Portman Ridge Finance Corporation

Welcome to Portman Ridge Finance Corporation's first quarter 2023 earnings conference call. An earnings press release was distributed yesterday, May 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-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 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. Jay from Roos, 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. Thanks, everyone, for joining our first quarter 2023 earnings call. I'm joined today, as previously mentioned, 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 the quarter. 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 first quarter 2023 results And continuing off the back of strong earnings momentum seen in fiscal year 2022, we're pleased to report yet another strong quarter of financial performance in the first quarter of 2023. Our total investment income, core investment income, and net investment income for the first quarter of 2023 all increased in comparison with the fourth quarter of 2022. as we continue to see the impact that rising rates have in generating incremental revenues from our debt portfolio investments. Our core investment income for the first quarter of 2023 was $19.3 million, an increase of $1.6 million as compared to $17.7 million for the fourth quarter of 2022, and an increase of $4.2 million as compared to $15.1 million for the first quarter of 2022. Our strong performance this past quarter has allowed us to raise our dividend for the third consecutive quarter to 69 cents per share. This increase to our shareholder distribution also represents the fifth overall increase over the past seven quarters. Regarding our primary market as a whole, the bank failures of Silicon Valley Bank, Signature Bank, and First Republic during March and April have further perpetrated the volatility and uncertainty perpetuated the fall of data and uncertainty in the syndicated markets that we have noted in our early March earnings call, which historically is favorable to private credit businesses such as Portman Ridge. We remain bullish on new investment opportunities and the ability to rotate our portfolio at reduced risk and incremental returns. For new opportunities, spreads remain approximately 150 basis points wide as compared to the beginning of 2022 and upfront fees are up an incremental 100 to 200 basis points. Additionally, we continue to see strong equity contributions from sponsors and reduced leverage levels on new opportunities. Turning the focus back to the company, we continue to believe in the valuation of Portman Ridge as we continued repurchasing shares under the renewed stock purchase program. In the first quarter, we repurchased an incremental 35,613 shares following on the trend seen throughout 2022, where we repurchased a total of 167,017 shares at an approximate cost of $3.8 million. We expect this trend of repurchasing Portman shares to continue throughout 2023 as we're able to do so. On this call, Patrick will also walk through the portfolio upside cases for our net asset value. Our portfolio is largely in first lien debt and is now valued at a meaningful discount to par. If you experienced normalized defaults or even elevated defaults rates versus history, we believe there's embedded net asset value upside in the portfolio. This adds to our earnings momentum driven by wider spreads and 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. Turn to slide five of our investment presentation and the sensitivity of our earnings to interest rates. As of March 31st, 2023, approximately 89.2% of our debt securities portfolio were either floating rate with a spread to an interest rate index such as LIBOR, SOFR, or PRIME, with 52% of these still being linked to LIBOR. As you can see from the chart, the underlying benchmark rates on our assets during the quarter lagged the prevailing market rates and still remain significantly below the LIBOR and SOFR rates as of April 24, 2023. We expect this to normalize over time as the underlying one, three, and six-month contracts reset. For illustrative 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 $690,000 of quarterly income. While our liability costs would also rise relative to their Q1 levels, we would still expect a net positive benefit of approximately $0.06 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 first quarter were lower than the prior quarter, resulting in net repayments and sales of approximately $32.6 million. Net deployment consisted of new fundings of approximately $11.8 million offset by approximately $44.4 million of repayments and sales. These new investments are expected to yield a spread to SOFR of 625 basis points on par balance, and the investments were purchased at a cost of approximately 97% of par, which will generate incremental income to the stated spread. As mentioned during our last earnings call, it was our expectation that Q1 would generate more repayments than deployments, as we intentionally drew up a portion of our revolver in Q4 2022 to to invest ahead of several repayments. In February, we repaid $6.9 million of our 2018-2 secured notes, and in May, we expect to make another paydown of approximately $23 million. During the fourth quarter, we funded $5.6 million into our Great Lakes Joint Venture, which has 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 OIDs. which should result in higher returns going forward. Our investment securities portfolio at the end of the first quarter remained highly diversified, with investment spread across 28 different industries and 106 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 December 31, 2022. which is a subordinated note in Lucky Bucks Holdings, which is valid at 24.75% of par. In aggregate, investments on non-accrual status remained relatively low at five investments in the first quarter of 2023 as compared to four investments on non-accrual status as of December 31st, 2022. These five investments on non-accrual status at the end of the first quarter of 2023 represents 0.3% and 1.5% 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 and exclude our investment in pro-wear holdings, which we have marked at zero, we have an aggregate debt securities fair value of $442.9 million, which represents a blended price of 91.11% of par value and is 85% comprised of first-seeing loans at par value. Assuming a par recovery, Our March 31, 2023 fair values reflect a potential for $43.2 million of incremental NAV value, or $4.52 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 $2.99 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 acquired portfolios, over the last three years, we have purchased a combined $434.8 million of investments that have realized over 72% of these investments at a combined realized and unrealized mark of 102% of fair value at the time of closing the respective mergers. We were able to achieve these 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 March 31st, 2023, there remains an incremental $11.8 million of value as compared to par in these portfolios, or $8.0 million when applying a similar 10% default rate and 70% recovery rate analysis. I'll now turn the call over to Jason to further discuss our financial results for the period.