Welcome to the Portman Ridge Finance Corporation Second Quarter 2022 Earnings Conference Call. An earnings press release was distributed yesterday, August 9, 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 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.
Good morning, and thanks everyone for joining our second quarter 2022 earnings call. I'm joined today by our Chief Financial Officer, Jason Roos, and our Chief Investment Officer, Patrick Schafer. I'll provide highlights on the company's performance and activities for this quarter. Patrick will provide commentary on our investment portfolio and our markets. Jason will discuss our operating results and financial condition in greater detail. Yesterday, Portman Ridge announced its second quarter 2022 results, and we are pleased to report a solid financial performance in a challenging economic environment. During a quarter in which our industry experienced significant market volatility and other macroeconomic and political factors, we remain committed to our strategy of prudent capital deployment and focusing on strong companies to add to our portfolio.
As a result, even under these market conditions, we ended the quarter with strong investment activity, lowered non-accrual investments as compared to previous quarters, and maintained our dividend of $0.63 per share. Investment activity was strong and although originations are still lower than the second half of 2021, during the second quarter we deployed approximately $57.6 million of our available cash in new investments, net of refinancing existing borrowers, and had an additional $20.6 million of new investments that closed in July. Almost all of these new investments had been in our pipeline into the first quarter, but due to the dislocation in the capital markets, both public and private markets, most of the new investments were settled towards the very end of the quarter or in July.
Patrick will provide additional details, but I'd like to emphasize that the reduced investment income from the quarter was a deployment timing issue, as we've only seen a very limited effect of the steps taken during the quarter. As Slide 9 of our earnings presentation shows, we anticipate normalized quarterly activity to result in NII per share that is greater than $0.70, with the majority of that increase relative to our second quarter NII per share driven by new investments that have already closed. Shifting to the liability side of our balance sheet, we're able to restructure our agreement with J.P. Morgan Chase and lower the interest rate and shift from LIBOR to SOFR and extend our maturity date by two and a half years. This restructured agreement has helped lower our cost of capital and provided an incremental investment horizon.
Furthermore, during the quarter, we repurchased over 106,000 shares under our renewed stock purchase program at an aggregate cost of approximately $2.5 million and nearly 130,000 shares at an aggregate cost of $3 million since the beginning of the year. We maintained our $0.63 quarterly distribution, which reflects the stable long-term performance of our operations and investment activities. Overall, we believe that we are well positioned to further improve our portfolio performance and net investment income in the second half of 2022. With that, I will turn the call over to Patrick Schafer, our Chief Investment Officer, for a review of our investment activity.
Thanks, Ted. Turning to Slide 6, we have provided specific details around a list of assets that were either on our SOI as of June 30th, 2022 or were closed shortly thereafter, but generated limited to no income during the quarter. In aggregate, these assets are expected to generate approximately $1.1 million of quarterly income, plus an additional $360,000 in one-time fee income. Furthermore, given the significant cash position we had heading into the quarter, there is expected to be relatively limited incremental interest expense as a result of closing these investments. Turning now to Slide 7 and the sensitivity around our earnings to interest rates.
As of June 30th, 2022, approximately 87.5% 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 93% of these still being linked to LIBOR. As you can see from the chart, the underlying benchmark rate on our assets during the quarter lagged the prevailing market rates and still remain significantly below the LIBOR and SOFR rates as of August 1st, 2022. We expect these to normalize over time as the underlying one, three, and six-month contracts reset. But for illustrative purposes, if all of our assets were to reset to either a three-month LIBOR or SOFR respectively, we'd expect to generate an incremental $1.7 million of quarterly income.
While our liability costs will also rise relative to their Q2 levels, we still expect a net positive benefit of approximately $0.05 per share, assuming all of our assets and liabilities are utilizing the same three-month benchmark rates for the entirety of the third quarter. Skipping now down to Slide 12. Investment activity and originations for the second quarter were higher than the first quarter of 2022, but were also very back-ended, as we have just highlighted. Net of refinancing existing borrowers, we deployed approximately $56.7 million during the quarter and were refinanced or repaid on approximately $32.7 million of investments. Additionally, we funded an incremental $20.6 million of investments early in the third quarter relating to investments that had been in our pipeline since the beginning of the second quarter.
These new investments are expected to yield a spread to SOFR of 683 basis points on the par balance. A number of these investments were purchased at a meaningful discount to par, which will generate income in addition to the 683 basis points of spread. Our debt securities portfolio at the end of the first quarter remains highly diversified, with investments spread across 32 different industries and 118 different entities, all while maintaining an average par balance per entity of approximately $3.5 million. Turning to Slide 13. As previewed in our first quarter earnings call, during the quarter, we materially cleaned up our portfolio as a result of the exit of Grupo Hima in April, which represented 84% of our March 31st non-accrual portfolio on a cost basis.
As of June 30th, 2022, 3 of our debt investments were on non-accrual status, compared to six as of March 31st, 2022, and seven as of December 31st, 2021. As a result, investments on non-accrual status as of June 30th, 2022, decreased to 0.0% and 0.3% of the company's investment portfolio at fair value and amortized cost, respectively. Which compares to investments on non-accrual status as of March 31st, 2022 of 0.2% and 1.9% of the company's investment portfolio at fair value and amortized cost, respectively, and 0.5% and 2.8% as of December 31st, 2021, respectively. I'll now turn the call over to Jason to further discuss our financial results for the period.
Thanks, Patrick. As both Ted and Patrick previously mentioned, similar to many other BDCs, our financial performance for the quarter was affected by market volatility and other macroeconomic and geopolitical factors. Our net asset value per share for the second quarter of 2022 was $27.26 per share as compared to $28.76 at March 31st, 2022, with the decline associated with mark-to-market declines on both debt securities and our CLO equity portfolio. For some directional context around mark-to-market impacts, the Credit Suisse Leveraged Loan Index went from a 449 basis points as of March 31st to 658 basis points as of June 30th and is now back down to 567 basis points as of August 8th.
The underlying average loan price of the index fell by 5.4 points from March 31st to June 30th, but has gained back 2.2 points as of August 8th. These market moves impacted our debt security valuations, but the associated NAV changes were not driven materially by changes in credit quality. Total investment income for the second quarter was $15 million, of which $11.9 million was attributable to interest income from our debt securities portfolio, inclusive of PIK income. Excluding the impact of purchase price accounting, our core investment income for the second quarter of 2022 was $13.7 million. This reflects a reduction in purchase price accretion from the Garrison and HCAP mergers, which amounted to $1.3 million for Q2 2022. Over the last several quarters, we have continued to work toward reducing expenses.
Total expenses for the second quarter of 2022 were $9.5 million, compared to $9.8 million in the second quarter of last year. Our net investment income for the second quarter was $5.5 million or $0.57 per share, which was down due to timing associated with the closing of certain Q2 investments, reduced income from pay downs, lower CLO and accretion income recorded for the quarter in combination with higher interest expense on our variable debt. At quarter end, we had total investments of $581.5 million, which was up from the previous quarter by approximately $13.5 million, largely as a result of purchases and origination outpacing pay downs and sales for the quarter.
Due to the higher interest rate environment we are currently experiencing, we expect our investment income for future periods to be positively affected as the rates on our floating rate investments reset beyond certain rate floors embedded in our asset portfolio, and we experience a nearly complete quarter benefit of rate reset timing among many of our investments. On the liability side of the balance sheet, as of June 30th, 2022, we had a total of $364.9 million par value of borrowings outstanding, comprised of $93.1 million of borrowings under our credit facility, $108 million of 4.78% Notes due 2026, and $163.7 million in secured notes due 2029.
This $12.5 million increase was the result of a draw on our credit facility. As of March 31st, 2022, our liabilities consisted of approximately $108 million par value with a fixed rate of interest and $256.9 million par value that had a floating rate of interest. As of the end of the quarter, we had $21.9 million of available borrowing capacity under the senior secured revolving credit facility and $25 million of borrowing capacity under the 2018-2 revolving credit facility. Additionally, perhaps most notably, we were successful in refinancing our senior secured revolving credit facility in April, which reduced the rate of interest and extended the maturity of the facility.
As of June 30th, 2022, our debt-to-equity ratio was 1.4 x on a gross basis and 1.2x on a net basis. From a regulatory perspective, our asset coverage ratio at quarter end was 170%. Given our stated objective has been to target overall leverage to a range of 1.25x and 1.4x , we believe we remain solidly positioned to pursue growth opportunities. Lastly, and as announced yesterday, a quarterly distribution of $0.63 per share was approved by the board and declared payable on September 2nd, 2022 to stockholders of record at the close of business on August 16th, 2022. With that, I will turn the call back over to Ted Goldthorpe.
Thank you, Jason. Ahead of questions, I'd like to emphasize again that although some of the metrics of our performance were below normal expectations, this is largely a timing issue, as we expect to see the full effect of our business initiatives and active repositioning of our portfolio to improve our bottom line in the second half of this year. Thank you once again to all our shareholders for your ongoing support. This concludes our prepared remarks, and I'll now turn the call over to the operator for any questions.
At this time, I would like to remind everyone, in order to ask a question, press star then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Christopher Nolan from Ladenburg Thalmann. Your line is open.
Hey, guys. Jason, on the higher interest expenses, were there any capitalized expenses related to the new credit facility?
Very little, but most of that increase in that interest expense, pretty much all of it really is due to the rate rise on the variable debt that we have on the balance sheet.
Great. Was the driver for the realized losses, Grupo Hima?
Yep, that's the predominant driver of that. Very minimal portion of that was true realized loss in the quarter. I would say within the hundreds of thousands, like, less than $400,000.
Great. As I recall.
Otherwise—
Yeah, go ahead.
The remainder of that, well, predominantly all of that was a flip between unrealized and realized. Grupo Hima made up the vast majority of that. Then we took some CLO impairment as well, which is a flip, as you know, between unrealized and realized.
How much was the CLO impairment?
I'm sorry?
How much was the CLO impairment?
Yeah. It was around $4 million across a couple of the CLOs.
Gotcha. Final question. Grupo Hima, as I recall, that had multiple and discrete investments which were non-accrual. I noticed Grupo Hima—
That's correct.
Is gone from the scheduled investment. Everything was just wiped, right?
That's correct. We sold all the securities as one package.
There you go. Okay. Thanks, guys.
Your next question comes from line Ryan Lynch from KBW. Your line is open.
Hey, good morning. Just had a couple questions regarding the income statement. It looked like CLO income was quite a bit lower this quarter versus the prior quarter. I'm just curious what drove that decline? Is this rate in the second quarter a good number going forward? Or should we expect another, you know, sort of sequential decline lower?
Yeah. So the CLO equity positions are under a beneficial interest method of accounting. The income is a function of the underlying cash flows. As they are updated every quarter, the rate of interest that we book to income is dependent on those underlying cash flows. Because those cash flows deteriorated this quarter, that's why you're seeing a drop in the CLO income this quarter versus prior quarter. I would think based on you know what we're seeing in the market currently, that this should be a good run rate, and if anything, should hopefully rebound as those cash flows start to come back.
Okay.
Yeah. Just because the cash flows, the underlying cash flows themselves are fairly stable. It's just around how much we book as income versus, you know,
Return of capital .
Taken to cost was kind of what changed during the quarter based on the pricing on the underlying CLO securities.
Yeah.
Okay.
Just to clarify, the cash flows I was referring to is the anticipated forecasted cash flows that go into the NPV calculation of the underlying assets itself.
Gotcha.
Not the two cash flows received.
Understood. Helpful slide deck you guys put out with some of the movements, you know, and kinda quarterly NAV bridge for things going forward. The one question I had, I think on Slide 8, you guys talk about repayment of prepayment activity being lower and associated fees and accelerated OID being lower this quarter versus the historical average, which drove some of the pressure, I think, to operating earnings this quarter. I'm just curious, you know, what are you. You know, obviously it's hard to know what happens going forward, but do you get any sense that that's going to return to, if not even normalized levels, do you expect it to pick up from where we've seen it in the second quarter going forward? Obviously it's hard to predict, but I would just love to hear your thoughts on that.
Yeah. Yeah. We really try to put a lot of detail in this presentation because, you know, obviously it's hard to, like, figure out what's happening just from the press release. You know, I don't think you're gonna see repayment activity go down. I just don't see the same level activity levels going forward that we saw in 2020 and 2021. I could be wrong. You've seen that the market's come back a lot since June thirtieth, right? Valuation should recover, obviously just from benchmarks. We've actually seen, like, more repayment activity in the last six weeks than we saw in the second quarter. It's not nearly back to the level that it was last year.
Again, that could change, but I'm not sure I see that actually. You know, given where pricing is for new LBOs and given where we're pricing things, it just has to slow down activity levels. To the extent that levels come back to where they were six to eight months ago. The good thing, the good news is we're booking assets at very wide yields. The stuff we did in the second quarter, and we showed you this on Slide 6, is really good stuff. Like, we're really happy about the loans we're doing and the spreads we're doing them at. But I don't foresee page eight recovering back to anywhere close to 21 for some period of time.
Okay.
It's like the classic, you know.
I think.
It's a classic, you know, we get to keep our good assets 'cause they're not getting refinanced, but, you know, we're not getting the same level of repayment, prepayment income. You're gonna see. I think our quality of earnings should start to go up in the sense of, like, our spreads are wider, you know, SOFR is going up. You're gonna get. The mix of our income is gonna change a little bit and, you know, it's gonna be a lot more predictable, I would say.
I think, Ryan, what I think for kind of the purposes, probably what you're getting at with your question, what Ted alluded to, we are seeing repayment activity in the quarter, and we have kind of line of sight on repayment activity. You know, it won't be a zero in terms of repayment activities in the quarter. We already have line of sight on, you know, a number of items, and we're seeing it. It's just still at a, you know, a meaningfully slower pace than in 2021.
The other thing I'd say, actually, one thing that's a new theme, Ryan, that I've never seen in my career is the stuff we're getting repaid on is typically not correlated with credit quality. You know, usually you're not getting refinanced out of your weaker credits. We've seen you know we've got notices on two or three credits to get refinanced that are, you know, I would say not our best credits in the whole portfolio. You know, old legacy positions that we've been positively surprised by.
Do you have any sense of why that would be? That seems kind of strange given the move in both spreads and benchmark rates higher. It seems odd that they would, you know, refinance out of lower quality or maybe not the best assets. Do you have any sense of why that occurred?
Yeah. I mean, generally speaking, these are more seasoned assets, so they're assets that have been, you know, outstanding for longer. Some of it's maturities. Some of it's just people trying to get ahead of. It's an incredibly uncertain environment over the next 12 to 18 months. I don't need to tell you that. I think people are just trying to get ahead of, you know. People have no idea what's gonna happen next year, and people are willing to pay more for certainty around capital structure.
Okay. Understood. I just had one other question, maybe best for Jason. On Slide 4, you guys talk about core NII of $0.51 and core net investment income of $4.874. I'm just curious. In that footnote, you talk about, you know, the, you know, backing out the purchase price accounting accretion, which, you know, I understand that. But then also within that number, you also talk about the impact of expenses, merger-related expenses that you back out from that core number. I'm just curious, what are those core ex- Obviously I can do the dollar amount math. I'm just curious, what are these merger-related expenses that you guys are incurring this quarter that you're backing out to your core net investment income number?
Yeah, we can walk you through that, Ryan. We have all the details separately, but it's a calculation that assumes that had the accretion from the purchase accounting not occurred in the current quarter, we rerun all of the fee structure, and we're not taking any fees out. We're just recalculating, you know, fees based on the new number, had it not generated income, including the purchase accounting. We affect that predominantly in the fees as opposed to.
It's basically like you're basically lowering the incentive fees for that calculation?
Exactly.
Okay. Gotcha. Okay. That's all for me. I appreciate the time this morning.
Your next question comes from the line of Steven Martin from Slater. Your line is open.
Hi, guys.
Hey, Steve. How are you?
Good, good. It's been a long week of BDC earnings, and it's only Wednesday. Can you comment on the leverage ratio and your comfort level, given all the factors and pro forma for the closings you know have occurred already in the third quarter?
I mean, I'll say—
Go ahead, Ted.
Yeah, sorry. I would say we, you know, our leverage ratio is right in the range that we've kinda guided people to. Again, I'm not predicting the future, but based on where valuations are today versus June thirtieth, you know, obviously that should help leverage just organically.
You mean because you'll get an upwards mark on the unrealized?
Correct. Yeah, I mean, you know, we use. You know, as Jason said in his prepared remarks, most of our mark-to-market, if like the vast majority of it was tied to, spread widening and obviously, you know, spreads have tightened. You can, you know, we don't wanna provide guidance just 'cause we don't know what's gonna happen in September, but, you know, obviously asset prices have gone up since, generally speaking, since June thirtieth.
Okay.
Yeah, the other thing I'd say, Steve, is given the cash position that we had, kind of all of the closing, so to speak, have no real impact on our gross leverage calculations.
Wait, repeat that one. I didn't quite catch that.
Yeah, because of all the cash from our balance sheet, the actual closings that we've been referencing don't have any impact on our gross leverage test, right? We had all the cash sitting there.
Got it.
Waiting for the deployment. The extra $20 million or so that we referenced that closed in July, but you know, doesn't come with you know, any change really in the gross leverage.
Right. That's why you made the comment that there was very little interest expense offset to that incremental i nterest income.
Correct. I think, yes. Yes, that's correct. There is a slight draw just 'cause we averaged some stuff out, but it had significantly, we had pretty much no incremental interest expense associated with those assets.
All right. What's your level of unfunded commitments for, you know, sort of as of the end of the quarter? How many of those were part of what you've already closed?
Yeah, I mean, just—
I think Jason's digging for the total number, but what I would say is the deals that we reference here, that we show here in the closings, I think have limited to no incremental kind of committed but unfunded. I don't know how they got characterized at quarter end in terms of whether it was considered a commitment or not. I think that normally shows up in our trades pending settlement or due for settled trades. I don't think it would show up in our unfunded commitments, if you will. But very limited of those new investments had associated unfunded DDTLs or revolvers or things like that. There was a little bit, but substantially limited.
Gotcha. You know, I think the best slide in the whole deck was the pro forma, what is it? Slide 9, you know. Assuming Slide 9 sort of occurs, how do you feel about your dividend and your dividend policy? Are you gonna just change, you know, adjust your dividend on a quarterly basis, or you're gonna go to a system of base dividend plus adjustments?
Yeah, I think. I mean, listen, I think we'll reassess that next quarter. I mean, this is just. You know, I call it transition quarter, but it's just a strange quarter. So I think, you know, come September board meeting, this is gonna be a conversation that, you know, we'll have with our board. I mean, I think generally speaking, we feel Raising the base dividend is the route we prefer to go versus paying variable dividends, just because, you know, I feel like the feedback we've gotten from our shareholders is, you know, they want a predictable dividend. But it's something we'll be discussing over the next couple of months, particularly as we finalize our September thirtieth results.
All right. Now that, you know, your stock's moved up a little and your book value, your NAV's come down, your price to NAV's above the 80% mark, you know, how do you feel about your ongoing buyback?
I still think it makes sense for us to buy back stock. You know, from our perspective, if you do the math, you know, I think we don't have a float problem and, you know, if you look at just the accretion dilution, it just makes sense for us to buy back stock. I think, I don't think we have any plans to stop that. We would, you know, like, again, it's a very uncertain environment, but you've seen our credit quality has gotten better. And as of now, our earnings are, and our portfolio companies are holding up very well. You know, with all those things being considered, I think it makes sense for us to buy back stock.
Great. I will comment that I've been on a lot of these calls, and I don't think anyone has the non-accruals at that low a level of portfolio.
Well, I appreciate you saying that. I mean, listen again, our franchise is mostly focused on B2B, and the places you've seen weakness across middle market in the B2C space has really been consumer. It's just not what we do. I'm not saying the other people are doing the right or wrong thing. It's just not our DNA, and I think that's helped us avoid some of the surprises that others have seen.
All right. Thank you very much.
Again, if you would like to ask a question, press star then the number one on your telephone keypad. We'll pause for just a moment to compile the roster. There are no further questions at this time. Mr. Ted Goldthorpe, Chief Executive Officer of Portman Ridge, I turn the call back over to you.
Thanks everyone for joining us today. We look forward to speaking to you guys in early November when we announce our 2022 results. For those who haven't seen it, we really tried this quarter to put a lot of detail into our investor presentation, which you can find on our website. We're always open to feedback, you know, we're always open to providing more disclosure. For those who want additional things, you know, please reach out to any member of the management team. Thanks to everybody, please try to enjoy the end of your summers. Obviously, as always, the door is always open here. Please come visit us or give us a call, and we're happy to kind of talk to you anytime. Thank you very much.
This concludes today's conference call. You may now disconnect.