Q4 2022 Portman Ridge Finance Corp Earnings Call
Speaker 2: A copy of the release, along with an earnings presentation, is available on the company's website at www.portmanridge.com in the investor relations section and should be reviewed in conjunction with the company's Form 10-K filed with the SEC.
Speaker 2: As a reminder, this conference call is being recorded for replay purposes.
Speaker 2: 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. 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 filings with the SEC.
Speaker 2: Portman Ridge Finance Corporation assumes no obligation to update any such forward-looking statements unless required by law.
Speaker 2: Speaking on today's call will be Ted Goldthorpe, Chief Executive Officer, President and Director of Portman Ridge Finance Corporation, Jason Ruiz, Chief Financial Officer, and Patrick Shaffer, Chief Investment Officer. With that, I would now like to turn the call over to Ted Goldthorpe, Chief Executive Officer of Portman Ridge. Thank you very much.
Speaker 3: Good morning. Thanks everyone for joining our fourth quarter and full year 2022 earnings call. I'm joined today by our Chief Financial Officer, Jason Roos, and our Chief Investment Officer, Patrick Shafer.
Speaker 3: I'll provide brief highlights on the company's performance and activities for full year 2022. Patrick will provide commentary on our investment portfolio and our markets, and Jason will discuss our operating results and financial condition in greater detail.
Speaker 3: Yesterday, Portman Ridge announced its fourth quarter and full year 2022 results, and we are pleased with the solid earnings power of the company, despite operating under difficult market conditions, a challenging economic environment, rising interest rates, and market volatility.
Speaker 3: Our core investment income in 2022 increased by $800,000 to $64.2 million in comparison to $63.4 million seen in 2021 as we continue to see the impact that rising rates have in generating incremental revenue from our sourced investments.
Speaker 3: Additionally, our amended and extended credit facility with JPMorgan Chase has reduced our cost of capital, helping further reduce our expenses relative to our asset base.
Speaker 3: Overall, our performance, both this quarter and this quarter, is about a quarter of the
Speaker 3: and earnings momentum from a timing lag and a realization of rising benchmarks has allowed us to raise our dividend for the second straight quarter to 68 cents per share.
Speaker 3: And we believe that we were situated to continuing delivering attractive returns to our shareholders in 2023.
Speaker 3: Regarding our primary market as a whole, despite the continued volatility in the syndicated markets and an uncertain macro backdrop, we remain bullish on new investment opportunities and the ability to rotate our portfolio at reduced risk and incremental returns.
Speaker 3: For new opportunities, spreads have widened by approximately 150 to 200 basis points as compared to the beginning of the year, and upfront fees are an incremental 100 to 200 basis points.
Speaker 3: Additionally, we continue to see strong equity contributions from sponsors and reduced leverage levels.
Speaker 3: To illustrate this, the weighted average total leverage of deals we completed in the fourth quarter was 4.8 times as compared to 5 times in Q3 and 5.5 times for all of 2022.
Speaker 3: Turning the focus back to the company, we continue to believe in the valuation of Partment Ridge as we continue repurchasing shares under our renewed stock repurchase program.
Speaker 3: In 2022 alone, we repurchased a total of 167,017 shares at an approximate cost of approximately $3.8 million, more than double the amount of shares we repurchased in 2021 at 75,377 shares.
Speaker 3: We expect this trend of repurchasing Portman shares to continue into 2023 as we are able to do so.
Speaker 3: On this call, Patrick will also walk through the potential upside cases for an asset value. Our portfolio is largely in first lien debt and is now valued at a significant discount to PAR.
Speaker 3: If you experience normalized defaults or even elevated default rates versus history, we believe there is embedded net asset value upside in the portfolio.
Speaker 3: So this adds to our earnings momentum, driven by wider spreads on new originations and rising short-term interest rates to drive both potential NAV and earnings upside.
Speaker 3: With that, I will turn the call over to Patrick Schaffer, our Chief Investment Officer, for review of our investment activity.
Speaker 3: With that, I will turn the call over to Patrick Schafer, our Chief Investment Officer, for review of our investment activity. Thanks, Ted.
Speaker 4: Turning to slide five of our presentation and sensitivity of our earnings to interest rates.
Speaker 4: As of December 31, 2022, approximately 90% of our debt securities portfolio
Speaker 4: were either floating rate with a spread to an interest index such as LIBOR, SOFR, or PRIME, with 67% of these still being linked to LIBOR.
Speaker 4: As you can see from the chart, the underlying benchmark rate of our assets during the quarter lag the prevailing market rates and still remain significantly below the LIBOR and SOFR rates as of February 28, 2023.
Speaker 4: We would expect this to normalize over time as the underlying 1, 3, and 6 month contracts reset.
Speaker 4: For lesser purposes, if all our assets were to reset to either a three-month LIBOR or SOFR rate, respectively, we would expect to generate an incremental $2 million of quarterly income.
Speaker 4: While our liability costs will also rise relative to their Q4 levels, we still expect a net positive benefit of approximately 10 cents per share, assuming all of our assets and liabilities are utilizing the same 3 month benchmark rates for an entire quarter.
Speaker 4: Skipping down to slide 11, both investment activity and originations for the fourth quarter were lower than the prior quarter, resulting in net deployments of approximately $6.3 million, excluding regularly scheduled quarterly amortization payments and fundings under previously committed facilities, including our Great Lakes Joint Venture.
Speaker 4: Net deployment consisted of new fundings of approximately $23.8 million, offset by approximately $16.5 million of repayments.
Speaker 4: These new investments are expected to yield a spread to SOFR.
Speaker 4: of 704 basis points on the par balance.
Speaker 4: And the investments were purchased at a cost of approximately 95.5% of par, which will generate incremental income in addition to the stated spread.
Speaker 4: As mentioned in our press release, we do $14.3 million under our 2018-2 secured notes at a rate of LIBOR plus 158 basis points to fund these assets yielding SOFR plus 704 basis points.
Speaker 4: resulting in a very attractive return on equity. Additionally, during the quarter we funded $13.7 million into our Great Lakes joint venture and have had additional funding so far this year that have in aggregate taken us close to being fully funded under that commitment.
Speaker 4: Similar to our experience with new assets on the balance sheet, incremental investments in our Great Lakes Joint Venture have come at increasing spreads and widening OID, which should result in higher returns going forward.
Speaker 4: Our investment securities portfolio at the end of the fourth quarter remained highly diversified with investments spread across 31 different industries and 119 different entities, all while maintaining an average par balance per entity of approximately $3.3 million.
Speaker 4: Turn to slide 12.
Speaker 4: We had one incremental investment on non-accrual as compared to September 30, 2022, which is a subordinating note in pro or holding, which is valid at 0.
Speaker 4: In aggregate, investments on non-accrual status remained relatively low at four investments in the fourth quarter of 2022 as compared to seven investments on non-accrual status as of December 31, 2021. These four investments on non-accrual at the end of 2022 represent 0.0 and 0.6% of the total profit of 2022.
Speaker 4: which represents a blended price of 91.66% of par value and is 84% comprised of first clean loans at par value.
Speaker 4: Assuming a par recovery, our December 31, 2022 fair values reflect a potential of $43.2 million of incremental NAV value, or $4.51 per share.
Speaker 4: For lesser purposes, if you were to assume a 10% default rate and a 70% recovery rate on this debt portfolio...
Speaker 4: there would still be an incremental $2.89 per share of NAV value over time as the portfolio matures and is repaid. This default rate is above anything the market is expecting or has experienced historically.
Speaker 4: Turning finally to slide 14. If you aggregate.
Speaker 4: these three portfolios, over the last three years, we have purchased a combined $434.8 million of investments.
Speaker 4: have realized over two-thirds of these positions at a combined realized and unrealized mark of 103% of fair value at the time of closing the respective mergers.
Speaker 4: We were able to achieve those results despite the global pandemic in 2020 and most of 2021 in a weak market for almost all asset classes in 2022.
Speaker 4: In a similar vein as the previous slide, as of December 31, 2022,
Speaker 4: there remains an incremental $13.7 million of value as compared to the par in these portfolios.
Speaker 4: or $9.3 million when applying a similar 10% default rate and 70% recovery rate analysis.
Speaker 4: I'll now turn the call over to Jason to further discuss our financial results for the period.
Speaker 5: Thanks, Patrick. As both Ted and Patrick previously mentioned, despite operating under a challenging economic environment, our results for both the fourth quarter and for the full year 2022 make strong financial performance.
Speaker 5: Total investment income for the full year 2022 was $69.6 million, of which $55.8 million was attributable to interest income from the debt securities portfolio.
Speaker 5: This compares to total investment income for the full year 2021 of $80.1 million, of which $65 million was attributable to interest income from the debt securities portfolio. The decrease was largely due to lower purchase price accretion reflected in 2022, as well as reduced repayments along with lower fee income.
Speaker 5: Excluding the impact of purchase price accounting, our core investment income for the year was $64.2 million, an increase of $800,000 as compared to core investment income of $63.4 million in 2021.
Speaker 5: Our net investment income for the full year 2022 was $28.9 million, or $3 per share, which compares to $42 million, or $4.92 per share for the full year 2021.
Speaker 5: The year-over-year decrease was largely due to the aforementioned impact of reduced purchase accretion, lower repayment activity, and reduced fee income.
Speaker 5: As of December 31, 2022 and December 31, 2021, the weighted average contractual interest rate on our interest earning debt securities was approximately 11.1% and 8.1% respectively.
Speaker 5: We believe the portfolio remains well positioned in a rising rate environment to generate incremental revenue in future quarters.
Speaker 5: Total expenses for the year ended December 31, 2022, were $40.7 million, compared to total expenses of $38.1 million seen in the full year 2021. This was predominantly driven by rising costs associated with the interest expense on our debt. One item to note is that we continue to see reduced expenses related to administrative services and other general and administrative costs.
Speaker 5: a trend we are looking to maintain in 2023.
Speaker 5: Our net asset value for the fourth quarter of 2022 was $232.1 million, or $24.23 per share, as compared to $251.6 million, or $26.18 per share in the third quarter of 2022.
Speaker 5: The decline due to our debt and equity securities was driven primarily by mark-to-market movements within our portfolio. On the liability side of the balance sheet, as of December 31, 2022, we had a total of 378.2 million par value of borrowings outstanding, comprised of 92 million in borrowings under our revolving credit facility.
Speaker 5: 108 million of 4.78 percent notes due 2026, and 178.2 million in secured notes due 2029. This balance represents a quarter-over-quarter increase of 9.2 million relating to a draw in our secured notes of 14.3 million, offset by a 5.1 million repayment on our revolving credit facility. As of the end of the quarter, we had 28.9 million of available borrowing capacity under elastic-typeMy Witt restaurant
Speaker 5: mark interest rate to three months SOFR, reduce the rate of interest margin to 2.8% per annum and extend the maturity of the facility to April 29, 2026.
Speaker 5: As of December 31, 2022, our debt-to-equity ratio was 1.6 times on a gross basis and 1.5 times on a net basis. From a regulatory perspective, our asset coverage ratio at quarter end was 160%.
Speaker 5: This is at the high end of our target range driven by the drawing of the remaining capacity under the 2018-2 revolver in advance of its expiration in the fourth quarter of 2022.
Speaker 5: Lastly, and as announced yesterday, a quarterly distribution of 68 cents per share, which represents an increase of one cent from prior quarter levels and an increase of five cents from levels seen in the first quarter of 2022, was approved by the Board and declared payable on March 31, 2023.
Speaker 5: to stockholders of record at the close of business on March 20th, 2023.
Speaker 5: The latest increase of 68 cents also represents two consecutive quarters of stockholder distribution increases and the fourth stockholder distribution increase over the last six quarters. This increased quarterly distribution is supported by the fourth quarter strong financial performance and our expectations for similar financial performance to continue in future quarters.
Speaker 3: With that, I will turn the call back over to Ted. Thank you. Ahead of questions, I'd like to reemphasize that we believe we are well positioned to take advantage of the current market. Through our prudent yet selective investment strategy, coupled with our emphasis on cost management, we anticipate that we will be able to generate strong returns for our shareholders in 2023.
Speaker 3: Thank you once again to all our shareholders for your ongoing support. This concludes our prepared remarks and I'll now turn the call over to the operator with any questions.
Speaker 2: At this time, if you'd like to ask a question, simply press star 1 on your telephone keypad. Our first question will come from the line of Christopher Nolan with Lattenberg-Thalman. Please go ahead.
Speaker 6: Hey guys, the leverage ratio is high. What's the anticipation going forward in terms of maintaining that level or bringing it down? And what's the current target leverage range?
Speaker 4: Yeah, I think our... Hey, Chris, it's Patrick Shafer. So I think our target leverage range kind of remains what we stated before, which is 125 to 1.4. So we're a little bit above that at 1.5. I think, again, as mentioned, we intentionally drew up our revolver, which brought us a little bit above our leverage range given...
Speaker 6: As a follow-up question, Silicon Valley Bank is in the news today and...
Speaker 6: I know it's a quickly evolving situation, but are you guys trying to figure out in terms of any of your portfolio companies or their sponsors may have exposure to Silicon Valley in terms of significant deposits there?
Speaker 6: I know it's early days and it's a fast-moving situation, but any perspective would be welcome.
Speaker 3: Yeah, anytime something like this happens, we're always very focused on the knock-on effects. You know, we called and spoke to a number of our portfolio companies both last night and this morning, and I think it's a little too early to assess, but obviously there will be some In how sobriety those numbers really differ.
Speaker 3: flow-through effects on certain tech businesses, given they're a big lender there, as well as a whole lot of the cash.
Speaker 3: And then we're looking at other knock-on effects too in terms of, you know, if they're having to sell securities at big discounts, you know, how does that ripple through the rest of the financial markets? I would say if you look at our portfolio, we think again, we don't think this is going to, as of right now, we don't think this is going to have really any material impact on our portfolio.
Speaker 3: unless there's other unforeseen things that happen because of it.
Speaker 2: Okay, that's it for me. Thanks, guys. Again, for any questions, please press star 1. Your next question will come from the line of Ryan Lynch with KBW. Please go ahead.
Speaker 7: Hey, good morning. First, I just wanted to hop into
Speaker 7: kind of what happened quarter over quarter regarding interest income as well as, or investment income as well as interest expense. So if I look at core investment income, it only increased about $100,000 from $17.6 million to $17.7 million.
Speaker 7: Meanwhile, and also looking at your slide as far as like accelerated fees, I know those were a little bit lower in the quarter, but I think that was only maybe a couple hundred thousand dollars lower versus Q3. So that was only a few hundred thousand dollar headwind. Meanwhile, interest extends.
Speaker 7: went up by over a million dollars. So I was just wondering, I understand that there's a lag from the positive impact of rising rates, but that same lag impacted third quarter numbers. And so effectively where we are, we're always in a lag, but...
Speaker 7: quarter over quarter, it feels like we should be moving up the, you know, the generally the same amount. So I was just curious on why the lack of movement in investment income this quarter relative to where rates went. Where rates really moved in the third quarter, which would have then mostly impacted your fourth quarter.
Speaker 4: resets in the middle of the quarter, specifically reset at the end of November . So we are on a bit of a different cadence where the majority of our liabilities on a floating rate reset during the quarter. So depending on when the actual Fed rate hikes are over the course of a period of time, we can get a bit of a mismatch there because of the timing of that reset.
Speaker 4: during the fourth quarter. So that's why we specifically highlighted some of the timing differences, but I'll turn it over to Jason to kind of go through some of the income numbers themselves. But I just wanted to throw that out there on on the timing. We have a bit of a unique situation because of when a big chunk of our of our floating rate liabilities reset. Okay, yeah. Yeah.
Speaker 5: And there's some netting impacts happening there. So if you look at quarter over quarter, you see purchase and creation kind of running off at a clip of about 500 grand. So that's a piece of income that has to be offset with the interest raised throughout the quarter.
Speaker 5: If you look at pure interest, we're up well over 1.2 to plus million quarter over quarter on the interest alone. That's offset a little bit by that accretion I was mentioning. Fees quarter over quarter slightly down, call it 200, closer to 270,000 for the quarter. CLO income is down and we can talk more about that.
Speaker 5: But those are some of the drivers really just offsetting to get to a net increase quarter over quarter on that investment income.
Speaker 7: Yeah, why would steel income down so much for a report? And if that is that for a runway, is that a good runway to go back going forward?
Speaker 5: Yeah, the CLOs are on a, the accounting model for that is a beneficial interest method and as you
Speaker 5: reset your basis in the assets and you calculate your IRR over the life of the future cash flows. And as those cash flows move around, your IRR will change, which drives your yield. And that's what drives your interest income on those CLOs. As a result of the embedded cash flows that future cash flow expected stream.
Speaker 4: decreasing just given the market environment we're in, that yield is coming down, which is what's driving the reduction in that yield. Yeah, so the shorthand there is the actual price of the CLOs that are marked at has an impact on what we recognize from a revenue perspective. So the marks on CLOs being down quarter over quarter lead to less revenue being recognized. So clearly the
Speaker 4: cash flow from the securities being down necessarily. So in theory, if we were to mark up the CLOs next quarter, you would see a increase in the revenue, roughly speaking, because of that. But it's a little bit more of a revenue recognition as opposed to underlying cash flows of the CLOs.
Speaker 3: Yeah, I think it's fair to say, and the same thing happened in 2020 and other periods of time, but I think the third party valuation firms changed their methodology around how they account for CLOs in terms of how they view defaults and future defaults.
Speaker 3: And so they made a change in the fourth quarter, which obviously had an impact not only on income, but also on valuations.
Speaker 8: Okay, gotcha.
Speaker 7: And the other question comes to, and you talked a little bit about in your prepared remarks, but just...
Speaker 7: the net portfolio losses that were recorded in this quarter and really the last couple quarters, you know, driving kind of the decline in NAV.
Speaker 7: I know last quarter you talked about it. It sounds like a lot of it is marked to market, but they've certainly been outsized relative to other BDC marks. Now I know you can't comment on how other BDCs are marketing their portfolios, and I also can understand that.
Speaker 7: when I look at non-accrual specifically, they haven't increased significantly. So that is one indicator that credit, at least from a non-accrual default standpoint, hasn't increased meaningfully. But still, the declines in your portfolio, the markdown has been well outside the normal range for what we see in the BBC. So it's...
Speaker 7: It feels like there's something more going on besides mark to market.
Speaker 7: Can you talk about that and why those marked out then so large and what you are expecting? I mean, if it is just mark the market, those will eventually theoretically recover, depending on how market conditions play out over time. But it is just that they are really outside relative to other BBCs.
Speaker 3: Yeah, I mean it's obviously something that we, you know, if you think about, just take a huge step back, right, if you think about what happened with markets last year and where comparable indices were last year and were levered, you know, we're not really a big outlier vis-a-vis the overall markets. We are an outlier vis-a-vis the BDC sector.
Speaker 3: And I can't speak to other people's policies, but you know, 84 percent, we are not seeing a market increase or decrease in credit quality. And our average, you know, as Patrick mentioned in his remarks, you know, 84 percent of our debt is first-lane debt. And our average debt mark is at 91, 91.6.
Speaker 3: So, you know, we, you know, I hear what you're saying, and by the way, we obviously look in the mirror every single day, and by the way, we look at our peers' earnings as well. But again, if you look at where our valuations are vis-a-vis market indices, I would say
Speaker 3: You know, we feel that like, you know, you can shock our portfolio in lots of different ways and you can add a very elevated default rate to this and there still should be a pretty big upside to our NAV. And so again, I'm not going to comment on broad valuation policies, but I would say we believe our NAV declines are largely temporary and mark-to-market in nature. I mean, there is obviously there's always credit specific stuff, but you know, our non-accruals today at fair value are zero.
Speaker 4: a little bit of a chunk of a liquid portfolio that has a lot more true kind of mark-to-market as opposed to like third-party valuation type of marks. So obviously the volatility in the syndicated markets and kind of where that market is has had, you know, perhaps a slightly disproportionate impact on kind of our fair value relative to perhaps another BDC that really doesn't have any...
Speaker 4: level two assets and then the second thing I would say is again not to get into general people's investment or valuation policies you know we do have a decent reliance on the actual liquid benchmarks and the yields of those benchmarks so that does ultimately again perhaps that does lead to a little bit more
Speaker 4: more volatility on market to market, perhaps relative to others, if they're not using kind of CS, like Leber loan indices from a yield perspective.
Speaker 7: Yeah, I mean, I guess I'm just looking at, versus the credit Swiss, I'm looking at LCDs and the average flow name bid is at 97. So I certainly appreciate the potential conservatism.
Speaker 7: in your book if you guys have your first link marked at 91, but I would also ask, I guess, why is it marked down that low to that level of conservatism when I don't see that in broad liquid indices and leverage loan indices and I don't see other BBCs.
Speaker 3: marking it down to that level, what drives that level of potential, you know, we'll find out over time that's just conservatism and that overall mark. I mean, I think that 97 number is a today figure. And again, these are 1231 marks. So when you look at our liquid indices benchmarks, and again, post SVB, we'll see if this changes, but you know, obviously,
Speaker 3: Obviously, we've had a pretty big rally in credit for the first three months of this year. So if you look at the benchmarks we use to value our portfolio, they're tighter today, meaning the spreads are tighter, meaning prices are higher than they were at $1,231. So you've had a pretty big rally in credit and you've definitely had a big rally in floating rate debt because obviously...
Speaker 3: This higher for longer has put a real floor under loan valuations and obviously, you know the vast majority of our portfolios floating rate loans.
Speaker 3: Again, if we were going to value our book today and use the indices today, you know, obviously the nav would look different.
Speaker 4: Yeah, and Ryan, the only thing I'd say, again, I'm happy to follow up offline. We use a, again, part of what we use is a broad credit Swiss Levered Loan Index that I'm literally pulled up and looking at right now. And as of year end, the average price in that index was 91.9, not 97.
Speaker 4: So, like I said, I'm happy to sync up afterwards. It's a publicly available entity that is part of what makes up our valuation process. But the 97, again, I'm not sure that's apples to apples.
Speaker 3: The last thing I'd say, we don't want to get all high and mighty about our valuation policies because everybody can speak for themselves, but the other backtesting we do for our board is we look at every single realization and where it was valued beforehand and where it was realized. And I think across, it's basically like 100% hit rate for the last couple of quarters on our realizations are.
Speaker 3: higher, at higher values than we were overvalued. So I mean it just shows, it's for us to provide comfort to the board that our valuations are, generally speaking, conservative.
Speaker 7: Yeah, I guess, you know, what we're trying to do with outsiders looking at is just figure out, you know, and if something is just conservative, then that's fine, but I guess, you know, from an outsider looking at we're trying to figure out these outsides moves in your portals now, or, you know, and and.
Speaker 7: the portfolio decline as well as the NAP decline. Is that credit or is that mark to market? And there's probably a combination of both of them given what's going on in the market today with just broadly deteriorating credit quality across the board.
Speaker 3: But I think that's the biggest, I think, focus right now for investors, particularly the sort of these outside moves that they have, is trying to navigate that. So I appreciate, you know. I honestly, I agree with everything you're saying. Yeah, I read your note last night too. Like I agree with all that. And so us, it's frustrating because we feel like our business is doing really well and we feel like.
Speaker 3: at the broad loan indices last year and see BDCs reporting flat to flat nav and I just to me I mean believe I mean I won't comment on others but I just say I don't think our numbers are wildly off
Speaker 3: where, you know, benchmarks are. So I can't, you know, so that's, but what you're saying is the same question, you know, we ask ourselves as well. You know, because I wouldn't be, if I was a shareholder, I'd be asking the same question. I mean, the counter to all that is, you know, obviously we're buying back our stock.
Speaker 3: We raised our dividend for the fourth time You know my guess is we'll have continuing dividend increases as those timing and lag issues normalize and so You know again. We're pretty optimistic for earnings this year
Speaker 7: Okay, I got you. Thanks for the dialogue. That's all for me today. I'll thank you. Thank you. Thank you.
Speaker 2: Once again, for any questions, press star 1 on your telephone keypad.
Speaker 2: If we have no further questions at this time, I'll hand the conference back over to management.
Speaker 3: Great. Thank you, everybody, for joining us today, and we look forward to speaking to you all in early May when we'll be announcing our first quarter of the 2020 results. Thank you very much.
Speaker 2: Ladies and gentlemen, that will conclude today's meeting. Thank you all for joining. You may now disconnect.
Speaker 1: I.