Portman Ridge Finance Q3 2024 Earnings Call Transcript

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November 12, 2024

Key Takeaways

  • Refinanced and extended its JPMorgan credit facility, cutting the margin by 30 bps and rolling $85 million of 2018–2 notes into the upsized facility at ~28 bps lower cost, which should save ~$265 K in quarterly interest expense (~$0.03 per share).
  • Repurchased 33,429 shares for ~$600 K under its Rule 10b5-1 program—accretive by $0.01 per share—while reiterating that the stock remains undervalued.
  • The board declared a $0.69 per share distribution for Q4 2024, equating to a 13.6% annualized return on NAV, one of the highest yields among BDCs.
  • Despite net repayments and sales of ~$11.6 million in Q3, management cites elevated core middle-market activity and expects to be a net deployer of capital in Q4 2024 and early 2025 to normalize net investment income.
  • Q3 net investment income fell to $5.8 million ($0.63 per share) from $6.5 million ($0.70 per share) in Q2, NAV declined to $20.36 per share (from $21.21), and non-accruals held steady at nine positions (~1.6% of the portfolio).
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Earnings Conference Call
Portman Ridge Finance Q3 2024
00:00 / 00:00

There are 8 speakers on the call.

Operator

Welcome to Portman Ridge Finance Corporation's Third Quarter 2024 Earnings Conference Call. An earnings press release was distributed Thursday, November 7th after market close. A copy of the release along with an earnings presentation is available on the company's website at www.parkmanbridge.com in the Investor Relations section and should be reviewed in conjunction with the company's Form 10 Q filed on November 7 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.

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 filing 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 Tad Gullthorpe, Chief Executive Officer, President and Director of Portman Ridge Finance Corporation Brandon Satoran, Chief Financial Officer and Patrick Schafer, 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 welcome to our Q3 2024 earnings call. I'm joined today by our Chief Financial Officer, Brandon Satoran and our Chief Investment Officer, Patrick Schaeffer. Following my opening remarks on the company's performance and activities during the Q2, Patrick will provide commentary on our investment portfolio and markets and Brandon will discuss our operating results and financial condition in greater detail. On November 7, 2024, Portman Ridge announced its Q3 2024 results. And following the strong earnings we saw in the first half of twenty twenty four, the company's 3rd quarter earnings were temporarily impacted by prudent cash and portfolio management initiatives prior to the successful refinancing of the 20 eighteen-two secondured notes.

Speaker 1

I'm very pleased with the work we did on the right side of the balance sheet and the substantial improvements we've made to the company's debt capital structure. Specifically, the company extended the maturity of the JPM credit facility while also reducing the spread by a full 30 basis points. Further, using the upsized and lower cost JPM credit facility, the company refinanced the remaining $85,000,000 of 2018 2 secondured notes at the end of August, which resulted in further net spread savings of approximately 28 basis points. On a run rate basis, the impact from reduced spreads should result in approximately $265,000 reduction in the of interest expense relative to Q3 results or $0.03 a share. That in mind, we continue to believe our stock remains undervalued and thus we continued repurchasing stock during the Q3 under our Rule 10b5 stock repurchase program.

Speaker 1

Specifically during the quarter ended September 30, 2024, the company repurchased 33,429 shares in the open market for an aggregate cost of approximately $600,000 which is accretive to NAV by $0.01 a share and reinforces our commitment to increasing shareholder value. Additionally, the Board of Directors approved a $0.69 per share distribution for the Q4 of 2024, which represents 13.6% annualized return on net asset value amongst the highest in the BDC space. Regarding the private credit markets and specifically the core middle market, which we define as companies generating 10% to 50% EBITDA, activity levels continue to be elevated relative to 2023. The majority of activity has consistently been from refinancings, add ons or amended extend transactions that most often results in lower cost of capital for our borrowers and extended maturities. While true new money buyout financings have remained at depressed levels throughout 2024, we continue to believe that a combination of dry powder, sponsors looking to return capital to LPs, the ongoing rate cuts by the Fed are all tailwinds for our sector.

Speaker 1

Looking ahead to the final quarter of 2024 and the beginning of 2025 with company's balance sheet fortified by the amended JP Morgan credit facility, we expect to be active in the market and net deployers of the company's capital, which we believe will restore net investment income back in line with more normalized levels. Above all, despite the current economic activity and a dynamic interest rate environment, we remain confident in our prudent investment strategy, strong pipeline and experienced management team and believe the company remains well positioned with our strong spillover income to continue to deliver positive returns to our shareholders. 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. Turning to slide 5 of our presentation and sensitivity to our earnings to interest rates. As of September 30, 2024 approximately 88.5% of our debt securities portfolio was floating rate with spread pegged to an interest rate index such as SOFR or Prime, with substantially all of these being linked to SOFR. As you can see from the chart, SOFR rates have been relatively consistent for the last several quarters with the decrease in rates impacting the current quarter. Skipping down to slide 10, originations for the Q3 were lower than last quarter and were also below the current quarter repayment and sales levels, resulting in net repayments and sales of approximately $11,600,000 During the quarter, we funded small incremental DDTLs and revolver draws in 7 existing portfolio companies and increased our investment in our Great Lakes joint venture, but did not add any new portfolio companies as we had one transaction closed in early October and several other transactions slated for Q4 closings.

Speaker 2

Our incremental fundings made during the quarter are expected to yield a spread to SOFR of 6.56 basis points on par value and the investments were purchased at a cost of approximately 98.5 percent of par. Our investment portfolio at the end of the 3rd quarter remains highly diversified. We ended the 3rd quarter with debt investment portfolio spread across 28 different industries with 72 unique portfolio companies and an average split and an average par balance of $2,700,000 Turning to slide 11, in aggregate, investments on non accrual status were 9 investments at the end of the Q3 of 2024, representing 1.6% and 4.5% of the company's investment portfolio at fair value and cost perspective. This compares to 9 investments on non accrual status as of June 30, 2024, representing 0.5% and 4.5% of the company's investment portfolio at fair value and cost respectively. On slide 12, excluding our non accrual investments, we have an aggregate debt investment portfolio of $341,000,000 at fair value.

Speaker 2

This represents a blended price of 92.6 percent of par and is 92.9% comprised of 1st lien loans at par value. Assuming the par recovery, our September 30, 2024 fair values reflect a potential of $27,300,000 of incremental NAV value or a 13.9% increase to NAV. When applying an illustrative 10% default rate and 70% recovery rate, our debt portfolio would generate an incremental $1.76 per share of NAV or an 8.3% increase as it rotates. Finally, turn to slide 13. If you aggregate the 3 portfolios acquired over the last 3 years, we have purchased a combined $435,000,000 of investments, have realized approximately 85% of these positions at a combined realized and unrealized mark of 101% of fair value at the time of closing the respective mergers.

Speaker 2

As of Q3, 2024, we fully exited the acquired Oak Hill portfolio and are down to a combined $27,900,000 of the acquired HCAP and initial K cap portfolios. I'll now turn the call over to Brandon to further discuss our financial results for the period.

Speaker 3

Thanks, Patrick. For the Q3 of 2024, Portman generated $15,200,000 of investment income, of which $12,700,000 was attributable to interest income inclusive of PIK income from the debt investment portfolio. This compares to total investment income for the Q2 of 2024 of 16,300,000 dollars of which $13,700,000 was attributable to interest income inclusive of PIK income from the debt investment portfolio. The decrease was primarily driven by lower interest income due to net repayments and sales during the quarter, a loan being placed on non accrual as well as lower CLO and joint venture income. With that in mind, I'd like to highlight that recurring PIK income as a percentage of total investment income declined by over 200 basis points compared to the prior quarter.

Speaker 3

Excluding the impact of asset acquisition accounting, our core investment income was $15,200,000 as compared to core investment income of $16,200,000 in the prior quarter. Total expenses for the quarter ended September 30, 2024 decreased by $500,000 to $9,400,000 as compared to $9,900,000 in the prior quarter. This decrease was largely driven by lower interest expense during the quarter as a result of the successful refinancing of the 20 eighteen-two secondured notes in conjunction with the amendment to the existing senior secured revolving credit facility with JPMorgan that reduced the applicable margin from 2.8 percent to 2.5 percent as well as lower management and incentive fees. Accordingly, our net investment income for the quarter decreased to $5,800,000 or $0.63 per share. This compares to $6,500,000 or $0.70 per share for the prior quarter.

Speaker 3

Further for the quarter ended September 30, net realized and change in unrealized losses on investments in debt was 7,300,000 This compares to net realized and change in unrealized losses on investments in debt of $12,800,000 in the prior quarter. As of September 30, 2024, the company's net asset value was $188,000,000 or $20.36 per share, a decrease of $8,400,000 or $0.85 per share compared to the company's prior quarter net asset value of 196,400,000 or $21.21 per share. As of September 30 June 30, 2024, our gross leverage ratios were approximately 1.4 times and 1.5 times respectively. For the same periods, our leverage ratio net of cash was 1.3 times. Specifically, as of September 30, 2024, we had a total of 267,500,000 in borrowings outstanding with a current weighted average contractual interest rate of 6.7%.

Speaker 3

This compares to $285,100,000 of borrowings outstanding as of the prior quarter with then current weighted average contractual interest rate of 6.9%. The company finished the quarter with $40,500,000 of available borrowing capacity under the senior secured revolving credit facility. Finally, the Board approved a quarterly distribution of $0.69 per share payable on November 29, 2024 to stockholders of record at the close of business on November 19, 2024. With that, I will now turn the call back over to Ted.

Speaker 1

Thank you, Brandon. Ahead of questions, I'd like to reemphasize that we believe we are well positioned to take advantage of the current market environment as shown for the 1st 9 months of the year. Through our prudent investment strategy, we believe we'll be able to deliver strong returns to our shareholders at the end in the tail end of 2024. Thanks again once again to all of our shareholders for ongoing support. This concludes our prepared remarks.

Speaker 1

I will turn the call over for any questions.

Speaker 4

And your first question comes from the line of Christopher Nolan with Ladenburg Thalmann. Your line is open.

Speaker 5

What's the driver of the realized losses please?

Speaker 3

Hey Chris, this is Brandon. The primary driver of the realized loss was Qualtech. You may recall on our last earnings call, we had disclosed that we had successfully exited Qualtech at the mark we had in the prior quarter. So there was no impact in that as a result of that realized loss that was previously captured.

Speaker 5

I thought so. Okay. On the interest rate sensitivity, I'm looking at Slide 5 and it says, blah, blah, blah, reduction of quarterly income of 164,000. And then if you look in the 10 Q, this is for 1% decrease in interest rates, it's $1,700,000 annually. And given that the Fed is eased by 75 bps or so, should that information I mean, there seems to be a lot the impact of a 1% rate change seems to be a lot bigger in the queue than is in the deck?

Speaker 5

Yes. So I can just

Speaker 2

be clear that in the deck, it's just a difference between the $475,000,000 and the $455,000,000 So it's not a full 1% reduction.

Speaker 5

Okay. And then I guess spillover, how much is spillover?

Speaker 3

So it's about $0.70 per share, Chris from the prior year.

Speaker 5

Finally, strategy. You guys are sort of cruising along at your normal leverage ratio and the growth has been slow. What is the strategy, if anything, to grow earnings and growing the book excuse me, growing NAV in general?

Speaker 1

So I'll start, which is number 1 is, I mean, there is a lot of embedded NAV to the extent that our loans mature at par. And we've Patrick talked a little bit about it in his scripts, but we can get you the numbers. So to the extent that we remain in a subdued credit environment, there just should be upside just with our existing portfolio. And there is some positions that we have that as rates go down, if they go down, you get a NAV increase. So there's a income comes down a little bit, but you get NAV increases in certain situations.

Speaker 1

That's number 1. And then in terms of investment strategy, again, like we haven't been as nearly as impacted as other BDCs by this reduction spreads. It may be coming to our market, it's beginning to come to our market, but that's really been a large cap and upper middle market phenomenon. So we've been able to retain spread and in the situations where we've been asked to kind of like reduce spreads to where big cap market guys are, we've generally taken the refi. So again, you can see on Slide 6 of what we disclosed, I mean fee income for us continues to be anemic like we only had we basically had our lowest fee income ever this quarter going back 4 years, 4, 5 years.

Speaker 1

And that should revert back to normal at some point as this refi wave continues. So there's like that obviously is a tailwind to earnings as well, although it's something we can't obviously forecast or predict.

Speaker 5

Is the call still going on?

Speaker 4

We're already Your next question comes from the line of Stephen Martin with Slater Capital. Your line is open.

Speaker 6

Hey, guys. Two questions. You made some comments about some activity in the Q4. Are we expecting net deployments in the Q4?

Speaker 2

I think the short answer is yes, Steve. The long answer is it always depends on there we only have sort of one known repayment during the quarter for now. So the answer is yes,

Speaker 5

all else

Speaker 2

being equal, we'd expect to be a net deployer over the next, call it, 2 months. But again, we might get unforeseen exits or things like that. But I'd say our strategy is and will be to be a net deployer.

Speaker 6

Okay. And your PIK income declined dramatically in the quarter, which was great. What was the reason for the decline?

Speaker 2

Yes. Brandon gave you the specifics, but we did have one company that had a period of time where there was a partial pick and that is converted back to cash and there's a couple other things that Brandon can enumerate, but

Speaker 3

Yes. It's 2 portfolio companies in particular that were previously paying their interest with PIK that reverted to cash this quarter. It was about $500,000 worth.

Speaker 6

Okay. That's the good way to reduce PIK. Can you talk about the activity in the non accruals? What went in, what went out?

Speaker 2

Yes. As we mentioned last quarter, so Flawltech security went out and the barber I should say went out and then we had one new bar in which is Vega on our SOI goes by a number of different names colloquially. It's Naviga on our SOI and Collinade is another name that it goes by. But that one, we've been we the lenders have been working through at the company. I think we would expect that to be somewhat temporary non accrual.

Speaker 2

But for now that's kind of where it is based on the facts and circumstances.

Speaker 6

Okay. And what does it look like for restructurings of any of the other non accruals?

Speaker 2

I think as of right now, there is nothing substantial. I mean, again, it's there are a couple that candidly just are we have marked at zeros and we would expect them to continue to be zeros, such as ProAir is a name that's on non accrual that will continue to be on non accrual until we can kind of legally clean it up. So I'd say, I don't think there's anything significant on the horizon in terms of other non accruals.

Speaker 6

Okay. Thanks a lot.

Speaker 2

I'm looking names now. There is one is in the process of restructuring Robert Shaw that should ultimately clear through our non accruals sometime shortly. That was a bankruptcy process that I believe the company is exiting shortly. And so we should ultimately that's just shortly. And so we should ultimately that should get cleaned up.

Speaker 2

And the new security we'd be taking on should be an accruing security. So that might be one other one. So that's a relatively small number. It's a couple of $100,000 in market value. So not particularly relevant, but that should get cleaned up shortly.

Speaker 6

Okay.

Speaker 4

Thanks. Your next question comes from the line of Paul Johnson with KBW. Your line is open.

Speaker 7

Hey guys, thanks for taking my questions. I'm hopping on the call a little bit late, so I apologize if you mentioned this in your remarks or if there was already a question. But in the release last night or sorry, last week on for earnings, you just mentioned some prudent cash and portfolio management initiatives prior to paying off some notes in the portfolio. Can you just tell us what exactly that was? And if how I guess how that would have affected results this quarter if it did at all?

Speaker 2

Yes, Paul. I mean the short answer is we were in the process of refinancing out the secured notes with an upsize the JP Morgan facility. And to be prudent and we had been sitting on additional cash in our vehicle to ensure a smooth refinancing. And so too we were sitting on incremental capacity in the JPMorgan facility to make sure that there was that the entire process went smoothly and we were able to successfully refinance and then able to kind of turn back to investing once we kind of had a collective facility with and better understood our kind of available capacity. But it was effectively holding back on investments and sitting on some cash to ensure a smooth refinancing process there.

Speaker 7

Got it. Appreciate that. That's helpful. That's all the questions for me. Thank you.

Operator

I will now turn the call back over to Mr. Goldthorpe for closing remarks.

Speaker 1

Thank you all for attending our call. As per always, please reach out to us with any questions, which we're happy to discuss. We look forward to speaking to you again on December 12 during our investor luncheon event and encourage you guys to come. Thank you very much.

Operator

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

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