Portman Ridge Finance Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 10, 2023

There are 7 speakers on the call.

Operator

Welcome to the Portland Ridge Finance Corporation's 2nd Quarter 2023 Earnings Conference Call. An earnings press release was distributed yesterday, August 9th, after market close. A copy of the release along with an earnings presentation is available on the company's website at www.partmanridge.com in the Investor Relations section and should be reviewed in conjunction with the company's Forms 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 involved a number of risks and uncertainties.

Operator

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 D. Ted Goldthorpe, Chief Executive Officer, President and Director of Portman Ridge Finance Corporation Jason Roos, Chief Financial Officer and Patrick Sheffer, 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 morning, and thanks everyone for joining our Q2 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 and 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 its Q2 2023 results and continuing off the back of strong earnings momentum seen in the Q1 of 2023, we are pleased to announce a solid financial performance for Portman Ridge in both the Q2 of 2023 and the first half of twenty twenty three overall.

Speaker 1

Our total investment income, Core investment income and net investment income substantially increased as compared to the 3 month 6 month period of last year as we continue to see the impact of rising rates have had in generating incremental revenues from our debt portfolio. Our core investment income for the Q2 of 2023 was $19,200,000 an increase of $5,500,000 as compared to $13,700,000 for the Q2 of 2022. Our strong performance this past quarter has allowed us to maintain our dividend of $0.69 per share marking a $0.06 per share distribution increase as compared to the Q3 of 2022. In terms of a market update, M and A and deal activity picked up during the Q2, particularly in the back half and early third quarter, despite the continued macro overhang of elevated inflation rates and continued increases in the Fed funds rate. While we continue to see lender friendly concessions on pricing and terms, the competitive dynamics are stronger than we've seen in several quarters.

Speaker 1

We remain very selective regarding new portfolio companies given the broader macroeconomic environment, but have found particularly attractive opportunities for add on investments in existing portfolio companies looking to compete tuck in acquisitions. Turning the focus back to the company, we continue to believe in the valuation of Portman Ridge as we continued repurchasing shares under our renewed stock purchase program. In Q2 of 2023, we repurchased an incremental 27,801 shares following on the trends seen throughout 2022 in the Q1 of 2023. We expect this trend of repurchasing Portman shares to continue throughout 2023 as we are able to do so. On this call, Patrick will also walk through the potential upside cases for our net asset value, but as it pertains to the current quarter performance, this continue to be a challenging asset class given certain structural issues with the syndicated loan market, CLO equity represents less than 3% of our total assets.

Speaker 1

Approximately 74% of our portfolio is in 1st lien debt and is now valued at a meaningful discount to par. We've Experience normalized defaults or even elevated defaults, default rates versus history, we believe there's still embedded net asset value upside in our portfolio. Thus, This adds to our earnings momentum driven by wider spreads on new origination and rising short term interest rates to drive both potential NAV and earnings upside. With that, I will turn the call over to Patrick Schaeffer, our Chief Investment Officer, for a review of our investment activity.

Speaker 2

Thanks, Ted. Turn to Slide 5 of our earnings presentation and the sensitivity of our earnings to interest rates. As of June 30, 2023, Approximately 90.9 percent of our debt securities portfolio were either floating rate with the spread to an interest with the Q4 of 2018. Great index such as LIBOR, SOFR or Prime Rate, with 69% of these being linked to SOFR. As you can see from the chart, The underlying benchmark rate of our assets during the quarter lagged the prevailing market rates and still remains meaningfully below the LIBOR and SOFR rates as of July 25, 2023.

Speaker 2

We expect this to normalize over time as the underlying 1, 3 6 month contracts reset. For illustrative purposes, if all of our assets were to reset either a 3 month LIBOR or SOFR rate respectively, we would expect to generate an incremental $484,000 of quarterly income. While our liability costs will also rise relative to their Q2 levels, we still expect a net positive benefit of approximately $0.04 per share, assuming all of our assets and liabilities are utilizing the same 3 month benchmark rate for an entire quarter, which is further illustrated on Slide 7. Skipping down to Slide 11, both investment activity and originations for the quarter were slightly higher than prior quarter, resulting in net repayment and sales of approximately $21,000,000 Net deployments consisted of new fundings of approximately $15,300,000 offset by approximately $36,300,000 of repayments in sales. These new investments are expected to generate are expected to yield a spread to SOFR of 828 basis points on the par balance and the investments were purchased at a cost of approximately 98.

Speaker 2

65% of par, which will generate incremental income to the stated spread. As mentioned during our earnings call, it was our expectation that Q2 would generate more repayments than deployments as we intentionally drew up a portion of our revolver in Q4 2022 to invest ahead of several repayments. In May, we repaid $23,600,000 of our 20 eighteen-two secondured notes. I would like to specifically call out 2 payments pay downs during the quarter, both of which occurred relatively early on. First, we completed the recapitalization of Northeast Metal Works, and asset acquired as part of the merger with Harvest Capital in April 2023.

Speaker 2

As part of the transaction, we repaid approximately 1 third of our position and restructured the remaining position to prioritize additional periodic repayments. Secondly, in mid May, we refinanced out We will refinance out of our 2nd lien term loan position in TechTeq, which has been a portfolio company since the initial externalization transaction back in April 2019. In addition being one of our larger positions, it was by far our largest second lien position and allows us to further rotate into 1st lien senior secured loans. During the quarter, we funded $600,000 into our Great Lakes joint venture, which has taken us close to being fully funded under that commitment. Similar to our experience with new assets on the balance sheet, incremental investments in our Great Lakes joint venture have come at increasing spreads and widening OID, should result in higher returns going forward.

Speaker 2

Our investment securities portfolio at the end of the second quarter remained highly diversified with investments spread across 27 different industries and 104 different entities, all while maintaining an average par balance per entity of approximately $3,200,000 Turning to Slide 12, we had one new issuer in 2 incremental portfolio company investments going on accrual as compared to March 31, 2023. One of which is a term loan for Qualtech, which is valued 53.82 percent of par and has recently emerged from bankruptcy from which we are looking to recover a portion of our initial investment. The second of which is a term loan for Lucky Bucks, which is valued at 28.2 percent of par. In aggregate, investments on non accrual status remain relatively low at 7 investments in the Q2 of 2023 as compared to 5 investments on nonaccrual status as of March 31, 2023. These 7 investments on non accrual status at the end of the Q2 of 2023 represent 0.8% and 2.6% of the company's portfolio at fair value and amortized cost respectively.

Speaker 2

On Slide 13, as Ted mentioned, if we focus on the top three rows of the table and exclude our non accrual investments, We have an aggregate debt securities fair value of $410,600,000 of which represents a blended price of 92 0.18 percent of par and is 88% comprised of 1st lien loans at par value. Assuming a par recovery, our June 31, 2023 fair values reflect a potential of $34,800,000 of incremental NAV, a 16.2% increase or $3.65 per share, excluding any recovery on the non accrual investments. For lesser purposes, if you were to assume a 10% default rate and 70% recovery on this debt portfolio, there would still be an incremental $2.25 per share of NAV value or a 10% increase over time as the portfolio matures and is repaid, again, excluding any recovery on the non accrual investments. The default rate is above this default rate is above anything market is expecting or has experienced historically. Turning finally to Slide 14.

Speaker 2

If you aggregate these 3 portfolios, Over the last 5 years 3 years, we have repurchased a combined $434,800,000 of investments, have realized over 73% of these positions at a combined realized and unrealized mark of 102% of fair value at the time of closing the respective mergers. We were able to achieve these results despite the global pandemic in 2020 and most of 2021 and a weak market for almost all asset classes in 2022. In a similar vein as the previous slide. As of June 30, 2023, there remains an incremental $12,800,000 of value as compared to par in these portfolios, which equates to $9,400,000 or a 4.4% increase when applying a similar 10% default rate and 70% recovery analysis and excluding non accrual investments. 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 Q2 of 2023 reflect strong financial performance. Our total investment income increased by $4,600,000 to $19,600,000 in the Q2 of 2023 in comparison to $15,000,000 in the Q2 of 2022, as we continue to see the impact of rising rates on our portfolio. This reported total investment income represents a $700,000 decrease from the $20,300,000 of reported total investment income in the Q1 of 2023. The quarter over quarter decrease was largely due to reduced payment in kind income seen in the Q2 when compared to the Q1 of 2023, as well as lower pay down income and lower purchase accretion as the discount associated with investments acquired through mergers and acquisitions continues to run off.

Speaker 3

Excluding the impact of purchase price accounting, our core and net income for the Q2 of 2023 was $19,200,000 an increase of $5,500,000 as compared to $13,700,000 for the Q2 of 2022 and and a decrease of $100,000 as compared to $19,300,000 for the Q1 of 2023. Our net investment income for the in Q2 of 2023 was $7,900,000 an increase of $2,400,000 as compared to $5,500,000 for the Q2 of 2022 and a decrease of $600,000 as compared to $8,500,000 for the Q1 of 2023. The quarter over quarter decrease was largely due to the aforementioned decrease as seen in payment in kind income, pay down income and purchase discount accretion. For the 6 months ended June 30, 2023, our NII was $16,400,000 an increase of $3,000,000 as compared to $13,400,000 in the same 6 month period from 2022. As of June 30, 2023 March 31, 2023, the weighted average contractual interest rate on our interest earning debt securities was approximately 12 0.1% and 11.7% respectively.

Speaker 3

We believe the portfolio continues to be well positioned in a rising rate environment to generate incremental revenue in future quarters. Total expenses were relatively flat quarter over quarter at 11 $7,000,000 for the Q2 of 2023 as compared to total expenses of $11,800,000 seen in the Q1 of 2023. This quarter over quarter decrease highlights our efforts at continuing to reduce overall expenses in certain areas such as administrative services, professional fees and other general and administrative costs. Our net asset value for the Q2 of 2023 was $215,000,000 or $22.54 per share as compared to $225,100,000 or $23.56 per share in the Q1 of 2023. A significant driver of the quarter over quarter decline is attributable to realized losses from impairment taken against our CLO equity positions as well as markdowns on that portfolio.

Speaker 3

On the liability side of the balance sheet as of June 30, 2023, we had $333,700,000 par value of borrowings outstanding comprised of $78,000,000 in borrowings under our revolving credit facility, $108,000,000 of 4.78 percent notes due 2026 $147,700,000 in secured notes due 2029. This balance represents a quarter over quarter decrease of $24,600,000 driven by a $23,600,000 repayment on the secured notes due 2029. As of the end of the quarter, we had $37,000,000 of available borrowing capacity under the senior 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 2022. As of June 30, 2023, our debt to equity ratio was 1.6 times on a gross basis and 1.4 times on a net basis from a regulatory perspective, our asset coverage ratio at quarter end was 163%. Lastly and as announced yesterday, a quarterly distribution of $0.69 per share was approved by the Board and declared payable on August 31, 2023 to stockholders of record at the close of business on August 22, 2023.

Speaker 3

This is a $0.06 per share distribution increase as compared to the 3rd of 2022. Including the distribution to the announcement of full year 2022 earnings results. Total stockholder distributions for 2023 amounted to $2.06 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 opportunities that arise from the current market environment by continuing to be selective and resourceful in our investment decision making. Overall, we believe we remain situated to continue to deliver attractive returns to our shareholders throughout the second half of twenty twenty three as we have demonstrated in the first half of twenty twenty three. Thank you once again to all our shareholders for your ongoing support. This concludes our prepared remarks And I'll now turn the call over to the operator for any questions.

Operator

Thank you. The floor is now open for your questions. We'll pause for just a moment to compile the Q and A roster. Your first question comes from of Christopher Nolan with Ladenburg Thalmann. Your line is open.

Speaker 4

Hey, guys. Hi, Chris. Did the share repurchases have any accretion to NAV per share? And if so, can you quantify it?

Speaker 3

Yes, we bought about what $500,000 worth of equity in the quarter. I think if you look at it 6 months today, I think it's about $0.37 a NAV roughly.

Speaker 4

Also, were there any non recurring items in EPS?

Speaker 3

Yes, I would say on the expense side, there's probably about a well, I know there is, there's about $100,000 of non recurring or one time just legal expense and the professional expenses. Other than that, our other income fees are generally kind of one times in nature, but do have a recurring effect quarter over quarter. It's generally pretty somewhat volatile, but there is always some fee income that we see in that line. I would say It trended up this quarter from last quarter due to some one time items in there about $300,000 $400,000 roughly.

Speaker 4

Great. And then I guess finally, for I'm seeing for the BECs I'll cover incremental asset quality deterioration. Strategically, do you see the developing environment to be conducive to more consolidation in the BDC space?

Speaker 1

That's not where I thought you're going with that question. I would say, I think a lot of the Low hanging fruit has been picked I think in terms of M and A. But again, scale is becoming more and more and more important across Broad credit and then you're seeing like both in terms of getting financing from banks, which is becoming more scarce and also in servicing our clients appropriately. So scale is definitely important. I don't see any near term M and A, but it is a good question.

Speaker 1

It's We're always looking for and obviously we always get phone calls on M and A opportunities. Sounds good. I'll get back in the queue. Thanks guys. Thank you.

Operator

Our next Question comes from Ryan Lynch with KBW. Your line is open.

Speaker 5

Good morning. First question Good morning. Hey, first is just a clarification. Did you say 72% of the realized losses, which was Kind of reflecting the $6,000,000 to $7,000,000 of losses which related to the CLO positions or was that 72% of realized and unrealized losses.

Speaker 3

Yes. Hey, Ryan. So of the $6,700,000 realized, About

Speaker 1

$5,600,000 that

Speaker 3

was related to the CLOs.

Speaker 5

Okay. And then so A couple of questions on that then. So what drove the decline in, I guess, CLOs That like because that wasn't offset by realized gain or unrealized gains, I guess when you sold those, what kind of drove the lower valuations in your CLO book because it didn't seem like broadly syndicated loan prices really move lower in the quarter, in fact they were up.

Speaker 3

Yes, let me clarify that a little bit, Ryan. So the CLOs did have about $900,000 in unrealized that flipped into realized as part of that 5.6% that I just mentioned. And the remainder of that while all of the 5.6% was flipped into realized as part of an impairment. So we reduced the cost basis of the instrument. It wasn't a sale of the positions.

Speaker 3

And that's driven by basically the accounting and the fair value based on the future cash flow expectations of that CLO equity. And I'll pass it Patrick?

Speaker 1

Yes. Having said all

Speaker 2

that, there is still a again, despite whether you consider it unrealized versus whether we took it as an impairment versus remains unrealized. There were some, I'll call it, fair value declines in the CLO portfolio. And by and large, your point, the syndicated market hasn't moved very much. But what we've seen, honestly, this quarter for the first time in a while, and we can talk about other reasons why, but a lot of the CLO managers themselves are actually selling some of the assets within the portfolio, sometimes to meet certain tests, sometimes for other reasons. But given that most of our The CLO vehicles that we were investing in are out of the reinvestment period.

Speaker 2

If you sell an asset at 90, That's just a lot that's just a hit relative to NAV. And so what we saw particularly again, it's across a number of the we have, I guess, 3 different managers in total between our CLOs. And by and large, The majority of the call it markdown or decline in fair value is from the managers themselves selling assets at below par.

Speaker 1

So Ryan, thematically what's happening, which obviously is incredibly frustrating is the way CLOs are set up. Obviously, they managed to test and you've obviously had ratings migration down or things on downgrade watch. And so, yes, as Patrick said, a lot of it is portfolio repositioning around Downgrades, and obviously that hurts the valuation of the CLO equity. So I mean, I guess the only silver lining is only 2.5% of our remaining portfolio.

Speaker 5

Yes. Okay. Makes sense. And then I guess On the other portion then, so that kind of covers I think a lot of the realized losses, but there were still some unrealized losses in the quarter as well as some realized that was outside of the CLOs. What drove those declines?

Speaker 5

I know there were, I think you said 2 non accruals. I haven't been able to calculate Were those driven by markdowns in the 2 new non accruals or what was kind of the overriding factors for the other write downs in the portfolio?

Speaker 1

Yes, I think it's probably a little bit

Speaker 2

from non accruals, but I'd say the bigger impact, probably about half of call it the non CLO impact is from one position, it's called Mobax. It's a mark to market decline. We continue to work with the company and the lender group and we feel pretty decent that markdown quarter over quarter is really temporary, and we would anticipate that sort of reversing itself in the kind of near to medium term. So that's kind of Half of the mark is really just what we would very much characterize mark to market. And probably like most of the rest of The other half is due to 2 other positions.

Speaker 2

1 is called Anthem Sports Entertainment. It's just a large position and we mark it down 2 or 3 points sort of kind of consistent with sort of mark to market. Again, it's not a significant markdown on a percentage basis, but It's a relatively large position, so it has kind of an outsized dollar impact. And then the third one is, HDC or Host Way Company has been underperforming a little bit. They are in the process of selling a number of assets, various different assets within the port within the company that we'd expect to realize a decent chunk of that loan in the kind of near to medium term and the remainder of it we'll kind of continue on.

Speaker 2

So again, I think we feel relatively good that most of that markdown is temporary or Call it mark to market as opposed to credit necessarily.

Speaker 1

Yes. And then one of them on the non accrual side, it is 2 new securities, but it's only 1 new issuer. And one of those issuers is expected to emerge from bankruptcy or to emerge from bankruptcy. So That will also the non accrual line should also be stable to positive barring some surprises. So I'd say thematically credit quality in the portfolio despite Patrick's comments is pretty stable actually.

Speaker 1

And again, we don't expect a big

Speaker 5

Okay. Well, kind of on that point and when you were talking about kind of host way and the potential recovery for there, You guys talked about some potential upside to NAV if some of your senior loans that aren't on non accrual status Or kind of recovered or even ran through a scenario where there was X percentage of falls and certain recoveries. I guess When I mean, what do you think changes in the environment before those start Getting written up or is it just a very slow sort of accretion, like if everything if those companies continue to perform, kind of lay that down as Foundation, is it just going to be a slow accretion over time as they get close to maturity and repay, which could obviously take years? Or does something have to happen in broader in the market regarding spreads or something like that? Or what is sort of the What do you see as the potential catalyst or timeframe to eventually recover those potential write downs?

Speaker 1

Yes. So I think we think there's a lot of embedded upside in the book because of this mark to market phenomenon. And the way our matrix works in terms of markdowns, There's a bit of a lag. So obviously today, as we sit here today, obviously the loan and high yield market have tightened recently. So Some of that should be will just be mark to market based on indices.

Speaker 1

And then the number 2 is obviously a lot of stream by activity levels. So Activity levels have been really, really muted this year, like repayments are really low. But we are seeing pickup in M and A and a pickup in activity levels. And So some of it is just these companies get sold. There's a huge pull the power effect.

Speaker 1

I mean one thing that's affecting us is Generally speaking is some companies are doing these small incrementals and these small incrementals are pricing wide to where the existing debt stacks So even though there's no credit issue, it reprises not only the 1st lane, but it reprises the 2nd lane preferred, it reprises the whole capital structure. And so when companies go out and do these small little add ons that also could have a pretty big impact on mark to market even though there's no credit issue. So we've seen that in a couple of names where we're marked at a pretty big discount to par, but there's no credit issue and it's generating really good yields. So I mean the answer to your question is a mixture of all of them like, A, there's a pull apart factors for maturities and we don't have a lot of like long term maturities given their loans. Number 2 is of the market, which we've seen a little bit of that happen over the last couple of months.

Speaker 1

And number 3 is, there are correlated because if the market starts tightening, People can obviously get things done easier and therefore activity levels should pick up M and A wise and there you get some pops on valuations when things get taken out.

Speaker 5

Yes. Okay. Understand. I know that we're obviously talking about the future, which is incredibly hard to nobody can predict, but I appreciate the comment on that. One other last question that actually just came up as I was kind of thinking about your previous comments on the CLOs.

Speaker 5

So I want to circle back to to the discussion on the CLOs and the write downs. Is I know it's a very small percentage of your portfolio at this point, especially with the Most recent markdowns, but the sort of trend that happened in the Q2 of maybe having to move some stuff around because of maybe some downgrades or things like that and having to sell at losses. Is there any reason to expect that, that would stop in the Q3? Or is there another risk potential for continued write downs. And again, I know it's a smaller portfolio, but could we continue to see that in the Q3 write downs from the CLOs?

Speaker 1

Yes, it's a good question. I mean the answer the short answer to your question is

Speaker 2

like,

Speaker 1

I don't know. Like it feels like a lot of that repositioning was done in the first half of the year. And obviously people are feeling much, much better about the economy and all that. So there's been way less ratings movements recently, but obviously ratings are a lagging indicator. So I don't have a great answer for your question.

Speaker 1

We think we're marked very conservatively on those and obviously we took a big write down this quarter. But it's hard to to be honest with you, it's hard to know because we're not the manager of those couple of securities, right? So, like I don't want to like say something that Turns out to be wrong because we just don't know.

Speaker 5

Yes. That's fair. Totally fair. Okay. That's all for me.

Speaker 5

I appreciate the time today.

Speaker 1

Thank you so much.

Operator

Next question comes from Stephen Martin with Slater. Your line is open.

Speaker 1

Hi, guys. Hi, Stephen.

Speaker 6

A couple of my questions have been asked and answered. Of your portfolio,

Speaker 1

the public

Speaker 6

The debt, the senior portion of your portfolio, how would what would you bet the average mark is?

Speaker 2

Yes, I mean, it's somewhere in I'd say the total is probably representative of the senior portfolio, which is somewhere in the low 90s, dollars 0.91 to $0.93 of par give or take. I think our portfolio as a whole is 91.6 6 or 91 spots 7. I don't think the senior loan versus the second lien is significantly different. Again, senior loans make up 75% of the total portfolio and 80 high 80 percent of the debt portfolio. So you could probably think of that as a pretty comparable number like in terms of representing the 1st lien portfolio as a whole.

Speaker 6

So that's why you say that there's a lot of accretion opportunity Or NAV recovery in the senior portion of the portfolio. Correct.

Speaker 2

In the portfolio as a whole, Obviously, it's significantly weighted towards senior and that's how I think we call that out specifically, because as we're thinking about default rates and recovery rates, obviously, Recovery rates would be much higher in senior positions as opposed to junior positions.

Speaker 6

Okay. The non performance, you have the Which I love of the acquisitions you've done and how those portfolios have realized and unrealized. Of the non performance, how many of them are BC partner, BC originated versus sort of old purchase portfolio

Speaker 2

Yes, sure answer is only one is a BC originated asset and the rest of them, The remaining, I guess, we're talking about 6 issuers or 6 portfolio companies. So the remaining 5 are various different kind of legacy, call it, positions, or at a minimum, we're in the book before we took over, and that would include going all the way back to the K cap externalization, but call it 5 of 6 borrowers are again between KGaP and these acquisitions are we'll call it legacy. We don't like to use that word, but call it legacy.

Speaker 6

Okay. And When you underwrote those acquisitions, are these surprises and are these Bad outcomes versus what you underwrote or is this where you had already it was part of your purchase accounting?

Speaker 2

Yes, good question. Honestly, I would need to look at them all individually. I do think a decent amount of sort of the 6, My hunch is so of the 6, again, let's just go back, of the 6, 2 are again, they're like kind of I'll call them like not real accruals there. 1 is $75,000 note that we converted an equity position to a senior note. It was never on accrual in the 1st place.

Speaker 2

It was never it would never had any fair value. So that really again, my perspective, that's not really a credit issue whatsoever. So that drops you down to, call it, 5 portfolio companies. One is a $500,000 remaining of a position from the original K cap that was already marked at $0.50 something when we took over. It was on non accrual when we took it over.

Speaker 2

There's a very small piece that we've been waiting to get sort of flushed out of a state bankruptcy process. It's been in this process for, I don't know, like 4 years or so. So that brings you down to 4. One of them is a BC portfolio company that brings you down to 3. I think 2 of the remaining 3 were on non accrual at the time we took it over.

Speaker 2

So maybe call it 1 was a surprise versus the 5 that we sort of took over in terms of our underwriting.

Speaker 6

Okay. Ted, what is the And you've talked about the Q3 a little, we're only halfway through. What's the prospect for deployment versus repayment in the Q3?

Speaker 1

I would say we continue to see good opportunities to deploy, although the market is getting a little like literally in a very, very like over the last like 3 weeks, the market has gotten tighter for the first time in probably 4 quarters. And then repayments continue to be muted. Like I would say, we're getting some one off payments, but I would say repayment activity, we haven't seen a big Pickup as compared to average.

Speaker 2

I think the only additional thing I would add to Ted's comment is We did like the Textech repayment was in sort of the middle of May, which was a relatively chunky position. It was almost $13,000,000 So as we kind of think about deployment that cash is sort of in the system waiting to be deployed and just the way that our market works, The private deals tend to have a bit of a lead time. So you could expect even all else being equal that $12,000,000 to be sort of redeployed into various different investments that perhaps were not on the books as of June 30.

Speaker 1

Yes. Then I mean not to state the obvious, TexTech was a second lien. And so we can recycle that into comparably yielding 1st liens and you obviously get better advance rates on your so it's a ROE accretive payoff, let's put it that way.

Speaker 6

Right. But would you expect if repayments are muted, would you expect to deploy $10,000,000 this quarter, dollars 20,000,000 $30,000,000 Is there some sort of guesstimate you have?

Speaker 2

I'd say probably more in the $10,000,000 to $20,000,000 range, probably not the $30,000,000 range, but I'd say more in the again, Just pure deployments, probably more in the $10,000,000 to $20,000,000 range.

Speaker 6

Okay. And one last one, you've for the last at least the last 2 or 3 quarters you've out earned your NII as far exceeded your dividend rate. And I know this is a question that you sort of expect. What's the prospect for either a dividend increase or some form of special between now and the end of the year or do we have to wait till after December?

Speaker 1

No, I think here's the challenge with the dividend policy is obviously we're way over in our dividend. The challenge we have is The way we do our dividend is the forward curve for rates. When we set our dividend last quarter was down like 200 basis points in the next 2 years. And obviously, this higher for longer The market is getting more comfortable with higher for longer. So that 2 year out curve is actually has gone up a lot.

Speaker 1

So we always want to make sure our dividend is protected around cuts and short term rates and we have a huge cushion for that. And number 2 is we're going to have to reprice some of our CLO debt on our balance sheet, right, which is going to be a bit of an increase. So all that stuff means that If we take a big, big hit on short term rates and we have to reprice all of our on balance sheet CLO debt, we can still easily cover our dividend. So yes, we'll revisit it next quarter. We revisit it every single quarter.

Speaker 1

It's just hard but when short term rates Forward are moving around as much as they have been. That actually So the answer is we will revisit our dividend Again in our November meeting.

Speaker 6

Yes, because the year over year has been year over year has been And your year over year is pretty flat. Yes. One other question on the CLOs. If you guys think that the CLOs are realizing losses or the non Outside managers, CLOs are realizing losses that you don't think are warranted. Are you allowed to go buy those Securities from them at that discount.

Speaker 2

I mean, there's I put it this way, Steve, there's nothing that would prevent us from doing it other than they don't necessarily like Tell us when they're going to sell stuff and what they're going to sell. So it would be very challenging to sort of like line that up. But conceptually, we could. We don't I mean, again, we could call them up and say, hey, before you sell anything in these vehicles, call us, which we could do. But they don't like give us a heads up as they're in the process selling things and what they're going to sell.

Speaker 2

So it's tough for us to like have advanced warning of their plans.

Speaker 6

Got it. And guys for the future, like no more CLOs, unless you're going to self manage them so you can control them. All right. I'll talk to you guys later.

Speaker 1

Thanks, Steve. Thanks,

Operator

Another question comes in from Christopher Nolan with Ladenburg Thalmann. Your line is open.

Speaker 4

Just a quick follow-up on the CLO question. Any timetable When you can basically unwind this position, I know you guys have been holding on to it, but given your portfolio managers are selling, Can we see a timeframe in terms of you exiting CLOs? Thanks.

Speaker 2

Yes. So I'd say, in most of our positions, We are not the majority holder, so we don't really have control over the exit. For ones that we do, which are a very Small subset. We certainly look at that, Chris, but obviously it again kind of where the market is right now and again putting aside the manager's Behavior, we do think there is some far more temporal clients or unrealized losses in the syndicated market just from kind of mark to market and things like that. So I think our Hope would be to kind of exit those in a more normalized environment.

Speaker 2

But for the most part, don't actually have control over those within our CLOs. We're a relatively small percentage of the equity.

Speaker 4

Okay. Thanks for the clarification.

Operator

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

Speaker 1

Thank you very much and thanks everyone for joining us today and we look forward to speaking to you again in early November when we'll be announcing our Q3 2023 results. Thank you so much and enjoy the end of your summer.

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Earnings Conference Call
Portman Ridge Finance Q2 2023
00:00 / 00:00