Q2 2022 Logan Ridge Finance Corp Earnings Call

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Welcome to Logan Ridge Finance Corporation's second quarter 2022 earnings conference call. An earnings press release was distributed yesterday, August 9th, after market closed.

A copy of the release along with an earnings presentation is available on the company's website at www.loganreagefinance.com in the investors relations section and should be reviewed in conjunction with the company's form Tim Q file yesterday with the SEC.

As a reminder, this conference call is being recorded for replay purposes.

Please note that today's call may contain four looking statements which are not guaranteed of future performance or results in voice.

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 filing with the SEC.

Logan Ridge 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 Ted Goldthorpe, Chief Executive Officer of Logan Ridge Finance Corporation.

Good morning. Welcome to our second quarter 2022 earnings call. I'm joined today by my Chief Financial Officer, Jason Ruz, and our Chief Investment Officer, Patrick Schafer.

Following my opening remarks, Patrick will provide additional detail on our investment activities to date. There were several cool things that I've suggested to keep you on the cover for individual

Jason will walk through the financials.

The second quarter of 2022 was transformational for Boken Ridge and marks our first year anniversary serving as the company's investment advisor.

We're proud to say that during this time, we've quickly and completely transformed Logan Ridge through the successful execution of our business plan, and we expect shareholders will really begin to see the fruits of our labor and the performance of the company in the second half of 2022.

While Patrick will provide additional details on the transformation of our portfolio, I would like to emphasize a few of the milestones that I believe are game changers for Logan Ridge.

We have substantially de-risked and de-levered the company. Specifically, as of June 30, 2022, 42% of the company's investment portfolio at fair value was originated by BC Partners credit platform, with ample cash and unused borrowing capacity under our new credit facility available for future deployment.

During the 12 months into June 30th, 2022, we have successfully monetized and or realized just under $150 million of the legacy portfolio we inherited from the former advisor.

This represents approximately 64% of the fair value of the portfolio when we took over managing the company.

Credit has stabilized and there has been no new non-apparals since Mount Logan Management became the company's investment advisor.

Further, we successfully exited a non-accrual investment we inherited for proceeds of $0.6 million.

This position was valued at zero as of June 30, 2021.

The company has delevered to one times as of June 30, 2022, from 1.2 times as of December 31, 2021, and 2 times as of 2.0 times as of December 31, 2020.

We materially lowered the company's cost of debt with the successful refinancing of the entire legacy debt capital structure, which we completed during the most recent quarter.

We've eliminated all near-term liability and sureties and increased the company's borrowing capacity, which will provide the company with the necessary flexibility to grow its balance sheet.

We've reduced the company's exposure to the legacy non-interest-earning equity investments to 21.4% of the portfolio at fair value as of June 30, 2022, including the successful exit of Logan Ridge's largest legacy non-yielding equity interest in e-Sport on June 29, 2022.

This compares to 32.3% of the portfolio at fair value as of June 30, 2021.

For the 12-month period into June 30, 2022, Administration Peas, Reimbursed to the Administrator, BC Partners Management totaled $0.6 million.

This compares to $1.4 million reimbursed to the former administrator, Capital Advisors Corporation for the 12 month period ended June 30, 2021.

With the successful completion of these material milestones, the current strength of our portfolio, and our commitment to execute on our growth initiatives, Logan Ridge is now well positioned with ample balance sheet flexibility to capitalize on opportunities arising from the current credit environment.

During the last 12 months, we've largely focused on riding the ship. We believe the collective successes I mentioned do exactly that. From here on out, we'll be laser focused on returning Logan Ridge to profitability. With our newly re-sinance capital structure and rising benchmark rates, we believe Logan Ridge is on track to begin to generate positive NII on a quarterly basis heading into next year before accounting for a return to normalized leverage levels.

or any incremental rotation of the remaining equity portfolio, and on path to reinstate a dividend.

With that, I'll turn the call over to Patrick Schafer, our Chief Investment Officer.

Thank you.

Thanks, Ted.

As of June 30, 2022, fair value of our portfolio was $175.9 million.

in 44 portfolio companies.

Consistent with our peers, we continue to operate in an uncertain economic environment with high inflation and rising interest rates.

which has impacted credit and capital markets broadly.

In spite of this, due to successful execution of our business plan and Perutum portfolio management.

We successfully monetized and or realized almost $150 million in legacy portfolio we inherited from the former advisor over the last year which represents approximately 64% of the initial portfolio at fair value.

As a result, 42% of the company's investment portfolio at fair value was invested in assets originated by the BC Partners credit platform as of the quarter end June 30, 2022.

Additionally,

The company has $29.5 million in cash as well as $34.4 million of unused borrowing capacity available for deployment in investments originated by the BC Partners credit platform as of June 30, 2022.

During the second quarter, the company

do you continue to judiciously redeploy capital generated from the exiting from exiting the legacy portfolio?

Specifically, the company made approximately $30.7 million in investments and had approximately $58.3 million in repayment and exits.

resulting in net repayments and sales of approximately $27.6 million for the quarter.

This includes the refinancing and recapitalization transaction completed by Eastport Holdings, LLC, that closes on June 29, 2022, whereby Logan Ridge received $16.5 million in cash and $19.3 million in principal of a new debt security in exchange for all its previous debt and equity securities.

generating a realized gain of approximately $16 million.

As of June 30, 2022, we had debt investment in two portfolio companies on non-accrual status with an aggregate cost of $12.1 million and a fair value of $6.4 million.

which represented 6.5% and 3.6% of the investment portfolio respectively.

There are no new non-accruals added to the portfolio during the quarter.

As of June 30, 2022, our debt investment portfolio represents 75% of the total portfolio at fair value.

It had a weighted average annualized yield of approximately 8.7%.

executing non-accruals, and collateralized loan obligations.

This compares to a debt investment portfolio which represented 68.1% of our total portfolio fair value with a weighted average annualized yield of approximately 8.3%, excluding non-accruals and cloud arts loan obligations as of March 31, 2022.

Finally, the cost and fair value of our non-yielding equity portfolio as of June 30, 2022 decreased to $40.7 million and $37.6 million, respectively.

This compares to the cost and fair value of $43.6 million and $58.7 million as of the prior quarter.

and $49.9 million and $73.7 million one year ago when we took over managing the company.

And I'll turn the call over to Jason.

Thanks, Patrick. According to our financial results for the quarter ended June 30, 2022.

Our net asset value was $101.1 million, or $37.31 per share, as compared to $106.2 million, or $39.16 per share at the end of the first quarter of 2022, and $107.1 million, or $39.48 per share as of December 31, 2021.

Net investment loss for the second quarter decreased to $900,000 as compared to net investment loss of $1.1 million reported in the first quarter of 2022. That said, net investment loss for the second quarter also included approximately $300,000 of incremental nonrecurring financing costs and professional fees. Accordingly, these excluding Net investment loss for the second quarter increased to $800,000 as compared to net investment loss of $1.1 million. The total amount of net investment loss for the second quarter increased to $1.1 million.

Excluding the impact of these non-recurring items, we would have reported adjusted net investment loss of $600,000.

Total investment income was $3.3 million for the second quarter of 2022, which is flat compared to prior quarter and a decrease from $5 million reported for the second quarter of 2021. The decline from second quarter of 2021 was primarily due to de-levering the portfolio.

Total expenses for the second quarter of 2022 declined to $4.2 million from $4.4 million in the prior quarter and $5 million during the second quarter of 2021. The decline in expenses driven primarily by lower interest and financing fees, management fees, and other general and administrative costs.

For the second quarter of 2022, we reported a net investment loss of $900,000 compared to net investment loss of $1.1 million in the prior quarter and net investment income of less than $100,000 during the second quarter of 2021.

Net realized gain on investments was $15.5 million for the second quarter of 2022, compared to a net realized loss of less than $100,000 in the prior quarter and a net realized gain of $6.9 million during the second quarter of 2021.

Cash and cash equivalents as of June 30, 2022, increased to $29.5 million as compared to $15.8 million as of March 31, 2022, primarily as a result of the Eastport Holdings LLC refinancing and recapitalization transaction that closed on June 29, 2022.

For the three months ended June 30th, 2022, the company reported a net decrease in net assets resulting from operations of $5 million, or a net loss per share of $1.86.

Further, during the second quarter we successfully completed our work on the legacy capital structure, which will position the company for success and provide it with the flexibility to grow its balance sheet.

Specifically, during the second quarter of 2022, we issued 15 million convertible notes to April of 2032.

and bear interest at a fixed interest rate of 5.25%. Additionally, during the quarter, we also amended our existing senior secured revolving credit agreement with KeyBank, increasing the commitment from 25 million to 75 million with an uncommitted accordion feature that allows us to borrow up to an additional 125 million. The amended KeyBank credit facility will mature on May 10th, 2027. Borrowings under the amended KeyBank credit facility will bear interest at a floating forward-looking term rate equal to one month SOFR plus.

The proceeds from these transactions were used to pay off the $52.1 million of 5.75% convertible notes outstanding, as well as the remaining $22.8 million of 6% notes outstanding, both of which matured on May 31, 2022.

With that, I will turn the call back over to Ted Goldthorpe.

Thank you. Thank you, Jason.

We are proud of the significant milestones we've accomplished over the last year.

which has put us in a position where we can now focus entirely on returning the company to profitability and paying a regular dividend.

Our team is committed to achieving this goal, and we fully expect this to be evident in the financial performance of the company during the second half of this year.

Thank you everyone for your support.

This concludes our prepared remarks and I'll now turn the call over to the operator for any questions.

If you would like to ask a question at this time, please press star, then the number one on your telephone keypad. Again, that's star and the number one. We will pause for just a moment to compile the Q&A roster.

Your first question comes from a line of Christopher Nolan with Landenburg-Baumont.

Patrick, on that realized gain, what was that company again and was it related to a debt to equity swap? Patrick Shepherd

Yeah, so it's Eastport. It was related to, yes, it was related to a restructure of the company whereby we exchanged our equity for a debt security. So 16 million is the realized amount, but some of that is unrealized swapping to realize. So the NAV impact or fair market value impact was a little over $3 million. The remaining 13 of that was previously.

unrealized gains. So the incremental nav, when you say impact, you mean

Positive, positive benefit. Of the 16, three is new. Yes, of the 16, three is new. I'll call it.

Great. And then the unrealized...

depreciation, that was mostly a true-up on that.

Yes, yes, yes.

Great. Yeah, so a good portion of that right flip from unrealized to realized and then there was the incremental mark on the portfolio which was

due to our normal quarterly evaluation process.

You gotta love the BDC accounting.

And then, Ted, on your comments in terms of the outlook for the second half of the year.

Is it fair to read from that that from your perspective right now, it seems like the company's trend towards returning to profitability will be in a better position by year end or close to profitability by year end than it is now?

Yeah, exactly. So, you know, again, like the big focus for us was really fixing the capital structure and getting leverage down. And now, you know, it's really about getting income up. So we've cut a lot of costs, you know, we run the vehicle up more efficiently now, as I mentioned, and you should be, you should begin to see, you know, as return to profitability and return to a position where we can start, you know, paying a dividend.

I think the big the big milestone this quarter clearly was we monetized our eSport Equity which massively reduced not only our equity exposure, but also took away concentration risk, you know because it is an outlier in terms of size.

So, you know now our largest equity position is like 4%.

And so, yeah, we feel very, very good about the second half of this year.

Great. Okay. Thank you guys.

I'm controlling the Steven Martin with Slater Capital.

A couple questions.

The unrealized loss of 19 million

Some of that was, as you were just talking about, e-sports flipping around. How much of it was portfolio marked to market? And how much of that might be recovered?

given where the market is now.

Yeah, good question.

Yeah, I would say about 13 was a true flip between unrealized and realized.

then the remainder was pretty much...

unrealized indicates, right, it's basically looking at fair values on a future cash flow projection on...

you know, outlooks on the performance of the underlying company.

you know, with a rebound in rates and great spread, some of that we would expect to come back.

Okay, can you talk about deployments and repayments?

Subsequent to the end of the quarter.

Yeah, I would say similar to

Similar to our other policy to see, which I know you were on as well, we had some increased deployment activity subsequent to the quarter end. I think the difference between the two would be for the most part of the second quarter, the folks in Logan Ridge had been the refinancing of the liability structure and getting the KeyBank facility in place.

And you kind of need to have a relatively static portfolio to kind of do those things. So there was, I would say, you know, we still have some work to do subsequent to quarter end to increase investment activity.

because a lot of the transactions that occurred across our platform in July , I'll call it, had been things that were in the works for a while. And so there's a little bit of timing mismatch on kind of Logan Ridge availability in terms of Logan Ridge availability, in terms of putting out and deploying to capital. So I'd say we still have some work to do on Logan Ridge in terms of deploying cash and making new investments.

Does it make sense, given the spreads right now, to utilize the excess capacity, which you obviously have in the liquid credit market?

if you can't put enough to work in the private credit market.

I mean the short answer is yes, the long answer is it's more complicated than that as everything is. Our, the facility has certain metrics that we, certain metrics and borrowing based calculations that we need to fall within and so the answer is yes, the local markets are attractive from a purely economical perspective but we also need to weigh that against, you know, assets that are eligible that we can utilize for the facility and so there's a Venn diagram of those things but the short answer is yes.

We would absolutely expect to utilize the liquid market to for some period of time to invest Invest out of those French

Okay, and recognizing that there was a lot going on on the debt side of Logan Ridge in Q2, can you give us an idea of what?

the pro forma interest expense might have looked like.

with the

capital structure that's in place now or the corollary to that is what might the interest expense look like for Q3.

given the current debt structure.

Yeah, I would say within the number that's presented for the quarter, there's about 230 of excess interest expense just due to duplicative debt being on the portfolio for the mechanics of paying off the existing debt. So that 2.1 has about 230 of call it one time interest expense in it. So that's the number that's presented for the quarter. So that's about 230 of excess interest expense in it. So that's about 230 of excess interest expense in it.

going forward, just using the rates that were in place as of 6-30, I would anticipate that that number be closer to the 1.7 million.

quarterly run rate.

Gotcha.

Anything material that was realized in the third quarter so far?

Yeah, I mean, it depends on your definition of materiality. I think in some respects, the answer is yes, we've realized.

We realized some exits. I think one of them was disclosed by the purchasing entity. We've exited very recently our position in biology. That is on our SOI. Our exit value, if you will, is in line with our quarter-end valuation as we had been expecting and knew that was in process as part of our quarter end valuation.

process so you shouldn't expect any any impact from that but that that was an asset that was realized this quarter it was you know a three point

I'd say it's a $3.8 million deposition. Again, depends on your definition, materiality. But I'd say that's one item that's been kind of publicly disclosed. And then I wouldn't think there's anything else that would rise to an unusual materiality threshold. Now, Volodymy was on the March 31st. You had debt and preferred.

And you marked the preferred back down to zero so that was a correct a non-recovery so to speak?

That's correct.

Gotcha.

So that would have been part of which

That would have been part of the... That'd be part of the unrealized. No, that's part of the unrealized. As of 6.30 it hadn't been realized.

So it'll be part of the unrealized number that will theoretically get reversed out, you know You'll reverse the unrealized and book the realized for q3 But that's part of the unrealized q2 number. So that's part of that 19 million

Yes, that's correct.

Got it. All right, thanks a lot.

There are no further questions in queue at this time.

Thank you again for dialing into our morning call and we look forward to speaking to you guys in mid-November. We wish everybody a really good end of summer and we'll talk to you in a couple weeks. Thank you so much.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.

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