Portman Ridge Finance Corporation

Welcome to Portman Ridge Finance Corporation's third quarter 2023 earnings conference call. An earnings press release was distributed yesterday, November 8th, 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 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 afternoon, and thanks everyone for joining our third quarter 2023 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 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 third quarter 2023 results, and we are pleased with the solid earnings power of the portfolio despite operating in a somewhat challenging market conditions. Our core investment income was up year over year, increasing by $700,000, as we continue to see the impact that rising rates have on our debt portfolio. Additionally, our net asset value per share increased from $2,254 per share to $2,265 per share. We continued our accretive repurchase program, purchasing over 60,000 shares at an average cost of approximately $1.2 million. during the third quarter. Due to the continued strong performance this past quarter, the Board of Directors was able to approve a dividend of 69 cents per share, a level that represents a 12.2% annualized return on net asset value. On a year-to-date basis, total dividends to be distributed to shareholders amount to $2.75 per share, representing 7.4% increase as compared to the dividend distributed in 2022. As we have discussed in previous quarters, M&A deal flow continues to be at depressed levels year to date, but we remain optimistic on the overall outlook. On the sponsor finance front, we are starting to see the early innings of deal activity pick up through a combination of valuation expectations being more reasonable, an acceptance that interest rates will remain elevated for an extended period of time, significant dry powder on the sidelines, and private equity LPs encouraging the return of capital from their fund managers. Sponsors are looking to put less total leverage on their companies, which lowers our detachment point. We'll remain cautious on the ultimate execution rate of these M&A processes. The recipe for increased activity levels appear to be in place. Both the sponsor and non-sponsor activity, we continue to find the investment opportunities to be very attractive, given the combination of higher benchmark rates, lower leverage on new deals, higher equity contributions from sponsors, and better documentation. Given the continued macro uncertainty around inflation, consumer sentiment, and ongoing conflict in Ukraine and Israel, we continue to be very selective on new investment opportunities and have overall found investments in existing portfolio companies more attractive than those in new borrowers. Refocusing on Portman Ridge, we continue to believe our stock remains undervalued. Thus, as previously mentioned, we continue repurchasing shares under our renewed stock purchase program. In the third quarter, we repurchased an incremental 60,559 shares for an aggregate cost of approximately $1.2 million. This follows the trend set throughout 2022 and the first half of 2023, and expect this trend to continue through the final quarter of the year as we are able to do so. Following my remarks, Patrick will also walk through the potential upside cases for net asset value, but in addition to the market trading discount of our stock price, we continue to believe that there is significant embedded value to NAV even when overlaying conservative default and recovery rates. With that, I will turn over the call to Patrick Schaefer, our Chief Investment Officer, for a review of our investment activity.

Patrick Schaefer Thanks, Ted. Turning now to slide five of our presentation and the sensitivity of our earnings to interest rates. As of September 30, 2023, Approximately 90.5% of our debt securities portfolio were either floating rate with a spread to an interest rate index such as LIBOR, SOFR, or PrimeRate, with 98% 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 remain below the SOFR rates as of October 30, 2023, but the gap is the narrowest it has been since the onset of the Fed rate hike cycle. hike cycle. 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 $75,000 of quarterly income. Having said that, slide 7 shows a slight decline in NII per share on a run rate basis, driven largely by a slightly lower asset balance as of September 30, 2023, and our simple methodology of not assuming any changes to the portfolio. Skipping down to slide 11, originations for the third quarter were slightly higher than the prior quarter, but still remained below repayment levels, resulting in net repayments and sales of approximately $11.6 million. Some of this was driven by late repayments during the quarter and two transactions expected to close in Q3 that were pushed into early Q4. Our new investments made during the quarter are expected to yield a spread to SOFR of 917 basis points on par value, and the investments were purchased at a cost of approximately 99.27% of par. Our investment securities portfolio at the end of the third quarter remained highly diversified, with investment spread across 26 different industries and 101 different entities, all while maintaining an average par balance per entity of approximately $3.3 million. Turning to slide 12, we had one new portfolio company go on non-accrual as of as compared to June 30, 2023, and one come off non-accrual due to the completion of a restructuring. In aggregate, securities on non-accrual status remain relatively low at eight investments in the third quarter of 2023, as compared to seven investments on non-accrual status as of June 30, 2023. These eight investments on non-accrual status at the end of the third quarter of 2023 are represent 1.6 and 3.6 percent of the company's investment portfolio at fair value and amortized cost, respectively. On slide 13, excluding our non-accrual investments, we have an aggregate debt securities fair value of $427 million, which represents a blended price of 93.4 percent of par value and is 88 percent comprised of first lien loans at par value. Assuming a par recovery, Our September 30, 2023 fair values reflect a potential of $28 million of incremental NAV value, a 13.1% increase, or $2.94 per share, excluding any recovery on the non-accrual investments. 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 $1.60 per share of NAV value, or a 7.1 percent increase over time as the portfolio matures and is repaid. Again, this is excluding any recovery on the non-accrual investments. This indicative default rate is above anything the market is expecting or has experienced historically. Finally, turning to slide 14, if you aggregate the three portfolios acquired over the last three years, we have purchased a combined $435 million of investments. have realized over 78% of these positions at a combined realized and unrealized mark of 103% of fair value at the time of closing the respective mergers. This is an indication of our ability to effectively realize the value of legacy portfolios acquired while rotating into BC partners sourced assets. More importantly, 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 and the first half of 2023. I'll now turn the call over to Jason to further discuss our financial results for the period.