Logan Ridge Finance - Q3 2021

Transcript

Speaker 0

Good day and thank you for standing by. Welcome to the Logan Ridge Third Quarter 2021 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 Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Jiay Linford.

You may begin.

Speaker 1

Thank you. Good morning, and welcome to Logan Ridge Finance Corporation's Q3 2021 Earnings Conference Call. An earnings press release was distributed yesterday afternoon, November 10th, after market close. A copy of the press release along with an earnings presentation is available on the company's website at 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 forward looking statements unless required by law. With that, I would now like to turn the call over to Ty Goldthorpe, Chief Executive Officer of Logan Ridge Finance Corporation. Please go ahead, Ted.

Speaker 2

Good morning, and welcome to our Q3 2021 earnings call. I'm joined today by our Chief Financial Officer, Jason Roos and our Chief Investment Officer, Patrick Schaeffer. This marks our 1st completed quarter as the new advisor to Logan Ridge Finance. And today, I'd like to 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 Jason will walk you through the financials.

We previously discussed our 2 immediate objectives as the new advisor. 1st and foremost, our goal is to reposition the book by rotating out of non income producing equity exposure and redeploying those proceeds into high quality senior secured income generated investments originated by BC Partners. And secondly, a key priority was to deleverage and optimize the company's debt capitalization. I'm pleased to report that during the Q3, the company made material progress on the repositioning front, exiting five portfolio companies, which generated proceeds of $59,700,000 of which approximately $11,200,000 was received for the successful exits from 3 non income producing equity investments. These positions were valued at $58,700,000 as of June 30, 2021.

Additionally, during the quarter ended September 30, 2021, we made $48,900,000 of new investment commitments to 60 portfolio companies, of which approximately $33,300,000 was funded as of quarter end. As a result, 1st lien debt as a percentage of the portfolio at fair value has increased to 58% from 50% in the prior quarter. 2nd lien debt has decreased to 11% from 17% in the prior quarter and our equity portfolio decreased to 31% from 32% in the prior quarter. We're very pleased with the progress we've made in repositioning the portfolio. With that in mind, I would like to spend a few minutes addressing our investment income during the Q3.

Our investment income declined this quarter compared to prior quarter, This is primarily driven by large exits occurring early in the quarter and the bulk of our deployment activity occurring at the end of the quarter. As prudent underwriters and good stewards of shareholder capital, we've always taken a disciplined approach to deploying capital and the reinvestment of Logan Ridge is no exception. In addition to the new funded loans made during the quarter, largely weighted towards the end of the quarter, we had $37,400,000 of cash on the balance sheet that is earmarked for previous commitments that we expect to fund and new investments we intend to make. We fully expect this dynamic to be transitory, but generally it is the result of successful proactive rotation of the portfolio. Our platform has a robust pipeline We expect to deploy the capital in a reasonably short period of time, which should drive incremental investment income that flows through 100% to NII.

With respect to the company's debt structure, we made tangible debt progress in risk reduction by additional deleveraging during the Q3. Following the full repayment of the $71,000,000 in SBA debentures during the Q2, we then repaid $25,000,000 outstanding on the KeyBanc Credit Facility during the quarter. Accordingly, our debt to equity ratio has decreased from 1.3x at the end of the second quarter 2021 to 1.1x as of the end of the Q3 2021. Furthermore, subsequent to quarter end, We announced that we successfully refinanced a portion of our long term debt. On October 29, 2021, the company issued $50,000,000 of 5.25 Senior Unsecured Notes due 2026, which received an investment grade rating of BBB- from Egan Jones.

The proceeds of this offering will be used to repay $50,000,000 in aggregate principal of the 6% notes due 2022, which will be completed early next month. Longer term, we've also discussed our plans to leverage the BC Partners platform and entire AUM base to drive operating efficiencies. So far, we've reduced and stabilized operating expenses and we expect we will be able to continue this trend of spreading a stable level of expenses across the larger asset base as we seek to grow the investment portfolio. As I mentioned earlier, our overall key objective is to reinstate a stable, sustainable dividend as soon as practically possible. We've made solid progress thus far.

We look forward to continuing this momentum and providing additional updates in the coming quarters. With that, I will turn the call over to Patrick Schaeffer, our Chief Investment Officer.

Speaker 3

Thanks, Ted. I'll briefly summarize investment activities for the 3rd quarter and then provide some more detail on activities subsequent to quarter end. During the quarter, the company made $48,900,000 of new investment commitments to 6 new portfolio companies, of which approximately $33,300,000 was funded as of quarter end. The company had approximately $64,100,000 and Net Repayments and Sales, resulting in net repayments and sales of approximately $30,800,000 for the quarter. As of September 30, 2021, the company's investment portfolio consisted company's portfolio consisted of investments in 33 portfolio companies with a fair value of approximately $195,400,000 The debt investment portfolio, which represented 69.1% The fair value of our total portfolio had a yield of approximately 8.9%.

As of quarter end, we had debt investments in 3 portfolio companies on non accrual status with an aggregate amortized cost of $21,300,000 and an aggregate fair value of $9,200,000 which represented 11.0% and 4.7% of the investment portfolio respectively. During the quarter, the company recognized $7,400,000 of realized gains on investments, driven by the successful exits of our investments in 3 Bridge Solutions, Rapid Fire Protection, Corporate Visions, Sitel and AmeriMark Direct. The company also recognized 9,400,000 of unrealized depreciation, driven largely by realizing depreciation on the positions we exited during the quarter. I'll now provide a little more detail on our activities subsequent to quarter end. To date, we have successfully exited Logan Ridge's investment in Chicken Soup For The Soul and approximately $7,000,000 of our investment in Navis Holdings Inc, generating proceeds of $17,000,000 of which approximately 1,300,000 was from our equity interest in Navis Holdings.

This was offset by $24,300,000 of new investment commitments to date. Additionally, we have equity interest in 2 additional portfolio companies that are currently in various stages of sale processes, one of which we're cautiously optimistic will close by year end. As we discussed at length, our immediate objectives continue to be successfully rotating the portfolio out of non income producing positions and redeployment proceeds into high quality senior secured interest earning debt investments originated by BC Partners, and we've made substantial progress on this initiative already. 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 $3,400,000 for the Q3 of 2021 compared to $5,000,000 for the Q2 of 2021. Interest income declined by $900,000 quarter to quarter due to lower average outstanding debt investments. Additionally, the 3rd quarter did not benefit from approximately $600,000 in nonrecurring dividend income received in the 2nd quarter.

Total expenses for the Q3 of 2021 were $4,900,000 compared to $5,000,000 for the Q2 of 2021. Interest and financing fees decreased by $400,000 management fees decreased by $200,000 and other general and administrative costs increased by $500,000 compared to the prior quarter. The decrease in expenses quarter to quarter was driven primarily by lower financing costs and lower management fees as a result of a smaller portfolio, partially offset by higher general and administrative expenses, driven primarily by $400,000 of onetime expenses during the Q3. Accordingly, net investment loss The quarter was $1,500,000 or $0.56 per share compared to income of $34,000 or $0.01 per share in the quarter ended June 30, 2021. We recognized $7,400,000 in net realized gains and $9,400,000 net change in unrealized losses.

The net decrease in assets resulting from operations was $3,500,000 or $1.29 per share for the Q3 of 2021 compared to a net decrease of $7,600,000 or $2.79 per share for the Q2 of 2021. Net assets as of September 30, 2021, were $110,300,000 or $40.67 per share compared to $113,700,000 or $41.96 per share at June 30, 2021. The decrease in NAV Per share was primarily due to the net change in unrealized losses during the quarter and lower net investment income. As of September 30, 2021, we had 37 point $4,000,000 in cash and cash equivalents. On the liability side of the balance sheet, we fully repaid the $25,000,000 outstanding on the KeyBanc credit facility during the Q3.

At quarter end, we had approximately $125,000,000 of debt outstanding comprised of $72,800,000 of 6 percent notes due 2022 and $52,100,000 of 5.75 percent convertible notes due 2022. The company's total debt Equity ratio was [email protected]@June30 and 2x@theprior year end. As Ted noted, subsequent to quarter end, on October 29, 2021, we issued $50,000,000 of 5.25 percent senior unsecured notes due 2026 in a private placement, which were rated BBB- by Egan Jones. The proceeds from this offering will be used to redeem $50,000,000 of the 72,800,000 and the 6% notes due 2022. We expect this redemption to be completed on December 6, 2021, and following that, $22,800,000 of the 6% notes due 2022 will remain outstanding.

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

Speaker 2

Thank you, Jason. In closing, we've made significant headway since assuming management of the company in the last quarter. We've reduced the equity composition of the investment portfolio and we are prudently redeploying proceeds into high quality debt investments. We've also made material progress on improving the capitalization of the company by quickly deleveraging and more recently refinancing a significant portion of our long term debt capital with lower cost. Look forward to providing more updates in the coming quarters as we continue to make progress.

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

Speaker 0

Thank you. Right. And first, we have Christopher Nolan with Ladenburg Thalmann.

Speaker 5

Hey, guys. Jason, the $400,000 in one time expense, What were those for again, please?

Speaker 4

Yes, sure. A couple of things. There were prepaid or Capitalized fees associated with a prior shelf registration and an equity offering program, known as an ATM program. We wrote those off as those programs expired this quarter. And then there was Some additional accruals that we put on related to audit expenses.

Speaker 5

Okay. And then I guess, I mean, you guys have been making really good progress in terms of just repositioning the book and the balance sheet and so forth. What is your timeframe in terms of you think you can Mostly you can get equity, let's say, to 10% or less of the toll portfolio cost

Speaker 2

I mean, we expect to make pretty material headway between now and the early Q1. So by the time of our next call, We'd expect the equity percentage of our portfolio to be down. We've got 2, as Patrick mentioned in his prepared remarks, we have 2 equity positions that are In pretty advanced stages of the sales process. So again, not saying it's going to happen or not happen, but we're doing a lot of work to get those down. In terms of getting to 10%, I think a realistic target is probably end of next year.

But But again, we're trying to accelerate that to the best of our abilities.

Speaker 5

Okay, great. And then I guess The convertible notes, any plan on refinancing those?

Speaker 4

Yes, I would say we're looking at the right side of the balance Holistically right now, including the convertible notes, that's we're right now looking at some restructuring on, Call it our credit facility, asset backed facility, and that will follow suit.

Speaker 5

Yes.

Speaker 2

So we just Put a partial tender out for our bonds, right, which will close December 6. And the converts are non call, Just given their converts, so we have a little more time to address those just because although they mature in May of 2022, unlike the bonds, They're not as easily to extinguish.

Speaker 5

Well, I mean, you guys Been doing a yeoman's job and I would note on the last call, your stock was trading roughly 52% of NAV, Now it's closer to 65%. So I think the changes that you're making are definitely starting to

Speaker 0

And there are no questions at this time. I'll now turn the call back over to the management.

Speaker 2

Great. Well, thank you all for dialing in this morning and thank you for your continued support. And as per always, the management team is available for calls at any time. Thank you very much.

Speaker 0

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