BCP Investment Corp (BCIC) 2019 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Portman Ridge First Quarter 2019 Earnings Call. An earnings press release was distributed this morning. If you did not receive a copy, the release is available on the company's website at www.portmanridge.com in the Investor Relations section.

As a reminder, this conference call is being recorded today, Friday, May 10, 2019. This call is also being hosted on a live webcast, which can be accessed at our company website at www.portmanridge.com in the Investor Relations section under the -- under Events.

Today's conference call includes forward-looking statements and projections, and we ask that you refer to Portman Ridge's most recent filings with the SEC for important factors that would cause actual results to differ materially from these projections. Portman Ridge Finance Corporation does not undertake to update its forward-looking statements unless required by law.

I would now like to introduce your host for today's conference, Mr. Ted Goldthorpe, Chief Executive Officer for Portman Ridge Finance Corporation. Mr. Goldthorpe, you may begin.

Thank you, operator, and good morning, everyone. Thank you for joining us on our earnings call. I'm joined by Ted Gilpin, our Chief Financial Officer; Patrick Schafer, our Chief Investment Officer; and Dan Gilligan, our Head of Structured Credit.

Today, Portman Ridge announced its first quarter 2019 financial results. As you know, on April 1, we closed on the externalization transaction, and at that time, an affiliate of BC Partners Advisors became the external manager of Portman Ridge Finance Corporation. Portman Ridge shareholders received a special distribution of $0.67 per share in connection with the externalization, and we are now able to utilize the full strength of the broader BC Partners platform. We intend to transition Portman Ridge to a more stable and predictable vehicle across both net investment income and net asset value.

Ted Gilpin, our CFO, will now provide a brief overview of the financial results for the quarter, and I will follow it with a review of our portfolio and investment strategy.

Thank you, Ted. Good morning, everyone. Please note that there are a couple of events in the first quarter of 2019 which had significant effects on the quarter results and are worth describing in more detail.

First, net investment income for the quarter was a loss of $2.2 million or $0.06 per basic share compared to income of $2.4 million (sic) [$2.5 million] or $0.07 per share in the quarter ended March 31, 2018, and $0.06 per share in the fourth quarter of 2018. The quarter ended 3/31/2019, however, had transaction-related expenses of $3.4 million or $0.09 per share, $2.2 million of which were expenses related to severance and the termination of our restricted stock program.

Second, there was an NII decline related to portfolio credit deterioration. One credit, Tank Partners, was restructured into equity. And 2 new credits, Roscoe and Stafford, went on to full nonaccrual in the quarter. This also resulted in a fair value decline of $8.7 million or $0.23 per share, the vast majority of which was associated with those 3 credits.

The onetime expenses and the impact of the nonaccruals on income resulted in a hit to NII of approximately $3.9 million or $0.10 per share. Without these 2 factors, NII would have been approximately $0.05 for the quarter. The combination of the onetime deal expenses, the fair value declines and the April distribution resulted in a reduction to NAV of 3 -- to $3.85 per share from $4.23 per share at 12/31/2018.

Interest income on our debt securities portfolio was $2.9 million or $0.08 per share compared to $3.8 million or $0.10 per share in the same period in 2018. Some of this decline is related to the aforementioned credits going on nonaccrual, and some is related to investments in debt securities being reallocated to our investment in the Great Lakes unitranche program, which had a lag on distributions and which will begin making income distributions in the second quarter.

Investment income on our CLO fund securities was essentially flat at $1.8 million or $0.05 per share. Income from our joint venture with FC3 was $950,000 or $0.03 per share versus $700,000 or $0.02 per share in the first quarter of 2018.

On the liability side of the balance sheet, as of March 31, 2019, we had approximately $121 million of par debt outstanding, $77.4 million of 6.125% notes due in 2022 and $43.9 million under our L plus 3.25% revolving credit facility.

Our asset coverage ratio at the quarter end was 216%. As of March 2019, Portman Ridge can increase leverage due to the new statute ratio of 150%. We are currently restricting our ability to do so under the covenants in our outstanding publicly traded debt, but of course, the new asset coverage ratio could give us significantly more flexibility in the future.

During the quarter, we invested approximately $28 million in interest-bearing securities. Of that amount, $13.2 million was invested in senior secured first-lien loans at a weighted yield of 7.96%. $12.5 million was invested in second lien with a weighted yield of 9.68%, and the remainder was put into the Great Lakes program.

Portman Ridge made its first quarter distribution of $0.10 per share on April 26. Going forward, to better align the payment of the distribution with the completion of the financials, we, like many BDCs, will declare quarterly dividends concurrent with the completion of the quarterly financials. For example, the second quarter declaration would be announced in August with an expected payment in September. So to be clear, we still -- we will still be making 4 distributions this year. Just the timing has changed to coincide with the actual financials.

And with that, I would like to turn the call back to Ted Goldthorpe.

Thanks, Ted. I would now like to focus my remarks on the current state of the portfolio and where we will take the business from here.

We feel confident that we've identified and are dealing with a small number of distressed credits in the portfolio. The majority of these credits have been written down to minimal market values, with the exception of Roscoe Medical, which has a fair value of $3.2 million. Given what we've identified and committed to, we believe by the end of the second quarter, we should be fully invested and utilizing our revolving credit facility efficiently. We will continue to reposition the portfolio in subsequent quarters and are working towards our long-term objectives of NII and NAV stability and growth.

I will now make a few comments about the market and our strategy. The unitranche market has increased in competitiveness over the last few quarters, and we're being very cautious and selective in this asset class. There have been a recent trend for unitranches to be increasingly clubbed up amongst a few lenders versus going with one lender. And as a result, there has been some pressure on spreads.

We continue to find value in our non-sponsor vertical as well as in stretch senior deals. These stretch senior deals have materially less leverage than unitranches with only a minor reduction in spread. We are pursuing junior capital solutions only in the most attractive of circumstances, and we'll only invest in economically resilient businesses.

Over the next few quarters, we will look to reduce our CLO equity exposure and replace it with investments in our senior and unitranche joint ventures, which we will continue -- which we continue to believe provide attractive risk-adjusted returns. Given the illiquidity of CLO equity, we expect this transition to happen over multiple quarters.

Lastly, we are finding opportunities to use the broader BC Partners franchise to earn capital markets fees for our shareholders, which we'll begin to see over the next quarter.

We continue to be committed to alignment with our shareholders. Under our externalization agreement, we've committed to support net investment income for a 1-year period and take any incentive fees into equity at net asset value for a 2-year period. We believe by demonstrating alignment and stabilizing our net asset value, we will be able to narrow our stock price discount to book.

Thank you for your support. And with that, we'd like to turn the call over to any questions.

(Operator Instructions) And our first question comes from the line of Christopher Nolan from Ladenburg Thalmann.

On talking of the leverage, Ted Gilpin, am I correct that your baby bonds still have covenants which prevents you from going up to above 1:1 debt to equity?

Yes, that's correct.

Okay. Is the plan to renegotiate those covenants or redeem those bonds? Or what's the thoughts there?

I mean obviously, we have -- we could go the restructuring route or they're callable in September. And I think that there's -- we still have room under the current leverage. So there's no immediate need to do that. But ultimately, if we want to go above the 1:1, we'll have to do something with the outstanding public debt.

I'll just say, from a portfolio management perspective, I don't think we have a near-term goal to exceed the 1:1 test, regardless of what the covenants say. I think just given where we are in the credit cycle and where we've seen opportunities, I think although we have the flexibility to do it longer term, I think in the shorter term, I think that's probably not something we would want to do anyways. But to Ted's point, it is always good to have flexibility on your liability side.

All right. Great. And Ted Goldthorpe, by that comment, do you mean that you could be between the current levels of 0.82 to 1x above current levels in coming quarters in terms of debt to equity?

Yes. I mean I think we tend to want to run the vehicle, again, at least in the short term, somewhere between a 0.7 and 0.85x leverage. That would be like the band. And I'm not saying we wouldn't go below that if we get a lot of refis or above that, if we see attractive opportunities. But we think that's probably the prudent amount of leverage in today's environment.

Great. And then turning to nonaccruals, the realized loss, I presume, was based on Tank Partners going. Have you guys -- have you, during basically over last quarter and this quarter, tried to take on -- front-load all the nonaccrual investments? Or should we start seeing a moderation in nonaccruals? Or what are your thoughts there? I mean I'm just trying to get a sense to where the asset quality is trending.

Yes. That's a good question. Again, we've written all of the credits that we're concerned about. They have very little in the way of fair value right now, and I don't think there's a whole bunch away from that. We have a -- we marked down a loan called Roscoe Medical to $3.2 million. Net of all the nonaccruals, that's really the only one with material amounts of market value.

Away from that, if you think about NAV ultimately going forward and where it might come from, obviously, we still own a material amount of CLO equity. Obviously, this quarter, our CLO equity is trending higher just given what's going on in the loan market. But obviously, that's a little more volatile asset class.

But away from that, we really feel like we've taken the restructurings we needed to take. And again, in terms of market value at risk, we think we've got it to a very, very manageable level.

Great. And then I guess the final question for Ted Goldthorpe. Given the comments you were making on the unitranche market, thank you, that's helpful. What sort of EBITDA multiples are you guys investing in, if you can share that?

Yes. I mean it's a really good question. I mean EBITDA multiples in the middle market have not really gone up over the last 3 to 4 years. So it's easy to kind of lull yourself into thinking leverage isn't increasing. A lot of that is driven by structural factors. Some banks are still bound by the OCC leveraged lending guidelines and other things.

But the -- but I think that's misleading because we're being asked to do more and more -- the bigger conversation we have with sponsors now is not so much about total leverage. The conversation has really morphed into adjustments. And sponsors are trying to push through, I would say, larger adjustments than what we've seen historically.

So even though the statistics would tell you that leverage hasn't gone up, I think the amount of adjusted EBITDA has increased. So...

You mean adjustments in terms of how EBITDA is calculated?

Exactly, exactly. So we -- the debate 5 years ago with sponsors was what was leverage, and today, it's what is EBITDA.

Got it.

So we spend a lot of our time really scrubbing those numbers and working with our clients to come to full consensus on that. But when we lose deals, we still don't lose it on leverage. We lose it on what EBITDA is.

Final question. Is the intention to take the CLO equity down to 0 eventually?

Yes. I mean I personally think -- CLO equity, I think, is a phenomenal asset class. I just don't think it's appropriate for a BDC. I think it's just too volatile. I think it's leverage on top of leverage. So I think -- I really like the asset class. I just don't think it fits in a public vehicle. That being said, we own a lot of it. It is illiquid, and so I think it's going to be a longer-term process. Like I don't think it's -- I don't think we have the ability to kind of -- I don't think you'll see us in the next 1 or 2 quarters get out of all our CLO equity.

So I think what you'll see us do over time is we have a really, really attractive senior joint venture that throws off returns that are equal or higher with less leverage and, quite frankly, originated product, which we're really good at. We also have a unitranche joint venture, which we think is one of the best risk/reward assets we have. So I think what you'll see us do over time is reduce CLO equity and upsize our commitments to those 2 joint ventures.

So I think -- I don't think there's going to be a wholesale change in investment strategy. It's still the barbell. You'll still see a lot of like first liens in the 70% bucket. And in the 30% bucket, I think you'll just see a shift from our CLO equity portfolio into upsizing some of these joint venture commitments we've made.

(Operator Instructions) Our next question comes from the line of Ryan Lynch from KBW.

First one, you talked a lot about rotating out of the CLO equity portfolio. But as you are now fully taken over as the manager and you look through the non-CLO portfolio and kind of the core debt portfolio, are you -- I guess what percentage of that portfolio do you guys intend to be core assets going forward? Or do you guys intend to also prune off or rotate out of some percentage of those investments as they may not be noncore middle-market investments?

Yes. No, that's a great question. So we think there's opportunities to, what I call, high-grade the portfolio. So we still have a number of lower-yielding, either liquid assets or illiquid assets. And so I think there's opportunities for us. Just given our origination franchise, I think there's opportunities for us to increase spreads on some of those assets.

We feel good about the existing portfolio. Like we -- as I said, we took our lumps this last quarter on our "at-risk investments." So I think on a go-forward basis, we feel pretty good about the rest of the portfolio. I think there's opportunities for us to -- so the credit quality, I think, is pretty solid away from the credits we've mentioned. And of the remaining portfolio, I think there's opportunities for us to reduce some of the lower-spread assets and put it in higher-spread assets. But when I say that, it's a lot of it's just trading the liquidity -- liquid assets for illiquid assets. So I think we can do things that are not increasing risk for -- like increasing credit risk but doing more originated product versus liquid lumps.

Okay. Makes sense. And then if I...

And Ryan, just to be even more -- to put an even more fine point on it, we have about $24 million face of loans that are what I would call like low-spread assets. So we have the opportunity to kind of increase spreads on that portion of the portfolio.

Okay. And then if I look at your presentation that you guys put out when this -- when you guys were talking about this transaction, you guys have BC Partners lending. Kind of it looks like your guys' core is going to be right around the $40 million, $50 million EBITDA company size. I look at Portman's balance sheet today, there's about $300 million or so of assets. Can you just talk about other funds across the BC Partners lending platform that you guys may be able to co-invest across? Or what sort of solutions can you provide a $50 million EBITDA borrower? Are you guys just going to be participating in club deals? Or can you actually be a full solution provider to any of those lenders -- or borrowers, excuse me?

Yes. I mean I think that's the big part of the value we bring here, which is it's been hard for KCAP to take material -- really lead transactions given the size of the balance sheet. We had exemption relief, so before this transaction happened, obviously, we got that from the SEC.

So what I would say is this. What I'd say is -- I mentioned in my prepared remarks that there's opportunities for us to generate capital markets fees. We just underwrote a deal for $52 million on a $14 million EBITDA company, so obviously not $50 million. And we've syndicated out to some people, and we'll get some fees for our shareholders.

So I think the ability for us to use the broader BC funds and platform will allow us to speak for more size and lead deals. So I think within the next -- in this quarter, we're already leading a bunch of deals. So that's number one. Number two is we do have this joint -- we have these 2 joint ventures that obviously, we have partners who've got big balance sheets as well. So we obviously benefit from that.

So the average EBITDA seems high given the size of our balance sheet. But again, remember, we get leverage off of our joint venture partners as well.

As far as the capital markets fees you talked about, how are those actually split? I mean because those are going to be originated. Those are deals that are obviously going to be originated by the adviser and placed across multiple funds. So will the BDC just participate? And I guess just how are those fees going to be split? And is the BDC just getting a pro rata share of those capital market fees? Or how does that exactly work?

Yes. Yes, that's a good question. So basically, any time we use Portman Ridge's balance sheet to commit to anything, all those fees go to shareholders. So you'll see in this next quarter, again, the advisers not taking any of those fees. It's going to -- on the portion of the loan that obviously has been committed to by Portman Ridge, all those fees are going to shareholders.

So we don't have -- BC, we don't have a broker-dealer. We don't have some of the things that some of our very large competitors have. So the intention is to have those fees go to shareholders. And that's a -- that lowers our cost of capital on the overall portfolio, and it's obviously not at risk. So it allows us to kind of like do safer things on the investment side. I hope that answers the question.

Yes. No, that's helpful. And then you mentioned a unitranche JV. Can you describe it? Is that something that BC Partners is doing? Or is that something that KCAP is involved -- or Portman Ridge is involved with?

Yes. So in our SOI, you'll see it. We call it our Great Lakes joint venture. So we have a joint venture whereby unitranches go into the joint venture. It's very -- it's structured very similarly to the other BDCs' joint ventures. So think about it very, very similarly to the other unitranche joint ventures that you've seen out there. And what it allows us to do is it allows us to, a, commit for more size, obviously; and be competitive in the unitranche market. And obviously, we get to leverage off of sourcing from our partner.

(Operator Instructions) And I'm showing no further questions at this time. I'd like to turn the call back to Mr. Ted Goldthorpe for closing remarks.

We just want to reiterate how excited we are to take over the vehicle, and we look forward to our continued partnership with our counterparties and our shareholders. Thank you very much.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a great day.