Q2 2024 Portman Ridge Finance Corp Earnings Call
Speaker Change: Good morning, ladies and gentlemen, and welcome to Portman Ridge Finance Corporation's second quarter 2024 earnings conference call. An earnings press release was distributed yesterday, August 8, after market close.
Unknown Executive: Finance Corporation's second quarter 2024 earnings conference call. An earnings press release was distributed yesterday, August 8, after the market closed. 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-Q filed yesterday with the SEC.
Speaker Change: 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-Q filed yesterday with the SEC.
Unknown Executive: As a reminder, this conference call is being recorded for replay purposes. 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 Change: As a reminder, this conference call is being recorded for replay purposes.
Speaker Change: Please note that today's conference call may contain forward-looking statements with
Speaker Change: 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.
Unknown Executive: 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 Goldthorpe, Chief Executive Officer, President, and Director of Portman Ridge Finance Corporation, Brandon Satoren, Chief Financial Officer, and Patrick Schafer, Chief Investment Officer. With that, I would now like to turn the call over to Ted Goldthorpe, Chief Executive Officer of Portman Ridge.
Speaker Change: Portman Ridge Finance Corporation assumes no obligation to update any forward any such forward-looking statements unless required by law.
Speaker Change: Speaking on today's call will be Ted Goldthorpe, Chief Executive Officer, President and Director of Portman Ridge Finance Corporation, Brandon Satoren, Chief Financial Officer, and Patrick Schafer, Chief Investment Officer.
Ted Goldthorpe: With that, I would now like to turn the call over to Ted Goldthorpe, Chief Executive Officer of Portman Ridge.
Ted Goldthorpe: Thank you. Good morning, and welcome to our second quarter 2024 earnings call. I'm joined today by our Chief Financial Officer, Brandon Satoren, and our Chief Investment Officer, Patrick Schafer. Following my opening remarks on the company's performance and activities during the second quarter, 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 second quarter 2024 results.
Ted Goldthorpe: Thank you. Good morning and welcome to our second quarter 2024 earnings call. I'm joined today by our Chief Financial Officer, Brandon Satoren, and our Chief Investment Officer, Patrick Schafer.
Speaker Change: Following my opening remarks on the company's performance and activities during the second quarter, Patrick will provide commentary on our investment portfolio and our markets, and Brandon will discuss our operating results and financial condition in greater detail.
Ted Goldthorpe: And despite operating under challenging market conditions, we reported net investment income of $6.5 million, or 70 cents per share, an increase of $300,000 or $0.03 a share as compared to the prior quarter. A well-diversified portfolio remains one of our highest priorities for Portman Ridge Portfolio, and I'm pleased to share that we finished the quarter with exposure to 28 industries and 75 unique portfolio companies, with an average par balance of $2.6 million.
Speaker Change: Yesterday, Portman Ridge announced its second quarter 2024 results, and despite operating under challenging market conditions, we reported net investment income of $6.5 million, or $0.70 per share.
Speaker Change: an increase of $300,000 or $0.03 a share as compared to the prior quarter.
Patrick Schafer: A well-diversified portfolio remains one of our highest priorities for Portman Ridge Portfolio, and I'm pleased to share that we finished the quarter with exposure to 28 industries and 75 unique portfolio companies, with an average par balance of $2.6 million.
Ted Goldthorpe: This compares to 27 industries and 79 unique portfolio companies with an average par balance per entity of $3.1 million as of March 31st, 2024. Additionally, subsequent to quarter end, we amended and extended our existing senior secure revolving credit facility with J.P. Morgan Chase Bank. Under the terms of the amendment, we increase the facility size by $85 million to $200 million and reduce the applicable margin by 30 basis points from 2.8% per year to 2.5% per year.
Patrick Schafer: This compares to 27 industries and 79 unique portfolio companies with an average par balance per entity of $3.1 million as of March 31, 2024.
Ted Goldthorpe: Additionally, the reinvestment period was extended from April 29, 2025, to April-August 29, 2026, lengthening our revolving period by two years and improving the company's asset liability matching. The remaining $85 million of secured notes will be refinanced with the upsize of the credit facility.
Patrick Schafer: Further, subsequent to quarter ends, we amended and extended our existing Senior Secure Revolving Credit Facility with J.P. Morgan Chase Bank.
Patrick Schafer: Under the terms of the amendment, we increase the facility size by $85 million to $200 million and reduce the applicable margin by 30 basis points from 2.8% per year to 2.5% per year.
Patrick Schafer: Additionally, the reinvestment period was extended from April 29th, 2025 to April-August 29th, 2026, terming out our revolving period by two years and improving the company's asset liability matching.
Patrick Schafer: The remaining $85 million of secured notes will be refinanced with the upsides of the credit facility. We value the long-term commitment and relationship we have with our lenders and JPMorgan, a world-class financial institution.
Ted Goldthorpe: We value the long-term commitment and relationship we have with our lenders and J.P. Morgan, a world-class financial institution. The amended credit facility will provide us with meaningful liquidity, as well as the flexibility to grow the company's balance sheet as we look to capitalize on future investment and origination opportunities. We continue to believe our stock remains undervalued, and as such, we continue to repurchase shares under our share repurchase program. During the second quarter, we purchased a total of 79,722 shares for an aggregate cost of $1.69.
Patrick Schafer: The amended credit facility will provide us with meaningful liquidity as well as the flexibility to grow the company's balance sheet as we look to capitalize on future investment and origination opportunities.
Patrick Schafer: We continue to believe our stock remains undervalued, and as such, we continue to repurchase shares under our share repurchase program.
Patrick Schafer: During the second quarter, we purchased a total of 79,722 shares for an aggregate cost of $1.6 million. These were purchases for a Creative Departments net asset value of $0.03 per share during the quarter.
Ted Goldthorpe: Thanks for purchasing this for a Creative Departments net asset value of $0.03 per share during the quarter. Additionally, the Board of Directors approved a $0.69 per share distribution for the third quarter of 2024, which represents a 13% annualized return on that asset value, amongst the highest in the BDC space. Turning to conditions in our primary market, the second quarter of 2024 continued the macro trend seen in the first quarter.
Patrick Schafer: Additionally, the Board of Directors approved a $0.69 per share distribution for the third quarter of 2024, which represents a 13% annualized return on that asset value amongst the highest in the BDC space.
Patrick Schafer: Turning to conditions in our primary market, the second quarter of 2024 continued the macro trend seen in the first quarter.
Ted Goldthorpe: New deal activity has picked up pace, and syndicated markets have continued to remain open. Borrowers have continued to rely heavily on private credit capital providers for M&A activity, given the certainty they provide, resulting in tailwinds for our industry. Having said that, the combination of continued private credit capital raising and a more competitive syndicated market alternative has led to meaningful spread compression in certain parts of the private credit market. According to KBRA-BLD private data, private credit spreads for borrowers with greater than $100 million of EBITDA and those between $50 and $100 million of EBITDA have both declined by approximately 75 basis points since the beginning of the year. That is compared to spread compression of approximately 50 basis points for borrowers between 20 and 50 Aviva DOT and just over 25 basis points for borrowers limited to less than 20 Aviva DOT.
Patrick Schafer: New deal activity has picked up pace, and syndicated markets have continued to remain open. Though borrowers have continued to rely heavily on private credit capital providers for M&A activity, given the certainty they provide, resulting in tailwinds for our industry.
Patrick Schafer: Having said that, the combination of continued private credit capital raising and a more competitive syndicated market alternative has led to meaningful spread compression in certain parts of the private credit market.
Speaker Change: According to KBRA-BLD private data, private credit spreads for borrowers with greater than $100 million a dividend and those between $50 and $100 million a dividend have both declined by approximately 75 basis points since the beginning of the year.
Speaker Change: That is compared to spread compression of approximately 50 basis points for borrowers between 20 and 50 of EBITDA and just over 25 basis points for borrowers limited to less than 20 of EBITDA.
Ted Goldthorpe: As always, our strategy at Portman is to be selective regarding new investment opportunities by leveraging the platform scale of BC Partners and its robust deal pipeline, while also increasing the diversification of our investment portfolio through hold size. As an example, during the quarter, we made only two investments in portfolio companies, one comprising a $4.6 million investment and the other a $2.7 million investment, while the remainder of our additions were in the form of incremental capital to existing portfolio companies to support their add-on acquisitions.
Fortman: As always, our strategy at Portman is to be selective regarding new investment opportunities by leveraging the platform scale of BC partners and its robust deal pipeline, while also increasing the diversification of our investment portfolio through hold size.
Fortman: As an example, during the quarter, we made only two investments in portfolio companies, one comprising a $4.6 million investment and the other a $2.7 million investment, while the remainder of our additions were in the form of incremental capital to existing portfolio companies to support their add-on acquisitions.
Ted Goldthorpe: Patrick will provide detail shortly, but this has allowed us to maintain relatively consistent spreads on new origination as compared to our portfolio as a whole. As we enter the back half of 2024, we remain confident in our business with our amended credit facility, robust pipeline, and strong balance sheet. We believe we are well positioned to continue executing our strategy and delivering strong returns for our shareholders. With that, I will turn over the call to Patrick Schafer, our Chief Investment Officer, for a review of our investment activity. Thanks, Chas.
Fortman: Patrick will provide detail shortly. This has allowed us to maintain a relatively consistent spreads on new origination as compared to our portfolio as a whole.
Patrick Schafer: As we enter the back half of 2024, we remain confident in our business. With our amended credit facility, robust pipeline, strong balance sheet, we believe we are well-positioned to continue executing our strategy and delivering strong returns for our shareholders.
Patrick Schafer: With that, I will turn over the call to Patrick Schafer, our Chief Investment Officer, for a review of our investment activities.
Patrick Schafer: Turning now to slide five of our presentation and the sensitivity of our earnings to interest rates, as of June 30, 2024, approximately 89% of our debt securities portfolio was either floating rate with a spread peg to an interest rate index such as SOFR or prime rate, with substantially all of these being lent to SOFR. As you can see from the chart, SOFR rates have remained relatively consistent for the last five.
Patrick Schafer: Thanks, Ted. Turning now to slide 5 of our presentation and the sensitivity of our earnings to interest rates.
Patrick Schafer: As of June 30, 2024, approximately 89% of our debt securities portfolio was either floating rate with a spread peg to an interest rate index such as SOFR or prime rate, with substantially all of these being linked to SOFR.
Patrick Schafer: As seen here from the chart, SOFR rates have remained relatively consistent for the last five quarters.
Patrick Schafer: Skipping down to slide 10, revenues for the quarter were lower than last quarter and were also below the current quarter repayments and sales levels, resulting in net repayments and sales of approximately $18.2 million. During the quarter, we took advantage of rising secondary prices to exit or materially reduce a number of our more liquid loans. This proactive rotation represents a substantial portion of the net repayment and sale amount. Our new investments made during the quarter are expected to yield a spread to SOFR of 724 basis points on par value, and the investments will be purchased at a cost of approximately 98.6% of par. Our investment portfolio at the end of the second quarter remains highly diverse.
Patrick Schafer: Skipping down to slide 10, regiations for the quarter were lower than last quarter and were also below the current quarter repayments and sales levels, resulting in net repayments and sales of approximately $18.2 million.
Patrick Schafer: During the quarter, we took advantage of rising secondary prices to exit or materially reduce a number of our more liquid loans. This proactive rotation represents a substantial portion of the net repayment in sales amounts.
Patrick Schafer: Our new investments made during the quarter are expected to yield a spread to SOFR of 724 basis points on par value, and the investments will purchase at a cost of approximately 98.6% of par.
Patrick Schafer: We ended the second quarter with a debt investment portfolio spread across 28 different industries, one more as compared to the end of the first quarter, at 75 unique portfolio companies with an average par balance of $2.6 million. Turn to slide 11, an aggregate investment anonymous status for nine investments at the end of the second quarter of 2024, representing 0.5% and 4.5% of the company's investment portfolio at fair value and cost.
Patrick Schafer: Our investment portfolio at the end of the second quarter remained highly diversified. We ended the second quarter with a debt investment portfolio spread across 28 different industries, one more as compared to the end of the first quarter, and 75 unique portfolio companies with an average par balance of $2.6 million.
Patrick Schafer: Turn to slide 11, in aggregate, investment canonical status for nine investments at the end of the second quarter of 2024, representing 0.5% and 4.5% of the company's investment portfolio at fair value and cost, respectively.
Patrick Schafer: This compares the seven investments on Omicron status as of March 31st, 2024, representing 0.5% and 3.2% of the company's investment portfolio at fair value and cost respectively. The main driver of this increase was due to placing an additional security of Qualtech on non-employees. We were able to exit our entire Qualtech position shortly after the quarter ended, but during the course of the quarter, the buyer for the company made a number of changes to the purchase price that ultimately resulted in our security receiving less than par, and therefore, we have included it on a non-equal list for the quarter. As of today, we have completely exited all Qualified Securities, and the ultimate NAB impact has been factored into the June 30th financial results.
Patrick Schafer: This compares the seven investments on anonymous status as of March 31st, 2024, representing 0.5% and 3.2% of the company's investment portfolio at fair value and cost respect.
Patrick Schafer: The main driver of this increase was due to placing an additional security of QualPAC on non-approval.
Speaker Change: We were able to exit our entire Qualtech position shortly after the quarter ended, but during the course of the quarter, the buyer for the company made a number of changes to the purchase price that ultimately resulted in our security receiving less than par, and therefore, we have included it on a non-equal list for the quarter.
Patrick Schafer: As of today, we have completely exited all Qualified Securities and the ultimate NAB impact has been factored into the June 30th financial results.
Patrick Schafer: On slide 12, excluding our non-accrual investments, we have an aggregate debt investment portfolio of $383.6 million at fair value, which represents a blended price of 93% of par value and is 91% comprised of first name loans at par value. Assuming partial recovery, our June 30, 2024 fair values reflect a potential of $26.7 million of incremental net value, or a 13.6% increase to net. Using an illustrative 10% default rate and 70% recovery rate, our debt portfolio would generate an incremental $1.64 per share of NAB, or a 7.7% increase as it rotates to maturity.
Patrick Schafer: On slide 12, excluding our non-accrual investments, we have an aggregate debt investment portfolio of $383.6 million at fair value, which represents a blended price of 93% of par value and is 91% comprised of first-name loans at par value.
Speaker Change: Assuming part recovery, our June 30, 2024 fair values reflect a potential of $26.7 million of incremental NAB value, or a 13.6% increase to NAB.
Patrick Schafer: When applying an illustrative 10% default rate and 70% recovery rate, our debt portfolio would generate an incremental $1.64 per share of NAB, or a 7.7% increase as it rotates to maturity.
Patrick Schafer: Finally, turning to slide 13, if you aggregate the three portfolios acquired over the last three years, we have purchased a combined $435 million of investment, have realized approximately 85% of these positions, and have a combined realized and unrealized mark of 101% of fair value at the time of closing the respective purchase. As of Q2 2024, we have fully added the acquired Oat Hill portfolio and are down to a combined $13.8 million of the acquired HCAP and the initial KCAP portfolio. And I'll turn the call over to Brandon to further discuss our financial results for the period. Thanks, Patrick, for the second one.
Patrick Schafer: Finally, turning to slide 13, if you aggregate the three portfolios acquired over the last three years.
Patrick Schafer: We have purchased a combined $435 million investment, have realized approximately 85% of these positions at a combined realized and unrealized mark of 101% of fair value at the time of closing the respective purchase.
Brandon Satoren: As of Q2 2024, we have fully added to the acquired Oatill portfolio and are down to a combined $13.8 million of the acquired HCAP and the initial KCAP portfolios. I'll turn the call over to Brandon to further discuss our financial results for the period.
Brandon Satoren: Thanks, Patrick. For the second quarter of 2024, Portman generated $16.3 million of investment income, of which $13.9 million was attributable to interest income inclusive of PIC income from the debt investment portfolio.
Brandon Satoren: for a total of $16.5 million, of which $14.2 million was attributable to interest income inclusive of PICC income from the debt investment portfolio. The decrease was driven by lower interest income due to net repayments and sales during the quarter, as well as the reversal of $0.1 million, or a penny per share, of previously approved unpaid interest on a loan placed on non-accrual status during the quarter, partially offset by higher dividend income from the Great Lakes Joint Venture. Excluding the impact of asset acquisition accounting, our core investment income for the quarter was $16.2 million as compared to $16.5 million in the prior quarter.
Brandon Satoren: This compares the total investment income for the first quarter of 2024 of $16.5 million, of which $14.2 million was attributable to interest income inclusive of PIC income from the debt investment portfolio.
Brandon Satoren: The decrease was driven by lower interest income due to net repayments and sales during the quarter, as well as the reversal of $0.1 million, or a penny per share, of previously accrued unpaid interest on a loan placed on non-accrual status during the quarter, partially offset by higher dividend income from the Great Lakes Joint Venture.
Speaker Change: Excluding the impact of asset acquisition accounting, our core investment income for the quarter was $16.2 million as compared to core investment income of $16.5 million in the prior quarter.
Brandon Satoren: Total operating expenses for the quarter ended June 30, 2024 decreased by $0.4 million to $9.9 million as compared to $10.3 million in the prior quarter. This decrease was largely driven by a decrease in interest expense as a result of a $6.6 million pay-down on the 2018-2 secured notes during the quarter, as well as a larger $34.2 million pay-down on the 2018-2 secured notes in the second half of the prior quarter.
Brandon Satoren: Total operating expenses for the quarter ended June 30, 2024, decreased by $0.4 million to $9.9 million, as compared to $10.3 million in the prior quarter.
Brandon Satoren: This decrease was largely driven by a decrease in interest expense as a result of the $6.6 million paydown on the 2018-2 six-year notes during the quarter.
Brandon Satoren: as well as a larger $34.2 million pay down on the 2018-2 secured notes in the second half of the prior quarter.
Brandon Satoren: Our net investment income for the quarter increased to $6.5 million, or $0.70 per share. This compares to $6.2 million, or $0.67 per share for the prior quarter. The increase in NII was primarily due to lower interest expense during the quarter ended June 30th.
Brandon Satoren: Our net investment income for the quarter increased to $6.5 million, or $0.70 per share. This compares to $6.2 million, or $0.67 per share for the prior quarter.
Brandon Satoren: The increase in NII was primarily due to lower interest expense during the quarter.
Brandon Satoren: 2024 net realized and change in unrealized losses on the investments in debt were $12.8 million. This compares to net realized and changing unrealized losses on investments in debt. $1.7 million in the prior quarter. As of June 30, 2024, the company's net asset value was $196.4 million or $21.21 per share, a decrease of $14.2 million or $1.36 per share compared to the prior quarter net asset value of $210.6 million or $22.57 per share. As of June 30th and March 31st, 2024, our gross leverage ratios were 1.5 times and 1.4 times, respectively. For the same period, our leverage ratio net of cash was 1.3 times and 1.2 times, respectively.
Brandon Satoren: For the quarter ended June 30, 2024, net realized and change in unrealized losses on investments in debt was $12.8 million.
Brandon Satoren: This compares to net realized and change in unrealized losses on investment in debt of $1.7 million in the prior quarter.
Brandon Satoren: As of June 30, 2024, the company's net asset value was $196.4 million, or $21.21 per share.
Brandon Satoren: A decrease of $14.2 million, or $1.36 per share, compared to the prior quarter net asset value of $210.6 million, or $22.57 per share.
Brandon Satoren: As of June 30th and March 31st, 2024, our gross leverage ratios were 1.5 times and 1.4 times, respectively. For the same period, our leverage ratio net of cash was 1.3 times and 1.2 times, respectively.
Brandon Satoren: Specifically, as of June 30th, 2024, we had a total of $285.1 million of borrowings outstanding with a current weighted average contractual interest rate of 6.9%. This compares to $291.7 million of borrowings outstanding as of the prior quarter, with a then current weighted average contractual interest rate of 6.9% as well. Additionally, consistent with the prior quarter, the company finished the quarter with $23 million of available borrowing capacity under the Senior Secured Revolving Credit Facility and no remaining borrowing capacity under the 2018-2 Secured Notes as the reinvestment period had ended.
Brandon Satoren: As Ted mentioned, subsequent to quarter end, we amended and extended our existing Senior Secured and Revolving Credit facility with JPMorgan. Under the terms of the amendment, the credit facility was upsized by $85 million for a total revolving capacity of $200 million. Additionally, the applicable margin was reduced from 2.8% to 2.5%, and the reinvestment period was extended by approximately two years to August 29, 2026. This amendment has reduced our overall cost of debt capital and extended the duration of our debt capital structure.
Brandon Satoren: Specifically, as of June 30th, 2024, we had a total of $285.1 million of borrowings outstanding with a current weighted average contractual interest rate of 6.9 percent.
Brandon Satoren: This compares to $291.7 million of borrowings outstanding as of the prior quarter, with a then current weighted average contractual interest rate of 6.9% as well.
Brandon Satoren: Additionally, consistent with the prior quarter, the company finished the quarter with $23 million of available borrowing capacity under the Senior Secured Revolving Credit Facility and no remaining borrowing capacity under the 2018-2 Secured Notes as the reinvestment period has ended.
Brandon Satoren: In addition, we intend to refinance the remaining $85 million of 2018-2 secured notes outstanding with the proceeds from the upsized J.P. Morgan Credit Facility. Finally, the board approved a quarterly distribution of $0.69 per share payable on August 30, 2024 to stockholders of record at the close of business on August 22, 2024. With that, I will turn the call back over to Ted.
Brandon Satoren: As Ted mentioned, subsequent to quarter end, we amended and extended our existing senior secured revolving credit facility located in Morgan.
Speaker Change: Under the terms of the amendment, the credit facility was upsized by $85 million for a total revolving capacity of $200 million.
Speaker Change: Additionally, the applicable margin was reduced from 2.8% to 2.5% and the reinvestment period was extended by approximately two years to August 29, 2026.
Speaker Change: This amendment has reduced our overall cost of debt capital and extended the duration of our debt capital structure.
Brandon Satoren: Further, we intend to refinance the remaining $85 million of 2018-2 secured notes outstanding with the proceeds from the upsized J.P. Morgan Credit Facility.
Speaker Change: Finally, the board approved a quarterly distribution of $0.69 per share payable on August 30, 2024 to stockholders of records at the close of business on August 22, 2024. With that, I will turn the call back over to Ted.
Ted Goldthorpe: Thank you, Brandon. 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 first half of the year. Through our prudent investment strategy, we believe we will be able to deliver strong returns to our shareholders in the back half of 2024. I would like to thank, once again, all of our shareholders for their ongoing support. This concludes our prepared remarks, and I'll turn the call over to you for any questions.
Ted Goldthorpe: Thank you, Brandon. 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 first half of the year.
Speaker Change: Through our prudent investment strategy, we believe we will be able to deliver strong returns to our shareholders in the back half of 2024.
Speaker Change: I would like to thank once again all of our shareholders for ongoing support. This concludes our prepared remarks and I'll turn the call over for any questions.
Operator: Thank you, and we will now begin the question and answer session. If you have dialed in and would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star 1 a second time. If you are called upon to ask your question and are listening via speakerphone on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. Again, press star 1 to join the queue, and your first question comes from the line of Christopher Nolan with Lautenberg-Tolman. Your line is open.
Speaker Change: Thank you and we will now begin the question and answer session. If you have dialed in and would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue.
Speaker Change: If you would like to withdraw your question, simply press star 1 a second time. If you are called upon to ask your question and are listening via speakerphone on your device, please pick up your handset and ensure that your phone is not on mute when asking your question.
Speaker Change: Again, press star 1 to join the queue.
Speaker Change: And your first question comes from the line of Christopher Nolan with Lautenberg-Tolman. Your line is open.
Christopher Nolan: Hey guys, what was the driver for the realized loss and the unrealized appreciation?
Speaker Change: Hey, guys. What was the driver for the realized loss and the unrealized appreciation, please?
Unknown Executive: Yes, I'll adjourn.
Patrick Schafer: Yeah, so I'll throw it over to Brandon for the realized, but on the unrealized front, the primary driver is Qualtech, which I talked about a little bit in my remarks. But we ultimately exited the investment sort of right after quarter end and had to take an unrealized write-down in and around the exit price there that, again, we'll just flip from unrealized to realized in Q3. But for Q2, it was a significant portion of our unrealized loss. Yeah, that's right.
Speaker Change: [inaudible]
Speaker Change: Yes, I'll throw them to Brandon for the realized, but on the unrealized front, the primary driver is Qualtech, which I talked about a little bit in my remarks.
Speaker Change: But we ultimately exited the investment sort of right after quarter end and had to take a unrealized write-down in and around the exit price there that, again, we'll just flip from unrealized to realized in Q3. But for Q2, it was a significant portion of our unrealized loss.
Brandon Satoren: On the real life front, Chris, it was an investment called Tank. We realized it at the mark we had last quarter.
Speaker Change: That's right, Patrick, go ahead.
Speaker Change: Yes, just haven't realized.
Speaker Change: On the realized fund front, Chris, it was an investment called Tank. We realized it at the mark we had last quarter, so that was already embedded in our net.
Christopher Nolan: It was just a flip from the last two. If I'm correct, tech is on the old Capitola investments. Is that correct?
Speaker Change: It was just a flip from our last two remotes.
Brandon Satoren: No, this was an old KTAP, like, a very legacy one. It was not approved. I took over the portfolio. We've had, like, a $40,000 receivable or something left from, like, some state, like, a state liquidation that finally got resolved. So it's been running at, like, almost no value on our SOI for several, several years now. Yeah, no, okay, I'm getting
Speaker Change: And if I'm correct, TAC was on the old Capitola investments, isn't it?
Speaker Change: Do I look great?
Speaker Change: No, this was an old KCAP, like, way legacy one. It was unauthorized, took over the portfolio. We've had, like, a $40,000 receivable or something left from, like, some state, like a state liquidation that finally got resolved.
Speaker Change: So it's been running at like almost no value on our SFI for several, several years now. Yeah, no, okay. I'm getting your point.
Christopher Nolan: Yeah, no, okay, I'm getting your portfolio company, excuse me, your BDC. Qualtech, what should we expect in terms of a realized loss for...
Speaker Change: Excuse me, your BDC is confused.
Speaker Change: Qualtech, what should we expect in terms of a realized loss for Qualtech?
Brandon Satoren: The short answer is it should all be a flip from unrealized to realized. There should be no NAB impact for Q3, Chris. I don't have the exact quantum of that. We can follow up with you with the exact quantum, but it will be a complete flip from unrealized to realized. So we baked in, and again, it closed in on like July 7th or something like that.
Speaker Change: 3 Q&A
Speaker Change: The short answer is it should be all a flip from unrealized to realized. There should be no NAB impact for Q3, Chris. I don't have the exact quantum of that. We can follow up with you with the exact quantum, but it will be a complete flip from unrealized to realized. So we baked in, and again, it closed in on like…
Christopher Nolan: So the price as of 630 is based on the exit price, but we can follow up with the exact amount that you should expect. No need. That's fine. Okay.
Speaker Change: Author of Wall Street Tricks.
Christopher Nolan: On the credit facility, the text of the press release says margin. Am I to presume that's a spread over some sort of index? Yeah, SOFR. It's a 250 basis points over SOFR.
Unknown Executive: Finance Corporation, 2nd quarter 2024 earnings conference call. An earnings press release was distributed yesterday, August 8th, after market close. A copy of the release along with an earnings presentation is available on the company's website at www.portman ridge.com in the investor relations section and should be reviewed in conjunction with the company's form 10Q filed yesterday with the SEC.
Speaker Change: The text of the press release says a margin of 2.5% or so. Am I to presume that's a spread over some sort of index? And if so, what's the index?
Ted Goldthorpe: Great. And the final question would be, can you give any sort of perspective as to what the BDC M&A market might be evolving like? Keeping in mind that many BDCs are starting to see asset quality deterioration this quarter. Yeah.
Speaker Change: Yeah, SOFR. It's a 250 over SOFR.
Speaker Change: Great. And final question would be, can you give any sort of perspective as to what the BDC M&A market might be evolving like given...
Unknown Executive: As a reminder, this conference call is being recorded for replay purposes. Please note that today's conference call may contain forward-looking statements, pardon me, 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. Portman Ridge Finance Corporation assumes no obligation to update any forward-any such forward-looking statements unless required by law.
Speaker Change: Many BDCs are starting to see asset quality deterioration this quarter.
Ted Goldthorpe: Yeah, I would say, I think it's still pretty quiet on that front, and we are, there is, there is a lot of strategic activity happening in the broader asset management space. So you've seen, you know, two big deals happen this past quarter. And, you know, we are seeing M&A activities pick up a lot in the broader asset management space. So I'm not sure that applies, I wouldn't say we've seen that in the quote, unquote, BDC space, but we are seeing it in the 40X space, and we're definitely seeing it in the broader institutional space. And The theme is the same.
Speaker Change: Yeah, I would say...
Speaker Change: I think it's pretty, I think it's still pretty quiet on that front.
Speaker Change: And we are, there is a lot of strategic activity happening in the broader asset management space, so you've seen...
Speaker Change: You know, two big deals happened this past quarter.
Speaker Change: And, you know, we are, M&A activities pick up a lot in the broader asset management space.
Speaker Change: I'm not sure that applies. I wouldn't say we've seen that in the quote-unquote BDC space, but we are seeing it in the 40X space, and we're definitely seeing it in the broader institutional space. And the theme is the same. The theme is
Unknown Executive: Speaking on today's call, we'll be Ted Goldthorpe, Chief Executive Officer, President and Director of Portman Ridge Finance Corporation, Brandon Satoren, Chief Financial Officer, and Patrick Schafer, Chief Investment Officer.
Christopher Nolan: The theme is scale matters. So, you know, I think costs keep going up. You know, there's pressure on fees. So I think, I think, you know, a lot of firms are having to put a lot of money into distribution in terms of expenditures. So I think the themes are becoming more pronounced. For example, I think some people in 2020 will have issues with credit. I think now that many people are having issues with scale.
Speaker Change: Skill Matters.
Speaker Change: So, you know, I think costs keep going up, you know, there's pressure on fees, so I think...
Edward Goldthorpe: With that, I would now like to turn the call over to Ted Goldthorpe, Chief Executive Officer of Portman Ridge. Thank you. Good morning and welcome to our second quarter, 2024 earnings call. I'm joined today by our Chief Financial Officer, Brandon Satoren, and our Chief Investment Officer, Patrick Schafer. Following my opening remarks on the company's performance and activities during the second quarter, Patrick will rely commentary on our investment portfolio and our markets, and Brandon will discuss our operating results and financial condition in greater detail.
Speaker Change: I think, you know, a lot of firms are having to put a lot of money into distribution in terms of expenditures.
Speaker Change: I think the themes are becoming more pronounced.
Speaker Change: So...
Speaker Change: I think some people in 2020 had issues with credit. I think now it's much more people are having issues with scale. So I think you're going to see a lot of M&A over the next 12 to 18 months. But that's a comment more broadly about 40 Act and around.
Christopher Nolan: So I think you're going to see a lot of M&A over the next 12 to 18 months. But that's a comment more broadly about 40X and around, and around asset management, as opposed to just BDCs. Okay, that's it for me.
Christopher Nolan: Okay, that's it for me. Thanks, guys.
Speaker Change: and around asset management, as opposed to just due disuse.
Speaker Change: Okay, that's it for me. Thanks, guys.
Deepak Sarpangal: And as a reminder, please press star 1 if you would like to ask a question. And your next question comes from the line of Deepak Sarpangal with Repertoire Partners. Your line is open.
Edward Goldthorpe: Yesterday, Portman Ridge announced its second quarter, 2024 results. Despite operating under challenging market conditions, we reported net investment income of $6.5 million or 70 cents per share, an increase in $300,000 or $3 cents a share as compared to the prior quarter. A well-diverse five portfolio remains one of our highest priorities for Portman Ridge Portfolio, and I'm pleased to share that we finished the quarter with exposure to 28 industries and 75 unique portfolio companies with an average power balance of $2.6 million. This compares to 27 industries and 79 unique portfolio companies with an average power balance per entity of $3.1 million as of March 31, 2024.
Chris: Thanks Chris.
Speaker Change: And as a reminder, please press star 1 if you would like to ask a question. And your next question comes from the line of Deepak Sarpangal with Repertoire Partners. Your line is open.
Deepak Sarpangal: Thank you. Hi, good morning. All right, good morning. So I have just a few questions. On the recent quarter, obviously, we'd all like to see that a lot of the weakness has been primarily in the high tech industry part of your portfolio. Is there something broader that you're, Unknown Speaker... that you're seeing. I know that the size of that has come down now, which is good, but is there anything else, any other context with respect to that? Because it looked like there were a few of them that...
Patrick Schafer: Yeah, that's actually a very perceptive question. I would say Qualtech's not really a tech company, and again, it's a long-term legacy position, and we've now exited it. I will say across our tech portfolio, which is generally speaking, you know, enterprise software, so recurring cash flow, I will say that they've definitely seen two factors impact them. One is sales cycles becoming longer for new sales, so their existing base of business is still turning along. But number two is, you know, this AI theme, and the expenditures on AI, you know; they are taking away a little bit of the budget for what I'd call traditional software.
Deepak Sarpengel: Thank you. Hi. Good morning.
Speaker Change: So, a few questions. On the recent quarter, obviously, we'd all like to
Speaker Change: to see zero markdowns at any given time but that's essentially impossible. Curious, I know Qualtech was one of the big drivers. It did seem like a lot of it was
Edward Goldthorpe: Further subsequent quarter ends, we amended and extended our existing senior secured revolving credit facility with JP Morgan Chase Bank. Under the terms of the amendment, we increased the facility size by $85 million to $200 million, and reduced the applicable margin by 30 basis points from 2.8 percent per year to 2.5 percent per year. Additionally, the re-investment period was extended from April 29, 2025 to April August 29, 2026. Terming out our revolving period by two years and improving the company's asset liability batch.
Speaker Change: Like a lot of the weakness has been primarily in the high-tech industry part of your portfolio. Is there something broader that you're...
Speaker Change: You know that you're seeing I know that that's you know the size of that has come down now, which is good, but but is there anything else? You know any other context you know with respect to that because it looked like there were a few of them that
Speaker Change: Yeah, that's actually a very perceptive question. I would say Qualtech is not really a tech company. And again, it's a long-term legacy position and we've now exited it.
Speaker Change: I will say across our portfolio, which is generally speaking, you know, enterprise software, so recurring cash flow.
Edward Goldthorpe: The remaining $85 million of secure notes will refinance with the upsides of the credit facility. We value the long-term commitment and relationship we have with our lenders and JP Morgan, a world-class financial institution. The amendment, the amended credit facility, will provide us with meaningful liquidity as well as the flexibility to grow the company's balance sheet as we look to capitalize on future investment and origination opportunities. We continue to believe our stock remains undervalued and as such, we continue to repurchase shares under our share repurchase program. During the second quarter, we purchased a total of 79,722 shares from aggregate costs of $1.690. These were purchases for a creative importance net asset value by three cents per share during the quarter.
Speaker Change: I will say that they've definitely seen two factors impact them. One is sales cycles becoming longer for new sales, so their existing base of business is still turning along.
Speaker Change: But number two is, you know, this AI theme and the expenditures in AI, they are taking away a little bit of the budgets for what I'd call traditional software, it feels like just looking at our portfolio companies.
Patrick Schafer: It feels like just looking at our portfolio companies. And then number three is, you know, there have been some very, very company-specific events that have impacted some of our companies, some of our companies in the broader space. I mean, obviously, everybody knows the CrowdStrike example, but that's actually happened in a couple of other situations. We had a specific investment in a company that had a cyber issue this quarter that we think is totally – we think it's a temporary markdown.
Speaker Change: And then number three is, you know, there has been some very, very company-specific events that have impacted...
Speaker Change: some of our companies, some of our companies in the broader space. I mean obviously everybody knows the CrowdStrike example but...
Speaker Change: That's actually happened in a couple other situations. We had a specific investment in a company that had a cyber issue this quarter that we think is totally, we think it's a temporary markdown. We think the company's totally fine.
Edward Goldthorpe: Additionally, the board of directors approved a 69 cent per share distribution for third quarter of 2024, which represents a 13% annualized return on that asset value amongst the highest in the BDC space. Turning to conditions in our primary market, the second quarter of 2024 continued the macro-trans scene in the first quarter. New Deal Activity picked up pace and syndicated markets have continued to remain open. The lawyers have continued to rely heavily on private credit capital providers for M&A activity given the certainty they provided resulting in tail-dence for our industry.
Patrick Schafer: We think the company's totally fine. But there are some idiosyncratic events happening in tech that, you know, are really – like we haven't seen before. CrowdStrike's the most public example, but we're seeing it on a smaller scale.
Speaker Change: But there is some idiosyncratic events happening in tech that, you know, are really like we haven't seen before. CrowdStrike's the most public example, but we're seeing it on a smaller scale.
Deepak Sarpangal: Okay, that makes sense. And then there is there.
Deepak Sarpangal: Also, is there anything, I know your business isn't seasonal, but it just so happened that last year it was like Q2 that was, you know, maybe a tougher quarter, but then it kind of reverted. Is there anything, maybe just kind of like where, you know, there's like you said, maybe there's company-specific factors or like the overall market just happened to be in a particular position. Is there anything just in terms of kind of like timing that contributes to, you know, maybe this being a tougher quarter than most?
Speaker Change: Okay, that makes sense. And then, is there...
Edward Goldthorpe: Having said that, the combination of continued private credit capital raising and a more competitive syndicated market alternative has led to meaningful spread compression and certain parts of the private credit market. According to KBRA-DLD private data, private credit spreads for borrowers of greater than $100,000,000, and those between $50,000 and $100,000,000, have both declined by approximately 75 basis points since the beginning of the year. That is compared to spread compression or approximately 50 basis points for borrowers between $20,000 and $50,000, and just over 25 basis points for borrowers within less than $20,000.
Speaker Change: like you said, maybe there's company specific factors or like the overall market just happened to be in a particular position. Is there anything just in terms of kind of like timing that contributes to?
Ted Goldthorpe: Yeah, another really good question. I would say, thematically, the banks were really closed in 2020. So, post Twitter, a lot of the investment banks were really reticent to take on risk. And then you obviously have the regional banking crisis. So we felt like there really wasn't a lot of issues.
Speaker Change: you know maybe this being like a tougher quarter than most.
Speaker Change: Yeah, another really good question. I would say...
Speaker Change: thematically, you know, the banks were really closed in 2020.
Speaker Change: Post
Speaker Change: Twitter, a lot of the investment banks were really reticent to take on risk, and then you obviously had the regional banking crisis, so we felt like there really wasn't a lot of issue. We've had more loan issuance year-to-date than we've had in the last two years combined.
Ted Goldthorpe: We've had more loan issuance year to date than we have in the last two years combined. It hasn't really impacted us because we're smaller in the market. So we haven't seen the refis that some of our larger peers have seen. Coming into this year, our portfolio and pipeline were not that great, but we were incredibly busy up until June.
Edward Goldthorpe: As always, our strategy at Portman is to be selective regarding new investment opportunities by leveraging the platform scale of B.C, partners and its robust deal pipeline while also increasing the diversification of our investment portfolio through old size. As an example, during the quarter, we made only two investments in portfolio companies, one comprising a $4.6 million investment and the other at $2.7 million investment, while the remainder of our additions were in the form of incremental capital to existing portfolio companies to support their add-on acquisitions.
Speaker Change: has really impacted us because we're the smaller in the market so we haven't seen the replies that some of our larger peers have seen.
Speaker Change: Coming into this year, our portfolio, our pipeline was not that great. We were incredibly busy up until June , and now our pipeline slowed down again. And the theme there is that there's just not a lot of new LDO activity.
Ted Goldthorpe: And now our pipeline's slowed down again, and the theme there is there's just not a lot of new LDO activity. So when you're seeing M&A pick up broadly, and you're seeing the investment banks comment on M&A, we're not seeing it at the private equity sponsor level. So exits are hard.
Speaker Change: So, you're seeing M&A pick up broadly, and you're seeing the investment banks comment on M&A.
Edward Goldthorpe: Patrick will provide detailed shortly. This is allowed us to maintain a relatively consistent spread on new origination as compared to our portfolio as a whole. As we enter the back half of 2024, we remain confident in our business. With our medicated credit facility, robust pipeline, strong balance sheet, we believe we are well positioned to continue executing our strategy and delivering stronger turns for our shareholders.
Speaker Change: We're not seeing it on the private equity sponsor level.
Ted Goldthorpe: Prices haven't come down that much, but financing costs are higher, and the economy's slowing down. So I think we're seeing our pipeline for new M&A activity in LDOs is pretty unique. So I think that'll pick up, like, if you look at our portfolio today, a very large percentage of them are, are supposed to go for sale in the fourth quarter. Now, again, that was the same thing last year; that doesn't mean they're actually going to transact. But there is a very, very large pipeline of companies in the middle market that need to be sold over the next one, two, three years. So, this should revert to...
Speaker Change: Exits are hard, you know, prices haven't come down that much.
Speaker Change: You know, financing costs are higher, and the economy is slowing down. So, I think we're seeing, like our pipeline for new M&A activity in LBOs is pretty anemic.
Speaker Change: So, I think that'll pick up. Like, if you look at our portfolio today.
Speaker Change: A very large percentage of them are supposed to go for sale in the fourth quarter. Now, again, that was the same thing last year. That doesn't mean they're actually going to transact. But there is a very, very large pipeline of companies in the middle market that need to be sold over the next one, two, three years.
Patrick Schafer: With that, I will turn over the call Patrick Chaper, our chief investment officer, for review of our investment activities. Thanks, Ted. Turning now to slide five of our presentation and the sensitivity of our earnings to interest rates. As accumulated 30th to 2024, approximately 89% of our debt security portfolio was either floating rate with a spread peg to an interest rate index, such as so-for-primary. The substance to all these things went to- as you see from the chart, silver rates have remained relatively consistent for the last five quarters.
Speaker Change: So this should revert to a mean at some point.
Deepak Sarpangal: And then this is what I would say, I would say to Deepak, I wouldn't say it's seasonal; it's more thematic, I would say. Okay, yeah, that makes more sense. And this question is a little bit more random, but I noticed that, you know, one thing I do like that again, the joint ventures and CLO, parts of your portfolios are smaller and continuing to get smaller. You know, in your fair value.
Speaker Change: Okay, and then this is... I would say to Deepak, I wouldn't say it's seasonal, it's more thematic, I would say.
Deepak Sarpengel: Okay yeah that makes more sense and this question is a little bit more random but I noticed that
Patrick Schafer: Skipping down the slide ten, the radiations for the quarter were lower than the last quarter, and were also below the current quarter repayments in sales levels, resulting in that repayments in sales of approximately 18.2 million dollars. During the quarter, we took advantage of rising secondary prices to exit or materially reduce a number of our more liquid loans. This productive rotation represents a substantial portion of the net repayment in sales amounts. Our new investments made during the quarter are expected to yield a spread to silver of 724 basis points on power values, and the investment will purchase at a cost of approximately 98.6% of fall.
Speaker Change: One thing I do like that, again, the joint ventures and CLO, parts of your portfolios are smaller and continuing to get smaller. You know, in your fair value,
Deepak Sarpangal: Disclosures and Assumptions, it looks like you value those with discount rates of over 20% on a weighted average. I'm glad that's conservative. It does seem like a high discount rate. Can you maybe explain a little bit more about how you come up with that?
Speaker Change: Disclosures and Assumptions, it looks like you you kind of value those with discount rates of over 20% on a weighted average.
Speaker Change: I'm glad that's conservative. It does seem like a high discount rate. Can you maybe explain a little bit more about how you come up with that?
Patrick Schafer: Yeah, yeah, Deepak, so this is Patrick. So the short answer is for all those valuations, we send those out to third parties to be valued. So, you know, third parties kind of come up with the discount rates. But the reality is... CLO equity, and that's kind of generally where those discount rates are coming from, not as much like Great Lakes Joint Venture, but really more so the other CLOs. You know, Kindle is just a very opaque market, and where spreads are right now, you know, liabilities came down a little bit, but not nearly as much as spreads have come down.
Speaker Change: you know, how to think about that.
Patrick Schafer: Our investment portfolio at the end of the second quarter remained highly diversified. We ended the second quarter with a debt investment portfolio spread across 28 different industries, one more as compared to the end of the first quarter at 75 unique portfolio companies with an average power balance 2.6 million dollars. For the slide 11, we can aggregate investment canonical status for nine investments at the end of the second quarter of 2024, representing 0.5% and 4.5% of the company's investment portfolio at fair value and cost perspective.
Speaker Change: Yeah, yeah, Deepak, so this is Patrick. So the short answer is for all of those valuations, we send those out to third parties to be valued. So, you know, third parties are kind of come up with the discount rates. But the reality is...
Speaker Change: CLO equity, and that's kind of generally where those discount rates are coming from, not as much like Great Lakes Joint Venture, but really more so the other CLOs.
Speaker Change: You know, Kindle is just a very opaque market, and where spreads are right now, you know, liabilities came down a little bit, but not nearly as much as spreads have come down, so...
Patrick Schafer: So, like, the return on equity in CLO land has been relatively compressed, which means you need to kind of price it at a much higher discount rate. So, again, it's not, like, the most obvious of answers, but just in the CLO market, in order to get potential buyers to transact, you really need to have a very healthy discount rate to that back end of bronze, just because of where the liability asset spread is on BSL.
Patrick Schafer: This compares to seven investment canonical status as of March 31, 2024, representing 0.5% and 3.2% of the company's investment portfolio at fair value and cost perspective. The main driver of this increase was due to placing an additional security to fallback on non-approval. We're able to exit our entire quality position shortly after the quarter end, but during the course of the quarter, the buyer for the company made a number of changes to the purchase price.
Speaker Change: like the return to equity in CLO land has been relatively compressed.
Speaker Change: which means you need to price it at a much higher discount rate.
Speaker Change: So, again, it's not like the most obvious of answers, but just in the CLO market in order to get potential.
Speaker Change: buyers to transact, you know, you really need to have a very healthy discount rate to that back end of Tron just because of where, like, the liability asset spread is on BSLs.
Patrick Schafer: The ultimate result that in our security receiving less than par and therefore we have included a non-approval list for the quarter. And today, we've completely exit all qualified securities and the ultimate net impact has been factored into the June 30 financial results. On slide 12, excluding our non-approval investments, we have an aggregate debt investment portfolio of 383.6 million dollars at fair value, which represents a blended price of 93% of par value and is 91% comprised of first-name loans at par value.
Patrick Schafer: Okay, and then As you mentioned, it's a very small portion of our book, and as we continue to get smaller, our Great Lakes Joint Venture, which is the big piece of that, is not valued at a 20 percent discount rate. All the individual loans within that joint venture are valued at their own individual discount rates that then kind of roll up into a joint venture valuation. I don't know the exact numbers off the top of my head, but those are all substantially lower than 20 percent. Yep.
Speaker Change: Okay, and then.
Speaker Change: As you mentioned, it's a very small portion of our book.
Speaker Change: and as we continue to get smaller, our Great Lakes Joint Venture, which is the big piece of that.
Speaker Change: is not valued at a 20% discount rate. All the individual loans within that joint venture are valued at their own individual discount rates that then kind of rolls up into a joint venture valuation. And I don't know the exact numbers off the top of my head, but those are all substantially lower than 20%.
Patrick Schafer: Assuming par recovery, our June 30, 2024 fair values reflect a potential of 26.7 million dollars of incremental net value or a 13.6% increase to net. When applying an illustrative 10% to fall rate and 70% recovery rate, our debt portfolio would generate an incremental $1.64 per share of net or a 7.7% increase as it rotates to maturity. Finally, during this slide 13, if you aggregate the free portfolios acquired over the last three years, we have purchased a combined $435 million of investment, have realized approximately 85% of these positions and combined realized and unrealized mark of 101% of fair value at the time of closing the respective purchase. As of Q2, 2024, we have fully edited the acquired Oakville portfolio that are down to a combined $13.8 million of the acquired HCAP and the initial KCAP portfolios.
Deepak Sarpangal: And again, in the relatively smaller cases where you're using EBITDA multiples, it does look like, again, I know that these are not necessarily apples to apples, but, to what extent are the businesses that you're valuing, like just lower multiple businesses versus, you know, maybe just like better, you know, better priced investments? And the reason why I asked that is like, for example, your multiples are by far the lowest, which is a good thing, I think, but by far the lowest, like, you know, if you look at the larger, you know, my larger BDCs, Aries, it's more like 11 or 13 times, I think, in terms of those EBITDA multiples. Now, I know, like, those could be like, software businesses But I'm just curious, is there anything else that accounts for that?
Speaker Change: Yep, and
Speaker Change: And again, in the relatively smaller cases where
Speaker Change: You're using EBITDA multiples.
Speaker Change: It does look like, again, I know that these are not necessarily apples to apples, but
Speaker Change: to what extent
Speaker Change: are the businesses that you're valuing in Hintz.
Speaker Change: like just lower multiple businesses versus you know maybe just like better you know better priced investments and the reason why I ask that is
Speaker Change: Like, for example, like...
Speaker Change: Your multiples are like by far the low, which is a good thing, I think, but by far the lowest like, you know if you look at the larger, you know, my larger BDCs, Aries
Brandon Satoren: I'll turn the call over to Brandon to further discuss our financial results for the future. Thanks, Patrick. For the second quarter of 2024, Portman generated 16.3 million of investment income. Of which 13.9 million was attributable to interest income, inclusive of pick income from the debt investment portfolio. This compares the total investment income for the first quarter of 2024 of 16.5 million. Of which 14.2 million was attributable to interest income, inclusive of pick income from the debt investment portfolio.
Speaker Change: It's more like 11 or 13 times, I think, in terms of those EBITDA multiples. Now, I know, like, those could be, like, software businesses or something like that, but I'm just curious, is there anything else?
Patrick Schafer: Another good question. So I'd say a couple of things. One, I think generally we try and be pretty conservative on our valuations, particularly on equity securities, which is what you're referencing, just because, again, like, equity can tend to be volatile, so we prefer to be on the conservative side. A little bit of a nuance there is that, generally speaking, our equity positions are tended to be some of the acquired portfolios from either Harvest or Garrison or even like CKF, where the bars themselves are probably a little bit smaller.
Speaker Change: that accounts for that.
Speaker Change: Another another good question so I say a couple things which is
Speaker Change: One, I think generally we try and be pretty conservative on our valuations, particularly on equity securities, which is what you're referencing. Just because, again, like, equity can tend to be volatile, so we prefer to be on the conservative side. I think the other...
Brandon Satoren: The decrease was driven by lower interest income due to net repayments and sales during the quarter, as well as the reversal of 0.1 million or an annual share of previously approved on interest on alone, placed on non-acool status during the quarter, partially offset by higher dividend income from the Great Lakes Joint Venture. Excluding the impact of asset acquisition accounting, our core investment income for the quarter of 16.2 million as compared to core investment income of 16.5 million in the prior quarter.
Speaker Change: a little bit of a
Speaker Change: That nuance there is, generally speaking,
Speaker Change: Our equity positions are tended to be some of the acquired portfolios from either Harvest or Garrison.
Patrick Schafer: And so we do tend to try and factor in a little bit of a size discount in terms of the size of the portfolio company relative to a quote-unquote peer set and where we think a valuation multiple should trade. So again, I think the combination of being able to conserve out the multiple and like using areas as an example. They're going to have much larger portfolio companies, so, you know, they're kind of, I guess, able to, or probably can look more similar to, like, the actual peer set from a valuation multiple perspective, as opposed to ours; we tend to apply a meaningful discount to where the peers trade, just to factor in the fact that they're smaller companies than the peers.
Speaker Change: where the bars themselves are probably a little bit smaller. And so we do tend to try and factor in a little bit of a size discount in terms of
Brandon Satoren: Total operating expenses for the quarter ended June 30, 2024 decreased by 0.4 million to 9.9 million as compared to 10.3 million in the prior quarter. This decrease was largely driven by a decrease in interest expense as a result of the 6.6 million dollar paydown on the 2018-2 secured notes during the quarter, as well as a larger 34.2 million dollar paydown on the 2018-2 secured notes in the second half of the prior quarter.
Speaker Change: the size of the portfolio company relative to, you know, a quote-unquote peer set and where we think of evaluation multiples should trade. So, again, I think it's a combination of being able to consider multiple and, like, if you're just using areas as the example.
Speaker Change: they're going to have much larger portfolio companies. So, you know, they're kind of, I guess, able to, or probably can look more similar to, like, the actual peer set from a valuation multiple perspective, as opposed to ours, we tend to apply a meaningful discount to where the peers trade, just to factor in the fact that they're smaller companies than the peers.
Brandon Satoren: Our net investment income for the quarter increased to 6.5 million or 70 cents per share. This compares to 6.2 million or 67 cents per share for the prior quarter. The increase in NII was primarily due to lower interest expense during the quarter. For the quarter ended June 30, 2024 net realized and changed and realized losses on the investments in debt was 12.8 million. This compares to net realized and change and unrealized losses on investment in debt of 1.7 million in the prior quarter.
Deepak Sarpangal: Great. I think I think that's all my questions. I am glad to see that you're continuing to take advantage of your undervalued stock, and it's not It's not every company that demonstrates that kind of Savvy Capital Allocation, and especially in the BDC space. So thanks, and look forward to more.
Speaker Change: [inaudible]
Speaker Change: Great, I think I think that's all my questions. I am glad to see that you're continuing to take advantage of your undervalued stock and it's not...
Speaker Change: It's not every company that demonstrates that kind of savvy capital allocation and especially in the BDC space. So thanks and look forward to more ahead.
Deepak Sarpangal: As a reminder, it is Star One if you would like to ask a question. And your next question comes from the line of Steven Martin with Slater Capital Management.
Speaker Change: Thank you.
Speaker Change: As a reminder, it is star 1 if you would like to ask a question, and your next question comes from the line of Stephen Martin with Slater Capital Management. Your line is open.
Brandon Satoren: As of June 30, 2024, the company's net asset value was 196.4 million or $21.21 per share. A decrease of 14.2 million or $1.36 per share compared to the prior quarter net asset value of 210.6 million or $22.57 per share. As of June 30 and March 31, 2024, our gross leverage ratios were 1.5 times and 1.4 times respectively. For the same periods, our leverage ratio net of cash was 1.3 times and 1.2 times respectively.
Steven Martin: Your line is open. Hi guys. Hi. Hi. Hi. Hi. Hi. Hi. Hi. Hi. Hi. Hi. Hi. Hi.
Steven Martin: Hi guys. You've addressed a lot of my questions. Can you comment on what the current trend is for amendments, extensions, waivers, etc.
Steven Martin: ?
Stephen Martin: Can you comment on, you know, what the current trend is in amendments, extensions, waivers, etc.?
Ted Goldthorpe: Yeah, I don't think we've seen a material pickup in amendment and waiver activity. So again, a lot of companies who are not fully levered were having trouble, not really trouble, but they were asking for extensions the last couple of years. Now the market's kind of normalized. And so there is some repricing activity. And to the extent we're not willing to do it, there are other lenders who might have to do it.
Speaker Change: Yeah, I don't think we've seen a material pickup in amendment and waiver activity. So, again, a lot of companies,
Speaker Change: who are not fully levered, were having trouble, not trouble, but they were asking for extensions the last couple of years.
Brandon Satoren: Specifically, as of June 30, 2024, we had a total of 205.1 million of borrowing sound standing. With a current weighted average contractual interest rate of 6.9 per cent, this compares to 291.7 million of borrowings outstanding as of the prior quarter with a then current weighted average contractual interest rate of 6.9 per cent as well. Additionally, consistent with the prior quarter, the company finished the quarter with $23 million in the available borrowing capacity under the senior security revolving credit facility.
Speaker Change: Now the market's kind of normalized, and so there is some repricing activity. And to the extent we're not willing to do it, there's other lenders lined up to do it. So...
Ted Goldthorpe: So I don't think there's been, I mean, obviously, we have some normal course amendments going on. But I don't think we've seen a material pickup in amendment activity. Actually, it's pretty, honestly, like this quarter has been relatively muted.
Speaker Change: I don't think there's been... I mean, obviously, we have some normal course amendments going on. I don't think we've seen a material pickup in amendment activity. Actually, it's pretty... Honestly, like, this quarter has been relatively muted.
Steven Martin: Gotcha. Um, can you comment on the nature of your PIC income? It's been relatively flat, isn't it? Penalty?
Speaker Change: Gotcha. Can you comment on the nature of your PIC income? It's been relatively flat. Is it...
Patrick Schafer: Is it, you know, a little extra income? Are you, you know, eventually collecting? What's the status? Yeah.
Speaker Change: Penalty? Is it, you know, a little extra income? Are you, you know, are you eventually collecting? What's the status?
Brandon Satoren: And no remaining borrowing capacity under the 2018-tune security notes as the reinvesting period has ended. I said, Mentally, subsequent to quarter end, we amended and extended our existing senior security revolving credit facility in Washington, Oregon. Under the terms of the amendment, the credit facility was upsized by 85 million per total, revolving capacity of 200 million. Additionally, the article on large and was reduced from 2.8% to 2.5% and the reinvestment period was extended by approximately two years to August 29th, 26th.
Patrick Schafer: Yeah, the answer is, it's a little bit of all of the above. So, you know, there are some instances that have been historically where a lot of it was coming out of COVID, where you get an extra 100, 150 basis points of price and concession for a covenant relief or a maturity extension or something, and that typically came in the form of PIC. And so you have, you know, whatever it is, 80% of your spread in cash, and the extra 100, 150 basis points you get are in the form of PIC, so there's a combination of that.
Speaker Change: Yeah, I mean, the answer is—hey, Steve, it's Patrick—the answer is...
Speaker Change: It's a little bit of all of the above. So, you know, there are some instances that have been historically where a lot of it was coming out of COVID.
Speaker Change: where you get an extra 100 or 150 basis points of price and concession for a covenant relief or a maturity extension or something, and that typically came in the form of PIC, and so you have, you know, whatever it is, 80% of your spread in cash.
Speaker Change: and the extra 100, 150 basis points you get is in form of PITs. There's a combination of that. I think more recently, and there's three good examples of this that we've done in the last handful of months, Riddell, which was done at the end of Q1,
Patrick Schafer: I think more recently, and there's three good examples of this that we've done in the last handful of months, Riddell, which we've done at the end of Q1, and then Princeton MedSpa and Care Connectors are the student business names that were the new portfolio company, those two were the new portfolio companies in this quarter, where, you know, we as, you know, BC and Portman collectively, you know, we did effectively like a two security unit tranche where, you know, we provided, let's call it, you know, 80% of our capital in the form of a senior secured first lien loan, and then 20% of our capital in the form of some kind of structured equity solution.
Brandon Satoren: This amendment has reduced our overall cost of debt capital and extended the duration of our debt capital structure. Further, we intend to refinance the remaining 85 million of 22-2 secured notes out the anchoring with the proceeds from the outsized drinking more in credit facility.
Speaker Change: And then Princeton MedSpa and Care Connectors are the student business names that were the new portfolio companies. Those two were the new portfolio companies in this quarter.
Edward Goldthorpe: Finally, the board approved a quarterly distribution of 69 cents per share, Able on August 30th, 2024, to stockholders of records at the close of business on August 22nd, 2024. With that, I will turn the call back over to it. Thank you, Brandon. 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 first half of the year. Through our prudent investment strategy, we believe we will be able to deliver stronger turns to our shareholders in the backup of 2024. I would like to thank once again all of our shareholders for ongoing support.
Speaker Change: where, you know, we as, you know, BC and Portman collectively, you know, we did effectively like a, like a two security Unitrons where.
Speaker Change: You know, we provided, let's call it, you know, 80% of our capital in the form of a senior-secured first lien loan.
Patrick Schafer: And so that equity piece itself is all PIC, but the way we look at the investment is a combined investment in both the term loan and the preferred equity. And so from a cash PIC component, you know, in terms of our investment in the bar in aggregate, it's probably something like 80-20, or an 85-15 type of a split, but those two securities themselves happen to be all PIC because they're structured equity. So the answer, Steve, is we look at both cash and PIC as a collective investment.
Speaker Change: and then 20% of our capital in the form of some kind of structured equity solution.
Speaker Change: And so that equity piece itself is all PIC.
Speaker Change: But the way we look at the investment is a combined investment in both the term loan and the preferred equity, and so from a cash pick.
Unknown Executive: This concludes our prepare remarks and I'll turn the call over for any questions. Thank you and we will now begin the question and answer session. If you have dialed in and would like to ask a question, please press star one on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star one a second time. If you are called upon to ask your question and are listening via speakerphone on your device, please pick up your handset and ensure that your phone is not on mute when asking your question.
Speaker Change: component, you know, in terms of our investment in the bar and aggregate, it's probably something like 80-20, 85-15 type of a split. But on those two, those two securities themselves happen to be all picked because they're structured equity.
Speaker Change: So, the answer, Steve, is...
Patrick Schafer: And so more often than not, it is a little bit of extra PIC in addition to the cash coupon for a borrower. But there are some instances, like the handful of deals or three deals that we've done recently where, technically, once secured, it's all PIC, but we did it as a strip between a first lien that is all cash and then preferred equity that's all PIC. And so it kind of blends to, again, you know, more of something that makes more sense in terms of like, again, 85-15, or whatever you want to think about a cash tip.
Speaker Change: We look at both cash and PICs as like a collective investment, and so more often than not,
Speaker Change: It is a little bit of extra pick.
Speaker Change: In addition to cash coupon for a borrower, but there are some instances like that the handful deals or three deals that we've done recently where technically once here it is all picked, but we did it as a strip between a first lien that is all cash and then deferred equity that's all picked. And so it kind of blends to, again, you know, more
Christopher Nolan: Again, press star one to join the queue and your first question comes from the line of Christopher Nolan with Lautenberg-Telman.
Patrick Schafer: Your line is open. What was the driver for the realized loss and the unrealized appreciation, please? Yes, I'll turn the brand for the realized, but on the unrealized front, the primary driver is that call tech, which I talked about a little bit in my remarks. But we also exited the investment right after quarter-end and had to take an unrealized write-down in and around the exit price there. Again, we'll just flip from unrealized to realized in Q3, but for Q2, it was a significant portion of our unrealized loss.
Speaker Change: Something that makes more sense in terms of like, again, 85-15 or whatever you want to think about a cash tip.
Patrick Schafer: Oh, go ahead. I just want to point out that there's a little, you know, it looks like PIC increased by 1% this quarter, but there's a little bit of a denominator effect there. The reality is, PIC increased by less than 203.
Speaker Change: Okay. Yeah, see you right now.
Speaker Change: Yeah, one more round. Okay, ahead.
Speaker Change: I'd just point out that there's a little, you know, it looks like PIC increased by 1% this quarter. There's a little bit of a denominator effect there. The reality is PIC only increased by less than $200,000.
Steven Martin: Right, I was more commenting on the last couple of quarters; it's been around the $2 million level. So I was, you know, curious as to the composition of the unrealized.
Speaker Change: Right. I was more commenting on the, you know, the last couple of quarters, it's been around the $2 million level. So I was, you know, curious as to the composition on the unrealized.
Ted Goldthorpe: Ted, you said spreads have tightened over the last couple of months. If spreads have tightened versus the prior four or five quarters, when they were wider, are we seeing, or should we not see, a recapture of some of our unrealized losses?
Speaker Change: Ted, you said spreads have tightened over the last couple of months.
Patrick Schafer: That's right, Patrick. Just on the realized, on the realized front, Chris, it was an investment call tank. We realized it at the mark we had last quarter, so that was our embedded in R&N, which is to flip from unrealized to realized. If I'm correct, tech was on the old Capitalla investments, is that correct? No, this was an old K-Cath way like you see one. It was unknowingly took over the portfolio. We've had a $40,000 receivable or something left from a state liquidation that finally got resolved.
Speaker Change: If spreads have tightened versus prior four or five quarters where they were wider,
Speaker Change: Are we seeing or shouldn't we see a recapture of some of our unrealized losses?
Ted Goldthorpe: Yeah, it's a good question. I mean, there's a bit of a lag. So I think spread compression always starts at the top. And we've seen spread compressions at the big cap level. And, you know, obviously, over time, that'll weigh on our market. So that should be a tailwind for valuations. And again, Patrick gave some color around, you know, NAV upside in our book right now. And so I think it should filter through.
Ted Goldthorpe: Yeah, it's a good question. I mean, there's a bit of a lag. So, I'd say a couple things. Spread compression always starts at the top. So, we've seen spread compressions at the big cap level and, you know, obviously over time that'll trip on our market.
Patrick Schafer: So you've been running it almost no value on our SRI for several, several years now, and your BDCs confused. Qualtech, what should we expect in terms of a realized loss for 3Q1U? The short answer is it should be all a flip from unrealized to realize that it should be no nav impact for Q3CRIS. I don't have the exact quantum of that. We can follow up with you with the exact quantum, but it will be a complete flip from unrealized to realize.
Ted Goldthorpe: So that should be a tailwind for valuations. And again...
Speaker Change: Patrick gave some color around, you know, Nav Upside in our book right now and so I think
Ted Goldthorpe: There's always a lag, though. So spreads have really come down pretty aggressively over the last, I'm going to say, three months. And again, the way our valuation methodology works is there's a bit of a lag on our..., matrix. So there should be some tailwind there, obviously, recent volatility excluded, you know, like in the markets.
Speaker Change: It should filter through. There's always a lag, though, so spreads have really come down pretty aggressively over the last, I'm going to say, three months, and again, the way our valuation methodology works is there's a bit of a lag on our
Speaker Change: matrix so there should be there should be some tailwind there obviously recent volatility excluded you know like in the markets
Steven Martin: Gotcha. With respect to position sizes, the last couple of deals you've added, you know, Riddle as an example, you've taken very little of the deal. Is there a reason why the position sizes you've added seem to be much smaller?
Speaker Change: Gotcha. With respect to position sizes, the last couple of deals you've added, you've, you know, RIDDLE as an example, you've taken very little of the deal. Is there a reason why the position sizes you've added seem to be much smaller?
Patrick Schafer: We bake it in the end again. It closes in on July 7th or something like that. The price out of the 630 of baked in the exit price, but we can follow the exact amount. No need. That's fine. On the credit facility, the text of the press release says margin of 2.5% or so. Am I to presume that's a spread over some sort of index and if so, what's the index? Yeah, so it's a 250 over so far.
Patrick Schafer: Yeah, I mean, Steve, I think the simple answer is, you know, I think our view on BDCs specifically is that they should be very well diversified portfolios. I think where we sit from a, you know, leverage perspective, and that's the capital perspective, I don't think, you know, we need to put out significant amounts of capital. And so for us, we've been focused on trying to continue to run a diversified book.
Speaker Change: Yeah, I mean, Steve, I think the simple answer is, you know, I think our view on BDCs specifically is that they should be very well diversified portfolios. I think where we sit from a...
Patrick Schafer: Great. Final question would be, can you give any sort of perspective as to what the BDC M&A market might be evolving like given many BDCs are starting to see as quality deterioration in this quarter? Yeah, I would say I think it's still pretty quiet on that front. And we are there is a lot of strategic activity happening in the broader S and Asian space, so you've seen two big deals have in this past quarter.
Speaker Change: you know, leverage perspective, investor capital perspective, you know, I don't think...
Speaker Change: you know, we need to put out significant amounts of capital. And so for us, we've been focused on...
Patrick Schafer: And in our opinion, you know, being able to take smaller bits of more deals is more advantageous for our shareholders, as they're able to invest in, again, a more diversified portfolio, or any individual deal becomes less impactful, either positively or negatively, and increases a lot more consistency of results.
Speaker Change: trying to continue to run a diversified book, and in our opinion, you know, being able to take smaller bits of more deals.
Speaker Change: is more advantageous for our shareholders as they're able to invest in, again, a more diversified portfolio where any individual deal becomes less impactful, either positive or minus, and increase a lot more consistency of results.
Steven Martin: All right, thanks.
Steven Martin: All right, thanks a lot.
Patrick Schafer: And you know, we are M&A activities take up a lot in the broader S and Asian space, so I'm not sure that applies. I wouldn't say we've seen that in the quote unquote BDC space, but we are seeing in the 4dx space and we're definitely seeing in the broader institutional space. And the theme is the same. The theme is scale matters. So I think I think costs keep going up. You know, the pressure on these so I think I think, you know, a lot of firms are having to put a lot of money into distribution in terms of expenditure.
Ted Goldthorpe: And we have no further questions at this time. I would now like to turn the conference back over to Mr. Ted Goldthorpe for closing remarks.
Speaker Change: All right, thanks a lot.
Speaker Change: And we have no further questions at this time. I would now like to turn the conference back over to Mr. Ted Goldthorpe for closing remarks.
Operator: Thank you all for attending our call, and, as always, please reach out to us for any questions which we're happy to discuss. We look forward to speaking to you again in November for our third quarter conference call, and we hope all of our shareholders and stakeholders have a very good end to the summer. Thank you. And, ladies and gentlemen, this concludes today's call, and we thank you for your participation. You may now disconnect. [music]
Ted Goldthorpe: Thank you all for attending our call and as per always please reach out to us for any questions which we're happy to discuss. We look forward to speaking to you again in November for our third quarter conference call and we hope all of our shareholders and stakeholders have a very good end of summer. Thank you.
Operator: And ladies and gentlemen, this concludes today's call, and we thank you for your participation. You may now disconnect. Thank you for watching!
Patrick Schafer: So I think the themes are becoming more pronounced. So I think some people in 2020 had issues of credit. I think now it's much more people have issues to scale. So I think you see a lot of M&A over the next 12 to 18 months, but that's a comment more broadly about 40 acts in around as management as poster species.
Speaker Change: And ladies and gentlemen, this concludes today's call, and we thank you for your participation. You may now disconnect.
Operator: [music] Thanks for watching!
Unknown Executive: Okay, this is for me. Thanks, Chris. Thanks Chris.
Unknown Executive: And as a reminder, please press star one, if you would like to ask a question.
Deepak Sarpangal: And your next question comes from the line of DPAC Sarpangle with repertoire partners. Your line is open. Thank you. Hi. Good morning. So a few questions. On the recent quarter, obviously, we'd all like to see zero mark downs at any given time, but that's essentially impossible. Curious, I know Qualtech was one of the big drivers. It did seem like a lot of it was like a lot of the weakness has been primarily in the high tech industry part of your portfolio.
Jason Roos: [music]
Deepak Sarpangal: Is there something broader that you're, you know, that you're seeing. I know that that's, you know, the size of that has come down now, which is good, but is there anything else? You know, any other context, you know, with respect to that, because it looked like there were a few of them.
Patrick Schafer: [inaudible] Yeah, that's actually a very perceptive question. I would say Paul Tech's not really a tech company and it gets a long-term legacy position and with no accident. I will say across our tech portfolio, which is generally speaking enterprise software, so recurring cash flow. I will say that they've definitely seen two factors that impact them. One is sales cycles which are coming longer for new sales, so their existing basic business is still turning along.
Patrick Schafer: Number two is this AI theme and the expenditures of an AI, they are taking away a little bit of the budgets for what I call traditional software. It feels like just looking at portfolio companies. And number three is there has been some very, very companies specific events that have impacted some of our companies. Some of our companies in the broader space, I mean obviously everybody knows the CrowdStrike example, but that's actually happening in a couple other situations, with a specific investment in a company that had a cyber issue this quarter, that we think it's a temporary market.
Patrick Schafer: We make the companies totally fine. But there is some EU's and credit events happening in tech that are really, like we haven't seen before. CrowdStrike's the public example, but we're seeing it on a smaller scale. Okay, that makes sense. And then is there, is there anything, I know your business isn't seasonal, but like, it also just so happened that last year it was like Q2 that was, you know, maybe a tougher quarter, but then it kind of reverted.
Patrick Schafer: Is there anything maybe just kind of like where, you know, there's, like you said, maybe there's a couple of specific factors or like the overall market just happened to, to be in a particular position, is there anything just in terms of kind of like timing that contributes to, you know, maybe this being like a tougher quarter than most. Yeah, another really good question. I would say, thematically, you know, the banks were really closed in 2020.
Patrick Schafer: So post, post Twitter, a lot of the investment banks were really reticent to take on risk. And then you obviously have the regional banking crisis. So we, we felt like the, there really wasn't a lot of issue. Look, we've had more loan issuance year to date than we've had in the last two years divine. Has really impacted us because we're at the smaller market. So we haven't seen the revised that some of our larger peers are seeing.
Patrick Schafer: Coming into this year, our portfolio, our pipeline is not that great. We were incredibly busy up to June, and our pipeline is still down again. And the theme there is if they're just not a lot of new LBL activity. So when you're seeing M&A pick up broadly and you're seeing the investment banks comment on M&A. We're not seeing it on the private equity sponsor level. So exits are hard, you know, prices haven't come down that much.
Patrick Schafer: You know, financing costs are higher and the economy's slowing down. So I think we're seeing like our pipeline for new M&A activity in LBL is pretty pretty unique. So, so I think they'll pick up like if you look at our portfolio today. In very large percentage of them are, are supposed to go for sale in the fourth quarter. Again, that was the same thing last year that doesn't mean they're actually going to transact, but there is a very, very large.
Patrick Schafer: Pipeline of companies in the middle market that need to be sold over the next one, two, three years. So this should revert to the mean at some point. Okay. And then this is, I wouldn't say, I would say to Deepak, I wouldn't say seasonal, it's more dramatic, I would say. Okay, yeah, that makes more sense. And this question is a little bit more random, but I noticed that you know, one thing I do like that again, the joint ventures in COLO, you know, parts of your portfolios are smaller and continuing to get smaller.
Speaker Change: Music Music Music Music Music
Patrick Schafer: You know, in your, in your fair value, disclosure and assumptions, it looks like you, you kind of value those with discount rates of over 20% on a weighted average. I'm glad that's conservative. It does seem like a high discount rate. Can you maybe explain a little bit more about how you come up with that and, you know, how to think about that. Yeah, yeah, Deepak. So this is better. So the short answer is for all those valuations, we send those out to third parties to be valued.
Patrick Schafer: So, you know, third parties are kind of come over the discount rate, but the reality is COLO equity. And that's kind of generally where the discount rates are coming from, not as much like Great Lakes Joint Venture, but really more so the other CLOs. You know, Kindly is a very opaque market and where spreads are right now, you know, liabilities came down a little bit, but not nearly as much as spreads have come down.
Patrick Schafer: So like the return to equity in COLO land has been relatively compressed, which means you need to price that much higher discount rate. So again, if it's not like the most obvious of answers, but just in the COLO market in order to get potential buyers to transact, you know, you really need to have a very healthy discount rate to that back end of a branch, just because of where like the liability asset spread is on BSLs.
Patrick Schafer: Okay. And then I know that it's a very small portion of our book, and I think you can do get smaller. Our Great Lakes Joint Venture, which is the biggest piece of that, is not valued at a 20% discount rate. The all the individual loans within that joint venture are value that their own individual discount rates that then kind of rolls up into a joint venture evaluation. And I don't know the exact numbers up top my head, but those are all substantially lower than 20% Yep.
Patrick Schafer: And and again, I mean, in the in the relatively smaller cases where you're using epitome multiples. It does look like again, I know that these are not necessarily apples to apples, but to what extent are the businesses that you're valuing in head, like just lower multiple businesses versus, you know, maybe just like better, you know, better priced investments. And the reason why I asked that is, like, for example, like your multiples are like by far, the low, which is a good thing, I think.
Patrick Schafer: But by far the lowest, like, you know, if you look at the larger, you know, larger BDCs, areas, it's more like 11 or 13 times, I think, in terms of those epitome multiples. [inaudible] Another, another good question. So I say a couple of things, which is one, I think generally trying to be pretty conservative on our value, which is particularly on equity securities, which is, which is what you're referencing. Just because, again, like at peak and it can tend to be volatile.
Patrick Schafer: So we would be on the surface side. I think the other little bit of a nuance there is generally speaking. Our acquisitions are tended to be, you know, some of the acquired portfolios from either harvest or garrison or even, you know, likes to take out where the bars and cells are probably a little bit smaller. And so we do tend to try and factor in a little bit of a like side discount in terms of size of the portfolio company relative to, you know, a quote unquote, peer said and where we think of evaluation multiple should trade.
Patrick Schafer: So I think again, I think the combination of being able to conserve multiple and like if you're using areas as big examples, they're going to have much larger portfolio companies. So, you know, they're kind of I guess able to or probably can look more similar to like the actual peer set from evaluation multiple perspective as opposed to ours. We tend to apply a meaningful discount to where the peers trade just to de factor in the fact that they're smaller companies than the peers.
Patrick Schafer: Great. I think I think that's all my questions. I am glad to see that you're continuing to take advantage of your undervalued stock and it's not it's not every company that demonstrates that kind of savvy capital allocation and especially in the BDC space. So thanks and look forward to us to more ahead. Thank you.
Steven Martin: As a reminder, it is star one if you would like to ask a question and your next question comes from the line of Steven Martin with Slater Capital Management. Your line is open. Hi guys. You've addressed a lot of my questions. Can you comment on what the current trend is in amendments, extensions, waivers, et cetera? Yeah, I don't think we've seen a material pick up in amendment and waiver activity. Again, a lot of companies who are not fully lever driven trouble, not trouble but they were asking for extensions, the last couple of years.
Steven Martin: Now the market's cut a normalized and so there is some reprised in activity and to the extent we're not willing to do it, there's other lenders why I have to do it. So I don't think there's been, I mean, obviously we have some normal course amendments went on. I don't think we've seen a material pick up in amendment activity.
Brandon Satoren: Actually, it's pretty, honestly, like this quarter has been relatively muted. Gotcha. Can you comment on the nature of your pick income? It's been relatively flat. Is it penalty? Is it, you know, little extra income? Are you eventually collecting what's the status? Yeah, the answer is the exact answer is it's a little bit of all be above. So, you know, there are some instances that have been historically where a lot was coming up.
Brandon Satoren: COVID where you get an extra 100 or 150 basis points of pricing concession for a covenant relief for a maturity extension or something. And that typically came in the form of pick. And so you have, you know, whatever it is 80% of your spread and cash and the extra 150 basis points you get is important. There's a combination of that. I think more recently and there's three good examples of this that we've done in the last handful of months.
Brandon Satoren: Redel, which was at the end of Q one and then Princeton med spa and care connectors of the business as names that were the new portfolio company, those two were the new portfolio companies in this quarter where, you know, we as, you know, BC important collectively. You know, we did effectively like a, like a two security unit branch where, you know, we provided, let's call it, you know, 80% of our capital in the form of a senior spirit personally loan.
Brandon Satoren: And then 20% of our capital in the form of some kind of structured equity solution. And so that equity piece itself is all pick, but the way we look at the investment is a combined investment in both the term loan and the preferred equity. And so from a cash pick component, you know, in terms of our investment in the bar and aggregate, it's probably something like 80, 20, 85, 15 type of a split, but on those two security themselves happen to be all pick because they're structured equity.
Brandon Satoren: So the answer Steve is we look at both cash and pick is like a collective investment. And so more often than not, it is a little bit of extra pick in addition to cash coupon for a bar. But there are some instances like that the handful of deals or three deals that we've done recently where technically once here does all pick, but we did it as a, as a strip between a person that is all cash.
Brandon Satoren: And then perfectly that's all pick. And so it kind of blends to again, you know, you know, more, something that makes more sense in terms of like again, 85, 15 or where you want to think about a cash test. One point out. I just point out that there's a little, you know, it looks like pick increased by 1% this quarter of the quarter. There's a little bit of an elevator effect there.
Brandon Satoren: The reality is pick only increase, pick increased by less than 200,000. Right. I was more commenting on the, you know, the last couple of quarters. It's been around the $2 million level. So I was, you know, curious as to the composition. On the unrealized, Ted, you said spreads have tightened over the last couple of months. If spreads have tightened versus prior four or five quarters where they were wider, are we seeing or shouldn't we see a recapture of some of our unrealized losses?
Brandon Satoren: Yeah, that's a good question. I mean, there's a bit of a lot. So I take up the spread compression always starts at the top. So we've seen, we've seen spread professions at the, at the big cat level and, you know, obviously over time that'll trick on our market. So that should be a tailored for valuations. And again, Patrick gave some color around, you know, nav outside in our book right now. And so I think it should, it should.
Brandon Satoren: I feel put through. There's always a lag though. So spreads have really come down pretty aggressively over the last three months. And again, the way our valuation methodology works is there's a bit of a lag on our matrix. So there should be, there should be some tailwind there. Obviously recent volatility excluded, you know, like in the markets. Gotcha with respect to position sizes. The last couple of deals you've added, you've, you know, riddle as an example, you've taken very little of the deal.
Brandon Satoren: Is there a reason why the position sizes you've added are seem to be much smaller? Yeah, I mean, Steve, I think the simple answer is, you know, I think our view on BDC specifically is that they should be very well diversified portfolios. I think where we sit from a, you know, leverage perspective is that the capital perspective, you know, I don't think, you know, we need to put out significant amounts of capital.
Brandon Satoren: And so for us, we've been focused on trying to continue to run a diversified book and in our opinion, you know, be able to take smaller bits of more deals is more advantageous for our shareholders as that they're able to invest in and again, a more diversified portfolio where any of it will deal, you know, becomes less impactful either either, you know, positive or minus and increase a lot more consistency of results.
Steven Martin: All right, thanks a lot.
Unknown Executive: And we have no further questions at this time.
Edward Goldthorpe: I would now like to turn the conference back over to Mr. Ted Goldberg for closing remarks. Thank you all for attending our call. And as per always, please reach out to us for any questions we're happy to discuss. We look forward to speaking to you again in November for a third quarter conference call and we hope all of our shareholders and stakeholders are very good in summer. Thank you.
Unknown Executive: And ladies and gentlemen, this concludes today's call and we thank you for your participation.
Unknown Executive: You may now disconnect, joining us today, thank you[inaudible] Thank you very much for joining us today, thank you very much for joining us[inaudible] joining us today, thank you[inaudible] Thank you very much for joining us today[inaudible] joining us today, thank you David Ratliff, Steven Martin, Paul Johnson, Christopher Nolan, Paul Johnson, Christopher Nolan[inaudible]