BCP Investment Corp (BCIC) 2020 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Portman Ridge Finance Corporation Conference Call. An earnings press release was distributed Thursday morning, August 6. 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 is being recorded today, Monday, August 10, 2020. This call is also being hosted on a live webcast, which can be accessed at the 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's most recent filings with the SEC for important factors that would cause actual results to differ materially from the 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. Please go ahead, sir.

Thank you, operator. Good afternoon, everyone, and thank you for joining us for our earnings call. We hope everyone and their families have remained safe and healthy during the pandemic and continue to do so.

Last Thursday, Portman Ridge announced its second quarter 2020 results and I'm joined by my CFO, Ted Gilpin; and my Chief Investment Officer, Patrick Schafer, to discuss the results and the portfolio, respectively.

Overall, we are very pleased with the quarter's results during an especially challenging period of time. Net investment income per share was $0.06, which is consistent with the last quarter and the distribution level that we have set for the past several quarters. Additionally, net asset value per share is $2.71, an increase of approximately 1% from March 31, 2020. Ted Gilpin will provide the details in his remarks, but we continue to purchase shares of Portman, both as a management team and as part of Portman's stock repurchase program. Our ability to purchase shares during the second quarter was limited by both volume restrictions and available windows. We continue to evaluate options to execute the previously announced stock repurchase program and anticipate putting in place a 10b5 program during the third quarter.

From a macro perspective, the second quarter was significantly more challenging as states enacted various levels of lockdowns that persisted for the bulk of the quarter. While the economy has begun opening back up, we feel like our portfolio companies have a much better grasp on demand and profitability levels as well as the various levers within their business. There is still significant uncertainty, and we believe our valuations for the quarter reflects this uncertainty and our own conservatism.

As we discussed during last quarter's earnings call, our portfolio has been relatively insulated from those sectors and industries that have been hit the hardest. Additionally, our portfolio remains very diverse containing 73 unique borrowers across our debt and equity securities. Our average position size is 1.3% of the debt and equity portfolio and 1% of our total investment portfolio.

In aggregate, we executed or are completing the execution of 8 material amendments during the quarter across our 73 unique borrowers. By meaningful, we are referring to amendments to the financial covenants or maturity date due to the impacts of COVID. In all but one of these situations, the portfolio companies have ample liquidity and are continuing to pay cash interest. In the remaining instance, the lenders have agreed to defer interest until September 30 to provide a temporary liquidity boost. And thus far, the portfolio company has been exceeding its initial budget of the COVID impact. Additionally, we had 1 portfolio company file for bankruptcy in early April and expect to receive a significant recovery of principal through the liquidation of assets, the majority of which should be realized in the third quarter.

On the new investment front, M&A activity, which is the traditional source of middle-market direct loans, was exceptionally quiet. Our level of overall activity, making 14 investments, 12 of which were into new borrowers, reflects our strong balance sheet position and flexibility heading into the pandemic as well as the breadth of the credit platform, sourcing investment opportunities through numerous channels. Specifically, the mix of assets we added during the quarter is a combination of higher spreading recently issued loans and lower spreading loans we acquired at material discounts to par, which should produce future NAV benefits. Additionally, we monetized a significant amount of assets during the quarter that were yielding a comparable spread. So our overall portfolio spread is relatively unchanged, but our all-in return has increased.

Finally, last but certainly not least, we are excited about the previously announced merger with Garrison Capital. As a brief reminder, on June 24, 2020, we announced the proposed merger of Portman Ridge and Garrison Capital. We believe the transaction will be immediately accretive on an NII per share basis simply due to the reduction of overhead expenses at the combined company.

Although we fully expect to generate additional return through leveraging the deal flow generated across our BC credit platform, we are comfortable in the economic benefit to both shareholder bases while that rotation plays out in an ordinary course. The merger will significantly increase the percentage of Portman assets that are first lien and significantly reduce our exposure to CLO equity.

Finally, we believe that the increased market capitalization will provide more liquidity in the stock and the combination of larger scale and stable income and NAV per share performance can ultimately lead to higher trading levels.

With that, I will turn the call over 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 concluding the call with some additional remarks.

Thank you, Ted, and good afternoon, everyone.

As of June 30, 2020, our NAV stood at $120.7 million or $2.71 per diluted share, up 1% from last quarter of $120.4 million or $2.69 per share. The increase was mainly attributable to unrealized gains, including $2.3 million on our debt securities portfolio and $2.3 million on our investment in the KCAP Freedom 3 joint venture. Our CLO equity positions showed unrealized losses of approximately $2.9 million in the quarter. The ongoing disruption in the markets due to the COVID-19 pandemic has continued to put pressure on valuations, especially in our legacy CLO equity positions that are out of their reinvestment period.

Net investment income for the second quarter of 2020 was $2.6 million or $0.06 per share as compared to $880,000 and $0.02 per share in the second quarter of last year and compared to $0.06 per share in the first quarter of 2020, right in line with our current quarterly distribution. The company will pay in cash its $0.06 distribution declared last week on August 28.

With respect to liquidity and unfunded commitments, our aggregate unfunded commitments stood at $29.2 million at June 30, 2020. However, only $2.4 million of this amount is subject to a 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 believe that we are in a relatively strong position and have meaningful investment and liquidity flexibility with relatively limited funding commitments. As of June 30, 2020, we had $76 million in 6.125% notes outstanding and $98.3 million in our borrowings under our credit facility for a total of $175 million of debt. Net of cash and trades pending settlement as of June 30, 2020, our debt-to-equity ratio was 1.3x. From a regulatory perspective, our asset coverage ratio as of June 30, 2020 was 167%, which is above the statutory requirement for BDCs of 150%.

Under the stock repurchase program announced in March of 2020, we continued repurchasing shares this quarter and repurchased 253,896 shares of stock at an average price of $1.12 per share. We expect to continue to evaluate opportunities to buy back shares as a means to drive value for shareholders, including entering into a 10b5 program. In addition, to take advantage of ongoing dislocation in our publicly traded bonds, KCAPL, we repurchased and retired approximately $109,000 of par value of those bonds in open market purchases at a cost of approximately or average $95,000.

Ted Goldthorpe mentioned the merger with Garrison Capital in his remarks. Under the terms of the proposed agreement, Garrison stockholders will receive a combination of $19.1 million in cash, newly issued Portman Ridge shares valued at 100% of its NAV per share and an additional cash payment of $5 million from Sierra Crest. We expect this transaction to close in the fourth quarter of 2020.

With that, I would like to turn the call over to Patrick Schafer, our Chief Investment Officer.

Thanks, Ted.

Turning to Page 5 of the slide presentation. During the quarter, we made investments into 14 borrowers, 2 of which were into existing portfolio companies and 12 of which were brand-new borrowers. Of these investments into new borrowers, all but 4 were completed alongside other BC Partners entities. In aggregate, these 14 investments totaled $41.9 million of face value, 84% of which were first lien securities, 13% of which were unsecured bonds that were almost all sold prior to the end of the quarter, and the remaining 2% being net add-ons to the Great Lakes joint venture and 2 small equity investments. The weighted average spread on new investments, excluding the Great Lakes joint venture that currently remain on our balance sheet, was 568 basis points, but the total return will ultimately be higher as a number of these investments were purchased at a significantly higher OID than is typical given the market environment.

Additionally, over the course of the quarter, we fully exited 8 positions, 3 of which were legacy KCAP or OHAI positions. In aggregate, our fully exited positions represented a carrying value of $21.0 million and resulted in a gain of $948,000. All positions were sold either at or above their carrying value relative to March 31 or cost if it was acquired during the quarter. Additionally, we partially monetized 4 positions that represent an aggregate carrying value of $9.7 million and realized a gain of $28,000. 3 of these 4 positions were sold at or above their carrying value with the remaining position sold for approximately 2% less than its carrying value. After adjusting for movements between unrealized and realized, we recognized approximately $384,000 of unrealized losses on our investments. Our debt and equity securities accounted for an approximately $200,000 unrealized gain, while CLO equity positions accounted for a $2.9 million unrealized loss, offset partially by a $2.3 million realized gain from our 2 joint ventures.

With respect to our debt and equity securities, BC Partners originated assets increased by approximately 1.3% quarter-over-quarter and legacy OHAI assets increased by approximately 3.0%, offset partially by legacy KCAP assets declining by approximately 2.6% quarter-over-quarter.

On an equivalent basis, excluding the nonaccruing asset of OCI, which was acquired with the OHAI portfolio, as of June 30, Portman Ridge has $233.4 million of debt securities marked at 88.5% of par and yielding a stated spread to LIBOR of 681 basis points on accruing debt securities. This compares to $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 as of March 31, 2020, and $165.7 million of debt securities portfolio marked at a blended price of 91.9% of par and a stated spread to LIBOR of 658 basis points when BC Partners took over management of Portman Ridge on April 1, 2019.

Turning to Slide 6. We had no new nonaccruals during the period. Nonaccruals as of June 30, 2020 represented 6.8% of cost and 4.3% of fair value on the investment portfolio.

Finally, moving to Slide 7. You can see the progress we have made in rotating the portfolio subsequent to the externalization and OHAI merger. We have reduced the legacy OHAI portfolio by 52% and KCAP legacy and noncore assets now represent only approximately 30% of our current investment portfolio.

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

Thank you, Patrick.

Let me say again that we're pleased with our performance during the quarter, where our investment portfolio sits from a credit quality and the expected earnings accretion through the Garrison merger. On the corporate activity front, our main focus over the next 3 months will be to complete the merger with Garrison as seamlessly as possible, though we will continue to pursue further consolidation opportunities as they come up.

With that, I would like to thank all of our shareholders for their continued support, and I will now turn over the call to the operator for your questions.

(Operator Instructions) Your first question comes from the line of Ryan Lynch from KBW.

The first one has to do with the Garrison transaction. Garrison's balance sheet, obviously, has a significant amount of leverage compared to Portman Ridge's balance sheet. As you prepare for that over the coming months, I guess, is the expectation that you guys will be deleveraging the Portman Ridge portfolio in order to take on that portfolio with higher leverage? Is that the expectation?

Yes. That's a great question. So through our merger agreement, number one is Garrison is relatively limited on new investments. So we expect potentially some organic deleveraging from that side. And from our side, number one, the investment environment right now, activity levels are down quite dramatically, but we're being very, very, very discerning about new investment activity. And the hope would be we can delever through a combination of our balance sheet as well as their balance sheet. So it's something we're very focused on. It's something post close we're going to want to get leverage way down from where the pro forma entity is. And we think we have a bunch of different paths to do that in a pretty expedited period of time. So we feel good about it. But to your question, we've really set the bar high for new investment activity to basically prepare for the merger.

Okay. I know there's not a ton of market activity going on as far as the direct lending markets today. But I think one of the important topics is staying relevant to your private equity clients and then borrowing partners. And if you guys are limiting the deals that you guys are really looking to do or setting that bar higher, could you maybe talk to Slide 11 a little bit that really shows the broader BC Partners platform and specifically the yield strategies that you guys have with the $3.3 billion of AUM? And while Portman Ridge may be stepping back a little bit from the market, which, again, the market is pretty muted right now, but maybe stepping back from the market a little bit to focus a little bit on deleveraging, can you talk about the BC Partners platform ability to step in and still support those existing borrowers?

Yes. I mean, our borrowers are really key to our lifeblood. And to your question, like I don't think there's any intention to cut off our borrowers from liquidity and also our best relationships. So number one, within Portman Ridge, we've got ample room in our bank lines and everything else for new activity. But exactly to your question, we do have other pockets of capital as a firm that we could use to support our best borrowers. So even though we've raised the bar, it doesn't mean we can't necessarily support our clients.

Okay. And then kind of on that point, I think you said you had -- correct me if I'm wrong in the way I heard this, but 4 new borrowers, excuse me, 12 new borrowers went into the Portman Ridge portfolio, and all of those, except for 4, were borrowers across the existing BC Partners platform. Not sure if I got that correct, so please correct me if I'm wrong in that. But can you talk about how deal sourcing is made across the platform as well as allocation policy to the different funds across the BC Partners platform and how Portman Ridge can benefit from broader deal sourcing across the platform?

Yes. Ryan, I'll take the first part and then I can pass up to Ted for the second part. But what we're trying to get at was we made 14 new investments during the quarter, 12 of which were to new borrowers and 2 of which were to existing borrowers within Portman Ridge. So think of it as add-ons or follow-ons or things like that for those 2. And then the remaining 12 were just new borrowers, kind of new to Portman. And all but 4 of those 12 were done with other BC entities investing alongside of Portman. So 8 of the 12 new investments were done alongside of Portman. And there's kind of various reasons for the other 4, which I have to give examples of, but that was what we're trying to get at was 8 of the 12 were done in connection with other BC entities investing at the same time.

Yes. And to the second part of your question, yes, I mean, listen, I think part of the reason why we've been able to be successful in getting people to join Portman Ridge in terms of merger candidates is couplefold. One is, we can speak to bigger deals and bigger size. So it's hard if you're a subscale credit manager to be relevant to clients without more capital. So the way our allocation policy works is very standard. I mean, we have exemptive relief. Every transaction gets shown to Portman Ridge. And we not only evaluate things on a NAV basis but also look at available liquidity. So it all flows through all that. And Portman Ridge has access to all of our deal flow, not only the deals that are relevant for Portman Ridge.

Your next question comes from the line of Christopher Nolan from Ladenburg Thalmann.

Reading the press release, am I correct that there was not a common dividend declared in the second quarter? Or did I misread it?

We did declare a dividend in the second quarter. So again, it was $0.06 per share payable on August 28, I think, to shareholders of record as of the 17th of August.

Okay. The only reason I'm...

Yes. Our dividend policy is unchanged.

Okay. The only reason I ask that is August I was reading as the third quarter, and I didn't see anything for the second quarter.

We declared that at the end of March.

Yes. We have a slightly different -- yes, we did it in March. So you might have missed it because we did it a little bit early because of the uncertainty in the markets with COVID and wanted people to know that their dividend was safe so. And yes, so we're following a 4 payments in the year methodology.

Got it. Okay. Was there any sort of nonrecurring deal expenses related to GARS in the quarter?

I don't think there was. If there was, I don't think there was a lot. I mean, I think that there's probably some as it relates to our professional fees, but I think that for the most part that's not in there.

I think it's important to address. It's a great question. I think it's important to address. I mean, one thing that we're very focused on, obviously, LIBOR has been a big headwind for all of the BDCs. And one thing we've done, and we always do this, but we're really trying to drive costs out of our business. So we've obviously done it through M&A, but we're also looking at every dollar that we spend on legal fees and every other part of our business. And we really are trying to drive down administrative expenses. It's the easiest way for us to deliver benefits to our shareholders, and it's something that we're incredibly focused on.

Okay. And Ted, I think you might have touched on this in the comments, but how exactly are you guys planning to take the leverage ratio down in the third quarter? Because I'm getting at 1.43x debt to equity and I'm just curious if there's a strategy to get that lower.

Yes. I think what we're focused on is between -- we're obviously looking forward to the pro forma entity. And really, what we're focused on is the combined leverage number. And we want to keep that at a relatively conservative number for a whole bunch of reasons. So we can do it through obviously selling assets. We can also do it by restricting originations, but it's something that we're obviously very, very focused on. If you look at our track record, Ryan asked in the previous question, but just to reiterate, when we did the Oak Hill transaction, we monetized a big chunk of the portfolio very soon after the transaction close. And so I think we've demonstrated a track record of being able to delever relatively quickly in some of these analogous merger situations.

Okay. Final question.

I was going to add one more thing actually just quickly. If you look at our balance sheet, we actually, as of June 30, we had a decent amount of cash. We call it restricted cash, but it's really just cash sitting in our credit facility and a certain number of trades that were executed that hadn't yet settled. So when you kind of look at it on a net basis, our debt-to-equity ratio is below that 4.3. It's more like -- I'm sorry, 4.43. It's more like 4.3x just for what it's worth.

Okay. And then I guess my final question. On the $10 million worth of incentive fees that you plan to invest in Portman Ridge shares at 1x NAV, would that be new shares that you would buy at 1x NAV or buying, I mean, I presume?

Yes. No. That's correct. So mechanically, the way it works to be technical is Portman will pay the manager the cash, the incentive fee, and then the manager takes that cash and then buys newly issued shares in Portman at NAV.

All right. So this would be -- because of where the shares are trading now, you get sort of a juiced effect in terms of capitalizing the balance sheet with new equities?

Yes. Equity, I mean, the equity count goes up. And obviously, the incentive fees we earn on a mark-to-market basis are obviously substantially below what the actual like earned amount is, but we feel good about our NAV and we think it's a great message for our shareholders.

At this time, there are no further questions.

Well, thanks again for all of your support. Thank you for all your great questions. And on a go-forward basis, please feel free to reach out to any one of members of management and we'd be happy to tell you more about Portman Ridge. Thank you very much and have a great evening.

This concludes today's conference. You may now disconnect.