Portman Ridge Finance Corporation

Welcome to the Portman Ridge Finance Corporation second quarter 2022 earnings conference call. An earnings press release was distributed yesterday, August 9th, after market closed. 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-Q filed yesterday with the SEC. 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 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 now like to turn the call over to Ted Goldthorpe, Chief Executive Officer of Portman Ridge.

Good morning, and thanks, everyone, for joining our second quarter 2022 earnings call. I'm joined today by our Chief Financial Officer, Jason Ruse, and our Chief Investment Officer, Patrick Schaefer. I'll provide highlights on the company's performance and activities for this quarter. Patrick will provide commentary on our investment portfolio and our markets. Jason will discuss our operating results and financial condition in greater detail. Yesterday, Portman Ridge announced its second quarter 2022 results, and we are pleased to report a solid performance of financial performance in a challenging economic environment. During a quarter in which our industry experienced significant market volatility and other macroeconomic and political factors, we remain committed to our strategy of prudent capital deployment and focusing on strong companies to add to our portfolio. As a result, even under these market conditions, we ended the quarter with strong investment activity, lowered non-accrual investments as compared to previous quarters, and maintained our dividend of 63 cents per share. Investment activity was strong, and although originations are still lower than the second half of 2021, during the second quarter we deployed approximately 57.6 million of our variable cash in new investments, net of refinancing existing borrowers, and had an additional 20.6 million of new investments that closed in July. Almost all of these new investments had been in our pipeline since the end of the first quarter, but due to the dislocation of the capital markets, both public and private markets, most of the new investments were settled towards the very end of the quarter or in July. Patrick will provide additional details, but I'd like to emphasize that the reduced investment income from the quarter was a deployment timing issue as we've only seen a very limited effect of the steps taken during the quarter. As slide nine of our earnings presentation shows, We anticipate normalized quarterly activity to result in NII per share that is greater than 70 cents, with the majority of that increase relative to our second quarter NII per share driven by new investments that have already closed. Shifting to the liability side of our balance sheet, we're able to restructure our agreement with JPMorgan Chase and lower the interest rate, shift from LIBOR to SOFR, and extend our maturity date by two and a half years. This restructured agreement has helped lower our cost of capital and provided an incremental investment horizon. Furthermore, during the quarter, we repurchased over 106,000 shares under our renewed stock purchase program at an aggregate cost of approximately $2.5 million and nearly 130,000 shares, an aggregate cost of $3 million since the beginning of the year. We maintained our 63 cent quarterly distribution, which reflects the stable long-term performance of our operations and investment activities. Overall, we believe that we are well positioned to further improve our portfolio performance and net investment income in the second half of 2022. And 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 to slide six, we have provided specific details around a list of assets that were either on our SOI as of June 30th, 2022, or were closed shortly thereafter, but generated limited to no income during the quarter. In aggregate, these assets are expected to generate approximately $1.1 million of quarterly income, plus an additional $360,000 in one-time fee income. Furthermore, given the significant cash position we had heading into the quarter, there is expected to be relatively limited incremental interest expense as a result of closing these investments. Turning now to slide seven and the sensitivity around our earnings to interest rates. As of June 30, 2022, approximately 87.5% of our DestiCurious portfolio were either floating rate with a spread to an interest rate index such as LIBOR, SOFR, or PrimeRate, with 93% of these still being linked to LIBOR. As you can see from the chart, the underlying benchmark rate on our assets during the quarter lagged the prevailing market rates and still remained significantly below the LIBOR and SOFR rates as of August 1st, 2022. We expect these to normalize over time as the underlying one, three, and six-month contracts reset. But for a luster of purposes, if all of our assets were to reset to either a three-month LIBOR or SOFR, respectively, we would expect to generate an incremental $1.7 million of quarterly income. While our liability costs will also rise relative to their Q2 levels, we still expect a net positive benefit of approximately 5 cents per share, assuming all of our assets and liabilities are utilizing the same three-month benchmark rates for the entirety of the third quarter. Skipping now down to slide 12, investment activity and originations for the second quarter were higher than the first quarter of 2022, but were also very back-ended, as we have just highlighted. Net of refinancing existing borrowers, we deployed approximately $56.7 million during the quarter and were refinanced or repaid on approximately $32.7 million of investments. Additionally, we funded an incremental $20.6 million of investments early in the third quarter relating to investments that had been in our pipeline since the beginning of the second quarter. These new investments are expected to yield a spread to SOFR of 683 basis points on the par balance, but a number of these investments were purchased at a meaningful discount to par, which would generate income in addition to the 683 basis points of spread. Our debt securities portfolio at the end of the first quarter remained highly diversified, with investments spread across 32 different industries and 118 different entities. all while maintaining an average power balance per entity of approximately $3.5 million. Turning to slide 13, as previewed in our first quarter earnings call, during the quarter, we materially cleaned up our portfolio as a result of the exit of Group Akima in April, which represented 84% of our March 31st non-recrual portfolio on a cost basis. As of June 30th, 2022, Three of our debt investments were on non-accrual status compared to six as of March 31st, 2022, and seven as of December 31st, 2021. As a result, investments on non-accrual status as of June 30th, 2022 decreased to 0.0% and 0.3% of the company's investment portfolio at fair value and amortized cost, respectively, which compares to investments on non-accrual status as of March 31st, 2022, of 0.2% and 1.9% of the company's investment portfolio at fair value and advertised cost, respectively, and 0.5% and 2.8% as of December 31st, 2021, respectively.