Portman Ridge's 2025 Q3 Earnings Call: Contradictions Emerge on PIK Reduction, Originations Strategy, Credit Resolutions, and Dividend Policy

Date of Call: November 7, 2025

Financials Results

• Revenue: $18.9M investment income for Q3 2025, up $6.3M from $12.6M in Q2 2025
• EPS: $0.71 per share (net investment income) for Q3 2025, up from $0.50 in Q2 2025

Guidance:

• Board approved a Q4 2025 base distribution of $0.47 per share.
• Announced a modified Dutch auction tender (~$9M) plus ongoing daily repurchases and insider purchases targeting ~10% of closing shares by year-end.
• Expect continued disciplined capital allocation: prioritize high-quality, selective originations and opportunistic buybacks when accretive.
• Proactively extended/layered unsecured debt (issued $75M 7.75% due Oct 2030 and $35M 7.5% due Oct 2028) and initiating redemption of 4.875% notes due Apr 2026.

Business Commentary:

• Stock Repurchase and Shareholder Value:
• Portman Ridge Finance Corporation announced a modified Dutch auction tender for approximately $9 million, combined with daily share repurchases, to potentially repurchase 10% of its outstanding stock by year-end.

• This action aims to drive shareholder value and reduce the discount to NAV.

• Strong Earnings and Investment Income:

• The company reported net investment income of $8.8 million or $0.71 per share for Q3, up from $4.6 million or $0.50 per share in the previous quarter.

• The increase was attributed to the Logan Ridge acquisition and expanded scale.

  

• Nonaccrual Investments and Portfolio Quality:

• The investment portfolio ended Q3 with 10 investments on nonaccrual status, representing 3.8% of the portfolio at fair value, up from 2.1% in the prior quarter.

• The increase was due to additions from the Logan Ridge transaction and certain portfolio ratings, but Patrick Schafer highlighted that two investments continue to recognize interest income on a cash basis.

• M&A and Market Activity:

• M&A activity increased during the quarter with over 80% of new fundings coming from new borrowers, reflecting easing benchmark rates and a more settled tariff framework.

• Competition intensified, leading to tighter spreads, but the company maintains focus on companies with less than $50 million of EBITDA and nonsponsor-backed companies.

• Capital Allocation and Leverage:

• The company's gross and net leverage ratios improved to 1.4x and 1.3x, respectively, from 1.6x and 1.4x in the prior quarter.
• This improvement reflects the proactively extended and laddered debt maturities, aiming to reduce near-term refinancing risk and enhance financial flexibility.
  

  Sentiment Analysis:

  Overall Tone: Positive

  • Management called Q3 "strong results" as first combined quarter, emphasized expanded scale, diversification and value-creation actions (buybacks) and said the company is "well positioned to drive continued earnings growth and long-term value creation."

Q&A:

• Question from Erik Zwick (Lucid Capital Markets, LLC): Is the announced ~10% repurchase target relative to the 9.30M outstanding balance or ~13.96M?
  Response: Buyback target is ~10% of the transaction-closing shares (about ~13.2M), not the Sept 30 figure; daily post-quarter repurchases of ~$1.2M have already occurred.

• Question from Erik Zwick (Lucid Capital Markets, LLC): Was the quarter-over-quarter improvement in internal ratings mainly from the merger or from upgrades within the combined portfolio?
  Response: Both, but primarily driven by assets added through the Logan Ridge transaction rather than broad portfolio upgrades.

• Question from Erik Zwick (Lucid Capital Markets, LLC): What's your strategy/methodology for resolving the 10 nonaccruals—restructurings, sales, near-term resolutions?
  Response: Case-by-case approach: one in active restructuring (likely Q4/Q1 resolution), one marketed for sale, and 2–3 others targeted for near-term resolution via restructuring, sale or selective additional capital.

• Question from Erik Zwick (Lucid Capital Markets, LLC): Was all purchase-accounting accretion recorded in 3Q and what remains/when will it be recognized?
  Response: About just north of $21M was recorded initially; roughly $18M remains and will be recognized over the life/maturities of underlying assets, with most accretion front-loaded in the quarters after closing.

• Question from Steven Martin (Slater Capital Management LLC): How will the buyback affect your ability to continue doing deals and what does Q4 activity look like?
  Response: Buybacks are accretive versus current stock price and won't prevent deals; firm has a large pipeline but will be selective—prioritizing deals where credit and pricing align.

• Question from Steven Martin (Slater Capital Management LLC): Are you investing in your own stock at current market prices?
  Response: Yes; board runs quarterly math versus new investments — buybacks often provide a guaranteed, shareholder-friendly return versus deploying capital into new deals.

• Question from Steven Martin (Slater Capital Management LLC): Any further realizations in legacy Logan Ridge equity exposure—is it still a lot of equity?
  Response: Not the majority; rough estimate is ~$20M of equity (perhaps one-third to one-half of that legacy piece), but management needs to run the precise numbers.

• Question from Steven Martin (Slater Capital Management LLC): Did purchase accounting drive the jump in weighted average yield on debt investments from 10.7% to 13.8%?
  Response: Yes — core yield is ~10.3%; the higher 13.8% figure reflects purchase-accounting accretion from the acquisition.

• Question from Steven Martin (Slater Capital Management LLC): What happened with PIK this quarter?
  Response: PIK declined materially as a percentage of income to ~14.3% from ~19.5% last quarter; management is actively reducing PIK exposure and favoring cash-paying investments.

• Question from Steven Martin (Slater Capital Management LLC): Are elevated overhead/professional fees from merger-related costs or is this the ongoing run rate?
  Response: Much of transaction costs hit NAV at close; elevated integration/professional fees affected Q3 but combined company run-rate is estimated around $1.8–$1.9M and some residual professional fees remain.

Contradiction Point 1

PIK Exposure Reduction

It involves the company's strategy and efforts to reduce PIK exposure, which is crucial for financial stability and risk management.

What is the status of PIK in the portfolio? - Steven L. Martin (Slater Capital Management LLC)

2025Q3: PIK as a percentage of the book has decreased to about 14.3%. Efforts are being made to reduce PIK exposure by focusing on cash flow opportunities and optimizing investments. - Brandon Satoren(CFO), Patrick Schafer(CIO)

How does the resolution trajectory look for opportunities to restructure or resolve nonaccrual loans and potentially return them to accrual status or sell them? - Erik Zwick (Lucid Capital Markets, LLC)

2025Q2: The PIK is down a little bit, let's call it, like a little over 10%... As we look forward here, I think there will probably be a little bit of a continued moderation over the course of the next year. - Edward Goldthorpe(CEO)

Contradiction Point 2

Strategic Focus on Originations

It pertains to the company's strategic focus on origination activities, which directly impacts revenue growth and market positioning.

How will the buyback impact the ability to pursue deals, and what is expected for Q4 activity? - Steven Martin (Slater Capital Management LLC)

2025Q3: The buyback will not significantly impact deal activity as the board prioritizes accretive capital allocation. There is a massive pipeline, including premium-priced opportunities, which should continue to drive value for shareholders. - Edward Goldthorpe(CEO), Patrick Schafer(CIO)

Can you confirm that the 60-day period post-closing allows buybacks to resume around mid-September? - Erik Edward Zwick (Lucid Capital Markets, LLC)

2025Q2: When you do a merger process, there's a period of time we have to wait like a cooling off period till -- to like the dust settles kind of thing... And that takes you right towards the end of the third quarter. And then at that time, you're running into things like blackouts and stuff. - Edward Goldthorpe(CEO)

Contradiction Point 3

Nonaccrual Credit Resolution

It involves the company's approach to resolving credits on nonaccrual status, impacting the overall financial health and risk management.

Can you discuss your strategy for resolving the 10 nonaccrual credits? - Erik Zwick (Lucid Capital Markets, LLC)

2025Q3: Each credit on nonaccrual status is unique, with some in restructuring or sales processes. Two are expected to be resolved in Q4, and others are being optimized for the best return. - Patrick Schafer(CIO), Edward Goldthorpe(CEO)

Can you provide pro forma NAV as of the transaction close date or end of July? - Erik Edward Zwick (Lucid Capital Markets, LLC)

2025Q2: I'd say I'd say maybe, let's call it, like flat to fault you positive in the sense of... there has been sort of a, I'd call it, a partial restructuring... So kind of we continue to leave it on nonaccrual, but we are recognizing the cash interest that we received on the loan however, kind of given all the puts and takes, we still struggle, kind of getting to a full par recovery... I do think there are probably a couple of the smaller names on there that are just going to take kind of a very long time to work through. - Edward Goldthorpe(CEO)

Contradiction Point 4

Dividend Policy and Supplementary Dividend

It involves changes in the company's dividend policy and supplementary dividend distribution, which are crucial for investor expectations.

Is the 10% share repurchase based on closing transaction shares, and is it based on the 9.3 million outstanding balance of approximately 13.96 million shares? - Erik Zwick (Lucid Capital Markets, LLC)

2025Q3: The board of directors has authorized a 10% share repurchase, which will begin in the fourth quarter and continue through the first quarter of 2026. - Patrick Schafer(CIO)

Is the supplemental dividend $0.07 per quarter? - Christopher Nolan (Ladenburg Thalmann & Co. Inc., Research Division)

2025Q1: The dividend policy is to pay approximately 50% of the incremental NII above the base each quarter. - Brandon Satoren(CFO)

Contradiction Point 5

Dividend Policy

It involves a contradiction in the explanation of the dividend policy, which is crucial for investors understanding the company's financial strategy.

Can you explain the dividend policy and the basis for the base distribution? - Unidentified Analyst (Lucid Capital Markets)

2025Q3: We've been resistant to change, but most BDCs are adopting this base plus supplemental model. - Ted Goldthorpe(CEO)

Can you explain your dividend policy and how you determined the base distribution? - Evan Slater (Slater Capital Management)

2024Q4: We've been resistant to change, but most BDCs are adopting this base plus supplemental model. - Ted Goldthorpe(CEO)