BCP Investment Corporation - Earnings Call - Q1 2025

Transcript

Operator (participant)

Welcome to Portman Ridge Finance Corporation's First Quarter-ended March 31, 2025 Earnings Conference Call. An earnings press release was distributed yesterday, May 8, 2025, after the close of the market. 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 10Q 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. Speaking on today's call will be Ted Goldthorpe, Chief Executive Officer, President, and Director of Portman Ridge Finance Corporation, Brandon Satoran, Chief Financial Officer, and Patrick Schiffer, Chief Investment Officer. With that, I would now like to turn the call over to Ted Goldthorpe, Chief Executive Officer of Portman Ridge.

Ted Goldthorpe (CEO)

Good morning. Welcome to our first quarter 2025 earnings call. I'm joined today by our Chief Financial Officer, Brandon Satoran, and our Chief Investment Officer, Patrick Schiffer. Following my opening remarks on the company's performance and activities during the first quarter, Patrick will provide commentary on our investment portfolio and our markets, and Brandon will discuss our operating results and financial condition in greater detail. During the first quarter, despite operating under unpredictable macroeconomic environment, we continued to execute our disciplined investment strategy, deploying approximately $17.5 million into strong defensively positioned opportunities in our pipeline. We also had $15.7 million of repayments in sales during the quarter, resulting in our return to net deployers of capital. Additionally, we are enthusiastic about the strategic benefits the combination with Logan Ridge provides.

This merger represents a meaningful step forward for the company, with the potential to provide increased scale, improved liquidity, and greater operational efficiency, all key drivers in enhancing long-term shareholder value. We encourage all shareholders to attend the meeting and vote for the proposed merger, as recommended by the board of directors of both companies. We're excited about the road ahead and look forward to sharing more updates soon. The first quarter, the board of directors approved a base distribution of $0.47 per share. Of note, earlier this year, we modified our dividend policy and introduced a stable base distribution of $0.47 per share, which is anticipated to be sustainable across market cycles. Looking ahead, the current macroeconomic backdrop, shaped by shifting trade dynamics, inflation, and ever-evolving monetary policy, continues to drive uncertainty in the market.

These dynamics highlight the importance of taking a long-term approach grounded in disciplined credit selection and prudent risk management, and we view this period as an opportunity to further differentiate through thoughtful deployment and rigorous underwriting. I remain confident in our ability to drive the best outcome for shareholders and, most importantly, credit quality of the overall portfolio. Overall, we're excited about the opportunities ahead on the BCP Investment Corporation side, in addition to the new opportunities that should arise following the proposed merger with Logan Ridge due to scale, expected synergies, and cost savings benefits. We anticipate being active in the market, and with a healthy pipeline, fortified balance sheet, prudent investment strategy, and experienced management team, we remain confident in our ability to generate strong returns, risk-adjusted returns, and derive long-term value for our shareholders.

With that, I will turn the call over to Patrick Schiffer, our Chief Investment Officer, for a review of our investment activity.

Patrick Schiffer (CIO)

Thanks, Ted. Turning now to slide five of our presentation and the sensitivity of our earnings to interest rates. As of March 31, 2025, approximately 88.5% of our debt securities portfolio was based on a floating rate, with a spread pegged to an interest rate index such as SOFR or Prime rate, with substantially all of these being linked to SOFR. As you can see from the chart, SOFR rates have slightly decreased over the last few quarters, impacting the current quarter net investment income. Skipping down to slide 10, originations for the quarter were higher than last quarter and above the current quarter repayment and sales levels, resulting in net deployment of approximately $1.8 million. Overall yield on par value of new investors during the quarter was 10.6%, slightly below the yield of the overall portfolio at 11.0% on par value. Our investment portfolio at year-end remained highly diversified.

We entered the first quarter with a debt investment portfolio, when excluding our investments in CLO funds, equities, and joint ventures, spread across 24 different industries, with an average par balance of $2.6 million. Turning to slide 11, in aggregate, we had six investments on non-accrual status at the end of the first quarter of 2025, representing 2.6% and 4.7% of the company's investment portfolio at fair and cost value, respectively. This compares to six investments on non-accrual status as of December 31, 2024, representing 1.7% and 3.4% 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 $314.1 million at fair value, which represents a blended price of 90.5% on par value and is 91.1% comprised of first-lien loans at par value.

Assuming a par recovery, our March 31, 2025, fair values point to a potential of $32.8 million of incremental net value, or an 18.3% increase to NAV. When applying an illustrative 10% default rate and 70% recovery rate, our debt portfolio would generate an incremental of $2.43 per share of NAV, or a 12.5% increase as it rotates. Finally, turning to slide 13, if you aggregate the last three portfolios we have purchased, a combined $435 million in investments, and realized approximately 86% of these investments at combined realized and unrealized marks of 101% fair value at the time of closing the respective mergers. As of Q1 2025, we have fully exited the acquired Oakhill portfolio and have gone to a combined $22 million of the acquired HCAP and initial KCAP portfolios. I'll turn the call over to Brandon to further discuss our financial results for the period.

Brandon Satoran (CFO)

Thanks, Patrick. For the quarter-ended March 31, 2025, BCP Investment Corporation generated $12.1 million in investment income, a decrease of $2.3 million, or $0.25 per share, compared to $14.4 million reported for the quarter-ended December 31, 2024.

The decrease in investment income from the prior quarter was primarily driven by, one, a decrease of $0.6 million, or $0.07 per share, as a result of lower non-recurring paydown and fee income; two, a decrease of $0.6 million, or $0.07 per share, as a result of placing the company's first-lien loan to Sundance on non-accrual status, of which $0.05 is the non-recurring one-time impact to earnings as a result of writing off the prior quarter's interest receivable balance through current period income; three, a decrease of $0.4 million, or $0.04 per share, as a result of lower base rates; four, a decrease of $0.4 million, or $0.04 per share, as a result of the majority of the current quarter's deployment occurring in the second half of the quarter relative to the timing of repayments and sales; and then five, lower income from CLOs of $0.1 million, or $0.01 per share.

For the quarter-ended March 31, 2025, total expenses were $7.8 million, a $1.1 million decrease, or $0.12 per share, as compared to $8.9 million reported for the prior quarter. The decrease in expenses relative to the prior quarter was primarily driven by lower interest expense of $0.3 million, or $0.03 per share, lower management and incentive fees of $0.3 million, or $0.04 per share, as well as lower general and administrative expenses of $0.4 million, or $0.04 per share. The decrease in the general and administrative expenses was primarily driven by a lower-than-anticipated tax liability for the prior year. Accordingly, our net investment income for the first quarter of 2025 was $4.3 million, or $0.47 per share, which constitutes a $1.2 million, or $0.13 per share, decrease from $5.5 million, or $0.60 per share, reported for the prior quarter.

Our net asset value as of March 31, 2025, was $173.5 million, representing a $5 million decrease as compared to the prior quarter net asset value of $178.5 million as of December 31, 2024. On a per-share basis, net asset value was $18.85 per share as of March 31, 2025, representing a $0.56 per share decrease as compared to $19.41 per share as of December 31, 2024. The decline in net asset value was driven by unrealized depreciation on the portfolio, as well as the company's March dividend exceeding the company's first quarter net investment income. As of March 31, 2025, our gross and net leverage ratios were flat to the prior quarter at 1.5 times and 1.3 times, respectively. Specifically, as of March 31, 2025, we had a total of $255.4 million of borrowings outstanding with a weighted average contractual interest rate of 5.9%.

This compares to $267.5 million of borrowings outstanding as of the prior quarter with a weighted average contractual interest rate of 6.2%. The company finished the quarter with $52.6 million of available borrowing capacity under the senior secured revolving credit facility. With that, I will turn the call back over to Ted.

Ted Goldthorpe (CEO)

Thank you, Brandon. Ahead of questions, I'd like to re-emphasize how excited we are about the opportunities the proposed merger will create. Additionally, with a robust pipeline, prudent investment strategy, and an experienced management team, we believe we are well-positioned to take advantage of the current market environment and will be able to deliver strong returns to our shareholders through 2025. Thank you once again to all of our shareholders for your ongoing support. This concludes our prepared remarks, and I will turn the call over for any questions.

Operator (participant)

At this time, I would like to remind everyone to, in order to ask a question, press star, then the number one on your telephone keypad. We will pause for just a moment to compile the Q&A roster. Your first question comes from the line of Eric Zwicke with Lucid Capital Markets. Your line is now open. Please go ahead.

Eric Zwicke (Analyst)

Thank you. Good morning, all. First, just maybe a follow-up to make sure I got it down right. Brandon, in your comments, I think you gave that the reversal of interest for Sundance was $0.05 per share. Did you have that on a—I guess I could kind of back into that. Did you have it on a dollar basis?

Brandon Satoran (CFO)

Yeah. The out-of-period impact is about $450,000, give or take. I could give you the exact number separately.

Eric Zwicke (Analyst)

Okay. No, that's helpful. That's about what I was calculating as well. I guess my follow-up to that is I was trying to look at kind of what a normalized level of investment income would have been for the period without the reversal. I guess kind of one of the factors I'm looking at here, PIC income has continued to grow over the past quarter or two, and it's about 24% or so of total income at this point. Just kind of curious, is this a trend that's developing here in some companies that you're working with and granting PIC, and what is the outlook for returning these companies back to cash pay?

Brandon Satoran (CFO)

I think I'll let Patrick speak to the portfolio itself. Just as it relates to the percentages this quarter, I think you've got two things at play. One is a denominator effect, just inherently lower investment income, with about a $600,000 increase quarter over quarter in PIC. However, with that said, we do have the $0.05 reversal, the impact of the late deployment during the quarter, etc., that is artificially decreasing that total investment income number. Further, in the PIC line item, and we tried to highlight this in the financial statements, there's an amendment fee that's about $200,000, and then there's about another $150,000 of non-recurring items flowing through PIC this quarter that we would expect to normalize in the coming quarter.

Patrick Schiffer (CIO)

Yeah. On the portfolio in general, as we kind of said before, we do not have all that many names that sort of have converted to full PIC through underperformance. A good chunk of it is sort of—I do not want to say pre-planned, but sort of embedded in sort of the investment thesis from the time of the investment. Having said that, we probably have three names that I can think of that are PICing that have been underperforming, that we are working with the company on either sort of getting them to a place to reverse to cash and/or exiting the positions. I think we are hopeful that we will have some realizations on that front this year for a couple of names.

There is certainly a handful of names that sort of had challenges over the last sort of two years that at least we feel like we're seeing the other side of.

Eric Zwicke (Analyst)

Got it. I appreciate the commentary there. Ted, in your prepared remarks, I think you used both the words healthy and robust to describe the pipeline today. I am wondering if you could maybe just expand on that a little bit in terms of how it is composed in terms of new versus add-on opportunities, as well as any industries where you are seeing particularly attractive opportunities to invest today.

Ted Goldthorpe (CEO)

Yeah. Good question. I mean, I think, I mean, overall, market activity is way down, particularly post-liberation day. I think activity, broadly speaking, is pretty anemic. We have actually a decent pipeline, but a lot of it is stuff that we sourced kind of pre-liberation day and are working their way through the system. I would say in terms of new deals coming in, I would say it is down probably a lot. We do have a decent pipeline of things we have been working on for a while that are closing. I would say we are very, very, very cautious. We feel like the economy is not going to get better, let us put it that way. Lots of things can happen in the next six months, but we feel a lot of demand has been pulled forward. I think we are pretty cautious on the environment.

Despite deal flow being down, I don't think we're that worried about it because we're not overly bullish right now anyways.

Eric Zwicke (Analyst)

Yeah. That's a good point. I guess, has the potential impacts of the tariffs and maybe reductions in government agencies, has that changed at all how, I guess, you are underwriting or the type of companies you might look to add to the portfolio in the future?

Ted Goldthorpe (CEO)

Yeah. Good question. Again, we have very, very, very little in the way of direct consumer exposure. I mean, Brandon in his comments mentioned Sundance, which is probably one of the very few companies that has direct exposure, and that was an inherited position from an acquisition. We do have one or two other companies that have direct tariff exposure, but quite frankly, they are very under-levered, and we are not that worried about it. Our big question for all of our companies is second and third-order effects. If you go into a recession, there are other things that can impact their business indirectly because of tariffs. I think our whole sector, not just BCP Investment Corporation, but I think, generally speaking, we are all pretty light on consumer. Some BDCs have more than others. We have very, very little. In terms of direct impacts, I think we do not have a lot.

Anyways, we're looking for businesses that have, obviously, the ability to pass on price increases, those who have very, very, very high gross margins, so think software. I think, as I said, we're very, very focused on we're kind of planning for the worst, and maybe something better happens, but I think that's what we're modeling right now.

Patrick Schiffer (CIO)

Yeah. I think on the diligence and underwriting side, I mean, the reality is if you're a private equity firm or a family office or whomever trying to buy a company, it's going to be really tough to sort of meet in the middle on a buyer and seller with companies that have direct tariff exposure. Just from a pipeline perspective and things that we're working on, they tend to be a lot more weighted toward service-related businesses, healthcare, software, things like that that are pretty obviously don't have the first-order effect. Then, as Ted said, we're really focused on kind of second and third order and how they perform during kind of recessionary environments.

Eric Zwicke (Analyst)

That's all very helpful. That's it for me. Thanks for taking my questions.

Operator (participant)

Your next question comes from the line of Christopher Nolan with Ladenburg Thalmann. Please go ahead.

Christopher Nolan (Analyst)

Hey, guys. First, on the dividend. Last quarter, you guys are hinting that the $0.07 supplemental dividend would be quarterly. I did not see it this quarter. Am I correct that it is not in the first quarter earnings?

Brandon Satoran (CFO)

Yeah. Chris, I think what we laid out was a dividend policy where we set the base at $0.47, and then we would pay approximately 50% of the incremental NII above the base each quarter. This quarter, with the Sundance out-of-period impact being about $0.05, as well as some of the other items we laid out in our investment income, we did not have incremental NII in excess of the base, so that is why there was no supplemental. However, if you run rate our earnings, you will see we are very much—we should be paying supplementals going forward. It would be consistent with that framework, 50% of the incremental NII above the base distribution of $0.47.

Christopher Nolan (Analyst)

Okay. Thanks, Brandon. I guess, I mean, given that you guys are sort of sensitive to the LBO market and private equity and so forth, what's the risk that your private equity sponsors will not step in with additional support for their companies in terms of more equity if this cycle sort of prolongs itself?

Ted Goldthorpe (CEO)

Yeah. I mean, I think we always live with that risk. Again, our portfolio is predominantly first-lien. What we've seen, actually, is in our market, which is more of the middle market, sponsors have been a little bit more supportive than the large-cap market. Generally speaking, it's because middle-market funds have fewer companies in their portfolio, and therefore, the risk of loss is much higher than a very, very—like these big, big, big funds that we do not back. We've really—I do not know. Sponsors have been very constructive, actually. The negotiations on situations where they're putting money have actually been relatively non-controversial, I would put it that way. Now, again, that might change if this prolongs. Obviously, it's a lot harder for these guys to sell their companies.

We've been in a very long, probably the longest in my career, prolonged period of no repayments because, A, there's just not a lot of velocity `of capital. There's not a lot of businesses being sold. Number two, with higher rates, no one wants to refi. We'll get some natural refinancing to our portfolio over the next 12-18 months, but it probably means we're not going to get a whole bunch of sales done.

Christopher Nolan (Analyst)

A final question, and I missed it. Have you guys announced the date of the shareholder vote for Logan?

Brandon Satoran (CFO)

Yeah. So you're very timely. That should go out later today. The record date will be May 6th. June 6th will be the initial date for the shareholder meeting.

Christopher Nolan (Analyst)

Sounds good. Thank you.

Operator (participant)

Our next question comes from the line of Steven Martin with Slater Capital. Your line is open.

Steven Martin (Analyst)

Guys. Two questions, and they're sort of related. Can you talk about the composition of non-accruals and what the prospect is of—and you did deal with this a little—what the prospect is of those, A, becoming accrual current pay and what the upside might be? Second, Patrick, every quarter, you talk about the embedded unrealized losses that could be recovered. When you look through, there are a couple of big ones that are basically marked to zero, which I don't think would fall into your calculation of what is recoverable. Of the unrealized losses embedded in the portfolio, what is actually possible to recover?

Ted Goldthorpe (CEO)

Yeah. I'll take your first one first, Steve. Really, on the non-accruals, I would say we have, I'd say, two main positions within the non-accruals that are worth talking about, one being NVIGA, one being Sundance. I would say Sundance just recently, obviously, this past quarter went on non-accrual. I would say it's tough to estimate what the pathway is to turning back on. We do lay out, I guess, in theory, the upside would have been laid out in Brandon's comments, which is on an ongoing basis, about $0.02 a share of ongoing income from Sundance. That theoretically is the upside there. Again, having said that, it just recently went on, so I think that is a little bit less clear.

On NVIGA, we've been doing a number of things with the company. It's about similarly sized as Sundance. I don't have the exact number, but I would think of it as a fairly similar potential impact. Call it on either side of $0.02 a share. For that one, the company is positive cash flow, generating cash flow. We have sort of taken a fairly conservative position as a lender group and kind of working through that. I would say there is a fairly good prospect for turning back on cash interest. Having said that, there's a different analysis of whether that ultimately comes in as income versus NAV recovery or cost recovery, depending on what we think about on the prospects there. I would say that there's definitely a line of sight for cash interest being turned back on.

As I said, that does not necessarily mean it is going to have an impact through the income. Yeah. When we look at NAV upside, Steve, we break out for the board, and we break out for ourselves, kind of like stress names and names that are performing. The performing names, there is a lot of embedded upside in just those names. I think you are making the right point. The right point is you cannot save a lot of embedded upside on something marked at zero. Yeah. That is fair. What we do is we break out two things. We have a watch list, and then we have our performing credits. We have a pretty long list of performing credits with an average price in low 90s or something that are covered. I think we feel very good about that portion of the portfolio.

Yeah. To be clear, we strip out all those numbers that I give, strip out all of our non-accruals, which, again, tend to be your lower priced and some zeros like a ProAir or things like that in there. The second thing is, as Ted mentioned, I mean, I'll give you just a simple example, and it's relatively small, but probably about half-ish of those numbers that I gave out, maybe a little bit less than half, are from liquid names. We feel good about them to varying degrees. There was one name on the list I can think of off the top of my head, Lifescan. It had been trading at like $0.25-$0.30 for the better part of the last year, and it's now back up to $0.62-$0.63 where we sit today.

I think if you would have had that conversation a couple of quarters ago, you would have been asking the same question, and we do see the recovery there. Again, we do try and strip out the very obvious names, the very obvious names like our non-accruals and do not factor that into our NAV upside. Again, even with some level of conservatism, if we are giving out a 12.5%, which is the number, obviously, there is a lot of room there to be off on that number and still have some fairly meaningful NAV upside.

Steven Martin (Analyst)

For instance, and I'm just looking at the schedule of investments. You have Kcap Freedom marked from $25 to $11. I don't know what asset management company is, but it's marked from $18 to zero.

Ted Goldthorpe (CEO)

Yeah. Steve, sorry. I do not want to cut you off. Sorry, maybe it was not clear in the commentary. We are specifically only focusing on the debt securities of our portfolio. Not any of our joint ventures, not our equity positions, strictly the debt portfolio.

Steven Martin (Analyst)

Got it.

Okay. I'll come back to you offline with some questions.

Ted Goldthorpe (CEO)

Thank you.

Operator (participant)

Our last question comes from the line of Lee Crockett, Private Investor. Your line is open.

Lee Crockett (Manager)

Thank you. Good morning. I had a couple of questions on Kcap Freedom 3. It looks like you haven't received a dividend for the past six quarters. Is that correct? Could you go into any detail as to why you haven't received that dividend? A couple of follow-up questions would be, do you anticipate any dividend from that joint venture this year? Does that joint venture have an end date?

Ted Goldthorpe (CEO)

Yeah. Lee, I'll take a couple of them and Brandon can follow up as necessary, but I think I'll cover it. The short answer is yes, we still receive dividends from it. A little bit similar to the answer I gave Steve on NVIGA, which is there's a different analysis when you receive the dividend from an accounting perspective, whether you recognize that as income through our P&L or a recovery of cost.

For the last, I don't know how many quarters, but a decently long period of time, we have been, as we receive distributions from that joint venture, we are recognizing it as a recovery of cost as opposed to income. The short answer is yes, we still receive distributions on it, but from an accounting perspective, we recognize it as a return of capital as opposed to a return on capital. On the end date, there is a stated end date. It is very far in the future. The reality is, because of the way that's structured, at some point, the liability costs will start to outweigh the income from the assets, in which case we would likely look to monetize or exit that portfolio to your point on the dividends.

In the meantime, while we're still receiving dividends and repayments, in our opinion, it makes sense to kind of continue managing the vehicle.

Brandon Satoran (CFO)

I'll just add, we did receive a distribution in Q1. It was about $360,000. And then over the course of 2024, we got just shy of $2 million in distributions. Again, though, given the unrealized loss position that you highlighted in your question, we've been reducing the cost basis to reduce the realized loss as opposed to recognizing that as an income distribution.

Lee Crockett (Manager)

Okay. You said you got $360 of distribution. I see that coming down in the cost basis from year-end, but you took down the fair market value by $1.6 million. Is there something going on there that—or is that just mark to market?

Ted Goldthorpe (CEO)

Yeah. That's just mark to market. The joint venture is funded via a CLO structure. It is like a senior loan fund that's funded with the CLO. This particular quarter, just given that it's kind of continued to be a smaller-sized deal from a valuation perspective, sort of the third-party valuation sort of moved it from a—I'll call it a traditional cash flow CLO valuation model to what would be more like a NAV liquidation analysis. There is a little bit of that going on in the mark to market impact for the quarter.

Lee Crockett (Manager)

Okay.

Just any commentary you might have on the switching to the Great Lakes joint venture? That looks like it's performing historically better than the Kcap Freedom 3. That's a fair statement. Or any commentary you might want to add there? Just be helpful.

Ted Goldthorpe (CEO)

I would say that's a fair statement. I would also just say they're differently structured. They're differently structured from a liability perspective, and therefore the valuations are run a little bit differently. Great Lakes is sort of a, I'll call it, has a traditional evergreen credit facility as opposed to a CLO liability structure. From a valuation perspective, it's literally a NAV buildup of we value every single one of the underlying assets at fair value and then reduce the cost of debt, sorry, reduce the amount of debt, and that spits out what our value is on our balance sheet.

It is a little bit more straightforward, to be honest. That also is a continuous—we generally have a continuous investment period on that. It was that structure, Great Lakes, had an original three-year investment period. We rolled it all into a new three-year investment period. That initial investment period is coming up this summer. We would anticipate and anticipate rolling it into a new three-year investment period this summer. Unlike the Kcap Freedom 3 joint venture, where it is effectively running down, the structure of Great Lakes is more of an evergreen fund structure that has a continuous investment period.

Brandon Satoran (CFO)

Lee, I would just highlight, I think one important point here is the Great Lakes joint venture is a VC proprietary platform trade, whereas the Kcap Freedom 3 was a legacy position we inherited when we took over KCAP.

Lee Crockett (Manager)

Okay. Thank you.

Ted Goldthorpe (CEO)

Thank you.

Operator (participant)

That concludes the question and answer session. I would like to turn the call back over to Mr. Goldthorpe for closing remarks.

Ted Goldthorpe (CEO)

Thank you for attending our call. We will continue to provide our shareholders with updates about the proposed merger with Logan Ridge as those become available. As always, please reach out to us with any questions, which we're happy to discuss. We look forward to speaking to you again in August when we announce our second quarter 2025 results. Thank you very much.

Operator (participant)

Ladies and gentlemen, this concludes today's conference call. Thank you all for joining, and you may now disconnect.