TRIN - Portman Ridge - Seeking Total Return But Not Finding It

2023-07-20 18:11:16 ET

Summary

• Portman Ridge Finance has been struggling to outperform its peers and the S&P 500, with its stock underperforming over the past nine months.
• Despite a rise in total investment, core investment, and net investment income in Q1 2023, the company saw a decline in total investments at fair value and an increase in non-accruals.
• The company is still absorbing costs and monetizing assets from M&A activities between 2019 and 2021, and analysts rate the stock as underperforming with a negative view.

Way back in 2016 when I first started writing for Seeking Alpha, I covered a small BDC that was trading at a discount to book value and was struggling to outperform its peers while paying a whopping 17% yield at the time. Back in those days it was known as KCAP but is now known as Portman Ridge Finance ( PTMN ) after undergoing some transformations over the last 7 years. Since 2016, I have covered PTMN several more times, including 3 times just in the past 18 months.

Here is a brief paragraph about Portman Ridge taken from their recent press release :

Portman Ridge Finance Corporation is a publicly traded, externally managed investment company that has elected to be regulated as a business development company under the Investment Company Act of 1940. Portman Ridge's middle market investment business originates, structures, finances and manages a portfolio of term loans, mezzanine investments and selected equity securities in middle market companies. Portman Ridge's investment activities are managed by its investment adviser, Sierra Crest Investment Management LLC, an affiliate of BC Partners Advisors, LP.

During my previous coverage of PTMN, I initiated the rating at a Strong Buy in January 2022, reduced it to a Buy in June 2022, and then to a Hold by October 2022. I am now writing a mid-year 2023 update, and I am keeping the Hold rating as the stock has underperformed the S&P 500 as well as its peers over the past 9 months.

Back in October, PTMN was trading at a big discount to NAV of -26% and although the discount has now closed to about -14% the price has not risen much above the market price it was trading for in October of about $20.

In fact, comparing PTMN to several other peer BDCs that are similar in size based on market cap, we can see that PTMN has performed the worst of all 6 in the past 1-year period.

There are about 50 publicly traded BDCs and based on recent performance over the past 12 to 18 months, I would rank PTMN in the lower half of public BDCs, while others like CGBD and FDUS remain clearly in the upper half.

But perhaps the market has it wrong and PTMN should be getting better price returns than it has been receiving for its efforts. Let's look at what PTMN is doing right and why investors may want to consider giving them a chance to prove themselves.

Q123 Results and Outlook

On May 10, Portman announced Q123 results and the report was not terrible. For example, total investment, core investment, and net investment income all increased over the previous quarter. And 35,600 shares were repurchased during the quarter. The dividend was raised to $0.69 for the quarter, an increase of $.01 from the previous quarter, and the third consecutive quarterly increase. The weighted average interest rate on portfolio debt securities increased to 11.7% due to rising interest rates.

Also, based on the bank failures in March the opportunities for PTMN to capture new business improved and the CEO, Ted Goldthorpe, remained bullish on new investment opportunities as a result, based on his comments during the earnings call :

Regarding our primary market as a whole, the bank failures of Silicon Valley Bank, Signature Bank and First Republic during March and April have further perpetuated the volatility and uncertainty in the syndicated markets that we have noted in our early March earnings call, which historically is favorable to private credit businesses such as Portman Ridge. We remain bullish on new investment opportunities and the ability to rotate our portfolio at reduced risk and incremental returns.

Now for some of the bad news, which may be what caused investors to sell off the stock after the report. The financial highlights from the Q123 report show that:

• Total investments at fair value declined to $539.1M from $576.5 as of 12/31/22.
• Non-accruals increased from 4 to 5, representing 1.5% of the portfolio value at amortized cost.
• NAV declined from $232.1M ($24.23 per share) on 12/31/22 to $225.1M ($23.56 per share) as of 3/31/23.
• Results compared to Q122 were substantially decreased in terms of net increase in net assets from operations as shown in this snippet from the report.

Much of the difference can be attributed to unrealized losses on investments and unrealized losses from depreciation. But those are some big numbers, relatively speaking, to be able to turn around in a reasonable amount of time as the market recovers. It will be interesting to see how well they did in Q2 when they next report earnings on August 9 given the bullish nature of the overall market in Q2.

The company's cash increased from $5.1M in unrestricted cash and $28M in restricted cash as of 12/31/22 to $11.9M in unrestricted and $34.2M in restricted cash as of March 31, 2023. There was also $36M in available borrowing capacity under the Senior Secured Revolving Credit Facility.

In addition, as I mentioned in the October article about PTMN, they are still absorbing the costs and monetizing the assets of the various M&A actions that took place between 2019 and 2021.

Also, the company is still in the early stages of monetizing the assets from the 3 companies (OHAI, GARS, HCAP) that they acquired from 2019 to 2021.

In fact, this footnote from the Q123 press release underscores the ongoing impact of that M&A activity:

¹ Core investment income represents reported total investment income as determined in accordance with U.S. generally accepted accounting principles, or U.S. GAAP, less the impact of purchase price discount accounting in connection with the Garrison Capital Inc. ("GARS") and Harvest Capital Credit Corporation ("HCAP") mergers. Portman Ridge believes presenting core investment income and the related per share amount is useful and appropriate supplemental disclosure for analyzing its financial performance due to the unique circumstance giving rise to the purchase accounting adjustment.

The acquisitions of GARS (October 2020) and HCAP (June 2021) did have a positive impact on earnings as a result of the amortization of the purchase discount established at the time of the merger, as indicated in this table from the company 10-Q.

Perhaps 2023 will be the year that they turn the business around and take advantage of new investment opportunities, while there are some good opportunities to be had. Wall Street analysts do not have any recent ratings in the past 30 days and of those who do follow the stock there is 1 Strong Buy and 2 Hold ratings in the past 90 days.

For another perspective, I checked the TipRanks website, and they rate the stock a 3 out of 10 or Underperform with a Negative view. There are clearly better BDCs to own right now, and I have written about some of them recently, including Trinity Capital ( TRIN ), which you can read about here .

Summary

Portman Ridge is a BDC that has been growing by acquisition over the past several years, attempting to transform itself into a strong business that yields about 13.5% annually based on the current quarterly dividend of $0.69 while trading for about $20 per share. However, the company has struggled to maintain good credit quality with 5 investments on non-accrual status as of the Q123 earnings report. As a result, investors have kept the market price down and NAV declined from Q422 resulting in a total return of -3% YTD.

If I was looking to start a new position in a BDC this would not be the one that I would choose, however, if you are already a shareholder, I would not suggest selling shares just yet. The performance of the stock may improve after reporting Q2 results on August 9, and I would wait to see what they have to say on the earnings call before making any trading decision.

Thanks for reading, and good luck whatever you decide.

For further details see: