Company History and Business Overview
Portman Ridge Finance Corporation (PTMN) is a non-diversified, externally managed 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 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 (IPO), converted to a corporation incorporated in Delaware on December 11, 2006. The company has undergone significant transformations over the years, including the externalization of its management in 2019 through an agreement with BC Partners Advisors L.P. and the acquisitions of Garrison Capital Inc. in 2020 and Harvest Capital Credit Corporation in 2021.
Originally known as KCAP Financial, Inc., the company changed its name to Portman Ridge Finance Corporation following the externalization transaction in 2019. This change coincided with the company's listing on the NASDAQ Global Select Market under the symbol PTMN. The externalization marked a significant shift in the company's management structure, with Sierra Crest Investment Management LLC, an affiliate of BC Partners, taking over as the external manager.
In addition to its strategic acquisitions and management changes, Portman Ridge has actively managed its capital structure and debt obligations. In 2021, the company issued $108 million of unsecured 4.88% Notes due 2026 and entered into a senior secured revolving credit facility with JPMorgan Chase Bank. These financial maneuvers have been part of the company's ongoing efforts to optimize its debt profile and strengthen its financial position.
Throughout its history, Portman Ridge has maintained a focus on providing debt financing to middle-market companies across diverse industries. The company has demonstrated resilience in the face of various market cycles and challenges, including the COVID-19 pandemic, while adhering to a prudent investment approach.
Today, Portman Ridge is led by an experienced management team and investment professionals from the Adviser, Sierra Crest Investment Management LLC, an affiliate of BC Partners. The company's investment objective is to generate current income and, to a lesser extent, capital appreciation from its investments in senior secured term loans, mezzanine debt, and selected equity investments in privately-held middle market companies.
Portman Ridge's portfolio is well-diversified, with debt investments spread across 28 different industries and 72 unique portfolio companies as of September 30, 2024. The weighted average contractual interest rate on the company's interest-earning debt securities portfolio was approximately 12.4% as of the same date.
Financial Performance and Liquidity
For the fiscal year ended December 31, 2023, Portman Ridge reported total revenue of $12.74 million and net income of $11.38 million, or $1.20 per diluted share. The company's operating cash flow and free cash flow for the year both amounted to $120.90 million.
In the third quarter of 2024, Portman Ridge reported revenue of $15.18 million and a net loss of $1.5 million. The company's earnings in this quarter were temporarily impacted by prudent cash and portfolio management initiatives prior to the successful refinancing of the 2018-2 secured notes.
As of September 30, 2024, Portman Ridge had total assets of $488.81 million and total liabilities of $292.38 million, resulting in a net asset value (NAV) of $196.43 million, or $21.21 per share. The company's gross leverage ratio was approximately 1.4 times, with $267.5 million in outstanding borrowings at a weighted average contractual interest rate of 6.7%.
Portman Ridge maintains a strong liquidity position, with $40.5 million of available borrowing capacity under its senior secured revolving credit facility as of September 30, 2024. The company's cash position stood at $26.91 million as of December 31, 2023. The company's Board of Directors has approved a quarterly distribution of $0.69 per share, payable on November 29, 2024, to stockholders of record at the close of business on November 19, 2024. This distribution represents a 13.6% annualized return on net asset value, which is one of the highest in the BDC space.
Portfolio Performance and Asset Quality
Portman Ridge's investment portfolio continues to demonstrate resilience, with investments on non-accrual status representing only 1.6% and 4.5% of the company's investment portfolio at fair value and cost, respectively, as of September 30, 2024. This compares to 0.5% and 4.5% as of June 30, 2024.
Excluding non-accrual investments, the company's aggregate debt investment portfolio had a fair value of $341 million as of September 30, 2024, 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, this portfolio could generate an incremental $27.3 million of net asset value, or a 13.9% increase to NAV. Even with an illustrative 10% default rate and 70% recovery rate, the debt portfolio would still generate an incremental $1.76 per share of NAV, or an 8.3% increase.
Over the last three years, Portman Ridge has successfully integrated the investment portfolios acquired through the GARS and HCAP transactions, realizing approximately 85% of these positions at a combined realized and unrealized mark of 101% of fair value at the time of closing.
As of June 30, 2024, Portman Ridge's investment portfolio was valued at $444.4 million, with the following composition:
1. Debt Securities Portfolio: Fair value of $358.9 million, spread across 75 different portfolio companies in 28 different industries. This segment represents 72.1% of the total portfolio.
2. CLO Fund Securities: Non-controlling investments in the most junior class of securities of CLO funds, with a fair value of $7.4 million.
3. Investments in Joint Ventures: Investments in the KCAP Freedom 3 LLC joint venture and the Series A Great Lakes Funding II LLC joint venture, with a total fair value of $54.3 million.
4. Equity Investments: Direct investments in equity securities of privately held middle market companies, with a fair value of $23.8 million.
5. Asset Manager Affiliates: Limited operations expected to be liquidated, with a negligible fair value.
Fortified Balance Sheet and Decreased Interest Expense
During the third quarter of 2024, Portman Ridge took important steps to strengthen its balance sheet and reduce its cost of capital. The company extended the maturity of its senior secured revolving credit facility with JPMorgan Chase Bank, N.A. to April 2026, while also reducing the applicable margin by 30 basis points to 2.5%.
Additionally, the company used the upsized and lower-cost credit facility to refinance the remaining $85 million of its 2018-2 secured notes, resulting in further net spread savings of approximately 28 basis points. On a run-rate basis, these actions are expected to reduce Portman Ridge's interest expense by approximately $265,000 per quarter, or $0.03 per share.
Commitment to Shareholder Value
Portman Ridge remains committed to enhancing shareholder value. During the third quarter of 2024, the company repurchased 33,429 shares in the open market for an aggregate cost of approximately $600,000, which was accretive to NAV by $0.01 per share.
Resilience in Challenging Market Conditions
While the current economic environment and dynamic interest rate landscape present challenges, Portman Ridge remains well-positioned to navigate these conditions. The company's prudent investment strategy, strong pipeline, and experienced management team have allowed it to continue delivering positive returns to shareholders.
Despite a slight decrease in net investment income during the third quarter, Portman Ridge's core investment income, which excludes the impact of purchase discount amortization, remained relatively stable compared to the prior quarter. The company's leverage ratios also remained within its target range, providing financial flexibility to capitalize on new investment opportunities.
Looking ahead, with its balance sheet fortified by the amended JPMorgan credit facility, Portman Ridge expects to be a net deployer of capital in the final quarter of 2024 and the beginning of 2025. The company believes this will restore net investment income to more normalized levels. While specific quantitative guidance was not provided, management has indicated that they anticipate being active in the market and deploying the company's capital in the coming quarters.
Conclusion
Portman Ridge Finance Corporation has demonstrated resilience and adaptability in navigating the dynamic market conditions of 2024. The company's diversified investment portfolio, prudent risk management, and ongoing efforts to optimize its capital structure position it well to continue delivering strong returns to its shareholders. As Portman Ridge looks to the future, investors should closely monitor the company's progress in deploying capital, managing credit quality, and maintaining its healthy financial position. The company's commitment to shareholder value, as evidenced by its share repurchases and attractive dividend yield, coupled with its strategic refinancing initiatives, suggest a positive outlook for Portman Ridge in the coming quarters.