U.S. Markets open in 4 hrs 45 mins

Edited Transcript of PTMN earnings conference call or presentation 8-Nov-19 2:00pm GMT

Q3 2019 Portman Ridge Finance Corp Earnings Call

NEW YORK Nov 17, 2019 (Thomson StreetEvents) -- Edited Transcript of Portman Ridge Finance Corp earnings conference call or presentation Friday, November 8, 2019 at 2:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Edward Joseph Goldthorpe

Portman Ridge Finance Corporation - Chairman, CEO & President

* Edward Udall Gilpin

Portman Ridge Finance Corporation - CFO, Secretary & Treasurer

* Patrick Schafer

Portman Ridge Finance Corporation - CIO

================================================================================

Conference Call Participants

================================================================================

* Jason Gordon Stankowski

Clayton Partners LLC - Partner and Portfolio Manager

* Ryan Patrick Lynch

Keefe, Bruyette, & Woods, Inc., Research Division - MD

* Steven L. Martin

Slater Capital Management, L.L.C. - Manager

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good morning, ladies and gentlemen, and welcome to the Portman Ridge Finance Corporation conference call. An earnings press release was distributed yesterday afternoon. 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, November 8, 2019. This call is also being hosted on a 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 of Portman Ridge Finance Corporation. Mr. Goldthorpe, you may begin.

--------------------------------------------------------------------------------

Edward Joseph Goldthorpe, Portman Ridge Finance Corporation - Chairman, CEO & President [2]

--------------------------------------------------------------------------------

Thank you, and good morning, everyone. Thank you for joining us for our earnings call. Today, Portman Ridge announced its third quarter 2019 financial results.

As you know, on August 1, we announced that Portman Ridge has entered into a definitive agreement under which OHA Investment Corporation will merge with and into Portman Ridge. The transaction remains subject to OHAI shareholder vote, and to the extent approved, is still on track to close in the fourth quarter of this year. For more details about the merger, please refer to the press release issued on August 1, which is available on the Portman Ridge website and the replay of the shareholder call hosted on the same day.

We continue to be excited about this opportunity as it will demonstrate the accretive nature of consolidation in the space. I will begin with a few comments about the market and our strategy, and then turn over the call to Ted Gilpin, our CFO, for a brief overview of the financial results for the quarter, and then to Patrick Schafer, our Chief Investment Officer, for a review of our investment activity, before concluding the call with some additional remarks.

Over the last several months, we have started to see signs of credit deterioration in the broader market and are becoming more cautious. As a result, excluding add-ons to the existing portfolio, all new investments during the quarter were first-lien securities. Though we continue to pursue junior capital solutions at high-quality economically resilient businesses with competitive advantages, our bar remains exceptionally high. Having said all that, the sponsor finance market remains very competitive on pricing and deal terms. Over the course of 2019, we've experienced a trend of sponsors willing to work more with lending partners -- with more lending partners in each transaction, allowing us to be more selective on credits and thus increasing our participation rate on deals we believe to be attractive. We continue to see value in nontraditional sponsored transactions and have closed 2 such investments during the quarter. These types of transactions tend to have much longer gestation periods and less timing predictability, but we believe they are the key to portfolio construction in order to generate outsized risk-adjusted return for shareholders.

We remain focused on reducing our CLO equity exposure and replacing it with investments in our senior and unitranche joint ventures, which we continue to believe provide attractive risk-adjusted returns.

With that, I will hand it off to Ted Gilpin to review the third quarter's financial results.

--------------------------------------------------------------------------------

Edward Udall Gilpin, Portman Ridge Finance Corporation - CFO, Secretary & Treasurer [3]

--------------------------------------------------------------------------------

Thank you, Ted. Good morning, everyone. Net investment income for the third quarter of 2019 was approximately $2.2 million or $0.06 per basic share compared with net investment income of approximately $0.9 million or $0.02 per basic share in the second quarter of 2019 and compared with net investment income of approximately $3 million or $0.08 per basic share during the third quarter of 2018. For the 3 months ended September 30, 2019, we reported total investment income of approximately $7.1 million or $0.19 per share, which remained relatively flat compared to the second quarter of 2019 and the same period last year.

Investment income from debt securities in the quarter was approximately $4.2 million or $0.11 per basic share compared with approximately $3.9 million or $0.10 per share in the second quarter and approximate $4.8 million or $0.13 per share in the third quarter of 2018. Investment income on CLO fund securities in the third quarter 2019 was approximately $1.6 million or $0.04 per basic share compared with approximately $1.7 million or $0.05 per share in the second quarter and $1.3 million or $0.03 per share in the third quarter of 2018. Investment income from joint ventures in the third quarter of 2019 was approximately $1.3 million or $0.03 per share, which was mostly unchanged in the second quarter and compared to approximately $800,000 or $0.02 per share in the third quarter of 2018.

For the 3 months ended September 30, 2019, total expenses were approximately $4.8 million or $0.13 per share compared to approximately $6 million or $0.16 per share for the 3 months ended June 30, 2019. Excluding the lease impairment charge recognized in the second quarter of 2019, total expenses in the second quarter were $4.6 million or $0.12 per share. As a side note, subsequent to the quarter end, we have entered into an agreement to terminate the lease for approximately its remaining carrying value.

The fair value of our portfolio was approximately $287 million as of September 30, 2019, and our net asset value stands at $3.55 per share. On the liability side of the balance sheet. As of September 30, 2019, we had approximately $125.4 million of par debt outstanding, $77.4 million of 6.125% notes due in 2022 and $48 million under our L-plus-3.25% revolving credit facility. Our asset coverage ratio at quarter end was 204%.

As of March 2019, Portman Ridge can increase leverage to the new statutory ratio of 150%, however, we are currently restricted in our ability to do so under the covenants in our outstanding publicly traded debt. The new asset coverage ratio will give us significantly more flexibility in the future. We are in active dialogue to opportunistically refinance our liability structure with the goal of reducing the cost of capital while maintaining maximum flexibility for investment strategies.

Portman Ridge's Board of Directors has approved a cash distribution of $0.06 per share on November 5. The distribution is payable on November 29 to stockholders of record at the close of business on November 15, 2019. The Board evaluated several factors in determining the amount of the quarterly distribution, including the amount required to be distributed for the company to maintain its status as a regulated investment company under the Internal Revenue Code.

With that, I would like now turn the call over to Patrick Schafer, Chief Investment Officer of Portman Ridge.

--------------------------------------------------------------------------------

Patrick Schafer, Portman Ridge Finance Corporation - CIO [4]

--------------------------------------------------------------------------------

Thanks, Ted. I'd like to now discuss the current state of the portfolio and how we continue to reshape it since the externalization. During the quarter, we made investments into 10 borrowers, 4 of which were into existing portfolio companies and 6 of which were brand-new borrowers. In aggregate, these investments totaled $49.4 million of face value, 76% of which were first-lien securities and the remaining investments being add-ons to the Great Lakes joint venture and existing preferred equity investment. The weighted average spread on these first-lien securities was 596 basis points.

Additionally, over the course of the quarter, we exited 10 positions, 6 of which were legacy KCAP positions that had an aggregate carrying value of $34.1 million for an aggregate loss of $140,000 relative to their carrying value as of June 30. The largest loss was related to the exit of Harland Clarke, which is a liquid security and saw a price deterioration from the June -- from June 30 until our exit in early September.

With respect to the portfolio as a whole. When BC Partners took over management of KCAP on April 1 of this year, the company had $165.7 million of debt securities, marked at a blended price of 91.9% of par and yielding a spread to LIBOR of 594 basis points. As of September 30, Portman Ridge has $194 million of debt securities, marked at 93.7% of par and yielding a spread to LIBOR of 649 basis points. Finally, there were no incremental nonaccruals during the quarter.

With that, I'll turn the call over to Ted Goldthorpe.

--------------------------------------------------------------------------------

Edward Joseph Goldthorpe, Portman Ridge Finance Corporation - Chairman, CEO & President [5]

--------------------------------------------------------------------------------

Thanks, Patrick. As Patrick noted, we continue to aggressively reposition the portfolio. Since April 1, we've completed investments in $95.4 million of face-value securities. Most of these investments were proprietarily sourced through the BC Partners platform. And as of September 30, excluding structured products and joint ventures, 58% of the portfolio has been sourced and underwritten by BC Partners, up from 22% as of March 31, when BC Partners became the external manager. Additionally, during the quarter, we completed 2 transactions alongside other BC Partners' entities, pursuant to a co-investment order. We'll continue to lever the broader -- leverage the broader BC Partners platforms on transactions going forward as this capability is crucial to our ability to compete with the other major market participants. Over the next several quarters, we continue to work towards reducing noncore and low-yielding assets, including exiting our structured credit exposure in a thoughtful manner. We believe the portfolio is trending in the right direction, and we are looking forward to continuing our repositioning work.

Last but certainly not least, we are very excited for the completion of the OHAI transaction. If approved by OHAI shareholders, both shareholder bases will benefit from increased scale of hold sizes and increasing our NII per share through spreading out public company costs over more AUM. We continue to seek opportunities in the middle-market lending space to prospectively enhance net investment income through the reposition of KCAP's legacy assets as well as an eye towards maximizing the pro forma Portman/OHAI asset composition.

Although we've made significant progress in just 2 quarters, we continue to expect to reposition the portfolio, including the additional OHAI assets in subsequent quarters, based on the long-term objective of NII growth and NAV stability. We believe the current dividend rate more closely mirrors the current earnings power of the company and will improve NAV stability in the long term.

Thank you for all of your support. And with that, we'd like to turn the call over to questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Our first question comes from [Craig Stover].

--------------------------------------------------------------------------------

Unidentified Participant, [2]

--------------------------------------------------------------------------------

I'm a personal investor. And I had a question, how much incentive fees have been paid to BC Partners in the past 2 quarters?

--------------------------------------------------------------------------------

Edward Udall Gilpin, Portman Ridge Finance Corporation - CFO, Secretary & Treasurer [3]

--------------------------------------------------------------------------------

So currently, no incentive fees have been paid to the manager in the last 2 quarters.

--------------------------------------------------------------------------------

Unidentified Participant, [4]

--------------------------------------------------------------------------------

Okay. None. Okay. The other question is your list of assets, you list $17.8 million of Asset Manager Affiliates. What exactly is that? You show no value for it. What -- I mean, what was that investment? And why is it 0 value?

--------------------------------------------------------------------------------

Edward Udall Gilpin, Portman Ridge Finance Corporation - CFO, Secretary & Treasurer [5]

--------------------------------------------------------------------------------

Yes. So in December of 2018, December 31, KCAP used to own 2 or 3 different asset managers, called the Asset Manager Affiliates. They were sold on December 31, what's on the -- so -- and it was sold at its fair value. That's the original cost that's sitting there. There's -- it's a sold business. So no carrying value.

--------------------------------------------------------------------------------

Unidentified Participant, [6]

--------------------------------------------------------------------------------

Why do we still list it as an asset?

--------------------------------------------------------------------------------

Edward Udall Gilpin, Portman Ridge Finance Corporation - CFO, Secretary & Treasurer [7]

--------------------------------------------------------------------------------

There's still -- the old holdco that held those is still open. We'll probably wind it down at the end of the year. It's -- it doesn't do any more business, so -- but it hasn't been finally liquidated.

--------------------------------------------------------------------------------

Unidentified Participant, [8]

--------------------------------------------------------------------------------

Okay. So you're still listing the original cost. Okay. All right.

--------------------------------------------------------------------------------

Operator [9]

--------------------------------------------------------------------------------

Our next question comes from [Angelo Gareno]

--------------------------------------------------------------------------------

Unidentified Participant, [10]

--------------------------------------------------------------------------------

So you've mentioned that -- you used a number, 50% of the assets were BC Partners drop-downs or affiliated with BC Partners. Was that just the new assets since -- is that 50% of the assets that you've acquired since the externalization? Or is that a statement that's characterizing the current percentage in the portfolio?

--------------------------------------------------------------------------------

Edward Joseph Goldthorpe, Portman Ridge Finance Corporation - Chairman, CEO & President [11]

--------------------------------------------------------------------------------

Yes. They are newly originated assets that were originated by the BC Partners platform.

--------------------------------------------------------------------------------

Patrick Schafer, Portman Ridge Finance Corporation - CIO [12]

--------------------------------------------------------------------------------

But represents the current value -- the current amount as of September 30, not a cumulative number of what's actually in the SOI as of September 30.

--------------------------------------------------------------------------------

Unidentified Participant, [13]

--------------------------------------------------------------------------------

Right. So you -- so 50% of the current holdings have come from some connection to a BC Partner deal, is one way of...

--------------------------------------------------------------------------------

Patrick Schafer, Portman Ridge Finance Corporation - CIO [14]

--------------------------------------------------------------------------------

Yes, 58%. Sourced from BC -- sourced through our BC Partners platform, 58%, yes.

--------------------------------------------------------------------------------

Unidentified Participant, [15]

--------------------------------------------------------------------------------

Right. It's not just -- it's not qualifying -- out of the new deals that you've done since externalization, 50% of them have been that -- that's where the current portfolio stands?

--------------------------------------------------------------------------------

Patrick Schafer, Portman Ridge Finance Corporation - CIO [16]

--------------------------------------------------------------------------------

Yes, that's correct.

--------------------------------------------------------------------------------

Unidentified Participant, [17]

--------------------------------------------------------------------------------

Okay, great. And when we're looking at OHAI, how do we think about -- can you spend some time talking about what their holdings look like and how much -- how much turn you see there that will be necessary? I mean, obviously, when we had KCAP, had to get rid of the CLOs, the affiliate managers. We had a lot of things that were not fitting the mold. Is OHAI already -- does OHAI already pretty much fit the mold? Or is there a lot of portfolio transition that has to happen there as well?

--------------------------------------------------------------------------------

Edward Joseph Goldthorpe, Portman Ridge Finance Corporation - Chairman, CEO & President [18]

--------------------------------------------------------------------------------

Yes. It's a good question. So we think the OHAI portfolio is a very high-quality portfolio, and we feel very good about what we're taking on. I think there will be some repositioning of that portfolio over time, and it'll be a little more straightforward, I think, than -- because certain of the assets are more liquid. But we feel very, very good about the assets we're acquiring. So I don't think there's any rush for us to reposition it. But again, if you look at our strategy of...

--------------------------------------------------------------------------------

Unidentified Participant, [19]

--------------------------------------------------------------------------------

Can you give like a little -- just a rough percentage of like -- would you think that after a year after the transaction, you would still hold approximately 3/4 of the OHAI still, or half? I mean how much of OHAI (inaudible)?

--------------------------------------------------------------------------------

Edward Joseph Goldthorpe, Portman Ridge Finance Corporation - Chairman, CEO & President [20]

--------------------------------------------------------------------------------

Yes. I mean, a good -- I mean, listen, the average duration of our assets is about 2.5 years. So most assets come out due to refinancings or sales or whatever. So just naturally, you're going to have 1/3 of the portfolio churn off in a year. So I think somewhere between 1/3 and 1/2 of the portfolio over a 12-month period seems reasonable.

--------------------------------------------------------------------------------

Unidentified Participant, [21]

--------------------------------------------------------------------------------

And we've talked about this in a previous conference call, and you had mentioned that you're going to be looking at refinancing just for 2 reasons: one, to relieve yourself of the covenants; and two, to get better deals. How much benefit can you -- maybe qualify a little bit what BC Partners is -- how BC Partners facilitates -- or may facilitate reduced financing costs and better terms.

--------------------------------------------------------------------------------

Edward Joseph Goldthorpe, Portman Ridge Finance Corporation - Chairman, CEO & President [22]

--------------------------------------------------------------------------------

Yes. I mean, listen, we obviously work -- we're affiliated with an asset manager with $30 billion of assets and are very big clients of a lot of the banks. And so we feel like, at least preliminarily, we should be able to drive better financing terms than what we've had historically. So all of that -- as I said, all that drops to the bottom line. It's just a cost-of-capital vehicle. So we expect any reduction in interest rate to go directly to shareholders' benefit. So that being said, the other thing we're obviously thinking about is we also have some fixed-rate liabilities. And obviously, that's something we're also looking at assessing on the liability side.

--------------------------------------------------------------------------------

Operator [23]

--------------------------------------------------------------------------------

Our next question comes from Ryan Lynch of KBW.

--------------------------------------------------------------------------------

Ryan Patrick Lynch, Keefe, Bruyette, & Woods, Inc., Research Division - MD [24]

--------------------------------------------------------------------------------

One thing I saw was, subsequent to quarter end, you guys made a $1.6 million payment regarding what you guys lease. I know you guys took a $1.4 million charge in the second quarter. I wasn't sure if there was an additional $300,000 -- or $200,000 charge in this third quarter taken. Or do you expect any accelerated charges in the fourth quarter to kind of true-up that $1.6 million payment?

--------------------------------------------------------------------------------

Edward Udall Gilpin, Portman Ridge Finance Corporation - CFO, Secretary & Treasurer [25]

--------------------------------------------------------------------------------

Yes. So the $1.6 million is essentially what our carrying value is left on it. There'll be a little bit of noise in terms of moving and closing it up, but I don't think it'll be material. So I think fourth quarter, we'll see very little noise related to the lease, and then it'll be gone completely.

--------------------------------------------------------------------------------

Edward Joseph Goldthorpe, Portman Ridge Finance Corporation - Chairman, CEO & President [26]

--------------------------------------------------------------------------------

And Ryan, one thing to add is, on a go-forward basis, obviously, we save about $100,000 a quarter. So that will go to benefit NII.

--------------------------------------------------------------------------------

Ryan Patrick Lynch, Keefe, Bruyette, & Woods, Inc., Research Division - MD [27]

--------------------------------------------------------------------------------

Okay. And then you mentioned in your prepared comments, and you've also talked about this in the past, looking to reduce your structured products. Obviously, there's been some headwinds in that market broadly. I know you guys took some markdowns in your CLO portfolio this quarter, and I think probably a lot of that is just due to some market weakness. But given the market weakness and some of the markdowns this quarter, does that potentially delay or change your thought process or time frame of when you guys are looking to exit those structured product positions?

--------------------------------------------------------------------------------

Edward Joseph Goldthorpe, Portman Ridge Finance Corporation - Chairman, CEO & President [28]

--------------------------------------------------------------------------------

Yes. It's a good question actually. I thought you were going in a different direction. So most of our NAV -- I mean, I think you highlighted yesterday in your note, most of our NAV movement was spread-related as opposed to credit-related. Our debt portfolio continues to be very, very stable. Again, like the CLO -- because of the embedded leverage in CLO equity, obviously, they're very, very volatile in terms of moving around. So I don't know if it's changed our long-term goal of reducing these. They're obviously very illiquid positions, and there's not a ready market for a lot of these securities. So I think we're always looking to exit these at fair value. And so I'm not sure it's really changed our strategy per se. But obviously, we're focused on maximizing returns for shareholders. So if we don't get appropriate prices for these, then we'll continue to hold on to them for the foreseeable future. I mean the good news is most of these are out of the reinvestment period. So a lot of our -- just organically, the CLO portfolio is shrinking just due to principal paydowns. So just every quarter, there will be a reduction in our CLO book, just through natural paydowns. So if we do nothing, roll forward 6 to 12 months, that book will be substantially smaller. And then obviously, if we're able to pull -- if we're able to kind of get the OHAI transaction completed, obviously, they do not own structured products in their portfolio, so the percentage of structured products, if we get that transaction done, as a percentage of our book, goes way down.

--------------------------------------------------------------------------------

Ryan Patrick Lynch, Keefe, Bruyette, & Woods, Inc., Research Division - MD [29]

--------------------------------------------------------------------------------

Okay. That makes sense. And then moving over to the liability structure, you talked about optimizing that -- some of those -- the components of that. Can you just talk about maybe longer term, how do you guys envision and what your guys -- what would be the composition of your liability structure as far as -- I'm not sure if you guys are looking at credit facilities, unsecured debt. Just what do you think is sort of an optimized liability structure with the different pieces longer term?

--------------------------------------------------------------------------------

Edward Udall Gilpin, Portman Ridge Finance Corporation - CFO, Secretary & Treasurer [30]

--------------------------------------------------------------------------------

Yes. It's a good question. We -- obviously, we have a revolver now in fixed-rate debt, and we've been talking about what's the appropriate size of each as we move forward. I think -- I'm sure we'll have both still in the future. The question is whether -- what the balance will be on that. I think both -- the fixed-rate bond market right now is pretty attractive. But as we've said, I think on the revolver side, we can get better financing. So it depends on what the ultimate terms are and how flexible those structures are, but I think you'd probably see the mix shift more toward the revolver side than fixed, but we'll still have a component of fixed.

--------------------------------------------------------------------------------

Ryan Patrick Lynch, Keefe, Bruyette, & Woods, Inc., Research Division - MD [31]

--------------------------------------------------------------------------------

Okay. And then one last one for me. If I look at your new investments this quarter, some of the larger ones on your balance sheet, maybe PHI, Anthem, Syndigo, can you maybe just talk about -- obviously, you guys held a component on your balance sheet for Portman Ridge. Can you talk about, out of some of those investments, how much was held across the broader BC Partners' platform? And in some of those deals, how much did the BC Partners' platform hold as respect to the entire debt tranche of those deals?

--------------------------------------------------------------------------------

Patrick Schafer, Portman Ridge Finance Corporation - CIO [32]

--------------------------------------------------------------------------------

Yes. Good question, Ryan. This is Patrick. What I'd say -- without kind of giving the specific amount, what I'd say is the amounts that are held in Portman in each of those 3, in particular ones that you referenced, the Portman account is the smallest hold size of all those accounts -- or comparable hold size as other vehicles in our platform.

--------------------------------------------------------------------------------

Ryan Patrick Lynch, Keefe, Bruyette, & Woods, Inc., Research Division - MD [33]

--------------------------------------------------------------------------------

Okay. Now -- and then as far as BC Partners and Portman combined commitments, where are you guys as a percentage of those debt tranches? Are you just a participant? Are you leading any of these transactions? Or are they small club deals? Any color on that would be great.

--------------------------------------------------------------------------------

Edward Joseph Goldthorpe, Portman Ridge Finance Corporation - Chairman, CEO & President [34]

--------------------------------------------------------------------------------

Yes. So I think -- actually, I think those 3 deals kind of are pretty emblematic of what we're doing. So Syndigo is a sponsor-backed deal. It's a larger company, and we sourced that through our joint venture partner. So that one we worked very, very closely with our large strategic joint venture partner that we've talked about. The other 2 deals are nonsponsor. So Anthem, we led the deal. So we sourced it, we negotiated the whole deal, and we brought in some co-investors alongside of us. So we feel like we have control. And it's a very low-levered, high-returning deal that we think is really interesting. And then PHI is an interesting one because I think it levers off our broader expertise, again, nonsponsor. It's an exit financing that is backed by collateral that's multiple times what the loan outstanding is. And so we are the largest -- BC is the largest, I believe, are the largest holder in the group of lenders in the -- who owns it. So again, we drove the terms. We led the transaction, but there's other lenders alongside of us.

--------------------------------------------------------------------------------

Ryan Patrick Lynch, Keefe, Bruyette, & Woods, Inc., Research Division - MD [35]

--------------------------------------------------------------------------------

That's good color. And kind of on that point, one more, if I can. I know you guys said nonsponsored was going to be a component of the deals that you do as you saw some value there. Just rough ballpark, maybe this quarter and maybe since you've taken over, approximately what percentage of the deals have you done have been in the nonsponsored area?

--------------------------------------------------------------------------------

Edward Joseph Goldthorpe, Portman Ridge Finance Corporation - Chairman, CEO & President [36]

--------------------------------------------------------------------------------

Yes. So we're roughly looking to aim for about 50-50, and that strips out our joint ventures. The joint ventures are mostly sponsor. So the Great Lakes and F3C (sic) [FC3] are mostly sponsor-led deals, but those are in our joint ventures. Outside of that on the balance sheet, we're targeting kind of 50-50. The nonsponsor stuff we're doing is lower levered, higher yield but takes a long time, like the Anthem deal we've worked on for 12 months. We just closed another one in the last couple of weeks that we've been working on for 18 months. So these take a lot longer, but we think it's good for our shareholders. Like we're getting anywhere from 50 bps to 300 bps of additional return. And we're getting full covenants, we're getting multiple covenants on most of these deals, like Anthem's got a number of different covenants in it. So -- and we lead it. We control it. And so we feel like it's a good risk/reward for our shareholders.

--------------------------------------------------------------------------------

Operator [37]

--------------------------------------------------------------------------------

Our next question comes from Jason Stan (sic) [Stankowski] of Clayton.

--------------------------------------------------------------------------------

Jason Gordon Stankowski, Clayton Partners LLC - Partner and Portfolio Manager [38]

--------------------------------------------------------------------------------

A lot of my questions have been asked. Can you talk to the stability of the dividend? And where you guys -- you obviously recast the dividend, and you've been talking about reducing financing costs, and it looks like you earned the dividend in the quarter. Do you feel like this is a pretty solid base? Or are there onetime things in the quarter that allowed you to earn this and you kind of need to fine-tune things just to get back to that, just to stay at that level? Or is there a possibility as you optimize that you'll be kind of over-earning the dividend? Just thoughts on sort of where -- how conservative do you think the reset was and what we might look forward to in the future?

--------------------------------------------------------------------------------

Edward Joseph Goldthorpe, Portman Ridge Finance Corporation - Chairman, CEO & President [39]

--------------------------------------------------------------------------------

Yes. So I'll start it off, and then the guys can kick in. I mean, the quality of the NII this quarter is much higher than what it's been previously, and we expect there's some tailwinds to our earnings. So number one is we're booking assets at higher spreads, as you've seen. And that was -- a lot of that was done throughout the quarter, so you're going to see that benefit coming into our earnings. Number two is our F3C (sic) [FC3] joint venture, we recognize income as it comes in. And just largely due to timing issues, it was kind of a little bit of a slower quarter in the third quarter, so fourth quarter should normalize. And then our Great Lakes joint venture is still ramping. So that, again, is almost fully invested now, so you'll get some benefit from that. If we're able to refinance our debt, which we feel very, very good about, preliminarily, it looks like we're going to have some interest savings there as well. So you throw all those things into a blender, and as long as we don't have any surprise nonaccruals, which we -- sitting here today, we have not, we think the quality of earnings is high, and we think the dividend is very sustainable.

--------------------------------------------------------------------------------

Edward Udall Gilpin, Portman Ridge Finance Corporation - CFO, Secretary & Treasurer [40]

--------------------------------------------------------------------------------

And of course, if the OHAI transaction goes through, we'll also be able to spread our expenses over a larger asset base, which will also help NII as well.

--------------------------------------------------------------------------------

Jason Gordon Stankowski, Clayton Partners LLC - Partner and Portfolio Manager [41]

--------------------------------------------------------------------------------

Great. Great. That's good to hear. And I didn't catch it at the very beginning, you were talking about the OHAI transaction. Did you mention when the vote was for them? We don't have to vote, right? It's just them. And is that (inaudible) ...

--------------------------------------------------------------------------------

Edward Udall Gilpin, Portman Ridge Finance Corporation - CFO, Secretary & Treasurer [42]

--------------------------------------------------------------------------------

It's their shareholder -- share -- the proxy is out. They have their meeting scheduled for December 12. So it's their shareholders that have to vote. Portman's do not need to.

--------------------------------------------------------------------------------

Jason Gordon Stankowski, Clayton Partners LLC - Partner and Portfolio Manager [43]

--------------------------------------------------------------------------------

You said -- but you're ready to go? If you get the green light, you can still close it by year-end?

--------------------------------------------------------------------------------

Edward Udall Gilpin, Portman Ridge Finance Corporation - CFO, Secretary & Treasurer [44]

--------------------------------------------------------------------------------

Yes. The goal would be if they get the vote in December at the time of their meeting, then we'll be set up to try to close it in -- by year-end.

--------------------------------------------------------------------------------

Operator [45]

--------------------------------------------------------------------------------

Our next question comes from Steve Martin of Slater.

--------------------------------------------------------------------------------

Steven L. Martin, Slater Capital Management, L.L.C. - Manager [46]

--------------------------------------------------------------------------------

A number of my questions have been answered as well. You talked about some of the new investments you've made. Can you talk about the industries they're in? And are there industries you're also avoiding?

--------------------------------------------------------------------------------

Edward Joseph Goldthorpe, Portman Ridge Finance Corporation - Chairman, CEO & President [47]

--------------------------------------------------------------------------------

Yes. I mean, we tended to skew towards recession-resilient industries. So we have a pretty heavy weighting, if you go through, to health care, to tech -- like when I say tech, I mean, low-tech tech. We're not doing venture lending -- media. We have not originated or done anything in mining, energy or any other, what I'd call, like cyclical sectors, aircraft. So I think it's pretty broad-based industry verticals. And we're not doing like heavily cyclical industries like steel or auto. We've no auto, we have no energy, we've no mining.

--------------------------------------------------------------------------------

Steven L. Martin, Slater Capital Management, L.L.C. - Manager [48]

--------------------------------------------------------------------------------

Okay. You talked about the CLO pool and how it will start running off. Is there some sort of duration? Is there -- are there some metrics you can provide for us as to how long it will run off -- the period it will run off over? Or when we'll see the bulk of it? Or I don't know what -- how you can answer that.

--------------------------------------------------------------------------------

Edward Udall Gilpin, Portman Ridge Finance Corporation - CFO, Secretary & Treasurer [49]

--------------------------------------------------------------------------------

Yes. I mean I think the -- sort of the old rule was once it passed its reinvestment period, it sort of rolled off about 20% -- paid down about 20% per year. But then when it reaches some critical mass, then the equity votes to call the deal. So typically, that would be -- depending on what other interest rates are at the time or what cash flows would be, that's either faster or slower, but it typically takes 3 or 4 years to wind it down to that call date.

--------------------------------------------------------------------------------

Patrick Schafer, Portman Ridge Finance Corporation - CIO [50]

--------------------------------------------------------------------------------

And that's a caveat that, assuming there's no reset or repricings or anything like that, that would extend the duration, but allow us the opportunity potentially to exit at that time.

--------------------------------------------------------------------------------

Steven L. Martin, Slater Capital Management, L.L.C. - Manager [51]

--------------------------------------------------------------------------------

Okay. Can you talk about your obligation to buy shares related to the OHAI transaction?

--------------------------------------------------------------------------------

Edward Joseph Goldthorpe, Portman Ridge Finance Corporation - Chairman, CEO & President [52]

--------------------------------------------------------------------------------

I mean the obligation we have to buy stock through our incentive fees remains intact. And we also have the potential buyback that we put in that transaction.

--------------------------------------------------------------------------------

Patrick Schafer, Portman Ridge Finance Corporation - CIO [53]

--------------------------------------------------------------------------------

Right. And the way it's set up is after a year post-closing, to the extent the stock still trades below a certain -- or I guess, above a certain discount to NAV, then we would -- then we would engage in share repurchases.

--------------------------------------------------------------------------------

Edward Joseph Goldthorpe, Portman Ridge Finance Corporation - Chairman, CEO & President [54]

--------------------------------------------------------------------------------

Our balance sheet and share repurchases -- obviously, we obviously believe in the marks in our portfolio, and we feel really, really good about our book. So buying back stock is obviously incredibly accretive, but the flip side of it is it reduces float and fixed costs get spread amongst a smaller base. So I think it's a balance. We -- the volume in our stock is already not great. So it's something we always have to think about in balance.

--------------------------------------------------------------------------------

Steven L. Martin, Slater Capital Management, L.L.C. - Manager [55]

--------------------------------------------------------------------------------

However, at this massive discount, if you really are comfortable with your marks, it would behoove -- to a certain level, it would behoove you to repurchase shares.

--------------------------------------------------------------------------------

Edward Joseph Goldthorpe, Portman Ridge Finance Corporation - Chairman, CEO & President [56]

--------------------------------------------------------------------------------

Potentially. Yes, I mean, it's something that we always are thinking about and talking to our Board about, for sure.

--------------------------------------------------------------------------------

Operator [57]

--------------------------------------------------------------------------------

There are no further questions. I'd like to turn the call back over to Ted Goldthorpe for any closing remarks.

--------------------------------------------------------------------------------

Edward Joseph Goldthorpe, Portman Ridge Finance Corporation - Chairman, CEO & President [58]

--------------------------------------------------------------------------------

Thank you very much for all the questions and for all your support, and we look forward to speaking to you again next quarter. Thanks.

--------------------------------------------------------------------------------

Operator [59]

--------------------------------------------------------------------------------

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