Portman Ridge Finance Corporation

Welcome to Portman Ridge Finance Corporation's second quarter 2023 earnings conference call. An earnings press release was distributed yesterday, August 9th, 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 Forms 10Q 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, Jason Roos, Chief Financial Officer, and Patrick Sheffer, Chief Investment Officer. With that, I would now like to turn the call over to Ted Goldthorpe, Chief Executive Officer of Portman Rich.

Good morning, and thanks everyone for joining our second quarter 2023 earnings call. I'm joined today by our Chief Financial Officer, Jason Roos, 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 second quarter 2023 results, and continuing off the back of strong earnings momentum seen in the first quarter of 2023, we are pleased to announce a solid financial performance for Portman Ridge in both the second quarter of 2023 and the first half of 2023 overall. Our total investment income core investment income and net investment income substantially increased as compared to the three-month and six-month period of last year, as we continue to see the impact of rising rates have had in generating incremental revenues from our debt portfolio. Our core investment income for the second quarter of 2023 was $19.2 million, an increase of $5.5 million as compared to $13.7 million for the second quarter of 2022. Our strong performance this past quarter has allowed us to maintain our dividend of 69 cents per share, marking a 6 cents per share distribution increase as compared to the third quarter of 2022. In terms of a market update, M&A and deal activity picked up during the second quarter, particularly in the back half and early third quarter, despite the continued macro overhang of elevated inflation rates and continued increases in the Fed funds rate. While we continue to see lender-friendly concessions on pricing and terms, the competitive dynamics are stronger than we've seen in several quarters. We remain very selective regarding new portfolio companies, given the broader macroeconomic environment, but have found particularly attractive opportunities for add-on investments in existing portfolio companies looking to compete tuck-in acquisitions. 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 purchase program. In Q2 of 2023, we repurchased an incremental 27,801 shares, following on the trend seen throughout 2022 and the first quarter of 2023. We expect this trend of repurchasing Portman shares to continue throughout 2023 as we are able to do so. On this call, Patrick will also walk through the potential upside cases for our net asset value but as it pertains to the current quarter performance, approximately 72% of our net losses in the investment portfolio were driven by our CLO equity positions. While this continues to be a challenging asset class given certain structural issues with the syndicated loan market, CLO equity represents less than 3% of our total assets. Approximately 74% of our portfolio is in first-line debt and is now valued at a meaningful discount to par. If you've experienced normalized defaults or even elevated defaults, default rates versus history, we believe there's still embedded net asset value upside in our portfolio. Thus, this adds to our earnings momentum, driven by wider spreads and new origination 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 earnings presentation and the sensitivity of our earnings to interest rates. As of June 30, 2023, approximately 90.9% of our debt securities portfolio were either floating rate with a spread to an interest rate index such as LIBOR, SOFR, or PRIME rate, with 69% of these being linked to SOFR. 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 meaningfully below the LIBOR and SOFR rates as of July 25, 2023. We expect this to normalize over time as the underlying one, three, and six-month contracts reset. For lesser purposes, if all of our assets were to reset to either a three-month LIBOR or SOFR rate, respectively, we would expect to generate an incremental $484,000 of quarterly income. While our liability costs will also rise relative to their Q2 levels, we still expect a net positive benefit of approximately $0.04 per share, assuming all of our assets and liabilities are utilizing the same three-month benchmark rate for an entire quarter, which is further illustrated on slide seven. Skipping down to slide 11, both investment activity and originations for the quarter were slightly higher than prior quarter, resulting in net repayment and sales of approximately $21.0 million. Net deployments consisted of new fundings of approximately $15.3 million, offset by approximately $36.3 million of repayments and sales. These new investments are expected to yield a spread to SOFR of 828 basis points on the PAR balance, and the investments were purchased at a cost of approximately 98.65% of PAR, which will generate incremental income to the stated spread. As mentioned during our earnings call, it was our expectation that Q2 would generate more repayments than deployments, as we intentionally drew up a portion of our revolver in Q4 2022 to invest ahead of several repayments. In May, we repaid $23.6 million of our 2018-2 secured notes. I would like to specifically call out two payments paydowns during the quarter, both of which occurred relatively early on. First, we completed the recalibration of Northeast Metalworks, an asset acquired as part of the merger with Harvest Capital in April 2023. As part of the transaction, we were repaid approximately one-third of our position and restructured the remaining position prioritize additional periodic repayments. Secondly, in mid-May, we will refinance out of our second lien terminal position in TechTech, which has been a portfolio company since the initial externalization transaction back in April 2019. In addition to being one of our larger positions, it was by far our largest second lien position and allows us to further rotate into first lien senior secured loans. During the quarter, we funded $600,000 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 OID, which should result in higher returns going forward. Our investment securities portfolio at the end of the second quarter remained highly diversified with investments spread across 27 different industries and 104 different entities, all while maintaining an average par balance per entity of approximately $3.2 million. Turning to slide 12, we had one new issuer and two incremental portfolio company investments going on accrual as compared to March 31, 2023, one of which is a term loan for Qualtech, which is valued at 53.82% of par and has recently emerged from bankruptcy, from which we are looking to recover a portion of our initial investments. the second of which is a term loan for Lucky Bucks, which is valued at 28.2% of par. In aggregate, investments on non-accrual status remain relatively low at seven investments in the second quarter of 2023 as compared to five investments on non-accrual status as of March 31, 2023. These seven investments on non-accrual status at the end of the second quarter of 2023 represent 0.8% and 2.6% of the company's portfolio at fair value and amortized cost, respectively. On slide 13, as Ted mentioned, if we focus on the top three rows of the table and exclude our non-accrual investments, we have an aggregate debt securities fair value of $410.6 million, of which represents a blended price of 92.18% of par and is 88% comprised of first lien loans at par value. Assuming a par recovery, our June 31, 2023 fair values reflect a potential of $34.8 million of incremental NAV. a 16.2% increase or $3.65 per share, excluding any recovery on the non-accrual investments. For lesser purposes, if you were to assume a 10% default rate and 70% recovery on this debt portfolio, there would still be an incremental $2.25 per share of NAB value or a 10% increase over time as the portfolio matures and is repaid, again, excluding any recovery on the non-accrual investments. 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 repurchased a combined $434.8 million of investments, have realized over 73 percent of these positions at a combined realized and unrealized mark of 102 percent 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 June 30, 2023, there remains an incremental $12.8 million of value as compared to par in these portfolios, which equates to $9.4 million, or a 4.4% increase, when applying a similar 10 percent default rate and 70 percent recovery analysis, and excluding non-accrual investments. And I'll turn the call over to Jason to further discuss our financial results for the period.