Q2 2019 Earnings Call

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I would like to turn the conference call over to your host Mr., Ted Goldthorpe Chief Executive Officer.

Thank you for joining us on our earnings call.

Today put rich announced its second quarter 2019 financial results.

As you know on April Onest, we closed on the externalization transaction and at that time and affiliate a B C partners Advisors LP became the external manager Portman Bridge Financial Corporation.

Additionally, on August 1st we announced that Portman Ridge has entered into a definitive agreement under which Oh Ha investment Corporation will merge with and into Portland Ridge.

The transaction is subject to Ohio shareholder vote and to the extent approved is expected to close in the fourth quarter of this year.

For more details about the merger please refer to the press release issued on August 1st which is available on the Portman Rich website and the replay of the shareholder call hosted on the same day.

We are excited about this opportunity as it embodies an important step in our vision for the BDC space and is expected to be accretive try an accretive transaction for both Ohio and Portman shirt stockholders.

I will begin with a few comments about the market in our strategy and then turn the call over to Ted Gilpin, our CFO for a brief overview of the financial results.

And then Patrick Shaffer, our Chief investment Officer for a review of investment activity before concluding the call with some additional remarks.

The market has seen increased competitiveness in the last few quarters. So we're being very selective in general.

Specifically within the Unitranche asset class, which has been in the preferred structure in the sponsor universe for some time now.

There has been a recent trend for unitranches to be increasingly clubbed up amongst few lenders versus going with one solution and as a result, our hit rate for that product has increased.

We continue to find value in our non sponsor vertical as well as in stretch senior deals.

These stretch senior deals have been immaterial at less leverage than unitranches with only a minor reduction in spread.

We are pursuing junior capital solutions and only the most attractive of circumstances.

And only in companies with economically resilient business models.

Over the next few quarters, we will look to continue to reduce our celo equity exposure and replace it with investments in our senior and Unitranche joint ventures.

Which we continue to believe provide attractive risk adjusted returns.

With that I will hand, it off to Ted Gilpin to review the second quarter financial results.

Thank you Ted Good morning, everyone net investment income for the quarter was approximately 880000 or two cents per basic share compared with net investment income of $2.5 million or seven cents per share in the quarter ended June Thirtyth 2018.

And a net investment loss of 2.2 million or negative six cents per basic share in the first quarter of 2019.

During the quarter, we were required to take a nonrecurring noncash nondeductible impairment charge to write down the lease right of use asset for office space previously occupied by the company.

That resulted in the hit to Eni of approximately $1.4 million or four cents per basic share without the lease impairment charge and I would have been $2.3 million or six cents per basic share.

Although net asset value per share declined by 12 cents to 373 per share during the second quarter.

A significant portion or approximately eight cents of the decline was attributed to the aforementioned lease impairment and a stockholder distributions in excess of net investment income earned during the quarter. The remaining four cents per share or 1% of our navy was driven by realized and unrealized losses in the underlying portfolio, mostly in our structured products portfolio.

Investment income from debt securities in the quarter was approximately $3.8 million compared with approximately 2.9 million in the first quarter of 2019 and approximately $4.3 million in the second quarter of 2018 investment income on COO funds securities in the second quarter of 2019 was approximately 1.7 million compared with approximately $1.8 million in the first quarter and 1.5 million in the second quarter of 2018.

Investment income from joint ventures, both the Great Lakes JV as well as EPS Threec JV increased in the second quarter of 2019 to approximately $1.3 million from approximately 1.0 million one $1 million in the first quarter 2019, and approximately 700000, the second quarter of 2018.

On the liability side of the balance sheet as of March 31, 2019.

We had approximately $122.8 million, our debt outstanding $77.4 million of six and one eight notes due.

In 2022, and $45.4 million of under our L. Plus 325 revolving credit facility, our asset coverage ratio at quarter end was 211% as of March 2019, Portland, Rich can increase leverage to the new statutory ratio of 150%. However, we are currently restricting our ability to do so under the covenants in our outstanding publicly traded debt.

But the new asset coverage ratio will give us significantly more flexibility in the future.

The Portman Ridge Board of Directors has approved a cash distribution of six cents per share on August 5th.

The distribution is payable on August 29 to stockholders of record at the close of business as of August 12 2019.

The new dividend level is based on the boards desire to more closely align dividends with net investment income and tax distributable income being generated by the fund.

When including the first two quarters of distributions, we are on pace to distribute.

32 cents per share for the full year 2019, excluding the 67 cents per share special distribution associated with the externalization.

The board evaluates several factors in serving the amount of quarterly distribution, including the amount required to be distributed in order for the company to maintain its status as a regulated investment company under the internal revenue code.

With that I would like now like to now turn the call to Patrick Schaefer CIO Portman Ridge.

Thanks, Ted I'd like to now discuss the current state of the portfolio and how we have begun to reshape it since the externalization.

During the quarter, we made investments into 12 borrowers for which we're into existing portfolio companies and eight of which were brand new borrowers in aggregate. These investments totaled $46 million face value, 27% of which were first lien securities and 63% of which were second lien securities with the remaining investments being add ons to the great Lakes joint venture and a small preferred equity investment the weighted average spread on these first and securities was 534 basis points and a weighted average spread on the second securities was 897 basis points.

Additionally, over the course of the quarter, we exited 12 legacy KCAP positions and aggregate carrying value of $22 million for an aggregate gain of $236000 relative to their carrying value as of March 30 Onest.

The largest gain was it related to the pay down of Rhodesian life Sciences, which is marked at 90% of par as of Q1 2019 and was repaid at par.

With respect to the portfolio as a whole there were no incremental non accruals during the quarter, nor any material credit event as evidenced by the relatively limited realized and unrealized losses, Ted Gilpin highlighted.

Finally.

Post quarter, we have committed to $21.7 million of face value loans, all of which are first lien securities at a weighted average spread of 564 basis points and we continue to have a strong pipeline of opportunities both sponsor and non sponsor.

The team is actively pursuing with that I will turn the call back over to Ted gold or.

Thank you Patrick.

During the second quarter, we began to reposition the portfolio, including reducing the companys exposure to close as a portion of total investments and net net asset value and we'll continue to seek opportunities in the middle market lending space to prospectively enhance net investment income.

We are excited about our recently announced proposed merger with LHP investment Corporation, which demonstrates BC partners commitment to pursue attractive opportunities in the market.

If approved by a high share stockholders. The combined company will be managed by Sierra crest investment management and is expected to increase total assets by approximately 20%, allowing for larger hold sizes on the portfolio and increasing earnings per share by spreading out our public company costs over a larger base.

As Patrick mentioned in his remarks since April Onest, we have deployed or committed to deploy $67.7 million of capital and predominantly first lien securities.

Most of these investments were proprietarily sourced through the BC partners platform and the ability of Portman Ridge to co invest alongside other BC partners entities pursuant to the co investment order previously discussed at the time of externalization.

Will allow us to come Pete with other major market participants in a way that the fund historically could not.

Going forward, we will continue to work towards reducing noncore and low yielding assets, including opportunistically exiting our structured credit exposure in short we believe the portfolio is trending in the right direction and we're looking forward to continuing our repositioning work.

We will continue to reposition the portfolio in subsequent quarters based on the long term objectives of net investment income growth in NAV stability.

For which the restructuring of the dividend policy approved by the board on August Fiveth was a key element.

Right sizing the dividend to track more closely to the earnings power of the company for improved NAV stability and allow us to deploy more capital in high yielding illiquid investments generated by the broader PC platform.

We also.

I believe that the expenses incurred due to the externalization had been realized and expect more earnings stability going forward.

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

Ladies and gentlemen, if you have a question at this time.

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Your first response is from Paul Johnson of KBW. Please go ahead.

Good morning, guys. Thanks for taking my question.

Just had a couple of today.

As far as the.

Hi, <unk>.

Cost.

This quarter.

And with that probably.

Merger transaction.

Is that what drove the higher.

Do you expect any of that.

In coming quarters.

Really there really was not a lot related to OE Jay.

Yet there are still some some noise in the expenses related to the.

Externalization.

Mostly related to sort of insurance costs at some and obviously the lease impairment and other lease associated.

<unk> expenses.

But I think.

Generally speaking.

And a little bit of professional fees still associated with.

Putting that all together.

But I think one of the reasons it hey.

Transaction is so attractive is that you're going to be able to spread our gene a cost or semi semi fixed across a bigger platform. So I think that.

You'll see the moderate a little bit.

But.

As Ted said, we have washed through a lot of the.

KCAP externalization expenses.

Now through this quarter.

Okay.

You are saying you expect.

Were there.

Yes, it should moderate a little bit and you will see some relief on some of the other lines like insurance.

<unk> expenses, so we at least so as we as you mentioned the last call and publicly the last couple of months there was some lingering expenses that.

For the externalization. So those are now through the system. So.

And those mostly manifest themselves as legal bills.

The L.A.J. expenses, there is nothing in here related to Ajay.

And so so that's not what drove it and obviously you said the lease impairment, which is noncash really an accounting issue. It had nothing to do with cash or anything else.

And so and that's a new accounting pronouncement that just came out in the last last quarter. So that to me is just a noncash accounting issue. It doesn't represent the core earnings power of the vehicle.

Okay. Thanks for that color.

Secondly.

We're obviously just the dividend at a level.

Yes.

I sort of look at your earnings.

I know, there's obviously the one time.

From a charge of four cents.

You got it.

Roughly that kind of run rate from here.

Hey.

I'm just curious do you guys see a path.

Going forward.

You know maybe higher dividends.

Comfortably.

Cover that dividend.

And so some of the steps to get there.

Why don't I start and.

My partners can can can weigh in.

You know I think number one is on I mean, we obviously see a path towards earnings growth. Your number one just the just the natural repositioning the portfolio. If you look at where we've been monetizing assets and were being originated assets, we're picking up a decent amount of spread so I think you'll get some eni expansion, we have been hurt by the LIBOR production and I think thats, probably going to be an issue for a lot of Bdcs. Obviously, we don't have matched funding.

You know part of our funding is fixed so that's been a bit of an earnings headwind.

And to the extent, we are able to.

To close the.

Hi transaction, clearly, that's very accretive for shareholders Eni basis. So.

We tried to set the dividend at a level, where we really felt we were well covered by operating earnings and we think we can actually grow earnings off of where we are today.

Okay.

And then just.

To make sure you guys are still committed to waiting.

Correct.

First quarter 20.

Yes, So let me let me just take a step back can explain that the and I guarantee so the Eni I guarantee was was set at a level that gets adjusted for any non accruals that happened before April onest.

So so if you run the math through it we are we're still doing that and still committed to doing that.

Its contractual.

But the but the actual guarantee is now around 33 cents.

Okay.

And then lastly, I just.

I was hoping that you could provide a little bit more color.

Inc.

I'm quite as familiar with.

Great Lakes JV can you just kind of remind me exactly what that is.

What the plans are for that.

Yes.

Yeah, well, so so we have a.

Weve Unitranche joint venture with a large bank.

Whereby.

When we do a unit tranche it goes into the vehicle, they're very similar to a lot of the other SSL piece that you've seen other.

Bdcs do the difference between this one in most of the other ones is.

This bank has a lot of origination so.

We get to leverage off their origination we can veto any deal.

And.

So you did last year I think we saw 180 unitranches improved six so we've been pretty selective about.

What goes into the vehicle.

So it's not just to play its not just a pure leverage play like you've seen some of the joint ventures. This actually is a true partnership.

Where we get to leverage off a big banks originations.

All right. So are you guys putting leverage into that vehicle.

Yes, there the vehicle itself is a bit again similar to the Antares main vehicle.

Or the areas vehicle well before.

It's a kind of first out last out unitranche structure in kind of a fund dynamic.

Yes, so it's no different it's not like when we do a unitranche oftentimes, we'll sell a first out piece, it's basically a whole bunch of its basically selling one big first out piece against a unitranche portfolio. So leverage is pretty low like it's it's you know celo equities, probably five times more levered than this vehicle and the returns are kind of similar so we actually think it's it's very good risk reward for our shareholders.

Okay.

Thanks for that those are all my questions.

Great. Thanks.

Thank you. Your next response is from Christopher Nolan Alan Offenberg Thalmann. Please go ahead.

Hi, Latam brick settlement.

Either Ted is there a target ROE for Portman rich now.

No I think I think listen I think over time.

Obviously, you know judge with what you have to just that you have to always that they give the overhang of low rates right. Now the 10 year Treasury is below 170, which is pretty amazing.

You know I think we should be striving to have a double digit early I mean, that's that's where we need to be.

Yeah, I think if you look at our projections and earnings models you know.

I think there is a path to achieve that both through all these initiatives you talked about.

And you know to the extent that interest rates rise, we greatly benefit from that so absent a rise in rates.

Our goal should be to hit a double digit darlie.

Great and today today, we're tracking today, we're tracking like high single digits.

Okay great.

And then so it sounds like that the current dividend the new six cents a quarter dividend sort of implies roughly a 9.7% or are we.

According to my back of the envelope calculation.

So.

Assuming that you're able to hit the high single digit cents six cents should be pretty.

Stable.

Yeah, I mean, I mean, I mean, we wanted to set a dividend policy at a place where we don't have to talk to you guys about it ever you know because we want to set at a level that we know we can have.

So again, we feel very comfortable that the new dividend policy.

As can be stable and then again.

You know we want to be a situation, where we can create earnings and NAV stability and again, we've been over distribute an income vis-a-vis our earnings power for quite some time. So we think this actually achieves the dual objectives of.

Not forcing us to stretch for for yield.

Allowing us to pay a nice distribution to shareholders.

And still can still maintain a very high dividend yield.

Therefore, we can potentially have upside appreciation in the stock.

But at the same time, you know stabilize NAV.

You know, we just kind of a situation where NAV just continues to go down because were over distributed income understood. Okay, turning to the balance sheet debt.

You are unsecured notes I believe are callable in September .

What's the thinking around that.

Yeah, we know they are callable in September .

The extent that we want the flexibility to go above the one to one leverage that we we could either try to restructure those or call them and issue new debt whether that would be.

Fix through baby bonds or through other types of structures that were not sure yet, but I think the thinking is that.

Eventually, we'll put ourselves in a situation, where we have more flexibility.

Is the inclination towards another you know debt issuance or to expand the revolver.

What we're looking at both I mean, I think that Theres room to do another debt issuance, but we are constantly looking at revolver possibilities.

Whether it's expanding into or doing something similar.

But I don't think either ones off the table.

Okay, and then final question the impact from the on earnings from the recent fed move.

Do you guys have any.

Guidance is to Uh huh.

How much that might hit earnings.

Yes, you will see that you'll see the exact activities laid out in our 10-Q.

Yes, we we provide you guys that information I mean, the reality is the reality is we don't have a I guess, we're not match funded so cuts in short term interest rates definitely affect earnings, but again and again, we that's all factored into our earnings models and dividend policy.

So I think in the queue.

It's on page.

95 five.

So you can see you know obviously.

Cuts in short term rates are not good for the BDC sector.

And then so you always have to ask question like why they're cutting rates.

You know again the good news is the BDC sector is usually they cut rates in an environment, where we're in a recession our economy is very weak.

The middle market US economy is still very strong so things like Chinese tariffs and and currency moves and trade wars, you'll have a much bigger impact on multinational companies than the company that we are.

Service. So so you are the credit quality is still very very good in our portfolio companies continue to do.

On the whole pretty well.

Great. Okay. Thank you for taking my I'm sorry, yeah.

Yeah, that's it from me thank you.

Thank you. Your next response is from Chris York of J.M.P. Securities. Please go ahead.

Good morning, guys and thanks for taking my questions and I'll forgive me if they have been asked as a matter of a couple of calls a tad I have a couple of strategic questions about that project. This morning, So given the Bdcs co investment exemption and the advisors manage kind of Mt. Logan in Canada, and then a growing demand protect capital buyback cannabis industry I'm curious if the advisors evaluating investment in any candidates companies or the industry.

For a bigger picture and then how are you thinking about this potential specialty lending niche.

Good question.

I think it say listen for Portman Road shareholders. A it is not a vertical that were going to pursue.

I think the risk reward the sector actually is pretty interesting, but you know we are limited being a NASDAQ listed company in a federally let right where he led a company on what we can and cannot do in that sector. So you guys. You know there's just because it's state legal doesn't mean, it's that really legal and so we have a you know we are we have some restrictions around what we even if we love the sector.

And we thought it was the greatest place to land be very difficult for us to do it at apartment Ridge.

And then vis-a-vis Mt. Logan in this vehicle you know there's limited circumstances will co invest I mean, the reality is that our cost of capital and where we need to be from an R&D perspective.

Just doesn't allow us to do low yielding first liens, just hard and Mt. Logan allows us to do that so when we're talking to a.

Sponsor or a family about doing a deal together.

We are able to offer them a full suite of products and to the extent that you know a securities to low yielding for our apartment to shareholders.

That might work for our Mt. Logan shareholders. So Mt. Logan is basically a lower yielding higher levered vehicle.

Got it makes a lot of sense.

And then switching gears, so mobile PC partners confirm district, CJ minority investment by Blackstone This week.

Which was quite a positive announcements so the terms werent disclosed, but I think the journal reported it being about 500 million euros. So should investors expect that BC partners credit could receive some of this investment to grow your credit business and how may this strategic investment.

Another great question. So yeah. This was just announced a couple of days ago. What it provides us is a balance sheet and credit to expand our business. You know obviously indirect lending there is some benefits to scale.

This allows us to.

Ah scale, our business and invest alongside our Lps. So this is undoubtedly good for apartment shareholders. You know we are we are much better capitalized you know BC partners. The partnership and now we've got a pool of capital that we can invest in different credit vehicles and products. So you know as the head of our credit business I can be more excited about the transaction and overtime I think public shareholders will see the benefits of the transaction.

Got it and then is it maybe reasonable to think that you could be investing in the team and then maybe could you remind us of your team size in terms of originators are investment professionals.

Yes, I mean, that's that's obviously part of the use of proceeds. So you know today, we've got 16 investment professionals and a very large non invest for reinvestment professional operation.

And that's for a company of our size. So obviously, we are built to grow and build to be bigger and we are firmly of the belief that that the bigger the funnel, we can create a better risk reward opportunities our shareholders will see so I'm sorry, I mean I mean this this is not a transaction that is like US caching and this is a transaction meant to help grow and strategically elevator business.

Got it a those were my questions. So thanks for the time and then take that.

Thanks.

I am showing no further questions in the queue at this time.

I would like to turn the call back over to Ted Goldthorpe.

Right well, thank you very much for dialing into our call and thank you very much for your continued support and we look forward to continuing engaging with our shareholders.

Over the next couple of months. Thank you.

Ladies and gentlemen, this concludes today's conference.

Thank you for your participation and have a wonderful day you may all disconnect.