KCAPL - Portman Ridge Finance Corporation (PTMN) CEO Ted Goldthorpe on Q2 2022 Results - Earnings Call Transcript
Portman Ridge Finance Corporation (PTMN)
Q2 2022 Earnings Conference Call
August 10, 2022 09:00 AM ET
Company Participants
Ted Goldthorpe - Chief Executive Officer
Patrick Schafer - Chief Investment Officer
Jason Roos - Chief Financial Officer
Conference Call Participants
Christopher Nolan - Ladenburg Thalmann & Co. Inc.
Ryan Lynch - Keefe, Bruyette, & Woods, Inc.
Steven Martin - Slater Capital Management, LLC
Presentation
Operator
Welcome to the Portman Ridge Finance Corporation Second Quarter 2022 Earnings Conference Call. An earnings press release was distributed yesterday, August 9, after market close, 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.
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. Portman Ridge Finance Corporation assumes no obligation to update any such forward-looking statements unless required by law.
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 thanks, everyone for joining our second quarter 2022 earnings call. I'm joined today by our Chief Financial Officer, Jason Roos and our Chief Investment Officer, Patrick Schafer. I'll provide highlights on the company's performance and activities for this quarter. Patrick will provide commentary on our investment portfolio and our markets. Jason will discuss our operating results and financial condition in greater detail.
Yesterday, Portman Ridge announced its second quarter 2022 results, and we are pleased to report a solid performance of financial performance in a challenging economic environment. During the quarter in which our industry experienced significant market volatility and other macroeconomic and political factors, we remain committed to our strategy of prudent capital deployment and focusing on strong companies to add to our portfolio.
As a result, even under these market conditions, we ended the quarter with strong investment activity, lowered non-accrual investments as compared to previous quarters and maintained our dividend of $0.63 per share. Investment activity was strong and although originations are still lower than the second half of 2021, during the second quarter, we deployed approximately $57.6 million of available cash in new investments net of refinancing existing borrowers and had an additional $20.6 million of new investments that closed in July.
Almost all of these new investments had been in our pipeline since the end of the first quarter, but due to the dislocation in the capital markets, both public and private markets, most of the new investments were settled towards the very end of the quarter or in July. Patrick will provide additional details, but I'd like to emphasize that the reduced investment income from the quarter was a deployment timing issue, as we've only seen a very limited effect of the steps taken during the quarter.
As Slide 9 of our earnings presentation shows, we anticipate normalized quarterly activity to result in NII per share that is greater than $0.70 with the majority of that increase relative to our second quarter NII per share, driven by new investments that have already closed.
Shifting to the liability side of our balance sheet. We are able to restructure our agreement with JPMorgan Chase and lower the interest rate, shift from LIBOR to SOFR, and extend our maturity date by 2.5 years. This restructured agreement has helped lowered our cost of capital and provided an incremental investment horizon.
Furthermore, during the quarter, we repurchased over 106,000 shares under our renewed stock purchase program at an aggregate cost of approximately $2.5 million and nearly 130,000 shares an aggregate cost of $3 million since the beginning of the year. We maintained our $0.63 quarterly distribution, which reflects the stable long-term performance of our operations and investment activities. Overall, we believe that we are well positioned to further improve our portfolio performance and net investment income in the second half of 2022.
And with that, I will turn the call over to Patrick Schafer, our Chief Investment Officer for a review of our investment activity.
Patrick Schafer
Thanks, Ted. Turning to Slide 6, we have provided specific details around a list of assets that were either on our SOI as of June 30, 2022, or close shortly thereafter, but generated limited to no income during the quarter. In aggregate, these assets are expected to generate approximately $1.1 million of quarterly income, plus an additional $360,000 in one-time fee income. Furthermore, given the significant cash position we had heading into the quarter, there is expected to be relatively limited incremental interest expense as a result of closing these investments.
Turning now to Slide 7 and sensitivity around our earnings to interest rates. As of June 30, 2022 approximately 87.5% of our debt securities portfolio were either floating rate with a spread to an interest rate index, such as LIBOR, SOFR or prime rate with 93% of these still being linked to LIBOR. As you can see from the chart, the underlying benchmark rate on our assets during the quarter lag the prevailing market rates and still remain significantly below the LIBOR and SOFR rates as of August 1, 2022.
We expect these to normalize over time as the underlying one, three and six-month contracts reset. But for a luster of purposes, it’s all of our assets were to reset to either a three-month LIBOR or SOFR, respectively. We would expect to generate an incremental $1.7 million of quarterly income. While our liability costs will also raise relative to their Q2 levels, we still expect a net positive benefit of approximately $0.05 per share, assuming all of our assets and liabilities are utilizing the same three-month benchmark rates for the entirety of the third quarter.
Skipping now down to Slide 12. Investment activity and originations for the second quarter were higher than the first quarter of 2022, but were also very backended as we have just highlighted. Net of refinancing existing borrowers, we deployed approximately $56.7 million during the quarter and were refinanced or repaid on approximately $32.7 million of investments. Additionally, we funded an incremental $20.6 million of investments early in the third quarter, relating to investments that had been in our pipeline since the beginning of the second quarter.
These new investments are expected to yield a spread to SOFR of 683 basis points on the par balance. But a number of these investments were purchased at a meaningful discount to par, which will generate income in addition to the 683 basis points of spread. Our debt securities portfolio at the end of the first quarter remained highly diversified with investments spread across 32 different industries and 118 different entities all while maintaining an average par balance per entity of approximately $3.5 million.
Turning to Slide 13. As previewed in our first quarter earnings call, during the quarter, we materially cleaned up our portfolio as a result of the exit of group Yakima in April, which represented 84% of our March 31 non-accrual portfolio on a cost basis. As of June 30, 2022, three of our debt investments were on non-accrual status compared to six as of March 31, 2022 and seven as of December 31, 2021.
As a result, investments on non-accrual status as of June 30, 2022, decreased to 0.0% and 0.3% of the company's investment portfolio at fair value and amortized cost respectively, which compares to investments on non-accrual status as of March 31, 2022 of 0.2% and 1.9% of the company's investment portfolio at fair value and amortized cost respectively and 0.5% and 2.8% as of December 31, 2021, respectively.
I’ll now turn the call over to Jason to further discuss our financial result for the period.
Jason Roos
Thanks, Patrick. As both Ted and Patrick previously mentioned similar to many other BDCs, our financial performance for the quarter was affected by market volatility and other macroeconomic and geopolitical factors. Our net asset value per share for the second quarter of 2022 was $27.26 per share as compared to $28.76 at March 31, 2022 with the decline associated with mark-to-market declines on both debt securities and our CLO equity portfolio.
For some directional context around mark-to-market impacts, the Credit Suisse leverage loan index went from a 449 basis points as of March 31 to 658 basis points as of June 30 and is now back down to 567 basis points as of August 8. The underlying average loan price of the index fell by 5.4 points from March 31 to June 30, but has gained back 2.2 points as of August 8. These market moves impacted our debt security evaluations, but the associated NAV changes were not driven materially by changes in credit quality.
Total investment income for the second quarter was $15 million of which $11.9 million was attributable to interest income from our debt securities portfolio, inclusive of PIK income. Excluding the impact of purchase price accounting, our core investment income for the second quarter 2022 was $13.7 million. This reflects a reduction in purchase price accretion from the Garrison and HCAP mergers, which amounted to $1.3 million for Q2 2022.
Over the last several quarters, we have continued to work toward reducing expenses. Total expenses for the second quarter of 2022 were $9.5 million compared to $9.8 million in the second quarter of last year. Our net investment income for the second quarter was $5.5 million or $0.57 per share, which was down due to timing associated with the closing of certain Q2 investments, reduced income from paydowns, lower CLO and accretion income recorded for the quarter in combination of higher interest expense on our variable debt.
At quarter end, we had total investments of $581.5 million, which was up from the previous quarter by approximately $13.5 million, largely as a result of purchases and origination outpacing paydowns and sales for the quarter. Due to the higher interest rate environment we are currently experiencing, we expect our investment income for future periods to be positively affected as the rates on our floating rate investments reset beyond certain rate floors embedded in our asset portfolio and we experienced the nearly complete quarter benefit of rate reset timing among many of our investments.
On the liability side of the balance sheet as of June 30, 2022, we had a total of $364.9 million par value of borrowings outstanding comprised of $93.1 million of borrowings under our credit facility, a $108 million of 4 7/8% notes due 2026 and $163.7 million in secured notes due 2029. This $12.5 million increase was the result of a draw on our credit facility.
As of March 31, 2022, our liabilities consisted of approximately $108 million par value with a fixed rate of interest and $256.9 million par value that had a floating rate of interest. As of the end of the quarter, we had $21.9 million of available borrowing capacity under the senior secured revolving credit facility and $25 million of borrowing capacity under the 2018-2 revolving credit facility.
Additionally, but perhaps most notably, we were successful in refinancing our senior secured revolving credit facility in April, which reduced the rate of interest and extended the maturity of the facility. As of June 30, 2022, our debt-to-equity ratio was 1.4x on a gross basis and 1.2x on a net basis. From a regulatory perspective, our asset coverage ratio at quarter end was 170%. Given our stated objective has been to target overall leverage to a range of 1.25x to 1.4x, we believe we remain solidly positioned to pursue growth opportunities.
Lastly, and as announced yesterday, a quarterly distribution of $0.63 per share was approved by the Board and declared payable on September 2, 2022 to stockholders of record at the close of business on August 16, 2022.
With that, I will turn the call back over to Ted Goldthorpe.
Ted Goldthorpe
Thank you, Jason. Ahead of questions, I'd like to emphasize again that although some of the metrics of our performance were below normal expectations, this is largely a timing issue as we expect to see the full effect of our business initiatives and active repositioning of our portfolio to improve our bottom line in the second half of this year. Thank you once again, to all our shareholders for your ongoing support.
This concludes our prepared remarks, and I'll now turn the call over to the operator for any questions.
Question-and-Answer Session
Operator
[Operator Instructions] Your first question comes from the line of Christopher Nolan from Ladenburg Thalmann. Your line is open.
Christopher Nolan
Hey, guys. Jason, on the higher interest expenses, were there any capitalized expenses regarding – related to the new credit facility?
Jason Roos
Very little, but most of that increase in net interest expense, pretty much all of it really is due to the rate rise on the variable debt that we have on the balance sheet.
Christopher Nolan
Great. And then was the driver for the realized loss is Grupo HIMA.
Jason Roos
Yes. That's the predominant driver of that. And then very – I would say very minimal portion of that was true realized loss in the quarter I would say within the hundreds of thousands, like less than 400,000.
Christopher Nolan
Great. Yes, go ahead.
Jason Roos
Yes. The remainder of that was – well predominantly all of that was a flip between unrealized and realized. And Grupo HIMA made up the vast majority of that. And then we took some CLO impairment as well, which is a flip as you know between unrealized and realized.
Christopher Nolan
How much was the CLO impairment?
Jason Roos
I'm sorry.
Christopher Nolan
How much was the CLO impairment?
Jason Roos
Yes. It was around the $4 million across a couple of the CLOs.
Christopher Nolan
Got it. And final question, Grupo HIMA, as I recall, that had multiple discrete investments, which were non-accrual. So I noticed Grupo HIMA gone from the scheduled investments. So everything was just wiped, right?
Jason Roos
Correct. We sold all the securities as one package.
Christopher Nolan
There you go. Okay. Thanks guys.
Operator
Your next question comes from the line Ryan Lynch from KBW. Your line is open.
Ryan Lynch
Hey, good morning. Just had a couple questions regarding the income statement. It looked like CLO income was quite a bit lower this quarter versus the prior quarter. I'm just curious what drove that decline and is this rate in the second quarter a good number going forward or should we expect another sort of sequential decline lower?
Jason Roos
Yes. So the CLO equity positions are under a beneficial interest method of accounting and the income is a function of the underlying cash flows. And as they are updated every quarter, the rate of interest that we book to income is dependent on those underlying cash flows because those cash flows deteriorated this quarter. That's why you're seeing the drop in the CLO income this quarter versus prior quarter. And I would think based on what we're seeing in the market currently, that this should be a good run rate and if anything should hopefully rebound as those cash flows start to come back.
Ryan Lynch
Okay. The underlying cash flows themselves are fairly stable, it’s just around how much we book as income versus taking to cost.
Jason Roos
Return to capital.
Ryan Lynch
Yes. Was kind of what changed during the quarter based on the pricing on the underlying CLO securities?
Jason Roos
Yes. To clarify the cash flows, the cash flows that I was referring to is the anticipated forecasted cash flows that go into the NPV calculation of the underlying asset itself.
Ryan Lynch
Got it. Understood. The helpful slide deck you guys put out with some of the movements and kind of quarterly average for things going forward. The one question I had I think on Slide 8, you guys talk about repayment and prepayment activity being lower and associated fees and accelerated OID being lower this quarter versus historical average, which drove some of the pressure, I think, to operating earnings this quarter. I'm just curious, what are – obviously it's hard to know what happens going forward, but do you get any sense that's going to return to, if not even normalized levels, do you expect it to pick up from where we've exceeded in the second quarter going forward? Obviously it's hard to predict, but I would just love to hear your thoughts on that.
Ted Goldthorpe
Yes. We are really trying to put a lot of detail in this presentation because, obviously it's hard to like figure out what's happening just from the press release. So again, I don't think you're going to see repayment activity go down. I just don't see the same level activity levels going forward that we saw in 2020 and 2021, and it could be wrong. You've seen that the markets come back a lot since we did our – since June 30, right, so valuation should recover obviously just from benchmarks. And we've actually seen like more repayment activity in the last six weeks than we saw in the second quarter, but it's not nearly back to the level that it was last year.
And again, that could change, but I'm not sure I see that actually given where pricing is for new LBOs and given where we're pricing things, it just has to slowdown activity levels. And to the extent that levels come back to where they were six to eight months ago. So the good news is we're booking assets at very wide yields and the stuff we did in the second quarter, and we showed you this on Slide 6, is really good stuff. Like we're really happy about the loans we're doing and the spreads we're doing, but I don't foresee Page 8, recovering back to anywhere close to 21 for some period of time.
Ryan Lynch
Okay.
Ted Goldthorpe
So it's like the classic – it's a classic. Yes. We get to keep our good assets because you're not getting refied, but we're not getting the same level as of repayment, prepayment income. So you're going to see – I think our quality of earnings should start to go up in the sense of like our spreads are wider, SOFR is going up. So you're going to get – the mix of our income is going to change a little bit and you're going to – it’s going to be a lot more predictable, I would say.
Patrick Schafer
But I think, Ryan, what I think for kind of the purposes, probably what you were getting with your question, what Ted alluded to. We are seeing repayment activity in the quarter and we have kind of line of sight on repayment activity. So it won't be a zero in terms of repayment activities in the quarter, we already have line of sight on a number of items that we're seeing it. It's just still at a meaningfully slower pace than 2021.
Ted Goldthorpe
And the other thing I'd say, actually, one thing that's a new theme, Ryan that I've never seen in my career is the stuff we're getting repaid on is typically not correlated with credit quality. So usually you're not getting refinanced at your weaker credits. We've seen – we've got notices on two or three credits to get refinanced that are, I would say, not our best credits in the whole portfolio, old legacy positions that we've been positively surprised by.
Ryan Lynch
Do you have any sense of why that would be, that seems kind of strange given the move in both spreads and benchmark rates higher seems odd that they would refinance out of lower quality or maybe not the best assets. Do you have any sense of why that occurs?
Ted Goldthorpe
Yes. I mean, generally speaking, these are more seasoned assets, so there are assets that have been outstanding for longer. So some of its maturities, so some of it’s just people trying to get ahead of – it's an incredibly uncertain environment over the next 12 to 18 months. I don't need to tell you that. And I think people are just trying to get ahead of – people have no idea what's going to happen next year. And so people are willing to pay more for certainty around capital structure.
Ryan Lynch
Okay. Understood. And then I just had one other question maybe be best for Jason. On Slide number 4, you guys talk about core NII of $0.51 and core net investment income of 4.874. I'm just curious in that footnote, you talk about the backing out the purchase price, accounting accretion which I understand that, but then also within that number, you also talk about the impact of expenses, merger-related expenses that you back out from that core number. I'm just curious what are those core? Obviously, I can do the dollar amount math. I'm just curious, what are these merger-related expenses that you guys are incurring this quarter that you're backing out to your core net investment income number?
Jason Roos
Yes. I would say the – yes, we can walk you through that, Ryan. We have all the detail separately. But it's a calculation that assumes that had the accretion from the purchase accounting not occurred in the current quarter. We run all of the fee structure and we're not taking any fees out or just recalculating fees based on the new number had it not generated income, including the purchase accounting. So we expect that predominantly in the fees as opposed to…
Ryan Lynch
So it's basically like lower – you're basically lowering the incentive fees for that calculation?
Jason Roos
Exactly.
Ryan Lynch
Okay. Got it. Okay. That's all for me. I appreciate the time this morning.
Operator
Your next question comes from the line of Steven Martin from Slater. Your line is open.
Steven Martin
Hi, guys.
Patrick Schafer
Hey Steve. How are you?
Steven Martin
Good. It's been a long week of BDC earnings and it's only Wednesday. Can you comment on the leverage ratio and your comfort level given all the factors and pro forma for the closings have occurred already in the third quarter?
Ted Goldthorpe
I mean, I'll say…
Patrick Schafer
Go ahead, Ted.
Ted Goldthorpe
Yes. Sorry. I would say, we – our leverage ratio is right in the range that we've kind of guided people to. And again, I'm not predicting the future, but based on where valuations are today versus June 30, obviously that should help leverage just organically.
Steven Martin
You mean because you'll get an upwards mark on the unrealized?
Ted Goldthorpe
Correct. Yes, I mean, we use – as Jason said in his prepared remarks, most of our mark-to-market, if like – the vast majority of it was tied to spread widening and obviously, spreads have tightened, so you can – we don't want to provide guidance just because we don't know what's going to happen in September, but obviously asset prices have gone up since – generally speaking since June 30.
Patrick Schafer
Yes. The other thing, I’d say Steve is, is given the cash position that we had kind of all of the closing so to speak have no real impact on our gross leverage calculations.
Steven Martin
Wait. Repeat that one. I didn't quite catch that.
Patrick Schafer
Yes. Because of all the cash from our balance sheet, the actual closings that we've been referencing don't have any impact on our gross leverage test, right. We had all the cash sitting there waiting for the deployment. So the extra $20 million or so that we referenced that closed in July, doesn't come with any change really in the gross leverage.
Steven Martin
Right. And that's why you made the comment that there was very little interest expense offset to that incremental interest income.
Patrick Schafer
Correct. I think, yes, that's correct. There is a slight draw just because we averaged some stuff out, but – and significantly, pretty much no incremental interest expense associated with those assets.
Steven Martin
What's your level of unfunded commitments for sort of as of the end of the quarter and how many of those were part of what you've already closed?
Patrick Schafer
I think Jason is digging for the total number, but what I would say is the deals that we referenced here that we show here in the closings, I think have limited to no incremental kind of committed to unfunded, I don't know how they got characterized at quarter-end in terms of whether it was considered a commitment or not. I think that normally shows up in our trades pending settlement or due for settled trades, but I don't think it would show up in our unfunded commitments if you will. But very limited of those new investments had associated unfunded details or revolvers or things like that. There was a little bit, but substantially limited.
Steven Martin
Got it. I think the best slide in the whole deck was the pro forma. Was it Slide 9, and assuming Slide 9 sort of occurs, how do you feel about your dividend and your dividend policy? Are you going to just change – adjust your dividend on a quarterly basis or you're going to go to a system of base dividend plus adjustments?
Ted Goldthorpe
Yes. I think, I mean, listen, I think, we'll reassess that next quarter. I mean, this is just – I call it transition quarter, but it's just a strange quarter. So I think, coming September Board meeting, this is going to be a conversation that we'll have with our Board. I mean, I think generally speaking, we feel raising the base dividend is the root we prefer to go versus paying variable dividends just because I feel like the feedback we've gotten from our shareholders is, they want a predictable dividend. But it's something we'll be discussing over the next couple months, particularly as we finalize our September 30 results.
Steven Martin
All right. And now that your stocks moved up a little and your book value or NAVs come down, your priced NAVs above the 80% mark, how do you feel about your ongoing buyback?
Ted Goldthorpe
I still think it makes sense for us to buyback stock. From our perspective, if you do the math, I think we don't have a float problem. And if you actually look at – if you look at just the accretion dilution, it just makes sense for us to buy back stock. So I think – I don't think we have any plans to stop that. Like again, it's a very uncertain environment, but you've seen our credit quality has gotten better. And as of now, our earnings and our portfolio companies are holding up very well. So with all those things being considered, I think it makes sense for us to buy back stock.
Steven Martin
Great. And I will comment that I don't – I've been on a lot of these calls and I don't think anyone has the non-accruals at that lower level of portfolio?
Ted Goldthorpe
Well, I appreciate you saying that. I mean, listen, again, our franchise is mostly focused on B2B and the places you've seen weakness across middle market and the BDC space has really been consumer and it's just not what we do. So I'm not saying that the other people are doing the right or wrong thing. It just not our DNA and I think that's helped us avoid some of the surprises that others have seen.
Steven Martin
All right. Thank you very much.
Operator
[Operator Instructions] There are no further questions at this time. Mr. Ted Goldthorpe, Chief Executive Officer of Portman Ridge, I turn the call back over to you.
Ted Goldthorpe
So thanks everyone for joining us today. We look forward to speaking to you guys in early November when we'll be announcing our 2022 results. And for those who haven't seen it, we really tried this quarter to put a lot of detail into our Investor Presentation, which you can find on our website. And we're always open to feedback whether we're always open to providing more disclosure. So for those who want additional things, please reach out to any member of the management team. Thanks to everybody, and please try to enjoy the end of your summers and obviously as per always, the door is always open here. So please come visit us or give us a call and we're happy to kind of talk to you anytime. Thank you very much.
Operator
This concludes today's conference call. You may now disconnect.
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Portman Ridge Finance Corporation (PTMN) CEO Ted Goldthorpe on Q2 2022 Results - Earnings Call Transcript