BCP Investment Corp (BCIC) 2021 Q2 法說會逐字稿

Good day, and thank you for standing by, and welcome to the Second Quarter 2021 Financial Results Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions) I will now hand today's conference over to your speaker, Jeehae Linford. Please go ahead.

Thank you. Good morning, and welcome to Portman Ridge Finance Corporation's second quarter 2021 earnings conference call. An earnings press release was distributed yesterday, August 5, 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. With that, I would now like to turn the call over to Ted Goldthorpe, Chief Executive Officer of Portman Ridge. Please go ahead, Ted.

Good morning, and thanks, everyone, for joining our second quarter 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 this quarter. Patrick will provide comment -- commentary on our investment portfolio and our markets, and Jason will discuss our operating results and financial conditions in greater detail.

Yesterday afternoon, Portman Ridge announced its second quarter 2021 results. We had an active quarter, highlighted by the strong financial results and a successful closing of the merger with Harvest Capital Corporation, which was completed on June 9, 2021. On the corporate front, we were pleased to reinstitute our share repurchase program following the closing of the Harvest transaction. During the quarter, we repurchased $380,000 of shares, and subsequent to quarter end, we've repurchased an additional of $1.2 million of shares. We also announced yesterday that the Board has approved a 1-for-10 reverse stock split that we expect to complete during the third quarter with an effective date to be announced in the coming weeks.

Beginning with our second quarter results. We generated net investment income per share of $0.15 and earnings per share of $0.14. Net asset value per share increased to $2.93 per share as of June 30, an improvement of $0.01 from the first quarter and marks the fifth straight quarter that we've increased NAV per share. The increase reflected continued favorable market conditions, including ongoing tightening of credit spreads and was offset partially by approximately $0.02 per share of onetime HCAP transaction costs.

We also had an active quarter in terms of origination and repayment. We successfully invested a total of $62 million during the quarter that generated a weighted average spread of 691 basis points, and fully exited or repaid on investments with a carrying value of $70 million. Patrick will provide more detail in his commentary, but we note that our new originations are consistently being underwritten at higher yields, higher than those of our existing debt portfolio investments, implying future increased returns for our shareholders on a risk-adjusted basis.

On June 9, we closed our merger with Harvest, which resulted in a number of benefits to Portman Ridge and shareholders that we have discussed at length in previous calls. These benefits include, the additional -- the adding of size and diversification to the existing platform, the leveraging of public company expenses across a broader asset base, the capability and flexibility to speak for larger deals in the longer term and this prospect for overall improved trading and liquidity in our stock. The Harvest portfolio added complementary, primarily first lien assets to our investment portfolio and also resulted in net deleveraging to the tune of about 0.1 turns on both a gross and net basis. We expect the merger to be earnings accretive for shareholders, both in the short and long term, driven by cost synergies across the platform, particularly with respect to public company expenses, but we also expect to benefit from lower financing fees and a lower blended fee structure.

On this note, during this quarter, we took the opportunity to reduce our long-term senior unsecured cost of debt by issuing $108 million of 4.875% senior notes. The proceeds from these notes will be used to redeem in full the $76.7 million of 6.125% notes during the quarter and a $28.75 million of HCAP's 6.125% notes, which were deemed subsequent to the quarter. Accordingly, this refinancing will result in substantial interest rate savings over time. As we stated in the past, we expect these interest savings and other cost efficiencies stemming from our consolidation activities to more fully emerge as we continue to spread fixed costs over a significantly larger asset base.

In corporate news, we are pleased to report that following the closing of the HCAP transaction, we've resumed active participation in our stock repurchase program. As a reminder, on March 11, 2021, the company's Board of Directors reauthorized the company to repurchase up to an aggregate of $10 million of its shares in the open market until March 31, 2022. Also, as previously announced, the company entered a Rule 10b5-1 stock trading plan to facilitate the repurchase of up to 2.5 million of its shares under the share repurchase program. Since the closing of the HCAP merger and to date, we've repurchased approximately a total of $1.6 million of shares. We continue to conduct buybacks under the program throughout the remainder of the year based on market conditions and other factors.

We also announced yesterday that the Board of Directors has approved a 1-for-10 reverse stock split of the company's outstanding common stock, which we expect to complete in the third quarter. This is something we've been talking about for a while as we believe having the shares undergo a reverse stock split may provide greater flexibility for a wider range of shareholders and thus ultimately generating value for the benefit of all shareholders. We will make announcement in the coming weeks regarding the effective date and further details around the reverse stock split. In summary, we feel very good about the first half of 2021, having accomplished a number of key objectives. Our portfolio is performing well, and we are pleased that overall, much of the heavier lifting is complete in terms of proactive monetizations and deleveraging.

Marketing conditions are strong with transaction levels remaining high and liquidity is abundant. With our leverage at the lower end of our target range, we have ample capacity to expand investment activity as we continue to rebuild and shift the portfolio composition to BC Partners' originated assets. Internally, we remain very focused on generating cost savings in all areas of the company in order to maximize value for our shareholders. With that, I will turn the call over to our CIO, Patrick Schafer, for a review of our investment activity.

Thanks, Ted. Turning first to current market conditions. The second quarter continued where the first quarter left off with strong economic tailwinds and continued low interest rates. In terms of liquid loan benchmarks, spreads during Q2 continued to tighten on average compared to Q1. The middle market benchmarks remain very slightly wider than Q4 2020 -- sorry, Q4 2019, but those also tightened in tandem with the broadly syndicated markets. Transaction volume remained strong in the quarter, including both new investment opportunities through M&A activity as well as refinancing activity. Repayments continued at an elevated level and were largely offset by new investment activity during the quarter with some additional transactions slipping into early Q3. As before, we note that spreads remained wider in the direct loan origination market relative to the liquid credit market and our ability to use the breadth of our platform to lead and structure transactions should generate consistent attractive risk-adjusted returns in excess of the broader market.

Looking ahead to the second half of the year, our focus continues to be managing our pipeline activity against asset repayments, now that we are comfortably within our target leverage range. Our new debt originations continue to generate yields in excess of our in-place debt portfolio as a whole, excluding the impact of the acquired harvest portfolio. So long term, we believe the increased repayment activities will lead to increased returns for shareholders as we further rotate out-of-legacy assets and into assets originated by BC Partners.

Even excluding the Harvest merger and associated assets, second quarter was very active in light of the elevated repayment activity across the portfolio. During the quarter, we made investments into 14 borrowers, 7 of which were existing borrowers, including both of our joint ventures and 7 of which were brand-new borrowers. In total, all but one of the 14 transactions were completed alongside other BC Partners' entities. In aggregate, these 14 investments totaled approximately $62 million of face value. Excluding short-term investments that were sold prior to the end of the quarter, 73% of new investments were first in securities, 18% were cycling securities and 9% were net add-ons to the Great Lakes and Freedom 3 joint ventures. The weighted average spread on the new investment, excluding the joint ventures, was 691 basis points.

On the repayment and disposition side, the quarter also continued to be very active. In total, we fully exited or repaid on 19 positions, 16 of which were repayments. In aggregate, these exits represented a carrying value of approximately $70 million and resulted in a gain of approximately $1.5 million. During the quarter, our debt and equity securities accounted for approximately $5.9 million net gain, while CLO equity positions accounted for a $1.1 million net gain, and our 2 joint ventures accounted for approximately $617,000 net loss.

On an equivalent basis, as of June 30, Portman Ridge had $449.6 million of debt securities, marked at 93.5% of par and yielding a stated spread to LIBOR of 745 basis points on accruing debt securities. This compares to $412.3 million of debt securities marked at 93.9% of par and yielding a stated spread to LIBOR of 658 basis points on accruing debt securities as of March 31, 2021. Nonaccruals as of June 30, 2021, represented 2.6% of cost and 1.1% of fair value on investment portfolio as compared to 2.3% and 0.7%, respectively, as of March 31. Eight investments were on nonaccrual status as of June 30, 2021.

And now I'll turn the call over to Jason to further discuss our financial results for the quarter.

Thanks, Patrick. GAAP net investment income for second quarter, 2021 was $11.7 million or $0.15 per share, which compares to net investment income of $8.2 million or $0.08 per share in the previous quarter. Total investment income was $21.5 million, an increase of $3.2 million or 17% due primarily to the increase in investments resulting from the HCAP merger, and income resulting from continued elevated repayment activity. We also generated additional income from CLO fund securities driven by repricing activity in a number of underlying CLOs and also from our joint ventures, driven by continued portfolio rotation and increased utilization of the JVs, as compared to prior quarter.

Total expenses for Q2 decreased to $9.8 million from $10.1 million in the previous quarter and from $11 million in the fourth quarter of 2020. Over the past several quarters, we have grown assets significantly while maintaining a relatively stable level of operating expenses, and we expect this trend will remain consistent going forward. At quarter end, we had total investments, excluding derivatives of $520 million and net assets of $269 million or $2.93 per share, an increase of $0.01 from $2.92 per share in the previous quarter. NAV per share was impacted by approximately $0.02 per share of onetime HCAP transaction expenses. Despite this impact, as Ted mentioned, this marks the fifth straight quarter that we have increased NAV per share.

The increase in NAV per share for the quarter was mainly attributable to net investment income of $11.7 million. During the quarter, several affiliates of the company's adviser and an affiliate of LibreMax Intermediate Holdings LP, purchased 1.4 million shares of the company's common stock for total consideration of approximately $4 million in a private placement. As a reminder, the externalization agreement entered into by the company in 2019 required the adviser to use up to $10 million of the incentive fee earned to be reinvested in newly issued stock at NAV through March 31, 2021. These shares sold represented the incentive fees received from the company. Taking into account these factors as well as the dividend paid during the quarter, NAV per share was $2.93 as of June 30, 2021.

During the second quarter, we issued $108 million in aggregate principal of 4.875% senior unsecured notes and 2 private placement offerings. We issued $80 million of the 4.875% notes on April 30, 2021, and issued an additional $28 million on June 24, 2021, under identical terms. Proceeds from these issuances were used to redeem in full of the 6.125% notes with outstanding principal balance of $76.7 million on May 30, 2021, and also to redeem in full HCAP's 6.125% notes with outstanding principal of $28.75 million subsequent to quarter end on July 23, 2021. Accordingly, as of June 30, 2021, we had a total of $369.7 million par value of borrowings outstanding, comprised of $108 million of the 4.875% notes just discussed, $69.1 million in borrowings under our credit facility, $163.9 million in secured notes due 2029, and $28.75 million of HCAP's 6.125% notes that as previously mentioned, were redeemed on July 23, 2021.

As of June 30, 2021, our debt-to-equity ratio was 1.4x on a gross basis and 1x on a net basis. From a regulatory perspective, our asset coverage ratio at quarter end was 171%. The reduction in net leverage from the previous quarter was driven primarily by the increase in net assets from the HCAP merger. Given that our stated objective has been to target overall leverage to a range of 1.25x to 1.4x, we believe we are solidly positioned to pursue growth opportunities. As of quarter end, we had unrestricted cash of $65.7 million, of which $28 million was held to repay the HCAP 6.125% notes, restricted cash of $47.6 million and an additional $46 million of available borrowing capacity under the credit facility. Our aggregate unfunded commitments stood at $36.5 million as of June 30, 2021. As announced yesterday and consistent with prior quarter levels, a quarterly distribution of $0.06 per share was approved by the Board and declared payable on August 31, 2021, to stockholders of record at the close of business on August 17, 2021.

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

Thank you, Jason. As you can hear, we've had a busy and productive quarter, highlighted by another quarter of solid earnings and also the successful closing of the HCAP merger. On the corporate side, we are pleased to resume our share repurchase activities, and we expect to continue to conduct buybacks subject to market conditions and other factors. Additionally, we are pleased to announce the Board's approval for a 1-for-10 reverse stock split, and we expect to complete the split sometime in the third quarter.

Looking ahead, we are in solid financial shape, and we've continued to position Portman Ridge for long-term success and earnings power. Our team has worked very hard to drive and execute on initiatives that we believe will create value for our shareholders. At the same time, we will remain vigilant as the potential for a resurgence in COVID in delta variant cases to unfortunately become a possibility to consider. Thank you all once again to all of our shareholders and stakeholders for your ongoing support. This concludes our prepared remarks, and I will now turn over the call to the operator for any questions.

(Operator Instructions) Your first question is from the line of Christopher Nolan with Ladenburg Thalmann.

Patrick, spreads on new investments are 691 basis points. What's the spreads on existing investments, please?

Yes. So existing investments, including HCAP -- the HCAP asset was 745 and excluding the HCAPs is more like 660 basis points.

Okay. Great. And Jason, I know you mentioned in the press release that the -- there was $0.02 of deal costs impacting NAV. And I thought I heard Ted say that there was $0.01 affecting operating EPS was -- I heard that wrong? Is the operating EPS number actually 17 rather than 15?

No, I would say, it's right on the cusp there, and rounding probably got in the way there. I would say 2 is probably a safe number.

Okay. And then finally, on the nonaccrual front. I thought you had 2 new nonaccruals, one is ATP, and the other one is ProAir. Are those HCAP deals?

So this is Patrick. ATP should not be a new nonaccrual. It was taken over in the OHAI transaction back in December of 2019. And it's -- we've never accrued interest on it. It's always been on nonaccrual. So perhaps that might have just been an outstanding issue. So it's never been nonaccruing status since we took it over. And ProAir is the one -- is the increase in nonaccrual, and that was on nonaccrual under HCAP at the time we took it over.

And just to note that is, we've not seen a -- our credit quality of our overall portfolio is very stable to probably improving. So that it's just a -- the increase in nonaccruals is primarily attributed to the Harvest merger.

(Operator Instructions) Your next question is from the line of Ryan Lynch with KBW.

The first one, do you have a -- the dollar amount of the purchase discount accretion that came through of the interest income side regarding the Garrison and Harvest mergers?

Yes. So first, I would point out the purchase discount of $3.8 million that we booked on the HCAP transaction in the current quarter. Part of that would have, call it, converted itself into NII just through pay activity and normal runoff. But I would point to some of our disclosure in the tax footnote related to approximately $0.08 for the quarter coming through the accretion line. And that includes Garrison and HCAP.

Yes. That's helpful. And then as I look at your overall combined portfolio today, you obviously have a decent amount of Garrison assets. You guys have the new Harvest book. When you initially took on the Garrison assets, you sold off a decent amount. Part of that was maybe just because you wanted to delever, maybe part of it was you didn't necessarily want those particular assets on your book at the time of the closing. As we sit here today, do you feel that there is going to be much exits of the remaining Garrison book or the HCAP asset that came on? Or are those going to just operate in your portfolio as normal course and runoff more organically?

Yes. This is Patrick. Happy to take that. I think the short answer is, it will probably be a little bit more of an organic course for the remainder with the caveat that the Garrison assets that we still own, a decent chunk of them still remain liquid and sellable. And so we tend to use that as kind of a lever to sell those more liquid loans when we're originating our own transactions. So depending on our pipeline and our origination activity, you might see slightly more exits on the Garrison name just because of that dynamic, but there being nothing else to it other than that.

Okay. Understood. And then the only last one is, was there -- you guys are obviously building up the broader BC Partners' credit platform. I was just curious with the Harvest merger or I guess even went with the Garrison merger, did you guys onboard any employees or investment professionals from those mergers? Or did you guys just keep all the people in-house to manage those portfolios post merger?

Yes. I'll take that. I would say, generally speaking, in each of these mergers, we've not taken on the investment teams. But we do have some ongoing relationship with the existing firms to help us with anything we require on the investment side. So we feel like we're getting the benefit of continuity on these deals, but we've actually -- as opposed to taking on investment professionals, we've actually hired new ones on our side.

Your next question is from the line of Kelly Rushing with U.S. Capital.

I have a somewhat complex question. It was my expectation that with the 1-for-10 reverse split, the stock will probably lose 10% of its value. And looking at the buyback for the prior quarter, it -- the average price -- purchase price of the stock, I think, was $2.42. Approximately 60 trading days. In those 60 trading days, there were only 2 days that the stock didn't trade below $2.42. So it looks to me like there should have been buying on weakness as opposed to buying on strength. The average price during that period was about $2.35, roughly. I know there are legal restrictions in buying back stock, but it can also be used somewhat tactly. And my question is, is there a process, is there a strategy in terms of the buyback to alleviate the likely pressure on the stock from the reverse split?

Yes, want to answer the question. #1 is, obviously, because of the Harvest transaction, we were blacked out until the very, very end of the quarter. So I think the time period you're using on the stock price is not that relevant because we were not buying stock over that period of time. We were only really started buying stock very close to quarter end. So I think that's #1. #2 is, we don't -- I mean, obviously, we don't try and market time our buyback program, like we're not buying one day out the next day. I think we want to be consistently in the market buying back stock because, again, we don't know where our stock is going to trade on any given day.

And the reverse stocks, but I mean, listen, I -- historically, reverse stock splits have been done when a company is in a position of weakness, and reverse splits for various reasons, including like maintaining listing requirements. This is something that all of our big institutional shareholders and many of our retail shareholders have asked us to do. And obviously, we think we're doing it from a position of strength. If we reverse stock split, it allows a broader group of institutions to buy our stock. People can actually margin the stock, and it opens up the number of buyers for it. So I don't know how you came up with your 10% decline. And I don't know, you might be right, you might be wrong. But we actually -- we are doing this from a position of strength versus weakness. We're not doing this because we need to maintain a listing requirement or some other nefarious reason. We're doing this at the direction of a lot of our -- we -- listen, we're trying to listen to our shareholders and get their feedback. And this is something that we've obviously foreshadowed to the market for the better part of the last 8 months. And so this is not a surprise. This is -- people voted on - our shareholders voted on this in our annual meeting. So again, it's not something we're trying to railroad through. And so I think the market, if you believe the markets are efficient, we've foreshadowed this for 8 months and people voted on it. So this is not -- this shouldn't come out as a big surprise to the market.

It will be a big surprise to me if it doesn't go down after the reverse split. That's been a long, long pattern regardless of the company being weak or strong. So I hope you're right. It does not do me any good, but I've seen it too many times to think that, that won't happen.

Yes. Listen, you could be right. Listen, our job -- listen, at the end of the day, our job is to execute on earnings and book-value growth. And I have no idea where our stock is going to trade. But obviously, we've been given -- we're not just doing this. We've gotten a lot of advice from shareholders, analysts, bankers. And yes, you could be right. And to your point about the buyback program and the fact that we'll be in the market buying back stock should -- if you are right and the stock will face weakness because of a reverse stock split, the fact that we're in the market buying back stock should at least mute that impact if you turn out to be right.

Yes. Well, I'd like to say, I hope I'm not. But if the objective is to buy as much stock as possible with as little money as possible, I would think you would look to weak periods or potential week periods to do that if it's legally possible.

The way simplistically, we think about a buyback program, just so we're on the record of saying it is we are a cost of capital vehicle. So we have a cost of debt, we have a cost of equity and our stock trades today, it just makes a lot of sense for us to buy back stock. And so to your point, that changes. If our stock trades at 2x book, maybe it doesn't make sense for us to keep buying back stock. But where our stock trades day versus where we're originating new assets, as a shareholder, we think it makes a lot of sense to buy back stock. It's very accretive for our shareholders.

Your next question is from the line of Chris Nolan with Ladenburg Thalmann.

Ted, given your perspective of what the debt market is for BDCs, given the private placements, and given that you guys have done a wonderful job in terms of fixing up Portman Ridge, where is your thinking in terms of debt costs for other similarly dented BDCs? Do you think the market is now still at 4.875 for other dented BDCs?

Well, we're investment-grade rated. So I would -- here's what I'd say. I would say we get the benefit of being part of a larger institution. So the fact that we're a bigger platform, the fact that we pay lots of money to the street, the fact that we are institutionalized, gives us a big advantage on the financing costs. And you can see it, we're financing ourselves 1.25% cheaper than Harvest was. And so I think from our perspective, being part of a large institution helps us. So I wouldn't compare it apples to apples. And then our financing, it was done very seamlessly. And I don't think a comparable BDC would be able to finance themselves at the exact same rate as us just because we obviously are a little more institutionalized to our peers. But what we've been guided to by the market is a comparable BDC, should be able to finance themselves in the high 5s.

Thank you. At this time, I'll turn the call back to management for any closing remarks.

Thanks, everyone, for joining us today. We look forward to speaking to you in the next quarter. And in the meantime, if anybody has any questions, feel free to reach out to any member of management or anybody else affiliated with Portman Ridge. Thank you very much, and have a wonderful weekend and a wonderful end to the summer.

Thank you. And this does conclude today's conference call. You may now disconnect.