Portman Ridge Finance Corporation

Good morning ladies and gentlemen and welcome to Portman Ridge Finance Corporation's second quarter 2024 earnings conference call. An earnings press release was distributed yesterday August 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 and should be reviewed in conjunction with the company's Form 10-Q filed yesterday with the SEC. As a reminder, this conference call is being recorded for replay purposes. Please note that today's conference call may contain forward-looking statements which are not guarantees of future performance or results and involve a number of risks and uncertainties. Actual results may differ materially from those in the forward-looking statements as a result of a number of factors, including those described in the company's filings with the SEC. Portman Ridge Finance Corporation assumes no obligation to update any such forward-looking statements unless required by law. Speaking on today's call will be Ted Goldthorpe, Chief Executive Officer, President, and Director of Portman Ridge Finance Corporation. Brandon Satorin, Chief Financial Officer, and Patrick Schaefer, Chief Investment Officer. With that, I would now like to turn the call over to Ted Goldthorpe, Chief Executive Officer of Portman Ridge.

Ted Goldthorpe Thank you. Good morning and welcome to our second quarter 2024 earnings call. I'm joined today by our Chief Financial Officer, Brandon Satorin, and our Chief Investment Officer, Patrick Schaefer. Following my opening remarks on the company's performance and activities during the second quarter, 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, Foreman Ridge announced its second quarter of 2024 results, and despite operating under challenging market conditions, we reported net investment income of $6.5 million, or 70 cents per share, an increase of $300,000, or 3 cents a share, as compared to the prior quarter. A well-diversified portfolio remains one of our highest priorities for Portman Bridge portfolio, and I'm pleased to share that we finished the quarter with exposure to 28 industries and 75 unique portfolio companies with an average par balance of $2.6 million. This compares to 27 industries and 79 unique portfolio companies with an average par balance per entity $3.1 million as of March 31, 2024. Further, subsequent to quarter end, we amended and extended our existing senior secure revolving credit facility with JPMorgan Chase Bank. Under the terms of the amendment, we increased the facility size by $85 million to $200 million and reduced the applicable margin by 30 basis points from 2.8% per year to 2.5% per year. The reinvestment period was extended from April 29th, 2025 to April, August 29th, 2026, terming out our revolving period by two years and improving the company's asset liability matching. The remaining $85 million of secured notes will be refinanced with the upsides of the credit facility. We value the long-term commitment and relationship we have with our lenders and J.P. Morgan, a world-class financial institution. The amended credit facility will provide us with meaningful liquidity, as well as the flexibility to grow the company's balance sheet as we look to capitalize on future investment and origination opportunities. We continue to believe our stock remains undervalued, and as such, we continue to repurchase shares under our share repurchase program. During the second quarter, we purchased a total of 79,722 shares for an aggregate cost of $1.620. These were purchases for a creative department's net asset value by $0.03 per share during the quarter. Additionally, the Board of Directors approved a $0.69 per share distribution for the third quarter of 2024, which represents a 13% annualized return on net asset value amongst the highest in the BDC space. Turning to conditions in our primary market, the second quarter of 2024 continued the macro trend scene in the first quarter. New deal activity has picked up pace, and syndicated markets have continued to remain open, though borrowers have continued to rely heavily on private credit capital providers for M&A activity, given the certainty they provide, resulting in tailwinds for our industry. Having said that, the combination of continued private credit capital raising and a more competitive syndicated market alternative has led to meaningful spread compression in certain parts of the private credit market. According to KBRA BLD private data, private credit spreads for borrowers with greater than $100 million of EBITDA and those between $50 and $100 million of EBITDA have both declined by approximately 75 basis points since the beginning of the year. That is compared to spread compression of approximately 50 basis points for borrowers between $20 and $50 of EBITDA and just over 25 basis points for borrowers with less than $20 of EBITDA. As always, our strategy at Portman is to be selective regarding new investment opportunities by leveraging the platform scale of BC Partners and its robust deal pipeline, while also increasing the diversification of our investment portfolio through hold size. As an example, during the quarter, we made only two investments in portfolio companies, one comprising a $4.6 million investment and the other a $2.7 million investment. while the remainder of our additions were in the form of incremental capital to existing portfolio companies to support their add-on acquisitions. Patrick will provide details shortly. This has allowed us to maintain a relatively consistent spreads on new origination as compared to our portfolio as a whole. As we enter the back half of 2024, we remain confident in our business. With our amended credit facility, robust pipeline, strong balance sheet, We believe we are well positioned to continue executing our strategy and delivering strong returns for our shareholders. With that, I will turn over the call to Patrick Schaefer, our Chief Investment Officer, for a review 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 June 30, 2024, approximately 89% of our debt securities portfolio was either floating rate with a spread pegged to an interest rate index such as SOFR or prime rate, with substantially all of these being linked to SOFR. As seen here from the chart, SOFR rates have remained relatively consistent for the last five quarters. Skipping down to slide 10, originations for the quarter were lower than last quarter and were also below the current quarter repayments and sales levels, resulting in net repayments and sales of approximately $18.2 million. During the quarter, we took advantage of rising secondary prices to exit or materially reduce a number of our more liquid loans. This proactive rotation represents a substantial portion of the net repayment and sales amounts. Our new investments made during the quarter are expected to yield a spread to SOFR of 724 basis points on par value, and the investments were purchased at a cost of approximately 98.6% of par. Our investment portfolio at the end of the second quarter remained highly diversified. We ended the second quarter with a debt investment portfolio spread across 28 different industries, one more as compared to the end of the first quarter, and 75 unique portfolio companies with an average par balance of $2.6 million. Turning to slide 11, in aggregate, investments on non-recrual status were nine investments at the end of the second quarter of 2024, representing 0.5% and 4.5% of the company's investment portfolio at fair value and cost respectively. This compares to seven investments on non-recrual status as of March 31, 2024, representing 0.5% and 3.2% of the company's investment portfolio at fair value and cost respectively. The main driver of this increase was due to placing an additional security of Qualtech on non-recrual. We were able to exit our entire Qualtech position shortly after the quarter end, but during the course of the quarter, the buyer for the company made a number of changes to the purchase price that ultimately resulted in our security receiving less than par, and therefore, we have included it on the non-recrual list for the quarter. As of today, we have completely exited all Qualtech securities, and the ultimate NAV impact has been factored into the June 30th financial results. On slide 12, excluding our non-accrual investments, we have an aggregate debt investment portfolio of $383.6 million at fair value, which represents a blended price of 93% of par value and is 91% comprised of first lien loans at par value. Assuming par recovery, our June 30, 2024 fair values reflect a potential of $26.7 million of incremental NAB value, or a 13.6% increase to NAB. When applying an illustrative 10% default rate and 70% recovery rate, our debt portfolio would generate an incremental $1.64 per share of NAV, or a 7.7% increase as it rotates to maturity. Finally, turning to slide 13, if you aggregate the three portfolios acquired over the last three years, we have purchased a combined $435 million of investments, have realized approximately 85% of these positions, and combined realized and unrealized mark of 101% of fair value at the time of closing the respective merchants. As of Q2 2024, we have fully edited the acquired OTA portfolio and are down to a combined $13.8 million of the acquired HCAP and the initial KCAP portfolios. And I'll turn the call over to Brandon to further discuss our financial results for the period.

Thanks, Patrick. For the second quarter of 2024, Portman generated $16.3 million of investment income, of which $13.9 million debt investment portfolio. This compares the total investment income for the first quarter of 2024 of $16.5 million, of which $14.2 million was attributable to interest income inclusive of fixed income from the debt investment portfolio. The decrease was driven by lower interest income due to net repayments and sales during the quarter, as well as the reversal of $0.1 million, or a penny per share, of previously accrued unpaid interest on a loan placed on non-recrual status during the quarter, partially offset by higher dividend income from the Great Lakes Joint Venture. Excluding the impact of asset acquisition accounting, our core investment income for the quarter was $16.2 million as compared to core investment income of $16.5 million in the prior quarter. Total operating expenses for the quarter ended June 30th, 2024 decreased by $0.4 million to $9.9 million as compared to This decrease was largely driven by a decrease in interest expense as a result of a $6.6 million pay down on the 2018-2 secured notes during the quarter, as well as a larger $34.2 million pay down on the 2018-2 secured notes in the second half of the prior quarter. Our net investment income for the quarter increased to $6.5 The increase in NII was primarily due to lower interest expense during the quarter. For the quarter ended June 30, 2024, net realized and change in unrealized losses on investments in debt was $12.8 million. This compares to net realized and change in unrealized losses on investment in debt of $1.7 million in the prior quarter. As of June 30, 2024, the company's net asset value was $196.4 million, or $21.21 per share, a decrease of $14.2 million, or $1.36 per share, compared to the prior quarter net asset value of $210.6 million, or $22.57 per share. As of June 30th and March 31st, 2021, For the same period, our leverage ratio net of cash was 1.3 times and 1.2 times, respectively. Specifically, as of June 30, 2024, we had a total of $285.1 million of borrowings outstanding, with a current weighted average contractual interest rate of 6.9%. This compares to $291.7 million of borrowings outstanding as of the prior quarter, million of available borrowing capacity under the Senior Secured Revolving Credit Facility and no remaining borrowing capacity under the 2018-2 secured notes as the reinvestment period has ended. As Ted mentioned, subsequent to quarter end, we amended and extended our existing Senior Secured Revolving Credit Facility located in Oregon. Under the terms of the amendment, the credit facility was upsized by $85 million for a total revolving capacity of $200 million. Additionally, the applicable margin was reduced from 2.8% to 2.5%, and the reinvestment period was extended by approximately two years to August 29, 2026. This amendment has reduced our overall cost of debt capital and extended the duration of our debt capital structure. Further, we intend to refinance the remaining $85 million of 2018-2 secure Finally, the Board approved a quarterly distribution of 69 cents per share payable on August 30th, 2024 to stockholders of records at the close of business on August 22nd, 2024. With that, I will turn the call back over to Ted.