Good morning, ladies and gentlemen, and welcome to the Portman Ridge First Quarter 2019 Earnings Call. An earnings press release was distributed this morning. If you did 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, Friday, May 10, 2019. This call is also being hosted on the live webcast, which can be accessed at our company's website at www.portmanridge.com in the Investor Relations section under Events.

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 would 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 for Portman Ridge Finance Corp. Mr. Goldthorpe, you may begin..

Thank you, Operator and good morning everyone. Thank you for joining us on our earnings call. I am joined by Ted Gilpin, our Chief Financial Officer; Patrick Schafer, our Chief Investment Officer; and Dan Gilligan our Head of Structured Credit. Today Portman Ridge announced its first quarter 2019 financial results.

As you know on April 1, we closed an externalization transaction and at that time an affiliate of BC Partners Advisors became the external manager of Portman Ridge Finance Corp.

Portman Ridge shareholders received a special distribution of $0.67 per share in connection with the externalization and we are now able to utilize the full strength of the broader BC Partners platform. We intend to transition Portman Ridge to a more stable and predictable vehicle across both net investment income and net asset value.

Ted Gilpin, our CFO will now provide a brief overview of the financial results for the quarter and I will follow it with a review of our portfolio and investment strategy..

Thank you, Ted. Good morning everyone. Please note that there are couple of events in the first quarter of 2019 which had significant effects on the quarter results and are worth describing in more detail.

First, net investment income for the quarter was a loss of $2.2 million or $0.06 per basic share compared with the income of $2.4 million or $0.07 per share in the quarter ended March 31, 2018 and $0.06 per share in the fourth quarter 2018.

The quarter ended 3/31/2019 however had transactions related expenses of $3.4 million or $0.09 per share, $2.2 million of which were expense related to severance and the termination of our restricted stock program. Second, there was an NII decline related to portfolio credit deterioration.

One credit, Tank Partners was restructured to equity and two new credits, Roscoe and Stafford went on to full nonaccrual in the quarter. This also resulted in a fair value decline of $8.7 million or $0.23 per share. The vast majority of which was associated with those three credits.

The one-time expenses and the impact to nonaccruals on income resulted in a hit to NII of approximately $3.9 million or $0.10 per share. Without these two factors NII would have been approximately $0.05 for the quarter.

The combination of the one-time deal expenses, the fair value declines and the April distribution resulted in a reduction to NAV to $3.85 per share from $4.23 per share at 12/31/2018. Interest income on our debt securities portfolio was $2.9 million or $0.08 per share compared to $3.8 million or $0.10 per share in the same period 2018.

Some of this decline is related to the aforementioned credits going on nonaccrual and some is related to investments in debt securities being reallocated to our investment in the Great Lakes unit tranche program which had a lag in distributions and which will begin making income distribution in the second quarter.

Investment income on our CLO fund securities is essentially flat to $1.8 million or $0.05 per share. Income from our joint venture with FC3 was 950,000 or $0.03 per share versus 700,000 or $0.02 per share in the first quarter of 2018.

On the liability side of the balance sheet as of March 31, 2019 we had approximately $121 million of par debt outstanding $77.4 million of 6.125 notes due in 2022 and $43.9 million under our L plus 3.25 revolving credit facility. Our asset coverage ratio at the quarter end was 216%.

As of March, 2019 Portman Ridge can increase leverage to the new statue e ratio of 150%. We're currently restricting our ability to do so under the covenants in our outstanding publicly traded debt, but of course the new asset coverage ratio could give us significantly more flexibility in the future.

During the quarter, we invested approximately $28 million in interest bearing securities of that amount $13.2 million was invested in senior secured first lien loans at a weighted yield of 7.96%, $12.5 million was invested in second lien with a weighted yield of 9.68% and the remainder was put into our Great Lakes program.

Portman Ridge made its first quarter distribution of $0.10 per share on April 26. Going forward its better aligned the payment of the distribution with the completion of the financials we like many BDCs will declare quarterly dividends concurrent with the completion of the quarterly financial.

For example the second quarter declaration would be announced in August with an expected payment in September. So to be clear, we will still be making four distributions this year just the timing has changed and to coincide with actual financials. And with that, I would like to turn the call back to Ted Goldthorpe..

Thanks Ted. I would now like to focus my remarks on the current state of the portfolio and where we will take the business from here. We feel confident that we've identified in our dealing with the small number of distressed credits in the portfolio.

The majority of these credits have been written down to minimal market values with the exception of Roscoe Medical which has a fair value of 3.2 million. Given what we have identified and committed to, we believe by the end of the second quarter we should be fully invested and utilizing our revolving credit facility efficiently.

We will continue to reposition the portfolio in subsequent quarters and are working towards our long-term objectives of NII and NAV stability and growth. I'll now make a few comments about the market and our strategy.

The unit tranche market has increased in competitiveness over the last few quarters and we're being very cautious and selective in this asset class. There have been a recent trend for unit tranches to be increasingly clubbed up amongst a few lenders versus going with one lender and as a result there has been some pressure on spreads.

We continue to find value on our non-sponsor vertical, as well as stretch senior deals These stretch senior deals have materially less leverage then unit tranches with only a minor reduction in spread. We are pursuing junior capital solutions only in the most attractive of circumstances and will only invest in economically resilient businesses.

Over the next few quarters we will look to reduce our CLO equity exposure and replace it with investments in our senior and unit tranche joint ventures which we continue to believe provide attractive risk-adjusted returns. Given the illiquidity of CLO equity, we expect this transition to happen over multiple quarters.

Lastly, we will find opportunities to use the broader BC Partners franchise, return capital markets fees for our shareholders which will begin to see over the next quarter. We continue to be committed to alignment with our shareholders.

Under our externalization agreement, we've committed to support net investment income for one year period and take any incentive fees and equity at net asset value for a two-year period. We believe by demonstrating alignment and stabilize net asset value, we will be able to narrow our stock price discount to book. Thank you for your support.

And with that we’d like to turn the call over to any questions..

[Operator Instructions] And our first question comes from the line of Christopher Nolan from Ladenburg Thalmann. You may begin..

On talking on the leverage take over that am I correct that your baby bonds still have covenants which prevent you from going up to both one-on-one debt to equity?.

Yes, that's correct..

Okay, is there plan to renegotiate those covenants or redeem those bonds or what’s your thought there?.

I mean, obviously we have - we can go the restructuring or the callable in September, and I think that theirs is - we still have room under the current leverage, so there's no immediate need to do that but ultimately, if we want to go above the one to one we will have to do something with the outstanding public debt..

I would just say from a portfolio management perspective, I don’t think we have a near-term goal to exceed the one-to-one test, regardless of what the covenant say.

I think just given where we are in the credit cycle and were see opportunities, I think you know, although we have the flexibility to do it longer-term, I think in the short-term I think that's probably not something we would want to do anyways, but it has pointed it's always good to have flexibility in your liability side..

And by that comments, do you mean that you could be between the current levels of 22 to 1 times above current levels coming quarters in terms of debt to equity?.

Yes, I mean, we tend to want to run the vehicle at least in the short-term somewhere between a 0.7 and .0.85 times leverage, both be like the band. And I’m not saying we wouldn't go below that to get a lot of refi’s or above that if we do see attractive opportunities but we think that's probably a prudent amount of leverage in today's environment..

And then turning to non-accruals, the realized loss I presume was based on tank partners going ,have you guys been - have you as a new external manager basically over the last quarter this quarter try to take on front load all the non-accrual investments or should we start seeing a moderation in non-accruals or what are your thoughts there I mean, just trying to get a sense what asset quality is trending?.

It’s good question. We’ve written all of the credits that were concerned about, they were very little in the way of fair value right now and I don't think there's a whole bunch away from that.

We have the – we marked down a loan called Roscoe medical to $3.2 million net of all the non-accruals that’s really the only one with material amounts of market value. Away from that if you’re thinking about NAV ultimately going forward and where it might come from? Obviously, we still own material amount of CLO equity.

Obviously this quarter our CLO equity is trending higher just given what's going on the loan market, but obviously that's a little more volatile asset class. But away from that we really feel like we've taken the restructurings we needed to take, and again, in terms of market value at risk we think we’ve got it to a very, very manageable level..

And then I guess the final question for Ted Gilpin, given the comments you are making on the tranche market, thank you but that’s helpful.

What sort of EBITDA multiples are you guys investing in if you can share that?.

I mean, it’s a really good question. EBITDA multiples in the middle market have not really gone up over the last three or four years, so it’s easy to kind of lower yourself thinking leverage isn’t increasing, a lot of that is driven by structural factors.

Some banks are still bound by the OCC letters lending guidelines and other things that the – but I think that’s misleading, because we’re being asked to do more and more – the bigger competition on the responses now is not so much about total leverage. The conversation it really morphed into adjustments.

And sponsors are trying to push through I would say larger adjustments than what we've seen historically. So even the statistics would tell you that leverage hasn’t gone up. I think the amount of adjusted EBIT has increased..

You mean adjustments in terms of how EBITDA is calculated?.

Exactly, exactly. The debate five years ago sponsors is what’s leverage and today is what is EBITDA. So we spent a lot of our time really swapping those numbers and working with our clients to come back to consensus on that but when we lose deals we can lose it on leverage. We lose it on what EBIT does..

Final question, is the intention to take the CLO equity down to zero financially?.

I personally think, CLO equity I think is a phenomenal asset class. I just don't think it's appropriate for BDC. I think it's just too volatile. I think it’s a leverage on top of leverage, so I think I will like the asset class that’s don’t I think fix in a public vehicle. That being said, we own a lot it.

It is illiquid and so I think it's good to be a longer-term process like I don’t think it’s - I don’t think we've the ability to kind of - I don’t think you will see us in the next one or two quarters get out of all CLO equity.

So I think we got fees do over time as we have a really, really attractive senior joint venture that throws off returns that are equal or higher with less leverage and I think quite frankly, originated product, which really good at. We also had a unit tranche joint venture which we think is one of the best overall assets we have.

So I think we'll go see us do over time is reduce CLO equity and upsize our commitments to those two joint ventures. So I think I don’t think there’s going to be a wholesale change in investment strategy, its still the barbell.

You will still see a lot of like's first liens, in the 70% bucket and in the 30% bucket I think you are going to see a shift from CLO equity portfolio into your upsizing some of these joint venture commitments we’ve made..

[Operator Instructions] Our next question comes from the line of Ryan Lynch from KBW. You may begin..

First one, you talked a lot about rotating out of the CLO equity portfolio but as you are now fully taken over as the manager and you look through the non-CLO portfolio in kind of the core debt portfolio, are you I guess, what percentage of that portfolio do you guys intend to be core assets going forward or do you guys intend to also prune off or rotate out of some percentage of those investments as they may not be non-core middle market investments?.

So we think there’s opportunities to what I would call high grade portfolio so we still have a number of lower yielding, either liquid assets or illiquid assets. And so I think there’s opportunities for us just given our origination franchise I think there's opportunities for us to increase spreads on some of those assets.

We feel good about the existing portfolio, like we – I just said, we took our lumps this last quarter on our “at risk investments". So I think on a go forward basis we feel pretty good about the rest of the portfolio.

I think there's opportunities for us to – so the credit quality I think is pretty solid away from the credits you mentioned and of the remaining portfolio I think there's opportunities for us to reduce some of the lower spread assets and put in higher spread assets.

But when I say that it’s a lot of just treating the liquidity – liquid assets for illiquid assets, so I think we can do things that are not increasing risk for like increasing credit risk but doing more originated product versus liquid ones..

Okay makes sense..

And Ryan just to be – just to give even more fine point on it. We’ve about $24 million phase of loans that are what I would call like low spread assets, so we have the opportunity to kind of increase spreads on that portion of the portfolio..

And then if I look at your presentation that you guys put out and you guys were talking about this transaction. You guys have BC partners lending kind of it looks like your guys core is going to be right around the 4$0 million, $50 million EBITDA company size.

I look at Portman's balance sheet today you know, there's about $300 million or so of assets. Can you just talk about other funds across the BC partners lending platform that you guys needle the co-investor cross or what sort of solutions can you provide $50 million EBITDA borrower.

Are you guys just going to be participating club deals or can you actually be a full solution provider in any of those vendors or borrowers, excuse me?.

You know, I mean, that’s the big part of the value we bring here, which is its been hard for to take material really lead transactions given the size of the balance sheet. We have exempt of relief. So before this transaction happens obviously we got that from the SEC.

So what I would say is this, what I would say is, I mentioned in prepared remarks that there is opportunities for us to generate capital markets fees. We just underwrote a deal for $52 million on a $14 million EBITDA company so obviously not 50. And we syndicated out to some people and will get some fees for our shareholders.

So I think the ability for us to use the broader BDC funds and platform will allow us to speak more size and lead deals. So I think in the next - in this quarter we’re already leading a bunch of deals that's number one. Number two is we do have this - we have two joint ventures that obviously we have partners who got big balance sheets as well.

So we obviously benefit from that. So the average EBITDA seems high given our size of our balance sheet, but again remember we get leverage off of our joint venture partners as well..

As far as the capital markets fees you talked about, how are those actually split I mean because those are going to be originated those are deals and it’s been originated by the adviser and placed across multiple funds.

So will BDC just participate and I guess just how are those fees going to be split and these fees being a pro rata share of those capital market fees or how is that exactly work?.

Yes, that’s a good question. So basically anytime we use Portman Ridge's balance sheet to commit to anything all those fees go to shareholders.

So you'll see in this next quarter again the adviser is not taking any of those fees it's going to - on the portion of the loan that obviously is being committed to by Portman Ridge all those fees are going to shareholders. So we don’t have BC we don't have a broker dealer. We don’t have some of the things that some of our very large competitors have.

So the intention is to have those fees go to shareholders and that lowers our cost of capital on the overall portfolio. It's obviously not at risk so that it allows us to kind of like do safer things on the investment side. I hope that answers the questions..

Yes, it’s helpful.

And then you mentioned the unit tranche JV, can - you described it, is that something that BC Partners is doing or is that something that KCAP is involved - Portman Ridge is involved with?.

Yes so in our SOI, you'll see it. We call it our Great Lakes joint venture. So we have a joint venture whereby unit tranches go into the joint ventures it’s structured very similarly to the other BDCs joint ventures. So, think about it very, very similarly to the other unit tranche joint ventures that you’ve seen out there.

And what allows us to do is it allows us to A) commit for more size obviously and B) competitive in the unit tranche market, and obviously we get to leverage off our sourcing from our partner..

[Operator Instructions] And I am showing no further questions at this time. I’d like to turn the call back to Mr. Ted Goldthorpe for closing remarks..

We just want to reiterate how excited we are to take over the vehicle and we look forward to continued partnership with our counterparties and our shareholders. Thank you very much..

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day..