Logan Ridge Finance Corporation

Ladies and gentlemen, thank you for standing by, and welcome to our second quarter 2021 financial results conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session, and instructions will follow at that time. If anyone should require assistance during the conference, please press star, then zero on your touch-tone telephone. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Ms. Jihei Linford. Thank you. Please go ahead.

Thank you. Good morning, and welcome to Logan Rich Finance Corporation's second quarter 2021 earnings conference call. An earnings press release was distributed this morning, August 16th, before market open. A copy of the press release, along with an earnings presentation, is available on the company's website at www.loganrichfinance.com in the investor relations section and should be reviewed in conjunction with the company's form 10Q filed today 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 detailed 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.

Good morning, and thank you for joining us on our earnings call. I'm joined today by our Chief Financial Officer, Jason Bruce, and our Chief Investment Officer, Patrick Schaefer. As you know, on July 1st, we announced the closing of the transition to a new investment advisor for Logan Ridge Finance Corporation. Logan Ridge's new advisor is Mount Logan Management, LLC, an affiliate of BC Partners Advisor LP for U.S. regulatory purposes and part of the BC Partners Credit Platform as a wholly owned subsidiary of Mount Logan Capital, Inc., a Canadian public company. BC Partners Credit is a leading provider of capital to middle market companies and and is part of the broader BC Partners organization, a leading global alternative asset manager with more than $40 billion in asset center management and over 30 years of operating history in the US and Europe. We're very excited about the advisor transition at Logan Ridge and as previously discussed, we have two immediate objectives as the new advisor. First, We are focused on actively rotating and replacing non-income producing investments with debt investments in the form of high quality senior secured positions originated by BC partners. Secondly, we'll look to improve and optimize the company's capital structure by reducing leverage and reducing the cost of debt while providing additional flexibility. In just six weeks since closing this transaction or transition, we've made significant headway on both of these objectives. Patrick will provide more commentary in his remarks, but we were pleased to report that subsequent to quarter end, the company has exited five portfolio companies, including three equity investments, valued at $58.7 million as of June 30th, 2021. We also have two additional portfolio companies that are in various stages of sales processes. Secondly, at the end of the second quarter, the company repaid in full the $71 million in SBA debentures outstanding and surrendered its corresponding SBIC license. Additionally, the KeyBank credit facility was repaid subsequent to quarter end. Our priority in the coming months as it relates to the right side of the balance sheet will be to address the near-term maturities with the objective of reducing cost of debt and increasing funding flexibility. Ultimately, our goal is to execute on these initiatives such that we are in a position to reinstate a sustainable dividend as soon as possible. Over the longer term, we believe there's an opportunity to reduce our administrative and operational expenses by leveraging the scale of BC Partners' credit platform and potential synergies across our total AUM base. Additionally, we plan to grow the platform, including through pursuing inorganic opportunities to further drive scale to the benefit of shareholders, including reducing the stock trading discount to NAV. We have a solid track record of executing strategic transactions in the public BDC sector, and we plan to leverage our expertise and abilities as opportunities arise in order to execute on our growth initiatives for Logan Ridge. With that, I will turn the call over to Patrick Schaefer, our Chief Investment Officer.

Thanks, Ted. I will briefly summarize investment activities for the quarter, then provide some more detail on activities subsequent to quarter end. During the second quarter, the company made approximately $10 million of investments and had approximately $33.5 million in repayments and sales, resulting in net repayments and sales of approximately $23.5 million for the period. As of June 30, 2021, the company's portfolio consisted of investments in 32 portfolio companies with a fair value of approximately $228 million. The debt investment portfolio consisted which represents 67.7% of the fair value of our total portfolio, had a yield of approximately 9.9%. At quarter end, we had debt investments in three portfolio companies on non-accrual status with an aggregate amortized cost of 21.3 million and an aggregate fair value of 9.8 million, which represented 9.8% and 4.3% of the investment portfolio, respectively. During the quarter, The company recognized $6.9 million of realized gains on investments, driven by the successful exits of our investments in CityGear LLC, CIS Secure Computing Inc., and Zergo Technologies LLC. The company also recognized $13.7 million of unrealized depreciation, driven in large part by two portfolio companies that have been impacted by COVID-related challenges. And I'll provide a little more detail on our activities subsequent to quarter. To date, we have successfully exited Logan Ridge's investments, Rapid Fire Protection, Inc., 3Bridge Solutions, LLC, Amerimac Direct, LLC, Cytel, Inc., and Corporate Visions, Inc., generating proceeds of $59.7 million, of which approximately $11.2 million was from our equity interests in these portfolio companies. These positions were marked at $58.7 million as of June 30, 2021. and our equity interests were valued at $10.2 million. Based on the marks as of June 30th, 2021, we successfully exited 14% of the company's equity portfolio. Additionally, we have equity interests in two additional portfolio companies that are currently in various stages of sale processes that we're cautiously optimistic will close by year end. As we've discussed at length, our objective is to continue to rotate out of these legacy positions and redeploy these proceeds into high-quality, senior secured interest earning debt investments originated by BC Partners. We believe these early successes are promising and demonstrate our ability to execute our strategic plan for repositioning this portfolio such that it earns a sustainable cash income stream sufficient to support a consistent recurring dividend for Logan Ridge shareholders. I'll now turn the call over to Jason.

Jason Gildea Thanks, Patrick. I will now quickly review the quarter and its key drivers. Total investment income was $5 million for the second quarter of 2021, compared to $4.9 million for the first quarter of 2021. Interest income declined by $500,000 quarter to quarter, offset primarily by $600,000 in non-recurring dividend received. Total expenses for the second quarter of 2021 were $5 million, compared to $5.7 million for the first quarter of 2021. Interest and financing expenses declined by $300,000. Base management fees declined by $100,000 and other general and administrative expenses declined by $264,000. Interest expense decreased compared to the prior quarter primarily due to full repayment of the SBA debentures in June. Accordingly, net investment income for the quarter was $34,000 or $0.01 per share compared to a loss of $800,000 or $0.29 per share in the quarter ended March 31, 2021. We recognized $6.9 million in net realized gains, $13.7 million net change in unrealized losses, and $800,000 extinguishment loss on the SBA debentures. The net decrease in assets resulting from operations was $7.6 million, or $2.79 per share, for the second quarter of 2021, compared to a net increase of $12.4 million or $4.56 per share for the first quarter of 2021. Net assets at June 30th, 2021 were $113.7 million or $41.96 per share compared to $121.3 million or $44.74 per share at March 31st, 2021. The decrease in NAV per share was primarily due to the net change in unrealized losses during the quarter. At June 30, 2021, we had $26.1 million in cash and cash equivalents. On the liability side of the balance sheet, we fully repaid $71 million of SBA debentures during the second quarter. At quarter end, we had approximately $150 million of debt outstanding comprised of $25 million drawn on the senior secured credit facility with KeyBank. 72.8 million of fixed rate notes bearing an interest rate of 6% and 52.1 million of convertible notes bearing an interest rate of 5.75%. The company's total debt to equity ratio was 1.3 times at quarter end compared to 1.6 times at March 31st and two times at the prior year end. Subsequent to quarter end, we have fully repaid the 25 million outstanding on the senior secured key bank facility. As Ted mentioned, we are actively focused on continuing to optimize our debt capital structure. With that, I will turn the call back over to Ted Goldberg.

Thanks, Jason.

In summary, we are very pleased with the progress we've made already since undertaking management of the company on July 1st. We focused on risk reduction by materially rotating the composition of the investment portfolio from from non-income-generating equity investments and redeploying those proceeds into income-producing, high-quality debt investments and also rapidly deleveraging with a longer-term objective of further optimizing our current liability structure. Our goal is to reinstate the dividend at a sustainable rate as soon as practically possible. Over time, our goal is to streamline operating expenses by leveraging the breadth and depth of the broader BC Partners credit platform and increase scale for strategic transactions. We look forward to providing more updates in the coming quarters as we continue to make progress. Thank you all for your support. This concludes our prepared remarks, and I will now turn over the call to the operator for any questions.

Ladies and gentlemen, if you have a question at this time, please press star, then the number one key on your telephone keypad. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Once again, that is star one for a question. Your first question comes from Christopher Nolan from Lindenburg-Faulman.

Hey, guys. Nice quarter. Congratulations on all the progress you've made in such a short time. Is it fair to say that given the exits of $58 million in the quarter to date, we should see the cash balance start to substantially rise in the balance sheet? And if so, Is the plan to start paying down the remaining debt early?

Hey, Christopher, this is Patrick. Thanks for the question. So some of that balance went towards repaying the key bank facility, which we noted in our prepared remarks. And then we didn't highlight it specifically, but we have been actively reinvesting those proceeds in BC-originated transactions. So when we get to kind of our quarter end, you'll see new investments on the books that are kind of BC-driven, BC-related investments. So there's a combination of those two things going on.

Great. And then a follow-up, should we expect realized gains in the third quarter from these exits?

So far from these exits, yes. I think we mentioned the numbers. There's a slight increase in terms of proceeds we receive relative to the balance as of June 30th. So as it relates to these specific five investments, yes. And obviously, you know, TBD on future realizations, but so far, yes. Great. Thank you. Thank you.

Once again, ladies and gentlemen, if you would like to ask a question, that is star followed by the number one on your touchtone telephone. If your question has been answered or you wish to remove yourself from queue, please press the pound key. Once again, that is star one to ask a question. I would now like to turn the call back to management for closing comments.

Thank you, everyone, for joining us today, and we look forward to speaking to you next quarter. And as always with us, please reach out to any member of management at any time with any questions. Thank you very much.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation, and have a wonderful day. You may all disconnect.