Portman Ridge Finance Corporation
Q4 2019 Earnings Call Transcript

Published: 9 Mar 2020

[Operator:]

Good morning, ladies and gentlemen, and welcome to the Portman Ridge Finance Corporation Conference Call.An earnings press release was distributed Friday afternoon. If you did not receive a copy, the release is available on the Company’s website at www.portmanridge.com in the Investor Relations section. As a reminder, this conference call is being recorded today Monday, March 9, 2020. This call is also being hosted on a live webcast, which can be accessed at our Company’s website at www.portmanridge.com in the Investor Relations section under Events.Today’s conference call includes forward-looking statements and projections and we ask that you refer to Portman Ridge’s most recent filings with the SEC for important factors that would cause actual results to differ materially from these projections. Portman Ridge Finance Corporation does not undertake to update its forward-looking statements, unless required by law.I would now like to introduce your host for today’s conference, Mr. Ted Goldthorpe, Chief Executive Officer of Portman Ridge Finance Corporation. Mr. Goldthorpe, you may begin.

[Ted Goldthorpe:]

Thank you, and good morning, everyone. And thank you for joining us for our earnings call. Today, Portman Ridge announced its fourth quarter 2019 and 2019 fiscal year financial results.2019 was a very active year for Portman Ridge. In April, we closed the Externalization transaction for KCAP. In mid-December, we received shareholder approval and completed the merger with OHA Investment Corporation. And at the end of December, we successfully completed the refinancing of our revolving credit facility, reducing borrowing costs and increasing our investment capacity for our business going forward.We remain very-excited about the integration and transformation of the OHA merger. Prior to the end of the year, we monetized close to 40% of the legacy OHA Investments at around NAV and have already reinvested or identified reinvestment for the bulk of those proceeds. We will continue to opportunistically rotate out of those assets as reinvestment opportunities arise. We anticipate that the incremental NII generated from OHA portfolio to pay back the transaction costs in approximately three quarters, which equates to an approximate 120% annual yield on the investment.As required with the merger, Portman announced the stock buyback program to repurchase up to $10 million of stock over the next year through open market purchases. And we’ll look to opportunistically purchase shares subject to blackout periods, available cash and restrictions in our existing bond indenture.Transitioning to the state of the markets. Right now, the liquid credit markets are experiencing the most volatility that we’ve seen since the energy downturn in 2015 and 2016, and even -- and more so even than in December 2018 as a result of the COVID-19 headlines. Although it is too early to see an impact in our underlying portfolio companies, we’re monitoring the situation closely and are in contact with companies that we perceive to have some amount of exposure. Generally, we have a negligible exposure to the most likely to be impacted sectors such as auto, energy, leisure, hospitality, travel and airlines.As it relates to our primary market, directly originating middle market loans, we have not seen the volatility or recent rate cuts trickle down to widening spreads, but the deal activity is picked up given the need for certainty. However, if volatility continues and the impacts of COVID-19 become more apparent, we would anticipate widening spreads as a response. We are very cautious on underwriting of the new loans, given the uncertain impact of the coronavirus, both on the economy and micro factors, namely supply chains, raw material pricing and availability and end-market demand.With that, I’ll turn the call over to Ted Gilpin, our CFO, for a brief overview of the financial results of the quarter; and then, Patrick Schafer, our Chief Investment Officer, for a review of our investment activity before concluding the call with some additional remarks.

[Ted Gilpin:]

Thank you, Ted. Good afternoon, everyone.So, a lot of moving parts this year at Portman, starting with the Externalization in April and the merger with OHAI in December. Both transactions had effects to NII and NAV in the period. As of December 31, 2019, our NAV stood at $152.2 million or $3.40 per diluted share, down from $158 million or $4.23 per share at the end of 2018, a decline of approximately $5.8 million. The component parts of the change were as follows

[Patrick Schafer:]

Thanks, Ted.Starting on page five of the presentation posted to Portman’s website. During the quarter and excluding the OHAI merger, we made investments into four borrowers, two of which were existing portfolio companies and two of which were brand new borrowers. In aggregate, these investments totaled $7.1 million of face value, 76% of which were first lien securities and the remaining net investment being the add-on to the Great Lakes joint venture. The weighted average spread on these first lien securities was 617 basis points.Additionally, over the quarter, we exited 23 positions, 11 of which were OHAI positions that had an aggregate carrying value of $24.9 million, 8 of which were legacy KCAP positions that had an aggregate carrying value of $13.8 million and the remaining 4 were BC sourced assets that had an aggregate carrying value of $12.5 million. In aggregate, these sales resulted in $118,000 loss relative to the carrying value as of September 30th or December 17th in the case of the legacy OHAI assets.Of the unrealized loss in the investment portfolio during the quarter, approximately 95% of it was attributable to the legacy CLO positions. Excluding these positions, the remaining investment portfolio was essentially flat quarter-over-quarter. With respect to the quarter as a whole, when BC Partners took over management of KCAP on April 1st of this year, the company had $165.7 million of debt securities marked at a blended price of 91.9% of par and had a stated spread to LIBOR of 658 basis points, excluding nonrecurring assets.On equivalent basis, excluding the non-recurring asset of OCI, which was acquired with the OHAI portfolio, as of December 31st, Portman Ridge had $194 million of debt securities marked at 92.9% at par and yielding a spread to LIBOR of 700 basis points on accruing debt securities. There were three incremental non-accruals during the quarter, two of which were legacy OHAI non-accruals and the other portfolio company was a company that was supposed to restructure -- complete restructuring during the quarter, but was delayed. Our expectation is that the restructuring will be completed by the end of March or early April, at which point the new securities will be accruing.Finally, moving to slide six. You can see the progress we have made in rotating the portfolio subsequent to the Externalization and OHAI merger. KCAP legacy and noncore assets have declined by 32% during the year, and we have already reduced the legacy OHAI portfolio by 41%.With that, I’ll turn the call over to Ted Goldthorpe.

[Ted Goldthorpe:]

Thank you. As Patrick noted, we’ve made significant progress in the last three quarters of the year, and repositioned the portfolio and we continue to feel good about the composition of the book. As we have discussed in the past, CLO equity has experienced volatility during the year in the quarter, and likely will continue to do so going forward. Since March 31st, the CLO equity positions have been reduced as a percentage of fair market value from 19% to under 12% of our portfolio, and we continue to look for opportunities to reduce our exposure.During the quarter, we completed two transactions alongside other BC Partners entities pursuant to our co-investment order, and continue to leverage the broader BC Partners platforms on transactions going forward as this capability is crucial to our ability to compete with the other major market participants.During 2020, we will continue to work towards reducing noncore and low-yielding assets, both from the OHAI and legacy KCAP portfolios and exiting our structured credit exposure in a thoughtful manner. We believe the portfolio is trending in the right direction and we look forward to continuing our repositioning work. Additionally, we will continue to look at both traditional and non-traditional acquisition and merger candidates. We consider these opportunistic and not essential to generating healthy stable returns for shareholders.Finally on slide eight, lays out graphically the improved earnings power of the business as March 31st. Through a combination of new asset origination, the OHAI merger, improving spreads on existing portfolio and investing in our Great Lakes joint venture, we’ve increased yields on NAV by 166 basis points in spite of declining LIBOR headwind. As mentioned previously, we hope to see the market volatility ultimately lead to higher spreads in our primary market.Thank you for your ongoing support. And with that, we’d like to turn the call over to the operator for your questions.

[Operator:]

Thank you. [Operator Instructions] Your first question comes from Christopher Nolan with Ladenburg Thalman. Your line is open.

[Christopher Nolan:]

Can you give any guidance in terms of where you think the CLO portfolio will be by the first quarter as a percentage of the total portfolio?

[Ted Goldthorpe:]

I would say, as of now, I think it’s going to be around the same level. The credit markets didn’t really move -- or the credit markets were relatively benign until the last couple of days. And you’re seeing big moves in pricing. So, I would say, as a percentage of the total portfolio, are expected to probably be down a little bit, but I don’t think -- as of right now, we don’t see it being down materially.

[Christopher Nolan:]

And then, in your comments earlier, you mentioned a three-quarter payback for the OHAI ideal. Is that a payback to NAV per share or to EPS dilution, did I miss this?

[Ted Goldthorpe:]

Oh, yes, sorry. No, we probably -- it’s probably our fault. No, we just look at the embedded transaction costs, and you overlay the embedded earnings growth -- or earnings contribution when you net off interest costs, it’s about a three-quarter payback. So, in the fourth quarter, we obviously -- part of our NAV reduction was obviously one-time transaction costs related to transaction, but we recouped those just through additional earnings power, over the next couple of quarters.

[Christopher Nolan:]

Okay. And then, I guess, I applaud the share repurchase. And given current market conditions, I understand, but I know management is talking about repurchasing shares at one times NAV over the past year some point. Where do we stand with that? I mean, totally understandable if it’s going to be on hold for a while, but...

[Ted Goldthorpe:]

Yes. I mean there’s three components to it. One is, our incentive fees, we’re taking at stock at best. So, instead of us taking in cash, like most managers, we’re actually going to take ours in stock. So, -- and our shareholders applaud us for doing that. In terms of stock buyback, particularly when you look at where our stock’s trading relative to NAV, we think it makes a lot of sense for us to buy back stock. We obviously have to wait that versus blackout periods and our leverage. But I think it’s our intention to buy back some stock. And the third part of it is, I think management continues to have a strong desire to buy back stock personally because I think it sends a great message to the shareholders and we think our stock is cheap. So, I think, you might also see some -- to the extent possible, you may also see some management insider buying as well.

[Operator:]

Your next question comes from Jim Remo with Remo Asset. [Ph] Your line is now open.

[Unidentified Analyst:]

Thank you. And thank you for your last comment, your commitment to the shares on behalf of both insiders and the Company itself. My question is on the dividend, and maybe you covered this in your opening remarks. I was a little late coming on. But, can you give a band, so to speak, given what you see where the dividend basically just around the $0.06. If I understand you correctly, when you absorb the benefits of OHAI, can one glean from that that’s pushing off of the $0.06, and so the $0.06 is more likely to go up and down versus other offsets? So, where might the dividend kind of be throughout this year?

[Ted Goldthorpe:]

No. It’s a great question. So, we actually put a slide together that’s in the supplement deck that I would point people to. It’s on page eight. So, I think, we’ve done a lot of things over the last nine months to enhance earnings power. So, coming into this year, we had a lot of tailwinds to earnings. And it’s a combination of cheaper liabilities, some of the asset origination we’ve done on higher spreads. And the offset to that is LIBOR has come down pretty dramatically the last couple of weeks. We do have LIBOR floors in a lot of our assets. Our liabilities -- some of our liabilities are fixed, but our floating rate liabilities don’t have LIBOR floors. So, we do have tailwinds just from like organically from what we put into the business. But again, this LIBOR moving last couple of weeks is going to be a headwind for all BDCs, not just itself.So, I think -- I mean, I think, the short answer is we feel good about our dividend. We felt really good about earnings growth pre LIBOR moving. But with LIBOR moving down, I think, it should be more than offset by the tailwinds. But again, that is a headwind that we’re recently facing.

[Unidentified Analyst:]

Got you. So, you think at this point, the tailwinds exceed the headwinds of LIBOR at this point?

[Ted Goldthorpe:]

Yes. And again, because there’s is LIBOR floor dynamic, if rates -- if short-term rates continue to go down, we actually do get some benefit out of it from the reasons I’ve said before. So, we’re kind of at the -- LIBOR went from 2 to 1, [indiscernible] LIBOR went from 1 to 0, which I’m not saying that’s going to happen, but if it did happen, we do get some benefit from that.

[Unidentified Analyst:]

And so, my last question here is, what did you -- can you give any color to the thinking that the commitment to the $0.06, given the -- where the balance sheet is now, might you be willing to finance the dividend for a quarter or two, if it’s not being earned to just kind of maintain it? I mean, in other words, do you have sufficient liquidity on the balance sheet -- or do you want to match payout to actual earnings?

[Ted Goldthorpe:]

I mean, again, I think the way I’d answer the question is, we feel good about our dividends and feel good about our earnings power, particularly over the short term but also over the long term. So, I don’t think there’s any -- I don’t think we foresee us under earning our dividend, to the extent we did, I don’t think we’d make a rash decision to cut the dividends if that happened for one or two quarters. But, as of now, as I said, I think, the intention over the course of the year is to over earn our dividend.

[Operator:]

Your next question comes from Paul Johnson with KBW. Your line is open.

[Paul Johnson:]

Hey, guys. Thanks for taking my questions. I just wanted to ask you, I believe, and correct me if I’m wrong. You have 1-to-1 covenant in your outstanding bonds. I’m just curious what your plans are for portfolio management going forward. Do you plan on kind of maintaining the portfolio where it is and using payoffs for a potential debt paydown or do you plan on refinancing its debt in the near-term, just your thoughts around that, please?

[Ted Goldthorpe:]

Yes, sure. That’s a good question. I mean, obviously, we still have -- while we have approval to go up to the new statutory limit of 2 to 1 that we still have that covenant in our old baby bond. So, obviously, market dependent, refinancing them is one option that we’ve been looking at and we’re prepared to do that, depending on how the market shake out. If not, then we have flexibility within the current structure to get to a point where we can actually either refinance -- finance and pay them down to the extent we need to.

[Paul Johnson:]

Okay. Those were all my questions. Thanks for taking my questions today.

[Operator:]

There are no further questions at this time. I’ll turn the call back over to presenters.

[Ted Goldthorpe:]

Great. Well, once again, we appreciate every dial in, and particularly on a stock market day like today. And if anybody has any questions, management is available to speak to any investor at any time. Thank you very much.

[Operator:]

This concludes today’s conference call. You may now disconnect.