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Investment Thesis

Too many unknowns leave Portman Ridge Finance Corporation (PTMN) unsuitable for the risk-averse investor. Recent management changes and the anticipated merger with Garrison Capital (GARS) add a considerable amount of uncertainty for future performance. This is especially true given the new management’s lack of experience and PTMN’s disappointing historical performance.

Dividend Sustainability

Currently, PTMN pays $0.24 per share in dividends, annually. That translates to an 18% forward dividend yield. The sustainability of this dividend relies on two conditions:

  1. Affordable payout ratio
  2. Healthy portfolio

PTMN historically distributed more cash to shareholders than it earned. As a result, PTMN lowered its dividends every year since 2013 to try to match the income it brings in with the dividend it pays out to investors. At a $0.06 quarterly dividend, PTMN seems to have finally found its balance.

Source: Graph created by the author. Data is sourced from the company’s financial statements.

PTMN Portfolio

PTMN’s dividend sustainability depends on more than a payout ratio that is below 100%. A healthy portfolio is paramount to that end. PTMN manages $281 million worth of investments. Below is a portfolio breakdown by type and product mix.

Source: Investors’ presentation

PTMN has a relatively small stake in equity, which is a good thing. Equity is riskier than debt securities. Gladstone investment corporation’s (GAIN) revenue decreased by 40% in Q2, as portfolio companies suspended dividend distributions during the pandemic. During the same period, PTMN revenue increased by 6% because of limited exposure to equity and the expansion of the investment portfolio through borrowing.

CLO investments are also extremely risky. This is demonstrated by the ~50% decrease in PTMN’s revenue from these vehicles in Q2 as shown below:

Source: Company financial statements

Second lien loans constitute 40% of PTMN’s debt investments. This is a high percentage.