Good morning, ladies and gentlemen, and welcome to the Portman Ridge Finance Corporation conference call. An earnings press release was distributed Monday evening, November 9th. If you do 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, Tuesday, November 10th, 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. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star, then one on your telephone keypad.
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 could 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, and welcome, everyone. Thank you for joining us. Yesterday afternoon, we reported our third quarter 2020 financial results. I am joined today by my CFO, Ted Gilpin, and my Chief Investment Officer Patrick Schafer. Ted Gilpin will provide additional detail on our financial results, and Patrick will do the same on the investment portfolio. I will begin by discussing Portman Ridge's performance for the third quarter and then speak more on the merger with Garrison Capital, which we closed on October 28th. Overall, I am pleased to report that Portman Ridge had a solid quarter marked by significant improvement in net realized and unrealized gains of $5.6 million across our entire portfolio.
While we were clearly not out of the woods with respect to COVID, we experienced improved market sentiment during the quarter as portfolio companies began to gain a better sense of near-term financial visibility on their prospects. M&A and refinancing activity began to pick up after having been quiet in the prior quarter. Net investment income per share was $0.06, consistent with the past four quarters and the distribution level we have set for the past several quarters. Net asset value per share was $2.85, an increase of 5% from the net asset value per share of $2.71 as of June 30th, 2020. Driving this increase in net asset value per share was a broad-based strengthening of our portfolio due to market spreads tightening throughout the quarter. M&A activity, which is a traditional source of middle market direct loans, picked up substantially towards the end of the quarter.
While still at depressed levels as compared to the last several years, we experienced buyers, sellers, and lenders all returning to the market in an orderly fashion, and activity levels continued to pick up pace through the end of the quarter up to present day. Turning now to our merger with Garrison Capital, which we first announced on June 24th and subsequently closed on October 28th, we believe this merger is a truly transformational event for Portman Ridge as it represents the continued execution of our vision of the consolidation in the public BDC space. It is the third strategic transaction successfully closed by our team in less than two years. We are very excited about the benefits this merger brings to the combined company. First, the merger results in significant added scale and size, essentially doubling the size of the company.
At closing, the combined company had held total assets of approximately $638 million compared to Portman Ridge at total assets of $300 million as of September 30th. As a larger company, we expect immediate savings related to overhead and public company expenses on a per-share basis and, in the longer term, increased trading liquidity of our common stock and the capability and flexibility to speak for larger deals. Based on our previously discussed target leverage range of 1.25x- 1.4x , where we sit today, the pro forma Portman would need to generate an approximately 9.5%-10% return on its investment portfolio to cover our historical $0.06 per quarter distribution. Over the last five quarters, Portman has averaged 10.8% annual return on its investment portfolio despite the headwinds from LIBOR declining and reduced earnings from our CLO equity portfolio.
Although these estimates are subject to change in the future, our historical ability to achieve returns on our investment portfolio in excess of what is required to sustain our distribution level should provide shareholders insight into earnings prospects going forward. Furthermore, we expect that leveraging the considerable resources, namely the access, sourcing capabilities, and industry expertise afforded by BC Partners across the entire platform, will be of significant benefit to all stakeholders of our combined company. Integration and repositioning efforts are already underway. As of this call, we have already sold approximately $87 million of assets originated by Garrison at a slight premium to the fair value at the time of the merger.
Pro forma for the Garrison merger and these asset sales, Portman's leverage on a net cash basis, i.e., after the use of cash on hand to pay down debt once the debt becomes callable, is approximately 1.4x our regulatory asset coverage of approximately 169%. We will continue to opportunistically sell assets as part of our repositioning strategy but believe that we have significantly reduced market risk to our portfolio in a very short period of time. Over time, our goal is to maintain a portfolio of directly originated senior secured debt investments with a focus on first-lien investments, and we look forward to updating you on our progress in future quarters.
With that, I will turn the call over to Ted Gilpin, our Chief Financial Officer, for a brief overview of the financial results, and then to Patrick Schafer, our Chief Investment Officer, for review of our investment activity before concluding the call with some additional remarks. Ted?
Thank you, Ted. Good morning, everyone. As of September 30th, 2020, our NAV stood at $126 million, or $2.85 per diluted share, up 5% from last quarter of $120.7 million, or $2.71 per share. The increase was mainly attributable to unrealized gains across our investment portfolio, including $4.6 million on our debt securities portfolio, $1.9 million in our legacy CLO equity positions, and $1.1 million on our investments in the KCAP Freedom 3 and BCP Great Lakes Joint Ventures. As Ted mentioned, we are beginning to observe improved market conditions, which resulted in the significant improvements in valuation. Net investment income for the third quarter of 2020 was $2.7 million, or $0.06 per share, as compared to $2.2 million and $0.06 per share in the third quarter of last year.
We have generated net investment income of $0.06 per share for the past five quarters, right in line with our current quarterly distribution. We announced our quarterly distribution of $0.06 per share on October 16th for shareholders of record on October 26th and to be paid on November 27th. Following this distribution, we will resume our normal declaration and payment schedule. With respect to liquidity and unfunded commitments, our aggregate unfunded commitments stood at $26.5 million at September 30th, 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 September 30th, 2020, we had $77 million in 6.125% notes outstanding and $94 million in borrowings under our credit facility for a total of $171 million of debt. As of September 30th, 2020, our debt to equity ratio was 1.36x . From a regulatory perspective, our asset coverage ratio as of September 30th, 2020, was 172%, 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 358,959 shares of stock at an average price of $1.27 per share. We expect to continue to evaluate opportunities to buy back shares.
To further facilitate these opportunities, we entered into a 10b5-1 repurchase plan on August 31st of this year. As Ted Goldthorpe mentioned, we are very pleased to complete the merger with Garrison Capital this quarter. At closing on October 28th, Garrison stockholders received a combination of $19.1 million in cash from Portman Ridge and newly issued Portman Ridge shares valued at 100% of NAV. Garrison stockholders also received an additional cash payment of $5 million from our investment advisor, Sierra Crest. As a result, Garrison stockholders received per share of Garrison stock $1.50 in cash and 1.917 shares of Portman Ridge stock per share. Following closing, Portman Ridge shareholders owned approximately 59%, and former Garrison stockholders owned 41% of the combined company. We are fully in process of integration and look forward to providing combined results next quarter.
With that, I'd like to turn the call over to Patrick Schafer, our Chief Investment Officer.
Thanks, Ted. Turning to page nine of the slide presentation, the third quarter was relatively quiet for us given where we plan to operate from a leverage perspective and preparing for the upcoming merger with Garrison. During the quarter, we made investments into two borrowers, one of which was into the BCP Great Lakes Joint Venture and the other of which was a brand new borrower, which was completed alongside other BC Partners entities. In aggregate, these two investments totaled $4.7 million of face value, 62% of which was a first-lien security and the remaining 38% being net add-ons to the Great Lakes Joint Venture. The weighted average spread on the new investment, excluding the Great Lakes Joint Venture that currently remained on our balance sheet, was 625 basis points.
Additionally, over the course of the quarter, we fully exited four positions, one of which was a legacy non-accrual OHAI position. In aggregate, our fully exited positions represented a carrying value of $9.4 million and resulted in a gain of approximately $65,000. All positions were sold either at or above their carrying value relative to June 30th or cost if it was acquired during the quarter. After adjusting for movements between unrealized and realized, we recognized approximately $5.6 million of unrealized gains on our portfolio. Our debt and equity securities accounted for an approximate $2.5 million unrealized gain, while CLO equity positions accounted for a $1.9 million unrealized gain, and our two joint ventures accounted for the remaining $1.1 million of unrealized gain.
On an equivalent basis, as of September 30th, Portman Ridge has $226.2 million of debt securities marked at 90.4% of par and yielding a stated spread to LIBOR of 715 basis points on accruing debt securities. This compares to $233.3 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 as of June 30th, 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 Sierra Crest took over management of Portman Ridge on April 1st, 2019. Turning to slide 10, non-accruals as of September 30th, 2020, represented 3.2% of cost and 1.3% of fair value on the investment portfolio as compared to 5.9% and 3.7% respectively as of June 30th.
With that, I'll turn the call back over to Ted Goldthorpe.
Thank you, Patrick. In closing, we are pleased with the results in the third quarter, especially in these difficult COVID times. The business environment certainly seems to be improving compared to conditions in March and the second quarter. However, we will continue to remain vigilant as the possibility of a second wave of COVID cases continues to loom over us. We are very pleased to have successfully closed the merger with Garrison and look forward to providing more updates on the combined company next quarter. I'd like to thank all of our shareholders for your ongoing support, and I will now turn over the call to operator for any questions.
Ladies and gentlemen, as a reminder, if you'd like to ask a question at this time, please press the star, then the number one key on your touch-tone telephone. To withdraw your question, press the pound key. Our first question comes from Christopher Nolan with Ladenburg Thalmann. Your line is now open.
Hey, guys. What is the ending following the Garrison closing, what do you estimate the ending share count to be, please?
Sorry, I was on mute.
Oh, no problem.
We estimate the ending share count to be just under 75 million. I can give you the.
Gotcha.
Yeah, I believe it's 74,960.
Great. And I guess a follow-up on, given where BDC landed in terms of valuations that's sort of hovering these days, what are your strategic thoughts in terms of once you digested Garrison, further acquisitions, or how do you plan to go forward from there?
I would say, well, I'd say a couple of things. One is we continue to think the whole sector is cheap, so we're going to continue to buy back our own stock, and you'll see more of that, I think, this quarter. I think number two is, obviously, we're always on the lookout for additional things to add into our business, whether they're publicly traded BDCs or privately traded BDCs or other types of mechanisms. Because again, the benefits to our shareholders are just very compelling, and we've shown a track record of being able to de-risk these transactions. I think we highlighted on the call, but when we closed the Garrison merger, we were 2x gross leverage, and we've got it down to 1.4x net in about two weeks.
And so it's a very similar playbook to what we've shown, and so we've de-risked the acquisition and executed on a lot of the integration and synergies we've talked about in a very short period of time. So we are always on the lookout for it, but I would say these things are always hard to predict, and so we don't have anything imminent to announce to put it that way.
Got it. Okay. Thanks, Ted.
As a reminder, ladies and gentlemen, that is star, then one, if you'd like to ask a question at this time. Our next question comes from Paul Johnson with KBW. Your line is now open.
Yeah. Hey, good morning, guys. Thanks for taking my question. You actually clarified one of the questions I wanted to ask just to make sure I heard it right, but yeah, 1.4x pro forma net leverage, that's, I'm assuming, after post-closing of all those asset sales, was it $87 million or so that you mentioned?
Yeah.
Yeah, that's right. They take a little bit to actually settle, but yes.
Yes. Line that up, we closed it, and then there are some CLO liabilities that we've inherited from the transaction which become callable imminently. So when those transactions settle, we'll be able to pay off debt. So that's the reason we quoted it. The reason we quoted it as net is because we're waiting for these transactions are off our books from a risk perspective but haven't settled, and when they settle, we'll be able to pay down some of our CLO liabilities.
Okay. Okay. And then, yeah, post-closing that merger, that's obviously a very positive improvement, very quick deleveraging that you guys already completed there, which is very positive. But going forward in the forward quarters, will the focus be to maybe first pay off some of those CLO tranches of debt, or will you turn your attention maybe to some of the unsecured debt, perhaps the, I think, the baby bonds that are due in 2022? Is there any sort of priority level there for the debt capital?
I think, John, the priority is sort of to remove the CLO liability debt first, generally speaking. But yes, we're aware that the baby bonds are coming due. We do like to have a mix of secured and unsecured, so there's a possibility that we'll go back into the unsecured market for that piece. But at the end, we'll probably have a blend between the secured and unsecured and not be reliant on the on-balance sheet CLO debt.
Gotcha. And lastly, I just wanted to ask the higher dividend income this quarter from the JV, was that just more or less sort of a catch-up from the previous quarter, or was there anything specifically that drove a higher distribution this quarter?
No, you're pretty spot on. It got held up in the prior quarters. We weren't able to distribute as much as we normally do. We were able to do a catch-up this quarter. So I think if you sort of look across the last three quarters, that's pretty much this steady state.
Gotcha. And one more, if I may, actually. Just kind of broadly speaking, from the beginning of the year, how would you characterize the depreciation, again, that's happened since the beginning of this year, the remaining depreciation, about how much of that you think would be recoverable going into next year? I'm looking at, I think, approximately maybe $32 million in the first quarter of net depreciation. I think this quarter was a pretty significant write-up of $5.6 million or so. Do you sort of look at that remaining depreciation as recoverable, or how would you characterize that?
Why don't I take the first crack at that? I mean, I think if you look at where our average debt is marked, we're still marked at a decent discount to par. So to the extent that we can continue to get non-accruals down and we don't have any surprises, there is some embedded upside in our NAV. Just between now and when we're going to realize that NAV is hard to predict. And obviously, I think we're pretty cautious going into next year about just what's going to happen, not speaking about our own specific portfolio, but just in general.
So it's always hard to predict, but again, where our average debt piece is marked and where our CLOs are marked vis-à-vis their cost, A, we think we're conservatively marked, and number two is if things continue to recover as they are, there should be some upside in our NAV. But again, we really are hesitant to provide any kind of guidance or forward guidance just given the amount of uncertainty and change that's happening on a daily basis out there. I think the good news from our perspective is if you take a step back, we've been able to increase debt spreads pretty dramatically, actually, over the last two quarters. So LIBOR has been kind of in our face, so that's been a negative. But we have been able to get additional spreads, and hopefully, those spreads will stay in our books for some period of time.
And then number two is you obviously saw the progress we made on non-accruals this quarter. And the credit quality of our portfolio has actually improved over the last six months, and actually, we've seen some improvement this quarter as well. So again, hard to predict that trend continuing just given everything happening out there, but I would say we continue to be encouraged from what we've seen on a trailing basis. Let's put it that way.
Gotcha. Okay. Thanks for that. That's good commentary, and that's all for me. Thanks.
As a reminder, ladies and gentlemen, that is star, then one, to ask a question. Our next question comes from Steven Martin with Slater. Your line is now open.
Hi, guys. A couple of questions. Can you talk in a little more detail about the CLO portfolio, where it was, what it went through, and where it is today? And it didn't look. I thought you guys would be running more of it off, and at cost, it doesn't seem to be diminishing. Hello?
Yeah. Ted or Patrick, do you want to address that? I can address it as well.
Sure. Go ahead.
Yeah. I mean.
Sorry. I didn't want to jump in. I mean, talking about where it was to where it is now, I think when you look at our CLO equity portfolio, obviously, we're de-emphasizing it and not continuing to invest, but the portfolio is split relatively evenly, I'll say, in terms of half of our positions are kind of out of their reinvestment period, and half are still in their reinvestment period, and so as you think about what happened during March and kind of where we are today, about half of the portfolio has been able to kind of take an active management, rotate out of CC Cs, buy assets at discounts, and kind of generally refill their collateral values and things like that, and the other half of them are, generally speaking, in a bit of a run-off.
I think the mix of those two things is kind of leading us to be relatively flat on an amortized cost basis, but I defer a little bit to Ted Gilpin on the specific accounting of that.
So yeah. Hi, Steve. So obviously, CLO goes through the effective interest method for accounting, which will determine which pieces that take down of the cost, if you will, and which is recognized as income. And as those cash flows change quarterly, you'll get a different calculation as to what the applied IRR is and then what gets booked. And so typically, since they're out of the reinvestment, you would start to see the cost and the principal piece come down. But if those cash flows change significantly in a quarter, you may get a quarter where more of it is income and less of it is bringing down a principal. But generally speaking, they should continue to pay down over time, and so you'll see them diminish. So you're right. That's what you'd expect to see.
Okay, and the CLO income was down this quarter even though the CLO mark went up. Was there something in the accounting that accounted for that?
Generally speaking.
Yeah. Well, if they're out of the reinvestment period, you have less cash coming in over time, right? You only have some quarter periods to bring forward. So the calculation would come out that you would tend to see some of that income come down as well.
Yeah. There's a little bit of a timing lag between the accounting and the mark of the CLO equities.
So going forward, should the CLO income be more like this quarter or more like the last couple of quarters, or do we not know at any given point in time?
It's sort of one of the frustrating parts of CLOs, Steve, is that income's not necessarily predictable. But I would say that it would tend to be relatively similar to where it is at the moment, although as they continue to pay down, I would expect that income to lessen slightly.
Okay.
Yeah. I think, importantly, obviously, the accounting will move things a little bit. But importantly, none of the CLOs, a couple shut off during the March period, but there's been no further degradation on actual cash coming out of the CLOs. So that's at least a decent indication that it should be relatively consistent.
Okay. How about commenting on the portfolio marks sort of subsequent to September 30th, i.e., October? So after September 30th, you had a mark when the deal closed. You had a mark at the end of October. And obviously, you haven't marked it today, but sort of where do you think that has evolved given the market's tightening?
I would say, I mean, from my perspective, I would say so pro forma for the merger, there's going to be some transaction costs that roll through NAV, just legal fees and stuff to get it closed. So that's obviously a slight negative. But as you've seen, there's been a continued tailwind in the credit markets. So hard to say, but when we set the, you can back into our NAV as of the merger because you can look at how many shares were issued at the time. So you can actually look at that. And NAV is kind of a little bit down, like flattish, but that's just transaction costs. And so again, it's a long-winded way of saying I don't think there's going to be a material impact on NAV as we sit here today. So a little bit of tailwinds offset by some transaction costs.
Okay. And you started to talk about cost savings, leverage in the acquisition, which obviously is one of the main goals of bigger BDCs buying smaller BDCs or combining them. When you look at the cost structure, what does your cost structure look like going forward versus what they had and what you had?
Yeah. So I think, obviously, that is one of the big reasons to combine to get a little bit bigger. And so if you look at our income statement and you look at the expense side, professional fees, admin services and expenses, insurance, and other G&A, one plus one doesn't equal two in this case. So we would expect you only have one audit, not two anymore, right? Your expenses will increase a little bit as you have to have some more people working on some things, but I would expect that our expenses will become more in line with sort of the rest of the industry on a percentage of assets. And so we've been a little bit high, and now you put two companies of similar size together, and those expenses should only marginally go up. So I think that's where you're going to start to pick up.
Yeah. I had heard that a lot of Garrison people had left Garrison before. So in big picture, how many people did you bring over? Did you have to bring over space? What are you going to have to do to your head count, whether in your accounting area or otherwise?
Yeah. So we've.
Let me [Four C] space is not relevant. [Four C] space isn't relevant during COVID.
You want to come right now?
That's not true. The rent expense portion of space may be relevant even if no one's using it.
Yeah. That's true.
Yeah. So I think, I mean, those are good questions, Steve. We're not going to need to add more space. I mean, I think that we did bring over one person from Garrison as it relates to sort of the financial and accounting side. We'll have to have a little bit more allocation to the fund, obviously, because it's bigger and there's more positions and there's stuff to do. But again, it's not a big lift. I mean, we had lots of capacity.
Yeah. I mean, I would answer it that versus what Garrison was spending, we're going to spend a lot less. That's very clear, so that all drops the bottom line. Within our own business, we've taken some cost actions over the last six months to take costs out of our own business across professional fees, some size of board, things like that, and that all, again, just drops the bottom line, so we're not only focused on cost take outs out of the merger, we're also focused on our own business, and anything like any costs like space and all that stuff, again, we think the transaction on costs alone is about mid-single digits accretive, and then if we can take their liquid portfolio and monetize it and recycle it into the types of things that we've been doing on our origination franchise, we think that's pretty accretive.
So we think the accretion is going to be even higher than that. So again, you've seen the spread pickup we've picked up in the last nine months. Some of that is spread widening in the markets, but a lot of that is monetizing some of these acquisitions liquid assets and recycling them into more proprietary assets that have wider spreads. So between all those things, it should be mid to high single digits accretive.
Okay. One last question and/or comment, which I will repeat again, and Ted, you're probably expecting it. Have you given any further consideration to reverse merger now that your share count is bigger and you're done with this deal?
I think you meant a reverse split. Stock split.
I'm sorry. Reverse split. Reverse split.
Yeah. Yeah. Yeah.
Yeah. I mean, it is obviously something we...
Oh, sorry. Go ahead.
Go ahead.
To do that, we need a shareholder vote, and so.
I'm ready to vote.
Well, and with mailings, I mean, it's something that we're focused on, and my guess is we'll do that in the next couple of quarters. I mean, it just makes sense for us to do it. And so don't be surprised to see us do a reverse merger or a reverse stock split over the next couple of months. I mean, I think yourself and a lot of our big shareholders have suggested the same thing. And I mean, we think it's a good idea.
Let's try to slip this in before you guys do your next acquisition. All right. Thanks a lot.
Yep. Thanks, Steve.
We have a follow-up question from the line of Christopher Nolan with Ladenburg Thalmann. Your line is now open.
Ted, was that mid to single digit accretive to EPS, I presume?
To NII per share. Yeah.
Okay. Great. And then what are your thoughts in terms of lowering your funding costs, SBA debt, or anything else like that?
On the SBA debt, I mean, we are looking into it, but I would say, and the terms covered the SBA debt are very attractive. I'm not sure we can get an SBIC approved. If we did get one approved, I think it would take us some period of time. I wouldn't want to guide people to that. I think our bigger focus is on, I mean, the great thing with our business now is we have a very diversified liability side between the CLO debt, our bonds, and our bank debt. During March, when some of our peers had issues around their bank lines, we're obviously very heavily skewed towards away from that now.
And so I think between, Ted mentioned it earlier, I think our focus is probably on tapping the unsecured markets at some point and at optimizing our CLO debt, just given all this cash we're taking in. So yeah, we are very focused on reducing funding costs, but I don't think it's realistic for us to access the SBA anytime soon.
Got it. Okay. That's it for me. Thank you.
That concludes today's question and answer session. I'd like to turn the call back to management for closing remarks.
Thank you all for joining us today. We really appreciate everybody dialing in for all the questions. And of course, myself, Patrick, Ted, and the entire management team are always available to answer any questions or suggestions that you might have. Thank you very much for dialing in today. Thanks.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.