Logan Ridge Finance - Q4 2021
March 16, 2022
Transcript
Speaker 0
Ladies and gentlemen, thank you for standing by, and welcome to the Logan Ridge Fourth Quarter 2021 Financial Results. 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 turn the conference over to your speaker for today, Serena Lidgee, you may begin.
Speaker 1
Thank you. Good morning, and welcome to Logan Ridge Finance Corporation's 4th quarter and full year 2021 Earnings Conference Call. An earnings press release was distributed on March 14 after market closed. 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 ks filed on Monday 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 Ted Goldthorpe, Chief Executive Officer of Logan Ridge Finance Corporation. Please go ahead, Ted.
Speaker 2
Good morning and welcome to our Q4 and full year 2021 earnings call. I'm joined today by our Chief Financial Officer, Jason Roos and our Chief Investment Officer, Patrick Schaeffer. This marks our 2nd completed quarter and the 1st fiscal year as the new advisor to Logan Ridge Finance. And today I'll 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 And Jason will walk through the financials.
Our immediate objectives as the new advisor are to first reposition the book by rotating out of non income producing equity exposure and redeploying those proceeds into higher quality senior secured income generated investments originating by BC Partners and second to delever and optimize the company's debt capitalization. During 2021, we made substantial progress repositioning the investment portfolio, having successfully monetized $100,000,000 of the legacy portfolio inherited. Since assuming the role as the company's investment advisor on July 1, 2021, we've Successfully exited equity investments in 6 portfolio companies generating $13,400,000 of proceeds through December 31, 2021, which can be redeployed into interest earning investments originated by Mount Logan Management, part of the BC Partners Credit Platform. During the Q4, we exited 3 equity investments generating $2,000,000 in proceeds that can be redeployed into interest earning investments. Originations and repayments were very active during this period and we will continue to redeploy the company's capital into new investment Commitments originated by the BC Partners Credit Platform in 2022.
During the quarter, we made approximately $46,200,000 of investments and had approximately $42,100,000 in repayments and sales investments resulting in net deployment of approximately $4,100,000 for the Q4 of 2021. Since assuming the role of the company's investment advisor on July 1, 2021, We've deployed $79,500,000 in interest earning investments originated by Mount Logan Management through December 31, 2021 And it had sales and repayments of $106,000,000 during the same period. As you can see on slide 4, 1st lien debt as a percentage of the portfolio at fair value was 49.6%. 2nd lien debt was 15.2%, Subordinated debt was 2.5% and collateralized loan obligations were 3.9% and our equity portfolio decreased to 28.8%. During the year, we made significant progress in risk reduction following the full repayment of the $91,000,000 in SBA debentures During the first and second quarter, we repaid the $25,000,000 outstanding on the KeyBanc credit facility and refinanced a portion of our long term notes.
And during the Q4 using $50,000,000 of 5.25 percent senior secured notes due 2026, which received an investment grade rating of BBB- Our total debt to equity ratio was 1.2 times as of the end of 2021 as compared to 2 times at the end of 2020. We will continue to work on optimizing the company's capital structure in 2022 aiming to further lower our overall cost of debt. Our longer term goal is to leverage the BC Partners platform An entire AUM base to drive operating efficiencies. So far, we have reduced and stabilized operating expenses by approximately 23% to $20,300,000 in 2021 as compared to $26,400,000 in 20 20. And we'll expect This trend of spreading a stable level of expenses across a larger asset base as we seek to grow the investment portfolio.
As we laid on Slide 8 of the earnings presentation, we believe there is a near term pathway to positive earnings and longer term accretion from the rotation of non income generating assets. In the near term, we expect significant cost savings from both one time items in the 4th quarter, such as an extra 30 days of interest on the $50,000,000 of notes that were refinanced and from lower liability costs upon the full refinancing of the legacy Logan Ridge liability structure. In addition to incremental income through the investment of our cash on our balance sheet. In the longer term, our expected rotation out of non income generating assets Is expected to significantly increase returns on equity for our shareholders, but our ability to predict the exact timing of that rotation is I would also like to note that we are not including any benefit from high grading the existing income generating portfolio or any benefit from rising interest rates in this analysis. 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 4th quarter, then provide some more details on activity subsequent to quarter end. During the 4th quarter, The company made $52,300,000 of new investment commitments to 10 new portfolio companies, of which approximately $46,200,000 was funded as of quarter end. The company had approximately $42,100,000 in repayments and sales, resulting in net deployment of approximately 4.1 percent for the period. As of December 31, 2021, company's investment portfolio consisted of 40 portfolio companies with a fair value of approximately $198,200,000 The debt investment portfolio, which represented 67.4% of the fair value of our total portfolio, had a yield of approximately 9.3%.
As of year end, we had debt investments in 2 portfolio companies that remain on non accrual status with an aggregate amortized cost of $12,700,000 and an aggregate fair value of $7,600,000 which represented 6.7% and 3.8% of the investment portfolio respectively. This compares to September 30, 2021 debt investments in the 3 portfolio companies on non accrual status with an aggregate Amortized cost of $21,300,000 at an aggregate fair value of $9,200,000 which represented 11% and 4.7% of the company's investment portfolio. During the quarter ended December 31, 2021, The company recognized $8,300,000 of net realized losses on its investment portfolio. During the quarter ended September 30, 2021, The company recognized net realized gains of $7,400,000 The increase in realized losses was primarily driven by the exit of a non Accrual investment during the Q4 of 2021 that has been valid at 0 since we became the company's investment advisor. For the full year 2021, the company recognized $8,800,000 of net realized loss on its investment portfolio.
This compares to $24,000,000 of net realized loss on our investment portfolio in 2020. The change in realized losses was primarily due to the changes in market conditions of our investments and the values at which they were realized, caused by fluctuations in the market and in the economy. As we have previously discussed at length, our immediate objective remains the successful rotation of our portfolio out of non income producing positions and redeployment of the proceeds into high quality senior secured interest earning debt investments originated by BC Partners. We believe that we have made good progress on this initiative in 2021 and since the beginning of 2022. To date, We have exited all or a substantial portion of 12 borrowers that were in the portfolio as of June 30, 2021.
In aggregate, we have generated proceeds of $106,200,000 and were offset by $95,100,000 of new investment commitments to date made across 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 Q4 of 2021, which represents an increase of less than $100,000 or approximately 1.2 percent compared to total investment income for the prior quarter ended September 30, 2021 of $3,400,000 Total investment income for the year ended was $14,800,000 for December 31, 2021, which represents a decrease of $9,700,000 or 36.6 percent compared to the prior year, mainly due to a smaller portfolio as a result of deleveraging the Company. Total operating expenses for the year ended December 31, 2021 decreased to $20,300,000 compared to $26,400,000 a year ago. Interest and financing expenses declined by $4,600,000 to 10,600,000 for the year ended December 31, 2021, primarily due to lower average debt outstanding.
Base management fee declined 25 percent to $4,800,000 for the year ended December 31, 2021 due to lower average assets under management. Additionally, our total operating expenses of $20,300,000 includes non recurring expenses of $370,000 during the Q3 of 2021 And $470,000 during the Q4 of 2021. Accordingly, net investment loss for the year was 3,600,000 Or $1.32 per share compared to income of $58,000 or $0.01 per share in 2020. During the Q4, we recognized $8,300,000 of net realized losses on our portfolio investments. This compares to net realized gains of $7,400,000 for the quarter ended September 30, 2021.
The increase in net realized losses was primarily driven by the exit of a non accrual investment during the Q4 of 2021 that was previously valued at 0 as of September 30, 2021. During the year ended December 31, 2021, we recognized $8,000,000 in net realized Losses on portfolio investments as compared to $24,000,000 a year ago. The change in realized losses was primarily due to changes in the market conditions of our investments And the values at which they were realized caused by fluctuations in the market and in the overall economy. Net assets As of December 31, 2021, were $107,000,000 or $39.48 per share compared to $110,300,000 or $40.67 per share at September 30, 2021. The decrease in NAV per share was primarily due to unrealized losses on the portfolio as well as the net investment loss during the Q4 of 2021.
As of December 31, 2021, we had $39,100,000 in cash and cash equivalents. On the liability side of the balance sheet, fully repaid the $25,000,000 outstanding on the KeyBanc credit facility during October 29, 2021, we issued $50,000,000 of 5.25 percent senior unsecured notes due 2026 in a private placement, which was rated investment grade. The proceeds from this offering we used to redeem $50,000,000 of the $72,800,000 outstanding of the 6% notes due 2022, of which we have $22,800,000 of the 6% notes due 2022 that will remain outstanding. Thus, at December 31, 20 21, we had approximately $125,000,000 of debt outstanding comprised of $22,800,000 of 6 percent notes due 2022, $50,000,000 of 5.25 percent senior unsecured notes due 2026 $52,100,000 of 5.75 percent convertible notes due 2022. The company's total debt to equity ratio was 1.2x@yearend2021 compared to 2x at year end 2020.
With that, I will turn the call back over to Ted Goldthorpe.
Speaker 2
Thank you, Jason. In closing, we made significant headway since assuming management of the company by improving capitalization, quickly deleveraging And most recently refinancing a significant portion of our long term debt capital with a lower cost. We look forward to providing more updates in coming quarters as we continue to make progress. Thank you for your support. This concludes our prepared remarks.
I will now turn it over to the call to the operator for any questions.
Speaker 0
Thank Our first question comes from the line of Christopher Nolan with Ladenburg Thalmann. Your line is open.
Speaker 5
Hey, guys. In the 10 ks, you have the JMP CLOs, which have roughly a 17% Yield, is that the cash yield on that or what's going on there?
Speaker 4
Yes, I guess that would be the calculated yield on the as you know, like CLO equity positions are subject to Beneficial interest accounting methodology and as a result of kind of like the future cash flows anticipated on the underlying equity investments that yield that is Essentially the IRR calculated for the period.
Speaker 5
Okay. And maturity on that It's like 2027, 2029, should we expect those investments to stay on the books for that long?
Speaker 3
No. Hey, Chris, it's Patrick. No, I think the reality is assuming we do absolutely nothing that it probably more likely runs off over a 18 to 24 month period, something like that. I would not think of that stated maturity as kind of the expected life.
Speaker 5
Great. And then given the current market conditions, do
Speaker 2
you really think you
Speaker 5
can lower your debt costs? I know you got 2 debt issuances maturing in May.
Speaker 3
I mean, yes, I think we do. I mean, importantly, if you just kind of think about the existing structure, it's Entirely unsecured. There's actually a small very small key bank facility that's undrawn that would be secured. So we think at a minimum Swapping unsecured for secured borrowing should reduce our cost of capital without doing too much effort. So yes, we absolutely do think we can reduce the cost capital.
Speaker 5
So you'd probably be financing this with your revolver?
Speaker 3
I think we've mentioned before, we would look to put in place a longer term larger, more substantial revolver than the existing KeyBanc facility.
Speaker 2
Yes. So like we always try to balance yes, like we always try to balance cost of capital With flexibility. So I think you'll see the mix between secured and unsecured debt as Patrick said Change, and lowers your cost of financing, but obviously you have to give up some security on your bank line. Okay. I'll get back in the queue.
Thank you.
Speaker 0
Thank you. Our next question comes from the line of Stephen Martin with Slater, your line is open.
Speaker 6
Hi, guys.
Speaker 3
Hi, Steve. How are you?
Speaker 6
Good, good. Couple of questions. Can you talk about well, I guess simple question is if your cap structure were exactly what it is today and nothing changed, what would you Expect interest expense to look like in Q1. It's hard. There were a lot of moving pieces in Q4.
Speaker 3
Yes. So I would say, again, if we did absolutely nothing simplistically, I think Jason mentioned, we had an extra We had an extra 30 days of interest expense in Q4 that would go away and I think it's approximately 250,000. 250, And then we reduced our cost by probably something like At least 50 basis points on that extra $50,000,000 for that $50,000,000 that was refinanced. So you could kind of do the math There, but that's again assuming absolutely no other changes.
Speaker 6
Got you. Can you talk about Q1 and what's gone on so far in terms of repayments, reinvestments? You've talked about Eastport before And what you see with the Heritage Logan Ridge portfolio And potential pay downs?
Speaker 3
Look, I'd say consistent with Our experience at Permian and consistent with the market last year being 2021 was an extremely active period of time. And generally speaking, I'd say a lot of activity was either pulled back from 2020 Or kind of pulled up through in the Q1 of 2022 here. So I'd say as a general comment, we've been a little bit lighter on The repayment and deployment activity in Q1 relative to the 2 quarters of 2021 where we had taken over management. But it's still active, is it slightly at a slightly lower rate?
Speaker 6
Well, you had $36,000,000 of cash on the books And I understand having been on the Portland call, you had some delayed fundings. Should we expect that Q1 you will net Fund or net repay?
Speaker 3
I know it sounds a little bit Given that we only have 15 more days in the quarter, but I think it's a little bit too early to say that, because we
Speaker 2
have a lot of we also have
Speaker 3
a lot of Commitments that we've made that generally speaking get drawn during a quarter. So it's a little bit tough even sitting where we are today to say how we're going to end up For the quarter.
Speaker 2
Yes. And I'd also say that we do have some maturities coming up in a couple of months. And so the cash can be used To pay off debt as well as, big new investments.
Speaker 6
Absolutely. All right. Thank you very much.
Speaker 0
Thanks. Thank
Speaker 2
you.
Speaker 0
At this time, I would now like to turn the call back over to Ted for closing remarks.
Speaker 2
Great. Thank you all for all your support. Thank you all for dialing in today. And we look forward