Portman Ridge Finance Corporation

Welcome to Portman Ridge Finance Corporation's first quarter 2024 earnings conference call. An earnings press release was distributed yesterday, May 8th, 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 10Q, filed yesterday with the SEC. As a reminder, this conference call is being recorded to 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 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 would be Ted Goldthorpe, Chief Executive Officer, President and Director of Portman Ridge Finance Corporation, Brandon Satoran, 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 Fort Language, please go ahead.

Good morning, and thanks everyone for joining our first quarter 2024 earnings call. I'm joined today by our Chief Financial Officer, Brandon Satoran, and our Chief Investment Officer, Patrick Schaefer. 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 Brandon will discuss our operating results and financial condition in greater detail. Yesterday, Portman Ridge announced its first quarter 2024 results, and following the strong earnings trajectory we saw in 2023, we are pleased with the solid earnings power of the portfolio. Despite operating under challenging market conditions, we reported net investment income of $6.2 million, or 67 cents per share, and net asset value of $210.6 million, or 22.57 per share. We continue to target a well-diversified portfolio with investments spread across 29 industries and 103 entities while maintaining an average par balance per entity of $3.1 million. This compares to 27 industries and 100 entities with an average par balance per entity of $3.1 million at the end of 2023. Credit quality remains stable with seven investments on non-accrual representing 0.5% of the portfolio on a fair value basis. Additionally, we continue to believe our stock remains undervalued, and during the quarter, we continue to repurchase shares under our repurchase program, purchasing 51,015 shares for an aggregate cost of $1 million. These repurchases had an accretive effect to Portman's net asset value of 2 cents per share, reinforcing our commitment to shareholder value. Further, the Board of Directors approved dividend for the second quarter of 2024 in the amount of 69 cents per share, which represents a strong 12.2% annualized return on net asset value, which is among the highest in the BDC space. Turning to conditions in our primary market, as we previewed on our fourth quarter earnings call, M&A activity has picked up during the quarter, and capital markets as a whole were extremely active as compared to the fourth quarter. Net deal activity, defined as new deals excluding corresponding repayments in the BSL loan market, was $57.2 billion, up 64% from the fourth quarter and represented the highest new net volume since first quarter of 2022 and is representative of the fundamental tailwinds we believe exist in our primary market. For all of 2023, private equity firms have been sitting on record amounts of dry powder while at the same time being pushed by LPs to return capital. Although expectations for future rate hikes have diminished towards the end of the first quarter and the beginning of the second quarter, I believe the aforementioned fundamentals combined with positive economic outlook and sentiment should continue to fuel new deal activity in our private credit space over the course of 2024. Specifically at Portman Ridge and more generally across BC Partners' credit platform, we continue to find attractive opportunities both through our sponsor relationships and our focus on non-sponsor or non-traditional sponsor-backed companies and continue to win transactions based on our ability to custom tailor a capital solution for the borrower and the borrower's belief that our platform can add value to their businesses over and above just being a capital provider. Our strategy has always been to be very selective on new investment opportunities, focusing on portfolio management and risk mitigation. To that point, during the quarter, we made investments into only one new portfolio company. Our goal continues to be the further diversification of our portfolio by investing in companies that have the potential to provide high returns for our shareholders. As we proceed further into 2024, our pipeline remains strong, and we believe we are well positioned to take advantage of new investment opportunities while also remaining diligent in our investment and capital deployment process. With that, I'll turn the call over to Patrick Schaefer, our Chief Investment Officer, for our 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 March 31, 2024, Approximately 91.1% of our debt securities portfolio were either floating rate with a spread to an interest rate index such as SOFR or PRIME, with substantially all 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 April 29th, 2024. But between the market transition last year from LIBOR to SOFR and the pause from the Fed earlier this year, the gap has narrowed has narrowed to the tightest it has been since the onset of the Fed rate hike cycle. Skipping down to slide 10, originations for the first quarter were higher than prior year first quarter and were above repayment levels, resulting in net originations of approximately $1.7 million. Our new investments made during the quarter are expected to yield a spread to SOFR of 581 basis points on par value, and the investments were purchased at a cost of approximately 98.4% of par. Our investment portfolio at the end of the first quarter remained highly diversified. We ended the year with investment spread across 29 different industries and 34 different borrowers, all while maintaining an average power balance per entity of approximately $3.1 million. Turning to slide 11, in aggregate, investments on non-accrual status remained relatively low at seven investments at the end of the first quarter of 2024, representing 0.5% and 3.2% of the company's investment portfolio at fair value and cost, respectively. This compares to December 31st, 2023, where there were also seven investments on non-recall status, representing 1.3% and 3.2% of the company's investment portfolio at fair value and cost, respectively. On slide 12, excluding our non-recall investments, we have an aggregate debt investment portfolio of $384 million at fair value, which represents a blended price of 93.7% of par and is 90% comprised of first lien loans based on par value. Assuming a par recovery, our March 31, 2024 fair values reflect a potential of $25.8 million of incremental NAV value, a 12.1% increase, or $2.72 per share, excluding any recovery from the non-accrual investments. If we were to further overlay an illustrative 10% default rate and 70% recovery rate to the entire debt securities portfolio, again, excluding non-accrual investments, the incremental NAV value potential would be $1.41 per share, or a 6.2% increase to NAV per share as of March 31, 2024. Finally, turning to slide 13, if you aggregate the three portfolios acquired over the last three years, we have purchased a combined $434.8 million of investments, have realized approximately 82% of these positions at a combined realized and unrealized mark of 102% of fair value at the time of closing the respective mergers. As of Q1, 2024, We had fully exited the acquired O'Kill portfolio and are down to a combined $33.5 million of the acquired HCAP portfolio and the initial KCAP portfolio. I'll now turn the call over to Brandon to further discuss our financial results for the period.

Thanks, Patrick. As Ted and Patrick previously mentioned, our results for the first quarter of 2024 continue to reflect the company's strong financial performance. Our total investment income for the quarter was $16.5 million, of which $14.2 million was attributable to interest income from the debt investment portfolio. This compares to total investment income for the fourth quarter of 2023 of $17.8 million, of which $15.3 million was attributable to interest income from the debt investment portfolio. The decrease was primarily driven by the reversal of $0.4 million, or $0.04 per share, of previously accrued unpaid interest on two portfolio companies placed on non-accrual during the first quarter of 2024, as well as lower paydown income of $0.04 million, or $0.04 per share, during the quarter. Excluding the impact of purchase price accounting, our core investment income for the quarter was $16.5 million, a decrease of $1.2 million compared to core investment income of $17.7 million in the prior quarter. Our net investment income for the quarter was $6.2 million or $0.67 per share. This compares to $11.2 million or $1.18 per share for the prior quarter. The decrease in net investment income was the result of lower investment income and $0.1 million or one penny per share of incremental expenses in the first quarter, as well as a one-time expense reimbursement from the company's investment advisor during the prior quarter. As of March 31, 2024 and December 31, 2023, the weighted average contractual interest rate on our interest earning debt investment portfolio was approximately 12.1% and 12.5% 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 quarter ended March 31st, 2024 were 10.3 million compared to total expenses of 11.9 million for the fourth quarter of 2023. The decrease was largely driven by a lower incentive fee as well as lower interest and financing costs as a result of lower average leverage during the quarter. Our net asset value as of March 31, 2024 was $210.6 million or $22.57 per share. a decrease of 19 cents per share as compared to the prior quarter net asset value of 213.5 million or $22.76 per share. The decrease was largely driven by our dividend exceeding net income for the quarter ended March 31st, 2024. Turning to the liability side of the balance sheet, as of March 31st, 2024, the company had a total of 291.7 million of borrowings outstanding with a weighted average interest rate of 6.9%. This balance was comprised of 92 million in borrowings under our senior secured revolving credit facility, 108 million of 2026 notes, and 91.7 million of 2018-2 secured notes due 2029. We finished the quarter with 23 million of available borrowing capacity under the senior secured revolving credit facility. Accordingly, as of March 31, 2024, our gross and net leverage ratios were 1.4 times and 1.2 times, respectively. Compared to the prior quarter, gross leverage is down one full turn from 1.5 times and net leverage is flat. The decrease in gross leverage is largely driven by the pay down on the 2018-2 notes during the quarter. From a regulatory perspective, our asset coverage ratio as of quarter end was 171%. Finally, the Board approved a quarterly distribution of 69 cents per share payable on May 31st, 2024 to stockholders of record at the close of business on May 21st. With that, I'll turn the call back over to Ted.

Thank you, Brendan. 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 in the first quarter. Through a prudent investment strategy, we believe we will be able to deliver strong returns to our shareholders for the rest of 2024. Thank you once again to all our shareholders for your ongoing support. This concludes our prepared remarks, and I'll turn the call over for any questions.

Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star one on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star one again. If you are called upon to ask your question and are listening via loudspeaker on your device, please pick up your handset and ensure that your phone is not on the mute when asking your question. Okay, your first question comes from the line of Christopher Nolan. Please go ahead.

Hey guys, can you hear me? Yeah, how are you? Good, how you doing? Hey, the slowdown in the growth of the portfolio, is the strategy now simply to make new investments to offset the prepay? So in other words, the amount of money that you put out to work in new investments is a function of how much you get back in terms of prepays that quarter?

I mean, I think... I think that's generally right, Chris. I do think kind of where we are in a net leverage basis, we're sort of at the low end of kind of our one and a quarter to 1.4 times range. So I think there is, you know, we do have room and would look to kind of increase, you know, I'll call it assets in addition to just, I'll call it, you know, one in, one out. But where we sit now, I think we are probably having a little bit more of a focus on what you just said, which is, you know, making sure we're replacing assets that have been repaid. We are kind of selectively reducing some of our liquid exposure just given the run-up in the BSL market. It's not a lot, but we have probably eight or nine names that are quote-unquote liquid in our book. So we would look to exit those positions at kind of attractive prices in the BSL market and then obviously have those proceeds to rotate into new private transactions. So it's a mix of a couple of those things, but I would say we definitely feel like we have room to kind of be a net grower of the portfolio, but being mindful of where we are relative to our leverage guidelines. Not guidelines, but guidance.

And then given that you're paying down the 2018 secured note, should we expect the bank revolver to pick up the slack to increase?

That's right. Where the revolver sits today, we're at about $92 million drawn or so. It has $115 million of total capacity, and there's an incremental above and beyond that. But the very short answer is yes. Okay.

And then I guess finally, Ted, can you give us a little color in terms of what you're seeing in terms of BDCs looking to be bought out? How has that market changed from your perspective?

I would say these things tend to go in waves. I would say there's not a lot of logical partners for us today, just given who's out there and given what's happening. And I think higher interest rates have obviously helped the whole sector in terms of earnings and other things, and obviously credit quality has been stable. So I would say as of now, I don't foresee a big wave of consolidation in the short term.

Okay, back in the queue. Thank you for answering my questions. Thanks.

Again, if you would like to ask a question, press star 1 on your telephone keypad. Our next question comes from the line of Deepak Sarkarnal from Repertoire Partners. Please go ahead.

Thank you. Hi, Ted. Hi, Patrick. Hi, Deepak. I guess given the first question you received, I have a different perspective on that. I actually just wanted to commend you on your fiduciary discipline to not simply grow the portfolio as some other managers do since you get paid on overall assets. So I think it's actually great. You're recognizing that your stock is undervalued. When it makes sense to lean in and extend new loans, you're doing it. And when it doesn't, you're pulling back. So I think that's actually great. And then the question I had was, I saw the new investment in Riddell, which I obviously know of the products, being a football fan, but I saw that you had like a broader partnership that you announced, you know, with the BC Credit and BC Partners platform. Could you talk a little bit more about that new investment and just give us a little bit more context there?

Yeah, I mean, we normally don't talk about individual investments, but this one specifically has been very high profile. So we have provided them financing. It closed right at quarter grand. And, you know, this is a perfect example of what we do, broadly speaking. So You know, we have a board seated with the company. We are very, very active in helping them with a number of different initiatives. And it's a great business because there's a big recurring replacement cycle embedded in their business. So usually we don't have a big consumer franchise, but when you actually dig into the business itself, it's much less exposed to consumer discretionary spending. So, yeah, it is an investment across the whole platform. And it's one of the advantages Portman gets as being part of a bigger platform is to get access to deals like this.

Got it. And then I couldn't tell for sure from the press releases, but to your point about the bigger platform, it almost sounded like you sourced it and brought it to the BC Partners platform rather than the other way around, or did I get that mixed up?

No, that's fair. I mean, we obviously have a lot of our own captive sourcing here. So yeah, we sourced it and You know, quite frankly, we've been working on it for, you know, we've been cultivating the management team for probably five years before the close.

That's great. And then one other one, is EBSC Holdings related to this or is that a separate investment?

No, it's the same. So the investment, the combined investment was structured as, again, round numbers, sort of 65%, you know, forcing secured loan and 35%. a preferred equity investment or structured equity investment in the business. And so for, again, Foreman as an example, they have a weight in between the two, but you can think of that as the same as, I think, the loan, the borrower is technically Riddell Inc., and then the preferred equity, the entity is technically EBSC, but that's just the parent company of Riddell.

Got it. And I suspect that preferred equity must be convertible into common, right?

It does have the potential to convert at certain metrics, yes.

Okay. No, I think because the first lien loan looks great, right? It's like 11% cash pay first lien, and then the preferred is 10% PIC, so I figured there must be a conversion feature to make. That's right.

That's right. Our expectation is overall return on that instrument would be meaningfully higher than 10%, but for Accounting purposes, that's what we would otherwise be reflecting, you know, until there was a, you know, some sort of catalyst.

Okay, great. Well, I mean, to me, it seems like generally more of the same good stuff. Seem to check off my key boxes. You got low and declining non-approvals, deleveraging, paying down debt. Seem like an even higher mix of senior secured loans this quarter while working off the CLO and doing venture stuff. and then more accretive buybacks and another nice dividend. So I appreciate the solid execution and the leadership. I look forward to keeping that going. Thank you.

Thank you, Deepak. Appreciate it.

Take care.

Thank you. Again, if you would like to ask a question, press star 1 on your telephone keypad. Your next question comes from the line of Stephen Martin. Please go ahead.

Hi, guys. Hi. So a couple questions. PIC, can you comment on PIC and what the trends have been? It looks like PIC is a higher percentage of total interest income recently.

Yeah, sorry, I was just pulling up the number, Steve. Look, I think probably some of that is driven by we had significantly lower payment income, so it might just look a little bit higher as a percentage because of that. Again, I'd say the broad brush comment is we don't see a material change in how we are going to market and pick first cash. There have been some competitors that you've seen in our market a little bit Some folks have been willing to offer like the first year, 12 to 18 months as a partial pick option for borrowers. It's kind of like trying to win a deal that's not particularly prevalent, candidly, but it is sort of out there every once in a while. But broadly speaking, we don't see material changes in our cash versus pick mix and kind of how we think about portfolio construction.

Okay. On slide 10, you made the comment that you only added one new portfolio company, yet purchases and draws were almost $39 million. All the rest of that was existing portfolio companies and drawdowns on delayed terms.

Yeah, that's right. Again, we have some revolvers, delayed draw term loans, and all in existing borrowers. And we had one new security, if you will, that wasn't like a previously committed DDTL, but in an existing borrower. So yeah, again, broadly speaking, that is all from kind of the existing base. We'll probably have, I don't know the exact number, we'll probably have two or three new borrowers this quarter, just kind of some activity in April and May. But, yes, but my statement is correct, and what you see there is activity within our existing portfolio.

Okay. Annette, you started to comment on the current quarter. Can you make any comments about what you're expecting in terms of portfolio activity and your portfolio size versus the first quarter?

Yeah, no, appreciate it. So again, kind of similar to what we had said last quarter, I think in what kind of I alluded to when Chris Nolan asked the question, I think overall we would kind of expect to be sort of on the margin in that deployer, but kind of, again, it depends a little bit on timing of certain things. Like as an example for this quarter, we were up, you know, a little under 2 million from net deployments, but the Riddell transaction closed at like the end of the quarter and And so if that had been pushed two days, it would have looked like we were, you know, six and a half or $7 million of, of, you know, net receiver of capital. So some of it depends a little bit on timing, but I think on the margin you would expect us to, we would expect to be flat or slightly growing, let's say over the course of the year, Steve, and whether it falls kind of a little bit around the edge of a quarter, you know, might be a plus or minus here or there, but we kind of generally would be ourselves as a marginal net deployer of capital this year. Got it.

Slide 11, non-accruals. The number of investments didn't change. The cost didn't change. I haven't had a chance to go through the whole portfolio from the queue, but the fair value changed.

Yeah, a lot of this was driven by – probably one security being marked down. You can ultimately look it through. It's a second-line security in Qualtech USA is the name of the borrower. But it's, again, obviously, regardless of whether it is on accrual or not, we kind of go through from a fair value perspective. So that's, again, just a reflection of a markdown in a position that's on non-accrual.

Okay. And... where are you putting money out currently? Like the most recent deal you did or the most, well, I guess you only did one new deal in the quarter, but where, you know, the pricing you're talking about on some of the new deals for the second quarter, what are you looking at?

No real big change. I mean, there's been a big, big, big delta between where large cap sponsor deals are getting done and where our market is. So like if you look at trends and covenants, if you look at trends and spreads, they've really come in pretty dramatically for big LBOs, and they haven't really come in that much for us. Like, there has been some spread compression, but not really that much. You know, our deployment really is in mostly two areas. It's really, you know, our core sponsor finance, first lien type stuff, which is still pricing at 12%, 13% yields. And then number two is, you know, we do have a big non-sponsor franchise, right? where we get paid a little bit more and help out the companies. So, like, Riddell kind of fits into that bucket because it's not a traditional deal. So, again, we haven't really experienced spread compression in our portfolio. And the impact of the opening up of markets and stuff has been much more muted. I mean, you can see there's been a big trend of BSLs being issued to take out direct loans. But if you look at our fee income, like, it's never been lower. So, you know, again, like, as these loans approach maturity, fee income should pick up. But we haven't experienced the broad-based paydowns that you've seen the BSL market do.

You actually just answered one of my questions. But assuming interest rates don't change much for the balance of the year, because at this point they're speculating one rate change and no one's sure if it's up or down. What would you expect to have on the unrealized line? Would you expect the portfolio to, you know, would you expect the mark to market to increase, decrease, stay sort of where it is?

Yeah, so good question, Steve. I'm just trying to think this through. It would depend a little bit more on where deals are getting done, obviously. And so there's kind of like two or three downstream effects, which is if I would say the bigger driver of whether we have, of how we have movements is probably a little bit more of the M&A market. And maybe that is like a derivative of the industry rate environment, but where we are today, there's not a massive amount of M&A. It's picking up, but obviously off of like a pretty low base. So there was a lot more activity this quarter, but off of an incredibly low base for, you know, probably the, the, last three quarters of 2023. And so with that as kind of like the backdrop, it's been somewhat competitive in our market, which has led to, again, BSL prices declining, decreasing, and even private, again, on the higher side, but private markets spreads also compressing, which is kind of like independent a little bit of interest rates are not directly correlated to interest rates. So It's a tough answer, but to say if M&A remains sort of somewhat muted this year because of interest rates, I would say on the margin we would have unrealized gains because that would probably lead to a continued spread compression and therefore pricing increases. But it's not, at least in our portfolio, it's not exactly a direct line between interest rate hikes or declines and the price of our portfolio.

All right. Thanks.

Thank you. We have no further questions. Please continue.

We did have a question about our realized losses. Brandon, do you want to take that?

Sure. So the primary driver of the realized losses during the period was one name in particular that was restructured. It was HDC or HostWay. That drove the vast majority of the realized during the period.

So really it's one restructured security that we still continue to hold. So anyways, thank you all for attending our call. As per always, please reach out with any questions. We're always happy to discuss with anyone. And we look forward to speaking to you again in August for our second quarter conference call. Thank you very much.

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.