Logan Ridge Finance - Q3 2024

Executive Summary

• Net investment income rose to $1.0M ($0.37 per share), up from $0.8M ($0.28) in Q2, while total investment income eased to $5.148M from $5.4M; NAV per share declined to $32.31 due to net realized/unrealized losses.
• The company executed a transformational exit of its largest equity holding, Nth Degree, for $17.5M in cash, approximately $2.0M above prior quarter fair value, enabling redeployment into interest-earning assets and lowering portfolio equity weighting.
• Cost of capital improved via an amendment and extension of the KeyBank revolver: margins reduced 10–5 bps and maturities pushed out; advance rates and concentration limits revised to increase borrowing capacity.
• Board raised the Q4 2024 distribution to $0.36 per share, a 9% increase vs Q3’s $0.33, reflecting confidence in long-term earnings power; recurring PIK income mix fell by >200 bps, quality improving.
• Wall Street consensus (S&P Global) for Q3 2024 was unavailable due to missing mapping; estimate-based beat/miss assessment not possible.

What Went Well and What Went Wrong

What Went Well

• Executed a strategic exit: “sale of our largest equity position, Nth Degree, above our prior quarter fair value… a transformational milestone… We plan to redeploy the cash proceeds into interest earning assets originated by the BC Partners Credit Platform”. Net realized gains on investments totaled $11.068M, driven by affiliate investment realization.
• Dividend raised: Board approved a Q4 distribution of $0.36 per share, +9% vs Q3’s $0.33; CEO highlighted dividend progression since reintroduction in 2023 as evidence of turnaround momentum.
• Funding terms improved: “amended and extended our revolving credit facility… reduced applicable margins… extended maturity… creating meaningful additional borrowing capacity”. Debt portfolio weight increased to 86.8% with weighted average annualized yield ~12.3% (ex non-accruals/CLOs), enhancing earnings quality.

What Went Wrong

• NAV decline: Net assets fell to $86.3M; NAV/share decreased $0.82 QoQ to $32.31, primarily due to net realized and unrealized losses (unrealized losses of $(13.263)M) despite realized gains.
• Lower total investment income: TII declined QoQ to $5.148M (from $5.4M), with the CFO citing absence of a prior-quarter nonrecurring dividend and lower expenses offsetting the impact.
• Non-accruals persisted: Three portfolio companies on non-accrual; fair value decreased to $8.2M from $10.1M (cost steady at $17.2M), including an additional markdown at Sequoia noted in Q&A, reflecting ongoing workout exposure.

Transcript

Operator (participant)

Thank you. Good morning and welcome to the Logan Ridge Finance Corporation's third quarter ended September 30, 2024, earnings conference call. An earnings press release was distributed Thursday, November 7, after the close of the market. A copy of the release, along with a supplemental earnings presentation, is available on the company's website at www.loganridgefinance.com in the Investor Resources section and should be reviewed in conjunction with the company's Form 10-Q filed 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.

Speaking of today's call will be Ted Goldthorpe, Chief Executive Officer, President and Director of Logan Ridge Finance Corporation, Brandon Satoren, Chief Financial Officer, and Patrick Schafer, Chief Investment Officer. With that, I would like to turn the call over to Ted Goldthorpe, Chief Executive Officer of Logan Ridge Finance Corporation. Please go ahead, Ted.

Ted Goldthorpe (CEO)

Good morning. Quarter 2024 earnings call. As mentioned, I am joined today by our Chief Financial Officer, Brandon Satoren, and our Chief Investment Officer, Patrick Schafer. Following my opening remarks, Patrick will provide additional details on our investment activity to date, and Brandon will walk through the financials. Before Brandon and Patrick provide more details on our portfolio and financials, I would like to discuss a few key highlights for the quarter. During the third quarter, we successfully exited our largest investment, Nth Degree Investment Group, for $17.5 million in cash, which was $2 million above its previously reported fair value as of June 30, 2024, in exchange for all of our equity interests. The sale of this equity investment is a transformative event for the company, as it represented 7.9% of the company's investments at fair value prior to the sale.

The proceeds of which can now be redeployed into interest-earning assets originated by BC Partners' credit platform, which will significantly improve the long-term earnings power of our portfolio. The rotation out of legacy equity portfolio has been a key component of our turnaround strategy for Logan Ridge since Mount Logan Management took over as the company's investment advisor in July of 2021. We are proud to have taken a major step forward towards this goal. Additionally, the underlying credit performance of our portfolio has remained stable, with no new investments being placed on non-accrual status during the quarter. The strength of the company's financial position and the outlook for long-term earnings power of the portfolio has allowed the company to declare a fourth-quarter distribution of $0.36 per share.

The dividend has doubled compared to the $0.18 per share distribution we declared in the first quarter of 2023 when we reintroduced our quarterly dividend, highlighting the company's successful turnaround story since we took over management back in July of 2021. Additionally, during the quarter, we amended and extended our revolving credit facility with KeyBank. The new attractive terms, which reduced the applicable margins and extended the maturity date on both the reinvestment and amortization periods, have reduced our overall cost of capital, creating meaningful additional borrowing capacity and providing us with further financial flexibility.

Regarding the private credit markets, specifically the core middle market, which we define as companies generating between 10 and 50 EBITDA, activity levels continue to be elevated relative to 2023, but the majority of the activity has consistently been from refinancings, add-ons, or amend-and-extend transactions that most often result in lower cost of capital for our borrowers and extended maturities. While true new buyout financings have remained at depressed levels through 2024, we continue to believe that a combination of dry powder, sponsors looking to return capital to LPs, and the ongoing rate cuts by the Fed are all tailwinds to activity in our sector. Looking forward to the final quarter of 2024 and into 2025, as we navigate through economic uncertainty and a dynamic interest rate environment, we remain confident in our prudent investment strategy, strong pipeline, and experienced management team.

We continue to see attractive opportunities in our pipeline and believe we remain well-positioned to continue to deliver positive returns to our shareholders through the diligent deployment of capital, continued rotation out of the legacy equity portfolio, by leveraging the attractive terms of our amended credit facility. With that, I will turn the call over to Patrick Schafer, our Chief Investment Officer.

Patrick Schafer (CIO)

Thanks, Ted, and hello, everyone. As of December 30, 2024, the fair value of Logan's portfolio was approximately $176.5 million, with exposure to 59 portfolio companies. This compares to 61 portfolio companies with a fair value of approximately $195.6 million as of the prior quarter and 59 portfolio companies with a fair value of $187.1 million as of September 30, 2023. During the quarter-ended September 30, 2024, while our pipeline of new opportunities remained strong, we continue our prudent and judicious approach on the deployment front. During the quarter, we deployed approximately $900,000 in new and existing investments and had approximately $19 million in repayments and sales, resulting in net repayments and sales of approximately $18.1 million for the quarter. The high level of repayments and sales were due largely to the aforementioned sale of our largest equity position, Nth Degree, for $17.5 million.

The company used a portion of the proceeds from the sale of Nth Degree to pay down the KeyBank credit facility. Now on to our portfolio composition. As of September 30, 2024, 65.4% of the company's investment portfolio at fair value was invested in assets originated by the BC Partners credit platform, up from 59.4% in the last quarter, and that percentage is artificially low as the proceeds from Nth Degree are not reflected in the amount of the investment portfolio originated by the BC Partners credit platform. As of September 30, 2024, our debt investment portfolio represented 86.8% of the total portfolio at fair value, with a weighted average annualized yield of approximately 12.3%, excluding non-accruals and collateralized loan obligations, or 11.1%, excluding just the income from non-accruals and collateralized loan obligations.

This compares to debt investment portfolio, which represented 80.0% of our total portfolio at fair value, with a weighted average annualized yield of approximately 12.7%, excluding non-accruals and collateralized loan obligations, or 11.4%, excluding just the income from non-accruals and collateralized loan obligations as of the prior quarter. As of September 30, 2024, 88.6% of our debt investment portfolio at fair value was bearing interest at a floating rate compared to 88.1% as of June 30, 2024, and 82.3% as of September 30, 2023. As of September 30, 2024, first-lien debt represented 67.6% and 69.3% of our total portfolio on a cost and fair value basis, respectively.

This compares to first-lien debt representing 65.8% and 64.0% of our total portfolio on a cost and fair value basis as of June 30, 2024, and 63.6% and 64.8% of our total portfolio on a cost and fair value basis, respectively, as of September 30, 2023. The equity portfolio represented 12.7% and 12.1% of the portfolio on a cost and fair value basis, respectively, as of September 30, 2024. This compares to 15.2% and 19.0% of the portfolio on a cost and fair value basis as of June 30, 2024. Moving on to non-accruals, as of September 30, 2024, the company had four debt investments across three portfolio companies on non-accrual status with an aggregate amortized cost and fair value of $17.2 million and $8.2 million, respectively, or 8.8% and 4.6% of the investment portfolio at a cost and fair value, respectively.

This remains unchanged from the second quarter, which had four debt investments across three portfolio companies with a cost and fair value of 17.2% and $17.2 million and $10.1 million, respectively, or 8.5% and 5.2% of the investment portfolio's cost and fair value, respectively. I'll now turn the call over to Brandon.

Brandon Satoren (CFO)

Thanks, Patrick. For the quarter-ended September 30, 2024, Logan generated $5.1 million of investment income, a decrease of $0.3 million as compared to $5.4 million for the prior quarter. The decrease was primarily due to the receipt of a non-recurring dividend of $0.2 million during the second quarter of 2024. Total operating expenses for the third quarter decreased by approximately $0.4 million to $4.2 million as compared to $4.6 million for the prior quarter. The decrease was largely due to non-recurring professional fees incurred in the previous quarter. Accordingly, our net investment income for the third quarter was $1 million, or $0.37 per share, an increase of $0.2 million from $0.8 million, or $0.28 per share, last quarter. Our net asset value as of quarter-end was $86.3 million, representing a $2.4 million decrease as compared to the prior quarter net asset value of $88.7 million.

On a per-share basis, net asset value was $32.31 per share as of September 30, 2024, representing an $0.82 per share decrease as compared to $33.13 per share as of June 30, 2024. The decrease in Net Asset Value quarter over quarter was primarily driven by net realized and unrealized losses on the portfolio. Additionally, I'd like to highlight that on August 21, we amended and extended our existing senior secured revolving credit facility with KeyBank. Under the terms of the amendment, the applicable margin during the reinvestment period was reduced from 2.9% to 2.8%. The reinvestment period was also extended from May 2025 to August 2027, and the maturity date was extended from May 2027 to August 2029. Importantly, under the terms of the amendment, the advance rates and concentration limits were revised, which created meaningful additional borrowing capacity for Logan Ridge.

Finally, as of quarter-end, the company had $5 million in cash and cash equivalents, as well as $35.9 million of unused borrowing capacity available for deployment in new investments. With that, I will turn the call back over to Ted.

Ted Goldthorpe (CEO)

Thank you, Brandon. To our shareholders, thank you so much for your continued support. This concludes our prepared remarks, and I'll now turn the call over to the operator with any questions.

Operator (participant)

Thank you. We will now begin our question-and-answer session. If you are dialed in and would like to ask a question, please press star followed by the number one on your telephone keypad. If you would like to withdraw your question, simply press star one again. We'll pause for a moment to compile the Q&A roster. Thank you. Our first question comes from the line of Christopher Nolan with Ladenburg Thalmann. Please go ahead.

Christopher Nolan (Analyst)

Hey, guys. First off, I want to say congratulations on the Nth Degree. You guys should take a victory lap around the conference table, and it was a good job all around. I guess in terms of two questions, were there any non-recurring items this quarter?

Patrick Schafer (CIO)

There were not, Chris.

Christopher Nolan (Analyst)

Okay. And then I guess what does this mean for in terms of integrating Logan Ridge with some of your other vehicles?

Ted Goldthorpe (CEO)

I mean, listen, as we've said very publicly, there's a number of things we had to get done in order to move that ahead, and obviously, this removes a very, very big barrier to do that. So I think we feel we've kind of outlined the three or four things that have to happen, and those all seem to be falling into place.

Christopher Nolan (Analyst)

Great. And then a final question on the revised facility. You guys indicated that you seem to have a higher advance rate. Are you reading any? I mean, it sounds like the bank has become much more accommodating to you guys, which is interesting given the potential for a commercial real estate wave hitting commercial banks. I mean, am I reading it correctly where the bank has actually been a bit more accommodating to you guys in revising the facility? That's it for me. Thank you.

Patrick Schafer (CIO)

Yeah. Look, Chris, I think what I'd say as a blanket statement there, and we can get into Logan, but I'd say across our platform, we are definitely seeing our financing sources being a little bit more accommodating, a little bit more aggressive on terms, on kind of availabilities and advance rates and concentration limits and things like that. So I think as a blanket statement, we are definitely seeing more competition from folks who want to do our financing facilities, this being kind of a representation of that. I think specifically for Logan Ridge, for our facility, it was put in place initially when we first took over, and so there were just, frankly, just a number of different concentration limits, and the way it's done, it's a very prescriptive, depending on all the different metrics of the company, you get a certain advance rate.

A lot of what we were doing was sort of just right-sizing the different concentration limits and tests and things like that, given that we now have a much larger portfolio that that facility is financing. I would think of it specifically what we did here as a little bit more unique to Logan Ridge just because of when we put that facility on versus now, but your comment, I think, as a broad brush is accurate, which is we are finding our financing sources in general to be a lot more accommodating and aggressive on advance rates and cost of capital and things like that.

Christopher Nolan (Analyst)

Okay. That's it for me, and congratulations once again. That was definitely a win. Thanks.

Patrick Schafer (CIO)

Thank you, Chris.

Operator (participant)

Our next question comes from the line of Stephen L. Martin with Slate. Please go ahead.

Stephen Martin (Analyst)

Hi, again, guys. Let me repeat some of the same questions. Can you comment on deployment in the fourth quarter? I understand you guys are Logan and Portman are on the same platform, but with the paydown from Nth Degree, I guess Logan is a lot less leveraged, and it would seem that you're going to have to do something a little different to get Logan more leveraged if Portman can't be?

Patrick Schafer (CIO)

I don't know that. The short answer to that, the long answer is I don't know that I'd frame it as a need to do something differently, but yes, I think that where Logan is right now with the Nth Degree and the paydown, I would say they certainly have. It is certainly less of a one-in-one-out or less of an optimizing the balance sheet necessarily, and there's probably more value to Logan in terms of being a little bit more of a market buyer of credit as opposed to being a selective buyer. So I think Logan probably has a little bit more flexibility to participate in some of the lower-yielding stuff that we still find very attractive from a credit perspective, but maybe is willing to do something at a marginally lower ROA because there is a significant benefit from an ROE perspective.

Stephen Martin (Analyst)

Right. I would hope so. And does the, well, I guess the deployment question is sort of moot. Non-accruals, okay? The number didn't change, the investments, the cost didn't change, but it seems like you picked up a little extra, $2 million extra on Nth Degree, but then your non-accruals went from $10 million of fair market value to $8 million. What was the change there?

Patrick Schafer (CIO)

Yeah. It was a further markdown of one of our non-accruals, Sequoia, which has been on non-accrual since we sort of took over the vehicle. So that's really a mark-to-market on that name, and it's gone through periods of time, but that has generally sort of tracked flat or slightly down relative to when we took over the portfolio.

Stephen Martin (Analyst)

Okay. And one last one, and it relates to the lower leverage in Logan. I guess I was a little disappointed that your share repurchase only resulted in, I don't know, 32 or 3,300 shares being repurchased. And given the lower leverage, it would seem that Logan has more capacity to buy, and we've talked about it, to buy back stock at the current discounts.

Patrick Schafer (CIO)

Yeah. And the only comment I'd make there, Steve, is because we proactively put in place 10b5-1 programs to avoid or to allow those to work during blackout periods, we put in place a program without knowing what was happening with Nth Degree. So I think in hindsight, it's easy to say the program should have been larger given lower leverage, but we didn't have the level of visibility on Nth Degree coming back when we originally put in place the 10b5-1 program for this quarter. So I agree with you. I think all else being equal, it would be reasonable to think that that could be a larger program. But at the time, we had to put it in place, and then we kind of couldn't really amend it until it came up again. Sort of the facts on the ground were slightly different than they are with hindsight.

Stephen Martin (Analyst)

Okay. Well, then the obvious question is, has it been amended?

Patrick Schafer (CIO)

It had to run in place for a certain period of time, and when we go and reset that, we will reset it with all the facts and circumstances in place when we think about that.

Brandon Satoren (CFO)

Yeah. And Steve.

Patrick Schafer (CIO)

Yeah. We normally do it one quarter at a time, and then we have the earnings, and we put in place a new one for the next quarter. So it's a quarterly program that we put in place. So sorry, I didn't mean to be evasive, Steve. The answer is yes. Now, when we put in place a new program for this quarter, we'll factor in the fact that our leverage is where it is and our liquidity is where it is as opposed to when we put in place at the beginning of the last quarter.

Stephen Martin (Analyst)

Okay, and you only really have two more equity positions of size. Any thoughts or any view as to the repayments on those? Is there anything on the horizon that you can't mention by name but might be in the works?

Patrick Schafer (CIO)

Look, I think I'll sort of repeat what I've done for the last couple of quarters, which is I think this is a decent market for companies to try and go out and execute an M&A strategy. I think for both of those large positions, I think our sense is that they've been held by the respective owners for a long enough period of time that we think it would make sense for them to go and execute on some sort of M&A transaction. But we obviously don't control either of those scenarios. But again, I would say that this feels like a fairly favorable market to be looking for exits for equity positions.

Stephen Martin (Analyst)

Okay. Thanks a lot.

Operator (participant)

That concludes the Q&A session. I would like to turn the call over back to Mr. Ted Goldthorpe for any closing remarks.

Ted Goldthorpe (CEO)

Right. Well, thank you very much for everyone joining us today, and we look forward to seeing you again in a few weeks during our investor luncheon scheduled for December 12th. Thank you so much, and happy early Thanksgiving.