Portman Ridge Finance Q1 2024 Earnings Call Transcript

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Provided by Quartr
May 9, 2024

There are 7 speakers on the call.

Operator

Welcome to Portman Ridge Finance Corporation's First Quarter 20 24 Earnings Conference Call. An earnings press release was distributed yesterday, May 8, after market close. A copy of the release, along with an earnings presentation, is available on the company's website at www.portmontbridge.com 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. Please note that today's call may be made in 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 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 Goldfarb, Chief Executive Officer, President and Director of Portman Bridge 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 Goldfarb, Chief Executive Officer of Portman Ridge. Please go ahead.

Speaker 1

Good morning and thanks everyone for joining our Q1 2024 earnings call. I'm joined today by our Chief Financial Officer, Brandon Satoran and our Chief Investment Officer, Patrick Schaeffer. I'll provide brief highlights on the company's performance and activities for the year. Patrick will provide commentary on our investment portfolio and our markets and Brandon will discuss our operating results and financial condition in greater detail. Yesterday Portman Ridge announced its Q1 2024 results and following the strong earnings trajectory we saw in 2023, we're pleased with the solid earnings power of the portfolio.

Speaker 1

Despite operating under challenging market conditions, we reported net investment income $6,200,000 or $0.67 per share and net asset value of $210,600,000 or $22.57 per share. We continue to target a well diversified portfolio with investments spread across 29 Industries and 103 entities while maintaining an average par balance per entity of $3,100,000 This compares to 27 industries and 100 entities with an average par balance per entity of $3,100,000 at the end of 2023. Credit quality remains stable with 7 investments on non accrual representing 0.5% of the portfolio on a fair value basis. Additionally, we continue to believe our stock remains undervalued and during the quarter we continue to repurchase shares under our repurchase program purchasing 51,015 shares for an aggregate cost of $1,000,000 These repurchases had an accretive effect to Portman's net asset value of $0.02 per share, reinforcing our commitment to shareholder value. Further, the Board of Directors approved dividend for the Q2 of 2024 in the amount of $0.69 per share, which represents a strong 12.2% annualized return on net asset value, which is among the highest in the BDC space.

Speaker 1

Turning to conditions in our primary market, as we previewed on our Q1 earnings call, M and A activity has picked up during the quarter and capital markets as a whole were extremely active as compared to the Q4. Net deal activity defined as new deals excluding corresponding repayments in the BSL loan market was $57,200,000,000 up 64% from the 4th quarter and represented the highest new net volume since Q1 of 2022 and is representative of the fundamental tailwinds we believe exist in our primary market. For all of 2023, private equity firms have been sitting on record amounts of dry powder, while at the same time being pushed by LPs to return capital. Although expectations for future rate hikes have diminished towards the end of the Q1 and the beginning of the second quarter, we believe the aforementioned fundamentals combined with positive economic outlook and sentiment should continue to fuel new deal activity in our private credit space over the course of 2024. Specifically at Portman Ridge and more generally across BC Partners Credit platform, we continue to find attractive opportunities both through our sponsor relationships and our focus on non sponsor or non traditional sponsor backed companies and continue to win transaction based on our ability to custom tailor capital solution for the borrower and the borrowers belief that our platform can add value to their businesses over and above just being a capital provider.

Speaker 1

Our strategy has always been to be very selective on new investment opportunities focusing on portfolio management and risk mitigation. To that point, during the quarter, we made investments into only one new portfolio company. Our goal continues to be the further diversification of we proceed further into 2024, our pipeline remains strong and we believe we are well positioned to take advantage of new investment opportunities while also remaining diligent in our investment and capital deployment process. With that, I'll turn the call over 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 sensitivity of our earnings to interest rates. As of March 31, 2024, approximately 91.1% of our debt securities portfolio were either floating rate with the spread to an interest rate index such as SOFR or Prime with substantially all these being linked to SOFR. As you can see from the chart, the underlying benchmark rates of our assets during the quarter lag the prevailing market rates and still remain below the SOFR rates as of April 29, 2024. But between the market transition last year from LIBOR SOFR and the pause from the Fed earlier this year, the gap has narrowed to the tightest it has been since the onset of the Fed rate hike cycle.

Speaker 2

Skipping down to Slide 10, originations for the Q1 were higher than prior year Q1 and were above repayment levels, resulting in net originations of approximately $1,700,000 Our new investments made during the quarter are expected to yield a spread to SOFR of 581 basis points on par value and the investments were purchased at a cost of approximately 98.4 percent of par. Our investment portfolio at the end of the Q1 remained highly diversified. We ended the year with investments spread across 29 different industries and 34 different borrowers, all while maintaining an average par balance per entity of approximately $3,100,000 Turning to Slide 11, in aggregate investments on non accrual status remain relatively low at 7 investments at the end of the Q1 of 2024 representing 0.5% and 3.2% of the company's investment portfolio at fair value and cost respectively. This compares to December 31, 2023, where there were also 7 investments on non accrual status representing 1.3% and 3.2% 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 $384,000,000 at fair value, which represents a blended price of 93.7 percent of par and is 90% comprised of 1st lien loans based on par value.

Speaker 2

Assuming the par recovery, our March 31, 2024 fair values reflect a potential of $25,800,000 of incremental net value, a 12.1% increase or $2.72 per share, excluding any recovery from the non accrual investments. If you were to further overlay in a lesser of 10% default rate and 70% recovery to the entire debt securities portfolio, again excluding non accrual investments, the incremental NAV value potential would be $1.41 per share or a 6.2% increase to NAV per share as of March 31, 2020 4. Finally, turning to Slide 13, if you aggregate the 3 portfolios acquired over the last 3 years, we have purchased a combined $434,800,000 of investments, have realized approximately 82% of these positions at combined realized and unrealized mark of 102 percent of fair value at the time of closing their respective mergers. As of Q1, 2024, we have fully exited the acquired Oak Hill portfolio and are down to a combined $33,500,000 of the acquired HCAP portfolio and the initial KCAP portfolio. I'll now turn the call over to Brandon to further discuss our financial results for the period.

Speaker 3

Thanks, Patrick. As Ted and Patrick previously mentioned, our results for the Q1 of 2024 continue to reflect the company's strong financial performance. Our total investment income for the quarter was 16,500,000 dollars of which $14,200,000 was attributable to interest income from the debt investment portfolio. This compares to total investment income for the Q4 of 2023 of $17,800,000 of which $15,300,000 was attributable to interest income from the debt investment portfolio. The decrease was primarily driven by the reversal of $400,000 or 0 point placed on non accrual during the Q1 of 2024, as well as lower pay down income of $400,000 or $0.04 per share during the quarter.

Speaker 3

Excluding the impact of purchase price accounting, our core investment income for the quarter was 16.5 $1,000,000 a decrease of $1,200,000 compared to core investment income of $17,700,000 in the prior quarter. Our net investment income for the quarter was $6,200,000 or $0.67 per share. This compares to $11,200,000 or $1.18 per share for the prior quarter. The decrease in net investment income was the result of lower investment income and $1,000,000 or $0.01 per share of incremental expenses in the first quarter as well as a one time expense reimbursement from the company's investment advisor during the prior quarter. As of March 31, 2024 and December 31, 2023, the weighted average contractual interest rate on our interest earning debt investment portfolio was approximately 12.1% and 12.5%, respectively.

Speaker 3

We continue to believe the portfolio remains well positioned to generate incremental revenue in future quarters due to the current rate environment. Total expenses for the quarter ended March 31, 2024 were $10,300,000 compared to total expenses of $11,900,000 for the Q4 of 2023. The decrease was largely driven by a lower incentive fee as well as lower interest and financing costs as a result of lower average leverage during the quarter. Our net asset value as of March 31, 2024 was $210,600,000 or $22.57 per share, a decrease of $0.19 per share as compared to the prior quarter net asset value of $213,500,000 or 22 point $0.76 per share. The decrease was largely driven by our dividend exceeding net income for the quarter ended March 31, 2024.

Speaker 3

Turning to the liability side of the balance sheet. As of March 31, 2024, the company had a total of $291,700,000 of borrowings dollars of borrowings outstanding with a weighted average interest rate of 6.9%. This balance was comprised of $92,000,000 in borrowings under our senior secured revolving credit facility, dollars 108,000,000 of 2026 notes and $91,700,000 of 20 18-two secondured notes due 2029. We finished the quarter with $23,000,000 of available borrowing capacity under the senior secured revolving credit facility. Accordingly, as of March 31, 2024, our gross and net leverage ratios were 1.4x and 1.2x respectively.

Speaker 3

Compared to the prior quarter, gross leverage is down 1 full turn from 1.5x and net leverage is flat. The decrease in gross leverage is largely driven by the pay down on the 20 eighteen-two notes during the quarter. From a regulatory perspective, our asset coverage ratio as of quarter end was 171%. Finally, the Board approved a quarterly distribution of $0.69 per share payable on May 31,

Speaker 1

Thank you, Brendan. 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 in the Q1. Through our prudent investment strategy, we believe we will be able to deliver strong returns to our shareholders for the rest of 2024. Thank you once again to all our shareholders for your ongoing support. This concludes our prepared remarks and I'll turn the call over for any questions.

Operator

Thank you. We will now begin the question and answer Your first question comes from the line of Christopher Nolan. Please go ahead.

Speaker 4

Hey, guys. Can you hear me?

Speaker 1

Yes. How are you?

Speaker 4

Good. How are you doing? The slowdown in the growth of the portfolio, is the strategy now simply to make new investments to offset the prepay? So in other words, the amount of money that you put out to work in new investments is a function of how much you get back in terms of prepays that quarter?

Speaker 2

I mean, I think that's generally right, Chris. I do think kind of where we are in a net leverage basis, we're sort of at the low end of kind of our 1.25 times to 1.4 times range. So I think there is we do have room and would look to kind of increase, I'll call it assets in addition to just I'll call it 1 in, out. But where we sit now, I think we are probably having a little bit more of a focus on what you just said, which is making sure we're replacing assets that have been repaid. We are kind of selectively reducing some of our liquid exposure, just given the run up in the BSL market.

Speaker 2

Again, it's not a lot, but we have probably 8 or 9 names that are liquid in our book. So we would look to exit those positions at kind of attractive prices in the DSO market and then obviously have those proceeds to rotate into new private transactions.

Speaker 1

So it's a mix of

Speaker 2

a couple of those things, but I would say we definitely feel like we have room to kind of be a net grower of the portfolio, but being mindful of where we are relative to our leverage guidelines, not guidelines but guidance.

Speaker 4

And then given that you're paying down the 2018 secondured note, should we expect the bank revolver to pick up the slack to increase?

Speaker 2

That's right. Where the revolver sits today, we're at about $92,000,000 drawn or so. It has $115,000,000 of total capacity and there's an incremental above and beyond that. But the very short answer is yes.

Speaker 4

Okay. And then I guess finally, Ted, can you give us a little color in terms of what you're seeing in terms of BDCs looking to be bought out? How has that market changed from your perspective?

Speaker 1

I would say these tend to go in waves. I would say there's not a lot of logical partners for us today just given who's out there and given what's happening. And I think higher interest rates have obviously helped the whole sector in terms of earnings and other things and obviously credit quality has been stable. So I would say as of now I don't foresee a big wave of consolidation in the short term. Great.

Speaker 1

I'll get back in the queue.

Speaker 4

Thank you for answering my questions.

Speaker 1

Thanks.

Operator

Our next question comes from the line of Deepak Sarparnal from

Speaker 5

I guess given the first question you received, I have a different perspective on that. I actually just wanted to commend you on your fiduciary discipline to not simply grow the portfolio as some other managers do since you get paid on overall assets. So I think it's actually great. You're recognizing that your stock is undervalued. When it makes sense to lean in and extend new loans, you're doing it and when it doesn't, you're pulling back.

Speaker 5

So I think that's actually great. And then the question I had was, I saw the new investment in Riddell, which I obviously know of the products being a football fan, but saw that you had like a broader partnership that you announced with BC Credit and BC Partners platform. Could you talk a little bit more about that new investment and just give us a little bit more context there?

Speaker 1

Yes. I mean, we normally don't talk about individual investments, but this one specifically has been very high profile. So we have provided them financing. It closed right at quarter end. And this is a perfect example of what we do broadly speaking.

Speaker 1

So we have a board seat up with the company. We are very, very active in helping them with a number of different initiatives. And it's a great business because there's a big recurring replacement cycle embedded in their business.

Speaker 2

So not usually we don't have

Speaker 1

a big consumer franchise, but when you actually dig into the business itself, it's much less exposed to consumer discretionary spending. So yes it is an investment across the whole platform and one of the advantages Portman gets as being part of a bigger platform is to get access to deals like this.

Speaker 5

Got it. And then the I couldn't tell for sure from the press releases, but to your point about the bigger platform, it almost sounded like you sourced it and brought it to the BC partners platform rather than the other way around or did I get that mixed up?

Speaker 1

No, that's fair. I mean we obviously have a lot of our own captive sourcing here. So yes, we sourced it and quite frankly we've been working on it for we've been cultivating the management team for probably 5 years before the close.

Speaker 5

That's great. And then one other one is EBSC Holdings related to this or is that a separate investment?

Speaker 1

No, it's the same.

Speaker 2

So the investment, the combined investment was structured as, again round numbers sort of 65% first in secured loan and 35% preferred equity investments or structured equity investment in the business. And so for again, Foreman as an example, they have a weighting between the 2, but that you could think of that as the same as I think the loan, the borrowers technically Radell Inc. And then the preferred equity, the SC is technically EBSE, but that's just the parent company of Radell.

Speaker 5

Got it. And I suspect that preferred equity must be convertible into common, right?

Speaker 2

It does have the potential to convert at certain metrics,

Speaker 5

yes. Okay. No, I think because the 1st lien loan looks great, right. It's like 11% cash pay first lien and then the preferred is 10% pick. So I figured there must be a conversion feature to make

Speaker 2

That's right. That's right. Where our expectation is overall return on that instrument would be meaningfully higher than 10%, but for accounting purposes that's what we would otherwise be reflecting until there was some sort of catalyst.

Speaker 5

Okay, great. Well, I mean to me it seems like generally more of the same good stuff seem to check off Mickey boxes, you got low and declining non accruals, deleveraging, paying down debt, seem like an even higher mix of senior secured loans this quarter while working off the CLO and joint venture stuff and then more accretive buybacks and another nice dividend. So appreciate the solid execution and the leadership. Look forward to keeping that going. Thank you.

Speaker 1

Thank you, Deepak. Appreciate it. Take care.

Operator

Thank you. Your next question comes from the line of Steven Martine. Please go ahead.

Speaker 6

Hi, guys. So a couple of questions. PIK, can you comment on PIK and what the trends have been? It looks like PIK is a higher percentage of total interest income recently?

Speaker 2

Yes. Sorry, I was just pulling up the number, Steve. Look, I think probably some of that is driven by we had significantly lower payment income. So it might just look a little bit higher as a percentage because of that. Again, I'd say like the broad brush comment is we don't see a material change in sort of how we are going to market and pick first cash.

Speaker 2

There has been some competitors that you've seen in our market a little bit. Some folks have been willing to offer like the 1st year or 12 to 18 months as a partial pick option for borrowers is kind of like a trying to win a deal that's not particularly prevalent candidly, but it is sort of out there every once in a while. But broadly speaking, we don't see material changes in our cash first pick our cash first pick mix and kind of how we think about portfolio construction.

Speaker 1

Okay.

Speaker 6

On Slide 10, you made the comment that you only added one new portfolio company, yet purchases and draws were almost $39,000,000 All the rest of that was existing portfolio companies and draw downs on delayed terms?

Speaker 2

Yes, that's right. It's a comment again. So we have some revolvers, delayed draw term loans and existing all in existing borrowers

Speaker 5

and we

Speaker 2

had new security, if you will, that wasn't like a previously committed DDTL, but in an existing borrower. So yes, again, broadly speaking that is all from kind of the existing base. We'll probably have, I don't know the exact number, we'll probably have 2 or 3 new borrowers this quarter, just constant activity in April May. But yes, but my statement is correct and what you see there is activity within our existing portfolio.

Speaker 6

Okay. And that you started to comment on the current quarter. Can you make any comments about what you're expecting in terms of portfolio activity and your portfolio size versus the Q1?

Speaker 2

Yes, no, I appreciate it. So again, kind of similar to what we had said last quarter, I think in what kind of I had alluded to when Chris Nolan asked the question. I think overall we would kind of expect to be sort of on the margin in that deployer, but kind of again, it depends a little bit on timing of certain things. Like as an example, for this quarter, we were up a little under $2,000,000 from net deployments, but the Radell transaction closed at like the end of the quarter. And so that would have been pushed 2 days, it would have looked like we were $6,500,000 or $7,000,000 of net receiver of capital.

Speaker 2

So some of it depends a little bit on timing, but I think on the margin you would expect us to we would expect to be flat or slightly growing, let's say over the course of the year, Steve, and whether it falls kind of a little bit around the edge of a quarter, might be a plus or minus here or there, but we kind of generally would be ourselves as a marginal net deployer capital this year.

Speaker 6

Got it. Slide 11, non accruals. The number of investments didn't change. The cost didn't change. I haven't had a chance to go through the whole portfolio

Speaker 1

from the

Speaker 6

queue. But the fair value changed?

Speaker 2

Yes. A lot of this was driven by probably one security being marked down. You can you could ultimately look at look it through it. It's a second lien security in Qualpek USA is the name of the borrower. But it's again, obviously regardless of whether it is on accrual or not, we kind of go through from a fair value perspective.

Speaker 2

So that's again, just a reflection of a markdown in a position that's on non accrual.

Speaker 6

Okay. And where are you putting money out currently? Like the most recent deal you did or the most well, I guess you only did one new deal in the quarter. But where the pricing you're talking about some of the new deals for the Q2, what are you looking at?

Speaker 1

No real big change. I mean, there's been a big, big, big delta between where large cap sponsor deals are getting done and where our market is. So like if you look at trends and covenants, if you look at trends and spreads, they've really come in pretty dramatically for big LBOs and they haven't really come in that much for us. Like there has been some spread compression, but not really that much. Our deployment really is in mostly two areas.

Speaker 1

It's really our core sponsor finance first lien type stuff, which is still pricing at 12%, 13% yields. And then number 2 is, we do have a big non sponsor franchise where we get paid a little bit more and help out the companies. So like Riddell kind of fits into that bucket because it's not a traditional deal. So again, we haven't really experienced spread compression in our portfolio and the impact of the opening up of markets stuff has been much more muted. I mean, you can see there's been a big trend of BSL has been issued to take out direct loans.

Speaker 1

But if you look at our fee income, like it's never been lower. So again, like as these loans approach maturity, fee income should pick up. But we haven't experienced the broad based pay downs that you've seen the BSL market do.

Speaker 6

Okay. You actually just answered one of my questions. But assuming interest rates don't change much for the balance of the year, because at this point where they're speculating one rate change and no one's sure if it's up or down. What would you expect to have on the unrealized line? Would you expect the portfolio to would you expect the mark to market to increase, decrease, stay sort of where it is?

Speaker 2

Yes. So good question, Steve. I'm just trying to think this through. It would depend a little bit more on where deals are getting done, obviously. And so there's kind of like 2 or 3 downstream effects, which is if I would say the bigger driver of whether we have of how we have movements is probably a little bit more the M and A market and maybe that is like a derivative of the interest rate environment.

Speaker 2

But where we are today, there's not a massive probably the last three probably the last three quarters of 2023. And so with that is kind of like the backdrop, it's been somewhat competitive in our market, which has led to again BSL prices declining, decreasing and even private in again on the higher side, but private markets spreads also compressing, which is kind of like independent a little bit of interest rates are not directly correlated to interest rates. So it's tough to answer, but to say if M and A remains sort of somewhat muted this year because of interest rates, I would say on the margin, we would have unrealized gains because that would probably lead to a continued spread compression and therefore pricing increases. But it's not like in our portfolio, it's not exactly a direct line between interest rate hikes or declines in the price of our portfolio.

Speaker 6

All right. Thanks.

Operator

Thank you. We have no further questions. Please continue.

Speaker 1

We did have a question about our realized losses. Brandon, do you want to take that?

Speaker 3

Sure. So the primary driver of the realized losses during the period was one name in particular that was It was HDC or Host Way that drove the vast majority of the realized during the period.

Speaker 1

Yes. So just really it's a one restructured security that we still continue to hold. So anyways, thank you all for attending our call. As per always, please reach out with any questions. We're always happy to discuss with anyone.

Speaker 1

And we look forward to speaking to you again in August for our Q2 conference call. 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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Key Takeaways

  • Q1 financial results: Reported net investment income of $6.2 million ($0.67 per share) and net asset value of $22.57 per share, with credit quality stable at 0.5% of assets on non-accrual across a portfolio of 29 industries and 103 entities.
  • Share repurchases and dividend: Bought back 51,015 shares for $1 million, accreting NAV by $0.02 per share, and declared a Q2 dividend of $0.69 per share, reflecting a 12.2% annualized return on NAV.
  • Primary market dynamics drove a 64% quarterly surge in net BSL loan deal volume to $57.2 billion—its highest level since Q1 2022—underscoring strong M&A activity and private credit tailwinds for 2024.
  • Floating-rate portfolio positioning remains high at 91% linked to SOFR, with new Q1 investments targeting a 581 basis-point spread over SOFR, setting up potential incremental revenue and NAV upside.
  • Leverage metrics at quarter end included $291.7 million of borrowings at a 6.9% average rate, 1.4x gross leverage and a 171% asset coverage ratio, providing capacity for measured portfolio growth.
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Portman Ridge Finance Q1 2024
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