Logan Ridge Finance - Q4 2022

Transcript

Speaker 0

Good morning, and welcome to Logan Ridge Finance Corporation's Full Year and 4th Quarter Ended December 31, 2022 Earnings Conference Call. An earnings press release was distributed earlier yesterday after the close of the market. A copy of the release along with a supplemental earnings presentation is available on the company's Web at www.loganridgefinance.com in the Investor Resources section and should be reviewed in conjunction with company's Form 10 ks filed with the SEC. 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 on today's call will be Ted Goldthorpe, Chief Executive Officer, President and Director of Logan Ridge Finance Corporation Jason Roos, Chief Financial Officer and Patrick Schaeffer, 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.

Speaker 1

Good morning, and welcome to our full year and Q4 2022 earnings call. As I mentioned, I am joined today by our Chief Financial Officer, Jason Roos and our Chief Investment Officer, Following my opening remarks, Patrick will provide additional detail on our investment activity to date and Jason will walk through the financials. The 4th quarter marks another significant milestone for Logan Ridge as the company is reinstating its quarterly dividend at $0.18 per share and marks 2nd consecutive quarter of positive NII since Mount Logan Management took over its investment advisor just 18 months ago. Furthermore, the company's Board of Directors approved a $5,000,000 share repurchase program, which will continue for 1 year. We believe our equity trades below fair value and the stock buyback plan is accretive to both our net asset value and net investment income per share.

Although our window is short between our year end results and our Q1 earnings period, we would look to capture that discount for our shareholders. We are very proud of what we achieved during 2022, which was a transformative year for the company and the first Full fiscal year under Mt. Logan's management stewardship. To open, I'd like to start by reminding you that last August when we reported our Q2 results, We said that management had made significant progress on the execution of our strategic priorities for Logan Ridge and that is the progress that Would be evident in the company's financials during the second half of the year. Notably, we had just announced a successful refinancing of the entire Legacy debt capital structure we inherited from the former advisor and successfully refinanced and recapitalized the company's legacy investment in Eastport Holdings We generated substantial cash for deployment and exited the company's non yielding equity interest in the portfolio company.

Fast forward to today, the company has reported its 2nd consecutive quarter of positive NII with the 4th quarter NII More than tripled the prior quarter which in turn led to the reintroduction of the quarterly dividend. Further, During the year, we took steps to reposition the company's investment portfolio making substantial progress on our goal to rotate out of the non income producing legacy equity Specifically the non yielding equity portfolio represents just 16.3% 14.2% compared to 27.2% 32.6% as of the prior year. We've also reduced the number of non accruals, Significantly increased the portfolio's diversification and grown the company's exposure to credits originated by the BC Partners Credit Platform. Most importantly, we achieved these results against the backdrop of particularly challenging and uncertain market conditions. Looking to the future, Logan Ridge is now well positioned to capitalize on opportunities arising from the current credit environment in 2020 Which we believe will produce an attractive vintage of credit.

Over the coming quarters, we will focus On maximizing the earnings power of the company's balance sheet and more efficient capital structure to further increase shareholder total returns. After a pivotal 2022, we enter 2023 optimistic and well positioned to continue our work transforming the With that, I will turn the call over to Patrick Schaeffer, our Chief Investment Officer.

Speaker 2

Thanks Ted and hello everyone. As of December 31, 2022, the fair value of our portfolio was approximately $203,600,000 and consisted of 59 portfolio companies. This compares to 54 portfolio companies and $98,200,000 as of December 31, 2021. In addition to substantially increasing our portfolio diversification as of December 31, 2022, 55 percent of the company's investment portfolio at fair value was invested in assets originated by the BC Partners Credit platform. As of December 31, 2022, we have an aggregate debt securities fair value of 169,200,000 which represents a blended price of 93.8 percent of par value and is 81% comprised of 1st lien loans at par value.

Assuming a par recovery, our December 31, 2022 fair values reflect a potential of $11,100,000 of incremental NAV value $4.12 per share. For illustrative purposes, if you assume a 10% default rate and a 70% recovery rate on this debt portfolio, There would still be an incremental $2.13 per share of NAV over time as the portfolio matures and is repaid. During the Q4, the company continued to judiciously redeploy capital generated from exiting the legacy portfolio. Specifically, the company made approximately $23,900,000 of investments and had approximately $10,200,000 in repayments and resulting in net deployment of approximately $13,700,000 for the quarter. At quarter end year end, debt investment portfolio represented 83% of the total portfolio at fair value and at a weighted average annualized yield of approximately This compares to a debt investment portfolio, which represented 67% of the total portfolio at fair value with a weighted average yield of approximately 8.1% excluding income from non accruals and collateralized loan obligations as of the prior Further, as of year end, 1st lien debt represented 64.9% and 67.3% of total portfolio on a cost and fair value basis respectively.

This compares to 1st lien debt representing 54.4% and 49.6 percent of our total portfolio on a cost and fair value basis respectively as of the prior year ended December 31, 2021. Our non yielding equity portfolio as of December 31, 2022 has decreased to 16.3% 14.2% of the portfolio on a cost and fair value basis respectively. This compares to 27.2% 32.6% of the portfolio on a cost and fair value basis as of December 31, 2021, which marks a substantial improvement, which is evident in our 4th quarter net investment income. During the Q4 of 2022, we successfully exited our debt investment in Big Mouth Inc. For a realized gain of approximately 100,000 which had been on non accrual since Mount Logan took over the company's investment advisor.

Accordingly, as of year end, only one debt investment remains on non accrual with an Aggregate amortized cost and fair value of $11,900,000 $9,700,000 respectively, were 5.4% and And I'll turn the call over to Jason.

Speaker 3

Thanks, Patrick. Turning to our financial results for the quarter ended December 31, 2022. As Ted mentioned, during the Q4 of 2022, Moreover, this is a substantial improvement compared to the prior quarter for which the company reported net investment income of $200,000 or $0.07 per share and a complete turnaround when compared to the Q4 of 2021 for which the company reported a net investment loss of 1,400,000 For the year, we reported total investment income and total interest income of $14,900,000 $13,700,000 respectively, primarily as a result of net deployment and increases in base rates. Total operating expenses for 2022 declined to 16,100,000 compared to $20,300,000 in 2021, primarily due to lower interest and financing expenses as a result of a smaller portfolio and a lower cost of capital. This represents a decrease in operating expenses of 20.7% year over year and we are looking to Our net asset value as of December 31, 2022 was $95,000,000 or $35.04 per as compared to $98,200,000 or $36.21 per share at the end of the Q3 of 2022 and $107,100,000 or $39.48 per share as of December 31, 2021.

This decrease was primarily due to the Net investment losses reported during the first half of the year and realized and unrealized losses on our portfolio. Finally, as of year end, the company had $6,800,000 in With that, I will turn the

Speaker 4

call back over to Ted.

Speaker 1

Thank you, Jason. We are proud of the significant milestones we achieved during 20 2 and are looking forward to 2023. Thank you all for your continued support. This concludes our prepared remarks

Speaker 0

Our first question comes from Christopher Nolan from Ladenburg Thalmann. Please go ahead. Your line is open.

Speaker 5

Hey, guys. Were there any non recurring items in the quarter, please?

Speaker 3

Yes. This is Jason. Hey, Chris. Good morning. I would say quarter is a pretty good quarter for a run rate projection.

Our expenses are relatively flat, Slightly up on the administrative service fees as a result of some just incremental oversight of the portfolio, but all in all relatively flat quarter over quarter and should Present pretty good run rate for you.

Speaker 5

Great. And then on the dividend, I mean given I mean by the way very nice quarter. It looks like the cash dividend will start to be reinstated sooner rather than later. Are there any sort of tax related things Which could basically retard the dividend being a percentage of GAAP income or will basically 75

Speaker 3

Yes, that's a good question, Chris. I think that's something that we'll Need to pay attention to as we go throughout the year here. Relatively new challenge for Logan Ridge given that this is the 1st quarter paying a dividend. And we monitor this on all the portfolios that we manage and the BDCs that we have oversight of. But we think this is A stable dividend that we can continue to achieve even factoring in the tax implications.

Speaker 5

Great. Nice quarter. Okay, that's it for me. Thank you.

Speaker 1

Thanks, Chris.

Speaker 0

Our next question comes from Stephen Martin from Slater Capital. Please go ahead. Your line is open.

Speaker 1

Hi, guys. Hi. Hi. How are you?

Speaker 4

And thank you for the dividend. Question about you gave some subsequent events information, anything on the portfolio

Speaker 2

Hey Steve, this is Patrick. No, nothing that would rise to a level of a subsequent event item.

Speaker 4

Or any comment on deployments and repayments subsequent?

Speaker 2

I would say generally ordinary course. I think probably in aggregate, we are slightly, I would say, net deployment. That's just off the In general, we kind of continue to utilize the new credit facility we put in place middle of last To deploy capital, our leverage levels are pretty reasonable and we see a decently attractive opportunity set. Again, I don't think anything particularly out of the ordinary, But I'd say on in general, we are we have been a net deployer of capital over the course of the quarter so far.

Speaker 4

Okay. And on Portman, you give that the slide where you say, what would the portfolio what would the NII have been if everything had flowed through? Would you care to hazard a guess as to what that would be on the LRFC portfolio Versus the earnings?

Speaker 2

Yes, I'd be a little bit hesitant to hazard a guess Exactly. I think it's fair to say it would be up quarter over quarter. Logan Sifclay has a little bit higher percentage of fixed rate and not relevant now, but their floors tended to be a little bit higher than Portman. So there was a little bit less Uplift earlier in the cycle, but I would say that in general, it should have kind of a Similar trajectory, with the caveat that newer originated assets Get on that higher end of the curve more quickly. So theoretically, Logan should benefit in terms of being a net deployer, Should benefit from being able to kind of move up that curve more quickly.

Speaker 4

Okay. Ted, would you care to comment on covenants, amendments, a little more on the credit Maybe some of the older investments that you guys have inherited as opposed to the newer ones that you put on yourself?

Speaker 1

I mean, I'll make a general comment, which is some of our some of the portfolios that we inherited, we're seeing Outperformance by some of the weaker credits because the things that were impacting them happened to be things like supply chain, COVID lockdowns and some other factors that seem to be abating. And then obviously on the flip side of that are strong growth companies, growth is slowing down And people are all seeing margin impacts or margin degradation. And obviously The good companies in these portfolios obviously have higher leverage and therefore are more impacted by rises in rates. So it's kind of like a Backwards environments towards normal. I would say amendment activity was It has increased the last couple of weeks and I can't tell you why that is.

A lot of it's like Very, very, very technical, like it's not covenant waivers and things like that. We are seeing a little bit of an increase generally speaking across the portfolio on What I would call technical amendments. Yes. Steve, just to put

Speaker 2

a little bit more meat on that. In Q4, Logan had, I'd say, 3 kind of amendments that would rise above sort of the ordinary course type stuff that Ted was alluding to. All of them were on Legacy positions, 2 were maturity extensions on Related to Sequoia Health, which is a name that's kind of been in the portfolio for some time. And the third was a maturity extension with the company with a view To kind of move in towards the sale of the business, I think historically the company had been looking to try and be an aggregator of other companies and the CEO Kind of wanted to be the controlling entity of some kind of merger combination, so made it a little bit challenging candidly. I think kind of we've sort of decided to move forward towards some kind of sale of that business where it's possible that We end up being the acquired entity as opposed to the majority entity.

But again, that's I think those are kind of the Only three things that sort of again rise to more than the level that Ted was referencing with changing LIBOR are the documents to SILFR or technical extensions on an audit by a month, etcetera, etcetera?

Speaker 4

On these Extensions, have we generally from a financial standpoint, are we cutting out ahead, behind or even?

Speaker 2

Yes, I'd say in general ahead. Obviously, all situations are dependent. One example, we move from like 8% fixed to floating plus 8%. So that's pretty well ahead. But I would say in general, they come A little bit ahead and it wasn't the case in this particular case sorry, in the case with Logan.

With Portman, we had a number of we had a couple of kind of maturity amendments that are Subsequently taken out of the portfolio. So it was again kind of a technical need another month or 2 to get taken out, or kind of some kind of substantial pay down. But I would say in general, Yes. You kind of are getting out ahead, if you will, but it is obviously very situation dependent.

Speaker 4

Okay. Thanks a lot guys and we'll talk to you later.

Speaker 1

Yes. Thanks, Steve.

Speaker 0

We have no further questions in queue. I would like to turn the call back over to Ted Goldthorpe for closing remarks.

Speaker 1

Great. Well, thank you everyone for joining us today and we look forward to speaking to you again in May when we announce our Q1 of 2023 results. Thank you so much.

Speaker 0

This concludes today's conference call. Thank you for your participation. You may now disconnect.