History and Business Overview
Portman Ridge Finance Corporation (PTMN) is a non-diversified, closed-end investment company that has elected to be regulated as a business development company (BDC) under the Investment Company Act of 1940. The company originates, structures, and invests in secured term loans, bonds or notes, and mezzanine debt primarily in privately-held middle market companies, as well as invests in debt and subordinated securities issued by collateralized loan obligation (CLO) funds.
Portman Ridge was formed as a Delaware limited liability company on August 8, 2006 and, prior to the issuance of shares of the company's common stock in its initial public offering, converted to a corporation incorporated in Delaware on December 11, 2006. The company has a long history of serving the middle market, with a focus on providing capital solutions to privately-held businesses.
In 2019, Portman Ridge underwent a transformative event, as it became externally managed by Sierra Crest Investment Management LLC, an affiliate of BC Partners Advisors L.P. This move was part of the company's "Externalization" strategy, which included a cash payment from BCP, or its affiliate, of $25 million, or $0.67 per share of Portman Ridge's common stock, directly to its stockholders. Additionally, the Adviser or its affiliate agreed to use up to $10 million of the incentive fee actually paid to the Adviser prior to the second anniversary of the Closing to buy newly issued shares of Portman Ridge's common stock at the most recently determined net asset value per share.
The company, formerly known as KCAP Financial, Inc., changed its name to Portman Ridge Finance Corporation and began trading on the NASDAQ Global Select Market under the symbol PTMN following the Externalization. In October 2020, Portman Ridge completed the acquisition of Garrison Capital Inc., a publicly traded BDC, which expanded its investment portfolio and assets under management. The GARS Acquisition was accounted for using the asset acquisition method, with the fair value of the purchase consideration allocated to the GARS investments acquired.
Further expanding its reach, in June 2021, Portman Ridge acquired Harvest Capital Credit Corporation, another publicly traded BDC. This HCAP Acquisition was structured as a merger and accounted for using the asset acquisition method. As part of the transaction, the company assumed $28.75 million in aggregate principal amount of HCAP's outstanding notes.
Throughout these transformative acquisitions, Portman Ridge has navigated various challenges, such as integrating the acquired portfolios, optimizing its capital structure, and managing its investment risk. The company has also had to contend with the broader market and economic conditions that have impacted the middle market lending space. Despite these hurdles, Portman Ridge has remained focused on its core investment strategy of providing financing solutions to privately-held middle market companies.
Since the Externalization, Portman Ridge has continued to execute on its strategy of providing financing solutions to middle market companies. The company's portfolio is highly diversified, with investments spread across 28 different industries and 72 unique portfolio companies as of September 30, 2024. Portman Ridge's average par balance per entity is approximately $2.7 million, reflecting its focus on the middle market.
Financial Performance and Liquidity
Financials
Portman Ridge's financial performance has been mixed in recent quarters, with the company reporting net investment income of $5.8 million, or $0.63 per share, for the third quarter of 2024. This compares to net investment income of $6.5 million, or $0.70 per share, in the prior quarter. The decrease was primarily driven by lower interest income due to net repayments and sales during the quarter, a loan being placed on non-accrual, as well as lower CLO and joint venture income.
Portman Ridge's net asset value (NAV) decreased to $188 million, or $20.36 per share, as of September 30, 2024, compared to $196.4 million, or $21.21 per share, as of the prior quarter. The decrease in NAV was primarily driven by net realized and change in unrealized losses on investments in debt of $7.3 million.
In the most recent quarter, Portman Ridge reported revenue of $308,000 and a net loss of $1,509,000. The company's operating cash flow (OCF) and free cash flow (FCF) for the quarter both stood at $15,519,000. These figures reflect the company's current financial position and its ability to generate cash from its operations.
Liquidity
As of September 30, 2024, Portman Ridge had $267.5 million in outstanding borrowings with a current weighted average contractual interest rate of 6.7%. The company's gross leverage ratio was approximately 1.4 times, and its leverage ratio net of cash was 1.3 times. Portman Ridge finished the quarter with $40.5 million of available borrowing capacity under its senior secured revolving credit facility.
Amidst this dynamic environment, Portman Ridge has taken proactive steps to strengthen its balance sheet and liquidity position. In the third quarter, the company amended and extended its existing senior secured revolving credit facility, upsizing the commitments to $200 million from $115 million and reducing the interest rate margin to 2.50% from 2.80%. Additionally, Portman Ridge used the upsized and lower-cost credit facility to refinance the remaining $85 million of its 2018-2 secured notes, further improving its debt capital structure.
The successful refinancing of the 2018-2 secured notes and the amendment to the JPMorgan credit facility are expected to result in a $265,000 reduction in quarterly interest expense, or $0.03 per share. This move demonstrates Portman Ridge's commitment to optimizing its capital structure and reducing costs.
Portfolio and Investment Activity
Portman Ridge's investment portfolio remains highly diversified, with debt investments spread across 28 different industries and 72 unique portfolio companies as of September 30, 2024. Approximately 88.5% of the company's debt securities portfolio was floating rate with a spread pegged to an interest rate index such as SOFR or PRIME at the end of the third quarter.
The company's Debt Securities Portfolio, which forms the core of its investments, had a fair value of approximately $358.90 million as of June 30, 2024. This portfolio was spread across 75 different portfolio companies with an average par balance per entity of $2.60 million. The weighted average contractual interest rate on the interest-earning Debt Securities Portfolio was approximately 12.40% as of the same date.
A significant portion of Portman Ridge's floating rate loans (81.60%) contain interest rate floors ranging between 0.50% and 3.25%, providing some protection against interest rate volatility.
In addition to its Debt Securities Portfolio, Portman Ridge has investments in CLO Fund Securities, which had a fair value of $7.40 million as of June 30, 2024. These investments provide exposure to diversified pools of corporate debt instruments. The company also has investments in joint ventures, including the KCAP Freedom 3 LLC joint venture and the Series A Great Lakes Funding II LLC joint venture, with a fair value of $54.30 million as of June 30, 2024.
Portman Ridge's investment portfolio also includes equity investments in private middle-market companies, which may include warrants or options to purchase common stock. As of June 30, 2024, the fair value of these equity investments was $23.80 million.
During the third quarter, Portman Ridge's origination activity was lower than the prior quarter, and was also below the current quarter's repayment and sales levels, resulting in net repayments and sales of approximately $11.6 million. The company funded small incremental delayed draw term loans and revolver draws in 7 existing portfolio companies and increased its investment in the Great Lakes joint venture, but did not add any new portfolio companies.
Investments on non-accrual status represented 1.6% and 4.5% of Portman Ridge's investment portfolio at fair value and cost, respectively, as of September 30, 2024, compared to 0.5% and 4.5% as of June 30, 2024. The company had 9 investments on non-accrual status at the end of the third quarter.
Excluding non-accrual investments, Portman Ridge's aggregate debt investment portfolio had a fair value of $341 million, representing a blended price of 92.6% of par and being 92.9% comprised of first lien loans at par value. Assuming a par recovery, the company's September 30, 2024 fair values reflect a potential $27.3 million of incremental NAV value, or a 13.9% increase to NAV. When applying an illustrative 10% default rate and 70% recovery rate, Portman Ridge's debt portfolio would generate an incremental $1.76 per share of NAV, or an 8.3% increase, as it rotates.
Risks and Outlook
Portman Ridge operates in a dynamic market environment, with shifting interest rates, evolving industry dynamics, and ongoing economic uncertainty. The company's performance is closely tied to the financial health and performance of its portfolio companies, as well as broader macroeconomic conditions.
One key risk factor for Portman Ridge is its exposure to fluctuations in interest rates, as a majority of its debt securities portfolio is floating rate. While the company has taken steps to mitigate this risk, such as securing a lower-cost credit facility, rising rates could still put pressure on its earnings.
Additionally, the middle market landscape remains competitive, with private equity firms and other lenders vying for deals. Portman Ridge's ability to source attractive investment opportunities and maintain its underwriting discipline will be critical to its long-term success.
Despite these challenges, Portman Ridge remains optimistic about the road ahead. The company's proactive balance sheet management, diversified portfolio, and experienced management team position it to navigate the current environment and capitalize on emerging opportunities. As the company looks to the final quarter of 2024 and the beginning of 2025, it expects to be an active net deployer of capital, which should help restore net investment income to more normalized levels.
Portman Ridge's Board of Directors has approved a $0.69 per share distribution for the fourth quarter of 2024, which represents a 13.6% annualized return on net asset value. This distribution reflects the company's commitment to delivering value to shareholders and its confidence in its ability to generate consistent returns.
Conclusion
Portman Ridge Finance Corporation has demonstrated resilience in the face of a dynamic market environment. The company's diversified portfolio, prudent balance sheet management, and strategic initiatives have positioned it to weather the current challenges and potentially capitalize on future opportunities. While the company's recent financial performance has been mixed, Portman Ridge's experienced management team and commitment to shareholder value creation suggest it remains well-equipped to navigate the road ahead. The company's focus on being an active net deployer of capital in the coming quarters, coupled with the expected benefits from its recent refinancing activities, provide a positive outlook for Portman Ridge's future performance and its ability to generate value for shareholders.