PTMN - Portman Ridge Finance's Transformation Is Nearly Complete So It's Time To Reconsider This 14.5% Yielding BDC

2024-03-10 21:46:02 ET

Summary

• BCPC created PTMN by purchasing several underperforming BDCs with the goal of selling off the Legacy investments and replacing them with Core MM Loans ("Portfolio Optimization Process").
• The Portfolio Optimization Process is almost completed, with Legacy investments only making up 27% of its investments. The process hasn't come without pain.
• PTMN incurred realized and unrealized losses of $4.39/share and $2.76/share over the last 2 years. Most of the losses were related to its Legacy investments.
• PTMN trades with an 18% discount to NAV and has a sustainable dividend yield of 14.5%.
• If its originated Core MM Loans continue to perform well, PTMN represents a great opportunity to buy a top-tier BDC at a significantly reduced price.

Summary:

BC Partners ("BCP") created Portman Ridge Finance Corporation ("PTMN") by purchasing several underperforming BDCs to sell off the Legacy investments and replace them with Core MM Loans to borrowers with EBITA between $25m - $50m (“Portfolio Optimization Process”); The Portfolio Optimization Process is almost completed with Legacy investment only making up 27% of its investments. The process hasn’t come without pain – over the last two years, PTMN incurred realized and unrealized losses of $4.49/share and $2.76/share. Most of the losses were related to its Legacy Investments. As we will go into greater detail, PTMN originated Core MM Loans are performing well. PTMN trades at a 15% discount to NAV and a sustainable dividend yield of 14.5%; If BCPC successfully builds out its Core MM Loan platform and its loans continue to perform well, PTMN could be an attractive investment opportunity.

Overview:

Roughly two years ago, I wrote an article on PTMN and Logan Ridge Finance Corporation (“LRFC”), two BCP, a $40b international private equity fund with a $8 billion private credit platform specializing in originating core middle market senior secured floating rate loans to borrowers with EBITDA between $25m - $50m (“Core MM Loans”). BCP’s private credit business (“BCPC”) is led by Ted Goldthorpe, CEO, and Patrick Schafer, CIO, who previously ran Apollo’s BDC.

BCPC created PTMN by acquiring four underperforming BDCs (“Legacy BDCs”) over the last few years. At Q3 2023, PTMN had $500m of investments. As I outlined in my previous article, I believed that PTMN was a potential “buy” because it was almost done selling off its legacy investments acquired with the Legacy BDCs (“Legacy Investments”) and replacing them with Core MM Loans from its active origination platform (“Portfolio Optimization”). While I believe my overall thesis was right that once the Portfolio Optimization process is completed, it will be a strong new entrant in the BDC space, with access to an active origination platform and a strong risk-adjusted investment portfolio, however, I underestimated the amount of credit risks still in the Legacy Investments portfolio, and (y) how long it would take BCPC to complete the Portfolio Optimization process. ...

For further details see: