Logan Ridge Finance - Q1 2022

Transcript

Speaker 0

Good day and thank you for standing by. Welcome to the Logan Ridge First Quarter 2022 Financial Results Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your speaker today, Serena Lije, please go ahead.

Speaker 1

Thank you. Good morning, and welcome to Logan Ridge Finance Corporation's Q1 2022 conference call. An earnings press release was distributed yesterday, May 12, after market close. A copy of the release, along with an earnings presentation, is available on the company's website at www.loganridgefinance.com in the Investor Relations section and should be reviewed in conjunction with the company's Form 10 Q filed yesterday with the SEC. 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 results 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 SEC. Logan Ridge Finance Corporation assumes no obligation to update any such With that, I would now like to turn the call over to Ted Goldthorpe, Chief Executive Officer of Logan Ridge Finance Corporation. Please go ahead, Ted.

Speaker 2

Good morning. Welcome to our Q1 2022 earnings call. I am joined today by our Chief Financial Officer, Jason Roos and our Chief Investment Officer, Patrick Schaeffer. Following my opening remarks, Patrick will provide additional detail on our investment activity to date, and Jason will walk through the financials. This marks our 3rd completed quarter as a new advisor to Logan Ridge, And I'm pleased to say that we've made significant progress since we began managing the company.

Although we have been operating in an environment Where there is market volatility, political uncertainty and rising interest rates, the fair value of our investment portfolio grew to approximately $207,000,000 driven primarily by unrealized depreciation on the portfolio and the judicious deployment of proceeds generating from exiting the legacy portfolio into interest earning investments originated by the BC Partners Credit Platform. Additionally, we are pleased to report that subsequent to quarter end, We successfully refinanced the remainder of Logan Ridge's legacy capital structure, which is a testament to the benefits shareholders receive from our ability to leverage the size and scale of our platform and the strong relationships we have with our lenders and financing partners. Specifically, on April 1, we issued a $15,000,000 convertible note. And on May 10, We amended our existing senior secured revolving credit agreement with KeyBanc to increase the commitment, reduce the interest rate and extend its maturity date. The proceeds will be used to repay the $52,100,000 of 5.75 percent convertible notes outstanding as well as $22,800,000 of 6 percent notes outstanding, both of which are scheduled to mature on May 31, 2022.

These transactions materially lower the cost of debt capital, which will be transformative for the company and an important milestone during our early stewardship. Investors will begin to benefit from the lower cost of debt capital during the Q3 of 2022. With that being said, I want to turn the call over to Patrick Schaeffer, our Chief Investment Officer.

Speaker 3

Thanks Ted. The fair value of our investment portfolio as of March 31, 2022 grew by $8,700,000 to $206,900,000 as of March 31, 2022 from $198,200,000 as of the prior quarter due to unrealized appreciation on the portfolio and net deployment. As of March 31, 2022, our portfolio consisted of investments in 42 different portfolio companies. We continue to judiciously redeploy capital generated from exiting the legacy portfolio. During the quarter, we made approximately $16,400,000 of investments, which outpaced the $8,400,000 in repayments and sales, resulting in net deployment of approximately $8,000,000 for the period.

Our debt investment portfolio, which represented 68.1 percent of our total portfolio at fair value, had a weighted average annualized yield of approximately 8.3%, excluding non accruals and collateralized loan obligations. Regarding non accruals, as of March 31, 2022, We had debt investments in 2 portfolio companies on non accrual status with an aggregate cost of $12,700,000 and fair value of $7,000,000 which represented 6.4% and 3.4% of the investment portfolio, respectively. This remains fairly unchanged from the prior which we reported non accrual debt investments in 2 portfolio companies with aggregate amortized cost of $12,700,000 and an aggregate fair value of $7,600,000 As of March 31, the 1st lien debt as a percentage of the portfolio at fair value was 48.7 percent, 2nd lien debt was 16.1%, subordinated debt was 3.4%, collateralized loan obligations were 3.7% and our equity portfolio was 28.4%. I'll now turn the call over to Jason.

Speaker 4

Thanks, Patrick. Turning to our financial results for the quarter. Total investment income was $3,300,000 for the Q1 of 2022 compared to $4,900,000 for the Q1 of 2021. The decline in interest income was due primarily to lower average debt investments as a result of our efforts to derisk and delever the company. Total expenses for the Q1 of 2022 were $4,400,000 compared to $5,700,000 for the Q1 of 2021.

The decrease in expenses was driven primarily by lower interest and financing expenses, which declined by 800,000 And lower base management fees, which declined by $400,000 Interest and financing costs as well as base management fees Outside of net investment income for the quarters ended March 31, 2022, 2021, we reported 200,000 and $27,200,000 of net change in unrealized appreciation and investments respectively. Additionally, the company reported net realized losses of less $100,000 $14,000,000 respectively for the same periods. Accordingly, we reported a net decrease in net assets resulting from operations $900,000 or $0.32 per share during the Q1 of 2022. This compares to a net increase in net assets from operations of 12,400,000 were $4.56 per share and $4.04 per share on a diluted basis for the Q1 of 2021. Net asset value as of quarter end declined slightly to $106,200,000 or $39.16 per share compared to 107,100,000 or $39.48 per share as of December 31, 2021, despite the general uncertainty in the market and environmental conditions.

As of March 31, 2022, we had $15,800,000 in cash and cash equivalents and our total debt to equity ratio was 1.18 times. As of March 31, 2022, we had no outstanding draws on the KeyBanc credit facility. Regarding our capital structure, As Ted mentioned, on April 1, we issued $15,000,000 of convertible notes. The convertible notes mature in April 2032 and bear interest at a fixed rate of 5.25%. The amendment to the KeyBanc credit facility increased the initial commitment from $25,000,000 to 75,000,000 Extended the maturity date to 2027 from 2023 and decreased the interest rate to 1 month term sulfur plus 2.90 basis With a 40 basis point floor during the revolving period from 1 month LIBOR and 3.50 basis points subject to a 75 basis point floor.

The amended credit facility also provides an uncommitted accordion feature that would allow the company to borrow up to an additional $125,000,000 which will afford us the flexibility to grow the balance sheet. The proceeds will be used to pay off the $52,100,000 of 5.75 percent convertible Notes outstanding as well as the remaining $22,800,000 of 6 percent notes outstanding, both of which mature May 31, 2022. We continue to closely monitor the increase in federal interest rates and the effect it could have on our net income for the rest of the year and going forward. Although the effect of these geopolitical and macroeconomic factors, including inflation, are outside of our control, our team is focused on prudent risk and portfolio management while pursuing growth. With that, I will turn the call back over to Ted Goldthorpe.

Speaker 2

Thank you, Jason. We've achieved another solid quarter and are confident that we will continue to grow our portfolio despite the increased turbulence in the economy, Driven by inflation, supply chain and the ongoing invasion. We are prudent with our investments and are hopeful for the future. Thank you for all your support. This concludes our prepared remarks, and I will now turn over the call to the operator for any questions.

Speaker 0

Our first question comes from Christopher Nolan of Ladenburg Thalmann. Please proceed.

Speaker 5

Hey, guys. The new capital structure, Jason, any Guidance or ideas how much of a per share savings that could represent?

Speaker 4

I could give you yes, just roughly I would say life to date Including the finance restructuring that we did last year, I can give it to you in dollars. I would say it's roughly $600 a quarter.

Speaker 3

Chris, if you this is Patrick. If you look at our Q4 earnings deck, we show a little bit of a we show a bridge around NII and one of those bars is the refinancing of the cap structure. The pricing of everything came in kind of exactly as expected. So you could use that chart as a pretty decent proxy to the quarterly impact.

Speaker 5

Great. And then related to that, were there any non recurring items, expense items or income items in the quarter?

Speaker 4

Yes. The expenses should give you a pretty good run rate going forward. There was one item in there around a $70,000 Expense we took to write off some of the capitalized expenses for the shelf registration that we had to write off this quarter. Outside of that $70,000 it's a pretty close run rate.

Speaker 5

Got you. And then I guess Being able to for revenues to cover the dividend excuse me, revenues to cover expenses, I mean, That seems like to be a key goal, I would think at this point. Any thoughts as to when we might See a crossover when you guys might be profitable?

Speaker 3

Yes. I think, from a profitability perspective, the 2 big focuses or the main focus has been this new facility, which allows us Do a couple of different things, which is 1, lower the cost side of the equation, but 2, provides us the ability to kind of increase Asset side, so we have a $75,000,000 facility and if we fully drew that facility, That would put us at about 1.3x leverage as compared to the 1.18x where we sit today. So between those two things, Those two things should get us in the positive here and the question is how quickly we would deploy that KeyBanc facility proceeds plus the cash depending on market conditions will kind of be the driver of us getting from where we are today to something positive. But I don't again, if you kind of think back to the bridge we outlined, I don't think that that gap From where we are today, the positive is relying upon any significant change in the equity stakes or kind of a rotation of those to get us into the positive.

Speaker 5

Great. Final question, decrease in equity as a percentage of total investments at costs, It decreased quarter over quarter. Any color around that?

Speaker 3

No, look, honestly, I look at it. My suspicion is it is because we increased the cost of our other positions as opposed to The equity decreasing, if that makes sense.

Speaker 5

Got it. That's it for me. I'll get back in the queue. Thanks, guys.

Speaker 2

Thank you.

Speaker 0

Thank you. Our next question comes from Stephen Martin of Slater. Please proceed with your question.

Speaker 6

Hi, guys. You guys have been pretty busy redoing the capital structure and you got a couple of new investments in the Q1. Can you comment on what's going on quarter to date in the Q2?

Speaker 3

Yes, I think I'll take it high level. Okay, Chad.

Speaker 2

Yes, I guess I'll take it high level and then Patrick can drop in. I would say activity levels have picked up dramatically post quarter end. It feels like a lot of demand for particularly our sponsor verticals was pulled forward into last year, but it feels like that's beginning to normalize. So I think we continue to be very cautious about everything going on clearly. But I'd say activity levels have definitely picked But Patrick, do you want to speak more specifically?

Speaker 3

No, that's all right. I think the only thing I would specifically add is Yes. In Logan specifically, we had a bit of a unique dynamic where we were obviously closing the credit facility and We kind of needed to have a relatively static asset lift in order to kind of close out a borrowing base and kind of do all that and Done and close. So we had a little bit of a period of time where we kind of needed to be relatively quiet from a trading perspective So that we could have a static pool. But generally, as Ted said, our pipeline generally continues to be pretty strong, Though we're being relatively cautious in the environment, but we certainly have or we believe we have plenty of opportunities to deploy the cash and credit facility going forward.

Speaker 6

Well, more specifically between now and recognizing that you had to be quiet for Sort of the debt reasons. Should we expect that between now and the end of Quarter, you will actually fund some transactions?

Speaker 3

I think that should be the expectation, Yes, with the caveat that it's a little bit more unpredictable on the repayment front. So we might all again, where we sit today, there's probably a Net negative deployment just if we happen to have a couple of large repayments during the quarter. But I think from a pure deployment perspective, yes, you could expect to see us Deploy capital from here to the end of the quarter.

Speaker 6

Well, speaking of specific large repayments, can you update us on eSport,

Speaker 3

If you can. Unfortunately, I don't think we're able to provide an update on Eastport at this time. Okay.

Speaker 6

Given the new refinancing, given your I'm sure you're expecting this question, given Your discount to NAV, is there anything in the new credit agreements that restricts your ability to repurchase shares at a 50% discount to NAV?

Speaker 3

No, there's nothing in our facility that would restrict our ability to repurchase shares. Okay.

Speaker 6

And I don't recall, so if I'm asking this in error, do you have a you don't have a repurchase Plan in place, do you?

Speaker 4

No, not right now, Steve. It's something that we're thinking through and It's a good question. I think it's something that might be put in place here in the near future.

Speaker 6

Okay. With respect to the convertible note, was there a specific reason for the convertible note?

Speaker 3

Yes, I think the reason

Speaker 2

is I think we're pretty focused on diversity of financing. We don't want to be too reliant on one source of And obviously, this greatly reduces the amount of convertible debt in our capital structure. So really what we're doing is Instead of just doing a one for 1 refi of our convert, I think the decision was made, it's cheaper cost of capital under the bank facilities we have, But we think it's important to maintain access to that market, in case we need to use it in the future. So you did a very, very small deal.

Speaker 6

Yes, that's why I was questioning it. You had a very big one. Obviously, the portfolio is a lot smaller. So I was wondering if there was a more specific requirement or just the desire for diversification?

Speaker 2

Yes. And we're constantly thinking about fixed versus floating liabilities. So obviously the converts are fixed, which provide some benefit to us. But floating through the lower spread. So it's something we're always kind of like balancing and thinking about and trying to diversify our liability

Speaker 6

Okay. Any general comment on the portfolio? I mean, you've put on a whole bunch of new positions and you inherited a whole bunch of old position. You've got a legacy portfolio. Any comment on the legacy portfolio visavis what you expected and or underwrote when you got there?

Speaker 3

Yes, I think I would say generally speaking, it's kind of performed in line As we kind of talked before in other forms, mostly the Portman Ridge form, we normally underwrite based on only negative things happening And you always have positive events. So we've had a couple of strong performers in the portfolio That offset maybe some weakness, particularly with Chieffire being the biggest one, but we kind of knew that going in to the transaction. So I'd say that was kind of expected, that one was struggling. But outside of that, I think kind of generally speaking, In aggregate, the portfolio has performed relatively in line with our expectations.

Speaker 4

Okay.

Speaker 6

I'll turn it over to someone else.

Speaker 0

Thank you. Our next question comes from David Mizayaki at Confluence Management.

Speaker 7

Hi, good morning. And I apologize if this is something that you guys have covered in the past. But I was just kind of wondering with regard to your legacy positions and where and thinking about where you'd like to be with the new underwriting. When you look at positions that you've inherited that are equity like, and they're more volatile And they're not generating any current income, but maybe you look at it and think this has a pretty nice IRR. It's just going to take 3 or 4 years to get there, but it's probably got to, I don't pick a number 14% or 15% IRR.

How do you prioritize Getting out of that and giving up what you see as might be potential upside versus just getting it out of the portfolio and moving on and having the portfolio

Speaker 2

Yes, it's a great question. Very good question actually. I don't think we've actually had this conversation. When we took over

Speaker 3

the vehicle, we were levered

Speaker 2

at 2 to 1. And so I think our biggest priority, particularly with this equity book, was to get leverage down, Which gives us now more flexibility on what to do on the go forward, I would say. And the second big priority for us Was refinancing the whole capital structure. We had 2 big maturities coming due in May, which we just refinanced as we talked about. And then obviously, there's a big laser focused on getting to NII positive, which given everything we've said in this call, we're on a Track 4, we're adding more interest earning assets to our portfolio.

We've cut expenses and we've cut, liability costs. So to your question, I think we have more time and flexibility to assume we really like something. But we do think equity as a percentage of the book is still too high. And if there's an equity position we think is undervalued or we think we can make a bunch of money on it, obviously, we won't sell it. I would say generally speaking, if we can get fair value or close to something we think is fair value, I think the bias is towards monetizing And put it into interest earning assets.

Speaker 7

Right. I think it makes sense given that I have I guess I can understand when managers really want to hold on to equity and especially when it's worth a lot. But I think in BAC Vehicles, the equity just can create so much mark to market volatility that it's just not a great vehicle to hold it in. And so, I was just kind of curious to see how you're balancing out maintaining or improving your net asset value Based versus kind of getting to where you want to be.

Speaker 2

Yes, I agree. And also, we're also very focused on Really diversified portfolio. So if you compare this to the other BDCs we manage, any large equity position regardless of how much we like it, It just doesn't make sense to have concentrated positions in the BDC. So I think that's a big focus from our perspective of getting increased diversity.

Speaker 7

And would you say that the destination that you're moving toward is going to be you're going to have a very similar profile to what you have with the Other BDC? In the long run? Yes. Okay. Yes.

Speaker 3

I mean, one of

Speaker 2

the advantages that Logan Ridge shareholders got when we took this over is access to our platform. If you look at our investment activity, most everything we do now is deals that we're leading across the platform And Logan Ridge benefits from that. So yes, our focus is to make this portfolio a lot more boring, Get diversified, getting in debt and start driving NII and turn the dividend back on.

Speaker 7

And you wouldn't see some managers have sort of sister BDCs that are out there where one takes focus more broadly on the capital structure and another one is more senior focus. Do you not see that or do you see them being Really very comparable to one another.

Speaker 2

Yes. I don't think I don't think we're going to go the route of like a senior BDC and a junior BDC. I don't think that's where we're going. I think Over time, our BDC should look more and more similar investment wise, just because that's our franchise. So I don't and that's We're always exploring strategic opportunities as everybody knows.

And maybe if there's some interesting angle for us to Maximize value for shareholders, we'll go down that road. But I think generally the base case is for us to make this vehicle look more and more like our other vehicles.

Speaker 7

Great, great. Well, thank you very much for your time and congratulations on the progress.

Speaker 2

Thank you. Great. Well, thank you everyone for joining us this morning. And we look forward to speaking to you in mid August when we announce Our 2022 Q2 results. And of course, if anybody has any further questions or any further follow ups, please feel free to reach out to any member of the management team.

Thank you very much and have a great weekend.

Speaker 0

This concludes today's conference call. Thank you for participating and you may now disconnect.