Portman Ridge Finance Corporation
Q1 2021 Earnings Call Transcript

Published: 7 May 2021

[Operator:]

Ladies and gentlemen, thank you for standing by, and welcome to the Portman Ridge Finance First Quarter 2021 Financial Results Conference Call. Please be advised that today’s conference is being recorded. Thank you. It is now my pleasure to turn the call over to Ms. Jeehae Linford. The floor is yours.

[Jeehae Linford:]

Thank you. Good morning, and welcome to Portman Ridge Finance Corporation’s first quarter 2021 earnings conference call. An earnings press release was distributed yesterday, May 6, after 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. As a reminder, this conference call is being recorded for replay purposes.

[Ted Goldthorpe:]

Great. Good morning, and thanks, everyone, for joining our first quarter earnings call. I’m sorry, it’s so early, but we’ve got four other guys in our space reporting and doing calls this morning as well. I’m joined today by our Chief Financial Officer, Jason Roos; and our Chief Investment Officer, Patrick Schafer. Yesterday afternoon, Portman Ridge announced its first quarter 2021 fiscal year financial results. I will begin with an update on the significant progress we’ve made towards our strategic goals and provide a high level overview of our first quarter results. I’ll finish with a discussion of our near-term priorities heading into 2021, including an update on our M&A pipeline activity, as it relates to the Harvest transaction. Following that, Patrick will give an update on our portfolio activity and status, and Jason will provide additional details on our financial results. In the first quarter of 2021, we continue to execute on our strategic plan of repositioning the Portman Ridge portfolio following the merger with Garrison in October of 2020. An immediate priority of ours was to reduce the combined leverage level after the merger, which was 1.8x on a net basis at close. Accordingly, we’ve proactively monetized an aggregate of $92.4 million in the fourth quarter of 2020 at or above fair value and utilize the net proceeds to repay approximately $88 million of the roughly $252 million in secured notes, which were assumed as part of the Garrison merger. This $88 million principal repayment was completed in the first quarter and as a result at quarter end gross leverage was 1.4x on a gross basis and 1.1x on a net basis compared to 1.7x gross leverage, and 1.4x on a net basis at year end. Having previously stated our long-term leverage range as 1.25x to 1.4x, we are pleased to achieve this range in a relatively short order without compromising price valuation or earnings.

[Patrick Schafer:]

Thanks Ted. Turning first to current market conditions. As many of you on this call know, our primary market has been very strong starting at the end of last year and really continuing into the first quarter of this year. Given the backdrop of low interest rates, vaccine distribution led reopening and ongoing fiscal stimulus. The overall credit market has remained extremely active. If you look at liquid loan benchmarks, spreads during the first quarter were actually lower on average than on average in the fourth quarter of 2019. The middle market benchmarks are still wider than in Q4 2019, but those also continue to grind tighter in tandem with the broadly syndicated markets. Transaction volume was strong in the quarter, including both new investment opportunities through M&A activity, as well as refinancing activity. Repayments, which were higher than typical in the past couple of quarters appear to be slowing down in the second quarter, particularly for the middle market where we operate. As before, we note that spreads remain higher, wider in the direct loan origination market, relative to the liquid credit market and our ability to use the breadth of our platform to lead and structure transactions should generate consistent, attractive risk adjusted returns in excess of the broader market.

[Jason Roos:]

Thanks, Patrick. As a quick note, given the transformational nature of the Garrison merger that closed in October, 2020, I will present all prior period comparisons to the first quarter of 2021 against the adjusted fourth quarter 2020 results, unless otherwise noted. GAAP net investment income for Q1 was $8.2 million or $0.11 per share, which compares to adjusted net investment income for Q4 of $0.08 per share after adjusting for the impact of Garrison purchase accounting. Total investment income was $18.3 million down $1.6 million or 8% due primarily to the timing between closing of the Garrison merger, which occurred in October and the eventual sales of $92.4 million in assets originated by Garrison as part of our goal to deleverage the combined portfolio. The bulk of these assets sales, which occurred after close and closer to year end generated investment income during this period. Total expenses for Q1 decreased to $10.1 million from $11 million in the fourth quarter of 2020. The decrease was driven primarily by lower performance-based incentive fees offset in part by higher management fees and professional fees. Management fees increased due to the full quarter impact of the Garrison merger and professional fees increased due to higher legal expenses related to merger activities and incremental tax fees incurred in the first quarter. Going forward, we do not anticipate professional fees to stay at this elevated level and would expect for them to normalize closer to fourth quarter 2020 levels. We also note that through the end of this quarter, all incentive fees earned are reinvested and new shares issued at half. Interest expense and amortization of debt issuance costs increased slightly quarter-to-quarter from $3.3 million to $3.4 million in the first quarter due primarily to the full quarter impact of the Garrison merger offset by lower debt balances as the company repaid $88 million of secured notes due 2029 during the quarter. We expect substantial interest expense savings and future periods driven by our issuance of the 4.875% senior unsecured notes on April 30 and the pending redemption of the 6.875% notes due 2022, which we expect will be completed on or before May 31. At quarter end, we had total investments excluding derivatives of $474 million and net assets of $220 million or $2.92 per share compared to investments excluding derivatives of $488 million and net assets of $216 million or $2.88 per share in the fourth quarter of 2020.

[Ted Goldthorpe:]

Thank you, Jason. We’re pleased with another quarter of progress at Portman Ridge. We’re in solid financial shape, and we certainly believe that we’ve taken the necessary steps to position Portman Ridge to generate stable, consistent earnings for the long-term and we believe that we’ve begun to see some of the fruition of our work to date and are confident that there’s more to come. I’d like to close our prepared remarks by encouraging shareholders of record to note our Annual Meeting on June 7 and to participate and vote. Thank you again to all our shareholders for your ongoing support. This concludes our prepared remarks, and I’ll now turn it over to the operator for any questions.

[Operator:]

Your first question comes from the line of Christopher Nolan from Landenburg Thalmann.

[Christopher Nolan:]

Hi, guys. I saw in the press release, it was $1.38 million share sale to an affiliate of the management. Can you explain that a little bit, please?

[Ted Goldthorpe:]

Yes. Jason, go ahead.

[Jason Roos:]

Yes, sure. So we issued equity to an affiliate of Portman and to the tune of like that $1.28 million was a equity issuance and kind of private placement.

[Patrick Schafer:]

It’s – Chris, this is the incentive fees being paid in stock.

[Christopher Nolan:]

Okay. Yes. And I thought so. I just – I thought at 1 times NAV, and that was a first quarter event or a second quarter event?

[Patrick Schafer:]

It will be second quarter event. So it was done as part of the financials yesterday and will be issued in the upcoming days.

[Christopher Nolan:]

Great. And then…

[Ted Goldthorpe:]

Chris. So just – I mean, for people who don’t recall, because we all think about this as normal. But when we did the – when we did some of these original mergers, we agreed or we offered shareholders the opposite that we would take our incentive fees in stock versus at NAV versus in cash, and we just thought it was a great message to send to shareholders to align ourselves with our shareholders. And that kind of gave rise to this. So this is just us taking our incentive fees in stock at NAV.

[Christopher Nolan:]

Yes. No, totally agree. And on the capital structure front, are you starting to see economic inflation in your portfolio companies? And how the prospect of inflation affecting how you guys are thinking about your capital structure going forward?

[Ted Goldthorpe:]

Yes. So I think what we’ve seen in the last 12 months is our portfolio companies have done an amazing job on the cost side. So despite the worries about supply chain and inflation, on a trailing basis, we’ve not seen a lot of – on a trailing basis, we just haven’t seen a lot of inflation. That being said, costs are going up all over the place right now, and it is something that we’re focused on. So revenue – so last year was all about expense controls and anemic revenue growth. Now you’ve got strong revenue growth. And the big question is what’s your expense is going to do. So I think it is something that we’re – it’s a good question actually, some that we’re definitely focused on. And on our new underwriting, for sure, we definitely are focused on it. We haven’t seen it, but we haven’t seen it roll through our portfolio companies broadly speaking now.

[Patrick Schafer:]

Yes. I was just going to add, it’s far more of a focus on new investment activity, trying to ascertain how much of the earnings are inflated. We obviously have a much better handle on our portfolio of companies because we saw them each quarter through the pandemic and feel pretty good about it, but it’s something we are laser-focused on for new investment activity.

[Christopher Nolan:]

Got you. And then, I guess, HCAP, are you planning once they have $68 million – excuse me, $63 million in debt, any plans to shut that debt? Or you think your leverage ratios can just absorb it and keep on going?

[Patrick Schafer:]

Yes. I think at the current stage, we’re only anticipating the – their existing senior unsecured bonds, which I believe is about $28 million, $29 million to carry over to the pro forma company. And at that point, we’ll decide how to address those relative to the new unsecured bonds that we just issued, but from a Harvest perspective, the only debt that we anticipate being carried over to Portman will be those unsecured notes.

[Ted Goldthorpe:]

Yes. So I would say, simplistically, we have the ability to take it on, and we have our leverage ratios that we do to take on the debt. I just think if you look at our recent execution of our bond deal, we think there’s opportunities for us to save money for our shareholders.

[Operator:]

Your next question comes from the line of Angelo Guarino .

[Unidentified Analyst:]

Good morning. Congratulations. Good performance. In regards to the reinvestment of the management fees, there’s been a bunch of moving parts there all the way back from the original KCAP transition that had a function like that. What you’re doing currently? What is the – what’s the lifespan of that? And when was that initiated? I’m assuming the original KCAP promise to reinvest is already expired. And this is a new one that we – just – if you could just bring me up to speed on, which – what we’re under now and what you’re operating under and when it expires?

[Patrick Schafer:]

Yes. Angelo , this is Patrick. Thanks for the question. So this is actually part of the original transaction. So we agreed as part of the original externalization of KCAP that for the first two years, we would take up to $10 million of incentive fees in the form of stock at NAV. And so this quarter here that ended 3/31/2021, will be the 2-year anniversary of that agreement. So this will be the last – or this was the last quarter where we are under the affirmative obligation to take stock in the form of – or take incentive fees in the form of stock.

[Unidentified Analyst:]

Okay. Were there any other overlapping?

[Patrick Schafer:]

No.

[Unidentified Analyst:]

Similar? Okay.

[Patrick Schafer:]

No, there were not. We didn’t have the similar construct in any of the other M&A activity. We had a separate, but unrelated stock buyback program as part of the Oak Hill acquisition that has come and gone. And so the new stock buyback program that was initiated earlier this year that is a proactive our choice, our decision to have an ongoing buyback program.

[Unidentified Analyst:]

And – okay, great. Thanks. Second question is regarding the reverse stock split. I’m in favor of the concept, but my concern is float size, obviously, and number of shares available. How do you think about that?

[Ted Goldthorpe:]

Yes. I think that’s a great question. It’s a balance. I think we were worried about it free Garrison. But now that we’ve done Garrison and now that we’re about to do Harvest, I think it’s probably less of a concern for us. Yes, I mean the reality is a lot of our institutions are and margin stock for stocks trading at this kind of share price level. And a lot of our investors have asked us this. So I think it’s just a balance. It’s just – we’re not going to do – it’s a balance between how much of a reverse split you do vis-a-vis making sure you’re conscious of the flow. I know there’s no right answer to this question, but it is something that we’re aware of.

[Unidentified Analyst:]

But in general, I guess, you’re trying to shoot for a stable above 10. Is that a way of thinking about it?

[Ted Goldthorpe:]

Yes. I mean I think the most likely range, if you look at the range, we’ve provided to be surprised to be coming in somewhere in the middle of that range. So like a 10

[Unidentified Analyst:]

Okay. That’s all I have. Again, congratulation.

[Operator:]

Your next question comes from the line of Steve Martin from Slater.

[Steve Martin:]

And I applaud the reverse split. And I agree, you don’t want to go too far. You just want to get it to a level that satisfies a whole lot of requirements but doesn’t reduce the flow too much, but in terms of timing, you left yourself a lot of timing on that. Any particular reason?

[Ted Goldthorpe:]

No. I mean there’s no real science behind it. I mean I think the reality is with all of the corporate activities, seeing the refinancings that we’re doing when we put the proxy out and our merger and everything else. I think it’s just – we put it in there just for flexibility, but there’s no – again, there’s no real science. I mean, it’s our intention to do it relatively soon after we get the vote – if we get the vote at the Annual Meeting, I think our intention is relatively symmetric.

[Steve Martin:]

You’ll wait till the H-CAP deal closes, so you sort of have a solid number of shares?

[Ted Goldthorpe:]

Yes. I mean if you look at our Annual Meeting, it lines up pretty well with when we’re closing Harvest. So they’re both kind of happening at the same time. So I think it probably makes sense for us to do post-Harvest close just because they’ve all happened at the same time, but our Annual Meeting and Harvest’s are expected to happen in June or July.

[Steve Martin:]

Got it. Yes. And if you – I guess, if you could do it before June – the end of June, then you don’t have – that would make your second quarter numbers sort of done, once and for all the share counts and everything are all done? All right. The buyback is your intention to put some sort of plan in place after the merger so that you don’t – with some form of trigger or formula so that you can buy since you’re always in quiet periods?

[Ted Goldthorpe:]

Yes. I mean, if you look at what we did with Garrison, we obviously had a 10b5 in place, which avoids this blackout issue. The issue that we have is, if you had that, you can’t buy back stock during a – if you have a proxy outstanding. So we still – obviously, we’ve got a shareholder vote going on right now to Harvest. And so I think – don’t be surprised if we do that again just because we want to buy back stock, we told shareholders are going to buy back stock. And anything we can do to do that, meaning a blind buyback as opposed to like us being restricted all the time. I think this makes a lot of sense.

[Steve Martin:]

I agree with that. Can you talk about two subjects in a little more detail, the non accruals, where they stand, what the prognosis is, and you’ve done a great job reducing them. And the status of the CLO book and the income you’re recording?

[Jason Roos:]

Yes, Steve. So first, on the non-accrual. So we’re down 1 non-accrual from last quarter to this quarter. And candidly, we have a couple of names on that list, two of which are kind of just in a liquidation. And so they’re relatively small amounts, but at some point, hopefully, in the next quarter or two, those get cleaned up and then there’s a third that is supposed to be purchased by stack, again, is all public information. The stack purchases is closing sometime in this quarter. And so that would come off the list there, too. So we think we have some relative near-term visibility to that number decreasing, but it’s kind of up in the air on the exact timing of that because you kind of have to go through some trustees on the liquidation side and then you’re just kind of waiting on a SPAC low for another one. So we generally think the trend is downward. The question is just kind of timing-wise when that rolls through.

[Steve Martin:]

So if some of them are getting sort of the ones that sort of go off because I think when the company went bankrupt this one thing. If one of them is getting bought by a SPAC, do you expect to recover some of the funds or some of the fair value – fair market value?

[Jason Roos:]

Yes. No, absolutely. We – and I’m going to get the number a little bit wrong, but we have it marked somewhere in the very high 50s, which is where we expect to receive – which is the value we expect to receive from the stack. It’s all been listed out and agreed to. So assuming it closes the quant number, the recovery is not in doubt. So that’s kind of baked into our fair values as of quarter end. And similar to the ones that are liquidating, we do expect to receive value from them and have been receiving value as they’ve been liquidating. It’s just – at some point, they’ll actually flip off of our non-accruals because they’ll no longer be an asset.

[Steve Martin:]

Okay. And the CLO book?

[Jason Roos:]

Yes, CLO book, we exited one position during the quarter as we’ve kind of continued to mention in – on a number of these calls. We look to proactively take advantage of resets and repricings and things like that. Another one of our positions got called during Q1, they’re still in the process of making payments out. Again, the early indications are, we’ll probably get a little bit more than the mark but kind of – it’s right around where we have it marked. And then again, I think there’s another position that was turned off from a cash flow perspective from most of last year. It’s now back on to making half payments, and hopefully, that flips. But I would say you could think of the CLO income is probably relatively stable here in the short term.

[Steve Martin:]

Great. Look, as far as I think most of us are concerned, getting paid at carrying value or book is a victory when you’re trading at a discount?

[Jason Roos:]

I agree. It’s just it’s a little bit tricky from the timing-wise because you kind of have to make sure it’s only really applicable and you’re able to kind of get those values when there’s kind of an actual events going on with the CLO to kind of get people to the table. So that’s kind of – it’s been a little bit slower than we expected candidly. But every single time, one of the CLOs has an event, we were proactive and we monetized.

[Steve Martin:]

Okay. And you may have said this, I got cut off at one point. Harvest, I assume they have been running their portfolio down prior to the actual deal closing. So what’s the status of their portfolio and the intention after the closing?

[Ted Goldthorpe:]

Yes, that portfolio is, I would say, trending in line or better than we expected. So – like from what we’ve presented to shareholders at the very end of last year, I think it’s – there’s been no real realizes. And again, they’re both – I mean, they have had some refinancings. So again, post close, we expect that transaction will look in line or better than what told people originally. And then the plan with that portfolio is yet to do exactly what we’ve done with the other portfolios. It’s a little harder because the Harvest portfolio is probably less liquid and smaller companies, but the plan would be to kind of wind down that portfolio in a prudent way and replace it with BC originated deals. And that’s kind of – so that’s kind of the plan with that portfolio.

[Steve Martin:]

All right. And then recognizing that you guys don’t have a whole lot of equity like securities, given all the refinancings, SPACs, et cetera, have you been able to achieve any gains on any – or have they on any of their – sometimes in those smaller companies, there are some equity securities? I haven’t looked at the portfolio risk carefully.

[Jason Roos:]

Yes. I mean they – Harvest had a big realization in Q1 that they noted as a subsequent event in their Q4 earnings, that was a relatively big pop. We’ve seen a couple of deals from the Garrison portfolio that had relatively large money multiple realizations, but they’re very small equity positions. So it doesn’t necessarily move the needle a ton. But yes, we’re absolutely seeing that activity. But to your point, our equity portfolio is a little bit smaller, so it’s a little bit less obvious as I work through the financials, but absolutely, we’re seeing some of that activity.

[Steve Martin:]

Okay. And one last one. Going back to the Oak Hill, recognizing that it was now 1.5 years ago, is that portfolio pretty much done? And – or are you left with anything that you’re just holding because they’re good assets or you haven’t been able to get rid off them?

[Jason Roos:]

Yes. I mean, we still have about roughly 1/3 of the assets. It’s maybe a touch over that, but I think where we sit right now, we’re kind of very comfortable from a credit perspective. And it makes a lot more sense just to kind of keep earning the income where we kind of feel good about the credits as opposed to proactively monetizing them.

[Steve Martin:]

Okay. Thanks a lot guys. And look forward to a quarter that is definitely have so many moving pieces.

[Operator:]

And I’m showing no further questions at this time. I will now turn the call back to Mr. Goldthorpe for any closing remarks.

[Ted Goldthorpe:]

Thank you. Thank you very much for all of your support. Again, we’re very sorry to have a call so early in the morning. I know a lot of you reached out to us. I think a number – I think 8 BDCs are reporting over the last 24 hours. So we try to put the call to be convenient, but thank you for all your support. And thank you for all of your questions. And if you guys have any questions at all, please reach out to any manager or management. Thank you very much, and hope you have a good weekend.

[Operator:]

Ladies and gentlemen, this does conclude today’s conference. Thank you again for your participation. You may now all disconnect.