Q3 2024 Portman Ridge Finance Corp Earnings Call
Speaker Change: Welcome to Portman Ridge Finance Corporation's third quarter 2024 earnings conference call. An earnings press release was distributed Thursday November 7th after market close.
Speaker Change: A copy of the release, along with an earnings presentation, is available on the company's website at www.partmanbridge.com.
Speaker Change: in the Investor Relations section and should be reviewed in conjunction with a company's Form 10-Q filed on November 7 with the SEC. 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 which are not guarantees of future performance or results and involve a number of risks and uncertainties.
Speaker Change: Portman Ridge Finance Corporation assumes no obligation to update 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.
Speaker Change: With that, I would now like to turn the call over to Ted Goldthorpe, Chief Executive Officer of Portman Ridge.
Ted Goldthorpe: Good morning and welcome to our third quarter 2024 earnings call.
Ted Goldthorpe: I'm joined today by our Chief Financial Officer, Brandon Satoren, and our Chief Investment Officer, Patrick Schafer.
Ted Goldthorpe: Following my opening remarks on the company's performance and activities during the second quarter, Patrick will provide commentary on our investment portfolio and markets and Brandon will discuss our operating results and financial condition in greater detail.
Ted Goldthorpe: On November 7th, 2024, Portman Ridge announced its third quarter 2024 results.
Ted Goldthorpe: And following the strong earnings we saw in the first half of 2024, the company's third-order earnings were temporarily impacted by prudent cash and portfolio management initiatives prior to the successful refinancing of the 2018-2 secured notes.
Ted Goldthorpe: I'm very pleased with the work we did on the right side of the balance sheet and the substantial improvements we made to the company's debt capital structure.
Ted Goldthorpe: Specifically, the company extended the maturity of the JPM credit facility while also reducing the spread by a full 30 basis points. Further, using the upsized and lower-cost JPM credit facility, the company refinanced the remaining $85 million of a 2018-2
Ted Goldthorpe: secured notes at the end of August, which resulted in further net spread savings of approximately 28 basis points.
Ted Goldthorpe: On a run rate basis, the impact from reduced spreads should result in approximately $265,000 reduction of interest expense relative to Q3 results, or $0.03 a share.
Ted Goldthorpe: That in mind, we continue to believe our stock remains undervalued, and thus, we continue repurchasing stock during the third quarter under our Rule 10b-5 Stock Repurchase Program.
Ted Goldthorpe: Specifically during the quarter ended September 30th, 2024, the company repurchased 33,429 shares in the open market for an aggregate cost of approximately $600,000, which was accretive to NAV by one cent a share and reinforces our commitment to increasing shareholder value.
Ted Goldthorpe: Additionally, the Board of Directors approved a $0.69 per share distribution for the fourth quarter of 2024, which represents a 13.6% annualized return on net asset value, amongst the highest in the BDC space.
Ted Goldthorpe: Regarding the private credit markets, and specifically the core middle market, which we define as companies generating 10 to 50 VBIDOCs,
Ted Goldthorpe: Activity levels continue to be elevated relative to 2023, but the majority of activity has consistently been from refinancings, add-ons, or amended extend transactions that most often result in lower cost of capital for our borrowers and extended maturities.
Ted Goldthorpe: While true new money buyout financings have remained at depressed levels throughout 2024, we continue to believe that a combination of dry powder, sponsors looking to return capital to LPs, the ongoing rate cuts by the Fed, are all tailwinds for our sector.
Ted Goldthorpe: Looking ahead to the final quarter of 2024 and the beginning of 2025.
Ted Goldthorpe: with the company's balance sheet fortified by the amended J.P. Morgan credit facility.
Ted Goldthorpe: who expect to be active in the market and net deployers of the company's capital, which we believe will restore net investment income back in line with more normalized levels.
Ted Goldthorpe: Above all, despite the current economic activity and a dynamic interest rate environment, we remain confident in our prudent investment strategy, strong pipeline, and experienced management team, and believe the company remains well-positioned with our strong spillover income to continue to deliver positive returns to our shareholders.
Speaker Change: With that, I will turn the call over to Patrick Schafer, our Chief Investment Officer, for a review of our investment activity.
Thanks, Ted.
Patrick Schafer: Turn to slide 5 of our presentation and the sensitivity of our earnings to interest rates.
Patrick Schafer: As of September 30, 2024, approximately 88.5% of our debt securities portfolio was floating rate with a spread pegged to an interest rate index such as SOFR or PRIME, with substantially all of these being linked to SOFR.
Patrick Schafer: As you can see from the chart, SOFR rates have been relatively consistent for the last several quarters, with a decrease in rates impacting the current quarter.
Patrick Schafer: Skipping down to slide 10, originations for the third quarter were lower than last quarter and were also below the current quarter repayment and sales levels, resulting in net repayments and sales of approximately eleven point six million dollars.
Patrick Schafer: During the quarter, we funded small incremental DDTLs and revolver draws in seven existing portfolio companies and increased our investment in our Great Lakes II invention, but did not add any new portfolio companies, as we had one transaction closed in early October and several other transactions slated for Q4 closings.
Patrick Schafer: Our approval of the fundings made during the quarter are expected to yield a spread to SOFR of 656 basis points on par value, and the investments were purchased at a cost of approximately 98.5% of par.
Patrick Schafer: Our investment portfolio at the end of the third quarter remains highly diversified. We ended the third quarter with debt investment portfolios spread across 28 different industries, with 72 unique portfolio companies, and an average par balance of $2.7 million.
Patrick Schafer: For Insight 11, in aggregate, investments on non-accrual status were nine investments at the end of the third quarter of 2024, representing 1.6% and 4.5% of the company's investment portfolio at fair value and cost respectively.
Patrick Schafer: This compares to nine investments on non-accrual status as of June 30, 2024, representing 0.5% and 4.5% of the company's investment portfolio at fair value and cost, respectively.
Patrick Schafer: On slide 12, excluding our non-accrual investments, we have an aggregate debt investment portfolio of $341 million at fair value. This represents a blended price of 92.6% of par and is 92.9% comprised of first-in loans at par value.
Patrick Schafer: Assuming a power recovery, our September 30, 2024 fair values reflect a potential $27.3 million of incremental NAB value, or a 13.9% increase in NAB.
Patrick Schafer: When applying an illustrative 10% default rate and 70% recovery rate, our debt portfolio would generate an incremental $1.76 per share of NAV, or an 8.3% increase as it rotates.
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 investments, have realized approximately 85% of these positions at a combined realized and unrealized mark of 101% of fair value at the time of closing their respective mergers.
Patrick Schafer: As of Q3 2024, we have fully exited the acquired Oakhill portfolio and are down to a combined $27.9 million of the acquired HCaP and initial KCaP portfolios.
Patrick Schafer: I'll now turn the call over to Brandon to further discuss our financial results for the period.
Brandon Satoren: Thanks, Patrick. For the third quarter of 2024, Portman generated $15.2 million of investment income, of which $12.7 million was attributable to interest income inclusive of PICC income from the debt investment portfolio.
Brandon Satoren: This compares to total investment income for the second quarter of 2024 of $16.3 million, of which $13.7 million was attributable to interest income, inclusive of PIC income, from the debt investment portfolio.
Brandon Satoren: The decrease was primarily driven by lower interest income due to net repayments and sales during the quarter, a loan being placed on non-accrual, as well as lower CLO and joint venture income.
Brandon Satoren: With that in mind I'd like to highlight that recurring PIC income as a percentage of total investment income declined by over 200 basis points compared to the prior quarter.
Brandon Satoren: Excluding the impact of asset acquisition accounting, our core investment income was $15.2 million as compared to core investment income of $16.2 million in the prior quarter.
Brandon Satoren: Total expenses for the quarter ended September 30th, 2024 decreased by $0.5 million to $9.4 million as compared to $9.9 million in the prior quarter.
Brandon Satoren: This decrease was largely driven by lower interest expense during the quarter as a result of the successful refinancing of the 2018-2 secured notes.
Brandon Satoren: in conjunction with the amendment to the existing senior secured revolving credit facility with JP Morgan that reduced the applicable margin from 2.8 percent to 2.5 percent as well as lower management and incentive fees.
Brandon Satoren: Accordingly, our net investment income for the quarter decreased to $5.8 million or $0.63 per share. This compares to $6.5 million or $0.70 per share for the prior quarter.
Brandon Satoren: Further, for the quarter ended September 30th, net realized and change in unrealized losses on investments in debt was 7.3 million. This compares to net realized and change in unrealized losses on investments in debt of 12.8 million in the prior quarter.
Brandon Satoren: As of September 30th, 2024, the company's net asset value was $188 million, or $20.36 per share.
Brandon Satoren: A decrease of $8.4 million, or $0.85 per share, compared to the company's prior quarter net asset value of $196.4 million, or $21.21 per share.
Speaker Change: As of September 30th and June 30th, 2024, our gross leverage ratios were approximately 1.4 times and 1.5 times respectively.
Speaker Change: For the same periods, our leverage ratio net of cash was 1.3 times.
Speaker Change: Specifically, as of September 30th, 2024, we had a total of $267.5 million in borrowings outstanding with a current weighted average contractual interest rate of 6.7 percent.
Speaker Change: This compares to 285.1 million of borrowings outstanding as of the prior quarter, with a then current weighted average contractual interest rate of 6.9%.
Speaker Change: The company finished the quarter with $40.5 million of available borrowing capacity under the Senior Secured Revolving Credit Facility.
Speaker Change: Finally, the board approved a quarterly distribution of 69 cents per share payable on November 29th, 2024 to stockholders of record at the close of business on November 19th, 2024. With that, I will now turn the call back over to Ted.
Ted Goldthorpe: Thank you, Brandon. Ahead of questions, I'd like to re-emphasize that we believe we are well positioned to take advantage of the current market environment as shown through the first nine months of the year. Through our prudent investment strategy, we believe we'll be able to deliver strong returns to our shareholders at the end, in the tail end of 2024.
Ted Goldthorpe: Thanks again, once again, to all of our shareholders for ongoing support. This concludes our prepared remarks, and I'll turn the call over for any questions.
Speaker Change: At this time, I would like to remind everyone, in order to ask a question, please press star, then the number one on your telephone keypad. We will pause for just a moment to compile the Q&A roster.
Speaker Change: And your first question comes from the line of Christopher Nolan with Landenburg-Fauben. Your line is open.
What's the driver of the realized losses, please?
Brandon Satoren: Hey Chris, this is Brandon. The primary driver of the realized loss was Qualtech. You may recall on our last earnings call we had disclosed that we had successfully exited Qualtech at the mark we had in the prior quarter, so
Brandon Satoren: there was no impact in that as a result of that realized loss that was previously captured.
Speaker Change: I thought so. Okay, on the interest rate sensitivity, I'm looking at slide five, and it says, you know, blah, blah, blah, reduction of quarterly income of 164K. And then if you look in the 10-Q,
Speaker Change: It's $1.7 million annually, and given that the Fed is eased by 75 bps or so, there seems to be a lot of the impact of our 1% rate.
at DECK.
Speaker Change: In the deck it's just a difference between the $4.75 and the $4.55, so it's not a full 1% reduction.
and then I guess Spillover.
I'm going to just spill over.
Speaker Change: So it's a it's a it's about 70 cents per share Chris from the prior year.
Speaker Change: Finally, strategy. You guys are sort of cruising along at your normal leverage ratio and the growth has been slow.
GROVE
Speaker Change: Earnings and growing the book, excuse me, growing that in general.
Speaker Change: So to the extent that we remain in a, you know, subdued credit environment, there just should be an upside just with our existing portfolio. And there is some positions that we have that as rates go down, if they go down,
you get a NAV increase, so there's a...
Speaker Change: income comes down a little bit, but you get NAB increases in certain situations.
Speaker Change: So that's number one. And then in terms of investment strategy...
Thank you.
Speaker Change: You know, again, like we haven't been as nearly as impacted as other BDCs by this reduction in spreads. It may be coming to our market, it's beginning to come to our market, but that's really been a large cap and upper middle market.
phenomenon. So we've been able to retain spread.
Speaker Change: and in the situations where we've been asked to kind of like reduce spreads to...
you know, wear Big Cap Mark.
Speaker Change: are. We've generally taken the brief eye. So again, you can see on slide six of what we just closed.
Speaker Change: I mean fee income for us continues to be anemic, like we only had, you know, we basically had our lowest fee income ever this quarter.
Speaker Change: Going back, you know, four years or five years and that that should revert back to normal at some point as you know This refi wave continues. So there's like that obviously is a tailwind to earnings as well. Although it's something we can't obviously forecast or predict
Okay, great. Thank you. Talk to you guys later.
Is the call still going on?
Speaker Change: Your next question comes from the line of Stephen Martin with Slater Capital. Your line is open.
Bye guys.
Two questions.
Speaker Change: You made some comments about some activity in the fourth quarter. Are we expecting net deployments in the fourth quarter?
Speaker Change: I think the short answer is yes, Steve. The long answer is it always depends on, you know, we only have
Speaker Change: sort of one known repayment during the quarter for now. So the answer is yes, I'll ask me Eagle, we'd expect to be a net deployer over the next call two months. But, again, we might get unforeseen exits or things like that, but I'd say our
strategy is and will be to be a NetDeployer.
Speaker Change: Okay, and your PIC income declined dramatically in the quarter, which was great. What was the reason for the decline?
Speaker Change: Yeah, Brandon gave you the specifics, but we did have one company that had a period of time where there was a partial pick, and that is converted back to cash, and there's a couple other things that Brandon can enumerate.
Speaker Change: Yeah, it's two portfolio companies in particular that were previously paying their interest with PICC that reverted to cash this quarter. It was about a half a million dollars worth.
Okay, that's the good way to reduce PIC.
Thank you.
Can you talk about the activity in the non-accruals?
What went in, what went out.
Yeah, they're, um...
Speaker Change: As we mentioned last quarter or so, Qualtech security went out.
Speaker Change: and the bar, I should say, went out. And then we had one new bar in which Vega.
Speaker Change: on our SOI. It goes by a number of different names locally. It's Naviga on our SOI, and Colonnade is another name that it goes by. But that one, we the lenders have been working through it, the company.
Speaker Change: I think we would expect that to be a somewhat temporary non-accrual, but for now that's kind of where it is based on the facts and circumstances.
Speaker Change: Okay, and what does it look like for restructurings of any of the other nonacryls?
Speaker Change: I think as of right now there is nothing substantial. I mean again it's
Speaker Change: There are a couple that, you know, candidly just are, you know, we have marked it zeroes and we would expect them to continue to be zeroes, such as Pro Air is a name that's on non-accrual that will continue to be on non-accrual until we can kind of legally clean it up. So I'd say I...
Speaker Change: I don't think there's anything significant on the horizon in terms of other nauticals.
Okay, thanks a lot.
I'll take that back. I'm looking at the names now.
Speaker Change: is in the process of restructuring Robert Shaw. That should ultimately clear through Arnano Crules sometime shortly. That was a bankruptcy process.
Speaker Change: that I believe the company is exiting shortly and so we should ultimately get cleaned up.
Speaker Change: and the new security we'd be taking on, you know, should be an accruing security. So that might be one other one, but that's a relatively small number. It's, you know, a couple hundred thousand dollars in market value, so not particularly relevant, but that should get cleaned up shortly.
Okay, thanks.
Speaker Change: Your next question comes from the line of Paul Johnson with KBW. Your line is open.
Speaker Change: Hey guys, thanks for taking my questions. I'm hopping on the call a little bit late, so I apologize if you mentioned this in your remarks or if there was already a question, but in the release last week for earnings, you just mentioned some prudent cash and portfolio management initiatives prior to paying off some notes in the portfolio. Can you just tell us what exactly
how, I guess, how that would have affected results.
quarter, if it did at all.
Speaker Change: Yeah, yeah, Paul, I mean the short answer is we were in the process of refinancing out the secured notes with an upsize to the J.P. Morgan facility and to we To be prudent and ensure we had been sitting on additional cash
Speaker Change: in our vehicle to ensure a smooth refinancing. And so, too, we were sitting on incremental capacity in the J.P. Morgan facility to make sure that there was, that the entire process went smoothly and we were, you know, able to successfully refinance and then able to kind of turn back to investing once we kind of had a collective facility with, and, you know, better understood our kind of available capacity. But it was effectively, you know, holding back on investments and sitting on some cash.
to ensure a smooth refinancing process there.
Speaker Change: Got it. Appreciate that. That's helpful. That's all the questions for me. Thank you.
Speaker Change: Again, if you would like to ask a question, press star 1 on your telephone keypad.
Speaker Change: I will now turn the call back over to Mr. Goldthorpe for closing remarks.
Ted Goldthorpe: Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.
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