Portman Ridge Finance Corporation

year 2023 earnings conference call. An earnings press release was distributed yesterday, March 13th after market close. A copy of the release along with an earnings presentation is available on the company's website at www.parklandridge.com in the investor relations section and should be reviewed in conjunction with the company's Form 10-K file yesterday with the SEC. As a reminder, this conference call is being recorded by 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. Portland 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 Portland Ridge Finance Corporation, Jason Roos, Chief Financial Officer, Patrick Schaefer, Chief Investment Officer, and Brandon Satoran, Chief Accounting Officer. 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 fourth quarter and full year 2023 earnings call. I'm joined today by our Chief Financial Officer, Jason Ruse, our Chief Investment Officer, Patrick Schaefer, and our Chief Accounting Officer, Brandon Satoran. I'll provide brief highlights on the company's performance and activities for the year. 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 2023 results, and we are pleased with the solid earnings power of the portfolio, despite operating in somewhat challenging market conditions. During the year, we saw a 10% increase in total investment income and a 16% increase in core investment income year over year. Additionally, our net asset value per share increased from $22.65 per share to $22.76 per share quarter over quarter. Credit quality also improved in the quarter, with a reduction in non-accruals on a cost, market value, and company count basis. We continued our accretive repurchase program, purchasing 101,680 shares at an average cost of approximately $1.8 million during the fourth quarter. Due to the continued strong performance this past quarter, the Board of Directors was able to approve another strong dividend for the first quarter of 2024 in the amount of 69 cents per share, a level that represents a 12.1% annualized return on that asset value. For the full year 2023, total dividends distributed to shareholders amounted to $2.75 per share, representing a 7.4% increase as compared to the dividend distributed in 2022. Turning to conditions in our primary market, new deal activity began picking up in late Q4, and while our primary market has been consistently active for most of 2024 so far, deal activity during 2023 as a whole was meaningfully down relative to 2022 and 2021. On the sponsor finance front, the fourth quarter deal activity began to tick up through a combination of valuation expectations being more reasonable and a belief by most industry participants that interest rates had either reached their peak or near enough that new buyers could reasonably estimate their cost of capital. In both the sponsor and non-sponsor activity, we continue to find the investment opportunities to be very attractive, giving the combination of higher benchmark rates, lower leverage on new deals, higher equity contributions from sponsors, and better documentation. As has been the case for the last couple of quarters, we continue to be very selective on new investment opportunities, and have overall found investments in existing portfolio companies more attractive in new borrowers. To that end, during the fourth quarter, 55% of our capital deployed was in existing portfolio companies as compared to 45% being deployed into new borrowers, three new borrowers to be specific. Our goal continues to be to maintain an exceptionally diversified portfolio and invest in companies that have the potential to provide strong returns for our shareholders. Refocusing on Portman Ridge, we continue to believe our buyback, our stock remains undervalued throughout 2023 and consistently repurchased shares under a renewed stock purchase program. During the year, we repurchased an incremental 224,933 shares for an aggregate cost of approximately $4.4 million. This compares to an aggregate cost of $3.8 million for full year 2022. Consistent with prior years, the company's board of directors renewed our $10 million stock buyback program for another year. And with that, I will turn the call over to Patrick Shaver, our chief investment officer, for a view of our investment activity.

Thanks, Ted. Turning now to slide five of our presentation and the sensitivity of our earnings to interest rates. As of December 31, 2023, approximately 90% of our debt portfolio were either floating rate were either floating rate with a spread to the interest rate index such as SOFR or prime rate, with substantially all of these being linked to SOFR. As you can see from the chart, the underlying benchmark rates of our assets during the quarter lagged the prevailing market rates and still remain below the SOFR rates as of March 8, 2024, but between the market transition last year from LIBOR to SOFR and the recent pause from the Fed, the gap is the narrowest it has been since the onset of the Fed rate hike cycle. the Fed rate hike cycle. For illustrative purposes, if all of our assets were to reset to a three-month SOFR rate, we would expect to generate an incremental $86,000 of quarterly income. Having said that, slide seven shows the aggregate impact to NII on a run rate basis of both our assets and liabilities as of December 31st, 2023. Given the relatively shallow benchmark curve and limited financial impact of this analysis, we will likely be retiring the slide going forward from our earnings presentations, as we have been relatively in equilibrium for the past few quarters. Skipping down to slide 11, originations for the fourth quarter remain at a lower level than prior year fourth quarter, as well as below the repayment levels, resulting in net repayments and sales of approximately $30.1 million. Our new investments made during the quarter are expected to yield a spread to SOFR of 798 basis points on par value, and the investments were purchased at a cost of approximately 96.3% of par. Our investment securities portfolio at the end of the fourth quarter remained highly diversified. We ended the year with investments spread across 27 different industries and 100 different entities, all while maintaining an average par balance per entity of approximately $3.1 million. Turning to slide 12, In aggregate, securities on non-accrual status remain relatively low and decreased to seven investments at the end of the fourth quarter of 2023, as compared to eight investments on non-accrual status as of September 30, 2023, as one of our borrowers emerged from bankruptcy in Q4 and our restructured loan returned to cash pay. These seven investments on non-accrual status at the end of the fourth quarter of 2023 are represent 1.3% and 3.2% 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 $373 million, which represents a blended price of 94.3% of par and is 88% comprised of first lien loans at par value. Assuming a par recovery, Our December 31st, 2023 fair values reflect a potential of $29.2 million of incremental NAV value, a 13.7% increase, or $3.12 per share, excluding any recovery on non-accrual investments. If we were to overlay an illustrative 10% default rate and 70% recovery to the entire debt securities portfolio, again, excluding non-accrual investments, the incremental NAV value potential would be $1.83 per share, or an 8% increase to NAV per share as of December 31, 2023. Finally, turning to slide 14, if you aggregate the three portfolios acquired over the last three years, we have purchased a combined $434.8 million of investments and have realized over 82% of these investments at a combined realized and unrealized mark of 102% of fair value at the time of closing the respective mergers. I'll now turn the call over to Jason to further discuss our financial results for the period.

Thanks, Patrick. As both Ted and Patrick previously mentioned, our results for the fourth quarter and full year 2023 reflect strong financial performance. Our total investment income for the full year 2023 was $76.3 million, of which $63.5 million was attributable to interest income from the debt securities portfolio. This compares to total investment income for the full year 2022 of $69.6 million, of which $55.8 million was attributable to interest income from the debt securities portfolio. The increase was largely due to growth in the previously discussed interest income, PIC, dividend, and fee income. Excluding the impact of purchase price accounting, our core investment income for the year was $74.5 million, an increase of $10.3 million as compared to core investment income of $64.2 million in 2022. Our net investment income for the full year 2023 was $34.8 million, or $3.66 per share. As of December 31, 2023 and December 31, 2022, the weighted average contractual interest rate on our interest-earning debt securities was approximately 12.5% and 11.1%, respectively. We continue to believe the portfolio remains well-positioned to generate incremental revenue in future quarters due to the current rate environment. Total expenses for the year ended December 31, 2023 were $46.8 million, compared to total expenses of $40.7 million for the full year, 2022. This increase was largely due to an increase in interest and amortization of debt issuance costs, which was largely driven by the increase in interest rates on the company's liabilities. Our net asset value for the fourth quarter of 2023 was $213.5 million or $22.76 per share, an increase of $0.11 per share as compared to $214.8 million or $22.65 per share in the third quarter of 2023. The quarter-over-quarter increase in NAV per share, despite total NAV decreasing slightly, was predominantly driven by the repurchase of 101,680 shares during the fourth quarter. Turning to the liability side of the balance sheet, as of December 31, 2023, we had a total of $325.7 million par value of borrowings outstanding at a current weighted average interest rate of 7%. This balance was comprised of $92 million in borrowings under our revolving credit facility, $108 million of 4.78% notes due 2026, and $125.7 million in secured notes due 2029. As of the end of the year, we had $23 million of available borrowing capacity under the senior secured revolving credit facility and no remaining borrowing capacity under the 2018-2 notes as the reinvestment period ended shortly after our draw on November 20, 2022. As of December 31, 2023, our leverage ratio was 1.5 times on a gross basis and 1.2 times on a net basis. From a regulatory perspective, our asset coverage ratio at year-end was 165%. Finally, and as announced March 13th, 2024, a quarterly distribution of 69 cents per share was approved by the board and declared payable on April 2nd, 2024 to stockholders of record at the close of business on March 25th, 2024. This is a one cent per share distribution increase as compared to the first quarter of 2023. Total stockholder distributions for 2023 amount to $2.75 per share. With that, I will turn the call back over to Ted.

Thank you, Jason. Ahead of questions, I'd like to reemphasize that we believe we are well positioned to take advantage of the current market environment as shown throughout 2023. Through our prudent investment strategy, we believe we will be able to deliver strong returns to our shareholders in 2024. Thank you once again to all of our shareholders for your ongoing support. This concludes our prepared remarks, and I'll turn over the call for any questions.

Thank you. The floor is now open for your questions. To ask a question this time, please press star followed by the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Christopher Nolan with Leidenberg. Your line is open.

Hey, guys. One time reimbursement expense relate to, please.

Yeah. Hey, Chris. This is Jason. That's a reimbursement to the fund related to and for administrative transition services paid to personnel of Ohio Garrison and HCAP following the acquisition of those BDCs.

Okay. And then given the 2018-2 secured notes are no longer in their reinvestment period, and given the slow, cautious investment perspective you guys are taking on new investments, how should we look at the balance sheet growing or not growing in coming quarters?

Yeah. Hey, Chris, it's Patrick. So I'd say I think the way I would frame it is I think relative to December 31st, I think you could reasonably expect more of a reduction in terms of our liabilities. As you saw at the end of the quarter, we had something like $70 million of cash on the balance sheet. I think it's reasonable to assume that a chunk of that is ultimately going to go towards debt repayment. But I would say kind of absent that, we would expect kind of generally speaking over the course of the year, I would imagine to be in a relatively stable place. I mean, if you assume, again, some chunk of that is repaid, you'd probably be down to something like somewhere between 1.3 and 1.4 times gross leverage. um you know and and probably on the lower end from a net leverage perspective like the same net leverage that that we have for the quarter um and that kind of is right within our our wheelhouse in terms of what we set our kind of target leverage ranges on a long-term basis so i think from that point point forward you you know you could reasonably expect you know relatively consistent uh portfolio size again obviously kind of timing around you know when things you know are repaid versus versus new investments but i think generally speaking we're probably on the tail end of sort of our kind of decrease in our portfolio in favor of debt repayment.

Gotcha. And then final question is on the driver, I noticed that ATP oil is no longer non-accrual. Was the exit from that the driver for the realized losses?

So, no, I don't think ATP – was ever on non-accrual. It's an equity position, so it doesn't have a stated coupon or anything to otherwise have it accrue.

The realized losses you're seeing there, Chris, are related to primarily a couple of CLOs that were called this last quarter, and as a result, we flipped... previously recognized unrealized losses and to realize this quarter.

Gotcha. And you guys are holding the equity strips on those CLOs, right? Correct.

I mean, again, as Jason mentioned, I think one or two of them finally got called. So no, but broadly speaking, when you look at our CLO bucket, that is the equity strips.

I'll get back in line. Thank you.

Our next question comes from the line of Paul Johnson with KBW. Your line is open.

Yeah, good morning. Thanks for taking my question.

I was sort of asked on the reimbursement, but I'm just curious, are those expenses that the advisor essentially reimbursed for this quarter, are those expenses done and over with at this point, or do you expect there will be more this year or Where do those stand?

No. No, that was a one-time expense reimbursement. And I would say for a good run rate on administrative expenses, you should look at the quarter amount for that being roughly the $400,000, $450,000. That's the quarterly run rate going forward. So you should see that.

Okay. Got you. Okay. And then, yeah, thanks for that. And then as far as the realization, I mean, it sounds like most of that is driven by the CLOs this quarter getting called away. I mean, were those – were most of those realized losses that you took from that? I mean, that's obviously closing out those positions. Were those already marked, or was there any sort of extra, you know, mark down in the quarter from those?

Yeah, about – So you're seeing total like 15.6 total realized loss. About 14.4 of that was flipped from unrealized to realized. Then the remainder was incremental this quarter related to a couple of other CLO positions that we still hold.

Okay. Appreciate that. That's helpful. And then, you know, in terms of just kind of leverage in the portfolio. You know, obviously, you're sitting in a pretty good spot in the net leverage basis. I mean, is this kind of where you'd like to have the portfolio sort of running going forward around these levels, or do you feel, you know, comfortable

Yeah, it's a great question. I mean, we've provided guidance on where we want to be in terms of target leverage range. And obviously, on a net basis, we're below the low end of that. You know, the investment environment today is very attractive, like we're seeing very widespread and obviously high SOFR. So it is a decent deployment environment. But, you know, we're continuing to be pretty prudent about investing money. So I don't think you're going to see a big spike in leverage. But I think we are operating at the low end of our target range.

Okay. And then this last one for me, a simple one, but on the share purchases for the quarter, do you guys have any on hand an estimation of how, you know, what sort of share basis that was secretive to have this quarter?

Yeah, we'll have to get back to you on that one. I don't have that on hand. Okay. No problem.

No problem. All right. Thanks for taking my questions. Thanks.

Next question comes from the line of Steven Martin with Slater. Your line is open.

Hi. Most of my questions have been asked and answered. Can you talk about the trends in PIC for the quarter? And also, I know you've talked about the portfolio for the quarter, but we're close to the end of the quarter. Can you say anything about deployments and repayments so far or where you expect?

Yeah, I think starting with your latter question, look, I think probably where we sit today we might be a little bit down still for the quarter, but there's a couple things that we're working on just from an investment perspective. So as I kind of mentioned to Christopher Nolan, like, you know, just kind of depending on whether that, you know, some of those things ultimately hit in, you know, March versus get kind of finalized in early April, obviously, you know, affects a little bit of that. But I would say we're probably still sort of a slight net repair.

Okay. And on the pick?

Yeah, on the pick, look, I wouldn't expect there to be meaningful trends in any direction. As we've talked about before, there are lots of instances where as we're thinking about an investment in a security, we're taking the combination of cash and PIC and thinking about it as an aggregate investment. From our perspective, if we think we can structure a higher overall returning piece of paper but a little a small component of that is PIC, we think that's an attractive opportunity to do so. Obviously, there are small instances where we intentionally go into a transaction with an all PIC security, but I'd say generally speaking, if you look at our PIC investment, our PIC income as a whole broadly, it's sort of in situations where there is a mix of cash and PIC component to the securities.

Okay, and can you talk about the portfolio restructurings, leverage ratio within the portfolio, what you're expecting in terms of... Yeah, I think we... No, no, great question.

I think we... It's somewhere on our slides. I think our leverage ratios are kind of roughly flat from the portfolio quarter over quarter. Again, I think generally speaking, we've mentioned this trend, but new positions tend to be sort of, I'll say, lower levered than perhaps legacy positions just because of the interest coverage and sort of how borrowers are thinking about that. But I would say, again, on the whole, if you look at our market as well as BDCs broadly, underlying performance of companies kind of continues to hold up. People are still seeing... somewhat decent revenue in EBITDA trends. So I'd say on the margin, you know, we probably would expect kind of, you know, flat to decreasing leverage over the whole of our portfolio.

And amendments? Credit quality, you know, like you saw this last quarter, you know, not accruals were down. I think you're going to, I think credit quality as we sit here today is stable across the portfolio.

And what about amendments and, you know, extensions?

I would say there's probably still a little bit of an uptick in extension activity in general just because, again, as we've kind of mentioned some of these trends, like the M&A market is coming back, but I think, generally speaking, sponsors obviously try and get themselves as much flexibility as they can in terms of when they might want to exit a portfolio. So we're definitely seeing sort of, you know, still like kind of some reasonable amount of sort of extension activity there. just because, look, we like the credit, the company's performing fine, we're happy to give the sponsor two more years to decide whether they want to exit the company. But I wouldn't say there's any uptick in forced extensions and things like that. I think it's generally a relatively stable-slash-average type of environment for that sort of activity.

And in the past, you've said you were getting paid for those. Would you still make the same comment?

Yes, we still either get, you know, a fee or some type of pricing. Again, the market right now, we are seeing where we sit today, like broadly speaking, spreads coming in as a whole in terms of new deals. So, you know, sometimes keeping the spread the same is the same, is an economic benefit to us as opposed to some type of repricing transaction. But yes, I'd say generally speaking that those activities are not for free. But again, in a situation where a company has meaningfully delevered and they want an incremental two or three years, keeping it at, let's say, S650 as opposed to getting priced down to S600 is actually an economic benefit to us. So I would say you're still getting paid for it, but sometimes, depending on the characteristics, it's a little bit less obvious how you're getting paid.

All right. Thank you very much.

Next question comes from the line of David Miyazaki with Confluence Investment Management. Your line is open.

Thank you. Thank you for taking my questions. Could you just remind us what your longer-term plan is for your CLO investments? You're down to about $9 million now that you're holding. Where do you plan to take this in the future?

Yeah, I mean, the plan is to take it to zero. I mean, we're trying to wind down the portfolio and get the CLOs called. So the plan is to take it to zero.

Okay. That was my thought on that. And does that affect kind of where your target leverage ratio is? As that winds down, do you feel like you have more capacity to take the balance sheet leverage up higher?

My opinion, not particularly. Again, it's kind of $8 million. It doesn't have kind of a meaningful impact on the asset side. We generally feel like we want to be in the 1.25 to 1.4 times net leverage. So I wouldn't say that that necessarily has a meaningful impact on how we think about leverage for the portfolio as a whole and how we think about either taking up or down that leverage. I'd say we probably would be more focused on sort of the macro in terms of where we think sort of the economy broadly as well as how attractive we think the investing environment is, that would probably be more so driving our leverage decisions as opposed to the CLO portfolio itself.

Okay, great. Thanks. And then if I just kind of step back and widen the lens a little bit, I mean, Ted, you and the team have had a lot of experience in the middle market. And one of the things that – managers in the industry tend to do is talk about the ideal kind of borrower profile to go after, and it's almost always whatever they happen to be working on. And since you've worked in the upper middle market and you've worked with some of these acquisitions that have been from the lower middle market, at $100 million, it looks like in EBITDA, it's been kind of your home kind of neighborhood as far as what your weighted average EBITDA is. Is that pretty close to what you say the median would be? And how do you feel about where you are? Do you like that neighborhood or do you think that you should be going up bigger is one of the trends to hear about? Or do you like sticking in the middle or lower side where you have more bargaining power?

Yeah, I think the latter. I mean, our franchise is really what I would call big enough. So we don't want to lend to companies below $15 million of EBITDA. Our weighted average EBITDA in our portfolio, I think, is a little misleading. It skews high versus where I think our real franchise is. I mean, the reality is some of our peers are committing head-to-head with the syndicated markets and the banks, which we are not. And just given our size as a platform, we just think, you know, like you can see our average spread to LIBOR is L750 versus a market at the large cap end of like L525. So... Our credit quality is very stable. Non-accruals are really low. So we think as long as the company is big enough, we think we get paid extra return, and we don't see a discernible difference in credit quality. So I would say that weighted average EBITDA always looks high if you really think about our core franchise, and it's driven by a couple outliers.

Okay. Yeah, that often tends to be one of the limitations of looking at weighted averages.

Yeah, I mean, also, to that point, like, there's a lot of instances where if we get involved in a roll-up acquisition strategy at 40 of EBITDA, that might be 180 of EBITDA now, but obviously our original investment was 40, and that's kind of how we look at it, and so, too, we tend to be a little bit more active in sort of, I would say, the quote-unquote syndicated market, but more so, like, in periods of stress where, you know, we're looking at acquiring assets off of bank balance sheets and things like that, and those would tend to skew higher EBITDA, but that is more of an opportunistic purchasing as opposed to, as Ted said, the core of our franchise. Right.

Okay. Last topic. I like slide 14. It's just good to see the history of how you've marched through acquiring assets. The industry has a mixed bag of outcomes with regard to acquiring portfolios of loans from other managers. And I mean, what can you kind of say about how your realizations or even what it used to kind of ongoing wind downs have been relative to your expectations? And when we look at the larger amounts that are still held, are you getting to a point where the proportion of difficult loans and conditions is higher now because the end of the portfolio is harder to wind down, or do you think that the progress is going to be relatively linear?

I think the latter. It's a great question, actually. I mean, the reality is if you look at slide 14, I mean, the Oak Hill portfolio were basically out of harvest for less than $10 million of exposure. And it's not on here because that's like the original platform was KCAP. And we're down to a very small number in KCAP too. So really the legacy loans relate to Garrison. A number of those loans, you know, some are more challenged than not, but most of them are lower yielding. And so Garrison had an on-balance sheet CLL structure. So those are the types of loans, those lower spreading loans tend to be the ones that get refinanced later. That being said, you know, we closed the Garrison transaction, you know, end of 2020. So we're three and a half years into that portfolio. So a lot of those legacy loans are coming up on maturities and other things. One suggestion that a very smart shareholder said to us yesterday is we may want to break out of that 69 how much we've extended. Because again, we tend to be, in the Garrison portfolio specifically, we tend to be a small player. So we usually take the realization. There has been some instances of us extending because we like the credit and we could get more spread. And so we should break that out for people around proactive extensions versus what else is in the portfolio. And then we should also break out for you guys what's like low yielding as a percentage of the remaining 69 million. But to answer your very last question, we think it's going to continue to be linear because a lot of these are coming up on, you know, two years or, you know, 18 months from their maturity date.

Okay. Yeah, that's very helpful. I think that you probably have... one of the best, if not the best, perspective on taking over portfolios and working them out. And you've had a lot of success in recycling this capital and seemingly not come across big surprises to the downside in what you're doing. So it's helpful to have some granularity on that. how that's actually unfolded and what's left. So I appreciate that.

It's good feedback. That's good feedback. We got similar feedback from somebody yesterday, and I think it's good feedback.

Okay. Thank you very much.

Thanks, Dave.

Next question comes from the line of Deepak Sarpangal with Repertoire Partners. Your line is open.

Thank you. Hey, Ted, Patrick, and team. Hey, how are you? Yeah, it seemed like more further progress on both the portfolio management side in terms of improvements in leverage and portfolio quality and also definitely on the capital allocation side. I know you've been buying back shares for a few years now, but... but kind of seems to be increasing in size of that as well, given the accretion that it's creating. A few questions on each of those. One, on the buybacks and capital allocation, I know that you've been pretty consistent in repurchasing shares, and you've talked about seeing your stock as undervalued, but you've also talked about the environment increasingly becoming a pretty attractive place to invest. How do you think about balancing those two alternatives and where to deploy your capital, especially because it looked like maybe in the previous year, you leaned into some of the weakness in the credit market and appropriately so, had a lot more deployments than repayments on a net basis. And then I think also similarly now, as there was a little bit of an improvement, you've seen now more repayments or paydowns. But maybe one, if you could talk, because I know it looks like some of the newer investments are yielding quite a high number up front and other good terms. So that was kind of like the first question just on the capital allocation side. And then on the portfolio management side, it seemed like we don't have the full details, obviously, in terms of gross versus net by industry, but it seemed like there was either an exit or reduction in some of the areas that are probably those that you viewed as less attractive, whether it's automotive, consumer, energy. I know you already have pretty low exposures there, but can you maybe talk about if there's anything that we can't see in that data in terms of industry breakdown? And then finally, it looked like there were some interesting new investments. Just curious to learn more about that. In particular, I think the newer ones were Murray, Cinemedia Holdings, and Tactical Air Systems. And then I think there were some follow-on investments, Metalworks and LB Holdco. We'd love to hear more about those. Thank you.

Well, why don't I start, and Patrick can chime in as well. I mean, the new investments that we're doing were... like are incredibly attractive. And you can see it, you know, we've picked up on a, like a portfolio basis, 75 basis points of incremental spread over even just two quarters. And then obviously silver's higher. You know, the post-regional banking crisis, there's just no one lending last year. And so we were able to do really low levered, wide spreading deals. So we're really excited about that vintage. I would tell you that it's got more competitive. So like, you know, spreads have definitely come down year to date, starting in about February, particularly on generic sponsor finance. Just supply to ban. There are just not that many good LBOs out there. So our new investments we're very excited about. On the exit side, yeah, you brought it up. I mean, we had a stressed auto supplier that we picked up in one of our acquisitions that we were taken out of this quarter. And I would tell you we're very excited to be taken out in many different ways. And so that was good. And away from that, I think a lot of the exit activity was relatively normal course. But yeah, the auto supplier in particular was something we were very excited to not have in our portfolio anymore. And then on capital allocation, I would say, you know, like this last year was the first year that I've run a BDC ever where it made, for the first time ever, the math made more sense for us to deploy capital than to buy back stock. But I think our philosophy is we should always be buyback stock, particularly when we're trading below NAV, because we believe that NAV is NAV. And we think, you know, you heard Patrick's comments. We think there's like, you know, 10 plus percent NAV upside in just things maturing at par. So we just think it's good discipline to always be buyback stock, regardless of what the math says. But the math for the first time and, you know, basically in a long, long time would support actually new deployment as well as buyback stock. So, you know, as you said, we've increased our buyback program, but we're also, you know, finding really good things to invest our money in.

Yeah, and Deepak, taking some of your portfolio questions. So I'll hit a couple of them, and I apologize if I don't get all of them, since you listed a couple. I just can't necessarily remember them all. But starting at the end, LB Holdco said, that was essentially a restructuring of a position we had in Lucky Bucks. The company emerged from bankruptcy, and we received debt and equity as part of a take-back. So that's just kind of a restructuring in the quarter. Northeast Metalworks, I think, dates back to Q2. It was a legacy Harvest Capital, HCAP portfolio company. We actually did a refinancing with the company where we brought in another lender, reduced our exposure, and sort of put in place a new facility. So that's really just kind of like a, again, I'd call it a refinancing, but shows up as different securities because we kind of brought in another person and reduced exposure there. On to your three new borrowers. Again, just to give you kind of a bit of a flavor, Tactical Air, It's a defense business. They have two main segments. One is they actually work with the Air Force and the Navy to retrofit older airplanes with their weapon systems and cockpit technology and things like that. That's one part of the business. They're one of the only folks that do that. Then The other part of their business is they actually – I forget the technical name of the segment, but they do what's called like the red team. So they actually – their team, they have pilots and airplanes, and they actually kind of train and help with training exercises for the Navy and the Air Force, essentially acting as sort of the quote-unquote enemy combatants for kind of training simulations. Right. Pretty good defensive business, you know, secured by, you know, pretty stable contracts. We really like that business. Moray, and we did a first-ling term loan there. Moray Global Corporation actually provides, it's a tech-enabled business that provides, like, legal solutions and consulting services. So a lot of what they do is around software implementation and ongoing maintenance for Fortune 500 companies within their kind of compliance and legal departments. to help manage various different work streams between general legal paperwork as well as litigation and lawsuits and discovery. And again, it's a fairly large gamut of things that they support Fortune 500 companies with. That particular transaction, the company was making an acquisition in a different jurisdiction, and we structured a first lien loan with some warrants attached to it as well. that we think is a pretty attractive overall investment and security. And then CineMedia, which will be the last one, that was a refinancing of an existing portfolio company of a large European private equity firm. It's a U.S. business, but it's a European private equity firm owns it. They do a couple of different things around sort of, I'll call it like video services and technology. So part of what they do is they actually – They have like, it is there like cards and software that go into set-top boxes for kind of traditional broadcast technology. So you can think mostly in kind of Europe where you have sort of, you know, Sky TV, SIM cards and things like that. That's a piece of their business. They also do, they work with content providers to help them deliver their video and streams sort of between, you know, I'll call it like a Netflix and sort of, you know, the Internet provider who's sort of, you know, piping into your homes. And then lastly, they actually, they also work with video streaming in a different area, but they help with ad targeting, content performance within applications and apps, and sort of, you know, broadband, you know, broadband device management and things like that. So it's a fairly diverse set of revenue streams. Again, we're a senior secured first lien loan. Again, that's priced at $775 at $96.50. So, again, that's just kind of a flavor of that. And if you just kind of think about that, you know, at a higher level, we've got a defense business and two business services that we're kind of adding, which we feel like are pretty attractive industries. And then Ted already alluded to it, but Exit hit a, you know, a automotive supplier, which we would have no intention of, you know, getting back into that industry.

That all sounds great. Yeah, I mean, I certainly recognize that you already have most of your investments in business services, high-tech industries, and healthcare and pharma, but seems like kind of a continued progression even more along that direction, which seems great. And then just a quick follow-up. I don't have the details on the Lucky Bucks thing, but I had read something about how the company was, um, you know, they're suing or in litigation with the former promoter of that business for a pretty big number. Um, it, is that something that could be interesting upside or is it kind of immaterial given the size of your equity, uh, stake, um, there?

I would not say it's immaterial. Um, but, uh, what I would say in general is, uh, look, it's, it's public. So I can, I can, I can, I can talk to some extent on it, but, um, I would say that the facts look pretty persuasive, but you kind of never know when you get involved in litigation. So I would say, you know, it feels pretty interesting to us, obviously, to be pursuing. But I would, again, I would say that that's not kind of really baked into how we think about the equity position there. So again, you can kind of take that for what it's worth, but I If you kind of read through the lawsuit, I'd say the facts are, you know, candidly pretty overwhelming. But having said that, like, you know, legal, I wouldn't want to handicap a legal process.

Sounds great. Keep up the great work. Thank you.

Thanks.

There are no further questions at this time. Mr. Ted Goldthorpe, I turn the call back over to you.

Thank you very much. Thank you all for attending our call. And as per always, please reach out to us with any questions, which we're happy to discuss. We look forward to speaking to you again on our next call, and thank you so much.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect. you Thank you. Welcome to Portman Ridge Finance Corporation's fourth quarter and full year 2023 earnings conference call. An earnings press release was distributed yesterday, March 13th, 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-K file yesterday with the SEC. As a reminder, this conference call is being recorded by 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. Portland 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 Portland Ridge Finance Corporation, Jason Roos, Chief Financial Officer, Patrick Schaefer, Chief Investment Officer, and Brandon Satoran, Chief Accounting Officer. 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 fourth quarter and full year 2023 earnings call. I'm joined today by our Chief Financial Officer, Jason Ruse, our Chief Investment Officer, Patrick Schaefer, and our Chief Accounting Officer, Brandon Satoran. I'll provide brief highlights on the company's performance and activities for the year. 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 2023 results, and we are pleased with the solid earnings power of the portfolio, despite operating in somewhat challenging market conditions. During the year, we saw a 10% increase in total investment income and a 16% increase in core investment income year over year. Additionally, our net asset value per share increased from $22.65 per share to $22.76 per share quarter over quarter. Credit quality also improved in the quarter with a reduction in non-accruals on a cost, market value, and company count basis. We continued our accretive repurchase program, purchasing 101,680 shares at an average cost of approximately $1.8 million during the fourth quarter. Due to the continued strong performance this past quarter, the Board of Directors was able to approve another strong dividend for the first quarter of 2024 in the amount of 69 cents per share, a level that represents a 12.1% annualized return on that asset value. For the full year 2023, total dividends distributed to shareholders amounted to $2.75 per share, representing a 7.4% increase as compared to the dividend distributed in 2022. Turning to conditions in our primary market, new deal activity began picking up in late Q4, and while our primary market has been consistently active for most of 2024 so far, deal activity during 2023 as a whole was meaningfully down relative to 2022 and 2021. On the sponsor finance front, the fourth quarter deal activity began to tick up through a combination of valuation expectations being more reasonable and a belief by most industry participants that interest rates had either reached their peak or near enough that new buyers could reasonably estimate their cost of capital. In both the sponsor and non-sponsor activity, we continue to find the investment opportunities to be very attractive, giving the combination of higher benchmark rates, lower leverage on new deals, higher equity contributions from sponsors, and better documentation. As has been the case for the last couple of quarters, we continue to be very selective on new investment opportunities, and have overall found investments in existing portfolio companies more attractive in new borrowers. To that end, during the fourth quarter, 55% of our capital deployed was in existing portfolio companies as compared to 45% being deployed into new borrowers, three new borrowers to be specific. Our goal continues to be to maintain an exceptionally diversified portfolio and invest in companies that have the potential to provide strong returns for our shareholders. Refocusing on Portman Ridge, we continue to believe our buyback, our stock remains undervalued throughout 2023 and consistently repurchased shares under a renewed stock purchase program. During the year, we repurchased an incremental 224,933 shares for an aggregate cost of approximately $4.4 million. This compares to an aggregate cost of $3.8 million for full year 2022. Consistent with prior years, the company's board of directors renewed our $10 million stock buyback program for another year. And with that, I will turn the call over to Patrick Shaver, our Chief Investment Officer, for a view of our investment activity.

Thanks, Ted. Turning now to slide five of our presentation and the sensitivity of our earnings to interest rates. As of December 31, 2023, approximately 90% of our debt portfolio were either floating rate were either floating rate with a spread to the interest rate index such as SOFR or prime rate, with substantially all of these being linked to SOFR. As you can see from the chart, the underlying benchmark rates of our assets during the quarter lagged the prevailing market rates and still remain below the SOFR rates as of March 8, 2024, but between the market transition last year from LIBOR to SOFR and the recent pause from the Fed, the gap is the narrowest it has been since the onset of the Fed rate hike cycle. the Fed rate hike cycle. For illustrative purposes, if all of our assets were to reset to a three-month SOFR rate, we would expect to generate an incremental $86,000 of quarterly income. Having said that, slide seven shows the aggregate impact to NII on a run rate basis of both our assets and liabilities as of December 31, 2023. Given the relatively shallow benchmark curve and limited financial impact of this analysis, we will likely be retiring the slide going forward from our earnings presentations, as we have been relatively in equilibrium for the past few quarters. Skipping down to slide 11, originations for the fourth quarter remain at a lower level than prior year fourth quarter, as well as below the repayment levels, resulting in net repayments and sales of approximately $30.1 million. Our new investments made during the quarter are expected to yield a spread to SOFR of 798 basis points on par value, and the investments were purchased at a cost of approximately 96.3% of par. Our investment securities portfolio at the end of the fourth quarter remained highly diversified. We ended the year with investments spread across 27 different industries and 100 different entities, all while maintaining an average par balance per entity of approximately $3.1 million. Turning to slide 12, In aggregate, securities on non-accrual status remain relatively low and decreased to seven investments at the end of the fourth quarter of 2023, as compared to eight investments on non-accrual status as of September 30, 2023, as one of our borrowers emerged from bankruptcy in Q4 and our restructured loan returned to cash pay. These seven investments on non-accrual status at the end of the fourth quarter of 2023 are represent 1.3% and 3.2% 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 $373 million, which represents a blended price of 94.3% of par and is 88% comprised of purchasing loans at par value. Assuming a par recovery, Our December 31st, 2023 fair values reflect a potential of $29.2 million of incremental NAV value, a 13.7% increase, or $3.12 per share, excluding any recovery on non-accrual investments. If we were to overlay an illustrative 10% default rate and 70% recovery to the entire debt securities portfolio, again, excluding non-accrual investments, the incremental NAV value potential would be $1.83 per share, or an 8% increase to NAV per share as of December 31, 2023. Finally, turning to slide 14, if you aggregate the three portfolios acquired over the last three years, we have purchased a combined $434.8 million of investments and have realized over 82% of these investments at a combined realized and unrealized mark of 102% of fair value at the time of closing the respective mergers. I'll now turn the call over to Jason to further discuss our financial results for the period.

Thanks, Patrick. As both Ted and Patrick previously mentioned, our results for the fourth quarter and full year 2023 reflect strong financial performance. Our total investment income for the full year 2023 was $76.3 million, of which $63.5 million was attributable to interest income from the debt securities portfolio. This compares to total investment income for the full year 2022 of $69.6 million, of which $55.8 million was attributable to interest income from the debt securities portfolio. The increase was largely due to growth in the previously discussed interest income, PIC, dividend, and fee income. Excluding the impact of purchase price accounting, our core investment income for the year was $74.5 million, an increase of $10.3 million as compared to core investment income of $64.2 million in 2022. Our net investment income for the full year 2023 was $34.8 million, or $3.66 per share. As of December 31, 2023 and December 31, 2022, the weighted average contractual interest rate on our interest-earning debt securities was approximately 12.5% and 11.1%, respectively. We continue to believe the portfolio remains well-positioned to generate incremental revenue in future quarters due to the current rate environment. Total expenses for the year ended December 31, 2023 were $46.8 million, compared to total expenses of $40.7 million for the full year, 2022. This increase was largely due to an increase in interest and amortization of debt issuance costs, which was largely driven by the increase in interest rates on the company's liabilities. Our net asset value for the fourth quarter of 2023 was $213.5 million, or $22.76 per share, an increase of $0.11 per share as compared to $214.8 million or $22.65 per share in the third quarter of 2023. The quarter-over-quarter increase in NAV per share, despite total NAV decreasing slightly, was predominantly driven by the repurchase of 101,680 shares during the fourth quarter. Turning to the liability side of the balance sheet, as of December 31, 2023, we had a total of $325.7 million par value of borrowings outstanding at a current weighted average interest rate of 7%. This balance was comprised of $92 million in borrowings under our revolving credit facility, $108 million of 4.78% notes due 2026, and $125.7 million in secured notes due 2029. As of the end of the year, we had $23 million of available borrowing capacity under the Senior Secured Revolving Credit Facility and no remaining borrowing capacity under the 2018-2 notes as the reinvestment period ended shortly after our draw on November 20, 2022. As of December 31, 2023, our leverage ratio was 1.5 times on a gross basis and 1.2 times on a net basis. From a regulatory perspective, our asset coverage ratio at year-end was 165%. Finally, and as announced March 13th, 2024, a quarterly distribution of 69 cents per share was approved by the board and declared payable on April 2nd, 2024 to stockholders of record at the close of business on March 25th, 2024. This is a one cent per share distribution increase as compared to the first quarter of 2023. Total stockholder distributions for 2023 amount to $2.75 per share. With that, I will turn the call back over to Ted.

Thank you, Jason. Ahead of questions, I'd like to reemphasize that we believe we are well positioned to take advantage of the current market environment as shown throughout 2023. Through our prudent investment strategy, we believe we will be able to deliver strong returns to our shareholders in 2024. Thank you once again to all of our shareholders for your ongoing support. This concludes our prepared remarks, and I'll turn over the call for any questions.

Thank you. The floor is now open for your questions. To ask a question this time, please press star followed by the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Christopher Nolan with Leidenberg. Your line is open.

Hey, guys. One time reimbursement expense relate to, please.

Yeah. Hey, Chris. This is Jason. That's a reimbursement to the fund related to and for administrative transition services paid to personnel of Ohio Garrison and HCAP following the acquisition of those BDCs.

Okay. And then given the 2018-2 secured notes are no longer in their reinvestment period, and given the slow, cautious investment perspective you guys are taking on new investments, how should we look at the balance sheet growing or not growing in coming quarters?

Yeah. Hey, Chris, it's Patrick. So I'd say I think the way I would frame it is I think relative to December 31st, I think you could reasonably expect more of a reduction in terms of our liabilities. As you saw at the end of the quarter, we had something like $70 million of cash on the balance sheet. I think it's reasonable to assume that a chunk of that is ultimately going to go towards debt repayment. But I would say kind of absent that, we would expect kind of generally speaking over the course of the year, I would imagine to be in a relatively stable place. I mean, if you assume, again, some chunk of that is repaid, you'd probably be down to something like somewhere between 1.3 and 1.4 times gross leverage. you know, and probably on the lower end from a net leverage perspective, like the same net leverage that we have for the quarter. And that kind of is right within our wheelhouse in terms of what we set our kind of target leverage ranges on a long-term basis. So I think from that point forward, you know, you could reasonably expect, you know, relatively consistent portfolio size. Again, obviously kind of timing around, you know, when things, you know, are repaid versus new investments. But I think generally speaking, we're probably on the tail end of sort of our kind of decrease in our portfolio in favor of debt repayment.

Gotcha. And then final question is on the driver, I noticed that ATP oil is no longer non-accrual. Was the exit from that the driver for the realized losses?

So, no, I don't think ATP – um, was ever on non-accrual. It's an equity position. So it's not, it doesn't have like a sort of stated coupon or anything to, to otherwise, otherwise have it, have it accrue.

Um, uh, so I don't that, um, yeah, no, let me maybe the realized losses you're seeing there, Chris are related to primarily a couple of, uh, CLOs that, uh, were called this last quarter. And as a result, we flipped, um, previously recognized unrealized losses and to realize this quarter.

Gotcha. And you guys are holding the equity strips on those CLOs, right? Correct.

I mean, again, as Jason mentioned, I think one or two of them finally got called. So no, but broadly speaking, when you look at our CLO bucket, that is the equity strips.

I'll get back in line. Thank you.

Our next question comes from the line of Paul Johnson with KBW. Your line is open.

Yeah, good morning. Thanks for taking my question.

I was sort of asked on the reimbursement, but I'm just curious, are those expenses that the advisor essentially reimbursed for this quarter, are those expenses done and over with at this point, or do you expect there will be more of those this year? Where do those stand?

No. No, that was a one-time expense reimbursement. And I would say for a good run rate on administrative expenses, you should look at the quarter amount for that being roughly the $400,000, $450,000 that's the quarterly run rate going forward. So you should see that.

Okay. Got you. Okay. And then, yeah, thanks for that. And then as far as the realization, I mean, it sounds like most of that is driven by the CLOs this quarter getting called away. I mean, were those – were most of those realized losses from that? I mean, that's obviously closing out those positions. Were those already marked, or was there any sort of extra, you know, mark down in the quarter from those?

Yeah, about – So you're seeing total like 15.6 total realized loss. About 14.4 of that was flipped from unrealized to realized. Then the remainder was incremental this quarter related to a couple of other CLO positions that we still hold.

Gotcha. Okay. Appreciate that. That's helpful. And then, you know, in terms of just kind of leverage in the portfolio. Obviously, you're sitting in a pretty good spot in the net leverage basis. I mean, is this kind of where you'd like to have the portfolio sort of running going forward around these levels, or do you feel comfortable

Yeah, it's a great question. I mean, we've provided guidance on where we want to be in terms of target leverage range. And obviously, on a net basis, we're below the low end of that. You know, the investment environment today is very attractive, like we're seeing very widespread and obviously high SOFR. So it is a decent deployment environment. But, you know, we're continuing to be pretty prudent about investing money. So I don't think you're going to see a big spike in leverage. But I think we are operating at the low end of our target range.

Okay. And then this last one for me, a simple one, but on the share purchases for the quarter, do you guys have any on hand an estimation of how, you know, what sort of share basis that was secretive to have this quarter?

Yeah, we'll have to get back to you on that one. I don't have that offhand. Okay. No problem.

No problem. All right. Thanks for taking my questions. Thanks.

Next question comes from the line of Steven Martin with Slater. Your line is open.

Hi. Most of my questions have been asked and answered. Can you talk about the trends in PIC for the quarter? And also, I know you've talked about the portfolio for the quarter, but we're close to the end of the quarter. Can you say anything about deployments and repayments so far or where you expect?

Yeah, I think starting with your latter question, look, I think probably where we sit today, we might be a little bit down still for the quarter, but there's a couple things that we're working on just from an investment perspective. So as I kind of mentioned to Christopher Nolan, like, you know, just kind of depending on whether that, you know, some of those things ultimately hit in, you know, March versus get kind of finalized in early April, obviously, you know, affects a little bit of that. But I would say we're probably still sort of a slight net repair.

Okay. And on the pick?

Yeah, on the pick, look, I wouldn't expect there to be sort of meaningful trends in any direction. As we've kind of talked about before, you know, there are lots of instances where, like, you know, as we're thinking about an investment in a security, sort of we're taking the combination of cash and PIC and thinking about it as kind of an aggregate investment. So from our perspective, if, you know, we think we can, you know, structure a higher overall returning piece of paper but a little more a small component of that is PIC, we think that's an attractive opportunity to do so. Obviously, there are small instances where we intentionally go into a transaction with an all PIC security, but I'd say generally speaking, if you look at our PIC investment, our PIC income as a whole broadly, it's sort of in situations where there is a mix of cash and PIC component to the securities.

Okay, and can you talk about the portfolio restructurings, leverage ratio within the portfolio, what you're expecting in terms?

Yeah, I think we – no, no, great question. I think we – it's somewhere on our slides. I think our leverage ratios are kind of roughly flat from the portfolio quarter over quarter. Again, I think generally speaking, we've mentioned this trend, but new positions tend to be sort of, I'll say, lower levered than perhaps legacy positions just because of the interest coverage and sort of how borrowers are thinking about that. But I would say, again, on the whole, if you look at our market as well as BDCs broadly, underlying performance of companies kind of continues to hold up. People are still seeing... somewhat decent revenue in EBITDA trends. So I'd say on the margin, you know, we probably would expect kind of, you know, flat to decreasing leverage over the whole of our portfolio.

And amendments? Credit quality, you know, like you saw this last quarter, you know, not accruals were down. I think you're going to, I think credit quality as we sit here today is stable across the portfolio.

And what about amendments and, you know, extensions?

I would say there's probably still a little bit of an uptick in extension activity in general just because, again, as we've kind of mentioned some of these trends, like the M&A market is coming back, but I think, generally speaking, sponsors obviously try and get themselves as much flexibility as they can in terms of when they might want to exit a portfolio. So we're definitely seeing sort of, you know, still like kind of some reasonable amount of sort of extension activity there. just because, look, we like the credit, the company's performing fine, we're happy to give the sponsor two more years to decide whether they want to exit the company. But I wouldn't say there's any uptick in forced extensions and things like that. I think it's generally a relatively stable-slash-average type of environment for that sort of activity.

In the past, you've said you were getting paid for those. Would you still make the same comment?

Yes, we still either get, you know, a fee or some type of pricing. Again, the market right now, we are seeing where we sit today, like broadly speaking, spreads coming in as a whole in terms of new deals. So, you know, sometimes keeping the spread the same is the same, is an economic benefit to us as opposed to some type of repricing transaction. But yes, I'd say generally speaking that those activities are not for free. But again, in a situation where a company has meaningfully delevered and they want an incremental two or three years, keeping it at, let's say, S650 as opposed to getting priced down to S600 is actually an economic benefit to us. So I would say you're still getting paid for it, but sometimes, depending on the characteristics, it's a little bit less obvious how you're getting paid.

All right. Thank you very much.

Next question comes from the line of David Miyazaki with Confluence Investment Management. Your line is open.

Thank you. Thank you for taking my questions. Could you just remind us what your longer-term plan is for your CLO investments? You're down to about $9 million now that you're holding. Where do you plan to take this in the future?

Yeah, I mean, the plan is to take it to zero. I mean, we're trying to wind down the portfolio and get the CLOs called. So the plan is to take it to zero.

Okay. That was my thought on that. And does that affect kind of where your target leverage ratio is? As that winds down, do you feel like you have more capacity to take the balance sheet leverage up higher?

My opinion, not particularly. Again, it's kind of $8 million. It doesn't have kind of a meaningful impact on the asset side. We generally feel like we want to be in the 1.25 to 1.4 times net leverage. So I wouldn't say that that necessarily has a meaningful impact on how we think about leverage for the portfolio as a whole and how we think about either taking up or down that leverage. I'd say we probably would be more focused on sort of the macro in terms of where we think sort of the economy as broadly as well as how attractive we think the investing environment is, that would probably be more so driving our leverage decisions as opposed to the CLO portfolio itself.

Okay, great. Thanks. And then if I just kind of step back and widen the lens a little bit, I mean, Ted, you and the team have had a lot of experience in the middle market. And one of the things that – managers in the industry tend to do is talk about the ideal kind of borrower profile to go after. And it's almost always whatever they happen to be working on. And since you've worked in the upper middle market and you've worked with some of these acquisitions that have been from the lower middle market, at $100 million, it looks like in EBITDA, it's been kind of your home kind of neighborhood as far as what your weighted average EBITDA is. Is that pretty close to what you say the median would be? And how do you feel about where you are? Do you like that neighborhood or do you think that you should be going up bigger is one of the trends to hear about? Or do you like sticking in the middle or lower side where you have more bargaining power?

Yeah, I think the latter. I mean, our franchise is really what I would call big enough. So we don't want to lend to companies below $15 million of EBITDA. Our weighted average EBITDA in our portfolio, I think, is a little misleading. It skews high versus where I think our real franchise is. I mean, the reality is some of our peers are committing head-to-head with the syndicated markets and the banks, which we are not. And just given our size as a platform, we just think, you know, like you can see our average spread to LIBOR is L750 versus a market at the large cap end of like L525. So... Our credit quality is very stable. Non-accruals are really low. So we think as long as the company is big enough, we think we get paid extra return, and we don't see a discernible difference in credit quality. So I would say that weighted average EBITDA always looks high if you really think about our core franchise, and it's driven by a couple outliers.

Okay. Yeah, that often tends to be one of the limitations of looking at weighted averages.

Yeah, I mean, also, to that point, there's a lot of instances where if we get involved in a roll-up acquisition strategy at 40 of EBITDA, that might be 180 of EBITDA now. But obviously, our original investment was 40, and that's kind of how we look at it. And so, too, we tend to be a little bit more active in sort of, I would say, the quote-unquote syndicated market, but more so in periods of stress where we're looking at acquiring assets off of bank balance sheets and things like that, and those would tend to skew higher EBITDA, but that is more of an opportunistic purchasing as opposed to, as Ted said, kind of the core of our franchise. Right.

Okay. Last topic, you know, I like slide 14. It's always, I mean, it's just good to kind of see the history of how you've marched through acquiring assets. And, you know, the industry kind of has a mixed bag of outcomes with regard to acquiring uh portfolios of loans from from other managers and i mean what can you kind of say about how um your realizations or even what it used to kind of ongoing wind downs have been relative to your expectations and when we look at the the larger amounts that are still uh still held are you getting to a point where the proportion of difficult loans and conditions is higher now because the end of the portfolio is harder to wind down, or do you think that the progress is going to be relatively linear?

I think the latter. It's a great question, actually. I mean, the reality is if you look at slide 14, I mean, the Oak Hill portfolio were basically out of harvest for less than $10 million of exposure. And it's not on here because that's like the original platform was KCAP, and we're down to a very small number in KCAP too. So really the legacy loans relate to Garrison. A number of those loans, you know, some are more challenged than not, but most of them are lower yielding. And so Garrison had an on-balance sheet CLL structure. So those are the types of loans, those lower spreading loans tend to be the ones that get refinanced later. That being said, you know, we closed the Garrison transaction, you know, end of 2020. So we're three and a half years into that portfolio. So a lot of those legacy loans are coming up on maturities and other things. One suggestion that a very smart shareholder said to us yesterday is we may want to break out of that 69 how much we've extended. Because again, we tend to be, in the Garrison portfolio specifically, we tend to be a small player. So we usually take the realization. There has been some instances of us extending because we like the credit and we could get more spread. And so we should break that out for people around proactive extensions versus what else is in the portfolio. And then we should also break out for you guys what's like low yielding as a percentage of the remaining 69 million. But to answer your very last question, we think it's going to continue to be linear because a lot of these are coming up on, you know, two years or, you know, 18 months from their maturity date.

Okay. Yeah, that's very helpful. I think that you probably have – one of the best, if not the best, perspective on taking over portfolios and working them out. And you've had a lot of success in recycling this capital and seemingly not come across big surprises to the downside in what you're doing. So it's helpful to have some granularity on that. how that's actually unfolded and what's left. So I appreciate that.

It's good feedback. That's good feedback. We got similar feedback from somebody yesterday, and I think it's good feedback.

Okay. Thank you very much.

Thanks, Dave.

Next question comes from the line of Deepak Sarpangal with Repertoire Partners. Your line is open.

Thank you. Hey, Ted, Patrick, and team. Hey, how are you? Yeah, it seemed like more further progress on both the portfolio management side in terms of improvements in leverage and portfolio quality and also definitely on the capital allocation side. I know you've been buying back shares for a few years now, but but kind of seems to be increasing in size of that as well, given the accretion that it's creating. A few questions on each of those. One, on the buybacks and capital allocation, I know that you've been pretty consistent in repurchasing shares, and you've talked about seeing your stock as undervalued, but you've also talked about the environment increasingly becoming a pretty attractive place to invest. How do you think about balancing those two alternatives and where to deploy your capital, especially because it looked like maybe in the previous year, you leaned into some of the weakness in the credit market and appropriately so, had a lot more deployments than repayments on a net basis. And then I think also similarly now, as there was a little bit of an improvement, you've seen now more repayments or paydowns. But maybe one, if you could talk, because I know it looks like some of the newer investments are yielding quite a high number up front and other good terms. So that was kind of like the first question just on the capital allocation side. And then on the portfolio management side, it seemed like we don't have the full details, obviously, in terms of gross versus net by industry, but It seemed like there was either an exit or reduction in some of the areas that are probably those that you viewed as less attractive, whether it's automotive, consumer, energy. I know you already have pretty low exposures there, but can you maybe talk about if there's anything that we can't see in that data in terms of industry breakdown? And then finally, it looked like there were some interesting new investments. Just curious to learn more about In particular, I think the newer ones were Murray, Cinemedia Holdings, and Tactical Air Systems. And then I think there were some follow-on investments, Metalworks and LV Holdco. I'd love to hear more about those. Thank you.

Well, why don't I start, and Patrick can chime in as well. I mean, the new investments that we're doing were... like are incredibly attractive. And you can see it, you know, we've picked up on a, like a portfolio basis, 75 basis points of incremental spread over even just two quarters. And then obviously silver's higher. You know, the post-regional banking crisis, there's just no one lending last year. And so we were able to do really low levered, wide spreading deals. So we're really excited about that vintage. I would tell you that it's got more competitive. So like, you know, spreads have definitely come down year-to-date, starting in about February, particularly on generic sponsor finance. Just supply the band. There are just not that many good LBOs out there. So our new investments we're very excited about. On the exit side, yeah, you brought it up. I mean, we had a stressed auto supplier that we picked up in one of our acquisitions that we were taken out of this quarter. And I would tell you we're very excited to be taken out in many different ways. And so that was good. And away from that, I think a lot of the exit activity was relatively normal course. But yeah, the auto supplier in particular was something we were very excited to not have in our portfolio anymore. And then on capital allocation, I would say, you know, like this last year was the first year that I've run a BDC ever where it made, for the first time ever, the math made more sense for us to deploy capital than to buy back stock. But I think our philosophy is we should always be buyback stock, particularly when we're trading below NAV, because we believe that NAV is NAV. And we think, you know, you heard Patrick's comments. We think there's like, you know, 10 plus percent NAV upside in just things maturing at par. So we just think it's good discipline to always be buyback stock, regardless of what the math says. But the math for the first time and, you know, basically in a long, long time would support actually new deployment as well as buyback stock. So, you know, as you said, we've increased our buyback program, but we're also, you know, finding really good things to invest our money in.

Yeah, and Deepak, taking some of your portfolio questions. So I'll hit a couple of them, and I apologize if I don't get all of them, since you listed a couple. I just can't necessarily remember them all. But starting at the end, LB Hold Co., That was actually a restructuring of a position we had in Lucky Bucks. The company emerged from bankruptcy and we received debt and equity as part of a take back. So that's just kind of a restructuring in the quarter. Northeast Metal Works, I think, dates back to Q2. It was a legacy Harvest Capital, HCAP portfolio company. we actually did a refinancing with the company where we brought in another lender, reduced our exposure, and sort of put in place a new facility. So that's really just kind of like a, again, I'd call it a refinancing, but shows up as different securities because we kind of brought in another person and reduced exposure there. On to your three new borrowers. Again, just to give you kind of a bit of a flavor, Tactical Air, It's a defense business. They have two main segments. One is they actually work with the Air Force and the Navy to retrofit older airplanes with their weapon systems and cockpit technology and things like that. That's one part of the business. They're one of the only folks that do that. Then The other part of their business is they actually – I forget the technical name of the segment, but they do what's called like the red team. So they actually – their team, they have pilots and airplanes, and they actually kind of train and help with training exercises for the Navy and the Air Force, essentially acting as sort of the quote-unquote enemy combatants for kind of training simulations. Right. Pretty good defensive business, you know, secured by, you know, pretty stable contracts. We really like that business. Moray, and we did a first-ling term loan there. Moray Global Corporation actually provides, it's a tech-enabled business that provides, like, legal solutions and consulting services. So a lot of what they do is around software implementation and ongoing maintenance for Fortune 500 companies within their kind of compliance and legal departments. to help manage various different work streams between general legal paperwork as well as litigation and lawsuits and discovery. And again, it's a fairly large gamut of things that they support Fortune 500 companies with. That particular transaction, the company was making an acquisition in a different jurisdiction, and we structured a first lien loan with some warrants attached to it as well. that we think is a pretty attractive overall investment and security. And then CineMedia, which will be the last one, that was a refinancing of an existing portfolio company of a large European private equity firm. It's a U.S. business, but it's a European private equity firm owns it. They do a couple of different things around sort of, I'll call it like video services and technology. So part of what they do is they actually – They have like, it is there like cards and software that go into set-top boxes for kind of traditional broadcast technology. So you can think mostly in kind of Europe where you have sort of, you know, Sky TV, SIM cards and things like that. That's a piece of their business. They also do, they work with content providers to help them deliver their video and streams sort of between, you know, I'll call it like a Netflix and sort of, you know, the Internet provider who's sort of, you know, piping into your homes. And then lastly, they actually, they also work with video streaming in a different area, but they help with ad targeting, content performance within applications and apps, and sort of, you know, broadband, you know, broadband device management and things like that. So it's a fairly diverse set of revenue streams. Again, we're a senior secured first lien loan. Again, I think that's priced at $775 at $96.50. So, again, that's just kind of a flavor of that. And if you just kind of think about that, you know, at a higher level, we've got a defense business and two business services that we're kind of adding, which we feel like are pretty attractive industries. And then Ted already alluded to it, but Exit hit a, you know, a automotive supplier, which we would have no intention of, you know, getting back into that industry.

That all sounds great. Yeah, I mean, I certainly recognize that you already have most of your investments in business services, high-tech industries, and healthcare and pharma, but seems like kind of a continued progression even more along that direction, which seems great. And then just a quick follow-up. I don't have the details on the Lucky Bucks thing, but I had read something about how the company was, um, you know, they're suing or in litigation with the former promoter of that business for a pretty big number. Um, it, is that something that could be interesting upside or is it kind of immaterial given the size of your equity, uh, stake, um, there?

I would not say it's immaterial. Um, but, uh, what I would say in general is, uh, look, it's, it's public. So I can, I can, I can, I can talk to some extent on it, but, um, I would say that the facts look pretty persuasive, but you kind of never know when you get involved in litigation. So I would say, you know, it feels pretty interesting to us, obviously, to be pursuing. But I would, again, I would say that that's not kind of really baked into how we think about the equity position there. So again, you can kind of take that for what it's worth, but I If you kind of read through the lawsuit, I'd say the facts are, you know, candidly pretty overwhelming. But having said that, like, you know, legal, I wouldn't want to handicap a legal process.

Sounds great. Keep up the great work. Thank you.

There are no further questions at this time. Mr. Ted Goldthorpe, I turn the call back over to you.

Thank you very much. Thank you all for attending our call. And as per always, Please reach out to us with any questions, which we're happy to discuss. We look forward to speaking to you again on our next call, and thank you so much.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.