Portman Ridge Finance Corporation (NASDAQ:PTMN) Q2 2023 Earnings Call Transcript

Portman Ridge Finance Corporation (NASDAQ:PTMN) Q2 2023 Earnings Call Transcript August 10, 2023

Operator: Welcome to Portman Ridge Finance Corporation’s Second Quarter 2023 Earnings Conference Call. An earnings press release was distributed yesterday, August 9, 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; Jason Roos, 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.

Ted Goldthorpe: Good morning, and thanks, everyone, for joining our second quarter 2023 earnings call. I’m joined today by our Chief Financial Officer, Jason Roos; and our Chief Investment Officer, Patrick Schafer. I’ll provide brief highlights on the company’s performance and activities for the quarter. Patrick will provide commentary on our investment portfolio and our markets, and Jason will discuss our operating results and financial condition in greater detail. Yesterday, Portman Ridge announced its second quarter 2023 results and continuing off the back of strong earnings momentum seen in the first quarter of 2023, we are pleased to announce a solid financial performance for Portman Ridge in both the second quarter of 2023 and the first half of 2023 overall.

Our total investment income, core investment income and net investment income substantially increased as compared to the 3-month and 6-month period of last year, as we continue to see the impact of rising rates have had in generating incremental revenues from our debt portfolio. Our core investment income for the second quarter of 2023 was $19.2 million, an increase of $5.5 million as compared to $13.7 million for the second quarter of 2022. Our strong performance this past quarter has allowed us to maintain our dividend of $0.69 per share, marking a $0.06 per share distribution increase as compared to the third quarter of 2022. In terms of a market update, M&A and deal activity picked up during the second quarter, particularly in the back half and early third quarter, despite the continued macro overhang of elevated inflation rates and continued increases in the Fed funds rate.

While we continue to see lender-friendly concessions on pricing and terms, the competitive dynamics are stronger than we have seen in several quarters. We remain very selective regarding new portfolio companies given the broader macroeconomic environment, but have found particularly attractive opportunities for add-on investments in existing portfolio companies looking to complete compete tuck-in acquisitions. Turning the focus back to the company; we continue to believe in the valuation of Portman Ridge as we continued repurchasing shares under our renewed stock purchase program. In Q2 of 2023, we repurchased an incremental 27,801 shares following on the trend seen throughout 2022 and the first quarter of 2023. We expect this trend of repurchasing Portman shares to continue throughout 2023, as we were able to do so.

On this call, Patrick will also walk through the potential upside cases for our net asset value, but as it pertains to the current quarter performance, approximately 72% of our net losses in the investment portfolio were driven by our CLO equity positions. While this continues to be a challenging asset class given certain structural issues with the syndicated loan market, CLO equity represents less than 3% of our total assets. Approximately 74% of our portfolio is in first lien debt and is now valued at a meaningful discount to par. If experienced normalized defaults or even elevated default rates versus history, we believe there’s still embedded net asset value upside in our portfolio. Thus, this adds to our earnings momentum, driven by wider spreads on new origination and rising short-term interest rates to drive both potential NAV and earnings upside.

With that, I will turn the call over to Patrick Schafer, our Chief Investment Officer, for a review of our investment activity.

Patrick Schafer: Thanks, Ted. Turning to Slide 5 of our earnings presentation and the sensitivity of our earnings to interest rates. As of June 30, 2023, approximately 90.9% of our debt securities portfolio were either floating rate with the spread to an interest rate index such as LIBOR, SOFR or primary, with 69% of these being linked to SOFR. As you can see from the chart, the underlying benchmark rate of our assets during the quarter lagged the prevailing market rates and still remains meaningfully below the LIBOR and SOFR rates as of July 25, 2023. We expect this to normalize over time as the underlying 1-, 3- and 6-month contracts reset. For illustrative purposes, if all of our assets were to reset to either a 3-month LIBOR or SOFA rate, respectively, we would expect to generate an incremental $484,000 of quarterly income.

While our liability costs will also rise relative to their Q2 levels, we still expect a net positive benefit of approximately $0.04 per share, assuming all of our assets and liabilities are utilizing the same 3-month benchmark rate for an entire quarter, which is further illustrated on Slide 7. Skipping down to Slide 11; both investment activity and originations for the quarter were slightly higher than prior quarter, resulting in net repayment and sales of approximately $21.0 million. Net deployments consisted of new fundings of approximately $15.3 million, offset by approximately $36.3 million of repayments and sales. These new investments are expected to yield a spread to SOFR of 828 basis points on the par balance and the investments were purchased at a cost of approximately 98 65% of par, which will generate incremental income to the stated spread.

As mentioned during our earnings call, there is our expectation that Q2 would generate more repayments than deployments as we intentionally drew up a portion of our revolver in Q4 2022 to invest ahead of several repayments. In May, we repaid $23.6 million of our 2018 2 secured notes. I would like to specifically call out 2 payments paydowns during the quarter, both of which occurred relatively early on. First, we completed the recapitalization of Northeast Metal works, an asset acquired as part of the merger with Harvest Capital in April 2023. As part of the transaction, we will repaid approximately 1/3 of our position and restructured the remaining position to prioritize additional periodic repayments. Secondly, in mid-May, we refinanced out — we will refinance out of our second lien term loan position in TechTech [ph], which has been a portfolio company since the initial externalization transaction back in April 2019.

The — in addition, being one of our larger positions, it was by far our largest second lien position and allows us to further rotate into first lien senior secured loans. During the quarter, we funded $600,000 into our Great Lakes joint venture, which has taken us close to being fully funded under that commitment. Similar to our experience with new assets on the balance sheet, incremental investments in our Great Lakes joint venture have come at increasing spreads and widening OID, which should result in higher returns going forward. Our investment securities portfolio at the end of the first — at the end of the second quarter remained highly diversified with investments spread across 27 different industries and 104 different entities, all while maintaining an average par balance per entity of approximately $3.2 million.

Turning to Slide 12; we had 1 new issuer in 2 incremental portfolio company investments to a nonaccrual as compared to March 31, 2023. The one of which is a term loan for QualTek, which is valued at 53.82% of par and has recently emerged from bankruptcy from which we are looking to recover a portion of our initial investment. The second of which is a term loan for Lucky box, which is valued at 28.2% of par. In aggregate, investments on nonaccrual status remained relatively low at 7 investments in the second quarter of 2023 as compared to 5 investments on nonaccrual status as of March 31, 2023. These 7 investments on nonaccrual status at the end of the second quarter of 2023 represents 0.8% and 2.6% of the company’s portfolio at fair value and amortized cost, respectively.

On Slide 13, as Ted mentioned, if we focus on the top 3 rows of the table and exclude our nonaccrual investments, we have an aggregate debt securities fair value of $410.6 million, of which represents a blended price of 92.18% of par and is 88% comprised of first lien loans at par value. Assuming a par recovery, our June 31, 2023 fair values reflect a potential of $34.8 million of incremental NAV, a 16.2% increase or 3.5 or $3.65 per share, excluding any recovery on the nonaccrual investments. For luster purposes, if you were to assume a 10% default rate and 70% recovery on this debt portfolio, there would still be an incremental $2.25 per share of NAV value or a 10% increase over time as the portfolio matures and is repaid, again, excluding any recovery on the nonaccrual investments.

The default rate is above — this default rate is by anything market is expecting or has experienced historically. Turning finally to Slide 14; if you aggregate these 3 portfolios, over the last 5 years — 3 years, we have repurchased a combined $434.8 million of investments, have realized over 73% of these positions at a combined realized and unrealized mark of 102% of fair value at the time of closing the respective mergers. We were able to achieve these results despite the global pandemic in 2020 and most of 2021 and a weak market for almost all asset classes in 2022. In a similar vein as the previous slide; as of June 30, 2023, there remains an incremental $12.8 million of value as compared to par in these portfolios, which equates to $9.4 million or a 4.4% increase when applying a similar 10% default rate and 70% recovery analysis and excluding nonaccrual investments.

I’ll now turn the call over to Jason to further discuss our financial results for the period.

Jason Roos: Thanks, Patrick. As both Ted and Patrick previously mentioned, despite operating under a challenging economic environment, our results for second quarter of 2023 reflect strong financial performance. Our total investment income increased by $4.6 million to $19.6 million in the second quarter of 2023 in comparison to $15 million in the second quarter of 2022 as we continue to see the impact of rising rates on our portfolio. This reported total investment income represents a $700,000 decrease from the $20.3 million of reported total investment income in the first quarter of 2023. The quarter-over-quarter decrease was largely due to reduced payment in kind income seen in the second quarter when compared to the first quarter of 2023, as well as lower paydown income and lower purchase accretion as the discount associated with investments acquired through mergers and acquisitions continues to run off.

Excluding the impact of purchase price accounting, our core investment income for the second quarter of 2023 was $19.2 million, an increase of $5.5 million as compared to $13.7 million for the second quarter of 2022 and a decrease of $100,000 as compared to $19.3 million for the first quarter of 2023. Our net investment income for the second quarter of 2023 was $7.9 million, an increase of $2.4 million as compared to $5.5 million for the second quarter of 2022 and a decrease of $600,000 as compared to $8.5 million for the first quarter of 2023. The quarter-over-quarter decrease was largely due to the aforementioned decreases seen in payment in kind income, pay down income and purchase discount accretion. For the 6 months ended June 30, 2023, our NII was $16.4 million, an increase of $3 million as compared to $13.4 million in the same 6-month period from 2022.

As of June 30, 2023, and March 31, 2023, the weighted average contractual interest rate on our interest-earning debt securities was approximately 12.1% and 11.7%, respectively. We believe the portfolio continues to be well positioned in a rising rate environment to generate incremental revenue in future quarters. Total expenses were relatively flat quarter-over-quarter at $11.7 million for the second quarter of 2023 as compared to total expenses of $11.8 million seen in the first quarter of 2023. This quarter-over-quarter decrease highlights our efforts to continuing to reduce overall expenses in certain areas such as administrative services, professional fees and other general and administrative costs. Our net asset value for the second quarter of 2023 was $215 million or $22.54 per share as compared to $225.1 million or $23.56 per share in the first quarter of 2023.

A significant driver of the quarter-over-quarter decline is attributable to realized losses from impairment taken against our CLO equity positions as well as markdowns on that portfolio. On the liability side of the balance sheet as of June 30, 2023, we had a total of $333.7 million par value of borrowings outstanding, comprised of $78 million in borrowings under our revolving credit facility, $108 million of 4 7/8% notes due 2026 and $147.7 million in secured notes due 2029. This balance represents a quarter-over-quarter decrease of $24.6 million, driven by a $23.6 million repayment on the secured notes due 2029. As of the end of the quarter, we had $37 million of available borrowing capacity under the senior secured revolving credit facility and no remaining borrowing capacity under [indiscernible] revolving credit facility as the reinvestment period ended shortly after our draw on November 20, 2022.

As of June 30, 2023, our debt-to-equity ratio was 1.6x on a gross basis and 1.4x on a net basis. From a regulatory perspective, our asset coverage ratio at quarter end was 163%. Lastly and as announced yesterday, a quarterly distribution of $0.69 per share was approved by the Board and declared payable on August 31, 2023, to stockholders of record at the close of business on August 22, 2023. This is a $0.06 per share distribution increase as compared to the third quarter of 2022. Including in including the distribution subsequent to the announcement of full year 2022 earnings results, total stockholder distributions for 2023 amounted $2.06 per share. With that, I will turn the call back over to Ted.

Ted Goldthorpe: Thank you, Jason. Ahead of questions, I’d like to reemphasize that we believe we are well positioned to take advantage of opportunities that arise from the current market environment by continuing to be selective and resourceful in our investment decision-making. Overall, we believe we remain situated to continue to deliver attractive returns to our shareholders throughout the second half of 2023 as we have demonstrated in the first half of 2023. Thank you once again to all our shareholders for your ongoing support. This concludes our prepared remarks, and I’ll now turn the call over to the operator for any questions.

Q&A Session

Operator: Thank you. The floor is now open for your questions. [Operator Instructions] Your first question comes from Christopher Nolan with Ladenburg Tallman.

Christopher Nolan: Did the share repurchases have any accretion to NAV per share? And if so, can you quantify it?

Jason Roos: Yes. We bought about, what, $500,000, about $500,000 worth of equity in the quarter. I think if you look at it 6 months to date, I think it’s about $0.37 in NAV, roughly [ph].

Christopher Nolan: Also, were there any nonrecurring items in EPS?

Jason Roos: Yes, I would say on the expense side, there’s probably about — well, I know there is there’s about $100,000 of nonrecurring or onetime legal expense and the professional expenses. Other than that, our other income fees are generally kind of onetime in nature, but do you have a recurring effect quarter-over-quarter, it’s generally pretty somewhat volatile, but there is always some fee income that we see in that line. I would say it trended up this quarter from last quarter due to some onetime items in there about $300, $400,000, roughly.

Christopher Nolan: Great. And then, I guess, finally, for — I’m seeing for the BDC as I cover incremental asset quality deterioration, strategically, do you see the developing environment to be conducive to more consolidation in the BDC space?

Ted Goldthorpe: That’s not what I thought you’re going with that question. I would say, I think a lot of the low-hanging fruit has been picked, I think, in terms of M&A. But again, scale is becoming more and more and more important across broad credit. And then you’re seeing like both in terms of getting financing from banks, which is becoming more scarce and also in servicing our clients appropriately. So scale is definitely important. I don’t see any near-term M&A, but it is a good question. It’s something we’re always looking for. And obviously, we always get phone calls on M&A opportunities.

Christopher Nolan: Thank you.

Operator: Our next question comes from Ryan Lynch with KBW.

Ryan Lynch: First is just a clarification. Did you say 72% of the realized losses, which was kind of reflecting the $6 million to $7 million of losses was related to the CLO positions? Or was that 72% of realized and unrealized losses?

Jason Roos: Yes, Ryan. So of the $6.7 million realized, about $5.6 million of that was related to the CLOs.

Ryan Lynch: Okay. And then, so a couple of questions on that then. So what drove the decline in, I guess, CLOs that like because that wasn’t offset by realized gain or unrealized gains. I guess when you sold those, what kind of drove the lower valuations in your CLO book? Because it didn’t seem like broadly syndicated loan prices really moved lower in the quarter. In fact, they were up [ph].

Jason Roos: Yes, let me clarify that a little bit, Ryan. So the CLOs did have about $900,000 in unrealized that flipped into realized as part of that $5.6 million that I just mentioned. And the remainder of that — well, all of the $5.6 million was flipped into realized as part of an impairment. So we reduced the cost basis of the instrument. It wasn’t a sale — the positions, and that’s driven by the — basically the accounting and the fair value based on the future cash flow expectations of that CLO equity. I’ll pass it to Patrick.

Patrick Schafer: Yes. Having said all that, there is still a — again, despite whether you consider it unrealized whether we took as an impairment versus remains unrealized. There were some, I’ll call it, fair value declines in the CLO portfolio. And by and large, to your point, the syndicated market hasn’t moved very much. But what we’ve seen, honestly, this quarter for the first time in a while, and we can talk about the reasons why. But a lot of the CLO managers themselves are actually selling some of the assets within the portfolio, sometimes to meet certain tests sometimes for other reasons, but given that most of our CLO the seal of vehicles that we’re invested in are out of the reinvestment period, if you sell an asset at 90%, that’s just a — that’s just a hit relative to NAV.

And so what we saw, particularly — again, it’s across a number of the — we have, I guess, 3 different managers in total between our CLOs. And by and large, the majority of the, call it, markdown or decline in fair value is from the managers themselves selling assets at below par.

Ted Goldthorpe: Yes. So Ryan, thematically, what’s happening, which obviously is incredibly frustrating is the way CLOs are set up, obviously, they manage to test. And you’ve obviously had ratings migration down or things on downgrade watch. And so as Patrick said, a lot of it is portfolio repositioning around downgrades. And obviously, that hurts the valuation of the CLO equity. So I mean, I guess the only silver lining is it’s only 2.5% of our remaining portfolio.

Ryan Lynch: Yes. Okay, makes sense. And then, I guess, on the other portion then, so that kind of covers, I think a lot of the realized losses, but there were still some unrealized losses in the quarter as well as some realized that was outside of the CLOs. What drove those declines? I know there were — I think you said 2 new nonaccruals. I haven’t been able to calculate Were those driven by markdowns in the 2 new nonaccruals? Or what was kind of the overriding factors for the other write-downs in the portfolio?

Patrick Schafer: Yes. I think it’s by a little bit from the nonaccruals, but I did the bigger impact, probably about half of, call it, the non-CLO impact is from one position, it’s called Mobax [ph], it’s a mark-to-market decline. We continue to work with the company and the lender group — and we feel pretty decent that markdown quarter-over-quarter is really just temporary, and we would anticipate that sort of reversing itself in the kind of near to medium term. So that’s kind of about half of the market is really just what we have very much characterized mark-to-market. And probably most of the rest of the other half is due to 2 other positions. One is called Anthem Sports Entertainment. It’s just a large position, and we mark it down 2 or 3 points sort of kind of consistent, it’s consistent with sort of mark-to-market.

Again, it’s not a significant markdown on a percentage basis, but it’s a relatively large position, so it has kind of an outsized dollar impact. And then, the third one is HDC or Hostway Company has been underperforming a little bit. They are in the process of selling a number of assets, various different assets within the company that we’d expect to realize a decent chunk of that loan in the kind of near to medium term and the remainder of it will kind of continue on. So again, I think we feel relatively good that most of that markdown is temporary or call it, mark-to-market is supposed to credit necessarily.

Ted Goldthorpe: Yes. And then one of the — on the nonaccrual side, it is 2 new securities, but it’s only one new issuer. And one of those issuers is expected to merchant bankruptcy or it’s emerged for bankruptcy. So that will also — the nonaccrual line should also be stable to positive — barring some surprises. So I’d say thematically, credit quality in the portfolio despite Patrick’s comments is pretty stable actually. And again, we don’t expect a big spike in nonaccruals going forward.

Ryan Lynch: Okay. What kind of on that point and when you’re talking about kind of Hostway and then the potential recovery for there, you guys talked about some potential upside to NAV if some of your senior loans that aren’t on nonaccrual status today are kind of recovered or you even ran through a scenario where there was a percentage of the falls in certain recoveries. I guess when — I mean what do you think changes in the environment before those start getting written up? Or is it just a very slow sort of accretion? Like if everything — those companies continue to perform kind of lay that down as the foundation. Is it just going to be, do you think, a slow accretion over time as they get closer to maturity and repay, which could obviously take years?

Or does something have to happen in broader in the market regarding spreads or something like that? Or what is sort of the — what do you see as the potential catalyst or time frame to eventually recover those potential write-downs?

Ted Goldthorpe: Yes. So I think — we think there’s a lot of embedded upside in the book because of this mark-to-market phenomenon. And the way our matrix works in terms of markdowns, there’s a bit of a lag. So obviously, today, as we sit here today, obviously, the loan and high-yield market have tightened recently. So — some of that should — will just be mark-to-market based on indices. And then the number two is, obviously, a lot of its driven by activity levels. So activity levels have been really, really muted this year, like repayments are really low. But we are seeing pickup in M&A and a pickup in activity levels. And so some of it is just these companies get sold. There’s a huge pull to par effect. I mean one thing that’s affecting us is, generally speaking, is some companies are doing these small incrementals.

And the small incrementals are pricing wide to where the existing debt stacks are. So even though there’s no credit issue, it reprices not only the first lien, but it reprices the second lien preferred, it repays the whole capital structure. And so when companies go out do these smaller add-ons, that also could have a pretty big impact on mark-to-market even though there’s no credit issue. So we’ve seen that in a couple of names where we’re marked at a pretty big discount to par, but there’s no credit issue, it’s generating really good yields. So I mean, the answer to your question is a mixture of all of them like, a, there’s a pull to par effects for maturities. And we don’t have a lot of like long-term maturities given their loans. Number two is tightening of the market, which we’ve seen a little bit of that happened over the last couple of months.

And number three is they’re correlated because if the market starts tightening, people can obviously get things done easier and therefore, activity level should pick up M&A-wise. And there you get some pops on valuations when things get taken out.

Ryan Lynch: Yes. Okay, I understand. I know we’re obviously talking about the future, which is incredibly hard, but nobody can predict, but I appreciate the comment on that. One other last question that actually just came out as I was kind of thinking about your previous comments on the CLO. So I want to circle back to the discussion on the CLOs and the write-downs. I know it’s a very small percentage of your portfolio at this point, especially with the most recent markdowns. But the sort of trend that happened in the second quarter of maybe having to move some stuff around because of maybe some downgrades or things like that and having to sell at losses. Is there any reason to expect that, that would stop in the third quarter? Or is there another risk potential for continued write-downs? And again, I know it’s a smaller portfolio, but could we continue to see that in the third quarter write-downs from the CLOs?

Ted Goldthorpe: Yes, it’s a good question. I mean, the answer — the short answer to your question is like, I don’t know, like it feels like a lot of that repositioning was done in the first half of the year. And obviously, people are feeling much, much better about the economy and all that. So there’s been way less ratings movements recently, but obviously, ratings are a lagging indicator. So I don’t have a great answer for your question. We think we’re marked very conservatively on those. And obviously, we took a big write-down this quarter. But it’s hard to — to be honest, it’s hard to know because we’re not the manager of those couple of securities, right? So, like I don’t want to like say something that turns out to be wrong because we just don’t know.

Ryan Lynch: That’s sure. That’s totally fair. Okay, that’s all for me. I appreciate the time today.

Ted Goldthorpe: Thank you so much.

Operator: Next question comes from Steven Martin with Slater.

Steven Martin: A couple of my questions have been asked and answered. Of your portfolio, the public — the debt, the senior portion of your portfolio, how would — what would you bet the average mark is?

Patrick Schafer: Yes. I mean it’s somewhere in — I’d say the total is probably representative of the senior portfolio, which is somewhere in the low $0.90s, $0.91 to $0.93 of par give or take. I think our portfolio as a whole is 91 spot 6 or 917. I don’t think the — I think the senior loan versus the second lien is significantly different. Again, senior loans make up 75% of the total portfolio in — high 80% of the debt portfolio. So you could probably think of that as a pretty comparable number like in terms of representing the first lien portfolio as a whole.

Steven Martin: So that’s why you say that there is a lot of accretion opportunity or NAV recovery in the senior portion of the portfolio.

Patrick Schafer: Correctly, in the portfolio as a whole, obviously, it’s significantly weighted towards senior and that’s how I think we called that out specifically because as we’re thinking about default rates and recovery rates, obviously, recovery rates would be much higher in senior positions as opposed to junior positions.

Steven Martin: Okay. The nonperforming, you had the chart which I love of the acquisitions you’ve done and how those portfolios have realized and unrealized. Of the nonperformings, how many of them are BC partner BC originated versus sort of old purchase portfolio position?

Patrick Schafer: Yes. So answer is only one is a BC-originated asset and the rest of them, the remaining, I guess, we’re talking about 6 issuers or 6 portfolio companies so the remaining 5 are various different kind of legacy, call it, positions or at a minimum, we’re in the book before we took over, and that would include going all the way back to the KCAP externalization — we call it 5 of 6 borrowers are, again, between KCAP and these acquisitions are — we’ll call it legacy. We don’t like to use that word, but call it legacy.

Steven Martin: Okay. And when you underwrote those acquisitions, are these surprises? And are these bad outcomes versus what you underwrote? Or is this where you had already — it was part of your purchase accounting?

Patrick Schafer: Yes, good question. Honestly, I would need to look at them all individually. I do think a decent amount of the 6. My hunch is — so of the 6 — again, let’s just go back of the 6, 2 are — again, they’re like kind of, I’ll call them, like not real accruals there. One is $75,000 note that we converted an equity position to a senior note. It was never on accrual in the first place. It would never had any fair value. So that really — again, in my perspective, that’s not really a credit issue whatsoever. So that drops you down to, call it, 5 portfolio companies. One is a $500,000 remaining of a position from the original KCAP that was already marked 50-something since when we took over, it was on nonaccrual, and we took it over.

There’s a very small piece that we’ve been waiting to get sort of flushed out of a state bankruptcy process. It’s been in this process for, I don’t know, like 4 years or so. So that brings you down to 4. One of them is a BC portfolio company. That brings you down to 3. And I think 2 of the remaining 3 were on nonaccrual at the time. We took it over. So maybe call it one was a surprise versus the 5 that we sort of took over in terms of our underwriting.

Steven Martin: Okay. Ted, what is the prospect and you’ve talked about the third quarter a little. We’re only halfway through. What’s the prospect for deployment versus repayment in the third quarter?

Ted Goldthorpe: I would say we continue to see good opportunities to deploy, although the market is getting a little — like literally in a very, very — like over the last like 3 weeks, the market has gotten tighter for the first time in probably 4 quarters. And then repayments continue to be muted. Like I would say, we’re getting some one-off payments, but I would say repayment activity, we haven’t seen a big pickup as compared to average.

Patrick Schafer: I think the only additional thing I would add to Ted’s comment is we did — like the [indiscernible] repayment was in sort of the middle of May, which was a relatively chunky position. It was almost $13 million. So as we kind of think about deployment, that cash is sort of in the system waiting to be deployed and just the way that our market works, the private deals tend to have a bit of a lead time. So you could expect even all else being equal, that $12 million to be sort of redeployed into various different investments that perhaps were not on the books as of June 30.

Ted Goldthorpe: Yes. Then I mean not to state the obvious, [indiscernible] was a second lien. And so we can recycle that into comparably yielding first liens and you obviously get better advance rates. So it’s an ROE-accretive payoff, let’s put it that way.

Steven Martin: Right. But would you expect — if repayments are muted, would you expect to deploy $10 million this quarter, $20 million, $30 million. Is there some sort of guesstimate you have?

Patrick Schafer: I’d say probably more in the 10% to 20% range is not — probably not the 30 range, but I’d say more in the — again, just pure deployments, probably more in the $10 million to $20 million range.

Steven Martin: Okay. And one last one. You — for the last — at least the last 2 or 3 quarters, you’ve I would earn — your NII has far exceeded your dividend rate. And I know this is a question that you sort of expect. What’s the prospect for either a dividend increase or some form of special between now and the end of the year? Or do we have to wait till after December?

Ted Goldthorpe: No, I think here’s the challenge to the dividend policy is, obviously, we’re way over in our dividend. The challenge we have is — the way we do our dividend is the forward curve for rates. When we set our dividend last quarter was down like 200 basis points in the next 2 years. And obviously, this higher for longer, the market is getting more comfortable with higher for longer. So that 2-year out curve has actually — has gone up a lot. So we always want to make sure our dividend is protected around cuts and short-term rates. And we have a huge cushion for that. And number two is we’re going to have to reprice some of our CLO debt on our balance sheet, right, which is going to be a bit of an increase. So all that stuff means that if we take a big, big hit on short-term rates and we have to reprice all of our on-balance sheet CLO debt, we can still easily cover our dividend.

So yes, we’ll revisit it next quarter. We revisited every single quarter. It’s just hard when short-term rates forward are moving around as much as they have been.

Ted Goldthorpe: The answer is, we will revisit our dividend again in our November meeting.

Steven Martin: Yes, because the year-over-year has been — year-over-year has been a nice percentage increase up until now. But last year, in the third quarter, you upped the dividend. So if you don’t up the dividend, your year-over-year is pretty flat. One other question on the CLOs. If you guys think that the CLOs are realizing losses or the non-outside manager CLOs are realizing losses that you don’t think all warranted. Are you allowed to go buy those securities from them at that discount?

Patrick Schafer: All right. I mean there is — I put it this way, Steve, there’s nothing that would prevent us from doing it other than they don’t necessarily like tell us when they’re going to sell stuff and what they’re going to sell. So it would be very challenging to sort of like line that up. But conceptually, we could. We don’t — I mean, again, we could call them up and say, hey, before you sell anything in these vehicles, call us, which we could do. But they don’t like give us a heads up as they’re in the process of selling things and what they’re going to sell. So it’s tough for us to like have advanced warning of their plans.

Steven Martin: Got it. And guys for the future, like no more CLOs unless you’re going to self-manage them so you can control them. All right. I’ll talk to you guys later.

Operator: [Operator Instructions] Another question comes in from Christopher Nolan with Ladenburg Thalmann.

Christopher Nolan: Just a quick follow-up on the CLO question. Any timetable when you can basically unwind this position? I know you guys have been holding on to it, but given your portfolio managers are selling, can we see a time frame in terms of you exiting CLOs?

Patrick Schafer: Yes. I’d say in most of our positions, we are not the majority holder, so we don’t really have control over the exit for ones that we do, which are a very small subset, we certainly look at that, Chris. But obviously, again, kind of where the market is right now and again, putting aside the manager’s behavior, we do think there is some far more temporal declines or unrealized losses in the syndicated market just from kind of mark-to-market and things like that. So I think our hope would be to kind of exit those in a more normalized environment. But for the most part, we don’t actually have control over those within our CLOs were a relatively small percentage of the equity.

Operator: There are no further questions at this time. Mr. Goldthorpe, I’ll turn the call back over to you.

Ted Goldthorpe: Thank you very much, and thanks, everyone, for joining us today, and we look forward to speaking to you again in early November when we’ll be announcing our third quarter 2023 results. Thank you so much, and enjoy the end of your summer.

Operator: Ladies and gentlemen, this concludes today’s conference call. You may now disconnect.