Portman Ridge Finance Corporation

Welcome to Portman Ridge Finance Corporation's first quarter-ended March 31, 2025 earnings conference call. An earnings press release was distributed yesterday, May 8, 2025, after the close of the market. 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 Gultorp, 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 Port Bentridge.

Good morning.

Welcome to our first quarter 2025 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 first 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. During the first quarter, despite operating under unpredictable macroeconomic environment, we continue to execute our disciplined investment strategy, deploying approximately $17.5 million into strong defensively positioned opportunities in our pipeline. We also had $15.7 million of repayments and sales during the quarter resulting in our return to net deployers of capital. Additionally, we are enthusiastic about the strategic benefits the combination with Logan Ridge provides. This merger represents a meaningful step forward for the company with the potential to provide increased scale, improved liquidity, and greater operational efficiency, all key drivers in enhancing long-term shareholder value. We encourage all shareholders to attend the meeting and vote for the proposed merger as recommended by the board of directors of both companies. We're excited about the road ahead and look forward to sharing more updates soon. The first quarter, the Board of Directors approved a base distribution of 47 cents per share. Of note, earlier this year, we modified our dividend policy and introduced a stable base distribution of 47 cents per share, which is anticipated to be sustainable across market cycles. Looking ahead, the current macro economic backdrop shaped by shifting trade dynamics, inflation, and ever-evolving monetary policy continues to drive uncertainty in the market. These dynamics highlight the importance of taking a long-term approach grounded in disciplined credit selection and prudent risk management, and we view this period as an opportunity to further differentiate through thoughtful deployment and rigorous underwriting. I remain confident in our ability to drive the best outcome for shareholders and, most importantly, credit quality of the overall portfolio. Overall, we're excited about the opportunities ahead on the Portland side, in addition to the new opportunities that should arise following the proposed merger with Logan Bridge due to scale, expected synergies, and cost-savings benefits. We anticipate being active in the market, and with a healthy pipeline, fortified balance sheet, prudent investment strategy, and experienced management team, we remain confident in our ability to generate strong returns, risk-adjusted returns, and derive long-term value for our shareholders. With that, I will turn the call over to Patrick Schaefer, our Chief Investment Officer, for a review of our investment activity. Thanks, Ted. Turning now to slide five of our presentation, the sensitivity of our earnings to interest rates. As of March 31st, 2025, approximately 88.5% of our debt securities portfolio was based on a floating rate with a spread peg to an 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, SOFA rates have slightly decreased over the last few quarters, impacting the current quarter net investment income. Skipping down to slide 10, originations for the quarter were higher than last quarter and above the current quarter repayment and sales levels, resulting in net deployment of approximately $1.8 million. Overall yield on par value of new investors during the quarter was 10.6%, slightly below the yield of the overall portfolio at 11.0% on par value. Our investment portfolio at year-end remained highly diversified. We ended the first quarter with a debt investment portfolio when excluding our investments in CLO funds, equities, and joint ventures spread across 24 different industries with an average par balance of $2.6 million. Turn to slide 11. In aggregate, we had six investments on non-recrual status at the end of the first quarter of 2025, representing 2.6 percent and 4.7 percent of the company's investment portfolio at fair and cost value, respectively. This compares to six investments on non-recrual status as of December 31st, 2024, representing 1.7 and 3.4 percent of the company's investment portfolio at fair value and cost, respectively. On slide 12, Excluding our non-recrual investments, we have an aggregate debt investment portfolio of $314.1 million at fair value, which represents a blended price of 90.5% on par value and is 91.1% comprised of personally loaned at par value. Two in a par recovery are March 31st, 2025 fair values, with a potential of $32.8 million of incremental net value, or an 18.3% increase to net. When applying an illustrative 10 percent default rate and 70 percent recovery rate, our debt portfolio would generate an incremental $2.43 per share of NAV, or a 12.5 percent increase as it rotates. Finally, referring to slide 13, if you aggregate the last three portfolios we have purchased, a combined $435 million in investments, and it realized approximately 86 percent of these investments at combined realized and unrealized marks of 101 percent fair value at the time of closing the respective mergers. As of Q1 2025, we've fully exited the acquired Oak Hill portfolio and are down to a combined $22 million of the acquired HCAP and 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 quarter ended March 31st, 2025, Portman Ridge generated $12.1 million in investment income. A decrease of $2.3 million, or 25 cents per share, compared to 14.4 million reported for the quarter ended December 31, 2024. The decrease in investment income from the prior quarter was primarily driven by, one, a decrease of $0.6 million, or 7 cents per share, as a result of lower non-recurring pay down and fee income. Two, a decrease of $0.6 million, or 7 cents per share, as a result of placing the company's first lien term loan to Sundance on non-accrual status, of which $0.05 is the non-recurring one-time impact to earnings as a result of writing off the prior quarter's interest receivable balance through current period income. Three, a decrease of $0.4 million, or $0.04 per share, as a result of lower base rate. Four, a decrease of $0.4 million or $0.04 per share as a result of the majority of the current quarter's deployment occurring in the second half of the quarter relative to the timing of repayments and sales. And then five, lower income from CLOs of $0.1 million or $0.01 per share. For the quarter ended March 31, 2025, total expenses were $7.8 million or a $1.1 million decrease or $0.12 per share as compared to $8.9 million reported for the prior quarter. The decrease in expenses relative to the prior quarter was primarily driven by lower interest expense of $0.3 million or $0.03 per share, lower management and incentive fees of $3 million or $0.04 per share, as well as lower general and administrative expenses of $0.04 million or $0.04 per share. The decrease in the general and administrative expenses was primarily driven by a lower than anticipated tax liability for the prior year. Accordingly, our net investment income for the first quarter of 2025 was $4.3 million, or 47 cents per share, which constitutes a $1.2 million, or 13 cents per share, decrease from $5.5 million, or 60 cents per share, reported for the prior quarter. Our net asset value as of March 31st, 2025 was $173.5 million, representing a $5 million decrease as compared to the prior quarter net asset value of $178.5 million as of December 31st, 2024. On a per share basis, net asset value was $18.85 per share as of March 31st, 2025, representing a 56 cent per share decrease as compared to $19.41 per share as of December 31st, 2024. The decline in net asset value was driven by unrealized depreciation on the portfolio, as well as the company's March dividend exceeding the company's first quarter net investment income. As of March 31st, 31st, 2025, our gross and net leverage ratios were flat to the prior quarter at 1.5 times and 1.3 times, respectively. Specifically, as of March 31st, 2025, we had a total of $255.4 million of borrowings outstanding with a weighted average contractual interest rate of 5.9%. This compares to $267.5 million of borrowings outstanding as of the prior quarter with a weighted average contractual interest rate of 6.2%. The company finished the quarter with $52.6 million of available borrowing capacity under the senior secured revolving credit facility. With that, I will turn the call back over to Ted.

Thank you, Brandon. Ahead of questions, I'd like to reemphasize how excited we are about the opportunities the proposed merger will create. Additionally, with a robust pipeline, prudent investment strategy, and an experienced management team, we believe we are well positioned to take advantage of the current market environment and will be able to deliver strong returns to our shareholders through 2025. Thank you once again to all of our shareholders for your ongoing support. This concludes our prepared remarks, and I will turn the call over for any questions.

At this time, I would like to remind everyone to, in order to ask a question, press star, then the number one on your telephone keypad. We will pause for just a moment to compile the Q&A roster. Your first question comes from the line of Eric Zwick with Lucid Capital Markets. Your line is now open. Please go ahead.

Thank you. Good morning, all. First, just maybe a follow-up to make sure I got it down right. Brandon, in your comments, I think you gave that the reversal of interest for Sundance was $0.05 per share. Did you have that on a – I guess I could kind of back into that. Did you have it on a dollar basis?

Yeah, so the out-of-period impact is about $450,000, give or take. I could give you the exact number separately.

Okay. That's helpful. That's about what I was calculating as well. And I guess my follow-up to that is I was trying to look at what a normalized level of investment income would have been for the period without the reversal. And I guess one of the factors I'm looking at here, PIC income has continued to grow over the past quarter or two, and it's about 24% or so of total income at this point. So I'm just kind of curious, is this a trend that's developing here in some companies that you're working with and granting? and what is the outlook for returning these companies back to cash pay?

So I think I'll let Patrick speak to the portfolio itself, but just as it relates to the percentages this quarter, I think you've got two things at play. One is a denominator effect, just inherently lower investment income with about a $600,000 increase quarter over quarter in PICC. However, with that said, we do have the five-cent reversal, the impact of the late deployment during the quarter, et cetera, that is artificially decreasing that total investment income number. Further, in the PIC line item, and we tried to highlight this in the financial statements There's an amendment fee that's about $200,000, and then there's about another $150,000 of non-recurring items flown through PIC this quarter that we would expect to normalize in the coming quarter.

Yeah, on the portfolio in general, as we kind of said before, we don't have – all that many names that sort of have converted to full pick through underperformance. A good chunk of it is sort of, you know, I don't want to say pre-planned, but sort of, you know, embedded in sort of the investment thesis, you know, from the time of the investment. And having said that, we probably have three names that I can think of that are picking that we are, you know, that have been underperforming that, you know, we are working with the company on, either sort of getting them to a place to reverse to cash and or exiting the positions. I think we're hopeful that we'll have some realizations on that front this year for a couple names. But there's certainly a handful of names that sort of had challenges over the last sort of two years that at least we feel like we're seeing the other side of.

Got it. I appreciate the commentary there. And then, Ted, in your prepared remarks, I think you used both the words healthy and robust to describe the pipeline today. So wondering if you could maybe just expand on that a little bit in terms of, you know, how it's composed in terms of new versus add-on opportunities, as well as any industries where you're seeing particularly attractive opportunities to invest today.

Yeah, good question. I mean, I think, I mean, overall market activity is way down, particularly post-liberation day. So I think I think activity, broadly speaking, is pretty anemic. We have actually a decent pipeline, but a lot of it's stuff that we sourced kind of pre-liberation day and are working their way through the system. So I'd say in terms of new deals coming in, I would say it's down probably a lot. But we do have a decent pipeline of things we've been working on for a while that are closing. And so I would say we're very, very, very cautious. You know, we feel like the economy is not going to get better. Let's put it that way. And lots of things can happen in the next six months, but we feel a lot of demand has been pulled forward. I think we're pretty cautious on the environment. So despite deal flow being down, I don't think we're that worried about it because, you know, we're not like overly bullish right now anyways.

Yeah, that's a good point. And I guess, you know, has the potential impacts of the tariffs and maybe reductions in government agencies, has that changed at all how, I guess, you are underwriting or the type of companies you might look to add to the portfolio in the future?

Yeah, good question. So, you know, again, like we have very, very, very little in the way of direct consumer exposure. I mean, Brandon in his comments mentioned Sundance, which is probably our, you know, one of the very few companies that has direct exposure, and that was an inherited position from an acquisition. We do have one or two other companies that have direct tariff exposure, but quite frankly, they're very under-levered and we're not that worried about it. Our big question for all of our companies is second and third order effects. If you go into a recession, there's other things that can impact their business indirectly because of tariffs. I think our whole sector, not just Portman, but I think generally speaking, we're all pretty light on consumer. Some BDCs have more than others. Like we have very, very little. So in terms of direct impacts, I think we don't have a lot. We're looking for businesses that have, you know, obviously ability to pass on price increases, those who have very, very, very high gross margins. So like Think Software. But I think, as I said, I think we're very, very focused on, you know, we're kind of planning for the worst and maybe something better happens, but I think that's what we're modeling right now. Yeah, I think on the diligence and underwriting side, I mean, the reality is, you know, if you're a private equity firm or, you know, a family office or whomever trying to buy a company, it's, you know, it's going to be really tough to sort of meet in the middle on a buyer and seller with companies that have direct tariff exposure. So just from a pipeline perspective of things that we're working on, you know, they tend to be a lot more weighted toward service-related businesses and healthcare, software, you know, things like that that are pretty obviously don't have the first-order effect. And then, as Ted said, we're really focused on kind of second and third order and how they perform, you know, during kind of recessionary environments.

That's all very helpful. That's it for me. Thanks for taking my questions.

Your next question comes from the line of Christopher Nolan with Leidenberg & Fallon. Please go ahead.

Hey, guys. First on the dividend, last quarter you guys are hinting that the $0.07 supplemental dividend would be quarterly, and I didn't see it this quarter. So am I correct that it's not in the first quarter earnings?

Yeah, so, Chris, I think what we laid out was a dividend policy where we set the base at $0.47, and then we would pay approximately 50% of the incremental NII above the base dividend. uh each quarter so this quarter with uh the sundance out of period impact uh being about five cents as well as some of the other items we uh laid out in our investment income we we didn't have incremental nii in excess of the base so that's why there was no supplemental however if you run rate our earnings uh you'll see we are uh very much uh you know we should be paying supplementals going forward uh And it would be consistent with that framework, 50% of the incremental NII above the base distribution of 47.

Okay. Thanks, Brandon. And I guess, you know, I mean, given that you guys are sort of sensitive to the LBO market and private equity and so forth, you know, what's the risk that your private equity sponsors will not step in with additional support for their companies in terms of more equity, you know, if this cycle sort of prolongs itself?

Yeah, I mean, I think we always live with that risk. You know, again, our portfolio is predominantly first lane. What we've seen actually is in our market, which is, you know, more of the middle market, sponsors have been a little bit more supportive than the large cap market. And generally speaking, it's because middle market funds have less companies in their portfolio. And therefore, you know, the risk of loss is much higher than a very, very like these big, big, big funds that we don't back. So we've really, I don't know, we've been really, Sponsors have been very constructive, actually, and have actually, the negotiations on situations where they put in money have actually been relatively non-controversial, I would put it that way. Now, again, that might change if this prolongs. Obviously, it's a lot harder for these guys to sell their companies. So we've been a very long, probably the longest in my career, prolonged period of no repayments because, A, there's just not a lot of velocity of capital. There's not a lot of businesses being sold. And number two, with higher rates, no one wants to refi. We'll get some natural refinancing to our portfolio in the next 12, 18 months, but it probably means we're not going to get a whole bunch of sales done.

A final question, and I missed it. Have you guys announced the date of the shareholder vote for Logan?

Yeah, so... You're very timely. So that should go out later today. So record date will be May 6th. June 6th will be the initial date for the shareholder meeting.

Sounds good, Al. Thank you.

Our next question comes from the line of Stephen Martin with Slater Capital. Your line is open.

Two questions, and they're sort of related. Can you talk about the composition of non-accruals and what the prospect is of, and you did deal with this a little, but what the prospect is of those, A, becoming a current pay and what the upside might be? And second, Patrick, every quarter you talk about the embedded unrealized losses that could be recovered. But when you look through, there are a couple of big ones that are basically marked to zero. which I don't think would fall into your calculation of what is recoverable. So of the unrealized losses embedded in the portfolio, what is actually possible to recover?

Yeah, so I'll take your first one first, Steve. So we really, on the non-accruals, I would say we have kind of two... I'd say two main positions within the non-accruals that are kind of worth talking about, one being Naviga, one being Sundance. I would say kind of Sundance just recently, obviously this past quarter, went on non-accrual. And so I would say it's tough to kind of estimate what the pathway is to sort of turning back on. We kind of do lay out, I guess, kind of In theory, the upside would sort of have been laid out in Brandon's comments, which is it's about, on an ongoing basis, about $0.02 a share of sort of ongoing income from Sundance. So that theoretically is the upside there. But, again, having said that, you know, it just recently went on, so, you know, I think that is a little bit less clear. On the VEGA... we've been doing a number of things with the company. It's about similarly sized as Sundance. So I don't have the exact number, but I would think of it as a fairly similar, you know, potential impact, you know, call it, you know, I need to decide two cents a share. And for that one, The company is positive cash flow, generating cash flow. We have sort of taken a fairly conservative position as a lender group and kind of working through that. I would say there is a fairly good prospect for a turning back on cash interest, but having said that, there's a different analysis of whether that ultimately comes in as income versus NAV recovery or cost recovery, depending on what we think about on the prospects there. But I would say that there's definitely line of sight for cash interest being turned back on, but that doesn't necessarily mean it's going to have an impact through the income. Yeah, so when we look at nav-upside, Steve, we break out for the board, and we break it out for ourselves. You know, kind of like stress names and names that are performing, and the performing names, there is a lot of embedded upside in just those names. So, like, I think you're making the right point. The right point is you can't take a lot of embedded upsides on something marked at zero. Yeah, again, that's fair. So what we do is we break out two things. We have, like, a watch list, and then we have our performing credits. And we have a pretty long list of performing credits with an average price in like low 90s or something that are covered. So I think we feel very good about that portion of the portfolio. Yeah, to be clear, we strip out and all those numbers that I give strip out all of our non-accruals, which again, tend to be your lower price in some zeros like a ProAir or things like that in there. And then the second thing is, as Ted mentioned, I'll give you just a simple example, and it's relatively small, but probably about half-ish of those numbers that I gave out, maybe a little bit less than half. are from liquid names and we feel, you know, good about them to varying degrees. But there was one, you know, one name, you know, on the list, I can say off the top of my head, LifeScan. It had been trading at like 25, 30 cents for, you know, the better part of the last year. And it's now back up to 62, 63 cents. where we sit today. So I think if you would have that conversation, you know, a couple quarters ago, you would have been asking the same question, and we do see the recovery there. So again, we do try and strip out the very obvious names, the very obvious names like our non-accruals, and don't factor that into our NAB upside. But again, even with some, you know, level of conservatism, you know, if we're giving out a 12.5%, which is the number, obviously there's a lot of room there to be off on that number and still have some fairly meaningful net upside.

Well, for instance, and I'm just looking at the schedule of investments, you know, you have KCAP Freedom marked from 25 to 11. I don't know what asset management company is, but it's marked from 18 to...

Yeah, Steve, sorry, I don't want to cut you off. And sorry, maybe it wasn't clear in the commentary. We're specifically only focusing on the debt securities of our portfolio, so not any of our joint ventures, not our equity positions, strictly the debt portfolio. Got it.

Okay. I'll come back to you offline with some questions.

Thank you. Thank you.

And our last question comes from the line of Lee Crockett, private investor. Your line is open.

Thank you. Good morning. I had a couple of questions on KCAP Freedom 3. It looks like you haven't received a dividend for the past six quarters. One, is that correct? And then you could go into any detail as to why you haven't received that. dividend. And then a couple of follow-up questions would be, do you anticipate any dividend from that joint venture this year? And does that joint venture have an end date?

Yeah. So, Lee, I'll take a couple of them and Brandon can follow up as necessary, but I think I'll cover it. The short answer is yes, we still receive dividends from it. But the A little bit similar to the answer I gave Steve on Naviga, which is there's a different analysis when you receive the dividend from an accounting perspective, whether you recognize that as income through our P&L or a recovery of cost. And so for the last, I don't know how many quarters, but a decently long period of time, as we receive distributions from that joint venture, we are recognizing it as a recovery of cost as opposed to income. So the short answer is yes, we still receive distributions on it, but from an accounting perspective, we recognize it as a return of capital as opposed to a return on capital. And then on the end date, there is not a stated – there is a stated end date. It is very far in the future. The reality is because of the way that's structured at some point, the liability costs will start to outweigh the income from the assets, in which case we would likely look to monetize or exit that portfolio, to your point on the dividends. But in the meantime, while we're still receiving dividends and repayments, in our opinion, it makes sense to kind of continue managing the vehicle.

I'll just add, we... We did receive a distribution in Q1. It was about 360 grand. And then over the course of 2024, we got just shy of $2 million in distributions. Again, though, given the unrealized loss position that you highlighted in your question, we've been reducing the cost basis to reduce the realized loss as opposed to recognizing that as an income distribution.

Okay. You said you got 360 of distribution. I see that coming down in the cost basis from year end, but you took down the fair market value by 1.6 million. Is there something going on there that, or is that just mark to market?

Yeah, this is market to market. The joint venture is funded via a CLO structure. So it's like a senior loan fund that's funded with the CLO. And so this particular quarter, just given that it's kind of continued to be a smaller size deal from a valuation perspective, sort of the third-party valuation sort of moved it from a, I'll call it a traditional cash flow CLO valuation model to what would be more like a NAV liquidation analysis. So there's a little bit of that going on in the mark-to-market impact of the quarter.

Okay. And just any commentary you might have on the switching to the Great Lakes joint venture, that looks like it's performing historically better than the KCAP Freedom 3. That's a fair statement. Or any commentary you might want to add there? I would say

I would say that's a fair statement. I would also just say they're differently structured. They're differently structured from a liability perspective, and therefore the valuations are run a little bit differently. You know, Great Lakes is sort of a – I'll call it has like a traditional evergreen credit facility as opposed to a CLO liability structure. So from a valuation perspective, it's literally a nav buildup of we value every single one of the underlying assets at fair value and then reduce the cost of debt. So reduce the amount of debt and that spits out what our value is on our balance sheet. So it's a little bit more straightforward. to be honest, but that also is a continuous, we generally have a continuous investment period on that. So it was that structure of Great Lakes had an original three-year investment period. We rolled it all into a new three-year investment period. That investment period is, initial investment period is coming up this summer. We would anticipate and anticipate rolling it into a new three-year investment period So unlike the KCAP Freedom 3 joint venture where, you know, it's effectively running down, the structure of Great Lakes is more of an evergreen fund structure that has a continuous investment period.

And Lee, I would just highlight, you know, I think one important point here is the Great Lakes joint venture is a BC proprietary platform trade, whereas the KCAP Freedom 3 was a legacy position we inherited when we took over KCAP.

Okay, thank you. Thank you.

And that concludes the question and answer session. I would like to turn the call back over to Mr. Goldthor for closing remarks.

Thank you for attending our call.

We will continue to provide our shareholders with updates about the proposed merger with Logan Ridge as those become available. As always, please reach out to us with any questions, which we're happy to discuss. We look forward to speaking to you again in August when we announce our second quarter 2025 results. Thank you very much.

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