BCP Investment Corp (BCIC) 2020 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Portman Ridge Finance Corporation conference call. An earnings press release was distributed Wednesday evening. 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, Thursday, May 7, 2020. This call is also being hosted on a live webcast, which can be accessed at our company's website at www.portmanridge.com in the Investor Relations section under Events.

Today's conference call includes forward-looking statements and projections, and we ask that you refer to Portman Ridge 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 of Portman Ridge Finance Corporation. Mr. Goldthorpe, you may begin.

Thank you, operator. Good morning, everyone, and sorry, we're starting a couple of minutes late. Thank you for joining our earnings call. First and foremost, we hope all of our stakeholders are staying healthy, safe and well provisioned in these unique and trying times. Last night, Portman Ridge announced first quarter 2020 results. And before my CFO, Ted Gilpin; and my CIO, Patrick Schafer, discuss the results and portfolio, respectively, I would like to take some time to discuss the state of the market as we see it and the steps we have taken at Portman.

March was an exceptionally challenging month in the credit industry, but I believe it highlights the importance of BC Partners human capital, infrastructure, multi-strategy platform and our ability to adapt to the investment environment. On the previous quarterly call, we highlighted the volatility in liquid markets and likelihood of widening spreads in our primary markets would be the results. The pricing within the leveraged loan index declined from approximately 95 at the beginning of March to a low of approximately 76 on March 23 before returning to approximately 83 by the end of the month. 6 of the 7 worst trading days, including all of the top 5 in the leveraged loan market, occurred in the month of March, with the only one being at the depths of the global financial crisis on October 10, 2008.

With that as a backdrop, the market for newly-originated loans has slowed considerably. While there is limited activity from new M&A transactions or sponsors, we have seen a number of attractive opportunities to provide add-on acquisition financing, purchase positions and recently completed loans at attractive OID levels. And additionally, we have been very active in sourcing additional investments in previously underwritten companies that we believe will be minimally impacted from the COVID in the long term. We've also seen an unprecedented rise in demand for liquidity from middle market companies who are looking to put cash on their balance sheets as a buffer, given all the uncertainty in the economy. We are being extremely judicious in deploying new capital and balancing it versus other corporate finance initiatives, such as buying back our own stock and bonds.

In terms of Portman itself, we took a number of steps leading into the downturn to be defensively positioned and generate shareholder value. First, since our previous earnings announcement, we purchased as much of our stock and bonds at a discount as we could during the month of March. We are limited by trading windows and volume restrictions on our buyback program. Secondly, we proactively used the bulk of the cash from our sale of the legacy OHAI assets to pay down our revolver with JPMorgan. Finally, heading into this period of dislocation, we were fortunate to have limited unfunded commitments that could have unilaterally -- that can be unilaterally called upon by borrowers, which allowed us to be offensive with our dry powder.

During late March, we opportunistically purchased $21.5 million of high-quality liquid first lien loans at an average price of $0.80. In addition to offsetting some of the mark-to-market declines elsewhere in our portfolio, this collection of assets has an extremely attractive total return profile, which is benefit -- which will benefit shareholders in the coming quarters and potential years. It is important to note that over 50% of our debt is unsecured and not subject to any borrowing base or liquidity tests.

With that, I will turn over the call to Ted Gilpin, our CFO, for a brief overview of the financial results for the quarter. And then Patrick Schafer, our Chief Investment Officer, for a review of our investment activity before I conclude the call with some additional remarks.

Thank you, Ted. Good morning, everyone. Obviously, there is quite a bit going on in the world and at Portman in the first quarter of 2020. The unprecedented dislocation in the markets due to the COVID-19 pandemic has put pressure on valuations, especially in our legacy CLO equity positions. As of March 31, 2020, our NAV stood at $120.4 million or $2.69 per diluted share, down from $152.2 million or $3.40 per share at the end of 2019, a decline of approximately $31.8 million. The decrease was mainly attributable to unrealized losses, including $11.7 million in our CLO equity positions and $7.3 million in our investment in the KCAP Freedom 3 joint venture. Our debt securities portfolio showed unrealized losses of approximately $10.8 million in the quarter.

More positively, net income for the first quarter of 2020 was $2.7 million or $0.06 per share as compared to a loss of $2.2 million and a negative $0.06 per share in the first quarter of last year and compared to $0.06 per share in the fourth quarter of 2019, so right in line with our current quarterly distribution. The company will pay in cash its $0.06 distribution declared in March on May 27. I would anticipate some pressure in second quarter on NII due to our CLO exposure. With respect to liquidity and unfunded commitments, our aggregate unfunded commitments stood at $28 million at March 31, 2020. However, only $0.7 million of this amount is subject to unilateral draw right by the borrower and the remaining commitments are subject to certain restrictions such as borrowing base, use of proceeds or leverage that must be satisfied before a borrower can draw down on the commitment.

On the liability side of the balance sheet, we had $76.8 million of 6.125% notes outstanding and $57.1 million in borrowings under our credit facility for total debt of $133.9 million for an asset coverage ratio of 188%, above the statutory requirement for BDCs of 150%. Finally, in March, our Board authorized us to repurchase up to $10 million in stock over the next year, subject to market conditions and certain other limitations. In the first quarter, we, in fact, repurchased 121,548 shares of stock at an average price of $1.01 per share. Stock repurchase program gives us additional flexibility to manage our capital and drive shareholder value through accretive stock repurchases. In addition, because there was also dislocation in our publicly traded bonds, symbol KCAPL, we repurchased and retired approximately 573,000 of par value of these bonds and recognized a gain on extinguishment of approximately $154,000.

And with that, I'd like to turn the call over to Patrick Schafer, our Chief Investment Officer.

Thanks, Ted. During the quarter, we made investments into 14 borrowers, 5 of which were existing portfolio companies and none of which were brand-new borrowers. In aggregate, these investments totaled $43.8 million of face value, 88% of which were first lien securities and 10% being net add-ons to the Great Lakes joint venture, with the remaining 2% being a bridge investment and a conversion of an equity position into a promissory note. The weighted average spread on these new investments, excluding the Great Lakes joint venture, was 696 basis points.

Additionally, over the course of the quarter, we fully exited 5 positions, 2 of which were legacy KCAP positions. In aggregate, our fully exited positions represented a carrying value of $8.1 million and resulted in a gain of $139,000. All positions were sold at or above their carrying value relative to the December 31 or cost if acquired during the quarter. BC Partners sourced assets representing 78% of the carrying value sold and 93% of the resulting gain. Additionally, we partially monetized 3 positions that represented an aggregate carrying value of $5 million and realized a gain of $49,000, again, with all positions being sold at or above their previous carrying value.

In aggregate, we recognized $30.9 million of unrealized losses on our investments. As Ted previously mentioned, $11.7 million or 38% was associated with our CLO equity positions despite only comprising 10.6% of our portfolio prior to mark-to-market adjustments and a further $7.3 million of unrealized losses or 24% of the total was from our KCAP Freedom 3 joint venture despite comprising 7.0% of the portfolio. Excluding these two categories, the remaining 83% of our investment portfolio accounted for $11.9 million of the unrealized loss or 38%.

Breaking down this last bucket in more detail, BC Partners originated assets representing 56.5% of the portfolio prior to unrealized losses and only 26.9% of the unrealized losses for the quarter, which would equate to a 2.4% decline versus prior quarter's mark or cost, depending on whether the asset was purchased during the quarter. Legacy KCAP assets represented 31.6% of the portfolio, but 47.6% of the unrealized losses, and legacy OHAI assets represented 11.9% of the portfolio but 25.7% of the unrealized losses, driven primarily by the legacy ATP asset, which is tied closely to oil and gas prices.

On an equivalent basis, excluding the nonaccruing asset of OCI, which was acquired with the Ohio portfolio, as of December 31 -- as of March 31, Portman Ridge has $226.4 million of debt securities marked at 87.7% of par and yielding a stated spread to LIBOR of 685 basis points on accruing debt securities. This compares to $165.7 million of debt security portfolio marked at a blended price of 91.9% of par and had a stated spread to LIBOR of 658 basis points when BC Partners took over management of Portman Ridge.

One of the incremental nonaccruals during the quarter was also the portfolio company most impacted by COVID, and unfortunately was forced to file for bankruptcy protection following a near complete decline in revenues. This asset represents 0.8% of our total debt securities prior to the mark-to-market adjustments, and we are expecting to receive a material portion of our pre-petition claim through the liquidation of assets.

There is one other security in our portfolio representing 0.6% of total debt securities prior to March 31 mark-to-market adjustments, where we had expected to receive cash interest, but the borrower did not make this payment. The company has not been as significantly impacted as the previously noted assets, but lenders and sponsor have been working on a pathway to shoring up liquidity in the event of a more prolonged impact to the business, which will require lenders to pick their interest for a period of time.

Finally, as you can see, we have made progress in rotating the portfolio subsequent to the externalization and the OHAI merger. We have reduced the legacy OHAI portfolio by 49%, and KCAP legacy and noncore assets now represent only 33% of our current investment portfolio.

With that, I'll turn the call back over to Ted Goldthorpe.

Thank you, Patrick. As Patrick detailed, overall, we are pleased with the performance of our debt securities portfolio through this incredibly challenging environment. On the whole, we have relatively minimal exposure to the sectors most impacted by the stay-at-home orders, such as travel, leisure, retail, restaurants, energy, et cetera, and we take comfort that our BC-originated assets are substantially outperforming legacy assets. So over time, as the asset rotation continues, our portfolio should trend positively.

While our CLO equity positions continue to negatively impact our results, we, as a management team, continue to pursue any and all avenues to mitigate the impact. We also continue to believe in the benefits of the scale of the platform. Of the 9 investments during the quarter into new borrowers, 2 were completed alongside other BC Partners entities pursuant to a co-investment order and 6 were also completed alongside other BC entities but did not require exemptive relief. Our ability to take advantage of the liquid markets in a period of dislocation and to underwrite investments in a period of stress, we believe, sets us apart from other BDC managers.

As noted at the top of the call, we believe that Portman Ridge came into this period of uncertainty in a strong liquidity position, and we're able to capitalize on that through stock and bond repurchases and opportunistically adding assets at the trough of the market. Additionally, prior to our blackout period, the management team was purchasing stock. As we continue through second quarter of 2020, we would expect to continue to execute on all 4 of these strategies, assuming the market discounts continue and our pipeline of new investments remains attractive.

I would also like to note that any -- I'd also like to note that for the next year, any incentive fees we earn will be reinvested into Portman Ridge stock at net asset value. Finally, from a corporate activity perspective, we continue to look for attractive strategic transactions that will be accretive for our shareholders. Thank you for your support. We wish all the best to all of our stakeholders, families and loved ones through these challenging, unprecedented times.

With that, we'd like to turn over the call to the operator for your questions.

(Operator Instructions) And there are no questions at this time.

Great. Well, thank you all for your support. And we wish -- again, we wish you all the best in this challenged time. Thank you.

That does conclude today's call. You may now disconnect.