BCP Investment Corporation - Q3 2023
November 9, 2023
Transcript
Operator (participant)
Welcome to Portman Ridge Finance Corporation's third quarter 2023 earnings conference call. An earnings press release was distributed yesterday, November 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 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, Jason Roos, 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.
Ted Goldthorpe (Managing Partner, Chairman of the Board of Directors, and CEO)
Good afternoon, and thanks, everyone, for joining our third quarter 2023 earnings call. I'm joined today by our Chief Financial Officer, Jason Roos, and our Chief Investment Officer, Patrick Schafer. I'll provide brief highlights on the company's performance and activities for the quarter. Patrick will provide commentary on our investment portfolio and our markets, and Jason will discuss our operating results and financial condition in greater detail. Yesterday, Portman Ridge announced its third quarter 2023 results, and we are pleased with the solid earnings power of the portfolio, despite operating in a somewhat challenging market conditions. Our core investment income was up year-over-year, increasing by $700,000, as we continue to see the impact that rising rates have on our debt portfolio. Additionally, our net asset value per share increased from $22.54 per share to $22.65 per share.
We continued our accretive repurchase program, purchasing over $60,000 shares at an average cost of approximately $1.2 million during the third quarter. Due to the continued strong performance this past quarter, the board of directors was able to approve a dividend of $0.69 per share, a level that represents a 12.2% annualized return on net asset value. On a year-to-date basis, total dividends to be distributed to shareholders amount to $2.75 per share, representing 7.4% increase as compared to the dividend distributed in 2022. As we have discussed in previous quarters, M&A deal flow continues to be at depressed levels year to date, but we remain optimistic on the overall outlook.
On the sponsor finance front, we are starting to see the early innings of deal activity pick up through a combination of valuation expectations being more reasonable and acceptance that interest rates will remain elevated for an extended period of time, significant dry powder on the sidelines, and private equity LPs encouraging the return of capital from their fund managers. Sponsors are looking to put less total leverage on their companies, which lowers our detachment point. We'll remain cautious on the ultimate execution rate of these M&A processes. The recipe for increased activity levels appear to be in place. Both the sponsor and non-sponsor activity, we continued to find the investment opportunities to be very attractive, given the combination of higher benchmark rates, lower leverage on new deals, higher equity contributions from sponsors, and better documentation.
Given the continued macro uncertainty around inflation, consumer sentiment, and ongoing conflict in Ukraine and Israel, we continue to be very selective on new investment opportunities and have overall found investments in existing portfolio companies more attractive than those in new borrowers. Refocusing on Portman Ridge, we continue to believe our stock remains undervalued. Thus, as previously mentioned, we continue to repurchasing shares under our renewed stock purchase program. In the third quarter, we repurchased an incremental 60,559 shares for an aggregate cost of approximately $1.2 million. This follows the trend set throughout 2022 and the first half of 2023, and expect this trend to continue through the final quarter of the year as we are able to do so. Following my remarks, Patrick will also walk through the potential upside cases for our net asset value.
But in addition to the market trading discount of our stock price, we continue to believe that there is significant embedded value to NAV, even when overlaying conservative default and recovery rates. With that, I will turn over the call to Patrick Schafer, our Chief Investment Officer, for a review of our investment activity.
Patrick Schafer (CIO and Director)
Thanks, Ted. Turning now to slide five of our presentation and the sensitivity of our earnings to interest rates. As of September 30th, 2023, approximately 90.5% 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 98% of these being linked to SOFR. As you can see from the chart, the underlying benchmark rate of our assets during the quarter lagged prevailing market rates and still remained below the SOFR rates as of October 30th, 2023, but the gap is the narrowest it has been since the onset of the Fed rate hike cycle.
For illustrative purposes, if all our assets were to reset to either a three-month LIBOR or SOFR rate, respectively, we would expect to generate an incremental $75,000 of quarterly income. Having said that, slide seven shows a slight decline in NII per share on a run rate basis, driven largely by a slightly lower asset balance as of September 30th, 2023, and our simple methodology of not assuming any changes to the portfolio. Skipping down to slide 11, originations for the third quarter were slightly higher than the prior quarter, but still remained below repayment levels, resulting in net repayments and sales of approximately $11.6 million. Some of this was driven by late repayments during the quarter and two transactions expected to close in Q3 that were pushed into early Q4.
Our new investments made during the quarter are expected to yield a spread to SOFR of 917 basis points on par value, and the investments were purchased at a cost of approximately 99.27% of par. Our investment securities portfolio at the end of the third quarter remained highly diversified, with investments spread across 26 different industries and 101 different entities, all while maintaining an average par balance per entity of approximately $3.3 million. Turning to slide 12, we had one new portfolio company go on non-accrual as of as compared to June 30th, 2023, and one come off non-accrual due to the completion of a restructuring.
In aggregate, securities on non-accrual status remained relatively low at eight investments in the third quarter of 2023, as compared to seven investments on non-accrual status as of June 30th, 2023. These eight investments on non-accrual status at the end of the third quarter of 2023 represent 1.6% and 3.6% of the company's investment portfolio at fair value and amortized cost, respectively. On slide 13, excluding our non-accrual investments, we have an aggregate debt securities fair value of $427 million, which represents a blended price of 93.4% of par value and is 88% comprised of first lien loans at par value.
Assuming a par recovery, our September 30th, 2023, fair values reflect a potential of $28 million of incremental NAV value, a 13.1% increase, or $2.94 per share, excluding any recovery on the non-accrual 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 $1.60 per share of NAV value, or a 7.1% increase over time as the portfolio matures and is repaid. Again, this is excluding any recovery on the non-accrual investments. This indicative default rate is above anything the market is expecting or has experienced historically. Finally, turning to slide 14.
If you aggregate the three portfolios acquired over the last three years, we have purchased a combined $435 million of investments, have realized over 78% of these positions at a combined realized and unrealized mark of 103% of fair value at the time of closing the respective mergers. This is an indication of our ability to effectively realize the value of legacy portfolios acquired while rotating into BC Partners-sourced assets. More importantly, we were able to achieve those results despite the global pandemic in 2020 and most of 2021, and a weak market for almost all asset classes in 2022 and the first half of 2023. I'll now turn the call over to Jason to further discuss our financial results for the period.
Jason Roos (CFO)
Thanks, Patrick. As both Ted and Patrick previously mentioned, despite operating under a challenging economic environment, our results for the third quarter of 2023 reflect strong financial performance. Our total investment income decreased slightly by $400,000 to $18.6 million in the third quarter of 2023, in comparison to $19 million in the third quarter of 2022. This reported total investment income represents a $1 million decrease from the $19.6 million of reported total investment income in the second quarter of 2023. The quarter-over-quarter decrease was largely due to reduced fee income and dividend income compared to the second quarter of 2023.
Excluding the impact of purchase price accounting, our core investment income for the third quarter of 2023 was $18.3 million, an increase of $700,000 as compared to $17.6 million for the third quarter of 2022. A decrease of $900,000 as compared to $19.2 million for the second quarter of 2023. Our net investment income for the third quarter of 2023 was $7.2 million, or $0.75 per share, a decrease of $1.2 million as compared to $8.4 million, or $0.87 per share, for the third quarter of 2022, and a decrease of $700,000 as compared to $7.9 million, or $0.83 per share for the second quarter of 2023.
The quarter-over-quarter decrease was largely due to the aforementioned decreases seen in fee and dividend income. As of September 30th, 2023, and June 30th, 2023, the weighted average contractual interest rate on our interest earning debt securities was approximately 12.3% and 12.1%, 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 decreased quarter-over-quarter from $11.7 million for the second quarter of 2023 to $11.4 million in the third quarter of 2023. This decrease was due to reduced expenses in predominantly all expense categories, a result of our efforts to reduce overall expenses.
Our net asset value for the third quarter of 2023 was $214.8 million, or $22.65 per share, as compared to $215 million, or $22.54 per share, in the second quarter of 2023. Turning to the liability side of the balance sheet, as of September 30th, 2023, we had a total of $321.5 million par value of borrowings outstanding at a current weighted average interest rate of 6.9%. This balance was comprised of $74 million in borrowings under our revolving credit facility, $108 million of 4.875% notes due 2026, and $139.5 million in secured notes due 2029.
The quarter-over-quarter decrease of $12.2 million was primarily driven by an $8.2 million repayment on the secured notes due 2029, and a net $4 million repayment on the revolving credit facility. As of the end of the quarter, we had $41 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 September 30th, 2023, our debt-to-equity ratio was 1.5x on a gross basis and 1.34x on a net basis. From a regulatory perspective, our asset coverage ratio at quarter end was 166%.
Finally, and as announced November 8, 2023, a quarterly distribution of $0.69 per share was approved by the board and declared payable on November 30th, 2023, to stockholders of record at the close of business on November 20th, 2023. This is a $0.2 per share distribution increase as compared to the fourth quarter of 2022. Including the distribution subsequent to the announcement of full year 2022 earnings results, total stockholder distributions for 2023 amount to $2.75 per share. With that, I will turn the call back over to Ted.
Ted Goldthorpe (Managing Partner, Chairman of the Board of Directors, and CEO)
Thank you, Jason. Ahead of questions, I'd like to reemphasize that we believe we are well-positioned to take advantage of the current market environment, as we have shown throughout the year so far. Through our prudent investment strategy, we believe we'll be able to deliver strong returns to our shareholders in the final quarter of the year and into 2024. Thank you once again to all of our shareholders for ongoing support. This concludes our prepared remarks, and I will turn the call over to for any questions.
Operator (participant)
At this time, if you'd like to ask a question, simply press Star, followed by the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Our first question will come from the line of Paul Johnson with KBW. Please go ahead.
Paul Johnson (VP)
Yeah, good evening, guys. Thanks for taking my questions. My first is just kind of just maybe kind of giving your, just overall thoughts on leverage, post-gross leverage in the BDC and, and, you know, kind of where you see that going into next year, if there's, you know, focus on reducing that, or, you know, rotating out certain investments that, you know, they're just basically just redeploying, you know, what's coming in, you know, in, in terms of the payments, the thoughts there would be helpful.
Ted Goldthorpe (Managing Partner, Chairman of the Board of Directors, and CEO)
Yeah, it's a great question. I think the answer is, you know, again, we have a stated target leverage range, which we're, you know, close to the high end of, and so again, I don't feel like our leverage. If anything, our leverage will go down. I don't feel like our leverage will go up going into next year. I mean, there's a lot of uncertainty going into next year. We're earning very strong ROEs, and we don't need leverage to earn our dividend nor our earnings. So we... You know, if you recall, we took up leverage for a temporary period of time, which is now coming down because we had a use it or lose it facility that was very accretive for shareholders.
But yeah, we expect leverage to come down, or at least stay, you know, within the range that we've kind of outlined to people.
Paul Johnson (VP)
Yeah, that's helpful. Is that gonna impede your ability to kind of continue buying back shares? How do you see that kind of impacting your thoughts around share purchases?
Ted Goldthorpe (Managing Partner, Chairman of the Board of Directors, and CEO)
I mean, I think, I think, listen, I've—we've done it for a bunch of years in a row. Like, we're very committed to buying back stock. And again, you know, given where our ROEs are and given where new investment rates are, you know, it's also very creative for us to invest. But given where our stock trades and given where our yield is at market, we just think it makes a lot of sense for us to buy back stock.
Paul Johnson (VP)
Thanks for that. And then, my other question is just on interest income. If I'm calculating it right, you know, approximately about 16% or so of total interest income was PIK income this quarter. I just wanna make sure that I'm looking at that correctly, and then also, how does that compare, I guess, historically to the, to the, you know, the portfolio?
Jason Roos (CFO)
Yeah, I would say we did have more PIK income this quarter relative to prior quarters as a function of some of our... We look at interest income and PIK income as kind of one and the same, as a conglomerate source of income. But you're right, this quarter, we had a larger amount of our investment income being made up of PIK income, which is a function of, you know, some of the assets that were previously cash paying are now PIKing due to some of the optionality that they have in the agreements themselves.
Patrick Schafer (CIO and Director)
Yeah, and there was also one specific name that moved from cash to PIK in Q3, but then was exited in-
... you know, where we sit today on the phone in Q4. So all else being equal, do you expect that to go down a little bit next quarter just 'cause of the exit of one of the assets that had a little bit of PIK for one particular quarter?
Paul Johnson (VP)
Yeah, that's very helpful. That's all for me. Thanks.
Operator (participant)
Your next question will come from the line of Christopher Nolan with Ladenburg Thalmann. Please go ahead.
Christopher Nolan (Managing Director of Equity Research)
Hey, guys. For your portfolio companies, are you seeing sponsors step up and put in more equity or not really?
Ted Goldthorpe (Managing Partner, Chairman of the Board of Directors, and CEO)
Well, why don't I go first, and then Patrick can respond. I think we're seeing, like, this is just my own opinion. Like, I think we're seeing a bifurcation in the market between size of sponsor. Meaning I think we're seeing pretty constructive behavior on behalf of middle-market sponsors, and we're seeing more economic decision-making on behalf of larger sponsors. And, again, that more affects the larger players in the BDC space and the syndicated markets. But, yeah, we're in constant dialogue with our sponsor counterparts, and I think, like, they've been very, very constructive so far.
Patrick Schafer (CIO and Director)
Yeah, I mean, I don't have much to add. Ted hit the nail there. The only thing I in some instances, if sponsors are looking at some sort of amend and extend for a kind of multiyear period, you know, the thing that ourselves, as well as just, you know, lenders in the market are focused on, is interest coverage at this point, you know, as opposed to leverage. And so there's often times where there needs to be a little bit of incremental equity coming in to the structure to bring you down to a coverage perspective that makes sense. So, you know, those are obviously all kind of one-off conversations, but as Ted said, kind of usually in those discussions, the bifurcation is really on size of sponsor and, you know, what they're comfortable doing.
Christopher Nolan (Managing Director of Equity Research)
I guess the follow-up question would be: What sort of EBITDA multiples are you seeing given the change in rates? I mean, obviously,
I'm just trying to see how the market is developing.
Ted Goldthorpe (Managing Partner, Chairman of the Board of Directors, and CEO)
Yeah. So I think, I think there's a push-pull, but everybody's on the same page, which is sponsors are back solving for their, you know, interest coverage ratios, basically to Patrick's point, but we're not being asked to max lever companies. So we've seen leverage come down anywhere from one to two turns pretty consistently, and that just ties back into, interest coverage ratios. There's a recent large private equity deal that was done with no debt, and the sponsor is just of the view that they're going to be able to finance it later, cheaper, which I don't know, I'm not sure I would make that bet. But, but yeah, we're definitely being asked for lower leverage levels. So it's not the intention of like, we're being asked for max leverage, we don't wanna do it.
Christopher Nolan (Managing Director of Equity Research)
Yeah. All for me. Thank you.
Operator (participant)
Again, to ask a question, simply press star one on your telephone keypad. That's star one for any questions. Our next question will come from the line of Steven Martin with Slater. Please go ahead.
Steven Martin (President)
Hey, guys.
Patrick Schafer (CIO and Director)
Hi, Steve.
Steven Martin (President)
A couple of questions. You said that on the non-accruals, that, one went on and one went off, yeah, but the total went from seven to eight. Am I missing something?
Patrick Schafer (CIO and Director)
No. I mean, technically, one, the new non-accrual has just two different securities, a revolving or term loan, and they're paired with each other, so we have both of them on non-accrual. It's one borrower, but two different securities. So that table is security count and not borrower count.
Steven Martin (President)
All right. Can you—would you care to elaborate on what that one security was? Or I, I know what it is, but what the story is behind it.
Patrick Schafer (CIO and Director)
The security that came back or the security that went on?
Steven Martin (President)
The one that came back, we're less concerned with, the one that went on.
Patrick Schafer (CIO and Director)
The one went on, the legal entity name is HDC, Hostway. There's a term loan and revolver. HDCHW Intermediate Holdings, LLC, is the legal name. It's a company that we've had sort of marked below par for a period of time. You know, they have sort of one business that has been struggling, and one side of the house that has been growing pretty well. But the side of the house that's growing is a little bit smaller than the side of the house that is declining.
We've been working with the other lenders on a potential restructuring pathway for the company, and kind of in light of the, you know, what we hope is a relatively short pathway to a restructuring, we felt it prudent to put it on non-accrual in the quarter, with the, you know, the hope that it's a relatively short-lived candidate within there.
Steven Martin (President)
Is it a sponsor-backed deal?
Patrick Schafer (CIO and Director)
It was a sponsor-backed deal. The sponsor is not very involved at this stage.
Steven Martin (President)
Got it. And was it a BC source deal, or was it one you inherited?
Patrick Schafer (CIO and Director)
It was not. It was inherited from the Garrison portfolio.
Steven Martin (President)
Okay. Can you talk about quarter-to-date events vis-à-vis repayments and, you know, sales, et cetera, and/or share repurchase?
Jason Roos (CFO)
I can give you some high-level numbers. On the purchases, we had about eighteen-- little over $18 million of purchases, offset by approximately $30 million of sales and pay downs. If you're doing the roll, then you have about $1.7 million of unrealized gain, offset by realized loss of about $1.6 million. And then with accretion and some others, you get, you get the delta in the investment portfolio.
Ted Goldthorpe (Managing Partner, Chairman of the Board of Directors, and CEO)
... Okay, are you asking about quarter to date, right? I mean-
Steven Martin (President)
Right.
Ted Goldthorpe (Managing Partner, Chairman of the Board of Directors, and CEO)
Are you, are you asking about activity through, you know-
Steven Martin (President)
Sorry.
Ted Goldthorpe (Managing Partner, Chairman of the Board of Directors, and CEO)
Quarter end?
Steven Martin (President)
Yeah.
Ted Goldthorpe (Managing Partner, Chairman of the Board of Directors, and CEO)
Yeah, I mean, I would say there's nothing... I mean, Patrick can speak up, too, but I think nothing, nothing outside of normal course. Like, I don't think there's anything particularly different about the market today than we experienced in the third quarter.
Patrick Schafer (CIO and Director)
No, that's right. We've had, you know, one or two, you know, handful of portfolio companies repay. We've invested in one or two new portfolio companies. Again, as Ted said, I don't think there's anything, you know, particularly outside of the ordinary course that's kind of gone on so far quarter to date.
Steven Martin (President)
Okay. And, share repurchase quarter to date?
Jason Roos (CFO)
I'd have to get back to you on that number, Steve. But-
Steven Martin (President)
Okay.
Jason Roos (CFO)
As you know, the program is. It's an ongoing program, and, you know, when that terms out, we'll set it up as we normally do.
Steven Martin (President)
Okay. Two more. Can you comment on the CLO market and, given your overearning the dividend, and your view on dividends going into the end of the year?
Patrick Schafer (CIO and Director)
Yeah, I'll take the CLO market and Ted could talk about dividends. I'd say in general, the CLO market has been a little bit healthier, particularly sort of back half of Q3, and maybe a touch into the first bit of Q4 here. You know, it that has led overall to, you know, a little bit better bids and pricing in the syndicated loan market in general, as some of that CLO formation has driven, you know, the need to buy some assets. So I'd say, kind of generally speaking, the CLO market is, like, a little bit healthier, this quarter or where we sit today, relative to perhaps, you know, some times in the last couple of quarters.
Having said that, our CLOs that we are invested in, generally speaking, are out of their investment periods. So by and large, the CLO managers there are kind of making decisions around what they might expect in terms of repayments on their various portfolios, the relative OC tests and things like that, around distributions, et cetera. So our particular portfolio is a little bit, you know, separate from the CLO market broadly, but I'd say generally speaking, the market has had some improvement, you know, over the last, call it, six to eight weeks or so.
Steven Martin (President)
Given your specific portfolios, the CLO, your CLO portfolio is a source of funds rather than a use of funds?
Ted Goldthorpe (Managing Partner, Chairman of the Board of Directors, and CEO)
Well, it's always a source of funds. It's just a different amount of source of funds, but it's not a use of funds.
Steven Martin (President)
Oh, okay. Yes, I meant your money is coming back-
Ted Goldthorpe (Managing Partner, Chairman of the Board of Directors, and CEO)
I think you're asking about total return versus income return. And, you know-
Steven Martin (President)
Yes
Ted Goldthorpe (Managing Partner, Chairman of the Board of Directors, and CEO)
... again, we're getting positive income off our portfolio, and I think, I mean, listen, it's, it's only a couple of weeks into the quarter. I don't think we can - I don't think we really know in terms of valuation.
Steven Martin (President)
Okay.
Ted Goldthorpe (Managing Partner, Chairman of the Board of Directors, and CEO)
It's small, and again, it's 2% of our portfolio.
Steven Martin (President)
Okay, and Ted, your comment about year-end dividends.
Ted Goldthorpe (Managing Partner, Chairman of the Board of Directors, and CEO)
In terms of a special dividend, is that what you're asking about?
Steven Martin (President)
Yeah, so-
Ted Goldthorpe (Managing Partner, Chairman of the Board of Directors, and CEO)
We can-
Steven Martin (President)
Something along those lines.
Ted Goldthorpe (Managing Partner, Chairman of the Board of Directors, and CEO)
I mean, listen, we, we obviously benefited greatly from some of this M&A, which, you know, created some advantages for our shareholders around spillover income. I would say we feel really good about our dividend. You know, even if the Fed cuts rates, which we don't obviously speculate on, because, you know, that's not our thing, you know, the dividend's pretty protected down to a pretty big reduction in short-term rates. So, you know, again, we assess every quarter. You know, obviously, we're comfortably overearning our dividend in a period of time where we're getting... So I think we feel good about where our dividend is, and I don't, I don't, I, you know, again, like, we'll, we'll assess it at year-end and, you know, see if there's a, see where we are in terms of spillover income.
Steven Martin (President)
All right. Thanks a lot.
Operator (participant)
Our next question comes from the line of James Power. Please go ahead.
Speaker 7
Good afternoon. I was wondering about this, I don't know whether I'm pronouncing it correctly, Repertoire Partners? But, anyway, they made a filing in the last quarter and, had quite a bit of stock. I was wondering if you had talked to them about their intentions and what they-- are they gonna be sellers of this block, and how did they get that big a block?
Ted Goldthorpe (Managing Partner, Chairman of the Board of Directors, and CEO)
Yeah, I don't think we comment on individual shareholders and individual shareholders' intentions. So I'm not sure we want to really make a comment on that.
Speaker 7
Okay. All right. Thank you.
Operator (participant)
We have no further questions at this time. I'll hand the call back over to Ted Goldthorpe for any closing remarks.
Ted Goldthorpe (Managing Partner, Chairman of the Board of Directors, and CEO)
Great. Well, thank you all for attending our call. As per always, please reach out to us with any questions, which we're happy to discuss, and hope everybody has a great Thanksgiving, and we look forward to speaking to you again on our next call. Thank you.
Operator (participant)
Ladies and gentlemen, thank you all for joining today's meeting. That will conclude our call. You may now disconnect.