Portman Ridge Finance Corporation (NASDAQ:PTMN) Q1 2019 Results Earnings Conference Call May 10, 2019 9:00 AM ET
Ted Goldthorpe – CEO
Ted Gilpin – CFO
Patrick Schafer – CIO
Dan Gilligan – Head of Structured Credit
Conference Call Participants
Christopher Nolan – Ladenburg Thalmann
Ryan Lynch – KBW
Good morning, ladies and gentlemen, and welcome to the Portman Ridge First Quarter 2019 Earnings Call. An earnings press release was distributed this morning. 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, Friday, May 10, 2019. This call is also being hosted on the 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 for Portman Ridge Finance Corp. Mr. Goldthorpe, you may begin.
Thank you, Operator and good morning everyone. Thank you for joining us on our earnings call. I am joined by Ted Gilpin, our Chief Financial Officer; Patrick Schafer, our Chief Investment Officer; and Dan Gilligan our Head of Structured Credit.
Today Portman Ridge announced its first quarter 2019 financial results. As you know on April 1, we closed an externalization transaction and at that time an affiliate of BC Partners Advisors became the external manager of Portman Ridge Finance Corp. Portman Ridge shareholders received a special distribution of $0.67 per share in connection with the externalization and we are now able to utilize the full strength of the broader BC Partners platform. We intend to transition Portman Ridge to a more stable and predictable vehicle across both net investment income and net asset value.
Ted Gilpin, our CFO will now provide a brief overview of the financial results for the quarter and I will follow it with a review of our portfolio and investment strategy.
Thank you, Ted. Good morning everyone.
Please note that there are couple of events in the first quarter of 2019 which had significant effects on the quarter results and are worth describing in more detail. First, net investment income for the quarter was a loss of $2.2 million or $0.06 per basic share compared with the income of $2.4 million or $0.07 per share in the quarter ended March 31, 2018 and $0.06 per share in the fourth quarter 2018.
The quarter ended 3/31/2019 however had transactions related expenses of $3.4 million or $0.09 per share, $2.2 million of which were expense related to severance and the termination of our restricted stock program.
Second, there was an NII decline related to portfolio credit deterioration. One credit, Tank Partners was restructured to equity and two new credits, Roscoe and Stafford went on to full nonaccrual in the quarter. This also resulted in a fair value decline of $8.7 million or $0.23 per share. The vast majority of which was associated with those three credits.
The one-time expenses and the impact to nonaccruals on income resulted in a hit to NII of approximately $3.9 million or $0.10 per share. Without these two factors NII would have been approximately $0.05 for the quarter.
The combination of the one-time deal expenses, the fair value declines and the April distribution resulted in a reduction to NAV to $3.85 per share from $4.23 per share at 12/31/2018.
Interest income on our debt securities portfolio was $2.9 million or $0.08 per share compared to $3.8 million or $0.10 per share in the same period 2018. Some of this decline is related to the aforementioned credits going on nonaccrual and some is related to investments in debt securities being reallocated to our investment in the Great Lakes unit tranche program which had a lag in distributions and which will begin making income distribution in the second quarter.
Investment income on our CLO fund securities is essentially flat to $1.8 million or $0.05 per share. Income from our joint venture with FC3 was 950,000 or $0.03 per share versus 700,000 or $0.02 per share in the first quarter of 2018.
On the liability side of the balance sheet as of March 31, 2019 we had approximately $121 million of par debt outstanding $77.4 million of 6.125 notes due in 2022 and $43.9 million under our L plus 3.25 revolving credit facility.
Our asset coverage ratio at the quarter end was 216%. As of March, 2019 Portman Ridge can increase leverage to the new statue e ratio of 150%. We’re currently restricting our ability to do so under the covenants in our outstanding publicly traded debt, but of course the new asset coverage ratio could give us significantly more flexibility in the future.
During the quarter, we invested approximately $28 million in interest bearing securities of that amount $13.2 million was invested in senior secured first lien loans at a weighted yield of 7.96%, $12.5 million was invested in second lien with a weighted yield of 9.68% and the remainder was put into our Great Lakes program.
Portman Ridge made its first quarter distribution of $0.10 per share on April 26. Going forward its better aligned the payment of the distribution with the completion of the financials we like many BDCs will declare quarterly dividends concurrent with the completion of the quarterly financial.
For example the second quarter declaration would be announced in August with an expected payment in September. So to be clear, we will still be making four distributions this year just the timing has changed and to coincide with actual financials.
And with that, I would like to turn the call back to Ted Goldthorpe.
I would now like to focus my remarks on the current state of the portfolio and where we will take the business from here. We feel confident that we’ve identified in our dealing with the small number of distressed credits in the portfolio. The majority of these credits have been written down to minimal market values with the exception of Roscoe Medical which has a fair value of 3.2 million.
Given what we have identified and committed to, we believe by the end of the second quarter we should be fully invested and utilizing our revolving credit facility efficiently. We will continue to reposition the portfolio in subsequent quarters and are working towards our long-term objectives of NII and NAV stability and growth.
I’ll now make a few comments about the market and our strategy. The unit tranche market has increased in competitiveness over the last few quarters and we’re being very cautious and selective in this asset class. There have been a recent trend for unit tranches to be increasingly clubbed up amongst a few lenders versus going with one lender and as a result there has been some pressure on spreads.
We continue to find value on our non-sponsor vertical, as well as stretch senior deals These stretch senior deals have materially less leverage then unit tranches with only a minor reduction in spread. We are pursuing junior capital solutions only in the most attractive of circumstances and will only invest in economically resilient businesses.
Over the next few quarters we will look to reduce our CLO equity exposure and replace it with investments in our senior and unit tranche joint ventures which we continue to believe provide attractive risk-adjusted returns. Given the illiquidity of CLO equity, we expect this transition to happen over multiple quarters. Lastly, we will find opportunities to use the broader BC Partners franchise, return capital markets fees for our shareholders which will begin to see over the next quarter.
We continue to be committed to alignment with our shareholders. Under our externalization agreement, we’ve committed to support net investment income for one year period and take any incentive fees and equity at net asset value for a two-year period. We believe by demonstrating alignment and stabilize net asset value, we will be able to narrow our stock price discount to book.
Thank you for your support. And with that we’d like to turn the call over to any questions.