Logan Ridge Finance - Q2 2022

Transcript

Speaker 0

Good morning. Welcome to our Q2 2022 earnings call. I'm joined today by my Chief Financial Officer, Jason Roos and our Chief Investment Officer, Patrick Schaeffer. Following my opening remarks, Patrick will provide additional detail on our investment activities to date and Jason will walk through the financials. The Q2 of 2022 was transformational for Bolken Ridge and marks our 1st 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 twenty twenty two. While Patrick will provide additional details on the transformation of our portfolio, I would like to emphasize a few milestones 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 Credit BC Partners Credit Platform with ample cash an unused borrowing capacity under our new credit facility available for future deployment. During the 12 months At June 30, 2022, we have successfully monetized and or realized just under $150,000,000 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 accruals since Mount Logan Management became the company's investment advisor. Further, we successfully exited a non accrual investment we inherited for proceeds of 600,000 This position was valued at 0 as of June 30, 2021. The company has delevered to 1 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 a 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 the securities 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 portfolio at fair value as of June 30, 2022 including the successful exit of Logan Ridge's largest legacy non yielding equity interest in Eastport on June 29, 2022. This compares to 32.3 percent of the portfolio at fair value as of June 30, 2021. For the 12 month period ended June 30, 2022, administration fees reimbursed the administrator, BC Partners Management totaled 0 point $6,000,000 This compares to $1,400,000 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 righting 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 refinanced 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 Schaeffer, our Chief Investment Officer.

Speaker 1

Thanks, Ted. As of June 30, 2022, fair value of our portfolio was $175,900,000 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 prudent portfolio management, we successfully monetized and or realized almost $150,000,000 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 investments investment portfolio at fair value was invested in assets originated by the BG Partners Credit Platform as of the quarter end June 30, 2022.

Additionally, The company has $29,500,000 in cash as well as $34,400,000 of unused borrowing capacity available for deployment in investments originated by the BC Partners Credit Platform as of June 30, 2022. During the Q2, the company continuing to judiciously redeploy capital generated from the exiting from exiting the legacy portfolio. Specifically, the company made approximately $30,700,000 of investments and had approximately $58,300,000 in repayments and exits, resulting in net repayments and sales of approximately $27,600,000 for the quarter. This includes the refinancing and recapitalization transaction leaded by Eastport Holdings LLC that closed on June 29, 2022, whereby Logan Ridge received $16,500,000 in cash and $19,300,000 in principle of a new debt security in exchange for all its previous debt and equity securities, generating a realized gain of approximately $16,000,000 As of June 30, 2022, We had debt investment in 2 portfolio companies on non accrual status with an aggregate cost of $12,100,000 and a fair value of $6,400,000 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 represented 75% of the total portfolio at fair value ahead of weighted average annualized yield of approximately 8.7%, excluding non accruals and collateralized loan obligations. This compares to a debt investment portfolio, which represented 68.1% of our total portfolio at fair value, with a weighted average annualized yield of approximately 8.3%, excluding non accruals and collateralized loan obligation as of March 31, 2022. Finally, the cost and fair value of our non yielding equity portfolio as of June 30, 2022 decreased to $40,700,000 $37,600,000 respectively. This compares to the cost and fair value of $43,600,000 58,700,000 as of the prior quarter $49,900,000 73,700,000 1 year ago when we took over managing the company. I'll now turn the call over to Jason.

Speaker 2

Thanks, Patrick. Turning to our financial results for the quarter ended June 30, 2022. Our net asset value with $101,100,000 or $37.31 per share as compared to $106,200,000 or $39.16 per share at the end of the Q1 of 2022 $107,100,000 or $39.48 per share as of December 31, 2021. Net investment loss for the 2nd quarter decreased to $900,000 as compared to net investment loss of $1,100,000 reported in the first of 2022. That said, net investment loss for the Q2 also included approximately $300,000 of incremental non recurring financing costs and professional fees.

Accordingly, these excluding the impact of these nonrecurring items, we would have recorded adjusted net investment loss of $600,000 Total investment income was $3,300,000 for the Q2 of 2022, which is flat compared to prior quarter and a decrease from $5,000,000 reported for the Q2 of 2021. The decline from Q2 of 2021 was primarily due to delevering the portfolio. Total expenses for the Q2 of 20 declined to $4,200,000 from $4,400,000 in the prior quarter and $5,000,000 during the Q2 of 2021. The decline in expenses driven primarily by lower interest and financing fees, management fees and other general and administrative costs. For For the Q2 of 2022, we reported a net investment loss of $900,000 compared to net investment loss of $1,100,000 in the prior quarter and net investment income of less than $100,000 during the Q2 of 2021.

Net realized gain on investments was $15,500,000 for the Q2 of 2022 compared to a net realized loss of less than $100,000 in the prior quarter and a net realized gain of 6 dollars 900,000 during the Q2 of 2021. Cash and cash equivalents as of June 30, 2022 increased $29,500,000 as compared to $15,800,000 as of March 31, 2022, primarily as of the Eastport Holdings LLC refinancing and recapitalization transaction that closed on June 29, 2022. For the 3 months ended June 30, 2022, the company reported a net decrease in net assets resulting from operations of $5,000,000 or a net loss per share of $1.86 Further, during the Q2, 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 Q2 Of 2022, we issued $15,000,000 convertible notes due 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 KeyBanc, increasing the commitment from $25,000,000 to $75,000,000 with an uncommitted accordion feature that allows us to borrow up to an additional 125,000,000 The amended KeyBanc credit facility will mature on May 10, 2027.

Borrowings under the amended KeyBanc Credit facility will bear interest at a floating forward looking term rate equal to 1 month SOFR plus 2.9 percent subject to a 40 basis point SOFR floor during the 3 year revolving period and 1 month SOFR plus 3.25 percent subject to a 40 basis point SOFR floor thereafter. This compares to the old facility, which bore interest at 1 month LIBOR plus 3.5 percent subject to a minimum rate of 4.25%. Our initial draw on the credit facility was $49,100,000 The proceeds from these transactions were 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 matured on May 31, 2022. With that, I will turn the call back over to Ted Goldthorpe.

Speaker 0

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 expect to be 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. I'll now turn the call over to the operator for any questions.

Speaker 3

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

Speaker 4

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

Speaker 1

Yes. So it's Eastport. It was related to yes, it was related to The company whereby we exchange our equity for a debt security. So $16,000,000 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 $3,000,000 The remaining $13,000,000 of that was previously unrealized gain.

Speaker 4

So the incremental NAV when you say impact, you mean?

Speaker 1

Positive benefit. Positive benefit. So you mean the NAV appreciation? The 2016, 3 is new. Yes.

Of the 16, 3 is new, I'll call it.

Speaker 4

Great. And then the unrealized depreciation that was mostly a true up on that?

Speaker 1

Yes. That's yes. Great. Yes.

Speaker 2

So a good portion of that right flip from unrealized to realized and then there was the incremental mark on the portfolio, which was Do our normal quarterly valuation process.

Speaker 4

You got to 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 We'll be in a better position by year end or close to profitability by year end than it is now.

Speaker 0

Yes. Yes, exactly. So again, like the big focus for us was really fixing the capital structure and getting leverage down. And now it's really about getting income up. So cut a lot of costs.

We run the vehicle a lot more efficiently now, as I mentioned. And you should begin to see as return to profitability and return to a position where we can start paying a dividend. I think the big milestone this quarter clearly was we monetized our e sport equity, which massively reduced not only our equity exposure, but also took away concentration risk because it's an outlier in terms of size. So now our largest equity position is like 4%. And so yes, we feel very, very good about the second half of this year.

Speaker 4

Great. Okay. Thank you, guys.

Speaker 3

And comes from the line of Stephen Martin with Slater Capital.

Speaker 1

Hi, guys.

Speaker 5

Thanks, Jason. Couple of questions. The unrealized loss of $19,000,000 Some of that was as you were just talking about Eastport flipping around. How much of it was portfolio mark To market and how much of that might be recovered given where the market is now? Yes, I

Speaker 1

would say Good question. Okay, Jason.

Speaker 2

Yes, I would say about 13 Was a true flip between unrealized and realized. And then the remainder was pretty much as Unrealized indicates, right? It's basically looking at fair values on a future cash flow projections Outlooks on the performance of the underlying company and with the rebound in rates and credit spread, Some of that we would expect to come back.

Speaker 5

Okay. Can you talk about deployments and repayments Subsequent to the end of the quarter.

Speaker 1

Yes. I would say Similar to our other policy, 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 2 would be For the most part of the quarter of the second quarter, the folks in Logan Ridge had been the refinancing of The liability structure and getting the KeyBanc facility in place and you come in to have a relatively static portfolio to kind of do those things. So there was, I would say, 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 the capital.

So I'd say we still have some work to do on Logan Ridge in terms of deploying cash and making new investments.

Speaker 5

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?

Speaker 1

I mean, the short answer is yes. The long answer is it's more complicated than that as everything is. Our 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 liquid markets are attractive from a purely economical perspective, but we also need to weigh that against assets that are eligible that we can utilize 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 markets to for some period of time to invest out of Logan Ridge.

Speaker 5

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 form a 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.

Speaker 2

Yes. I would say within the number that's presented for the quarter. There's about $230,000,000 of excess interest expense, just due to Duplicative debt being on the portfolio to the for the mechanics of like paying off the existing debt. So That $2,100,000 has about $230,000,000 of call it one time interest expense in it. Going forward, just using The rates that were in place as of sixthirty, I would anticipate that that number be closer to the 1,700,000 On a quarterly run rate.

Speaker 5

Got you. Anything material that was realized in the Q3 so far?

Speaker 1

Yes, I mean, it depends on your definition of materiality. I'd say in some respects, the answer is yes. We've realized some exits. I think one of them was disclosed by the purchasing entity we've exited very recently our position in biology. So that is on our Our exit value, if you will, is in line with our quarter end valuation as we I had been expecting and knew that was in process as part of our quarterly valuation process.

So you shouldn't expect Any impact from that, but that was an asset that was realized this quarter. It was a 3.6 $800,000 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.

Speaker 5

Now, Vology was On the March 31, you had debt and preferred and you marked the preferred debt down to 0. So that was

Speaker 1

a Correct.

Speaker 5

Non recovery, so to speak?

Speaker 1

That's correct.

Speaker 5

Got you. So that would have been part of which That would have been part of the

Speaker 1

That'd be part of the no, that's part of the unrealized because as of six thirty, it hadn't been realized. So it will be part of the unrealized number that will theoretically get reversed out. You'll reverse the unrealized and book the realized for Q3, But that's part of the unrealized Q2 number.

Speaker 5

So that's part of that $19,000,000

Speaker 1

Yes, that's correct.

Speaker 5

Got it. All right. Thanks a lot.

Speaker 3

There are no further questions in queue at this time.

Speaker 0

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 of weeks. Thank you so much.

Speaker 3

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