Portman Ridge Finance Corporation

At this time, management will like for me to inform you that certain statements made during this conference call, which are not historical, may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although Kohlberg Capital Corporation believes the expectations reflected in any forward-looking statements are based on reasonable assumptions, it can't give no assurance that these expectations will be attained.

Factors and risks, such as those described in the Risk Factors section of our 10-K and sections of our 10-Q and other SEC documents filed during the course of the year could cause actual results to differ materially from expectations.

Now at this time, for opening remarks, I will like to introduce Dayl Pearson, CEO. Mr.

Pearson, please begin.

Thank you. And thanks, all of you, for joining Kohlberg Capital for a review of the company's fourth quarter 2011 financial results, as well as the discussion of some recent events.

I will open the call with some broad commentary about our activities during the quarter, subsequent events, and we'll then discuss our investment portfolio in more detail. I will then turn the call over to our Chief Financial Officer, Mike Wirth, who will provide a recap of our fourth quarter financial results and performance.

We will then open the line up for your question at the end of the call.

First, let me provide a brief recap of recent events. On February 29, 2012, the company closed on the acquisition of Trimaran Advisors for a total purchase price of $50.2 million, $25 million of which was in cash.

This increased our investment in the 2 types of assets. First, we purchased $18 million of par value CLO equity for approximately $12 million.

The yield on this CLO funds on fair market value is similar or higher than the current yield on fair market value of the KDA managed funds, which is approximately 33%.

The remainder of purchase price relates to the purchase of the Trimaran Advisors Asset Management business. The 4 CLO funds managed by Trimaran are similar to the 5 CLO funds currently managed by KDA, the management fees on $1.4 billion of Trimaran Fund, approximately 50 basis points.

As part of the acquisition, 6 of the employees of Trimaran will continue to be involved in managing those funds, including the 2 principles and the portfolio manager.

As you know, Asset Management businesses have significant economies of scale. After we integrate the platform in the next quarter, KCAP should see a significant increase in distributable income for our combined asset management platform.

From a long-term strategic perspective, increasing the size of our Asset Management business in terms of both AUM and Professionals, will lead to a greater ability to access the new issue CLO market allowing us to grow the platform internally.

Prior to closing on the Trimaran acquisition, we closed on a new $30 million credit facility with Credit Suisse. This is attractive for both a spread and structural viewpoint.

At LIBOR plus 300 with no LIBOR floor, and total collateral pledged when fully funded at $42.5 million, it allows us to make accretive investments in first lien months. Now to review 2011.

As you may recall, we repaid in full the outstanding balance of our secured credit facility on January 31, 2011. In addition, we also received a settlement payment of $2 million from the lenders, which we recognized in the first quarter of 2011.

Then in March, we issued $60 million in convertible notes. Since then, we have been focusing on utilizing the proceeds of the convertible debt issuance to increase our investment portfolio debt securities.

At year-end, we had sufficient liquidity in cash and highly liquid investments with which to may continue to higher-yielding investments that meet our credit and underwriting profile. Given the uncertain economic environment and the volatile credit market, we have remained cautious in terms of deploying capital and continue to maintain a significant liquidity.

We also continue to evaluate our equity and debt financing options, which will allow us to focus on continued balance sheet growth, increasing net investment income and dividend distributions.

I will now briefly present some fourth quarter financial metrics and commentary. On December 31, 2011, NAV per share was $7.85, adjusting for the dividend payable which only occurs at year-end and not the intervening quarters, NAV would have been $8.03.

For the 12 months ended December 31, 2011, net investment income was $0.70 per share as compared to $0.53 per share for the same period of 2010. Net investment income for the 3 months ended December 31, 2011, was $0.18 per share as compared to $0.23 per share for the fourth quarter of 2010.

The company declared and paid a dividend of $0.18 for the fourth quarter of 2011 and $0.70 for the entire 2011 calendar year.

For the year ended December 31, 2011, KCAP had $28 million of total income as compared to total income of $29.4 million for the same period of 2010. I will now review our portfolio of middle-market corporate loans and equity investments in our new originations activity.

We continue to see repayment of lower yielding assets at par, which allows us to further increase net spread as we invest these proceeds in higher-yielding investments, primarily mezzanine and other junior securities.

As always, we will continue to be focused on credit quality and we'll manage and monitor risk appropriately. After a very strong level of high quality deal flow in the second and third quarter of 2011, the overall level and quality of that flow was considerably lower during the fourth quarter.

However, since early February, deal flow has increased dramatically. We have one new middle-market investment that should close before the end of the first quarter, and we have several outstanding term sheets and other middle-market yields.

As of December 31, 2011, the weighted average yield on fair value for income producing loan and bond portfolio was approximately 8.4% as compared to 8.6% at the end of last year. The yield on our loan and bond portfolio, coupled with our overall CLO portfolio that is yielding over 20% on fair value, provides a reasonable net interest spread before factoring any distributions that may be made from Katonah Debt Advisors.

The combined yield on our total debt portfolio loans, bonds and CLO securities was 14% on fair value in the fourth quarter.

Our 2 largest CLO investments, Katonah X and Katonah 2007-1, represent 83% of our total CLO investments and 88% of KDA-managed sales, and our currently yielding average rate annual return of 27% at fair value. As of December 31, 2011, our weighted average mark on our debt securities portfolio was 84, as compared to 71 at year-end 2010.

As far as CLO portfolio, our weighted average mark was 69 as of December 31, 2011, a slight decrease from the weighted average mark of 74 for the year earlier, year-end. Our 100% ownership of KDA was valued at approximately $41 million based upon its assets under management of prospective cash flows at December 31, 2011.

Our investment portfolio at the end of the fourth quarter of 2011 totaled approximately $240 million.

Looking at the composition of our investment portfolio, our portfolio quality continues to hold up well. At the end of the fourth quarter, our debt securities totaled approximately $114 million, or represented about 48% of the investment portfolio.

First lien loans now represent approximately 39% of the debt securities, and the second lien loans at 41%. Approximately 10.2% of our investments are fixed-rate with the weighted average rate of 12.9%.

As of December 31, we had 3 issuers on nonaccrual status representing less than 1% of total assets at fair value. Our KDA-managed CLOs continue to perform well with the quarter-over-quarter increase in the distributions to us.

All KDA-managed CLO funds continue to make the distributions to junior securities we hold as investments, and all senior and subordinate management fees are being paid to KDA at a current basis. The management fees stream paid to KDA is based upon the par value of assets managed and thus provides a relatively stable income stream, not subject to potential volatility in the market prices of the underlying assets being managed.

The stable income stream allows KDA to make periodic distributions to us in the form of a dividend.

In 2011, KDA made distributions to us at $1.9 million. Additionally, as of December 31, 2011, KDA had approximately $1.9 billion of par value assets under management.

And now, I'll ask Mike to walk through the details of our financial performance. Mike?

Thank you, Dayl, and good afternoon, everyone. For the year ended December 31, 2011, we reported net investment income of approximately $16 million or $0.70 per share compared to approximately $11.9 million or $0.53 per share for 2010.

For the 3 months ended December 31, 2001 (sic) , we reported a net investment income of approximately $4.1 million or $0.18 per share. Our total investment income for the year ended December 31,2011, was approximately $28 million, and as compared to approximately $29.4 million for the same 2010 period.

Our total investment income, the 3 months ended December 31, 2001 (sic) , was approximately $7.1 million as compared to approximately $6.9 million for the fourth quarter of 2010. Investment income from debt securities decreased $5 million from approximately $14.4 million in 2010 to approximately $9.4 million in 2001 [sic] 2011.

This decrease was primarily due to a reduction in the size of our loan portfolio, and thus lower average investment balances on which interest is earned. The decline in debt securities revenue was offset by an increase in CLO income of $4.4 million for 2011 relative to 2010.

For the full year 2011, sale of fund securities income was approximately $14.6 million as compared to the prior year's reported CLO income of $10.2 million. For the 3 months ended December 31, 2011, our CLO fund securities dividend income was approximately $3.7 million as compared to approximately $3 million for the same period of the prior year.

Overall, approximately 99% of our equity CLO investments are distributing cash flows with a fourth quarter weighted average annual return of 33% fair value.

Given that our CLO portfolio has an average remaining term of approximately 6 years, we expect to continue to receive significant equity distributions from our CLO investments for many more years. For the year ended December 31, 2011, Katonah Debt Advisors, the company's wholly-owned asset managers, paid cash dividends to the company of $1.9 million.

Expenses for the year ended December 31, 2011, totaled approximately $12 million as compared to approximately $17.5 million in 2010. For the full year 2011, we had professional fees of approximately $2 million compared to $5.4 million for the same period in 2010.

The decrease was due to having incurred higher than usual accounting, third-party valuation and printing fees expenses in 2010 of approximately $3.5 million, related to the restatement of year-end 2008 and first and second quarter of 2009 financial statements.

Interest expense was $4.6 million in 2011 and $7 million for 2010. The reduction is due to average lower outstanding average balances on the company's credit facility, which, as Dayl mentioned earlier, was paid off on January 31, 2011.

The average outstanding balance in 2011 was approximately $65 million as compared to $157 million for 2010 after considering the convertible debt issuance that we had in the first quarter.

Focusing on just the fourth quarter of 2011, expenses for the 3 months ended December 31, totaled approximately $3 million as compared to approximately $1.7 million for the same quarter in 2010. In this case, the increase in the 2011 fourth quarter only expenses, relative to 2010, is due to increased interest expense that is partially offset by decrease in compensation costs.

Realized losses of approximately $18.5 million, or $0.81 per share, were recognized during the year ended December 31, 2011, as compared to $17.9 million, or $0.79 per share in 2010.

During the year ended December 31, 2011, our total investments had net unrealized depreciation of approximately $10.11 million -- I'm sorry, $10.1 million. During the year ended December 31, 2010, our total investments had net unrealized depreciation of approximately 8.3.

The $10.1 million of unrealized gains during the year ended December 31, 2011, are due to net unrealized gains of approximately $11 million on debt securities, equity security and CLO fund securities and a $1 million decrease in the value of Katonah Debt Advisors.

Moving onto our balance sheet. At year-end, we had approximately $33 million in liquid money market funds and cash.

Ultimately, a portion of that cash was used to fund the Trimaran acquisition at the end of February. On the liability side of our balance sheet, as of December 31, 2011, our only debt was $60 million convertible notes, the 5-year term at a fixed rate of 8.75%.

Our asset coverage ratio at year-end was over 400%, well above the minimum required 200% for BDCs. Pro forma, with the new $30 million credit facility Dayl mentioned earlier, our asset coverage is over 330%.

For the fourth quarter, we declared an $0.18 dividend, which was paid in cash on January 27, 2012, to holders of record as of December 23, 2011. For 2011, we paid totaled dividends of $0.70 per share as compared to total dividends of $0.68 per share in 2010.

In determining the dividend for the fourth quarter, considerations included, estimated quarter net income, anticipated net income for the year, the impact of increased or decreased expenses, and the sustainability and smoothing out of the dividend for future quarters.

The aforementioned discussions in the fourth quarter 2011 results and year-end results are also discussed in our recently filed annual report on Form 10-K and quarterly reports on Form 10-Q, which are available at our website, www.kohlbergcapital.com, or at www.sec.gov.

With that, I'd like to turn the call back over to the operator to start the Q&A session. Operator?

First, I think spreads are down nominally since the end of last year. You guys seemed to be -- yes, you've highlighted that your pipeline looks pretty solid.

Where are you finding pockets or where are you finding the most attractive risk-adjusted returns in the market right now?

I think we're -- yes, the middle market is sort of M&A activity, is sort of died significantly in sort of the September time period last year, started to pick up once people had the year-end 2011 results, and we're seeing mostly sponsor-oriented investments. I will say in a lot of cases, we're trying to fly somewhere between necessarily the most senior piece and the most junior mezzanine piece, or we can get a nice risk-adjusted return and have a lot lower leverage.

And one of the deals we're looking at now we're at sort of a second lien behind the first lien, and have the mezzanine fees whereas the total leverage is 4x and we're going to be on 2.6, 2.7x. The deal goes forward.

We still got a 12-plus percent return. So we like those types of pieces of paperwork and managed risk.

We also like to keep looking at things with relatively low leverage. The deal we're going to close at the end of the month is a mezzanine deal.

But again, the leverage is well under 4x. So those types of things we like.

But it's really just a lot of different activities. And some of it -- significantly most of it from sponsors but also some from other relationships we have.

Okay. And Mike, you mentioned that you referred to that 83% of the CLOs is utilized, I think it's 2010 and the '07 one.

The -- they're cash flowing with -- there's a small group that aren't. If -- would you expect those to regain full cash flows or distributions to equity?

And if so, how much could that the -- do much of the be like at a quarterly basis?

The -- there's only 1% of the CLO funds in total that aren't. And they're not actually managed by KDA, they're managed by another asset manager.

I'm actually referring to the CLO equity securities you guys own?

Well, the ones that we had are all cash flown.

The one that we own that we manage are all cash flown.

They're all cash flown.

Okay. Okay.

So excuse me, I heard that wrong. I'm sorry.

Okay. And then, with respect to the Trimaran acquisition, do you expect any kind of one-time closing of professional fees in Q1?

Yes.

So we're going to have some excess cost in Q1. We were hoping to close it earlier in Q1.

So I don't think you're going to see in Q1 any accretion to the company because of those professional fees. But really, you'll start to see the difference in Q2.

Do you have a sense on what that cost might range? Or it is too speculative at this point?

We settled out all of the legal fees and things like that. So now -- we're just now getting some of those billings in.

Legal and a lot of accounting fees as well.

Okay. And then on the KDA platform, yes, how do you guys view the new issue CLO markets?

How far away are spreads at the equity level or the AAA level for -- to get somewhat fluid again where you can start considering new issuances out of the KDA structure or the KDA segment?

It's starting to get very interesting right now. The spreads, new issues, have been coming down much more slowly than it did last year.

Last year, they started, what, from 175 to 120 in 3 to 4 months, and then popped back up again when you had the credit sort of seize up in midsummer. They sort of went from quickly from 175 down to 150.

Now, each new deal that gets priced sort of goes down 4 or 5 basis points. I think the last one was around LIBOR 142 on the AAA's.

And what's also helped is the pricing on the more junior securities has come in. So it starts to get very interesting at the levels we're at now.

You're talking about IRRs in the low- to mid-teens, so it moves up very quickly from there. And that's not factoring.

And obviously, the season we get, the additional incremental fees we're going at the KDA, so it's just return on the equity investment.

So LIBOR plus 142 on the senior notes now. Is there a threshold of LIBOR plus some level where you'd say that's a market that you'll be actively trying to do a new issue?

I don't know if we have no specific number, but it's very close to that number today.

Could you talk about the 2 major Katonah CLO equity pieces you own along with the new Trimaran equity, $12 million that you own? How long until those start exiting the reinvestment period and we start seeing some declines in the equity distributions?

Well, for the Katonahs X and 2007-1, I think those are in the earliest -- and the reinvestment period is -- and E.A. Kratzman is on the line, the president of Katonah.

E.A., do you remember those are? I think it's 2015 or '14?

Yes, okay, side. Yes, the 2007-1 CLO is probably one of the last CLOs that will go through the reinvestment period in basically January 2015, and X will go probably due, let's say, it's...

May of 2014.

Yes, the middle of 2014.

Yes. So we have 3 years of [indiscernible] '11 and call it 2.5 on X.

The last Trimaran deal has essentially the same vintage as X. So that alpha goes through '14.

And then the earlier ones are a little bit before that. So we have a fair amount of runway on this.

All right. Can you talk about -- it looks like there's about a $2 million write-down in the CDO equity and about $2 million write-down in the ownership of the KDA fair values this quarter?

Can you talk about the purpose for those?

Sure. For KDA, it -- as we do a discounted cash flow, the cash flow model so much didn't change as much as how the discount rate was built up.

So there was some compression there that impacted fair value there. On the CLO funds, they went down just by nature of those projected cash flows as well.

And...

I also think there's a mark -- there was some public marks on some related securities that were down a bit in the fourth quarter, right?

I can't remember if it was the fourth quarter or the third quarter. But there was some, yes.

But we wait -- we changed the modeling ever so slightly for both types of asset classes as we continue to refine the valuation models and make them a little bit more robust. And also, as well, because there's more market information that's available as well that we can point to, to weigh into our final valuations.

Okay, great. And then in the press release today, you talked about, you want to use prudent leverage in the model and mentioned some additional types of debt that you could raise.

And I think you actually mentioned SBIC debt in there. Can you tell us what your kind of target leverage is that you view as prudent leverage?

And then, I would assume you've at least looked into the SBIC, if you're mentioning that in the press release, can you tell us where you are in that process?

Yes. I mean, I think we're in the early stages of the SBIC process.

I think, in terms of prudent leverage, and I think that probably -- again, our NAV has gone up because of the issuance of the shares related to Trimaran. So that gives us an additional $25 billion or so of borrowing capacity over and above what we have now.

And we've probably looked to keep that and I think we've talked about it this in the past and the sort of the point -- it's always, I think, 0.6 and 0.7 leverage. They're probably not as high as 0.7, more like 0.6, 0.65 at the most.

But I don't anticipate us going with that leverage anytime soon, but we just think with the mix of securities we have today, we want to keep the leverage lower than we had in the past.

Right. Then on the new $30 million of debt that you guys issued from the CDO notes, what's the maturity on those?

You mean the Credit Suisse facility?

Yes.

It's a 3-year maturity.

Okay. All right.

And is it all outstanding or is that a revolver that you can draw up and down on?

It is a revolver, but we'll have it pretty fully funded fairly quickly.

Okay, great. And then one last quick modeling question.

In the fourth quarter, what were your origination and repayment activity?

I don't think we closed any new deals. And I don't think we had any repayments in the quarter either.

Mike will take a look at that and we'll answer that before we get off. The fourth quarter was a pretty slow quarter for originations, and it was a very slow quarter also for repayments.

We may have had one small repayment, but I don't think we had any new middle-market deals that closed. We had one that closed on the last day of the third quarter, and we had one that we thought we were going to close in the fourth quarter, but did -- never did close.

So I don't think we had any significant new of either.

I have a question on the, I guess the one of the non-managed CLOs that moved to nonaccrual during the quarter. I'm just wondering if you recognized any income from that CLO during the fourth quarter?

Yes. That was Katonah III which isn't managed by KDA.

Right now, it's -- we kind of in limbo as far as...

Well, do you recognize any income?

No, we do not recognize any income from it, no. No.

One of the reasons I think is the incentive fee have kicked in there, right?

Right.

And so that's...

That's kind of a level as to whether or not I was going to get called or...

Yes. So the manager and some of the equity holders have tried to call it.

And I think the value would probably be -- if they did -- if they do, yes, call the value it'll probably be above where we...

Definitely, a significant value to the 1,000.

No, that's not.

No, [indiscernible] at end of the quarter.

So, we're not expecting anymore distributions, but we do expect a fairly significant payout when and if it's called.

Okay, great. And then just looking at the income we saw from a non-affiliate CLO dividend during the quarters, $462,000.

I wouldn't expect that to drop off in the first quarter?

No. The vast majority of that is Grant Grove, which is sort of the same vintages as Katonah X.

So that has a long kind of run and is well-managed, and we don't really anticipate any falloff in that. And I think that's probably all of the non-managed income.

That' right. Grant Grove 3 and 5.

And 3 and 5 aren't producing any...?

NRI. Those are the ones that is 1,000 each.

Okay, great. And then the decline you saw in projected cash flows for the managed CLOs, the KDA-managed CLOs, is that a function of credit or a function of them approaching the end of their reinvestment period?

I'm just trying to get an idea what...?

It actually is somewhat volatile from quarter-to-quarter, depending on when the LIBOR resets for the liabilities and that type of thing. So -- I mean, the decline isn't really all that I guess, significant because like I said, it could be somewhat volatile.

Yes, I mean I think, to some extent, we're already surprised there wasn't a bit of a decline earlier. But there have been a lot of repricings of loans which have brought some out the asset spread in a tiny bit.

But it's -- it's my sense, it can evolve from quarter-to-quarter depending it from when they reset and what the spreads are when they reset, and what LIBOR is when they reset.

Okay, great. So credit quality remains strong there?

Credit quality is very strong, yes, absolutely. And as is true with before this way that we approach this as part of the Trimaran acquisition, the credit quality is excellent.

Okay, great. And then in terms of the new deals here, it's on the books this quarter, do you have a rough, maybe I missed this earlier, but a rough yield on that portfolio of leverage loans you purchased from Credit Suisse?

You mean, for the credit facility? Yes, I -- my guess is you're probably looking at, what, 150 basis point net spreads after you take into account the interest costs.

Okay, great. So I guess the Credit Suisse revolver is L plus 300, so looking something like L plus 450 [indiscernible?

Maybe a little bit under that.

Okay, great. And then I think that -- the one, I guess, one investment moved off nonaccrual, I'm just wondering what -- which one that was?

That was -- 1 second, which one was on accrual? The last quarters?

I don't have the last quarters.

We'll have to get back.

I think I'm looking at the portfolio last quarter, non-accrual was Suncoast, the GIN and then L.A. Conduit Lenders, and then International Architectural Products and Creed Media?

Yes, I'm sorry, yes. It was derivative.

That debt got restructured, and so the loan got reinstated. I forget what the loan was and we got some equity.

But that is, that loan is paying interest. Sorry.

Yes, actually I have a follow-up on John's question earlier about issuing new CLOs outside of -- from KDA. For the equity investments in those, are you guys expected to provide the capital for the Junior tranches?

Or is the market open where there are buyers of that junior capital as well? And so it's all going to be owned by third-party?

I wouldn't say, it's all going to be owned by a third party, but it's going to be substantially owned by third parties. We will have an investment in the lowest tranche, but that will be a function of a number of things.

We haven't worked through yet what that is, but anything above that, BBs, BBBs, all those things are -- would be placed.

So you don't have to worry about KCAP liquidity in terms of issuing new CLO equity? That shouldn't be a limiting factor of issuing new CLOs?

It shouldn't be, no.

I don't have anything, but I want to thank you all for being on the call and participating. And we'll talk to you soon again.

Thank you.