BCP Investment Corp Q2 FY2025 Earnings Call

Welcome to Portman Ridge Finance Corporation's Second Quarter Ended June 30, 2025 Earnings Conference Call. An earnings press release was distributed yesterday, August 7, after market close. A copy of the release, along with an earnings presentation is available on the company's website at www.portmanridge.com in the Investor Relations section and should be reviewed in conjunction with the company's Form 10-Q filed yesterday with the SEC. As a reminder, this conference call is being recorded for replay purposes. Please note that today's conference call may contain forward-looking statements, which are not guarantees of future performance or results and involve a number of risks and uncertainties. Actual results may differ materially from those in the forward-looking statements as a result of a number of factors, including those described in the company's filings with the SEC. Portman Ridge Finance Corporation assumes no obligation to update any such forward-looking statements unless required by law. Speaking on today's call will be Ted Goldthorpe, Chief Executive Officer, President and Director of Portman Ridge Finance Corporation; Brandon Satoren, Chief Financial Officer; and Patrick Schafer, Chief Investment Officer. With that, I would now like to turn the call over to Ted Goldthorpe, Chief Executive Officer of Portman Ridge. Please go ahead, Ted.

Good morning, and welcome to our second quarter 2025 earnings call. I'm joined today by our Chief Financial Officer, Brandon Satoren; and our Chief Investment Officer, Patrick Schafer. Following my opening remarks on the company's performance and activities during the second quarter, Patrick will provide commentary on our investment portfolio and our markets, and Brandon will discuss our operating results and financial condition in greater detail. We continue to advance our strategic priorities in the second quarter, generating net investment income of $4.6 million or $0.50 per share compared with $4.3 million or $0.47 per share in the prior quarter. Our focus remains on maintaining a high-quality portfolio and delivering long-term value to our shareholders. Additionally, the recent completion of our merger with Logan Ridge Finance Corporation marks a transformational milestone for the company. We are extremely proud to have completed this transaction and look forward to the greater scale, broader portfolio diversification and enhanced financial flexibility it will provide. We believe the newly combined company will drive improved operating efficiency and shareholder returns over time. Logan Ridge also delivered strong results for the second quarter, generating net investment income of $1.2 million or $0.47 per share, up from $0.9 million or $0.35 per share in the first quarter of 2025. The increase was driven by net deployment activity of $3.8 million during the quarter and continued credit strength with no new investments on nonaccrual at quarter end. To better reflect this next chapter and the strength of our adviser, we will also be changing our corporate name to BCP Investment Corporation with the NASDAQ ticker BCIC in the following weeks. The new name highlights our affiliation with BC Partners, a global alternative investment platform with deep credit expertise and reinforces our commitment to build an industry-leading business development company. For the second quarter of 2025, the Board of Directors approved a base distribution of $0.47 per share as well as a supplemental cash distribution of $0.02 per share. Of note, earlier this year, we modified our dividend policy and introduced a stable base distribution of $0.47 per share, which is anticipated to be sustainable across market cycles. Looking forward, we are excited about the opportunities ahead for the combined company. We will seek to leverage the company's enhanced scale, further diversified portfolio, cost savings due to lower overall operating expenses and improved stock trading liquidity to deliver compelling risk-adjusted returns and drive long-term value for our shareholders. We remain confident in our strategy and experienced management team as we enter the back half of this year. With that being said, I will turn the call over to Patrick Schafer, our Chief Investment Officer, for a review of our investment activity.

Thanks, Ted. Activity in our core market was partially constrained for the quarter due to the initial tariff announcements and subsequent revisions to the various levels. Having said that, deal volume did pick up meaningfully towards the end of the quarter, and thus far during Q3, our pipeline and repayment activity has been fairly active. For the first time in a while, there appears to be a healthy mix of new LBO sale processes as well as refinancings and the syndicated markets appear to be open for the very large end of the middle market. While this last dynamic has a limited direct impact on our franchise, it does point to overall healthy capital markets that should lay the groundwork for increased deal activity in the second half of the year. Turning now to Slide 6 of our presentation and sensitivity of our earnings to interest rates. As of June 30, 2025, approximately 86.9% of our debt securities portfolio was based on a floating rate with a spread pegged to an interest rate index such as SOFR or PRIME rate, with substantially all of these being linked to SOFR. As you can see from the chart, SOFR rates have slightly declined over the last few quarters, impacting current quarter net investment income. Getting down to Slide 11. Originations for the second quarter were $10.9 million and repayment and sales were $17.0 million, resulting in net repayment and sales of approximately $6.1 million. Overall yield on par value of the new investments during the quarter was 11.5%, slightly above the yield of the overall portfolio at 10.7% on par value. Our investment portfolio at year-end remains highly diversified. We ended the second quarter with a debt investment portfolio when excluding our investments in CLO funds, equities and joint ventures, spread across 69 different portfolio companies and 25 different industries, with an average par balance of $2.6 million. Turning to Slide 12. In aggregate, we had 6 investments on nonaccrual status at the end of the second quarter of 2025, representing 2.1% and 4.8% of the company's investment portfolio at fair value and cost, respectively. It's worth noting that for a subset of the nonaccrual population, the company started during Q2 to recognize interest income on a cash basis, i.e., only when cash payments are received. This compares to 6 investments on nonaccrual status as of March 31, 2025, representing 2.6% and 4.7% of the company's investment portfolio at fair value and cost, respectively. On Slide 13, excluding our nonaccrual investments, we have an aggregate debt investment portfolio of $314.7 million at fair value, which represents a blended price of 86.6% of par value and it's 88.6% comprised of first lien loans at par value. Assuming a par recovery, our June 30, 2025 fair values reflect the potential of $24 million of incremental NAV value or a 14.6% increase to NAV. When applying an illustrative 10% default rate and 70% recovery rate, our debt portfolio would generate an incremental $1.51 per share of NAV or an 8.4% increase as it rotates. Finally, turning to Slide 14, if you aggregate the last three acquired portfolios, we have purchased a combined $435 million of investments and have realized approximately 88% of these positions at a combined realized and unrealized mark of 100% of fair value at the time of closing in the respective merger. As of Q2 2025, we have fully exited the acquired Oak Hill portfolio and are down to a combined $20 million of the acquired HCAP and initial KCAP portfolios. I'll now turn the call over to Brandon to further discuss our financial results for the period.

Thanks, Patrick. For the quarter ended June 30, 2025, Portman Ridge generated $12.6 million of investment income, an increase of $0.5 million compared to the $12.1 million reported for the quarter ended March 31, 2025. The increase in investment income from the prior quarter was primarily driven by the reversal of previously accrued but unpaid income from our investment in Sundance, which had a nonrecurring negative impact to prior quarter earnings when it was placed on nonaccrual. Additionally, I'm pleased to report that PIK income has declined by approximately 20% quarter-over-quarter which was also driven by a nonrecurring item that inflated the company's PIK income in the prior quarter. We remain focused on managing our noncash income to a prudent level. For the quarter ended June 30, 2025, total expenses were $8.1 million, which represents a $0.3 million increase or $0.03 per share as compared to $7.8 million reported for the prior quarter. The increase in expense compared to the prior quarter was driven by lower-than-anticipated tax expenses in the prior year, the benefit of which was recognized in the prior quarter. Accordingly, our net investment income for the second quarter of 2025 was $4.6 million or $0.50 per share, which constitutes an increase of $0.3 million or $0.03 per share from $4.3 million or $0.47 per share for the first quarter of 2025. Our net asset value as of June 30, 2025, was $164.7 million, representing an $8.8 million decrease as compared to the prior quarter net asset value of $173.5 million. On a per-share basis, net asset value was $17.89 per share as of June 30, 2025, representing a $0.96 per share decrease as compared to $18.85 per share as of March 31, 2025. The decline in NAV was primarily driven by net realized and change in unrealized losses of $9.1 million partially offset by the company's second quarter net investment income exceeding the distribution paid in May for the first quarter by $0.3 million. As of June 30, 2025, our gross and net leverage ratios were 1.6x and 1.4x, respectively, compared to 1.5x and 1.3x, respectively, in the prior quarter. Specifically, as of June 30, 2025, we had $255.4 million of borrowings outstanding with a current weighted average contractual interest rate of 6%, this compares to the same amount outstanding as of the prior quarter with a weighted average contractual interest rate of 5.9%. The company finished the quarter with $52.6 million of available borrowing base capacity under the senior secured revolving credit facility, subject to borrowing base restrictions. With that, I will turn the call back over to Ted.

Ahead of questions, I'd like to reemphasize how excited we are for the opportunities the newly combined company will create and are rebranding to BCP Investment Corporation. Additionally, with a robust pipeline, prudent investment strategy and increased scale, we believe we are well positioned to take advantage of the current market environment, and we'll be able to deliver strong returns to our shareholders through the second half of 2025. Thank you again to all our shareholders for your ongoing support. This concludes our prepared remarks, and I'll turn the call over for any questions.

Your first question comes from Christopher Nolan with Ladenburg.

Brandon, were there any nonrecurring items in the quarter?

Outside of the other income that's broken out on the financial statements, there were no material items this quarter.

Okay. And then why was interest income higher quarter-over-quarter despite a smaller portfolio and a slight dip in yield?

So it was largely driven by the deployment we had in the prior quarter flowing through the current period.

Yes, Chris, it's just a timing impact of last quarter, we tended to have some more stuff come on sort of like second half of February and into March and so we didn't get kind of a full quarter impact last quarter.

Simple timing issues?

Yes. In the previous quarter, we had a one-time reversal of about $0.5 million in previously accrued income related to Sundance that affected Q1 on an out-of-period basis, which I noted in my remarks.

Great. And then the realized loss was $15 million. ProAir was $6 million. What's the rest...

So the other half is Anthem, which we restructured this quarter.

Great. And I guess final, is there a hard date when the trading symbol is going to switch over and the name change going to take effect?

It's not a final date, but we should have everything completed over the next couple of weeks. The main delay has been building the new website and managing the new branding. We expect to wrap that up soon, after which we will announce the ticker change and website update. We also preferred to wait until after earnings to make this announcement, as changing the name just before the earnings period has administrative implications.

Got it. I guess final question is you guys serve are the go-to guys to buy broken BDCs. And given that there's a big maturity wall for a lot of the investment spreads for BDCs are going to be coming in? Have you guys seen more deal activity or shown to you more deals or merging with other BDCs?

I would say deal activity has definitely picked up. Our M&A pipeline is probably the highest it's been in a very long time. I'm not sure it has to do with the maturity wall, but broadly, what’s happening across the space indicates that scale is becoming more important. This is driving many internal conversations at firms about where to focus and where to scale. So, I would say our M&A pipeline has never been higher. We're spending a lot of time on this. Ultimately, we want our BDC to grow significantly, and we have received great support from our shareholders to complete our merger. As we've mentioned, we hope this is a step towards achieving greater scale. Our pipeline includes not just traditional BDCs, but also closed-end funds, private non-traded BDCs, and other entities. There have been some winners in this space, but also a couple of firms facing challenges in scaling, and those firms are starting to look at partnering with larger platforms to facilitate growth. Sorry for the lengthy response.

Yes. No, no problem at all. I mean it's all good stuff. I imagine the next steps will be renegotiating the bank revolver and you're sort of edging towards at some point, try to get an investment-grade rating for the notes. I mean...

Yes, if you examine financing costs in the industry, especially with larger platforms, there's a significant difference in those costs. We operate in the cost of capital sector, and this impacts our bottom line. In a situation where spreads are decreasing and earnings face some challenges, refinancing our debt at lower rates is crucial. Currently, the market is very receptive, which is vital for enhancing earnings.

Your next question comes from the line of Erik Zwick with Lucid Capital Markets.

You sounded fairly optimistic about the opportunity for originations in the back half of the year, noting some increased activity up in the market. Just as you look at the pipeline today, I'm curious how kind of breaks down in terms of maybe new and add-on opportunities and how spreads are today versus maybe a quarter ago beginning of the year?

Yes. I'll go first. We're focused on two key areas in the latter half of this year. We're observing a significant increase in refinancing activity, which hasn't yet reflected in our earnings. Our sponsor-based pipeline has grown substantially over the last couple of months, and I'm sure you've heard similar reports from others. In addition, we've seen a rise in activity levels resulting in tangible results. It's been primarily refinancing for the past three years, but for the first time, we're witnessing some genuine sales, although refinancings still dominate. I believe spreads haven't decreased significantly over the last quarter. We're targeting the middle market, and our spreads appear to be 50 to 75 basis points higher than the very large deals being completed. The syndicated markets are currently very active, with deals priced this week at tight spreads without any original issue discount. Although we don't compete directly with the syndicated markets, they impact our industry. Additionally, we are aware of our stock's trading position. We've been unable to repurchase stock or undertake similar actions. However, in conjunction with this merger, we’ve indicated that once we are able, we will aggressively buy back stock, not just through regular methods. Considering the current spreads, it makes sense for us to explore both buybacks and tender offers. In the latter half of this year, as I mentioned, the rise in refinancing activities means that cash won’t just go toward new lower-spread loans; some of it will definitely be allocated toward buying back stock.

Ted covered the key points well, but I want to add a few notes. Generally, when we're looking at refinancing opportunities, we tend to see slightly better spreads. This is due to various costs, either direct or perceived, associated with finding new lenders and managing a new credit agreement with a different lending group. As a result, refinancing an existing deal often yields a premium or at least results in less spread compression. Our franchise is more focused on non-sponsor or non-traditional sponsors, which means the competition is somewhat less fierce. This allows us to have a better ability to price and structure deals, providing some insulation when larger deals and sponsors are pressing lenders for better terms. We benefit from this insulation and protection.

I appreciate the additional commentary there. And with regard to Ted, your commentary about fairly strong appetite to use the buyback, that was 60 days from the closing to be kind of mid-September, like September 15-ish or so when you could potentially get back into the market with the buyback. Is that correct?

Yes, during a merger process, there is a waiting period, often referred to as a cooling-off period, until things settle down. This period aligns closely with the end of the third quarter. At that point, we encounter restrictions, such as blackouts. We are doing our best to make progress during this time, but it may take a bit longer until the blackout ends. The timing is generally accurate, although it may be slightly delayed.

Got it. Congratulations on closing the deal earlier this quarter. I'm curious if you can share a pro forma NAV either from the date the transaction closed or at the end of July, or anything you have available that you could provide?

Yes, Eric, so it's about just north of $235 million.

Okay. And with regard to the comments about the potential benefit to NAV from the positions that you currently hold that are at a discounted par, like the potential for those to convert towards par as they mature, any kind of commentary you could provide in terms of the potential timeframe? Like what is the average remaining maturity on that portion of the book? Or just how to think about the opportunity and timeframe to realize those potential benefits?

Yes, it's Patrick. I'll have a couple of comments here. We just say it's not all just maturity necessarily. We do have a handful of sort of liquid CUSIP-type securities that do move around a bit. And so there is some kind of material NAV benefit potential from those names that frankly doesn't necessarily take maturity to work through. I would say also kind of practically speaking, over the course of a normal cycle, you tend to see a natural maturity duration of kind of about 2.5 to 3 years. So that would kind of be like how we sort of look at things like that sort of over a 2.5, 3-year period. Again, kind of maybe a couple of different ways to get at it.

That's helpful. And last one for me. I'm just looking at that nonaccrual book, and it seems like there's still a lot of LME activity in the space more limited on kind of bankruptcy side. But just curious about, as you look at your nonaccrual book, the opportunity to potentially either restructure or resolve some of those and potentially kind of move those back to accrual or maybe sell? How does the kind of the resolution trajectory look at this point?

I would describe it as mostly flat to slightly positive. There are a few smaller names that will likely take a long time to resolve. Regarding one of our larger names mentioned during the call, there's been a partial restructuring. We are now receiving cash interest on the loan, but given various factors, we still find it challenging to reach a full par recovery based on our evaluation of the business and its enterprise value. Therefore, we maintain it on nonaccrual status, but we are recognizing the cash interest received on the loan while not accounting for any PIK. We believe this situation will likely improve. For the remaining positions, they are relatively flat to somewhat increasing. We are also working with another large position to monetize some non-core assets to generate payments, which, while not necessarily moving that back to nonaccrual, allows us to recover funds and redeploy them elsewhere, having the same positive impact.

Your next question comes from the line of Steven Martin with Slater Capital.

Most of my questions have been asked and answered. When you look at the pro forma combined portfolio, recognizing that we sort of knew what was in each, what is the most dramatic change going to be? Is it just the Logan equity that Portman doesn't have a lot of equity in and it will end up getting diluted? What is the nature of the difference in the portfolio going to look like?

Good question. The reason this makes sense is that the portfolios are quite similar, and we have effectively reduced several equity positions in Logan Ridge over the past year. Therefore, if you examine the pro forma company, the equity will appear relatively small. Our joint ventures and fuel equities will also be smaller in comparison. From a Portman perspective, Logan Ridge had minimal to no CLO equity and fewer joint venture positions. Thus, when you look at the balance sheet as of September 30 from a Portman standpoint, those numbers will decrease slightly as a percentage of the total, while debt will increase a bit as a percentage. I don't think this change is significant, but again, from a Portman perspective, the mix of debt will likely rise slightly, or alternatively, CLO equity will decrease somewhat. I anticipate that equity will increase a bit, but it's not a major change. Overall, it will be a relatively consistent SOI.

Steve, I would just add, as of 6/30, the weighted average yield was 10.7% at Portman for Logan, it was 10.6% on a combined basis, it's 10.7%. But there's pretty material operating expense efficiencies that you guys will all benefit from. Going forward as well as, of course, the fee waivers, et cetera, that we put in place that will drive P&L going forward. And then over the longer term, we'd look to rotate out of the equity book and all of the non-yielding names that Logan Ridge has and redeploy those proceeds into interest-earning loans.

Since there was a substantial overlap in names over the last 2 to 3 years, when you combine them, is there going to be a material difference in the number of different names in the portfolio?

Again, we can talk about materiality, probably not. I mean, again, if you're looking at it from a Portman perspective, there are 94, 96 unique borrowers that will maybe go up by 10 to 15 names so that obviously, we are adding diversification. I wouldn't say it's substantial. And I would also say the names are pretty similar, but depending on the timing of when we did the individual names, one name might be a slightly higher percentage of Logan versus Portman that will kind of like normalize out when you add the two things together. Candidly, I think the biggest piece from our perspective that will move around when you put the two things together is we'll have a lot more flexibility around where we sort of put the names and the exposures between our different credit facilities and where we can kind of get better borrowing capacity. Again, all of our different two different credit facilities have different industry concentrations, leverage concentrations, kind of things like that. So the ability for us now under one combined roof to be able to sort of, I'll call it, move around the asset positions within the credit facilities, at least from our perspective, is where we'll be able to sort of unlock a lot of value from the SOI being put together.

Got it. One last question. Considering that you've exited several of the larger equity positions, can you share any updates regarding the remaining Logan Ridge equity?

No, there isn't a significant change. We're still addressing a few minor issues, particularly related to managing our data, which remain in process. We have limited control in these circumstances, so we are pushing where we can. However, I wouldn't say there's anything definitive on the horizon. That said, considering the macro environment and the direction of the LBO landscape over the next six months, I wouldn't be surprised if we encounter unexpected smaller positions. In terms of volume, we might see more items that we didn't anticipate actually getting monetized and realized.

That concludes our question-and-answer session. I will now turn the call back over to Ted Goldthorpe for closing remarks.

Thank you all for attending the call. As always, please reach out to us with any questions, which we're happy to discuss. We look forward to speaking to you again in November when we announce third quarter 2025 results, and I wish everybody a great end to their summer. Thank you so much.

Ladies and gentlemen, this concludes today's call. Thank you all for joining. You may now disconnect.