Q4 2021 Logan Ridge Finance Corp Earnings Call

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Ladies and gentlemen, thank you for standing by and welcome to the Logan breach fourth quarter 2021 financial results.

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Thank you good morning, and welcome to login Rich Finance Corporation's fourth quarter and full year 2021 earnings conference call on the earnings Press release was distributed on March 14th after market close a copy of the release along with an earnings presentation is available on the company's website at Www Dot Logan.

Rich finance Dot com in the Investor Relations section and should be reviewed in conjunction with the company's Form 10-K filed on Monday with the S E T.

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 adults 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 FCC.

Logan re finance Corporation assumes no obligation to update any such forward looking statements unless required by law with that I would now like to turn the call over to Tad Goldberg Chief Executive Officer of Logan Reg Finance Corporation. Please go ahead Ted.

Good morning, and welcome to our fourth quarter and full year 2021 earnings call.

I'm joined today by our Chief Financial Officer, Jason Rus, and our Chief Investment Officer, Patrick Schafer.

This marks our second completed quarter and the first fiscal year as the new advisor to Logan Rich finance and today I'll start off by summarizing the progress that we've made and what lies ahead.

Following that Patrick will provide additional detail on our investment activity to date and Jason will walk through the financials.

Our immediate objectives as the new advisor are to first repositioning the book by rotating out of non income producing equity exposure and redeploying those proceeds into higher quality.

Senior secured income generating investments originated by BC partners and second to Delever.

And optimize the company's debt capitalization.

During 2021, we made substantial progress repositioning the investment portfolio have been successfully monetized approximately $100 million of the legacy portfolio we inherited.

Since assuming the role as the company's investment adviser on July one 2021, we've success successfully exited equity investments in six portfolio companies generating $13 $4 million of proceeds through December 31, 2021.

Which can be redeployed into interest, earning investments originated by Mount Logan management part of the BC partners credit platform.

During the fourth quarter, we exited three equity investments generating $2 million in proceeds that can be redeployed into interest earning investments.

Originations and repayments were very active during this period and we will continue to redeploy to the company's capital into new investment commitments originated by the BC partners credit platform in 2022.

During the quarter, we made approximately $46 $2 million of investments and had approximately $42 $1 million in repayments and sales of investments, resulting in net deployment of approximately $4 $1 million for the fourth quarter of 2021.

Since assuming the role of the company's investment adviser on July one 2021, we have deployed $79 5 million and interest earning investments originated by Mount Logan management.

Through December 31, 2021, and then it had sales and repayments of $106 million during the same period.

As you can see on slide four first lien debt as a percentage of the portfolio at fair value was 49, 6% second lien debt was 15, 2% subordinated debt was two 5% and collateralized loan obligations or three 9% and our equity portfolio decreased.

28, 8%.

During the year, we made significant progress in risk reduction.

Following the full repayment of the $91 million in SBA debentures during the first and second quarter, we repaid the $25 million outstanding on our Keybank credit facility and refit financed a portion of our long term notes and during the fourth quarter using $50 million of 5.25% senior secured notes due 2026, which received an investment.

Grade rating Triple B minus.

Our total debt to equity ratio was 1.2 times as of the end of 2021 as compared to two times at the end of 2020.

We will continue to work on optimizing the company's capital structure in 2022, aiming to further lower our overall cost of debt.

Our longer term goal is to leverage the BC partners platform, an entire AUM base to drive operating efficiencies.

So far we have reduced and stabilized operating expenses by approximately 23% to $23 million in 2021 as compared to $26 4 million in 2020 and.

And we'll expect to continue this trend of spreading a stable level of expenses across a larger asset base as we seek to grow the investment portfolio.

As we lay out on slide eight of the earnings presentation. We believe there is a near term pathway to positive earnings and longer term accretion from the rotation of non income generating assets.

In the near term, we expect significant cost savings from both one time items in the fourth quarter, such as an extra 30 days of interest on the $50 million of notes that were refinanced and from lower liability costs. Upon the full refinancing of the legacy Logan rich liability structure.

In addition to incremental income through the investment of our cash on our balance sheet.

In the longer term our expected rotation out of non income generating assets is expected to significantly increase returns on equity for our shareholders, but our ability to predict the exact timing of that rotation is difficult.

I would also like to note that we are not including any benefit from high grading the existing income generating portfolio or any benefit from rising interest rates in this analysis.

With that I will turn the call over to Patrick Schafer, our Chief investment Officer.

Thanks Ted.

If we summarize investment activities with fourth quarter, and then provide some more details on activity subsequent to quarter end.

During the fourth quarter the company made $52 3 million of new investment commitments to 10, new portfolio companies.

With approximately 40 to $46 2 million was funded as of quarter end.

The company had approximately $42 1 million in repayments in sales, resulting in net deployment of approximately four 1% for the period.

As of December 31, 2021, the company's investment portfolio consisted of 40 portfolio companies with a fair value of approximately $198 $2 million.

The debt investment portfolio, which represents represented 67, 4%, but the fair value of our total portfolio had a yield of approximately nine 3%.

As of yearend, we had debt investments in two portfolio companies that remain on nonaccrual status with an aggregate amortized cost of $12 $7 million and an aggregate fair value of $7.6 million.

Which represented six 7% and three 8% of the investment portfolio respectively.

This compares to September 30th.

2021.

Debt investments in the three portfolio companies on nonaccrual status with an aggregate amortized cost of $21 3 million and an aggregate fair value of $9 2 million, which represented 11% and 4.7% of the company's investment portfolio.

During the quarter ended December 31, 2021, the company recognized $8 3 million of net realized losses on its investment portfolio.

During the quarter ended September 32021, the company recognized net realized gains of $7 4 million. The increase in realized losses was primarily driven by the exit of a non accrual investment during the fourth quarter of 2021 that has been valued at zero since we became the Companys investment advisor.

For the full year 2021, the company recognized a $8 million of net realized loss on its investment portfolio. This compares to 24 million of net realized loss on our investment.

Portfolio in 2020.

The change in realized losses was primarily due to the changes in market conditions of our investments and the values at which they were realized caused by fluctuations in the market and in the economy.

As we've previously discussed at length, our immediate objective remains to successful rotation of our portfolio.

Non income producing positions and redeployment of the proceeds into high quality senior secured interest, earning debt investments originated by BC partners.

We believe that we have made good progress on this initiative in 2021 and since the beginning of 2022.

To date, we have exited all or a substantial portion of 12 borrowers that were in the portfolio as of June 32021.

In aggregate, we have generated proceeds of $106 $2 million.

And were offset by $95 1 million of new investment commitments to date made across 16, new borrowers.

I'll now turn the call over to Jason.

Thanks, Patrick turning to our financial results for the quarter.

Total investment income was $3 4 million for the fourth quarter 2021, which represents an increase of less than <unk> 1 million or approximately 1.2% compared to total investment income for the prior quarter ended September 30th 2021 of $3 4 million.

Total investment income for the year ended was $14 8 million for December 31, 2021, which represents a decrease of $9 7 million or 36, 6% compared to the prior year, mainly due to a smaller portfolio as a result of deleveraging the company.

Total operating expenses for the year ended December 31, 2021 decreased to $20 3 million compared to $26 4 million a year ago interest and financing expenses declined by $4 6 million to $10 6 million for the year ended December 31, 2021, primarily due to lower average debt outstanding based <unk>.

<unk> feed declined 25% to $4 8 million for the year ended December 31st 2021, due to lower average assets under management.

Additionally, our total operating expenses of $23 million includes nonrecurring expenses of 370000 during the third quarter of 2021 and 470000 during the fourth quarter of 2021, Accordingly, net investment loss for the year was $3 6 million or $1.32 per share compared to income of.

50, 58000, or a penny per share in 2020.

During the fourth quarter, we recognized $8 3 million of net realized losses on our portfolio investments.

This compares to net realized gains of $7 4 million for the quarter ended September 32021, the increase in net realized losses was primarily driven by the exit of a nonaccrual investment during the fourth quarter of 2021 that was previously valued at zero as of September 30th 2021.

During the year ended December 31st 2021, we recognized $8 million and net realized losses on portfolio investments as compared to 24 million a year ago. The change in realized losses was primarily due to changes in the market conditions of our investments and the values at which they were realized caused by fluctuations in the market and in the overall economy.

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Net assets of.

As of December 31st 2021, where 107 million or $39 48 per share compared to a $110.3 million or $40.67 per share at September 30th 2021.

The decrease in NAV per share was primarily due to unrealized losses on the portfolio as well as the net investment loss during the fourth quarter 2021.

As of December 31, 2021, we had $39 1 million in cash and cash equivalents.

On the liability side of the balance sheet, we fully repaid the 25 million outstanding on the Keybank credit facility during 2021.

On October 29, 2021, we issued 50 million of 5.25% senior unsecured notes due 2026, and a private placement, which was rated investment grade. The proceeds from this offering we used to redeem 50 million of that $72 8 million outstanding in the 6% notes due 2022.

Of which we have $22 8 million of the 6% notes due 2022 that would remain outstanding for us.

At December 31st 2021, we had approximately $125 million of debt outstanding comprised of $22 8 million a 6% notes due 2020 to 50 million a five minute quarters senior unsecured notes due 2026 and $52.1 million of five and three quarters percent convertible notes due 2022, the company's total debt.

The equity ratio was 1.2 times at year end 2021, compared to two times at year end 2020 with that I will turn the call back over to Ted Goldberg.

Thank you Jason in closing, we've made significant headway since assuming management of the company by improving capitalization quickly deleveraging and most recently refinancing a significant portion of our long term debt capital with a lower cost.

We look forward to providing more updates in coming quarters as we continue to make progress.

Thank you for your support this concludes our prepared remarks, and I'll now turn it over to the call to the operator for any questions.

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Our first question comes from the line of Christopher Nolan with Ladenburg Thalmann.

Okay.

Hey, guys.

And the 10-K, you have the JMP, CLO, which have roughly a 17%.

Yield is that the cash yield on that or.

What's going on there.

Yeah that that I guess that would be the the calculated yield on the as you know like CLO equity positions are subject to.

Yeah beneficial interest accounting methodology and as a result of kind of like the future cash flows anticipated on the underlying equity investments that you have that is essentially the IRR calculated for the period.

Okay and the maturity on that it was like 27 2020, 729 should we expect those investments to stay on the books for that long.

No.

Hey, Chris This is Patrick no I think the reality is you know assuming we do absolutely nothing that it probably more likely runs off over a <unk>.

18 to 24 month period, something like that I would not think of that state of maturity as as kind of the expected life.

Great.

Given the current.

Market conditions do you really think you can lower debt costs.

Two debt issuances maturing in May.

Yes.

I mean, yeah, I I think I think we do I mean importantly, if you just kind of think about the existing structure, it's entirely unsecured Ah theres actually a small very small keybank facility undrawn that would be secured so you know we think at a minimum swapping you know unsecured for secured borrowing should reduce our cost of capital.

You know without without doing a too much effort.

Yeah, we absolutely do think we can reduce our cost of capital.

So you'd probably be financing this with your revolver.

I think we've mentioned before we would look to put in place a longer term.

Larger more substantial revolver than the existing Keybank facility.

Yeah. So so like we always try to balance like we always trying to balance cost of capital with flexibility. So I think you'll see the mix between secured and unsecured debt as Patrick said a change.

And be it lowers your cost of financing, but obviously you have to give up some security on.

England.

Okay I'll get back into queue. Thank you.

Thank you.

As a reminder, ladies and gentlemen, Thats star one to ask the question.

Our next question comes from the line of Steven Martin with Slater. Your line is open.

Hi, guys.

Hey, Steve how are you.

Good good a couple.

Couple of questions.

Can you talk about.

I guess the simple question is if your cap structure were exactly what it is today and nothing changed what would you expect interest expense to look like in Q1.

It's hard to there were a lot of moving pieces in Q4.

Yeah.

So I would say again, if we did absolutely nothing simplistically.

I think Jason mentioned, we had an extra we an extra 30 days of interest expense in Q4 that would go away and I used approximately 250000 to 50.

And then we reduced our cost by <unk>.

Probably something like at least 50 basis points on that on that extra $50 million and we're at 51 that was refinanced.

So you can kind of do the math, there, but that's again, assuming absolutely no other changes.

Got you can you talk about.

Q1, and what's gone on so far in terms of repayments and Reinvestments.

You've talked about esports before.

And what you see with the.

Heritage, our Logan reach portfolio and potential pay downs.

Yeah.

Yeah look I I'd say consistent with.

Our experienced poor remaining consistent with the market last year being 2021 was an extremely active period of time and generally speaking I'd say a lot of activity was either you know pulled pulled back from 2020 or kind of pulled up through you know in the in the first quarter of 2022.

Two here so I would say is as a general comment we've been you know a little bit lighter on the repayment and deployment activity in Q1 relative to the FERC. The two quarters of 2021, where we had taken over management, but you know, it's it's still active ish it slightly at a slightly lower rate.

Well, you had $36 million of cash on the books and I understand you know having been around the port recall you had some delayed fundings should we expect that Q1, you will net.

Fund or net repays.

I know it sounds a little bit.

Given that we only have 15 more days in the quarter, but I think it's a little bit too early to say that because we have a lot of it. We also have a lot of commitments that we've made that that generally speaking get drawn during a quarter. So.

So it's a little bit tough, even even sitting sitting where we are today and to say, how we're going to end up for the quarter.

I'd also say that you know, we do have some maturities coming up in a couple of months.

So the cash can be used to delever can pit to pay off debt as well as make new investments.

Oh, absolutely absolutely alright, thank you very much.

Thanks.

Thank you.

At this time I would now like to turn the call back over to Pat for closing remarks.

Great. Thank you all for all your support thank you all for dialing in today and we look forward to read them.

Picking to you again at the end of our first quarter. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.

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