Logan Ridge Finance Corporation

Good day and thank you for standing by. Welcome to the Logan Ridge First Quarter 2022 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. Please be advised that today's conference is being recorded. To ask a question during the session, you will need to press star one on your telephone. If you require any further assistance, please press star and zero. I would now like to hand the conference over to your speaker today. Serena Ligi, please go ahead.

Thank you. Good morning, and welcome to Logan Ridge Finance Corporation's first quarter 2022 earnings conference call. An earnings press release was distributed yesterday, May 12th, 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 10Q 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 Ted Goldthorpe, Chief Executive Officer of Logan Ridge Finance Corporation. Please go ahead, Ted.

Good morning. Welcome to our first quarter 2022 earnings call. I am joined today by our Chief Financial Officer, Jason Ruse, and our Chief Investment Officer, Patrick Schaefer. Following my opening remarks, Patrick will provide additional detail on our investment activity to date, and Jason will walk through the financials. This marks our third completed quarter as a new advisor to Logan Ridge, and I'm pleased to say that we've made significant progress since we began managing the company. Although we have been operating in an environment where there is market volatility, political uncertainty, and rising interest rates, the fair value of our investment portfolio grew to approximately $207 million driven primarily by unrealized appreciation on the portfolio and the judicious deployment of proceeds generating from exiting the legacy portfolio into interest earning investments originated by the BC Partners credit platform. Additionally, we are pleased to report that subsequent to quarter end, we successfully refinanced the remainder of Logan Ridge's legacy capital structure which is a testament to the benefits shareholders receive from our ability to leverage the size and scale of our platform and the strong relationships we have with our lenders and financing partners. Specifically, on April 1st, we issued a $15 million convertible note, and on May 10th, we amended our existing Senior Secured Revolving Credit Agreement with KeyBank to increase the commitment, reduce the interest rate, and extend its maturity date. The proceeds will be used to repay the $52.1 million of five and three quarters convertible notes outstanding as well as $22.8 million of 6% notes outstanding, both of which are scheduled to mature on May 31st, 2022. These transactions materially lower the cost of debt capital, which will be transformative for the company and an important milestone during our early stewardship process. Investors will begin to benefit from the lower cost of debt capital during the third quarter of 2022. With that being said, I want to turn the call over to Patrick Schaefer, our Chief Investment Officer.

Thanks, Ted. The fair value of our investment portfolio as of March 31, 2022, grew about $8.7 million to $206.9 million as of March 31, 2022, from $198.2 million to as of the prior quarter due to unrealized appreciation on the portfolio and net deployment. As of March 31, 2022, our portfolio consisted of investments in 42 different portfolio companies. We continued to judiciously redeploy capital generated from exiting the legacy portfolio. During the quarter, we made approximately $16.4 million of investments, which outpaced the $8.4 million in repayments and sales, resulting in net deployment of approximately $8 million for the period. Our debt investment portfolio, which represented 68.1% of our total portfolio at fair value, had a weighted average annualized yield of approximately 8.3%, excluding non-accruals and collateralized loan obligations. Regarding non-accruals, as of March 31, 2022, we had debt investments in two portfolio companies on non-accrual status, with an aggregate cost of $12.7 million and fair value of $7.0 million, which represented... 6.4% and 3.4% of the investment portfolio, respectively. This remains fairly unchanged from the prior period, which we reported non-accrual debt investments in two portfolio companies with aggregate amortized cost of $12.7 million and an aggregate fair value of $7.6 million. As of March 31st, the first lien debt as a percentage of the portfolio at fair value was 48.7%, second lien debt was 16.1%, Subordinated debt was 3.4%. Collateralized loan obligations were 3.7%, and our equity portfolio was 28.4%. And I'll turn the call over to Jason.

Thanks, Patrick. Turning to our financial results for the quarter. Total investment income was $3.3 million for the first quarter of 2022, compared to $4.9 million for the first quarter of 2021. The decline in interest income was due primarily to lower average debt investments as a result of our efforts to de-risk and de-lever the company. Total expenses for the first quarter of 2022 were $4.4 million compared to $5.7 million for the first quarter of 2021. The decrease in expenses was driven primarily by lower interest and financing expenses, which declined by $800,000, and lower base management fees, which declined by $400,000. Interest and financing costs, as well as base management fees, declined as a result of managing a smaller portfolio due to our intentional deleveraging of the company. Outside of net investment income, for the quarters ended March 31, 2022 and 2021, we reported $200,000 and $27.2 million of net change and unrealized appreciation in investments, respectively. Additionally, the company reported net realized losses of less than $100,000 and $14 million respectively for the same periods. Accordingly, we reported a net decrease in net assets resulting from operations of $900,000 or $0.32 per share during the first quarter of 2022. This compares to a net increase in net assets from operations of $12.4 million or $4.56 per share and $4.04 per share on a diluted basis for the first quarter of 2021. Net asset value as of quarter end declined slightly to $106.2 million, or $39.16 per share, compared to $107.1 million, or $39.48 per share, as of December 31, 2021, despite the general uncertainty in the market and environmental conditions. As of March 31, 2022, we had $15.8 million in cash and cash equivalents, and our total debt-to-equity ratio was 1.18 times. As of March 31, 2022, we had no outstanding draws on the KeyBank credit facility. Regarding our capital structure, as Ted mentioned, on April 1, we issued $15 million of convertible notes. The convertible notes mature in April 2032 and bear interest at a fixed rate of 5.25%. The amendment to the KeyBank credit facility increased the initial commitment from $25 million to $75 million, extended the maturity date to 2027 from 2023, and and decrease the interest rate to one-month term SOFR plus 290 basis points with a 40 basis point floor during the revolving period from one-month LIBOR and 350 basis points subject to a 75 basis point floor. The amended credit facility also provides an uncommitted accordion feature that would allow the company to borrow up to an additional $125 million, which will afford us the flexibility to grow the balance sheet. The proceeds will be used to pay off the $52.1 million of 5.75% convertible notes outstanding as well as the remaining $22.8 million of 6% notes outstanding, both of which mature May 31, 2022. We continue to closely monitor the increase in federal interest rates and the effect it could have on our net income for the rest of the year and going forward. Although the effect of these geopolitical and macroeconomic factors, including inflation, are outside of our control, our team is focused on prudent risk and portfolio management while pursuing growth. With that, I will turn the call back over to Ted Goldthorpe.

Thank you, Jason. We've achieved another solid quarter and are confident that we will continue to grow our portfolio despite the increased turbulence in the economy driven by inflation, supply chain, and the ongoing invasion. We are prudent with our investments and are hopeful for the future. Thank you for all your support. This concludes our prepared remarks, and I will now turn over the call to the operator for any questions.

As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Our first question comes from Christopher Nolan of Leidenberg Thalmann. Please proceed.

Hey, guys. The new capital structure, Jason, any guidance or ideas how much of a per share savings that could represent?

I can give you. Yeah, just roughly. I would say life to date, including the finance restructuring that we did last year, I can give it to you in dollars. I would say it's roughly $600,000 a quarter.

Chris, if you look at our Q4 earnings deck, we show a little bit of a bridge around NII, and one of those bars is the refinancing of the cap structure, the the pricing of everything came in kind of exactly as expected, so you could use that chart as a pretty decent proxy to the quarterly impact.

Great. And then related to that, were there any non-recurring items, expense items or income items in the quarter? Yeah.

Yeah, the expenses should give you a pretty good run rate going forward. There was one item in there around a $70,000 rate. expense we took to write off some of the capitalized expenses for the shelf registration that we had to write off this quarter. Outside of that $70,000, it's a pretty close run rate.

Gotcha. And then I guess, you know, being able to, for revenues to cover the dividend, excuse me, revenues to cover expenses, I mean, that seems like to be a key goal, I would think, at this point. Any thoughts as to when we might see a crossover where you guys might be profitable?

Yeah, I think from a profitability perspective, the two big focuses or the main focus has been this new facility, which allows us to do a couple of different things, which is, one, lower the cost side of the equation, but, two, provides us the ability to kind of increase the asset side. So we have a $75 million facility, and if we fully drew that facility, that would put us at about 1.3 times leverage as compared to the 1.18 where we sit today. So between those two things, those two things should get us in the positive here, and the question is how quickly we would deploy that key bank facility proceeds plus the cash depending on market conditions. will kind of be the driver of us getting from, you know, where we are today to something positive. But I don't – again, if you kind of think back to the bridge we outlined, I don't think that gap from where we are today to positive is relying upon, you know, any significant change in the equity stakes or kind of a rotation of those to get us into the positive.

Great. Final question. Decrease in equity as a percentage of total investments at cost – it decreased quarter over quarter. Any color around that?

No. Honestly, my suspicion is it is because we increased the cost of our other positions as opposed to the equity decreasing, if that makes sense.

Got it. That's it for me. I'll get back in the queue. Thanks, guys. Thank you.

Thank you. As a reminder, to ask a question, you will need to press star 1 on your telephone, and to withdraw your question, press the pound key. Our next question comes from Stephen Martin of Slater. Please proceed with your question.

Hi, guys. You guys have been pretty busy redoing the capital structure, and you got a couple of new investments in in the first quarter. Can you comment on what's going on quarter to date in the second quarter?

Why don't I take it high level? Oh, go ahead, Dad.

Yeah, I'll take it high level, and then Patrick can jump in. I would say activity levels have picked up dramatically post-quarter end. It feels like a lot of demand for particularly our sponsor verticals was pulled forward into last year, but it feels like that's beginning to normalize. So I think we continue to be very cautious about everything going on clearly, but I'd say activity levels have definitely picked up. Patrick, do you want to speak more specifically?

No, that's all right. I think the only thing I would specifically add is in Logan specifically, we had a bit of a unique dynamic where we were obviously closing the credit facility and we kind of needed to have a relatively static asset list in order to kind of close out a borrowing base and kind of do all that and get it done and closed. So we had a little bit of a period of time where we kind of needed to be relatively quiet from a trading perspective so that we could have a static pool. But generally, as Ted said, our pipeline generally continues to be pretty strong, though we're being relatively cautious in the environment. But we certainly have or we believe we have plenty of opportunities to deploy the cash and credit facility going forward.

Well, more specifically, between now and recognizing that you had to be quiet for sort of, you know, the debt reasons, should we expect that between now and the end of the quarter you will actually fund some transactions?

I think that should be the expectation, yes, with the caveat that it's a little bit more unpredictable on the repayment front. So we might all, again, where we sit today, there's probably a couple things that we're hoping are going to happen in the quarter, but you might get to the end of the quarter and still have a net negative deployment just if we happen to have a couple of large repayments during the quarter. But I think from a pure deployment perspective, yes, you could expect to see us deploy capital from here to the end of the quarter.

Well, speaking of specific large repayments, can you update us on eSport if you can?

Unfortunately, I don't think we're able to provide an update on eSport at this time.

Okay. Given the new refinancing, I'm sure you're expecting this question, given your discount to NAV, Is there anything in the new credit agreements that restricts your ability to repurchase shares at a 50% discount to NAV?

No, there's nothing in our facility that would restrict our ability to repurchase shares.

Okay. And I don't recall, so if I'm asking this in error, you don't have a repurchase plan in place, do you?

No, not right now, Steve. It's something that we're thinking through, and it's a good question. I think it's something that might be put in place here in the near future.

Okay. With respect to the convertible note, was there a specific reason for the convertible note?

Yeah, I think the reason is I think we're pretty focused on diversity of devices, uh, financing, you know, we don't want to be too reliant on one source of financing. And obviously this greatly reduces the amount of convertible debt in our capital structure. Um, so really what we're doing is instead of just doing a, a one for one refi of our convert, I think the decision was made, you know, it's cheaper cost of capital under the, um, bank facilities we have, but we think it's important to maintain access to that market, um, in case we need to use it in the future. So we did a very, very small deal.

Yeah, that's why I was questioning it. You know, you had a very big one. Obviously, the portfolio is a lot smaller. So I was wondering if there was a more specific requirement or just the, you know, desire for diversification.

Yeah, and we're constantly thinking about, you know, fixed versus floating liabilities. You know, so obviously the converts are fixed, which, you know, provides some benefit to us. Yeah. but floating is a lower spread. So it's something we're always balancing and thinking about and trying to diversify our liability side.

Okay. Any general comment on the portfolio? I mean, you've put on a whole bunch of new positions and you inherited a whole bunch of old positions. You've got a legacy portfolio. you know, any comment on the legacy portfolio vis-a-vis what you, you know, you expected and, or underwrote when you got there?

Yeah, I, I think, um, I would say generally speaking, it's kind of performed, um, in line as, um, as we kind of talked before in, in other forms, mostly, mostly the, the, uh, Portland Ridge Forum. Um, we normally underwrite based on only negative things happening, and you always have positive events. So we've had a couple of strong performers in the portfolio that have offset maybe some weakness, particularly with Chief Fire being the biggest one, but we kind of knew that going into the transaction, so I'd say that was kind of expected that that one was struggling. But outside of that, I'd say kind of generally speaking, In aggregate, the portfolio is performed, you know, relatively in line with our expectations.

Okay. I'll turn it over to someone else.

Thank you. Our next question comes from David Mizuyaki at Confluence Management.

Hi, good morning, and I apologize if this is something that you guys have covered in the past, but I'm just kind of wondering with regard to your legacy positions and thinking about where you'd like to be with the new underwriting. When you look at positions that you've inherited that are equity-like and they're more volatile and they're not generating any current income, but maybe you look at it and think, This has a pretty nice IRR. It's just going to take three or four years to get there, but it's probably got to, I don't know, pick a number, 14% or 15% IRR. How do you prioritize getting out of that and giving up what you see as might be potential upside versus just getting it out of the portfolio and moving on and having the portfolio positioned as you want it?

That's a great question. Very good question, actually. I don't think we've actually had this conversation before. When we took over the vehicle, we were levered at two to one. And so, you know, I think our biggest priority, particularly with this equity book, was to get leverage down, which we've kind of done, which gives us now more flexibility on what to do on the forward, I would say. And the second big priority for us was, you know, refinancing the whole capital structure. You know, we had two big maturities coming due in May, which we just refinanced, as we talked about. And then, obviously, there's a big laser focused on getting to – you know, NII positive, which, you know, given everything we've said in this call, we're on a track for. You know, we're adding more interest-earning assets to our portfolio. We've cut expenses, and we've cut liability costs. So to your question, I think we have more time and flexibility to say we really like something, but we do think equity as a percentage of the book is still too high, and if there's an equity position we think is or we think we can make a bunch of money on it, obviously, you know, we won't sell it. But I would say generally speaking, you know, if we can get fair value or close to something we think is fair value, I think the bias is towards monetizing and putting it into interest-sharing assets. Right.

I think that makes sense given that, you know, I have – I guess I can understand when managers really want to hold on to equity, especially when it's worth a lot. But I think in BAC vehicles, the equity just can create so much mark-to-market volatility that it's just not a great vehicle to hold it in. And so I was just kind of curious to see how you're balancing out maintaining or improving your net asset value and equity base versus kind of getting to where you want to be.

Yeah, I agree. And also, you know, we're also very focused on really diversifying this portfolio. So if you compare this to the other BDCs we manage, you know, any large equity position, regardless of how much we like it, it just doesn't make sense to have concentrated positions in a BDC. So I think there's a big focus from our perspective of getting increased diversity.

And would you say that the destination that you're moving toward is going to be You're going to have a very similar profile to what you have with the other BDC in the long run?

Yeah, I mean, one of the advantages that Logan Ridge shareholders got when we took this over is access to our platform. If you look at our investment activity, most everything we do now is deals that we're leading across the platform, and Logan Ridge benefits from that. So, yeah, our focus is to make this portfolio a lot more boring you know, get diversified, getting in debt, and start driving NII and turn the dividend back on.

And you wouldn't see, you know, some managers have sort of sister BDCs that are out there where one takes, you know, focus more broadly on the capital structure and another one is more senior focused. Do you not see that or do you see them being really very comparable to one another?

I don't think we're going to go the route of a senior BDC and a junior BDC. I don't think that's where we're going. I think over time, our BDC should look more and more similar investment-wise just because that's our franchise. We're always exploring strategic opportunities as everybody knows. Maybe if there's some interesting angle for us to maximize value for shareholders, we'll go down that road, but I think the base case is for us to make this vehicle look more and more like our other vehicles.

Great. Great. Well, thank you very much for your time, and congratulations on the progress.

Thank you.

Thank you. At this time, I would like to turn the conference back to Ted Goldthorpe for closing remarks.

Great. Well, thank you, everyone, for joining us this morning. and we look forward to speaking to you in mid-August when we announce our 2022 second quarter results. And, of course, if anybody has any further questions or any further follow-ups, please feel free to reach out to any member of the management team. Thank you very much, and have a great weekend.

This concludes today's conference call. Thank you for participating, and you may now disconnect.