Portman Ridge Finance Corporation

Welcome to Portman Ridge Finance Corporation's fourth quarter and full year 2022 earnings conference call. An earnings press release was distributed yesterday, March 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-K filed 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 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. Speaking on today's call will be Ted Goldthorpe, Chief Executive Officer, President and Director of Portman Ridge Finance Corporation, Jason Ruse, Chief Financial Officer, and Patrick Schaefer, Chief Investment Officer. With that, I would now like to turn the call over to Ted Goldthorpe, Chief Executive Officer of Portman Ridge. Good morning.

Good morning. Thanks, everyone, for joining our fourth quarter and full year 2022 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 full year 2022. Patrick will provide commentary on our investment portfolio and our markets, and Jason will discuss our operating results and financial condition in greater detail. Yesterday, Portman Ridge announced its fourth quarter and full year 2022 results, and we are pleased with the solid earnings power of the company, despite operating under difficult market conditions, a challenging economic environment, rising interest rates, and market volatility. Our core investment income in 2022 increased by $800,000 to $64.2 million in comparison to $63.4 million seen in 2021 as we continue to see the impact that rising rates have in generating incremental revenue from our sourced investments. Additionally, our amended and extended credit facility with JPMorgan Chase has reduced our cost of capital, helping further reduce our expenses relative to our asset base. Overall, our performance both this quarter and earnings momentum from a timing lag and a realization of rising benchmarks has allowed us to raise our dividend for the second straight quarter to 68 cents per share, and we believe that we are situated to continuing delivering attractive returns to our shareholders in 2023. Regarding our primary market as a whole, despite the continued volatility in the syndicated markets and an uncertain macro backdrop, we remain bullish on new investment opportunities and the ability to rotate our portfolio at reduced risk and incremental returns. For new opportunities, spreads have widened by approximately 150 to 200 basis points as compared to the beginning of the year, and upfront fees are an incremental 100 to 200 basis points. Additionally, we continue to see strong equity contributions from sponsors and reduced leverage levels. To illustrate this, the weighted average total leverage of deals we completed in the fourth quarter was 4.8 times as compared to five times in Q3 and and 5.5 times for all of 2022. Turning the focus back to the company, we continue to believe in the valuation of Portman Ridge as we continued repurchasing shares under a renewed stock repurchase program. In 2022 alone, we repurchased a total of 167,017 shares at an approximate cost of approximately 3.8 million, more than double the amount of shares we repurchased in 2021 at 75,377 shares. We expect this trend of repurchasing Portman shares to continue into 2023 as we're able to do so. On this call, Patrick will also walk through the potential upside cases for an asset value. Our portfolio is largely in first lien debt and is now valued at a significant discount to par. If you experience normalized defaults or even elevated default rates versus history, we believe there is embedded net asset value upside in the portfolio. So this adds to our earnings momentum, driven by wider spreads on new originations and rising short-term interest rates, to drive both potential NAV and earnings upside. 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 five of our presentation and the sensitivity of our earnings to interest rates, As of December 31st, 2022, approximately 90% of our debt securities portfolio were either floating rate with a spread to an interest index such as LIBOR, SOFR, or PRIME, with 67% of these still being linked to LIBOR. As you can see from the chart, the underlying benchmark rate of our assets during the quarter lagged the prevailing market rates and still remains significantly below the LIBOR and SOFR rates as of February 28th, 2023. We would expect this to normalize over time as the underlying one, three, and six-month contracts reset. For lesser purposes, if all our assets were to reset to either a three-month LIBOR or SOFR rate, respectively, we would expect to generate an incremental $2 million of quarterly income. While our liability costs will also rise relative to their Q4 levels, we still expect a net positive benefit of approximately 10 cents per share assuming all of our assets and liabilities are utilizing the same three-month benchmark rates for an entire quarter. Skipping down to slide 11, both investment activity and originations for the fourth quarter were lower than the prior quarter, resulting in net deployments of approximately $6.3 million, excluding regularly scheduled quarterly amortization payments and fundings under previously committed facilities, including our Great Lakes joint venture. Net deployment consisted of new fundings of approximately $23.8 million, offset by approximately $16.5 million of repayments. These new investments are expected to yield a spread to SOFR of 704 basis points on the par balance. And the investments were purchased at a cost of approximately 95.5 percent of par, which will generate incremental income in addition to the stated spread. As mentioned in our press release, We drew $14.3 million under our 2018-2 secured notes at a rate of LIBOR plus 158 basis points to fund these assets yielding SOFR plus 704 basis points, resulting in a very attractive return on equity. Additionally, during the quarter we funded $13.7 million into our Great Lakes joint venture and have had additional funding so far this year that have in aggregate taken us close to being fully funded under that commitment. Similar to our experience with new assets on the balance sheet, incremental investments in our Great Lakes Joint Venture have come at increasing spreads and widening OID, which should result in higher returns going forward. Our investment securities portfolio at the end of the fourth quarter remained highly diversified, with investments spread across 31 different industries and 119 different entities, all while maintaining an average par balance per entity of approximately $3.3 million. Turning to slide 12, We had one incremental investment on non-recrual as compared to September 30, 2022, which is a subordinated note in pro-error holdings, which is valued at zero. In aggregate, investments on non-recrual status remained relatively low at four investments in the fourth quarter of 2022 as compared to seven investments on non-recrual status as of December 31, 2021. These four investments on non-accrual at the end of 2022 represent 0.0 and 0.6 percent of the company's investment portfolio at fair value and amortized cost, respectively. On slide 13, as Ted mentioned in his opening remarks, if we focus on the top three rows of the table, we have an aggregate debt securities fair value of $475.3 million, which represents a blended price of 91.66 percent of par value and is 84% comprised of first lien loans at par value. Assuming a par recovery, our December 31, 2022 fair values reflect a potential of $43.2 million of incremental NAV value, or $4.51 per share. For illustrative purposes, if you were to assume a 10% default rate and a 70% recovery rate on this debt portfolio, there would still be an incremental $2.89 per share of NAV value over time as the portfolio matures and is repaid. This default rate is above anything the market is expecting or has experienced historically. Turning finally to slide 14, if you aggregate these three portfolios, over the last three years, we have purchased a combined $434.8 million of investments. have realized over two-thirds of these positions at a combined realized and unrealized mark of 103% of fair value at the time of closing the respective mergers. We're able to achieve those results despite the global pandemic in 2020 and most of 2021 and a weak market for almost all asset classes in 2022. In a similar vein as the previous slide, as of December 31st, 2022, There remains an incremental $13.7 million of value as compared to the par in these portfolios, or $9.3 million when applying a similar 10% default rate and 70% recovery rate analysis. And I'll turn the call over to Jason to further discuss our financial results for the period.