Portman Ridge(US:PTMN)2023-03-09 22:12Part I Business Portman Ridge Finance Corporation is an externally managed BDC focused on generating income and capital appreciation by investing in secured debt of U.S. middle-market companies - Portman Ridge is an externally managed BDC focusing on secured debt in U.S. middle-market companies, defined as those with EBITDA of $10 million to $50 million1821 Portfolio Overview as of December 31, 2022 | Metric | Value | | :--- | :--- | | Total Portfolio Fair Value | $576.5 million | | Number of Industries | 31 | | Number of Entities | 119 | | Average Par Balance per Entity | ~$3.3 million | - The company has completed several strategic transactions, including becoming externally managed in 2019, acquiring GARS in 2020, acquiring HCAP in 2021, and executing a 1-for-10 reverse stock split in 202127303234 - The company has elected to be treated as a Regulated Investment Company (RIC) for U.S. federal income tax purposes, which generally allows it to avoid corporate-level income taxes by distributing its income to stockholders25115 Investment Portfolio The company's investment portfolio primarily comprises debt securities, joint ventures, and CLO fund securities, with debt securities constituting 82% of the total fair value Portfolio Composition by Fair Value (December 31, 2022) | Portfolio Segment | % of Total Portfolio (Fair Value) | | :--- | :--- | | Debt Securities Portfolio | ~82% | | CLO Fund Securities | ~3% | | Joint Ventures & Other | ~15% | - The Debt Securities Portfolio is diversified across 31 industries and 119 entities, with an average par balance of approximately $3.3 million per investment. 88% of this portfolio consists of senior secured loans50 - The company holds investments in two key joint ventures: KCAP Freedom 3 LLC (F3C Joint Venture) and Series A – Great Lakes Funding II LLC (Great Lakes II Joint Venture), with fair values of $18.7 million and $40.3 million, respectively, as of December 31, 20224750 Advisory and Administration Agreements The company is managed by Sierra Crest Investment Management LLC, which receives a base management fee and a two-part incentive fee, while administrative services are provided by BC Partners Management LLC Adviser Compensation Structure | Fee Type | Rate/Structure | | :--- | :--- | | Base Management Fee | 1.50% on average gross assets (excluding cash). | | | 1.00% on average gross assets exceeding 200% of NAV. | | Incentive Fee (Income-Based) | 17.50% of pre-incentive fee net investment income, subject to a 7.00% hurdle rate. | | Incentive Fee (Capital Gains) | 17.50% of cumulative realized capital gains net of losses and unrealized depreciation. | - The Advisory Agreement is subject to annual re-approval by the Board of Directors. It was most recently re-approved on March 6, 202383 - The company reimburses the Administrator for costs and expenses related to administrative services, including office space, equipment, and allocable compensation for the CFO and CCO8687 Regulation and Taxation As a BDC, the company must invest primarily in qualifying assets, maintain a 150% asset coverage ratio, and distribute at least 90% of taxable income to maintain RIC tax status - The company must maintain an asset coverage ratio of at least 150%, a requirement that became effective March 29, 2019, allowing for increased leverage compared to the previous 200% requirement104 - To qualify as a RIC, the company must meet a 90% Income Test (deriving at least 90% of gross income from specific investment sources) and Diversification Tests at the end of each quarter119 - The company is also subject to a 4% nondeductible U.S. federal excise tax unless it distributes at least 98% of its net ordinary income for the calendar year and 98.2% of its capital gain net income for the one-year period ending October 31117 Risk Factors The company faces significant business, structural, leverage, investment, and market risks, including conflicts of interest, illiquid portfolio valuations, and interest rate fluctuations - Business & Structural Risks: Conflicts of interest may arise from the Adviser's compensation structure. The company operates in a highly competitive market and relies on key personnel from the Adviser141152157 - Leverage Risks: Borrowing money magnifies gains and losses. The company may default on its credit facilities or notes, which contain restrictive covenants that could hinder operations and distributions188193 - Investment Risks: The portfolio consists of illiquid, speculative, and below-investment-grade securities. Valuations are determined in good faith and are subject to uncertainty. The company is non-diversified, increasing risk from individual issuer defaults214220222 - Market & Economic Risks: Economic recessions, capital market disruptions, inflation, and interest rate changes could adversely affect portfolio companies and the company's financial results. The discontinuation of LIBOR presents transition risks166213266 - Common Stock Risks: Shares of BDCs frequently trade at a discount to their net asset value. The company may not be able to pay distributions, and a portion of distributions may be a return of capital240244 Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - None279 Properties The company does not own any real estate or other real property - The company does not own any real estate280 Legal Proceedings The company is involved in two stockholder class action lawsuits alleging breaches of fiduciary duties related to the HCAP acquisition, with an indeterminable outcome - The company is a defendant in two stockholder class action lawsuits related to the HCAP merger, alleging breaches of fiduciary duties by former HCAP officers and directors282 - As the surviving corporation of the HCAP merger, Portman Ridge is responsible for any claims against HCAP and indemnification for its former officers and directors283 Mine Safety Disclosures This item is not applicable to the company - Not applicable285 Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Portman Ridge's common stock trades on NASDAQ, consistently traded at a discount to NAV, and the company maintains a quarterly distribution policy and a stock repurchase program Stock Price vs. NAV per Share (2022) | Period | NAV per Share | High Closing Price | Low Closing Price | High as % of NAV | Low as % of NAV | | :--- | :--- | :--- | :--- | :--- | :--- | | Q4 2022 | $24.23 | $23.00 | $19.61 | (5.08)% | (19.07)% | | Q3 2022 | $26.18 | $24.38 | $20.00 | (6.88)% | (23.61)% | | Q2 2022 | $27.26 | $24.08 | $21.86 | (11.66)% | (19.80)% | | Q1 2022 | $28.76 | $25.15 | $23.29 | (12.55)% | (19.02)% | - The company intends to continue making quarterly distributions, determined by the Board, to maintain its RIC status291 Stock Repurchase Program Activity | Period | Shares Purchased | Average Price Paid | Dollar Value Remaining | | :--- | :--- | :--- | :--- | | 2022 Total | 167,017 | ~$22.90 | $6,169 thousand | | 2021 Total | 75,377 | ~$24.23 | $8,174 thousand | Management's Discussion and Analysis of Financial Condition and Results of Operations In 2022, the company experienced decreased investment income and increased expenses, resulting in a net decrease in net assets from operations, while maintaining a compliant asset coverage ratio Key Operational Results (Years Ended Dec 31) | ($ in thousands) | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Total Investment Income | $69,614 | $80,086 | $42,764 | | Total Expenses | $40,724 | $38,082 | $26,321 | | Net Investment Income | $28,890 | $42,004 | $17,000 | | Net Realized (Loss)/Gain | ($31,185) | ($4,258) | $7,605 | | Net Unrealized (Depreciation)/Appreciation | ($17,915) | ($8,443) | $6,813 | | Net (Decrease)/Increase in Net Assets | ($20,996) | $26,026 | $31,573 | Financial Condition (As of Dec 31) | ($ in thousands, except per share) | 2022 | 2021 | | :--- | :--- | :--- | | Total Investments (Fair Value) | $576,478 | $549,985 | | Total Assets | $619,486 | $648,301 | | Total Liabilities | $387,363 | $368,179 | | Net Assets | $232,123 | $280,122 | | NAV per Share | $24.23 | $28.88 | - The company's asset coverage ratio was 160% as of December 31, 2022, exceeding the 150% minimum required by the 1940 Act386 - The company's critical accounting policy is the valuation of its portfolio investments, which are primarily illiquid Level III assets. The Adviser is designated as the valuation designee, using methodologies like discounted cash flow and enterprise value, with oversight from the Board and input from independent valuation firms407409 Quantitative and Qualitative Disclosures About Market Risk The company's primary market risks are interest rate fluctuations, with 90% of the debt portfolio being floating rate, and portfolio valuation risk due to illiquid investments - As of December 31, 2022, 90.0% of the company's Debt Securities Portfolio (at par) was floating rate, making investment income sensitive to interest rate changes440 Annualized Impact of Interest Rate Changes on Net Investment Income | ($ in thousands) | +1% Change | +2% Change | +3% Change | | :--- | :--- | :--- | :--- | | Increase in Interest Rate | $1,963 | $3,927 | $5,890 | | Decrease in Interest Rate | ($1,963) | ($3,927) | ($5,625) | - Portfolio valuation risk is significant due to the illiquid nature of the company's investments. Fair value is determined in good faith by the Adviser, as the designated valuation designee, with Board oversight and the use of third-party valuation firms447448 Financial Statements and Supplementary Data This section refers to the company's audited consolidated financial statements and supplementary data, which begin on page F-1 - The company's financial statements are annexed to the Annual Report beginning on page F-1449 Controls and Procedures Management concluded that the company's disclosure controls and procedures and internal control over financial reporting were effective as of December 31, 2022 - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by the report450 - Management concluded that the company maintained effective internal control over financial reporting as of December 31, 2022, based on the COSO framework454 Other Information This section details estimated annual expenses as a percentage of net assets, totaling 18.03% for 2022, and provides a hypothetical expense illustration Annual Expenses (as a percentage of net assets) | Expense Category | Percentage | | :--- | :--- | | Base management fee | 3.60% | | Incentive fee | 2.64% | | Interest payments on borrowed funds | 7.63% | | Other expenses | 3.68% | | Acquired fund fees and expenses | 0.48% | | Total annual expenses | 18.03% | - A hypothetical $1,000 investment with a 5% annual return would incur approximately $149 in expenses in the first year and $612 over five years461 Part III Directors, Executive Officers, Corporate Governance, Executive Compensation, Security Ownership, and Principal Accountant Fees Information for Items 10 through 14, covering governance, compensation, and ownership, is incorporated by reference from the 2023 proxy statement - Information for Part III (Items 10, 11, 12, 13, and 14) is incorporated by reference from the company's definitive proxy statement for the 2023 annual meeting of stockholders468469470471472 Part IV Exhibits and Financial Statement Schedules This section provides an index of the financial statements and other required exhibits filed with the report - This section provides an index of the financial statements and exhibits filed with the report474475 Financial Statements Consolidated Balance Sheets As of December 31, 2022, the company reported total assets of $619.5 million, total liabilities of $387.4 million, and net assets of $232.1 million, with a decrease in NAV per share from 2021 Consolidated Balance Sheet Summary | ($ in thousands) | Dec 31, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Total Investments at Fair Value | $576,478 | $549,985 | | Total Assets | $619,486 | $648,301 | | Total Liabilities | $387,363 | $368,179 | | Total Net Assets | $232,123 | $280,122 | | Net Asset Value Per Share | $24.23 | $28.88 | Consolidated Statements of Operations For 2022, the company reported $69.6 million in total investment income, resulting in a net investment income of $28.9 million and a net decrease in net assets from operations of $21.0 million Statement of Operations Summary (Year Ended Dec 31, 2022) | ($ in thousands) | Amount | | :--- | :--- | | Total investment income | $69,614 | | Net expenses | $40,724 | | Net investment income | $28,890 | | Net realized loss on investments | ($31,185) | | Net unrealized depreciation on investments | ($17,915) | | Net decrease in net assets from operations | ($20,996) | Consolidated Schedules of Investments As of December 31, 2022, the company's $576.5 million investment portfolio was primarily composed of senior and junior secured loans, diversified across 31 industries Portfolio Composition by Fair Value (Dec 31, 2022) | Security Type | Fair Value ($ in thousands) | % of Portfolio | | :--- | :--- | :--- | | Senior Secured Loan | $418,722 | 73% | | Junior Secured Loan | $56,400 | 10% | | Joint Ventures | $58,955 | 10% | | Equity Securities | $21,905 | 4% | | CLO Fund Securities | $20,453 | 3% | | Total | $576,478 | 100% | Top Industry Concentrations by Fair Value (Dec 31, 2022) | Industry | Fair Value ($ in thousands) | % of Portfolio | | :--- | :--- | :--- | | Banking, Finance, Insurance & Real Estate | $78,264 | 14% | | High Tech Industries | $73,994 | 13% | | Services: Business | $66,207 | 11% | | Joint Ventures | $58,955 | 10% | | Healthcare & Pharmaceuticals | $50,566 | 9% | Notes to Consolidated Financial Statements The notes detail the company's accounting policies, investment valuation, debt structure, and the accounting treatment of the GARS and HCAP acquisitions - The company's valuation policy designates the Adviser as the "valuation designee" under SEC Rule 2a-5, responsible for fair value determinations of the portfolio, with Board oversight580 Borrowings as of December 31, 2022 | Debt Instrument | Carrying Value ($ in thousands) | | :--- | :--- | | 2018-2 Secured Notes | $176,937 | | 4.875% Notes Due 2026 | $105,478 | | Revolving Credit Facility | $90,893 | | Total | $373,308 | - The acquisitions of GARS (2020) and HCAP (2021) were accounted for as asset acquisitions, resulting in purchase discounts of $40.4 million and $3.8 million, respectively, which are amortized into interest income over the life of the acquired investments757762