Q4 2019 Earnings Call

Ladies and gentlemen, and welcome to the Portman Rich Finance Corporation Conference call and earnings Press release was distributed Friday afternoon. If you did not receive a copy. Please the release is available on the company's website at Www Dot Portman rich Dot Com and Investor Relations section as reminder, this conference call is being.

Recorded today Monday March nine 2020. This call is also being hosted on a live webcast, which can be accessed at our company's website at www Dot Portman rich dot com in the Investor Relations section under events. Today's conference call include forward looking statements and projections and we ask that you.

For to the Portman Ridge, most recent filings with the SEC for important factors that would cause actual results to differ materially from those projections Portman Rich Portman Rich Finance Corporation does not undertake to update its forward looking statements unless required by law I would now like to introduce your host for today's conference Mr. Ted Goldcorp.

Executive Officer of Portman, Rich Finance Corporation Mr. Cold you may begin.

Thank you and good afternoon. Thank.

Thank you for joining us for earnings call today Boardman Ridge announces fourth quarter 2019 in 2019 fiscal year financial results 2019 was a very active here for Portman rich in April we closed the externalization transaction for kick up in mid December we received shareholder approval and completing the merger with Oh Ha investment Corporation.

And at the end of December we successfully completed the refinancing of our revolving credit facility, reducing borrowing costs, an increase in our investment capacity for our business going forward.

We remain very excited with the integration transformation of the O. H a merger.

Prior to the ended the year, we monetized close to 40% of the legacy AJ investments at around now and have already reinvested or identified reinvestment for the bulk of those proceeds.

We continue to Opportunistically rotate out of those assets as reinvestment opportunities arise.

We anticipate that the incremental eni generated from away Jay.

Portfolio to payback, the transaction costs, and approximately three quarters, which equates to an approximate 120% annual yield on the investment.

As required with the merger Portman announced a stock buyback program to repurchase up to $10 million of stock over the next year through open market purchases and we'll look to Opportunistically purchase shares.

Subject to blackout periods available cash and restrictions in our existing bond indenture.

Transition to the state of the markets right now the liquid credit markets are experiencing the most volatility that we have seen since the energy downturn in 2015 in 2016, and even and more so even than in December 2018, as a result of the co vid 19 headlines.

Although it is too early to see an impact in our underlying portfolio companies. We're monitoring the situation closely and are in contact with companies that we perceived to have some amount of exposure.

Generally we have a negligible exposure to the most likely to be impacted sectors, such as auto energy leisure hospitality travel airlines.

As it relates to our primary market directly originated middle market loans, we have not seen the volatility or recent rate cuts trickle down to widen spreads, but the deal activity has picked up given the need for certainty.

However, if volatility continues in the impacts of KOVA 19 become more apparent we would anticipate widening spreads as a response.

We're very cautious on underwriting with new loans, given the uncertain impacted the krona virus, both on the economy and micro factors, namely supply chains raw material pricing and availability and end market demand.

With that ill turn the call over to Ted Gilpin, our CFO for a brief overview of the financial results for the quarter and then Patrick Shaffer, Our Chief investment Officer for review of our investment activity before concluding the call with some additional remarks.

Thank you Ted good afternoon, everyone.

Rollout of moving parts this year at Portman, starting with the externalization in April and our merger with though age AI in December both transactions had effects to Eni and maybe in the period.

As of December 30, Onest 2019, or any V stood at 152.2 million.

Or $3.40 per diluted share.

From 158 million or $4.23 per share of the ended 2018.

Kind of approximately $5.8 million component parts of the cheese were as follows an increase of approximately 25 million from the merger with OE, Jr, including a day, one unrealized gain of 6.4 million.

Of which 2.5 million was realized in the quarter.

A decrease due to realized and unrealized losses of 20.9 million due mainly to tank partners and COO equity positions.

Over distributions of 8 million caused mainly by transaction expenses associated with the externalization and the final piece being the issuance of approximately 7.4 million shares for the.

Transaction.

Net investment income for the full year two to 2019 was 3.1 million.

Or eight cents per share as compared to 10 million and 27 cents per shares last year net investment income was adversely impacted in 2019 by approximately 4.8 million of nonrecurring transaction costs associated with externalization or approximately 13 cents per share.

Net investment income for the third and fourth quarter was six cents per share right in line with our current quarterly distribution.

On the liability side of the balance sheet concurrent with the merger with only CCI Portman refinanced its revolving credit facility, where the rate of LIBOR, plus 325, with a new revolving credit facility, where the rate of LIBOR plus 285.

As of December 30, Onest 2019, we had 77.4 million of six and and an eight the bonds due 2022, and 79.6 million of drawings under our new revolving credit facility for an asset coverage ratio of 195% above the statutory requirement for bdcs.

As of 150%, but below the required 200% coverage ratio over existing six in the notes.

In February of 2020, the time of our dividend declaration revolver been paid down such that Portland was above the 200% required ratio.

Finally, as Ted mentioned in his opening remarks, our board has authorized us to repurchase up to 10 million in stock over the next year subject to market conditions and certain other limitations.

Stock repurchase program will give us additional flexibility to manage our capital and drive shareholder value through accretive stock repurchases, we intend to start purchase the equity as soon as practically possible, but in the very short term need to consider both blackout periods and the leverage covenant of our bonds.

We believe we're in good position to earn our distribution and we will continue to evaluate our debt structure and mix between fixed and floating rate debt.

With that I'd like to turn the call over to Patrick Shaffer, Our Chief investment Officer.

Thanks, Ted starting on page five of the presentation posted departments website during the quarter and excluding the Ohio merger, we made investments into for borrowers to which were existing portfolio companies and two of which were brand new borrowers and aggregate. These investments totaled $7.1 million, a face value, 76% of which were.

Since securities and the remaining net investment being an add on to the great Lakes joint venture the weighted average spread on these first in securities was 617 basis points.

Additionally over the quarter, we perhaps we exited 23 positions 11 of which were Ohio positions that had an aggregate carrying value of $24.9 million eight of which were legacy KCAP positions that had an aggregate carrying value of $13.8 million and the remaining for PC sourced assets.

That had an aggregate carrying value of $12.5 million.

In aggregate de sales resulted in a 118000 dollar loss relative to the carrying value as of September thirtyth or December 17th indicate to the legacy Oh Hadžić assets.

Of the unrealized loss in the investment portfolio during the quarter approximately 95% of it was attributable to the legacy CLL positions. Excluding these positions the remaining investment portfolio was essentially flat quarter over quarter.

With respect to the quarter as a whole when BC partners took over management of KCAP on April Onest of this year. The company had $165.7 million of debt securities market, a blended price of 91.9% of par had a stated spread to LIBOR of 658 basis points, excluding non accrual.

Assets.

The equivalent basis, excluding the nonrecurring asset of OCI, which was acquired with the old age AI portfolio as of December 30, Onest pulling rich has $194 million of debt securities marked at 92.9% of par and yielding a spread to LIBOR of 700 basis points on accruing taxes.

Ladies.

There were three incremental non accruals during the quarter two of which were legacy Oh, H AI non accruals and the other portfolio company was.

A company that was supposed to restructure conclude restructuring during the quarter, but was delayed our expectation is that the restructuring will be completed by the end of March or early April at which point the new securities will be accruing.

Finally, moving to slide six you can see the progress we have made in rotating the portfolio subsequent to the externalization and Ohio merger.

KCAP legacy and noncore assets have declined by 32% during the year and we've already reduced the legacy add portfolio by 41%.

With that ill turn the call over to Ted Goldcorp.

Thank you.

Patrick noted we've made significant progress in the last three quarters of the year and repositioning the portfolio and we continue to feel good about the composition of the book.

As we've discussed in the past seal equity has experienced volatility during the year in the quarter unlikely. We'll continue to do so going forward since March 30 Onest.

The seal equity positions have been reduced as a percentage of fair market value from 19% to under 12% of our portfolio and we continue to look for opportunities to reduce our exposure.

During the quarter, we completed two transactions are clear alongside other BC partners entities pursuant to our co investment order and continue to leverage the broader BC partners platforms onto on transactions going forward. As this capability is crucial to our ability to compete with the other major market participants.

During 2020, we will continue to work towards reducing noncore and low yielding assets.

Both from the OE, CIT, Oh, H, AI and legacy KCAP portfolios and.

Zoning are structured credit exposure and thoughtful manner.

We believe the portfolios trend into right direction, and we will continue we look forward to continuing our repositioning work.

Additionally, we will continue to look at both traditional and nontraditional acquisition and merger candidates.

We consider it is opportunistic or not.

Essential to generate a healthy stable returns for shareholders.

Finally on slide eight lays out geographically the improved earnings power of the business since March 30, Onest through a combination of new asset origination the Oh, H AI merger, improving spreads on existing portfolio and investing in our great Lakes joint venture we've increased yields on NAV by 166 basis points in spite of a decline of.

Declining LIBOR headwind.

As mentioned previously we hope to see the market volatility ultimately lead to higher spreads in our primary market.

Thank you for your ongoing support and with that we'd like to turn the call over to the operator for your questions.

Thank you ladies and gentlemen, if you have a question at this time. Please press star and then the number one key in your Touchtone phone. If your question has been answered all your question. We received from the Q. Please press the pellet key.

Our first question comes from Christopher Nolan with Ladenburg Thalmann. Your line is open.

Hey, guys.

Hey, Chris had total Thor.

Can you give any guidance in terms of where you think to see a low portfolio will be by the first quarter as a percentage of the toll portfolio.

I would say as of now I think it's going to be around the same level.

The credit markets didn't really move the car markets were relatively benign until the last couple of days and you've seen big moves and leverage loan pricing. So.

I would say as a percentage of the total portfolio I would expect it'd probably be down a little bit, but I don't think I as of right. Now we don't see have been to being down materially great and then in your comments earlier, you mentioned, a three quarter payback for the approach.

Deal is that payback to NAV per share or to EPS dilution I missed it.

Yes, sorry, we probably it's probably our fault.

No. We just look at the embedded transaction costs and you overlay the embedded earnings growth or Oren earnings contribution when you net off interest costs, it's about a three three quarter payback. So in the fourth quarter, we obviously.

Part of our NAV reduction was obviously onetime transaction costs related to transaction that we recoup those just through additional earnings power over the next couple quarters, Okay, and then I guess.

Plus the share repurchase.

And given current market conditions, I understand but I know management's talking about repurchasing shares at one time staff.

Over the past year some points.

Where we stand with that I mean.

Total understandable, if it's going to hold for awhile, but.

I mean, just theres three components to it one is our incentive fees were taking at stock at NAV.

So instead of us taking and cash like most managers were actually going to take ours and stock so and our shareholders are partners for doing that in terms of stock buyback, particularly when you look at where our stocks trading relative to NAV.

Yes, we think it makes a lot of sensors to buy back stock, we obviously have to wait that versus blackout periods.

And our leverage but I think it's our intention to buyback some stock.

Part of it as you know I think management continues to have strong desire to buy back stock personally because I think its integrate message the shareholders and we think our stock is cheap. So I think you may also see some to extent possible. You may also see some management insider buying as well.

So the answers.

Thanks, Chris.

Again, ladies and gentlemen, if you have a question at this time, Please press star and the number one key inner touchtone phone.

Your next question comes from Jim that will not with BMO asset your line is open.

Thank you. Thank you for your last comment your commitment to.

The shares will be effort insiders and companies. So my question is on the dividend and May be you covered this in your opening remarks I was a little late coming on but can you can you give me a band so to speak of given what you see where this dividend.

Basically just during the six cents.

If I understand you correctly when you absorb the benefits of all age AI.

In Q1 glean from that that Thats pushing.

Off of the six cents and so the six cents is more likely to go up and down.

The other offsets so.

Where where might the dividend.

Kind of the.

Throughout this year.

No. It's great question. So we actually put a slide together that's in the 10 or supplement deck that I'd point people to it's on page eight but I think I think we've done a lot of things over the last nine months to enhance earnings power. So coming into this year, we had a lot of tailwinds to earnings and it's a combination of cheaper liabilities.

Some of the asset origination we've done on higher spreads and the offset to that is is LIBOR has come down pretty dramatically. The last couple of weeks.

We do have LIBOR floors, and a lot of our assets our liabilities some of our liabilities are fixed but our floating rate liabilities don't have LIBOR floors.

So.

We do we do have Tailwinds just from like you know organically from that the what we put into the business.

But again this this this level of over the last couple of weeks is going to be a headwind for all bdcs not just yourself.

So I think I mean, I think that the short answer is we feel good about our dividend.

We felt really good about earnings growth pretty pretty LIBOR, moving but with LIBOR moving down I think I think.

It should be more than offset by the tailwinds, but again that is that as a headwind that were recently facing.

Got it. So you are you think at this point the.

The tailwinds.

Exceed the headwinds like war.

At this point.

Yes.

Okay, Yeah, and again, because as LIBOR floor dynamic if rates could if short term rates continue to go down we actually do get some benefit out of it from the reasons as said before.

So we're kind of at the whatever went from two to one hurts US earnings wise like we went from one to zero, which I'm, not saying thats going to happen, but if it did happen.

We do get some benefit from that.

And so my last question here is what is you can you give any color to that thinking that.

Commitment to the six cents given the where the balance sheet is now might you be willing to finance the dividend for quarter or too.

If it's not being earned.

To just kind of maintain it in other words.

Sufficient liquidity in the balance sheet or do you want to match payout to actual earnings.

I mean again I think the way to answer. The question is is we feel good about our dividends and feel good about our earnings power.

Particularly over the short term, but also over the long term. So I don't think Theres any I don't think we foresee us under earning our dividend to extent, we did I don't think we'd make a rash decision to cut the dividend if that happened for one or two quarters.

But as of now as a set I think I think we the intention over the course ears to over in our dividend.

Okay. Thank you.

Thanks.

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

Hey, guys. Thanks for taking my questions.

I just wanted to ask you I believe and correct me if I'm wrong, you have a one to one covet in your and your outstanding bonds.

Curious what your plans are for portfolio management going forward do you plan on kind of maintaining the portfolio, where it is and using payoffs for potential debt pay down or do you plan on refinancing is dead in the near term just your thoughts around that please.

Yes sure.

Good question I mean, obviously, we still have.

While we have proven to go up to the new statuary limit of two to one.

We still have that covenant in our old baby bonds, So obviously market dependent.

Refinancing them is is one option that we've been looking out and we're prepared to do that depending on.

How the market shake out if not then we have flexibility within the current structured to get to where we can actually either refinance financing were paid them down to certain to the extent we need.

Okay. So thanks Thats all those were all my questions. Thanks for taking my questions today.

Yes.

There are no further questions kept at this time, a kind of call back over to presenters.

Right well once again, we appreciate every dialing in particularly on a on a stock market day like today.

And.

If anybody has any questions management's available to speak to any investor at any time.

Thank you very much.

This concludes today's conference call you may now disconnect.