BCP Investment Corporation - Q2 2023

Transcript

Operator (participant)

Portman Ridge Finance Corporation's Q2 2023 earnings conference call. An earnings press release was distributed yesterday, August 9th, 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 Forms 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 the forward-looking statements as a result of a number of factors, including those described in the company's filings Portman Ridge Finance Corporation assumes no obligation to update any such forward-looking statements unless required by law.

Speaking on today's call will Ted Goldthorpe, Chief Executive Portman Ridge Finance Corporation Jason Roos, Chief Financial Officer, Patrick Schafer, Chief Investment Officer. With that, I would now like to turn the call over Ted Goldthorpe, Chief Executive Officer of Portman Ridge Finance Corporation.

Ted Goldthorpe (CEO, President, and Director)

Good morning, thanks everyone for joining our Q2 2023 earnings call. I'm joined today by our Jason Roos, our Chief Investment Patrick Schafer. I'll provide brief highlights on the company's performance and activities for the quarter. Patrick Schafer will provide commentary on our investment portfolio and our Jason Roos will discuss our operating results and financial condition in greater detail. Yesterday, Portman Ridge Finance Corporation announced its Q2 2023 results, continuing off the back of strong earnings momentum seen in the Q1 2023, we are pleased to announce a solid financial performance for Portman Ridge Finance Corporation in both the Q2 2023 and the H1 of 2023 overall.

Our total investment income, core investment income, and net investment income substantially increased as compared to the three-month and six-month period of last year, as we continue to see the impact of rising rates have had in generating incremental revenues from our debt portfolio. Our core investment income for the Q2 of 2023 was $19.2 million, an increase of $5.5 million, as compared to $13.7 million for the Q2 of 2022. Our strong performance this past quarter has allowed us to maintain our dividend of $0.69 per share, marking a $0.06 per share distribution increase as compared to the Q3 of 2022.

In terms of a market update, M&A and deal activity picked up during the Q2, particularly in the back half and early Q3, despite the continued macro overhang of elevated inflation rates and continued increases in the Fed funds rate. While we continue to see lender-friendly concessions on pricing and terms, the competitive dynamics are stronger than we've seen in several quarters. We remain very selective regarding new portfolio companies, given the broader macroeconomic environment, but have found particularly attractive opportunities for add-on investments in existing portfolio companies looking to complete, compete tuck-in acquisitions. Turning the focus back to the company, we continue to believe in the valuation of Portman Ridge Finance Corporation as we continued repurchasing shares under our renewed stock purchase program.

In Q2 of 2023, we repurchased an incremental 27,801 shares, followed on the trend seen throughout 2022 and the Q1 of 2023. We expect this trend of repurchasing Portman Ridge Finance Corporation shares to continue throughout 2023, as we are able to do so. On this call, Patrick Schafer will also walk through the potential upside cases for our net asset value, but as it pertains to the current quarter performance, approximately 72% of our net losses in the investment portfolio were driven by our CLO equity positions. While this continued to be a challenging asset class, given certain structural issues with the syndicated loan market, CLO equity represents less than 3% of our total assets.

Approximately 74% of our portfolio is in first lien debt and is now valued at a meaningful discount to par. We've experienced normalized defaults or even elevated defaults, default rates versus history. We believe there's still embedded net asset value upside in our portfolio. Thus, this adds to our earnings momentum, driven by wider spreads on new origination and rising short-term interest rates to drive both potential NAV and earnings upside. With that, I will turn the call over Patrick Schafer, our Chief Investment Officer, for a review of our investment activity.

Patrick Schafer (Chief Investment Officer)

Thanks, Ted Goldthorpe. Turn to slide five of our earnings presentation and the sensitivity of our earnings to interest rates. As of June 30th, 2023, approximately 90.9% of our debt securities portfolio were either floating-rate with a spread to an interest rate index, such as LIBOR, SOFR, or Prime Rate, with 69% of these being linked to SOFR. As you can see from the chart, the underlying benchmark rate of our assets during the quarter lagged the prevailing market rates and still remains meaningfully below the LIBOR and SOFR rates as of July 25, 2023. We expect this to normalize over time as the underlying one, three, and six-month contracts reset.

For illustrative purposes, if all of our assets were to reset to either a three-month LIBOR or SOFR rate, respectively, we would expect to generate an incremental $484,000 of quarterly income. While our liability costs will also rise relative to their Q2 levels.

We still expect a net positive benefit of approximately $0.04 per share, assuming all of our assets and liabilities are utilizing the same three-month benchmark rate for an entire quarter, which is further illustrated on slide seven. Skipping down to slide 11, both investment activity and originations for the quarter were slightly higher than prior quarter, resulting in net repayment and sales of approximately $21.0 million. Net deployments consisted of new fundings of approximately $15.3 million, offset by approximately $36.3 million of repayments and sales. These new investments are expected to yield a spread to SOFR of 828 basis points on the par balance, the investments were purchased at a cost of approximately 98.65% of par, which will generate incremental income to the stated spread.

As mentioned during our earnings call, it was our expectation that Q2 would generate more repayments than deployments, as we intentionally drew up a portion of our revolver in Q4 of 2022 to invest ahead of several repayments. In May, we repaid $23.6 million of our 2018-2 Secured Notes. I would like to specifically call out two payments paydowns during the quarter, both of which occurred relatively early on. First, we completed the recapitalization of Northeast Metal Works, an asset acquired as part of the merger with Harvest Capital in April 2023. As part of the transaction, we were repaid approximately 1/3 of our position and restructured the remaining position to prioritize additional periodic repayments.

Secondly, in mid-May, we will refinance out of our second lien term loan position in Tex-Tech, which has been a portfolio company since the initial externalization transaction back in April 2019. In addition to being one of our larger positions, it was by far our largest second lien position and allows us to further rotate into first lien senior secured loans. During the quarter, we funded $600,000 into our Great Lakes joint venture, which has taken us close to being fully funded under that commitment. Similar to our experience with new assets on the balance sheet, incremental investments in our Great Lakes joint venture have come at increasing spreads and widening OID, which should result in higher returns going forward.

Our investment securities portfolio at the end of the Q2, remained highly diversified, with investments spread across 27 different industries and 104 different entities, all while maintaining an average par balance per entity of approximately $3.2 million. Turning to slide 12. We had one new issuer and two incremental portfolio company investments going on accrual as compared to March 31st, 2023. 1One of which is a term loan for QualTek, which is valued at 53.82% of par and has recently emerged from bankruptcy, from which we are looking to recover a portion of our initial investment. The second of which is a term loan for Lucky Bucks, which is valued at 28.2% of par.

In aggregate, investments on nonaccrual status remain relatively low at 7 investments in the Q2 of 2023, as compared to five investments on nonaccrual status as of March 31st, 2023. These seven investments on nonaccrual status at the end of the Q2, 2023, represent 0.8% and 2.6% of the company's portfolio at fair value and amortized cost, respectively. On slide 13, as Ted Goldthorpe mentioned, if we focus on the top three rows of the table and exclude our nonaccrual investments, we have an aggregate debt securities fair value of $410.6 million, of which represents a blended price of 92.18% of par and is 88% comprised of first lien loans at par value.

Assuming a par recovery, our June 31st, 2023, fair values reflect a potential of $34.8 million of incremental NAV, a 16.2% increase or $3.65 per-- or $3.65 per share, excluding any recovery on the nonaccrual investments. For illustrative purposes, if you were to assume a 10% default rate and a 70% recovery rate on this debt portfolio, there would still be an incremental $2.25 per share of NAV value, or a 10% increase over time as the portfolio matures and is repaid. Again, excluding any recovery on the nonaccrual investments. The default rate is above-- this default rate is above anything the market is expecting or has experienced historically. Turning finally to slide 14.

If you aggregate these three portfolios, over the last three years, we have repurchased a combined $434.8 million of investments, have realized over 73% of these positions at a combined realized and unrealized mark of 102% of fair value at the time of closing the respective mergers. We were able to achieve these results despite the global pandemic in 2020 and most of 2021, and a weak market for almost all asset classes in 2022.

In a similar vein as the previous slide, as of June 30th, 2023, there remains an incremental $12.8 million of value as compared to par in these portfolios, which equates to $9.4 million, or a 4.4% increase when applying a similar 10% default rate and 70% recovery analysis and excluding nonaccrual investments. I'll now turn the call over Jason Roos to further discuss our financial results for the period.

Jason Roos (CFO)

Thanks, Patrick Schafer. As both Ted Goldthorpe and Patrick Schafer previously mentioned, despite operating under a challenging economic environment, our results for Q2 of 2023 reflect strong financial performance. Our total investment income increased by $4.6 million to $19.6 million in the Q2 of 2023, in comparison to $15 million in the Q2 of 2022, as we continue to see the impact of rising rates on our portfolio. This reported total investment income represents a $700,000 decrease from the $20.3 million of reported total investment income in the Q1 of 2023.

The quarter-over-quarter decrease was largely due to reduced payment-in-kind income seen in the Q2 when compared to the Q1 of 2023, as well as lower paydown income and lower purchase accretion, as the discount associated with investments acquired through mergers and acquisitions continues to run off. Excluding the impact of purchase price accounting, our core investment income for the Q2 of 2023 was $19.2 million, an increase of $5.5 million as compared to $13.7 million for the Q2 of 2022, and a decrease of $100,000 as compared to $19.3 million for the Q1 of 2023.

Our net investment income for the Q2 of 2023 was $7.9 million, an increase of $2.4 million as compared to $5.5 million for the Q2 of 2022. A decrease of $600,000 as compared to $8.5 million for the Q1 of 2023. The quarter-over-quarter decrease was largely due to the aforementioned decreases seen in payment-in-kind income, paydown income, and purchase discount accretion. For the six months ended June 30th, 2023, our NII was $16.4 million, an increase of $3 million as compared to $13.4 million in the same six-month period from 2022.

As of June 30th, 2023, and March 31st, 2023, the weighted average contractual interest rate on our interest-earning debt securities was approximately 12.1% and 11.7%, respectively. We believe the portfolio continues to be well-positioned in a rising rate environment to generate incremental revenue in future quarters. Total expenses were relatively flat quarter-over-quarter at $11.7 million for Q2 2023, as compared to total expenses of $11.8 million seen in Q1 2023. This quarter-over-quarter decrease highlights our efforts at continuing to reduce overall expenses in certain areas such as administrative services, professional fees, and other general and administrative costs.

Our net asset value for the Q2 of 2023 was $215 million, or $22.54 per share, as compared to $225.1 million, or $23.56 per share in the Q1 of 2023. A significant driver of the quarter-over-quarter decline is attributable to realized losses from impairment taken against our CLO equity positions, as well as markdowns on that portfolio.

On the liability side of the balance sheet as of June 30th, 2023, we had a total of $333.7 million par value of borrowings outstanding, comprised of $78 million in borrowings under our revolving credit facility, $108 million of 4.875% Notes due 2026, and $147.7 million in secured Notes due 2029. This balance represents a quarter-over-quarter decrease of $24.6 million, driven by a $23.6 million repayment on the secured Notes due 2029.

As of the end of the quarter, we had $37 million of available borrowing capacity under the senior secured revolving credit facility and no remaining borrowing capacity under the 2018-2 Revolving Credit Facility, as the reinvestment period ended shortly after our draw on November 20th, 2022. As of June 30th, 2023, our debt-to-equity ratio is 1.6 times on a gross basis and 1.4 times on a net basis. From a regulatory perspective, our asset coverage ratio at quarter-end was 163%. Lastly, as announced yesterday, a quarterly distribution of $0.69 per share was approved by the board and declared payable on August 31st, 2023, to stockholders of record at the close of business on August 22nd, 2023.

This is a $0.06 per share distribution increase as compared to the Q3 of 2022. Including the distribution, sorry. Including the distribution subsequent to the announcement of full year 2022 earnings results, total stockholder distributions for 2023 amount to $2.06 per share. With that, I will turn the call back over to Ted Goldthorpe.

Ted Goldthorpe (CEO, President, and Director)

Thank Jason Roos. Ahead of questions, I'd like to reemphasize that we believe we are well-positioned to take advantage of opportunities that arise from the current market environment by continuing to be selective and resourceful in our investment decision making. Overall, we believe we remain situated to continue to deliver attractive returns to our shareholders throughout the H2 of 2023, as we have demonstrated in the H1 of 2023. Thank you once again to all our shareholders for your ongoing support. This concludes our prepared remarks, and I'll now turn the call over to the operator for any questions.

Operator (participant)

Thank you. The floor is now open for your questions. To ask a question this time, please press Star, then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes Christopher Nolan with Ladenburg Thalmann. Your line is open.

Christopher Nolan (Managing Director and Equity Research Analyst Covering Mortgage REITS and BDCs)

Hey, guys.

Jason Roos (CFO)

Hi.

Christopher Nolan (Managing Director and Equity Research Analyst Covering Mortgage REITS and BDCs)

Did the Anchor purchases have any accretion to NAV per share? If so, can you quantify it?

Jason Roos (CFO)

Yeah, we bought about, what? about $500,000 worth of equity in the quarter. I think if, if you look at it, six months to date, I think it's about $0.37 a NAV, roughly.

Christopher Nolan (Managing Director and Equity Research Analyst Covering Mortgage REITS and BDCs)

... Were there any non-recurring items in EPS?

Jason Roos (CFO)

Yeah, I would say on the expense side, there's probably about Well, I know there is. There's about $100,000 of non-recurring or one-time legal expense in the professional expenses. Other than that, you know, our, you know, other income fees are generally kind of one-time in nature, but do have a recurring effect, you know. Quarter-over-quarter, it's generally pretty somewhat volatile, but there's always some fee income that we, we see in that line. I would say it's, it was, it trended up this quarter from last quarter due to some one-time items in there, about $300,000-$400,000, roughly.

Christopher Nolan (Managing Director and Equity Research Analyst Covering Mortgage REITS and BDCs)

Great. Then I guess finally, I'm seeing, for the BDCs I cover, incremental asset quality deterioration. Strategically, do you see the developing environment to be conducive to more consolidation in the BDC space?

Patrick Schafer (Chief Investment Officer)

Oh, that's not where I thought you were going with that question. I would say, I think the a lot of the low-hanging fruit has been picked, I think, in terms of M&A. You know, again, scale is becoming more, and more, and more important across broad credit. Then you're seeing, like, you know, both in terms of getting financing from banks, which is becoming more scarce, and also in servicing our clients appropriately. Scale is definitely important. I, you know, I don't see any near-term M&A, but, but it is a good question. It's something we're always looking for, and obviously, we always get phone calls on, on M&A opportunities.

Christopher Nolan (Managing Director and Equity Research Analyst Covering Mortgage REITS and BDCs)

Sounds good. I'll get back in the queue. Thanks, guys.

Jason Roos (CFO)

Thank you.

Operator (participant)

Our next question comes Ryan Lynch with KBW. Your line is open.

Ryan Lynch (Managing Director in the Equity Research Group)

Good morning. My first question-

Jason Roos (CFO)

Good morning.

Ryan Lynch (Managing Director in the Equity Research Group)

Hey. First, this is clarification. Did you say 72% of the realized losses, which was kind of reflecting the, you know, the, you know, $6 million-$7 million of losses was related to the CLO positions, or was that 72% of realized and unrealized losses?

Jason Roos (CFO)

Yeah. Hey, Ryan Lynch. Of, of the $6.7 realized, about $5, $5.6 of that was related to the CLOs.

Ryan Lynch (Managing Director in the Equity Research Group)

A couple of questions on that then. What drove the decline in, I guess, CLOs? Because that wasn't offset by realized gain or unrealized gains. I guess when you sold those, what kind of drove the lower valuations in your CLO book? Because it didn't seem like for all these syndicated loan prices really moved lower in the quarter. In fact, they were up.

Jason Roos (CFO)

Yeah. Let me clarify that a little bit, Ryan Lynch. The CLOs did have about $900,000 in unrealized that flipped into realized as part of that $5.6 million that I just mentioned. The remainder of that, well, all of the $5.6 million was flipped into realized as part of an impairment, so we reduced the cost basis of the instrument. It wasn't a sale of the positions, and that's driven by basically, the accounting and the fair value based on the future cash flow expectations of that CLO equity. I'll pass it to Patrick Schafer.

Patrick Schafer (Chief Investment Officer)

Yeah. Having said all that, there is still again, despite whether you consider it unrealized versus whether we, we took it as an impairment versus remains unrealized, there were some, we'll call it, fair value declines in the CLO portfolio. By and large, your point, the syndicated market hasn't moved very much. What we've seen, you know, honestly, this quarter for the first time in a while, we can talk about other reasons why, but a lot of the CLO managers themselves are actually selling some of the assets within the portfolio, sometimes to meet certain tests, sometimes for other reasons.

Given that most of our CLO, the CLO vehicles that we're invested in are out of the reinvestment period, you know, if you sell an asset at 90, that's just a, a hit relative to, to NAV. What, what we saw, particularly, again, it's across a number of the we have, I guess, three different managers in total between our CLOs, and, and by and large, the, the majority of the, of the, call it, markdown or decline in fair value is from the managers themselves selling assets at, you know, below par.

Ted Goldthorpe (CEO, President, and Director)

Yeah. Ryan Lynch, thematically, what's happening, which obviously is incredibly frustrating, is the way CLOs are set up. Obviously, they manage to tests, and you've obviously had ratings migration down or things on downgrade watch.

Yeah, as Patrick Schafer said, a lot of it is portfolio repositioning around downgrades. Obviously, that hurts the valuation of the CLO equity. I mean, I guess the only silver lining in it is it's only 2.5% of our remaining portfolio.

Ryan Lynch (Managing Director in the Equity Research Group)

Okay. Makes sense. Then I guess on, on the other portion then, that, that kind of covers, I think, a lot of the, the realized losses, but there were still some unrealized losses in the quarter, as well as some realized that was outside of the CLOs. What drove those declines? I know there were, I think you said two non-accruals. I haven't been able to calculate. Were those driven by markdowns in the two new non-accruals, or what was kind of the overriding factors for the other writedowns in the portfolio?

Patrick Schafer (Chief Investment Officer)

Yeah, I'd say there's probably a little bit, a little bit from the non-accruals. I'd say the bigger impact, probably about half of, call it the non-CLO impact, is from one position. It's called Movex. It's a mark-to-market decline. You know, we continue to work with the company and the lender group, and, you know, we feel pretty decent that that markdown quarter-over-quarter is really just temporary. We would, you know, anticipate that sort of reversing itself in the kind of near to medium-term. That's kind of about half of the mark is really just what we would, what we would very much characterize mark-to-market.

Ryan Lynch (Managing Director in the Equity Research Group)

Probably most of the rest of the other half is due to two other positions. One is called Anthem Sports & Entertainment. It's just a large position, and we marked it down, you know, two or three points, sort of, kind of consistent. It's consistent with sort of mark-to-market. Again, it's, it's not a, it's not a significant markdown on a percentage basis, but it's a relatively large position, so it has kind of an outsized dollar impact. The third one is HDC or Hostway has been underperforming a little bit.

They are in the process of selling a number of assets, various different assets within the, the company, that we'd expect to realize a decent chunk of that loan in the kind of near to medium term, and the remainder of it will kind of continue on. So again, you know, I think we feel relatively good that most of that markdown is temporary or call it mark-to-market, as opposed to credit necessarily.

Ted Goldthorpe (CEO, President, and Director)

Yeah, one of them, on the nonaccrual side, it is two new securities, but it's only 1 new issuer.

Ryan Lynch (Managing Director in the Equity Research Group)

Oh.

Ted Goldthorpe (CEO, President, and Director)

One of those issuers is expected to emerge from bankruptcy, or it's emerged from bankruptcy. The nonaccrual, the, the nonaccrual line should also be stable to positive, barring some surprises. I'd say thematically, credit quality in the, in the portfolio, despite Patrick Schafer's comments, is, is, is pretty stable actually. Again, we don't expect a big spike in nonaccruals going forward.

Ryan Lynch (Managing Director in the Equity Research Group)

Okay. Well, kind of on that point, and, and, when you were talking about kind of Hostway and then the potential recovery for there, you guys talked about some potential upside to, to NAV if, if some of your, your senior loans that, that aren't on nonaccrual status today are kind of recovered, or even ran through a scenario where there was, you know, X percentage of defaults and certain recoveries. I guess, when I mean, what, what do you think changes in the environment before those start getting written up? Or is it just a very slow sort of accretion?

Like, if everything-- if, if those companies continue to perform, kind of lay that down as the foundation, is it just gonna be a, do you think, a slow accretion over time as they get closer to maturity and repay, which, you know, could obviously take years? Does something have to happen in, in broader in, in the market regarding spreads or something like that? Or, what is sort of the, the... What do you see as the, the potential catalyst or timeframe to, to, to, you know, eventually recover, you know, those, those potential writedowns?

Ted Goldthorpe (CEO, President, and Director)

Yeah. I'll-- I, I think, I think-- We think there's a lot of embedded upside in the book because of this mark-to-market phenomenon. The way our matrix works in terms of markdowns, there's a bit of a lag. Obviously, today, as we sit here today, you know, obviously, the loan and high yield market have tightened, you know, recently. Some of that will just be mark-to-market based on indices. Then the number two is, obviously, a lot of it's driven by activity levels. Activity levels have been really, really muted this year. Like, you know, repayments are really low. We are seeing, you know, pickup in M&A and a pickup in activity levels. Some of it is just, you know, these companies get sold. There's a huge pull to par effect.

I mean, one thing that's affecting us is, generally speaking, is, some companies are doing these small incrementals, and these small incrementals are pricing wide to where the existing debt stacks are. Even though there's no credit issue, it reprices not only the first lien, but it reprices the second lien preferred, it reprices the whole capital structure. When companies go out and do these small little add-ons, that also could have a pretty big impact on mark-to-market, even though there's no credit issue. We've seen that in a couple names where we're marked at a pretty big discount to par, but there's no credit, there's no credit issue, and it's generating really good yields. I mean, the answer to your question is a mixture of all of them.

Like, A, there's a pull-to-par effect just for maturities, we don't have a lot of, like, long-term maturities given their loans. Number two is, tightening of the market, which we've seen a little bit of that happen over the last couple of months. Number three is, you know, it, they're correlated, because if the market starts tightening, people can, can obviously get things done easier, and therefore activity levels should pick up M&A-wise. There, there you get some pops on valuations when things get taken out.

Ryan Lynch (Managing Director in the Equity Research Group)

Yeah. Okay. I understand. I know it, we're obviously talking about the future, which is incredibly, you know, hard to, you know, nobody can predict, but I appreciate the, the comment on that. One other last question that, that actually just, just came up as I was kind of thinking about your previous comments on the CLOs. I want to circle back to, to the discussion on the CLOs and, and the writedowns. Is, is...

I know it's a very small percentage of your portfolio at, at this point, especially with the most recent markdowns, but the sort of trend that happened in, in the Q2 of, of maybe having to, to move some stuff around because of, you know, maybe some downgrades or things like that, and having to sell at, at losses, is there any reason to expect that, that would stop in the Q3, or is there another risk, potential for continued writedowns? Again, I know it's a smaller portfolio, but could we continue to see that in the Q3, writedowns from the CLOs?

Ted Goldthorpe (CEO, President, and Director)

Yeah, it's a good question. I mean, the answer, the short answer to your question is, like, I don't know. It feels like a lot of that repositioning was done in the H1 of the year, and obviously, people are feeling much, much better about the economy and all that. There's been way less ratings movements recently, but obviously ratings are a lagging indicator. I don't have a great answer for your question. We think we're marked very conservatively on those, and obviously, we took a big writedown this quarter. It's hard to, to be honest with you, it's hard to know because we're not the manager of those couple securities, right? Like, I don't wanna, I don't wanna, like, say something that turns out to be wrong because we just don't know.

Ryan Lynch (Managing Director in the Equity Research Group)

Yep. That's fair. That's totally fair.

Patrick Schafer (Chief Investment Officer)

... Okay. That's all for me. I appreciate the time today.

Ted Goldthorpe (CEO, President, and Director)

Thank you so much.

Operator (participant)

Next question comes Steven Martin with Slater Capital Management. Your line is open.

Steven Martin (Portfolio Manager)

Hi, guys.

Ted Goldthorpe (CEO, President, and Director)

Steven Martin.

Steven Martin (Portfolio Manager)

A couple of my questions have been asked and answered. Of your portfolio, you know, the debt, the senior portion of your portfolio, what would you bet the average mark is?

Patrick Schafer (Chief Investment Officer)

Yeah, I mean, it's, it's somewhere in the-- I'd say the, the, the total is probably representative of, of the senior portfolio, which is somewhere in the, in the low 90s, $0.91-$0.93 of par, give or take. I think our portfolio as a whole is 91.6% or 91.7%. I don't think the, I don't think the senior loan versus the second lien is, is significantly different. Again, senior loans make up, you know, 75% of the total portfolio and high 80% of the debt portfolio. You could probably think of that as a, as a pretty comparable number, like, you know, in terms of representing the first lien portfolio as a whole.

Steven Martin (Portfolio Manager)

That's why you, you say that there's a lot of accretion opportunity or NAV recovery in the senior portion of the portfolio?

Patrick Schafer (Chief Investment Officer)

Correct. In, in the, in the portfolio as a whole, obviously, obviously, it's, it's significantly weighted towards senior, and that's how. I think we, we call that out specifically, because as we're thinking about default rates and recovery rates, obviously recovery rates would be much higher in, in senior positions as opposed to junior positions.

Steven Martin (Portfolio Manager)

Okay. The non-performings. You know, you, you have the chart, which I love, of the acquisitions you've done and how those portfolios have realized, realized and unrealized. Of the non-performings, how many of them are BC Partners, BC Partners originated versus sort of old purchased portfolio positions?

Patrick Schafer (Chief Investment Officer)

Yeah, the short answer is only one is a BC Partners, is a BC Partners-originated asset, and the rest of them, the remaining, I guess we're talking about six issuers or six portfolio companies. The remaining five are, you know, various different kind of legacy, call it, positions. Or at a minimum, were in the, you know, were in the book before we took over, and that would include going all the way back to the KCAP externalization. Call it, you know, five o fsix borrowers are, you know, again, between KCAP and these acquisitions, are, we'll call it legacy. We don't like to use that word, but call it legacy.

Steven Martin (Portfolio Manager)

Okay. You when you underwrote those acquisitions, are these surprises and are these bad outcomes versus what you underwrote? Is this where you had already... You know, it was part of your purchase accounting?

Patrick Schafer (Chief Investment Officer)

Yeah, good question. I, honestly, I would need to, I would need to look at them all individually. I do think a decent amount of, of, so of the six, my hunch is... Of the six, again, let's just go back. Of the six, two are, again, they're like, kind of, I'll call them, like, not real accruals. They're. One is $75,000 note that we converted a equity position to a senior note. It was never on accrual in the, in the first place. It was never. It never had any fair value. That really, again, in my, my perspective, that's not really a credit issue whatsoever. That drops you down to, call it, five portfolio companies.

One is a $500,000 remaining of a position from the original KCAP that, you know, was already marked at $0.50 something when we took over. It was on non-accrual when we took it over. There's a very small piece that we've been waiting to get sort of flushed out of a state bankruptcy process. It's been in this, it's been in this, you know, process for, I don't know, like four years or so. That, that brings you down to four. One of them is a BC portfolio company. That brings you down to three. I think two of the remaining three were on non-accrual at the time we took it over, so maybe call it one was a surprise, versus the, versus the five that we sort of took over in terms of our underwriting.

Steven Martin (Portfolio Manager)

Okay. Ted Goldthorpe, what is the prospect? And you've talked about the Q3 a little. We're only halfway through. What's the prospect for deployment versus repayment in the Q3?

Ted Goldthorpe (CEO, President, and Director)

I would say we continue to see good opportunities to deploy, although the market is getting a little, literally over the last three weeks, the market has gotten tighter for the first time in, in probably four quarters. Repayments continue to be muted. I would say, you know, we're getting some one-off payments, but I would say repayment activity, we haven't seen a big pickup, you know, as compared to, as compared to average.

Patrick Schafer (Chief Investment Officer)

I, I think the, the only additional thing I would add, I would add to Ted Goldthorpe's comment is: we did, like the, the Tex-Tech repayment was in sort of the middle of May, which was a relatively chunky position. It was almost $13 million. As we kind of think about deployment, that cash is sort of in the system waiting to be deployed. Just the way that our market works, the private deals tend to have a bit, a bit of a lead time. You, you could expect, even all else being equal, that $12 million to be sort of redeployed into various different investments that perhaps were not on the books as of June 30th.

Ted Goldthorpe (CEO, President, and Director)

Yeah, I mean, not to state the obvious, Tex-Tech was a second lien. We can recycle that into comparably yielding first liens. You obviously get better advance rates on your. It's a ROE accretive payoff, let's put it that way.

Steven Martin (Portfolio Manager)

Right, but would you expect if, if repayments are muted, would you expect to deploy, $10 million this quarter, $20 million, $30 million? Is there some sort of guesstimate you have?

Patrick Schafer (Chief Investment Officer)

I'd say probably more in the $10 million-$20 million range, as if not, probably not the $30 million range, but I'd say more again, just pure deployments, probably more in the $10 million-$20 million range.

Steven Martin (Portfolio Manager)

Okay. One last one. You've cons- you've, for the last, at least the last two or three quarters, you've outearned, your NII has far exceeded your dividend rate. I know this is a question that you sort of expect. What's the prospect for either a dividend increase or a, some form of special between now and the end of the year, or do we have to wait till after December?

Ted Goldthorpe (CEO, President, and Director)

No, I think here's, here's the challenge with the dividend policy, is obviously we're way over in our dividend. The challenge we have is the, you know, the way we do our dividend is the forward curve for rates. It, you know, when we set our dividend last quarter, was down like 200 basis points in the next two years. Obviously, this, this higher for longer, you know, the market's getting more comfortable with higher for longer, so that, that, that two-year-out curve is actually, has gone up a lot. We always want to make sure our dividend is protected, around cuts and short-term rates, and we're, we have a huge cushion for that. Number two is we're gonna have to reprice some of our CLO debt on our balance sheet, right, which is gonna be a bit of an increase.

All that stuff means that if we, if we take a, a big, big hit on short-term rates, and we have to reprice all of our on-balance sheet CLO debt, we can still easily cover our dividend. Yeah, we'll, we'll, we'll revisit it next quarter. We re-revisit it every single quarter. It's just hard with when, you know, when short-term rates forward are moving around as much as they have been.

Steven Martin (Portfolio Manager)

That, that actually-

Ted Goldthorpe (CEO, President, and Director)

The answer is, the answer is, the answer is we will revisit our dividend again in our November meeting.

Steven Martin (Portfolio Manager)

Yeah, because the year-over-year has been, you know, year-over-year has been, you know, a nice percentage increase up until now. Last year, in the Q3, you upped the dividend, so if you don't up the dividend, your year-over-year is pretty flat. Well, one other question on the CLOs. If you guys think that the CLOs are realizing losses or I... You know, the non, you know, outside manager CLOs are realizing losses that you don't think are warranted, are you allowed to go buy those securities from them at that discount?

Patrick Schafer (Chief Investment Officer)

I mean, there is, I put it this way, Steven Martin. There's nothing that would prevent us from doing it other than they don't necessarily, like, tell us when they're gonna sell stuff and what they're gonna sell. It'd be very challenging to sort of, like, line that up, but conceptually, we could. I mean, again, we could, we could call them up and say, "Hey, before you sell anything in these vehicles, call us," which, which we could do. You know, they don't, they don't, like, give us a heads up as they're in the process of selling things and what they're gonna sell. It's, it's tough for us to, like, have advance warning of, of their plans.

Steven Martin (Portfolio Manager)

Got it. Guys, for the future, like, no more CLOs. Unless you're gonna self-manage them, so you can control them. All right, I'll talk to you guys later.

Ted Goldthorpe (CEO, President, and Director)

Thanks, Steven Martin.

Patrick Schafer (Chief Investment Officer)

Thanks, Steven Martin.

Operator (participant)

Again, if you would like to ask a question, press star, then the number one on your telephone keypad. Another question comes in Christopher Nolan with Ladenburg Thalmann. Your line is open.

Christopher Nolan (Managing Director and Equity Research Analyst Covering Mortgage REITS and BDCs)

Just a quick follow-up on the CLO question. Any timetable when you can basically unwind this position? I know you guys have been holding on to it, but given your portfolio managers are selling, can we see a timeframe in terms of you exiting CLOs? Thanks.

Patrick Schafer (Chief Investment Officer)

Yes, I'd say, in most of our positions, we are not the majority holder, so we don't really have control over the exit. For ones that we do, which are a very small subset, we certainly look at that, Christopher Nolan. Obviously, it again, kind of where the market is right now, and again, putting aside the, the managers' behavior, you know, we do think there is, there is some far more temporal, declines or, or unrealized losses in the syndicated market, just from kind of mark to market and things like that. I think our, our hope would be to kind of, you know, exit those in a more normalized environment. For the most part, we don't actually have control over those within our CLOs, we're a relatively small, percentage of the equity.

Christopher Nolan (Managing Director and Equity Research Analyst Covering Mortgage REITS and BDCs)

Okay, thanks for the clarification.

Operator (participant)

There are no further questions at this time. Mr. Goldthorpe, I turn the call back over to you.

Ted Goldthorpe (CEO, President, and Director)

Thank you very much, and thanks, everyone, for joining us today, and we look forward to speaking to you again in early November, when we'll be announcing our Q3 2023 results. Thank you so much, and enjoy the end of your summer.

Operator (participant)

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.