Portman Ridge to Merge Investcorp BDC, Buys Back Stock Instead

Portman Ridge Finance has agreed to acquire Investcorp Credit Management BDC at 90% of net asset value, a discount it expects will lift its own net asset value per share at closing. The all-share-plus-cash deal, unanimously approved by both boards, is the company's fifth BDC merger since BC Partners took over management in 2019.

BCP CEO Ted Goldthorpe framed the transaction as accretive on two fronts: net asset value per share at closing and net investment income per share over time. He cited the discounted purchase price, the elimination of duplicative costs and an expected reduction in financing costs as the drivers.

What are the merger's terms?

ICMB shareholders will receive consideration equal to 90% of ICMB's net asset value shortly before closing, paid in newly issued BCP shares valued at BCP's net asset value per share. If the share issuance would exceed 19.99% of BCP's outstanding stock, the excess is paid in cash.

Based on September 30 net asset values and estimated transaction expenses, ICMB holders would receive approximately 0.172 BCP shares and $0.26 in cash per ICMB share, worth $2.49 per share at BCP's net asset value. Measured against BCP's November 9 closing price of $6.57, the deal values ICMB at roughly $1.38 per share — a 127% premium to ICMB's closing price of $0.61 that day. The final exchange ratio will be set using both companies' net asset values determined within 48 hours before closing, Goldthorpe said.

Investors holding approximately 41% of ICMB's outstanding shares, including Investcorp, Stifel and ICMB's directors and officers, have agreed to vote for the transaction. ICMB's board acted on the unanimous recommendation of a special committee of independent directors.

Why is ICMB selling?

ICMB President and CEO Suhail Shaikh was blunt about the arithmetic of smallness. The company's size had made it increasingly difficult to absorb the fixed costs of operating independently, he said. Its net asset value had declined, and its board suspended the quarterly distribution earlier in the year.

Shaikh said the special committee reviewed a range of alternatives before concluding the BCP deal offered the most compelling outcome for shareholders. Scale, in the BDC sector, is not a luxury.

BCP expects to repay ICMB's revolving credit facility and redeem its 2029 notes at or shortly after closing.

Buybacks and deleveraging before new deals

Alongside the merger, BCP is retreating from new lending. The company plans to be selective about new investments, prioritizing support for existing portfolio companies and opportunities offering compelling risk-adjusted returns, Goldthorpe said. Proceeds from repayments, payoffs and sales will go toward share repurchases and debt reduction.

"With our stock where it is today, the best risk-adjusted use of each incremental dollar of our stockholders' capital is to buy back stock at a discount and delever the balance sheet," Goldthorpe said.

The board has already authorized up to $10 million in repurchases through March 31, 2027, and Goldthorpe said the company intends to be active under that and future programs, subject to market conditions, regulatory requirements, transaction-related restrictions and blackout periods. After closing, BCP will direct proceeds from acquired assets toward reducing leverage to its target range of 1.25 to 1.4 times (net debt divided by equity) before repurchasing shares and making qualifying new investments. Capital allocation will be reassessed each quarter.

How did the third quarter look?

Less well. Investment income fell to $13.9 million from $15.2 million in the prior quarter, a decline CFO Brandon Satoren attributed primarily to a smaller income-producing portfolio following net repayments and sales.

Net investment income dropped to $4.6 million, or $0.37 per share, from $5.5 million, or $0.45 per share. Core net investment income, which excludes merger-related purchase discount accretion, was $2.9 million, or $0.24 per share, against $3.3 million, or $0.27 per share, in the second quarter.

Net asset value (the per-share value of assets minus liabilities) declined to $162.7 million, or $13.13 per share, from $179.5 million, or $14.49 per share, at the end of June. Satoren attributed the fall primarily to unrealized mark-to-market losses on the portfolio. Outstanding borrowings stood at $282.4 million at quarter end, and the asset coverage ratio (assets as a multiple of debt) fell to 157% from 162%.

Chief Investment Officer Patrick Schafer said BCP made three follow-on investments and none in new borrowers during the quarter. Originations totaled $3.1 million; repayments and sales reached $8.9 million.

At quarter end, 10 investments across seven portfolio companies were on non-accrual status (interest no longer being recognized as income), representing 2.8% of the portfolio at fair value and 6.0% at amortized cost. That compares with 11 investments across seven companies, or 3.1% at fair value and 5.7% at cost, a quarter earlier.

What happens next?

Portman Ridge Finance Corporation (NASDAQ: PTMN) is a business development company providing financing to middle-market companies through senior secured loans, unitranche and subordinated debt, and equity investments. The merger awaits shareholder approval, with the exchange ratio fixed only 48 hours before closing. Until then, the plan is simple: shrink the portfolio, buy back discounted stock, and let the discount do the work.