Portman Ridge Finance Q3 2023 Earnings Call Transcript

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November 9, 2023

There are 8 speakers on the call.

Operator

Welcome to Portman Ridge Finance Corporation's Third Quarter 2023 Earnings Conference Call. An earnings press release was distributed yesterday, November 8, after market close. A copy of the release, along with an earnings presentation, is available on the company's website at www.portmanridge. Come in the Investor Relations section and should be reviewed in conjunction with the company's Form 10 Q filed yesterday with the SEC. As a reminder, this conference call is being recorded for replay purposes.

Operator

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 Porpenridge Finance Corporation Jason Roos, Chief Financial Officer and Patrick Schaeffer, Chief Investment Officer. With that, I would now like to turn the call over to Ted Goldthorpe, Chief Executive Officer of Portman Ridge.

Speaker 1

Good afternoon, and thanks everyone for joining our Q3 2023 earnings call. I'm joined today by our Chief Financial Officer, Jason Roos and our Chief Investment Officer, Patrick Schaeffer. I'll provide brief highlights on the company's performance and activities for the quarter. Patrick will provide commentary on our investment portfolio and our markets, And Jason will discuss our operating results and financial condition in greater detail. Yesterday, Portman Ridge announced Q3 2023 results and we are pleased with the solid earnings power of the portfolio despite operating in a somewhat challenging market conditions.

Speaker 1

Our core investment income was up year over year, increasing by $700,000 as we continue to see the impact that rising rates have on our debt portfolio. Additionally, our net asset value per share increased from $22.54 per share to $22.65 per share. We continued our accretive repurchase program, purchasing over 60,000 shares at an average cost of approximately $1,200,000 during the Q3. Due to the continued strong performance this past quarter, the Board of Directors was able to approve a dividend of $0.69 per share, a level that represents a 12.2 percent annualized return on net asset value. On a year to date basis, Total dividends to be distributed to shareholders amount to $2.75 per share, representing 7.4% increase as compared to the dividend distributed in 2022.

Speaker 1

As we have discussed in previous quarters, M and A deal flow continues to be at depressed levels year to date, but we remain optimistic on the overall outlook. On the sponsor finance front, we are starting to see the early innings of deal activity pickup through a combination of valuation expectations being more reasonable An acceptance that interest rates will remain elevated for an extended period of time, significant dry powder on the sidelines And private equity LPs encouraging the return of capital from their fund managers. Sponsors are looking to put less total leverage on their companies, which lowers our We'll remain cautious on the ultimate execution rate of these M and A processes. The recipe for increased activity levels appear to be in place. Both the sponsor and non sponsor activity, we continue to find the investment opportunities to be very attractive Given the combination of higher benchmark rates, lower leverage on new deals, higher equity contributions from sponsors and better documentation.

Speaker 1

Given the continued macro uncertainty around inflation, consumer sentiment and ongoing conflict in Ukraine and Israel, We continue to be very selective on new investment opportunities and have overall found investments in existing portfolio companies more attractive than those in new borrowers. Refocusing on Portman Ridge, we continue to believe our stock remains undervalued. Thus, as previously We continue to repurchasing shares under our renewed stock purchase program. In the Q3, we repurchased an incremental 60,559 shares for an aggregate cost of approximately $1,200,000 This follows the trend set throughout 2022 in the first half of twenty twenty three and expect this trend to continue through the final quarter of the year as we are able to do so. Following my remarks, Patrick will also walk through the potential upside cases for net asset value.

Speaker 1

But in addition to the market trading discount of our stock price, We continue to believe that there is significant embedded value to NAV even when overlaying conservative default and recovery rates. With that, I will turn over the call to Patrick Schaeffer, our Chief Investment Officer, for a review of our investment activity.

Speaker 2

Thanks, Ted. Turning now to Slide 5 of our presentation and the sensitivity of our earnings to interest rates. As of December As of September 30, 2023, approximately 90.5 percent of our debt securities portfolio were either floating rate with a spread to an interest Rate index such as LIBOR, SOFR or prime rate with 98% of these being linked to SOFR. As you can see from the chart, The underlying benchmark rate of our assets during the quarter lagged prevailing market rates and still remain below the sulfur rates As of October 30, 2023, but the gap is the narrowest it has been since the onset of the Fed rate hike cycle. For illustrative purposes, if all our assets were to reset to either a 3 month LIBOR or SOFR rate respectively, We would expect to generate an incremental $75,000 of quarterly income.

Speaker 2

Having said that, Slide 7 shows A slight decline in NII per share on a run rate basis, driven largely by slightly lower asset balance as of September 30, 2023 And our simple methodology of not assuming any changes to the portfolio. Skipping down to Slide 11, Originations for the Q3 were slightly higher than the prior quarter, but still remain below repayment levels, resulting in net repayments And sales of approximately $11,600,000 Some of this was driven by late repayments during the quarter and 2 transactions expected to close in Q3 They were pushed into early Q4. Our new investments made during the quarter are expected to yield a spread to SOFR of 9 17 basis points on par value The investments were purchased at a cost of approximately 99.27 percent of par. Our investment securities portfolio at the end Of the 3rd quarter remained highly diversified with investment spread across 26 different industries and 101 different entities, All while maintaining an average par balance per entity of approximately $3,300,000 Turning to Slide 12, We had one new portfolio company go on non accrual as compared to June 30, 2023 and one come off non accrual due to the completion of a restructuring.

Speaker 2

In aggregate, securities on non accrual status remained relatively low at 8 investments in the Q3 of 2023 as compared to 7 investments on non accrual status as of June 30, 2023. These 8 investments on non accrual status at the end of the Q3 23 represent 1.6% and 3.6% of the company's investment portfolio at fair value and amortized cost respectively. On Slide 13, excluding our non accrual investments, we have an aggregate debt securities fair value of 427,000,000 which represents a blended price of 93.4 percent of par value and is 88% comprised of 1st lien loans at par value. Assuming the power recovery, our September 30, 2023 fair values reflect a potential of $28,000,000 of incremental NAV value, A 13.1% increase or $2.94 per share, excluding any recovery on the non accrual investments. For illustrative purposes, if you would assume a 10% default rate and a 70% recovery rate on this debt portfolio, There would still be an incremental $1.60 per share of NAV value or a 7.1% increase over time as the portfolio matures And is repaid.

Speaker 2

Again, this is excluding any recovery on the non accrual investments. This indicative default rate Is above anything the market is expecting or has experienced historically. Finally, turning to Slide 14. If you aggregate the 3 portfolios Acquired over the last 3 years, we have purchased a combined $435,000,000 of investments, have realized over 78 Percent of these positions at a combined realized and unrealized mark of 103% of fair value at the time of closing the respective mergers. This is an indication of our ability to effectively realize the value of legacy portfolios acquired while rotating into BC Partners sourced assets.

Speaker 2

More importantly, we're able to achieve those results despite the global pandemic in 2020 most of 2021 and a weak market for Almost all asset classes in 2022 and the first half of twenty twenty three. I'll now turn the call over to Jason to further discuss our financial results for the period.

Speaker 3

Thanks, Patrick. As both Ted and Patrick previously mentioned, despite operating under a challenging economic environment, Our results for the Q3 of 2023 reflect strong financial performance. Our total investment income decreased slightly by 400,000 to $18,600,000 in the Q3 of 2023 in comparison to $19,000,000 in the Q3 of 22. This reported total investment income represents a $1,000,000 decrease from the $19,600,000 of reported total investment income in the Q2 of 2023. The quarter over quarter decrease was largely due to reduced fee income and dividend income compared to the Q2 of 2023.

Speaker 3

Excluding the impact of purchase price accounting, our core investment income for the Q3 of 2020 3 was $18,300,000 an increase of $700,000 as compared to $17,600,000 for the Q3 of 2022, a decrease of $900,000 as compared to $19,200,000 for the Q2 of 2023. Our Our net investment income for the Q3 of 2023 was $7,200,000 or $0.75 per share, a decrease of $1,200,000 as compared to $400,000 or $0.87 per share for the Q3 of 2022 and a decrease of $700,000 as compared to $7,900,000 or $0.83 per share for the Q2 of 2023. The quarter over quarter decrease was largely due to the aforementioned decreases seen in fee As of September 30, 2023 June 30, 2023, the weighted average contractual interest rate On our interest earning debt securities was approximately 12.3% and 12.1% 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 decreased quarter over Quarter from $11,700,000 for the Q2 of 2023 to $11,400,000 in the Q3 of 2023.

Speaker 3

This decrease was Due to reduced expenses in predominantly all expense categories, a result of our efforts to reduce overall expenses. Our net asset value for the Q3 of 2023 was $214,800,000 or $22.65 per share as compared to 215,000,000 or $22.54 per share in the Q2 of 2023. Turning to the liability side of the balance sheet. As of September 30, 2023, we had a total of $321,500,000 par value of borrowings outstanding at a current weighted average interest rate of 6.9%. This balance was comprised of $74,000,000 in borrowings under our revolving credit facility, dollars 108,000,000 in 4.70 percent notes due 2026 and $139,500,000 in secured notes due 2029.

Speaker 3

The quarter over quarter decrease of $12,200,000 was primarily driven By an $8,200,000 repayment on the secured notes due 2029 and a net $4,000,000 repayment on the revolving credit facility. As of the end of the quarter, we had $41,000,000 of available borrowing capacity under the senior secured revolving credit facility and no remaining borrowing capacity Under the 20 eighteen-two revolving credit facility as the reinvestment period ended shortly after our draw on November 20, 2022. As of September 30, 2023, our debt to equity ratio was 1.5 times on a gross basis and 1.34 times on a net basis. From a regulatory perspective, Our asset coverage ratio at quarter end was 166%. Finally, and as announced November 8, 2023, a quarterly distribution $0.69 per share was approved by the Board and declared payable on November 30, 2023 to stockholders of record at the close of business on November 20, 2023.

Speaker 3

This is a $0.02 per share distribution increase as compared to the Q4 of 2022. Including the distribution subsequent to the announcement of full year 2022 earnings results, total stockholder distributions For 2023 amount to $2.75 per share. With that, I will turn the call back over to Ted.

Speaker 1

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 we have shown throughout the year so far, through our prudent investment strategy, we believe we will be able to deliver strong returns to our shareholders The final quarter of the year and into 2024. Thank you once again to all of our shareholders for ongoing support. This

Operator

Our first question will come from the line of Paul Johnson with KBW. Please go ahead.

Speaker 4

Yes, good evening guys. Thank you for taking my questions. The first is just kind of just maybe kind of giving your overall thoughts on leverage, post leverage in the BDC And kind of where you see that going into next year, if there's focus on Reducing that or rotating out certain investments, they're just basically just redeploying what's coming in in

Speaker 1

Yes, it's a great question. I think the answer is, Again, we have a stated target leverage range, which we're close to the high end of. And so again, I don't feel like our leverage If anything our leverage will go down. I don't feel like our leverage will go up going into next year. I mean there's a lot of uncertainty going into next year.

Speaker 1

We're earning very strong ROEs and We don't need leverage to earn our dividends nor our earnings. So we if you recall, we took up leverage for a temporary period of time which is now coming down because we had a use it or lose it facility that was very accretive for shareholders. But But yes, we expect leverage to come down or at least stay within the range that we've kind of outlined to people.

Speaker 4

Got it. That's helpful. And then, is that going to, I guess, your ability to kind of continue buying back shares? How do you see that kind of impacting your thoughts around share repurchases?

Speaker 1

I mean, I think, listen, we've done it A bunch of years in a row like we're very committed to buying back stock. And again, given where ROEs are and given where new investment rates are, It's also very accretive for us to invest, but given where our stock trades and given where our yield is at market, we just think it makes a lot of sense for us to buy back stock.

Speaker 4

Thanks for that. And then my other question is just on interest income. If I'm calculating it right, approximately about 16% or so of total interest income Was pig income this quarter. I just want to make sure that I'm looking at that correctly. And then also how does that compare, I guess, Historically, the portfolio.

Speaker 3

Yes, I would say, we did have more pick income this Order relative to prior quarters. That's a function of some of our we look at interest income and PIK income as kind of 1 in the same as A conglomerate source of income. But you're right, this quarter, we had a larger amount Of our investment income being made up of PIK income, which is a function of Yes, some of the assets that were previously cash paying are now picking due to some of the optionality that they have in the agreements themselves.

Speaker 2

Yes. And there was one there was also one specific name that moved from cash to pick this in Q3, But then was exited in where we sit today on the phone in Q4. So all else be equally, do you expect that to go down a little bit next quarter just because of the exit of one of the assets that had a little bit of pick

Operator

Your next question will come from the line of Christopher Nolan with Ladenburg Thalmann. Please go ahead.

Speaker 5

Hey, guys. For your portfolio companies, are you seeing sponsors step up and put in more equity or Not really.

Speaker 1

Why don't I go first and then Patrick can respond. I think we're seeing This is just my own opinion. Like I think you're seeing a bifurcation in the market between size of sponsor, meaning I think we're seeing pretty constructive behavior on behalf Middle market sponsors and we're seeing more economic decision making on behalf of larger sponsors. And again that more affects the larger players in the BDC space And the syndicated markets, but yes, we're in constant dialogue with our sponsor counterparts and I think like they've been very, very constructive so

Speaker 2

Yes. Matt, I don't have much to add. Ted hit the nail there. The only thing in some instances, if Sponsors are looking at some sort of amend and extend for a kind of multiyear period. The thing that ourselves as well as just lenders in the market are focused on is Coverage at this point as opposed to leverage.

Speaker 2

And so there's oftentimes where there needs to be a little bit of incremental equity coming into the structure to bring you down to a coverage Perspective that makes sense. So those are obviously all kind of one off conversations. But as Ted said, kind of usually in those discussions, the bifurcation is really on Size of sponsor and what they're comfortable doing.

Speaker 5

And I guess the follow-up question would be what sort of EBITDA multiples are you seeing given the change in rates? I mean, obviously,

Speaker 1

we have

Speaker 5

to try to see

Speaker 2

Are the market developing?

Speaker 1

Yes. So I think there's a push pull, but everybody's on the same page, which is Sponsors are back solving for their interest coverage ratios basically to Patrick's point, but we're not being asked to max lever companies. So we've seen leverage come down anywhere from 1 to 2 turns pretty consistently and that just ties back into interest coverage ratios. There's a recent large private equity deal that was done with no debt and the sponsor is just of the view that they're going to be able to finance it later cheaper which I don't know, I'm not sure I would make that But yes, we're definitely being asked for lower leverage levels. So it's not the intention of like we're being asked for max leverage, we don't want to do it.

Speaker 1

That's all for me. Thank you.

Operator

Our next question will come from the line of Stephen Martin with Slater. Please go ahead.

Speaker 6

Hey, guys.

Speaker 1

Hi, Steve.

Speaker 6

Couple of questions. You said that on the non accruals that, 1 went on and 1 went off, Yes, but the total went from 7 to 8. Am I missing something?

Speaker 2

No. I mean, technically, one, The new non accrual has just 2 different securities as a revolve in our term loan and They're paired with each other. So we have both of them on non accrual. It's 1 borrower, but 2 different securities. So that table is security count and not borrower account.

Speaker 6

All right. Would you care to elaborate on what that one security was? Or I know what it is, but what the story is behind it?

Speaker 2

The security that came back or the security that went on?

Speaker 6

The one that came back we're less concerned with the one that went on.

Speaker 2

The move on, the legal entity name is HDC, Hostway. There's a term loan and revolver. HDCHW Intermediate Holdings LLC is the legal name. It's a company that we've had Sort of March below par for a period of time. They have sort of one business that has been struggling in one side of the house that has been growing pretty well.

Speaker 2

But the side

Speaker 1

of the house is

Speaker 2

growing, it's a little bit smaller than the side of the house that is declining. We've been working with the other lenders on a potential Restructuring pathway for the company and kind of in light of the what we hope is a relatively short pathway To a restructuring, we felt it prudent to put it on non accrual in the quarter with the hope that it's a relatively short lived candidate within there.

Speaker 6

Is it a sponsor back deal?

Speaker 2

It was a sponsor back deal. The Sponsor is not very involved at this stage.

Speaker 6

Got it. And was it a BC source deal or was it one you inherited?

Speaker 2

It was not. It was inherited from the Garrison portfolio.

Speaker 4

Okay.

Speaker 6

Can you talk about quarter to date events Vis a vis repayments and sales etcetera and or share repurchase?

Speaker 3

Well, I can give you some high level numbers. On the purchases, we had about 18,000,000 a little over 18,000,000 of purchases offset by Approximately $30,000,000 of sales and pay downs. If you're doing the roll, then you have about $1,700,000 of Unrealized gain offset by realized loss of about $1,600,000 And then with accretion and some others, you get the delta in the investment portfolio.

Speaker 1

Okay. You're asking about quarter to date, right? I mean, are you asking about activity through Sorry. Quarter end.

Speaker 2

Yes.

Speaker 4

Yes.

Speaker 1

I mean I would say there's nothing I mean Patrick can speak up too, but I think nothing outside of normal course. I don't think there's anything particularly different about the market today than we experienced in the Q3.

Speaker 2

No, that's right. We had 1 or 2 A handful of portfolio companies repay. We've invested in 1 or 2 new portfolio companies. Again, as Ted said, I don't think there's anything Particularly outside of the ordinary course that's kind of gone on so far quarter to date.

Speaker 6

Okay. And share repurchase quarter to date?

Speaker 3

I'd have to get back to you on that number, Steve. But as you know, the program is It's an ongoing program. And when that turns out, we'll set it up as we normally do.

Speaker 1

Okay.

Speaker 6

2 more. Can you comment on the CLO market and given your over earning the dividend And your view on dividends going into the end of the year?

Speaker 2

Yes, I'll take the CLO market and Teck could talk About dividends, I'd say in general, the CLO market is has been a little bit healthier, particularly sort of Half of Q3 and maybe a touch into the first bit of Q4 here, That has led overall to a little bit better bids and pricing in the Syndicated loan market in general as some of that CLO formation has driven the need to buy some assets. So I'd say Kind of generally speaking, the CLO market is like a little bit healthier this quarter or where we sit today relative to perhaps sometimes in the last couple of quarters. Having said that, the CLOs that we are invested in generally speaking are out of their investment Periods, so by and large, the CLO managers there are kind of making decisions around what they might Expect in terms of repayments on their various portfolios, the relative OC tests and things like that around Distributions, etcetera. So our particular portfolio is a little bit separate from the CLO market broadly. But I'd say generally speaking the market has had some improvement over the last call it 6 to 8 weeks or so.

Speaker 6

So Given your specific portfolios, the CLO your CLO portfolio was a source of funds rather than a use of funds?

Speaker 1

It's always a source of funds. It's just it's always a different amount of source of funds, but It's not a use of funds.

Speaker 6

Okay. Yes, I meant money is coming back to the stock.

Speaker 1

I think you're asking about total return versus income return and Yes. We're getting positive income off our portfolio and I think I mean, listen, it's only a couple of weeks in the quarter. I don't think we can I don't think we really know in terms of valuation? Okay. It's small and again, it's 2% of our portfolio.

Speaker 6

Okay. And Ted, your comment about year end dividends.

Speaker 1

In terms of a special dividend, is that what you're asking about? Yeah, it's something along those lines. I mean, listen, we obviously benefited greatly from some of this M and A, which created some advantages for our shareholders around spillover income. I would say we feel really good about our dividend even if the Fed cuts rates which we don't obviously speculate on because that's Not our thing. The dividend is pretty protected down to a pretty big reduction in short term rates.

Speaker 1

So again, we assess every quarter. Obviously, We're comfortably over earning our dividend in a period of time where we're getting. So I think we feel good about where our dividend is and I don't again like we'll assess it at year end and see if there's see where we are in terms of spillover income.

Speaker 4

All right. Thanks a lot.

Operator

Our next question comes from the line of James Power. Please go ahead.

Speaker 7

Good afternoon. I was wondering about this, I don't know whether I'm pronouncing it correctly, Repertoire Partners, But anyway, they made a filing in the last quarter and had quite a bit of stock. I was wondering if you would talk to them About their intentions and what they are they going to be sellers of this block? And how did they get that bigger block?

Speaker 1

Yes, I don't think we comment on individual shareholders and individual shareholders' intentions. So I'm not sure we want to really make a comment on that.

Speaker 7

Okay. All right. Thank you.

Operator

We have no further questions at this time. I'll hand the call back over to Ted Goldthorpe for any closing remarks.

Speaker 1

Great. Well, thank you all for attending our call. As per always, Please reach out to us with any questions, which we're happy to discuss and hope everybody has a great Thanksgiving and we look forward to speaking to you again on our next call. Thank you.

Operator

Ladies and gentlemen, thank you all for joining today's meeting. That will conclude our call. You may now disconnect.

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Earnings Conference Call
Portman Ridge Finance Q3 2023
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