share. And NAV for the year increased to $280.1 million, or $28.88 per share. All of these improved metrics reflect broad-based improvements in our debt portfolio investments and joint ventures. On the corporate front, we took steps to leverage fixed costs, lower our cost of capital, and reduce expenses relative to our asset base. We generated interest savings driven by a lower weighted average cost of debt. Furthermore, we maintained other operating expenses at a relatively stable level and believe the impact of these savings will continue to materialize over time. as we continue to grow and reposition our portfolio to higher quality and higher yielding assets. Origination activity was robust during the year, and we continue to realize the strength of the BC Partners platform in generating attractive risk-adjusted opportunities. During the year, we continued participating in our stock repurchase program, and during the year, we repurchased shares in the open market transactions at an aggregate cost of approximately $1.8 million. As a result, our Board of Directors declared a 63-cent per share quarterly distribution, which represents a 1-cent increase from prior quarter levels and another 3-cent increase from preceding quarters. This marks the second quarter in a row of increased distributions. This increased quarterly distribution reflects the consistently improved performance of the company's operations and investment activities, as well as the general economic outlook and related factors. The refinancing of our long-term fixed-rate debt during 2021, especially now that the federal interest rates are rising, should result in significant interest savings and higher net investment income for Portman Ridge during the first half of 2022, all else being equal. We are well positioned and have the capacity to grow and increase the proportion of BC Partners' originated assets. While we will continue to be proactive in repositioning our portfolio and several targets already under consideration, we will also take an opportunistic approach. With that, I will turn the call over to Patrick Schaefer, our Chief Investment Officer, for a review of our investment activity.

Thanks, Ted. Turning first to the current market conditions, as already noted by most of our peers, the fourth quarter of 2021 was our most active quarter from an origination perspective and perhaps the second most active on an exit and repayment front outside of Q4 2020 when we acquired Garrison. Although some of these trends abated in early Q1 due to the Omicron variant, Q4 activity was driven by ever-increasing return to business as usual in the U.S. and a desire for sellers to crystallize gains prior to year end. As many in our sector have noted, the market strength carried over from the first half of the year into the second half. We had an active quarter in terms of originations and repayments, with originations materially outpacing repayments. Excluding revolving credit commitments, We invested a total of $108 million during the quarter and exited or repaid on investments with a carrying value of $78.1 million. With respect to debt originations, we made investments into 17 borrowers, of which eight were existing borrowers. In total, all but three of these transactions were completed alongside other BC entities, and the three transactions were all small investments in legacy Portman-only borrowers. Excluding short-term investments that were sold prior to the end of the quarter, 93% of new investments were in first-lane securities and 7% were in second-lane securities. The weighted average spread on the new investments was 721 basis points. Additionally, our Great Lakes Twin Venture returned a net $6.2 million during the quarter, and we opportunistically purchased $18.1 million of assets from J&P Group, as reported on October 26, 2021, in a Form 8-K. On the repayments and dispositions side, the fourth quarter was more active relative to last quarter due to the typical year-end rush. In total, we exited or repaid on several positions, the majority of which were repayments. In aggregate, these exits represented a carrying value of approximately $78.1 million and resulted in an incremental NAV of approximately $0.2 million. Relative to September 30th, 2021, fair value or cost if originated during the quarter, our debt and equity securities accounted for approximately $3.7 million of net loss, while CELO equity positions accounted for a $3.1 million net loss, and our two joint ventures accounted for a $0.1 million net loss. As it relates to the debt and equity securities, 3.6 of the $3.7 million is related to a select few investments, one legacy equity position everywhere global, and two legacy positions that have been on non-accrual for some time, Groupahima and ProAir. As of year end, those legacy positions had an aggregate fair value of $2.8 million, or 0.4% of total assets. On an equivalent basis, as of December 31st, 2021, Portman Ridge has $468 million of debt securities marked at a 92.8% of par, and yielding a stated spread to LIBOR of 725 basis points on accruing debt securities. This compares to 455.1 million of debt securities marked at 93.8% of par and yielding a stated spread to LIBOR of 748 basis points on accruing debt securities as of September 30th, 2021. Non-accruals as of December 31st, 2021 represented 2.6% of cost and 0.5% of fair value on the investment portfolio, as compared to 2.5% and 0.9%, respectively, as of September 30, 2021. Seven investments were on non-accrual status as of December 31, 2021, compared to six investments that were on non-accrual status as of last quarter. However, we would like to note that the new non-accrual is the result of converting a portion of our existing group AHIMA term loan into a rolled-up term loan, so from a practical perspective, the non-equals are flat quarter over quarter. I'll now turn the call over to Jason to further discuss our financial results for the period.

Thanks, Patrick. Given this is the time of year we provide annual results, I wanted to take this time to highlight some of the more notable achievements we were able to accomplish in 2021. I'll start with the sizable investment portfolio acquisitions done recently. of which we were able to earn an entire year of interest income from the $353 million of assets acquired from Garrison in Q4 2020. This resulted in a significant increase in interest income during 2021 and adds to our core investment income. We then added to this with the acquisition of HCAP with assets of $89 million in late second quarter 2021, which has had incremental contributions to core investment income with minimal purchase discounts. Not only have we made progress on the asset side of the balance sheet, but we were able to reduce our cost of capital through the successful refinancing of $77.4 million of our 6% and 1.8% baby bonds, and even with the growth in the portfolio, we maintained our target leverage ratio. In addition, we completed a 10-for-1 reverse stock split effective August 26, 2021, which benefits our shareholders through enhanced capability to more efficiently invest in Portman shares. Accordingly, all common shares and per-share metrics have been adjusted retroactively for this split. As Ted previously mentioned, during the year through these efforts, we improved our net asset value, net investment income, lowered net expenses as a percentage of total investment income, and lowered our cost of capital. Our net asset value for the full year 2021 increased to $280.1 million, or $28.88 per share, from $216.3 million, or $28.77 per share, year over year, reflecting broad-based improvements in the debt portfolio investments and joint ventures. Total investment income for the full year of 2021 was $80.1 million, of which $63.8 million was attributable to interest income from our debt securities portfolio. This represents an increase of 87% compared to total investment income for the full year of 2020, and it was driven by higher interest income and higher capital structuring fees received during the year, reflecting a strong level of originations. Net expenses for the full year 2021, although increased to $38.1 million, decreased to 47.6% as a percentage of total investment income as compared to 60.2% in 2020. As we have discussed at length, we are very focused on maintaining a stable level of operating expenses against our net asset base, which we believe will start to normalize given the significant asset growth and relative stability in the portfolio. As a result of the $37.3 million increase in total investment income offset by a $12.3 million increase in net expenses, net investment income for the full year 2021 increased to $42 million or $4.92 per share as compared to $17 million or $3.40 per share a year ago. We have provided additional information this quarter within the earnings presentation on slide five to help show what we consider to be our core earnings absent the effects of amortization of purchase discounts. We have shown the impact of purchase price accounting to both investment income and net investment income for the last three years. We believe this provides further transparency in the investment income one may expect absent the amortization of purchase discounts recorded. As the purchase discounts are amortized and accreted into income, the difference between GAAP earnings and core investment income is expected to reduce over time to eventually be consistent with what the core investment income represents. Core investment income for the full year 2021 was $63.4 million, an increase of $24.3 million as compared to core investment income of $39.1 million in 2020. Our core net investment income for the full year 2021 increased to $25.4 million, or $2.97 per share, as compared to $13.3 million, or $2.67 per share, a year ago. It is our intent to continue providing similar disclosure on an ongoing basis. Moving on to the liability side of the balance sheet, as of December 31, 2021, we had a total of $352.4 million par value of borrowings outstanding. comprised of $80.6 million in borrowings under our credit facility, $108 million of our 4.78% notes due 2026, and $163.7 million in secured notes due 2029. During the year, we redeemed in full the aggregate amount outstanding of $28.75 million of the HCAP 6.25% notes due 2022. We also fully refinanced $77.4 million of our 6.8% notes replacing them both with 4.78% notes in the amount of $108 million due to 2026. In addition, we repaid $88 million of lower tranche CLO debt obligations, which reduced our cost of capital and allowed us to manage our leverage to a point we believe optimal to generate yield, but within a reasonable risk tolerance. During the fourth quarter, we also purchased $18.1 million of portfolio assets in exchange for $1.4 million in cash and 556,852 shares of common stock issued at NAV during fourth quarter 2021, resulting in approximately $16 million of new equity. These aforementioned items have put us in a much stronger financial position, and we are pleased with the current composition of our capital structure. At December 31, 2021, par value of outstanding borrowings was $352.4 million, with an asset coverage ratio of total assets to total borrowings of 178%. Our gross leverage was 1.3 times and 1.01 times on a net basis. Our aggregate unfunded commitments stood at $47.9 million as of December 31, 2021. We had unrestricted cash of $28.9 million and restricted cash of $39.4 million, which along with other assets, places us in a good position to meet commitment obligations as they may occur. Finally, during the year, we repurchased 75,377 shares under our stock repurchase program in open market transactions at an aggregate cost of approximately $1.8 million, which we plan to reestablish as soon as possible. As mentioned in our earnings presentation, our board has renewed our stock repurchase program for another year, and we plan to generate value to the shareholders by continuing to buy shares when and as we believe market pricing is advantageous to do so. With that, I will turn the call back over to Ted Goldthorpe.

Thank you, Jason. Before opening the floor to questions, I would like to address an important topic, which is the impact of rising rates. As other BDCs, Portman Ridge investment income is affected by fluctuations in various interest rates, including LIBOR and prime rates. As of December 31st, 2021, approximately 84% of our debt securities portfolio was either floating rate with a spread to an interest rate index, such as LIBOR or the prime rate. 75% of these floating rate loans contain LIBOR floors, ranging between 50 basis points and 200 basis points. As of December 31st, 2021, we had approximately $352 million of borrowings outstanding, of which approximately 31% had a fixed rate and 69% had a floating rate component. As we move forward with new investments in 2022, we expect these portfolio investments to predominantly be floating rate investments. In periods of rising or lowering interest rates, the cost of the portion of debt associated with fixed rates such as our 4 and 7 nodes due 2026 would remain the same, while the costs associated with the borrowings and the revolving credit facility would fluctuate with changes in interest rates. An increase in the base rate index for floating rate investment assets would increase gross investment income, and a decrease in the base rate would decrease gross investment income. In either case, such an increase or decrease may be limited by interest rate floors minimums for certain investment assets. A 1% increase in interest rates would have a negative impact of approximately $1.1 million toward net investment income, while a 2% and 3% increase in interest rates would have a positive impact of approximately $217,000 and $1.7 million, respectively. I'll close by saying we're very pleased with the progress we made during the year in terms of active repositioning, deleveraging, and refinancing our long-term debt, and we continue to generate solid earnings results on a consistent and steady basis. We're also pleased to be in a great financial position, and for the second quarter in a row, increasing our distributions per share to our shareholders. Thank you once again to all our shareholders for your ongoing support. This concludes our prepared remarks, and I'll now turn the call over to the operator for any questions.

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. Again, that is star, then one, if you'd like to ask a question at this time. Our first question comes from Christopher Nolan with Lattenberg-Fallman.

Hey, guys. The increase in CLOs, was that related to the JMP acquisition? Yes. Okay. And then by my calculation, it looks like you guys did very little in the way of stock repurchases in the fourth quarter. Is that correct? And if so, does that indicate a change in capital management strategy? Yeah.

I would characterize that as we had a lot of filings in the fourth quarter that were pretty much throughout the fourth quarter, and our program had expired, so the windows were limited for us to reopen that. And then we've been closed really since then with open filings. So I would not take that as an indication of a view on market price.

Yeah, we plan to buy back stock as soon as practically possible.

Okay, and is your leverage ratio still 1.25 to 1.40?

That's right. Yeah, at their target window.

And final question, the realized gains, what was the driver on that? I might have missed it from Jason's comments.

Yeah, I would say, I mean, we had 20-plus sales throughout the quarter. I would say there's not really one of any particular note more than another. And I would say the majority of that is a flip between realized and unrealized. You know, there was very little NAV impact to that.

Great. Okay, I'll get back in the queue. Thanks.

As a reminder, that is star, then one to ask a question. Our next question comes from Ryan Lynch with KBW.

Hey, good morning. Thanks for taking my questions. First one's just a high-level one. You know, as we kind of look towards 2022, you guys have had several busy years, a lot of acquisitions. you know, redoing the capital structure, things like that. How should we measure your guys' success in 2022? And what are the goals that you guys are wanting to accomplish for Portman in 2022?

Yeah, it's a great question. So, yeah, I mean, I think the level of transaction activity, I think, is going to obviously slow. And, you know, we're really trying to point everybody towards our core earnings just because of, you know, some of the noise around the accretion. So we laid out our investor deck and we tried to address it. So I think this year, you know, listen, I think we are pretty cautious going into this year, just given everything going on. And this is even, this is pre the Russian conflict. So even before that, I think we were getting pretty cautious. So I think, you know, our goal is to kind of keep leverage within our range. To the extent good acquisitions come along, we'll obviously take a look at them. But really, our goal is to continue to wring out costs out of our business and drive stable earnings and stable credit quality.

Okay. Thanks, Seth. And then one question I had, you guys have a slide that just shows the weighted average EBITDA for your debt portfolio. It's about $75 million in the fourth quarter. I'm just curious, is that skewed by... I know there's a few transactions that you guys have that are maybe more like broadly syndicated loans that are really large that skew that number, or how should we think about that? That feels pretty big relative to the size of your entity.

Yeah, I'll start, and then I'll let Patrick jump in. Yeah, I mean, you're dead right. So when we took over the Garrison portfolio, some of their, you know, obviously they had an on-balance sheet CLO, and some of the assets in there skew the numbers high, So, you know, our core franchise is really 10 to 50 EBITDA. So that number is a little misleading because it's skewed by a couple, you know, things that we inherited in the garrison transaction.

Yeah, I think the other thing I'd add is typically if we're going to be in a junior position in a cap structure, we like much larger businesses, much larger, more stable businesses. So, you know, some of that impact, it's tough to see exactly, but you know, as we are exiting out of perhaps smaller company legacy second lien positions and investing in kind of, I'll call it a new second lien position, the net second lien securities will be flat, but we'll actually be high grading into larger, more stable businesses. So that's kind of some of our game plan as well. But I wouldn't read too much into that 75. It is a little bit skewed away from what our kind of core franchise is.

Okay. Yes, that makes sense. And then how are you guys thinking about, you know, the dividend going forward? You guys have obviously, you've raised it twice. I think one compliment would be slide number five, and you guys, you know, flagged, that's helpful to kind of flag, you know, kind of the core earnings that you guys have in 2021, which was, you know, 74 cents on a quarterly basis versus the 63 cents. I'm just curious, you know, if that level of earnings is relatively sustainable going forward. There's a pretty big gap between, you know, operating earnings and kind of the dividend. So how every BDC kind of chooses to manage their dividend policy different. You know, what is your thoughts regarding dividend policy and dividend payout? You know, percentage is the right number, but how do you guys kind of think about matching that close to NOI?

Yeah, so I'd say it's a great question. So, you know, this is a subject of a lot of discussion with our shareholders and our board. I think, you know, listen, we have a very, very strong dividend coverage. We also have one of the highest dividend yields at NAV and at market in the space. So we're at the very high end of – we're at a pretty high end of our payout already. And it just goes to, like, our ROEs are obviously pretty strong. So, listen, I think, you know, there's a lot of uncertainty out there between everything going on. And so we want to make sure whatever we raise our dividend to, we feel really good about. But to the extent that these earnings tailwinds continue and to the extent that our credit quality is stable, which so far it is, you know, I wouldn't be surprised for us to continue to increase the dividend. I don't think you're going to see us, you know, the other new phenomenon out there across corporate America is a variable dividend. And I don't think you're going to see us pursue that policy. And then in terms of the other thing that benefited us is when we did a lot of these merger transactions, there was a lot of tax benefits to doing that. So we're in actually pretty good shape on a spillover income perspective. So unlike a normal BDC who is static in nature, we have a lot more flexibility in our dividend policy just due to some of these tax benefits we picked up in some of these deals.

Okay.

Got you.

Okay, that's all for me this morning. I appreciate the time today. Thanks, Ryan.

As a reminder, if you'd like to ask a question at this time, that is star, then 1. We have a question from the line of Steven Martin with Slater.

Hi, guys. Hey. Can you hear me?

Yeah, yeah, yeah.

Oh, okay. A follow-up to Ryan's question. Given your level of core NII and given, you know, I'm looking at slide five, forgetting spillover for a second, you see your spread of dividend to NII is actually sort of decreasing. And so your spillover is therefore increasing every quarter. And if the 2021 sort of model is any example, you know, you're going to continue at that level. Do you think, and I know it's a subject of a lot of discussion, but do you think increasing, you know, one cent a quarter is going to narrow that gap at all?

Yeah, I mean, I think increasing it by one cent a quarter clearly narrows the gap. As I said earlier, I mean, we disclose our spillover income. You know, we're in decent shape there, but that will begin to build, obviously, over the next, you know, four to eight quarters. So, you know, this is something that's going to be a subject of discussion every quarter. And we just want to make sure that, you know, whatever we raise our dividend to, you know, we can sustain it for a very long period of time through all cycles. So, as you said, we do have a decent amount of cushion now between core earnings and our – and our dividend, but unlike most BDCs, because we picked up a lot of tax, one thing that I don't think was apparent to a lot of people when we did these mergers is we did pick up a lot of tax benefits from our shareholders, which have real value. And so, again, from a spillover perspective, you know, that'll definitely build over the next couple quarters. And so, you know, you can imagine that we're talking about this quite a lot about where to ultimately settle out our dividend policy vis-a-vis core earnings. Okay. I'd also say the reason we're giving you a wishy-washy answer is because, obviously, over the last two years, we've had a lot of, I would say, non-recurring expenses in terms of M&A fees, lawyers' fees. And then later on top of that, we're really trying to drive a lot of costs out through refinancing debt. We did switch certain professionals to get costs down. We've done some stuff on the administration side to get it down. So I think we feel like our core earnings are our core earnings. And there are some tailwinds to our earnings, particularly if rates go up more than a couple Fed rate hikes. And LIBOR, as of now, is at 80 basis points. It was at 30 a couple weeks ago. So all that's good for us, hopefully, over the long period of time.

All right. If I can refer to slide 10 for a second. Equity securities jumped in Q2, obviously merger-related. have seemed to be relatively flat the last couple of quarters. With all the refinancing, this M&A activity, et cetera, I would have expected, unless you're investing in new equity securities, I would have expected maybe some of that to run off or get refinanced out.

Yeah, we're not... As a general rule, we're not investing in new equity-only securities. So there are some instances where we're making an investment and we're getting penny warrants or something like that as kind of part of the transaction. So there are some kind of quote-unquote new equity securities, but obviously it's a corollary with the debt investment we're making. We do have a couple of equity positions in the book that have appreciated in value over the last couple of quarters that BC has invested in. So there's kind of some offset of some of these legacy equity positions kind of being refinanced out or taken out, and then an increasing in fair value of some of the positions that we've put on over the last, you know, call it two and a half years.

I guess, is there sort of on the horizon, should we expect that, you know, it's $22 million, should we expect that maybe some of that gets refinanced and converted into interest-bearing positions or should we expect that to be relatively static?

Yeah, I think as a general rule, it should be decreasing a little bit but not significantly. I mean, if you look at our SOI, it's a lot of cats and dogs in terms of line items. So there's not any – I think our largest equity position is maybe $5 million, and that's actually a preferred equity position that is generating income for us, that is a cash-paying security position. So I'd say as a general rule of thumb, again, it's just a lot of relatively small positions. So we would love to reduce that over time and move that into interest-bearing securities. But the reality is there's not like a meaningful needle mover in that group.

All right. You commented on your leverage ratio. It sort of slipped a little this quarter. You didn't invest as much as you got repaid. Was that a conscious decision or was that just a function of what was available to you and what got repaid?

Yeah, honestly, it was a bit of a function of urine activity. So kind of heading into December, we had a number of planned investment activities, drew a little bit on the revolver. kind of were ready for a couple of deals. We had two or three deals that got pushed. And then at the end of the year, we had a bunch of repayment activity that obviously wasn't necessarily anticipated. So between a combination of those things, we kind of drew on our facility expecting to need the capital. And at the end of the day, we had kind of way more repayments towards the very end. And so I would think of that as more of a minor blip. from a timing perspective than anything that was very intentional on our part to take up leverage.

Well, then, did I miss, was there a disclosure that I didn't see on quarter-to-date activity?

I think I had mentioned it in my script. I think we had purchased 108 million of securities, and I think we exited 78 million of securities, give or take. Okay. Those are kind of new deals. So if we fund an existing commitment, that kind of doesn't get counted in there. And if just kind of regular course repayment activity doesn't necessarily get counted in that. But I'd say as a general rule of thumb, we put out more money than we brought in.

Okay. And one last question. And again, I got on a couple minutes late. Did you comment anything on your portfolio companies' exposure to Russia, Ukraine, Belarus?

Yeah, we didn't. I mean, I was thinking the same thing. So we have no direct exposure to any of the recent volatility. And we have very, very limited indirect exposure. So we don't have any energy companies or anything else. You know, the one thing we are watching is for, like, third derivative effects. So things like rising input costs and other factors. But as of now, we've not seen any material impact on our portfolio.

Okay. And one last one on the share repurchase. You said your plan has expired. Is the intention to be opportunistic or is the intention to put a new plan in place?

Yeah, sorry. So... Justin Delacruz- couple things to clarify there that the board just reapproved our extension or a new repurchase program that will extend through the year 2022 expiring march 2023 what I referred to a plan expiring it was just a brokerage agreement with a broker and we just need to reestablish that.

If our old 10B5 program expired and we would look to implement a new one at some point, you know. Yeah, exactly.

That's what I was referring to, and that might, you know, especially if you're not in a prospectus proxy situation, maybe you'll be able to actually buy some shares.

Exactly, and we are eager to exit this blackout window. Good. Thanks a lot, guys.

Thank you. Yep, thank you.

That concludes today's question and answer session. I'd like to turn the call back to Ted Goldthorpe for closing remarks.

Great. Well, thank you very much for joining us today, and thank you for all your support. And we look forward to speaking to you guys in a couple weeks when we report our first quarter earnings. Thank you very much.

This concludes today's conference call. Thank you for participating. You may now disconnect.