Portman Ridge Finance Q3 Earnings Call Highlights

Key Points

• BCP agreed to acquire Investcorp Credit Management BDC, with ICMB shareholders receiving consideration equal to 90% of ICMB’s pre-closing NAV, primarily in newly issued BCP shares. BCP expects the deal to boost NAV per share at closing and net investment income per share over time through cost and financing savings.
• BCP plans to curb new investments and direct portfolio repayments and sale proceeds toward share buybacks and debt reduction, targeting leverage of 1.25–1.4 times before resuming qualifying investments.
• Third-quarter results weakened: net investment income fell to $4.6 million from $5.5 million, while NAV declined to $13.13 per share from $14.49, primarily due to unrealized portfolio losses.

BCP Investment Corporation has agreed to acquire Investcorp Credit Management BDC in a transaction that executives expect to increase BCP’s net asset value per share while adding scale to its lending portfolio.

The proposed merger comes as BCP plans to slow new investments and use loan repayments and sales to repurchase shares and pay down debt. The company also reported a decline in third-quarter net investment income and net asset value.

Under the agreement, Investcorp Credit Management BDC, or ICMB, will merge into BCP, with BCP continuing as the surviving company. BCP CEO Ted Goldthorpe said the deal would be the company’s fifth BDC merger since BC Partners assumed its management in 2019.

Merger terms and expected benefits

ICMB shareholders will receive aggregate consideration equal to 90% of ICMB’s net asset value shortly before closing. The consideration will be paid in newly issued BCP shares valued at BCP’s net asset value per share. If the number of shares required exceeds 19.99% of BCP’s outstanding stock immediately before closing, the excess will be paid in cash.

Based on the companies’ September 30 net asset values and estimated transaction expenses, ICMB shareholders would receive approximately 0.172 BCP shares and $0.26 in cash for each ICMB share. That would represent $2.49 per ICMB share using BCP’s net asset value.

Using BCP’s November 9 closing stock price of $6.57 instead, the transaction would value ICMB at approximately $1.38 per share, a 127% premium to ICMB’s closing price of $0.61 that day. The final exchange ratio will depend on both companies’ net asset values determined within 48 hours before closing, Goldthorpe said.

Both companies’ boards unanimously approved the agreement, with ICMB’s board acting on the unanimous recommendation of a special committee of independent directors. Investcorp and other ICMB shareholders, including Stifel and ICMB’s directors and officers, have agreed to vote in favor of the transaction. Together, they hold approximately 41% of ICMB’s outstanding shares, Goldthorpe said.

ICMB President and CEO Suhail Shaikh said the company’s size had made it increasingly difficult to absorb the fixed costs of operating independently. Its net asset value had declined, and its board suspended the quarterly distribution earlier in the year. Shaikh said the special committee reviewed a range of alternatives before determining that the BCP deal offered the most compelling outcome for shareholders.

Goldthorpe said BCP expects the acquisition to increase net asset value per share at closing and net investment income per share over time. He cited the discounted purchase price, elimination of duplicative costs and an expected reduction in financing costs. BCP expects to repay ICMB’s revolving credit facility and redeem its 2029 notes at or shortly after closing.

Repurchases and debt reduction take priority

BCP plans to be selective about new investments, prioritizing support for existing portfolio companies and opportunities offering compelling risk-adjusted returns, Goldthorpe said. The company instead intends to direct proceeds from repayments, payoffs and sales toward share repurchases and debt reduction.

“With our stock where it is today, the best risk-adjusted use of each incremental dollar of our stockholders’ capital is to buy back stock at a discount and delever the balance sheet,” Goldthorpe said.

BCP’s board previously authorized up to $10 million in share repurchases through March 31, 2027. Goldthorpe said the company intends to be active under that and future programs, subject to market conditions, legal and regulatory requirements, transaction-related restrictions and customary blackout periods.

After closing, BCP expects to apply proceeds from acquired assets to reducing leverage toward its target range of 1.25 to 1.4 times and repurchasing shares before making qualifying new investments. Goldthorpe said the company would reassess its capital allocation each quarter.

Third-quarter income and NAV decline

BCP reported third-quarter investment income of $13.9 million, down from $15.2 million in the prior quarter. CFO Brandon Satoren said the decrease primarily reflected a smaller income-producing portfolio following net repayments and sales.

Net investment income fell to $4.6 million, or $0.37 per share, from $5.5 million, or $0.45 per share. Core net investment income, which excludes merger-related purchase discount accretion, was $2.9 million, or $0.24 per share, compared with $3.3 million, or $0.27 per share, in the second quarter.

Net asset value declined to $162.7 million, or $13.13 per share, from $179.5 million, or $14.49 per share, at the end of June. Satoren attributed the decline primarily to unrealized mark-to-market losses on the portfolio. Outstanding borrowings were $282.4 million at quarter end, and the asset coverage ratio fell to 157% from 162%.

Chief Investment Officer Patrick Schafer said BCP made three follow-on investments and no investments in new borrowers during the quarter. Originations totaled $3.1 million, while repayments and sales were $8.9 million.

At quarter end, 10 investments across seven portfolio companies were on non-accrual status, representing 2.8% of the portfolio at fair value and 6.0% at amortized cost. That compared with 11 investments across seven companies, representing 3.1% at fair value and 5.7% at cost, at the end of the prior quarter.

About Portman Ridge Finance (NASDAQ:PTMN)

Portman Ridge Finance Corporation is a business development company (BDC) that provides financing to middle-market companies. The company seeks to invest in established businesses through a range of debt and equity instruments, with a primary focus on privately negotiated investments in U.S. companies. Its portfolio may include senior secured loans, unitranche and subordinated debt, and equity investments. Portman Ridge generally targets companies across a variety of industries and uses its investments to support acquisitions, recapitalizations, refinancings, growth initiatives, and other corporate purposes.

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