Q3 2022 Portman Ridge Finance Corp Earnings Call
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My pleasure to turn the call over to Ted Goldberg CEO . Mr. Goldberg. Please go ahead.
Good morning, Thanks, everyone for joining our third quarter 2022 earnings call.
I'm joined today by our Chief Financial Officer, Jason Rus, and our Chief Investment Officer, Patrick Schaefer.
I'll provide brief highlights on 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 third quarter 2022 results and we were pleased to report a strong quarter of financial performance. Despite operating under difficult market conditions are very challenging economic environment rising interest rates and market volatility.
Our total investment income our core investment income and net investment income for the third quarter of 2022.
All in all increased in comparison to the second quarter of 2022, as we started to see the impact that rising rates had in generating incremental revenues from our investments.
Between the reduced cost of capital from our amended and extended credit facility with JP Morgan Chase and the continued benefit of rising rates. We expect this quarter's strong performance will continue going forward in future quarters, allowing us to increase our quarterly dividend by 6% to 67 per share.
Regarding the macro environment in our sector, we continue to see the impact.
On the liquid markets spilling over into the private markets.
Leveraged loan new issue volume declined by over 80% year over year during the quarter. It was down almost 60% year to date due to a combination of lower M&A volumes and a decline in CLO formation, which is a key source of demand for the market additions.
Additionally loan prices on average peaked in August around 95% of par and then traded down to 92% of par by the end of September and remained at those depressed levels. So far in the fourth quarter.
The volatility displayed in the loan markets have benefited Portman ridge in the following ways first the reduced demand for new issue as far as potential borrowers away from the loan market and into the private debt market, increasing our potential deal funnel and allowing for increased selectivity on new deals.
Secondly, the trading place decline has resulted in an increase in private debt deal economics.
Through approximately 102 hundred basis points of higher spreads and 100 to 300 basis points of ink points of incremental OID.
Finally, the volatility has allowed Portman ridge to be nimble and Opportunistically purchase loans originally underwritten by a syndicate of banks that had significant discount and loans trade in the secondary market at significant discounts, although the latter opportunity has become much more pronounced so far in the fourth quarter.
During the third quarter, we remain cautious in our investment strategy and saw net deployments, excluding ordinary course amortization payments of approximately $2 $4 million.
As a result, we ended the quarter with a well balanced portfolio and kept our non accrual positions under control.
Although the full impact of rates have not flown through through our underlying borrowers through June 30th the average interest coverage in our portfolio was three and a half times and on average LTM revenues grew by four 5%.
As we continue to execute our investment strategy, we are well positioned to take advantage of opportunities that arise from the current market environment I continue to be selective and resourceful in our investment decisions.
We will continue to be prudent with underwriting new investments given the current economic uncertainty.
With that I will turn the call over to Patrick Schafer, Our Chief investment Officer for a review of our investment activity.
Thanks Ted.
Turning now to slide five of the presentation and the sensitivity of our earnings to interest rates.
At September 30th 2022, approximately 89, 3% of our debt securities portfolio were either floating rate with a spread to an interest rate index, such as LIBOR, so far or prime rate was 71% of these still being linked to LIBOR.
As you can see from the chart the underlying benchmark rate on our assets during the quarter lag to prevailing market rates and still remains significantly below the LIBOR and so for rates as of November 4th 2022.
We would expect this to normalize over time as the underlying one three and six month contracts reset, but for illustrative purposes, if our assets were to reset to either a three month LIBOR or sofa rate, respectively. We would have.
To generate an incremental $2 $4 million of quarterly income.
Well, our liability costs, but also rise relative to their Q3 levels. We still expect a net positive benefit of approximately eight cents per share assuming all of our assets and liabilities are utilizing the same three months benchmark rates for the entirety of the quarter.
Skipping down to slide 11 investment activity in originations for the quarter were lower than prior quarter, but repayment activity was higher resulting in net deployment of approximately $2 $4 million, excluding regularly scheduled amortization payments and fundings under previously committed facilities, including our great Lakes joint venture.
Net deployment consisted of new fundings of approximately $44 $3 million offset by approximately $41 $9 million of repayments.
These new investments are expected to yield a spreadsheet silver of 664 basis points on the par balance, but a number of the investments were purchased at a meaningful discount to par or included upfront upfront fees, which will generate income in addition to the state and spread.
Our debt securities portfolio at the end of the third quarter. It remained highly diversified with investments spread across 32 different industries and 117 different entities, all while maintaining an average par balance per entity of approximately $3 $4 million.
Turning to slide 12 investments on nonaccrual were flat as compared to June 30th.
2022, and representing 0.0%, 0.3% of the company's investments and investment portfolio at fair value and amortized cost respectively.
Now I'll turn the call over to Jason to further discuss our financial results for the period.
Thanks, Patrick as both Ted and Patrick previously mentioned, despite operating under a challenging economic environment. Our results for the third quarter reflect a period of strong financial performance.
Total investment income for the third quarter of 2022 was $19 million of which $15 4 million was attributable to interest income from the debt securities portfolio.
This compares to total investment income for the second quarter 2022, a $15 million and overall increase of 3.6 million quarter over quarter due to the impact of rising rates generating incremental revenue on our investment portfolio.
Excluding the impact of purchase price accounting, our core investment income was $17 6 million. This compares to $13 7 million core investment income in the second quarter of 2022 core investment income reflects a reduction in purchase price accretion from the garrison and each cat mergers, which amounted to 1.4 million for the third quarter 2022.
Two.
Our net investment income for the third quarter of 2022 was $8 4 million or <unk> 87 per share, which compares to $5 5 million or 57 cents per share for the second quarter of 2022. This.
This quarter over quarter increase is inherently due to the rising rate environment associated with their floating rate investments as well as the settlement of certain investments early in the third quarter, resulting in a full quarter benefit of interest income.
Total expenses for the third quarter of 2022 were $10 6 million compared to $9 1 million in the second quarter of last year. This was predominantly driven by rising costs associated with the interest expense on our debt.
Our net asset value for the third quarter of 2022 was $251 6 million or $26 18 per share as compared to 202 hundred $61.7 million or $27.26 per share in the second quarter of 2022.
The decline due to our debt and equity securities was almost entirely driven by mark to market movements within our portfolio.
On the liability side of the balance sheet as of September 32022, we had a total of $368 9 million par value of borrowings outstanding.
Apprised of $97 1 million in borrowings under our credit facility and $108 million four and seven 8% notes due 2026 and $163 $7 million in secured notes due 2029.
This balance represents a quarter over quarter increase of 4 million relating to a draw on our credit facility.
As of the end of the quarter, we had $17 9 million of available borrowing capacity under the senior secured revolving credit facility and 25 million of borrowing capacity under the 2018 dash to revolving credit facility.
Additionally, and as pointed out in our second quarter earnings call. We successfully refinanced our senior secured revolving credit facility in April which didn't change the benchmark interest rate to three months. So for reduced the rate of interest margin to two 8% per annum from 2.85% per annum and extended the maturity of that facility to April 29.
26.
As of September 30th 2022, our debt to equity ratio was 1.5 times on a gross basis and 1.3 times on a net basis from a regulatory perspective, our asset coverage ratio at quarter end was 167%.
We believe we remain well positioned to pursue growth opportunities with our overall leverage position.
Lastly, and as announced yesterday, our quarterly distribution of <unk> 67 per share, which represents an increase of four cents from prior quarter levels was approved by the board and declared payable on December 13th 2022 to stockholders of record at the close of business on November 24th 2022.
This increased quarterly distribution is supported by the third quarter strong financial performance and our expectations for similar financial performance to continue into future quarters.
With that I will turn the call back over to Ted.
Thank you Jason.
The head of questions I'd like to again emphasize that this quarter. We saw the benefits of the active steps we took earlier in the year to reposition our portfolio to see strong financial results.
Like the ones, we've demonstrated this past quarter.
As we are approaching year end, we believe we're in a ideal position to have another strong quarter of strong financial performance in the fourth quarter.
Thank you once again to all of our shareholders for your ongoing support and this concludes our prepared remarks and I'll now turn the call over to operator for any questions.
Certainly at this time, if you'd like to ask a question. Please press star one on your telephone keypad will pause for a moment to compile the Q&A roster.
Christopher Nolan with Ladenburg Thalmann. Your line is open.
Hey, guys, Jason I missed it were there any non recurring items earnings.
Yeah, I would say this this is a pretty good quarter for just.
Normal run rate and kind of look at expenses I assume you're talking about the expense side of the P&L.
Yeah.
Anything that.
Yeah, Yeah. So so I would say no to that largely it's a pretty good run rate quarter for you.
On the expense side professional fees are down 120 grand quarter over quarter, which reflects more normalized legal expense, which is a pretty good run rate I would use for going forward. Other expenses are down as well by about 214 grand quarter over quarter.
That's largely due to you know some benefit we're seeing on reduced insurance premiums, yeah, CLO admin costs and some tax expense coming down I would say, that's probably a little light I would look at that and probably right around that mark right around 500 Grand.
On the revenue side.
Okay.
I was gonna stay on the revenue side, it's pretty.
Pretty good run rate there as well I mean, we anticipate to see continued uptick in AR and the interest income coming in in the future as rates continue to rise and as are our positions continue to reset and we provided a walk of that with it within the.
Within the materials, but you know the CLO income JV income all of that so you should be about pretty good run rate.
And then given that given that it was seem to be a fairly clean quarter and seems to be that this whole interest rate environments working towards.
The company's benefit in terms of the earnings run rate.
The 67 cents, new dividend seems to be potentially a little bit on the low side of luster.
Issues.
Tax issues or things like that that's a fair way to look at.
I think that's relatively fair this is Ted.
You know I think I think if theres going to be pressure on our dividend and it's gonna be increases versus like.
The risk is a dividend increase I think there's just so much uncertainty right now we have we are not seeing.
Any credit quality issues or credit quality deterioration in our portfolio today.
But just given all the uncertainty.
With every passing quarter as short term rates roll through our numbers you know our forecast just keep going up and a lot of it's driven by macro considerations versus micro considerations. So you know on slide five in our earnings deck I think states. The best I mean, we're only getting to 8%.
On LIBOR today in LIBOR sits at four 5%. So we think we've got really good earnings tailwind and to the extent they keep coming through.
I think theres going be a heart theres going to be a lot of conversation with the board about potentially you know increasing dividend versus decreasing the dividend.
So for me. Thank you and then the other thing I'd say on dividend policies, we as a management team probably have a pretty strong bias towards base dividend versus variable dividends and so we.
We have the advantage over others because of some of these M&A. We've done we actually do get some tax benefits out of that as around.
In regards to spillover income.
But obviously you know our preference over time is to have a higher base dividend versus paying specials.
Okay.
Paul Johnson with <unk> Your line is open.
Yes, good morning.
For taking my questions.
First question I was hoping you could help us understand just.
Slide seven a little bit better.
Slide by the way.
Helpful to happen there.
Yes.
But obviously.
Jumping 95.
Pretty big chunks, and I was kind of looking at our presentations for from last quarter. The same slide youre projecting around 74 cents, which is a lot closer I think to your sort of adjusted result, this quarter. So.
That 95% that you show on this slide.
Does that include some level of purchase accounting accretion in there.
And is there any way to I guess.
Estimate how much that is included in there and maybe a better way of asking the question is.
If you have some sorted Roe.
You would expect to generate as what you would consider run rate Roe.
This is a closer to 15% ROE it feels a little high.
Yeah. So Paul this is Patrick Schafer at so a couple a couple of questions which is.
This analysis.
Chart seven is intended to be kind of the most simplistic form of this exercise and so what it's really doing is taking everything that was done at Q3.
And really just essentially changing the benchmarks on the underlying assets and liabilities that we had during that we had at the end of the quarter and what that what that difference would be from assuming kind of a run rate for the quarter as opposed to what actually transpired and so to that point. The 95 cents here would include the same amount.
Of purchase price accretion that was in the Q3 numbers and so we show that on slide.
I had to add in the next slide eight you can kind of see where we have the purchase discount accounting and so that that number would be in our 95 is a similar amount of that that we had in Q3 again, we're trying to make this as simplistic as possible and not making any kind of incremental assumptions about.
Anything in our portfolio anything in the P&L other than just changing the benchmark rates on LIBOR and so far so that you can that would kind of be your easy walk to kind of what that 95 cents would look like on a quote unquote core basis, you could just kind of take the same difference here between our reported and and core on slide eight.
And kind of overlay that to the 95 and you did it.
Your note last night.
Just for this.
The other thing the other big assumption, obviously that assumes flat repayment activity.
As we show it in a previous slide you know, obviously that can change from quarter to quarter. So I think that's all we were trying to do here is just show purely the impact on rates and not make a bunch of assumptions in footnotes for for the for our shareholders. This is really meant to just show you just like the pure.
If rates were higher this what our earnings would have been.
Got it yeah I appreciate the.
The explanation there.
This is a help to fly out of way side.
Thanks for the.
The explanation on that.
And then another question on your dividend policy.
Just.
Going forward.
We had an incremental already use this quarter I mean is that kind of what you expect obviously this is a fairly good.
Our margin of 95 or 80 sensor so adjusted sort of run rate.
Well above that.
New distribution level. So is it the intention I guess to just kind of walk that higher as you get your arms around the earnings generation portfolio into next year.
Or do you kind of.
Intend to I guess maintain a pretty good margin question, there and maybe to be more conservative on the dividend hike.
Okay.
The answer I think the answer is both I mean that we want to be conservative and make sure. We can cover our dividend for a sustained period of time. It is our third dividend increase which I think most bdcs have not done that.
You know again again rates are changing so quickly and I just think we want to be take a very measured approach to this just given the fact that you know with each passing quarter youre going to have this benefit of short term rates flowing through our portfolio and you know again, if you look at the forward curve on rates, which again, we're not macroeconomists there.
Showing short term rates coming down middle to end of next year, which you know.
People can take their own view on that but.
So I think we've tried to take a very measured approach.
But again I think the I think the.
Momentum is positive versus stable.
Around dividend policy and then number two is but we do want to maintain a relatively healthy cushion just given the uncertain environment.
Okay I appreciate that.
So I think I think the thing we want to stress is like we were not expecting a whole bunch of non accruals. Our portfolio is incredibly diversified so it's not like we're taking a view on credit we're not seen it but again you know just given given what's happening in the world I think we want to just continue to be conservative.
Yes that makes sense that makes sense.
Yes.
The.
The DLO income for the quarter sounds like.
Probably one of the previous questions that should be fairly good number going forward sorry, the JV income going forward.
For our run rate and you can correct me if I'm wrong there.
I'm just curious what is going on there in the quarter just because it looks like you may have had a reduction of our investment in the JV I don't know if that was the return on capital.
And.
Just want to make sure that I heard that correctly at $2 2 million or so of JV income this quarter should be kind of expected to run through.
Going forward, we should be looking at.
Potentially a little bit lower.
Yeah, Hey, Paul it's Patrick so.
During the quarter and it's specifically are particularly related to our great lakes joint venture.
We sort of we are.
If you're in the right way to frame this but we essentially the.
The investment period of the joint venture was expiring or was in the process of expiring so essentially.
<unk> built a new joint venture and moved everything from one from.
One joint venture to two joint venture. So I mean, just kind of kind of moved over but we also we also upsized that joint venture. So you saw a temporary return of capital as as Portland, specifically essentially got kind of reallocated. If you will and then that we've had incremental fundings on that during the quarter or so.
By the end of this quarter, you would expect to see that back to kind of the I'll call. It. The June level. If you will so is there maybe a very small temporary.
Of of income declined, possibly but with rates rising in all of those underlying assets are floating rate as well.
I guess as youre, not going to be really that far off from upfront a meaningful impact.
Got it I appreciate that was really it was really temporary return of capital that again by the time, we get to the end of the quarter, we'll be back to kind of the same notional value in that joint venture.
Got it.
Yeah.
And.
Last question just in terms of.
The deal flow that you guys are seeing it sounds like.
<unk> may potentially be improving in the market, but just wanted to get your sense I get from.
The BC partners platform.
That is the case.
Like less I believe last quarter potentially the quality of the deals you were seeing or maybe not.
Quite as attractive, but I'm wondering if that chain.
Changed at all in today's environment.
Yeah, I mean, it's definitely changed in the sense of I think the biggest question. We got six months ago was in a period of rising rates is the risks to spread tightening. So I think I think some people felt like some of the large players in our space, we're going to cut spread and it's been the complete opposite.
Is that the syndicated markets have effectively been closed for at least six months and so our industry has stepped in to provide that capital and.
Say like people are being very very very selective and spreads are wider.
We're getting L plus we're getting asked plus 700.
On very high quality unit tranches right now and that was you know that would have priced it S. Plus 525 six months ago. So we're getting almost 200 basis points of spread and we're also getting you know 350 basis points of incremental sofa.
So the returns, we're generating or a close to double what they were even six months ago and.
And quite frankly better than larger companies. So this is this is an incredible environment to deploy capital and the other thing I'd say as Patrick said in his statements. We obviously have the ability to buy secondary debt as well, which we do very selectively and quite frankly rarely.
For the first time in really since the middle of 2020. There are also secondary opportunities to buy things that are floating rate first lien pieces of bank debt at what appears to be.
Really really really low ltvs.
And in industries, where even if you go into a massive recession, we don't feel there's really a lot of credit risk.
So we're seeing a lot of opportunities both on the primary side and secondary side.
That's all.
Sorry for the long answer, but that's all offset obviously repayments are down we are seeing a little bit of an uptick in repayment activity.
We saw it this quarter, obviously, but we're seeing it again in this fourth quarter for some reason.
Which is good but repayment activity is still relatively muted versus what it was last year.
Yes, that's great.
Great.
Great information and.
Those are all my questions. Thanks.
Yeah.
Again, if you'd like to ask a question. Please press star one on your telephone keypad.
There are no further questions at this time.
We do have a question.
From Steve Steven Martin with Slater capital.
And great quarter, and thanks for the incremental dividend.
Hey, Steve.
Good good can you I always love Slide 14, which is sort of.
Portfolios you've bought.
You've done a great job of underwriting those such that even with the mark to market now it doesn't appear like there had been any losses can you talk about where you stand on the evolution of those portfolios and continued run off.
Yeah, Hey, Steve It's Patrick So look I think from.
All of this taken from left to right again, Ohio portfolio. These are only 15% of it last there's a couple of good names in there we would expect those in ordinary course to get to get taken out, but we're kind of I don't really feel need to press anything there, we're very comfortable with all the credits.
Garrison again still kind of like 30 ish percent left generally speaking that is still kind of more on the liquid side, which we generally like to have some mix of that in our portfolio.
To kind of keep invested while we're waiting for a private opportunities. Obviously this is not the kind of market to sell illiquid names. So we're generally comfortable with the with the credit quality, but probably more likely to hold onto some of those names just kind of given the environment right now.
And then lastly, the harvest one again I think going into it we knew this would be probably the longest on a relative basis in terms of in terms of refinancing. It's still we're still at a 40% of it in a relatively short period of time.
Couple of more deals that we've been working on with the company's on kind of refinancings negate exits that we think over the next quarter or two should come to fruition.
Hopeful that another kind of a decent chunk of that will be will be taken out in the next call. It six months if you will.
But I would say in general we're pretty comfortable where we are in terms of the rotation we don't have any.
Particularly large portfolio names within there are within there that we kind of you know it would really want it you can it really be pressing the exit button on again say for a couple of that I, just referenced and harvest that we're expecting over the next call. It six months.
And the Mark to market you talked about and that's great that you know most of the mark to market is sort of pricing related and not fundamental related.
If you look at the Mark to market in Portman, Cree or BC sourced deals versus sort of old deals on this page.
How would you.
Think about it.
Yes, I don't I mean, candidly I don't think theres any any massive difference between them I would say for the legacy I think the way I would characterize this as for the legacy portfolio.
The portfolios if you will there's probably a little bit more variance in the sense of there were some names in there that had more impact from COVID-19 that are that have been coming back some more positives.
And perhaps a couple of negatives as well to kind of offset each other.
Is that kind of really leaves you with just true mark to market across all the books and again, we mark everything in the exact same way. So a change in the benchmark rates is going to have an equal impact on agaricin old gas name as it is on our BC name.
I generally say like for me the clinical credit things.
Generally offset each other and we're probably a more a more impacted in those portfolios, but overall just mark to market is pretty consistent across the books, yes.
When you look at credit if you look at credit marks there basically theres puts and takes but its basically 100% of our mark to market volatility this quarter was from spread widening.
If you if you back out the puts and takes on credit.
It's all of this is just mark to market.
Yes.
Ill just add by the way that having listened to a number of BDC calls over the last week and obviously more to go there or some of the some of the companies.
I don't understand how they mark to markets aren't bigger.
And so it from <unk>.
<unk>.
Our knowledge and knowledgeable perspective, it seems like you are being relatively conservative to some of the other compared to some of the others I've listened to.
You didn't buyback any stock this quarter was that just because the market was a little turbulent and you wanted to preserve opportunity.
Yeah.
Yeah, I mean I think.
The answer to that is no.
We've said we've said you know we've always said that anytime we're able to buy back stock, we'll buy back stock.
And I think we've got a path to reinstating our buyback program in a relatively short period of time, and it's a big big priority for us to be buying back stock I mean, given where our stock trades. It makes total sense for our shareholders frustrate buying back stock. So anytime we can buy stock we do so.
There is.
We weren't able to buy stock this past quarter, but we feel like there's a path to being able to buy back stock relatively soon.
Okay. Thanks, a lot.
Thanks.
Again, if you'd like to ask a question. Please press star one.
There are no further questions at this time I'd now like to turn the call back over to management for final remarks.
Yeah.
Thanks, everyone for joining us today, and we look forward to speaking to you in early March when we were announcing our full year results and I wish everybody, a happy and very early Thanksgiving.
Thank you.
This concludes today's conference call. We thank you for your participation you may now disconnect.
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Okay.
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