Business Context and Reporting Period
Company: Portman Ridge Finance Corporation (PTMN), formerly KCAP Financial, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2020
Business Model: Externally managed Business Development Company (BDC) regulated under the Investment Company Act of 1940. The Company invests primarily in secured term loans, bonds, and mezzanine debt of privately-held middle-market companies, as well as joint ventures and Collateralized Loan Obligation (CLO) Fund Securities.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 |
|---|---|---|---|
| Total Investment Income | $7.79 million | $22.86 million | $19.79 million |
| Net Investment Income | $2.70 million | $8.06 million | $0.93 million |
| Net Realized Gains (Losses) | ($1.89 million) | ($3.82 million) | ($16.80 million) |
| Net Unrealized Appreciation (Depreciation) | $7.51 million | ($21.85 million) | ($0.15 million) |
| Net Increase (Decrease) in Stockholders' Equity | $8.32 million | ($17.45 million) | ($16.02 million) |
| Net Asset Value (NAV) per Share | $2.85 | $2.85 (End of Period) | $3.55 (End of Period) |
| Total Assets | $300.13 million | $300.13 million | $310.37 million (Dec 31, 2019) |
| Total Liabilities | $174.19 million | $174.19 million | $158.18 million (Dec 31, 2019) |
| Stockholders' Equity | $125.95 million | $125.95 million | $152.20 million (Dec 31, 2019) |
| Asset Coverage Ratio | 172% | 172% | 204% (Dec 31, 2019) |
Material Changes vs. Prior Period
- Portfolio Valuation: Total investments at fair value decreased from $277.9 million (Dec 31, 2019) to $289.1 million (Sep 30, 2020) in terms of cost basis, but fair value dropped significantly due to unrealized depreciation. The nine-month period saw a net unrealized depreciation of $21.85 million, primarily driven by the economic impact of the COVID-19 pandemic on CLO Fund Securities ($12.7 million depreciation) and Joint Ventures ($4.7 million depreciation).
- Net Investment Income: Net investment income for the nine months ended Sep 30, 2020 ($8.06 million) was significantly higher than the prior year period ($0.93 million), driven by increased interest income from debt securities ($13.91 million vs. $10.65 million) and joint ventures ($4.76 million vs. $3.54 million).
- Debt Levels: Total borrowings increased to $168.65 million (Sep 30, 2020) from $153.86 million (Dec 31, 2019). This includes a new $115 million Revolving Credit Facility with JPMorgan Chase entered into in December 2019, with $94.3 million outstanding as of Sep 30, 2020.
- NAV Decline: NAV per share declined from $3.40 at the beginning of the period to $2.85 at period end, a decrease of approximately 16.2%.
Guidance, Outlook, Risks, and Unusual Items
- COVID-19 Impact: Management highlights that the pandemic has adversely affected portfolio company operations and investment valuations. Four Catamaran CLO Funds breached covenants in Q2 2020, diverting cash flows away from the Company's subordinated notes to senior noteholders. Future distributions from these CLOs are uncertain.
- Merger with Garrison Capital (GARS): On October 28, 2020 (subsequent to the reporting period), the Company completed the acquisition of Garrison Capital Inc. The transaction involved a cash and stock exchange. Post-merger, the Company will consolidate GARS's CLO vehicle, introducing new leverage and risks associated with CLO investments.
- Stock Repurchase Program: A $10 million stock repurchase program was approved in March 2020. During the nine months ended Sep 30, 2020, the Company repurchased 734,403 shares for approximately $863,000.
- Dividend Policy: The Board declared a cash distribution of $0.06 per share for the third quarter of 2020. The Company intends to distribute substantially all taxable income to maintain Regulated Investment Company (RIC) status.
- Risk Factors: Key risks include the potential for further unrealized depreciation due to the pandemic, the phase-out of LIBOR affecting floating-rate assets, and the risk of breaching asset coverage covenants if NAV declines further.
Investor Verification Checklist
- CLO Covenant Breaches: Verify the specific impact of the four Catamaran CLO Fund covenant breaches on future cash flows and the likelihood of distribution suspension.
- Post-Merger Capital Structure: Review the consolidated balance sheet impact of the Garrison Capital (GARS) acquisition, specifically the treatment of GARS's CLO subordinated notes as leverage.
- Asset Coverage Ratio: Monitor the asset coverage ratio (currently 172%) to ensure it remains above the 150% threshold required by the 1940 Act, especially given the recent NAV decline.
- Non-Accrual Status: Confirm the status of the eight debt investments currently on non-accrual status and the potential for further credit deterioration in the portfolio.
- LIBOR Transition: Assess the Company's strategy for transitioning floating-rate assets and liabilities away from LIBOR, which is scheduled to be phased out by the end of 2021.