BCP Investment Corporation - Q1 2024
May 9, 2024
Transcript
Operator (participant)
Welcome to Portman Ridge Finance Corporation's first quarter 2024 earnings conference call. An earnings press release was distributed yesterday, May 8, 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 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.
Speaking on today's call will be Ted Goldthorpe, Chief Executive Officer, President, and Director of Portman Ridge Finance Corporation; Brandon Satoren, Chief Financial Officer; and Patrick Schafer, Chief Investment Officer. With that, I would now like to turn the call over to Ted Goldthorpe, Chief Executive Officer of Portman Ridge. Please go ahead.
Ted Goldthorpe (CEO, President, and Director)
Good morning, and thanks everyone for joining our first quarter 2024 earnings call. I'm joined today by our Chief Financial Officer, Brandon Satoren, and our Chief Investment Officer, Patrick Schafer. I'll provide brief highlights on the company's performance and activities for the year. Patrick will provide commentary on our investment portfolio and our markets, and Brandon will discuss our operating results and financial condition in greater detail. Yesterday, Portman Ridge announced its first quarter 2024 results, and following the strong earnings trajectory we saw in 2023, we are pleased with the solid earnings power of the portfolio. Despite operating under challenging market conditions, we reported net investment income of $6.2 million or $0.67 per share and net asset value of $210.6 million or $22.57 per share.
We continue to target a well-diversified portfolio with investment spread across 29 industries and 103 entities while maintaining an average par balance per entity of $3.1 million. This compares to 27 industries and 100 entities with an average par balance per entity of $3.1 million at the end of 2023. Credit quality remains stable with seven investments on non-accrual, representing 0.5% of the portfolio on a fair value basis. Additionally, we continue to believe our stock remains undervalued, and during the quarter, we continue to repurchase shares under our repurchase program, purchasing 51,015 shares for an aggregate cost of $1 million. These repurchases had an accretive effect to Portman's net asset value of $0.02 per share, reinforcing our commitment to shareholder value.
Further, the Board of Directors approved dividend for the second quarter of 2024 in the amount of $0.69 per share, which represents a strong 12.2% annualized return on net asset value, which is among the highest in the BDC space. Turning to conditions in our primary market, as we previewed on our fourth quarter earnings call, M&A activity has picked up during the quarter, and capital markets as a whole were extremely active as compared to the fourth quarter. Net deal activity, defined as new deals excluding corresponding repayments in the BSL loan market, was $57.2 billion, up 64% from the fourth quarter, and represented the highest new net volume since first quarter of 2022 and is representative of the fundamental tailwinds we believe exist in our primary market.
For all of 2023, private equity firms have been sitting on record amounts of dry powder while at the same time being pushed by LPs to return capital. Although expectations for future rate hikes have diminished towards the end of the first quarter and the beginning of the second quarter, we believe the aforementioned fundamentals, combined with positive economic outlook and sentiment, should continue to fuel new deal activity in our private credit space over the course of 2024. Specifically at Portman Ridge and more generally across BC Partners Credit Platform, we continue to find attractive opportunities both through our sponsor relationships and our focus on non-sponsor or non-traditional sponsor-backed companies, and continue to win transactions based on our ability to custom tailor a capital solution for the borrower and the borrower's belief that our platform can add value to their businesses over and above just being a capital provider.
Our strategy has always been to be very selective on new investment opportunities, focusing on portfolio management and risk mitigation. To that point, during the quarter, we made investments into only one new portfolio company. Our goal continues to be the further diversification of our portfolio by investing in companies that have the potential to provide high returns for our shareholders. As we proceed further into 2024, our pipeline remains strong, and we believe we are well-positioned to take advantage of new investment opportunities while also remaining diligent in our investment and capital deployment process. With that, I'll turn the call over to Patrick Schafer, our Chief Investment Officer, for our review of our investment activity.
Patrick Schafer (Chief Investment Officer)
Thanks, Ted. Turning now to slide 5 of our presentation and the sensitivity of our earnings to interest rates. As of March 31, 2024, approximately 91.1% of our debt securities portfolio were either floating rate with a spread to an interest rate index such as SOFR or Prime, with substantially all these being linked to SOFR. As you can see from the chart, the underlying benchmark rates of our assets during the quarter lagged the prevailing market rates and still remain below the SOFR rates as of April 29, 2024. Between the market transition last year from LIBOR to SOFR and the pause from the Fed earlier this year, the gap has narrowed to the tightest it has been since the onset of the Fed rate hike cycle.
Skipping down to slide 10, originations for the first quarter were higher than prior year first quarter and were above repayment levels, resulting in net originations of approximately $1.7 million. Our new investments made during the quarter are expected to yield a spread to SOFR of 581 basis points on par value, and the investments were purchased at a cost of approximately 98.4% of par. Our investment portfolio at the end of the first quarter remained highly diversified. We ended the year with investments spread across 29 different industries and 34 different borrowers, all while maintaining an average par balance per entity of approximately $3.1 million. Turning to slide 11, in aggregate, investments on non-accrual status remain relatively low at seven investments at the end of the first quarter 2024, representing 0.5% and 3.2% of the company's investment portfolio at fair value and cost, respectively.
This compares to December 31, 2023, where there are also seven investments on non-accrual status, representing 1.3% and 3.2% of the company's investment portfolio at fair value and cost, respectively. On slide 12, excluding our non-accrual investments, we have an aggregate debt investment portfolio of $384 million at fair value, which represents a blended price of 93.7% of par and is 90% comprised of first-lien loans based on par value. Assuming a par recovery, our March 31, 2024 fair values reflect a potential of $25.8 million of incremental NAV value, a 12.1% increase or $2.72 per share, excluding any recovery from the non-accrual investments.
If we were to further overlay an illustrative 10% default rate and 70% recovery rate to the entire debt securities portfolio, again excluding non-accrual investments, the incremental NAV value potential would be $1.41 per share or a 6.2% increase to NAV per share as of March 31, 2024. Finally, turning to slide 13, if you aggregate the three portfolios acquired over the last three years, we have purchased a combined $434.8 million of investments, have realized approximately 82% of these positions at a combined realized and unrealized mark of 102% of fair value at the time of closing the respective mergers. As of Q1 2024, we had fully exited the acquired Oak Hill portfolio and are down to a combined $33.5 million of the acquired HCAP portfolio and the initial KCAP portfolio. I'll now turn the call over to Brandon to further discuss our financial results for the period.
Brandon Satoren (CFO)
Thanks, Patrick. As Ted and Patrick previously mentioned, our results for the first quarter of 2024 continue to reflect the company's strong financial performance. Our total investment income for the quarter was $16.5 million, of which $14.2 million was attributable to interest income from the debt investment portfolio. This compares to total investment income for the fourth quarter of 2023 of $17.8 million, of which $15.3 million was attributable to interest income from the debt investment portfolio. The decrease was primarily driven by the reversal of $0.4 million or $0.04 per share of previously accrued unpaid interest on two portfolio companies placed on non-accrual during the first quarter of 2024, as well as lower paydown income of $0.4 million or $0.04 per share during the quarter.
Excluding the impact of purchase price accounting, our core investment income for the quarter was $16.5 million, a decrease of $1.2 million compared to core investment income of $17.7 million in the prior quarter. Our net investment income for the quarter was $6.2 million or $0.67 per share. This compares to $11.2 million or $1.18 per share for the prior quarter. The decrease in net investment income was the result of lower investment income and $0.1 million or $0.01 per share of incremental expenses in the first quarter, as well as a one-time expense reimbursement from the company's investment advisor during the prior quarter. As of March 31, 2024, and December 31, 2023, the weighted average contractual interest rate on our interest-earning debt investment portfolio was approximately 12.1% and 12.5%, respectively.
We continue to believe the portfolio remains well-positioned to generate incremental revenue in future quarters due to the current rate environment. Total expenses for the quarter ended March 31, 2024, were $10.3 million compared to total expenses of $11.9 million for the fourth quarter of 2023. The decrease was largely driven by a lower incentive fee as well as lower interest and financing costs as a result of lower average leverage during the quarter. Our net asset value as of March 31, 2024, was $210.6 million or $22.57 per share, a decrease of $0.19 per share as compared to the prior quarter net asset value of $213.5 million or $22.76 per share. The decrease was largely driven by our dividend-exceeding net income for the quarter ended March 31, 2024.
Turning to the liability side of the balance sheet, as of March 31, 2024, the company had a total of $291.7 million of borrowings outstanding with a weighted average interest rate of 6.9%. This balance was comprised of $92 million in borrowings under our senior secured revolving credit facility, $108 million of 2026 notes, and $91.7 million of 2018-2 secured notes due 2029. We finished the quarter with $23 million of available borrowing capacity under the senior secured revolving credit facility. Accordingly, as of March 31, 2024, our gross and net leverage ratios were 1.4x and 1.2x, respectively. Compared to the prior quarter, gross leverage is down one full turn from 1.5x, and net leverage is flat. The decrease in gross leverage is largely driven by the paydown on the 2018-2 notes during the quarter.
From a regulatory perspective, our asset coverage ratio as of quarter end was 171%. Finally, the Board approved a quarterly distribution of $0.69 per share payable on May 31, 2024, to stockholders of record at the close of business on May 21st. With that, I will turn the call back over to Ted.
Ted Goldthorpe (CEO, President, and Director)
Thank you, Brandon. Ahead of questions, I'd like to reemphasize that we believe we are well-positioned to take advantage of the current market environment as shown in the first quarter. Through our prudent investment strategy, we believe we will be able to deliver strong returns to our shareholders for the rest of 2024. Thank you once again to all our shareholders for your ongoing support. This concludes our prepared remarks, and I'll turn the call over for any questions.
Operator (participant)
Thank you. We will now begin the question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star one again. If you are called upon to ask your question and are listening via loudspeaker on your device, please pick up your handset and ensure that your phone is not on the mute when asking your question. Okay. Your first question comes from the line of Christopher Nolan. Please go ahead.
Speaker 5
Hey, guys. Can you hear me?
Ted Goldthorpe (CEO, President, and Director)
Yeah. How are you?
Speaker 5
Hey.
Good. How are you doing? Hey, the slowdown in the growth of the portfolio, is the strategy now simply to make new investments to offset the prepay? So, in other words, the amount of money that you put out to work in new investments is a function of how much you get back in terms of prepay that quarter?
Patrick Schafer (Chief Investment Officer)
Yeah. I mean, I think that's generally right, Chris. I do think kind of where we are on a net leverage basis, we're sort of at the low end of kind of our 1.25x-1.4x range. So I think we do have room and would look to kind of increase I'll call it assets in addition to just I'll call it one in, one out. But where we sit now, I think we are probably having a little bit more of a focus on what you just said, which is making sure we're replacing assets that have been repaid. We are kind of selectively reducing some of our liquid exposure just given the run-up in the BSL market. Again, it's not a lot, but we have probably 8 or 9 names that are "liquid" in our book.
So we would look to exit those positions at kind of attractive prices in the BSL market and then, obviously, have those proceeds to rotate into new private transactions. So it's a mix of a couple of those things, but I would say we definitely feel like we have room to kind of be a net grower of the portfolio, but being mindful of where we are relative to our leverage guidelines not guidelines, but guidance.
Speaker 5
Given that you're paying down the 2018 secured note, should we expect the bank revolver to pick up the slack to increase?
Patrick Schafer (Chief Investment Officer)
That's right. Where the revolver sits today, we're at about $92 million drawn or so. It has $115 million of total capacity, and there's an incremental above and beyond that. But the very short answer is yes.
Speaker 5
Okay. I guess, finally, Ted, can you give us a little color in terms of what you're seeing in terms of BDCs looking to be bought out? How has that market changed from your perspective?
Ted Goldthorpe (CEO, President, and Director)
I would say these things tend to go in waves. I would say there's not a lot of logical partners for us today, just given who's out there and given what's happening. And I think higher interest rates have, obviously, helped the whole sector in terms of earnings and other things, and, obviously, credit quality has been stable. So I would say, as of now, I don't foresee a big wave of consolidation in the short term.
Speaker 5
Great. I'll get back in the queue. Thank you for answering my questions.
Ted Goldthorpe (CEO, President, and Director)
Thanks.
Operator (participant)
Again, if you would like to ask a question, press star one on your telephone keypad. Our next question comes from the line of Deepak Sarpangal from Repertoire Partners. Please go ahead.
Deepak Sarpangal (Founder and Managing Partner)
Thank you. Hi, Ted. Hi, Patrick.
Ted Goldthorpe (CEO, President, and Director)
Hey, Deepak.
Deepak Sarpangal (Founder and Managing Partner)
Hey, I guess, given the first question you received, I have a different perspective on that. I actually just wanted to commend you on your fiduciary discipline to not simply grow the portfolio as some other managers do since you get paid on overall assets. So I think it's actually great you're recognizing that your stock is undervalued, when it makes sense to lean in and extend new loans, you're doing it, and when it doesn't, you're pulling back. So I think that's actually great. And then the question I had was, I saw the new investment in Riddell, which I obviously know of the products being a football fan, but I saw that you had a broader partnership that you announced with BC Credit and BC Partners Platform. Could you talk a little bit more about that new investment and just give us a little bit more context there?
Ted Goldthorpe (CEO, President, and Director)
Yeah. I mean, we normally don't talk about individual investments, but this one specifically has been very high-profile. We have provided them financing. It closed right at quarter end. This is a perfect example of what we do, broadly speaking. We have a board seat with the company. We are very, very active in helping them with a number of different initiatives. It's a great business because there's a big recurring replacement cycle embedded in their business. Usually, we don't have a big consumer franchise, but when you actually dig into the business itself, it's much less exposed to consumer discretionary spending. Yeah, it is an investment across the whole platform, and it's one of the advantages Portman gets from being part of a bigger platform is to get access to deals like this.
Deepak Sarpangal (Founder and Managing Partner)
Got it. And then I couldn't tell for sure from the press releases, but to your point about the bigger platform, it almost sounded like you sourced it and brought it to the BC Partners Platform rather than the other way around, or did I get that mixed up?
Ted Goldthorpe (CEO, President, and Director)
No, that's fair. I mean, we obviously have a lot of our own captive sourcing here. So yeah, we've sourced it, and quite frankly, we've been cultivating the management team for probably five years before the close.
Deepak Sarpangal (Founder and Managing Partner)
That's great. And then one other one, is EBSC Holdings related to this, or is that a separate investment?
Patrick Schafer (Chief Investment Officer)
No, it's the same. So the combined investment was structured as, again, round numbers, sort of 65% first lien secured and 35% a preferred equity investment or structured equity investment in the business. And so for, again, Portman as an example, they have a weighting between the two, but you could think of that as the same as, I think, the loan, the borrower is technically Riddell, Inc., and then the preferred equity, the entity is technically EBSC, but that's just the parent company of Riddell.
Deepak Sarpangal (Founder and Managing Partner)
Yep. Got it. And I suspect that preferred equity must be convertible into common, right?
Patrick Schafer (Chief Investment Officer)
It does have the potential to convert at certain metrics, yes.
Deepak Sarpangal (Founder and Managing Partner)
Okay. No, I figured because the first-lien loan looks great, right? It's like 11% cash pay first-lien, and then the preferred is 10% PIK, so I figured there must be a conversion feature to make that end match.
Patrick Schafer (Chief Investment Officer)
That's right. That's right. Where our expectation is overall return on that instrument would be meaningfully higher than 10%, but for accounting purposes, that's what we would otherwise be reflecting until there was some sort of catalyst.
Deepak Sarpangal (Founder and Managing Partner)
Okay. Great. Well, I mean, to me, it seems like generally more of the same good stuff seem to check off my key boxes. You got low and declining non-accruals, deleveraging, paying down debt, seem like an even higher mix of senior secured loans this quarter while working off the CLO and joint venture stuff, and then more accretive buybacks and another nice dividend. So appreciate the solid execution and the leadership. Look forward to keeping that going. Thank you.
Patrick Schafer (Chief Investment Officer)
Thank you, Deepak. Appreciate it.
Deepak Sarpangal (Founder and Managing Partner)
Take care.
Operator (participant)
Thank you. Again, if you would like to ask a question, press star one on your telephone keypad. Your next question comes from the line of Steven Martin. Please go ahead.
Speaker 6
Hi, guys. A couple of questions. Can you comment on PIK and what the trends have been? It looks like PIK is a higher percentage of total interest income recently.
Patrick Schafer (Chief Investment Officer)
Yeah. Sorry. I was just pulling up the number, Steve. Look, I think probably some of that is driven by we had significantly lower payment income, so it might just look a little bit higher as a percentage because of that. Again, I'd say the broad brush comment is we don't see a material change in sort of how we are going to market and pick first cash. There have been some competitors that you've seen in our market a little bit. Some folks have been willing to offer the first 12-18 months as a partial PIK option for borrowers as kind of like trying to win a deal. That's not particularly prevalent, candidly, but it is sort of out there every once in a while.
Broadly speaking, we don't see material changes in our cash first PIK mix and kind of how we think about portfolio construction.
Speaker 6
Okay. On slide 10, you made the comment that you only added one new portfolio company, yet purchases and draws were almost $39 million. All the rest of that was existing portfolio companies and drawdowns on delayed draw terms?
Patrick Schafer (Chief Investment Officer)
Yeah, that's right. Again, we have some revolvers, delayed draw term loans, and all in existing borrowers. And we had one new security, if you will, that wasn't a previously committed DDTL but in an existing borrower. So yeah, again, broadly speaking, that is all from kind of the existing base. We'll probably have I don't know the exact number, but we'll probably have two or three new borrowers this quarter, just kind of some activity in April and May. But yes, but my statement is correct, and what you see there is activity within our existing portfolio.
Speaker 6
Okay. You started to comment on the current quarter. Can you make any comments about what you're expecting in terms of portfolio activity and portfolio size versus the first quarter?
Patrick Schafer (Chief Investment Officer)
Yeah. No, appreciate it. So again, kind of similar to what we had said last quarter, I think in what kind of I had alluded to when Chris Nolan asked the question, I think overall, we would kind of expect to be sort of on the margin of net deployer, but kind of, again, it depends a little bit on timing of certain things. So as an example, for this quarter, we were up a little under $2 million from net deployments, but the Riddell transaction closed at the end of the quarter. And so if that had been pushed 2 days, it would have looked like we were $6.5 million or $7 million of net receiver of capital.
So some of it depends a little bit on timing, but I think on the margin, you would expect, we would expect to be flat or slightly growing, let's say, over the course of the year, Steve, and whether it falls kind of a little bit around the edge of a quarter might be a plus or minus here or there, but we kind of generally would view ourselves as a marginal net deployer of capital this year.
Speaker 6
Got it. Slide 11, non-accruals. The number of investments didn't change. The cost didn't change. I haven't had a chance to go through the whole portfolio from the queue, but the fair value changed?
Patrick Schafer (Chief Investment Officer)
Yeah. A lot of this was driven by probably one security being marked down. You could ultimately look it through. It's a second-lien security in QualTek USA is the name of the borrower. But again, obviously, regardless of whether it is on accrual or not, we kind of go through from a fair value perspective. So that's, again, just a reflection of a markdown in a position that's on non-accrual.
Speaker 6
Okay. And where are you putting money out currently? The most recent deal you did or the most well, I guess you only did one new deal in the quarter, but the pricing you're talking about on some of the new deals for the second quarter, what are you looking at?
Ted Goldthorpe (CEO, President, and Director)
No real big change. I mean, there's been a big, big, big delta between where large-cap sponsor deals are getting done and where our market is. So if you look at trends in covenants, if you look at trends in spreads, they've really come in pretty dramatically for big LBOs, and they haven't really come in that much for us. There has been some spread compression, but not really that much. Our deployment really is in mostly two areas. It's really our core sponsor finance first-lien type stuff, which is still pricing at 12%-13% yields. And then number two is we do have a big non-sponsor franchise where we get paid a little bit more and help out the companies. So Riddell kind of fits into that bucket because it's not a traditional deal.
So again, we haven't really experienced spread compression in our portfolio, and the impact of the opening up of markets and stuff has been much more muted. I mean, you can see there's been a big trend of BSLs being issued to take out direct loans, but if you look at our fee income, it's never been lower. So again, as these loans approach maturity, fee income should pick up, but we haven't experienced the broad-based paydowns that you've seen the BSL market do.
Speaker 6
Okay. You actually just answered one of my questions, but assuming interest rates don't change much for the balance of the year because at this point, they're speculating 1 rate change and no one's sure if it's up or down, what would you expect to have on the unrealized line? Would you expect the mark-to-market to increase, decrease, stay sort of where it is?
Patrick Schafer (Chief Investment Officer)
Yeah. So good question, Steve. I'm just trying to think this through. It would depend a little bit more on where deals are getting done, obviously, and so there's kind of like two or three downstream effects, which is I would say the bigger driver of how we have movements is probably a little bit more the M&A market, and maybe that is a derivative of the interest rate environment. But where we are today, there's not a massive amount of M&A. It's picking up, but obviously off of a pretty low base. So there was a lot more activity this quarter, but off of an incredibly low base for probably the last three quarters of 2023.
And so with that as kind of the backdrop, it's been somewhat competitive in our market, which has led to, again, BSL prices declining, decreasing, and even private again, on the higher side, but private markets spreads also compressing, which is kind of independent a little bit of interest rates or not directly correlated to interest rates. So it's a tough answer, but to say if M&A remains sort of somewhat muted this year because of interest rates, I would say on the margin, we would have unrealized gains because that would probably lead to a continued spread compression and therefore pricing increases. But at least in our portfolio, it's not exactly a direct line between interest rate hikes or declines and the price of our portfolio.
Speaker 6
All right. Thanks.
Operator (participant)
Thank you. We have no further questions. Please continue.
Ted Goldthorpe (CEO, President, and Director)
We did have a question about our realized losses. Brandon, do you want to take that?
Brandon Satoren (CFO)
Sure. So the primary driver of the realized losses during the period was one name in particular that was restructured. It was HDC or Hostway. That drove the vast majority of the realized during the period.
Ted Goldthorpe (CEO, President, and Director)
Yep. So just related to one restructured security that we still continue to hold. So anyways, thank you all for attending our call. As per always, please reach out with any questions. We're always happy to discuss with anyone, and we look forward to speaking to you again in August for our second quarter conference call. Thank you very much.
Operator (participant)
Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.