Welcome to Logan Ridge Finance Corporation Second Quarter 2022 Earnings Conference Call. An earnings press release was distributed yesterday, August 9, after market close.

A copy of the release, along with an earnings presentation is available on the company's website at www.loganridgefinance.com in the Investors Relations section and should be reviewed in conjunction with the company's Form 10-Q filed yesterday with the SEC. As a reminder, this conference call is being recorded for replay purposes.

Please note that today's 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..

Good morning. Welcome to our second quarter 2022 earnings call. I'm joined today by my Chief Financial Officer, Jason Roos; and our Chief Investment Officer, Patrick Schafer. Following my opening remarks, Patrick will provide additional detail on our investment activity to date and Jason will walk through the financials.

The second quarter of 2022 was transformational for Logan Ridge and marks our first year anniversary serving as the company's investment adviser.

We're proud to say that during this time, we've quickly and completely transformed Logan Ridge through the successful execution of our business plan and we expect shareholders will really begin to see the fruits of our labor and the performance of the company in the second half of 2022.

While Patrick will provide additional details on the transformation of our portfolio, I would like to emphasize a few of the milestones that I believe are game changers for Logan Ridge. We have substantially derisked and delevered the company.

Specifically, as of June 30, 2022, 42% of the company's investment portfolio at fair value was originated by BC Credit -- BC Partners credit platform with ample cash and unused borrowing capacity under our new credit facility available for future deployment.

During the 12 months ended June 30, 2022, we've successfully monetized and/or realized just under $150 million of the legacy portfolio we inherited from the former adviser. This represents approximately 64% of the fair value of the portfolio when we took over management of the company.

Credit has stabilized and there has been no new nonaccruals since Mount Logan Management became the company's investment adviser. Further, we successfully exited a nonaccrual investment we inherited for proceeds of $0.6 million. This position was valued at zero as of June 30, 2021.

The company has delevered to 1x as of June 30, 2022, from 1.2x as of December 31, 2021 and 2x as of -- 2.0x as of December 31, 2020. We materially lowered the company's cost of debt with the successful refinancing of the entire legacy debt capital structure which we completed during the most recent quarter.

We've eliminated all near-term liability maturities and increased the company's borrowing capacity which will provide the company with the necessary flexibility to grow its balance sheet.

We've reduced the company's exposure to the legacy noninterest-earning equity investments to 21.4% of the portfolio at fair value as of June 30, 2022, including the successful exit of Logan Ridge's largest legacy nonyielding equity interest in Esport on June 29, 2022. This compares to 32.3% of the portfolio at fair value as of June 30, 2021.

For the 12-month period ended June 30, 2022, administration fees, reimbursed the administrator, BC Partners Management totalled $0.6 million. This compares to $1.4 million reimbursed to the former administrator Capitala Advisors Corporation for the 12-month period ended June 30, 2021.

With the successful completion of these material milestones, the current strength of our portfolio and our commitment to execute on our growth initiatives, Logan Ridge is now well positioned with ample balance sheet flexibility to capitalize on opportunities arising from the current credit environment.

During the last 12 months, we've largely focused on writing the ship. We believe the collective successes I mentioned do exactly that. From here on out, we'll be laser-focused on returning Logan Ridge to profitability.

With our newly refinanced capital structure and rising benchmark rates, we believe Logan Ridge is on track to begin to generate positive NII on a quarterly basis, heading into next year, before accounting for a return to normalized leverage levels or any incremental rotation of the remaining equity portfolio and on path to reinstated dividend.

With that, I'll turn the call over to Patrick Schafer, our Chief Investment Officer..

Thanks, Ted. As of June 30, 2022, fair value of our portfolio was $175.9 million in 44 portfolio companies. Consistent with our peers, we continue to operate in an uncertain economic environment with high inflation and rising interest rates which has impacted credit and capital markets broadly.

In spite of this, due to successful execution of our business plan and prudent portfolio management, we successfully monetized and/or realized almost $150 million in legacy portfolio we inherited from the former adviser over the last year which represents approximately 64% of the initial portfolio at fair value.

As a result, 42% of the company's investments, investment portfolio at fair value was invested in assets originated by the BC Partners Credit platform as of the quarter end June 30, 2022.

Additionally, the company has $29.5 million in cash as well as $34.4 million of unused borrowing capacity available for deployment and investments originated by the BC Partners Credit platform as of June 30, 2022. During the second quarter, the company continued to judiciously redeploy capital generated from exiting the legacy portfolio.

Specifically, the company made approximately $30.7 million of investments and had approximately $58.3 million in repayments and exits, resulting in net repayments and sales of approximately $27.6 million for the quarter.

This includes the refinancing and recapitalization transaction completed by Esports Holdings LLC as that closed on June 29, 2022, whereby Logan Ridge received $16.5 million in cash and $19.3 million in principal of a new debt security in exchange for all its previous debt and equity securities, generating a realized gain of approximately $16 million.

As of June 30, 2022, we had debt investments in 2 portfolio companies on nonaccrual status with an aggregate cost of $12.1 million and a fair value of $6.4 million which represented 6.5% and 3.6% of the investment portfolio, respectively. There are no new nonaccruals added to the portfolio during the quarter.

As of June 30, 2022, our debt investment portfolio represented 75% of the total portfolio at fair value and had a weighted average annualized yield of approximately 8.7%, excluding nonaccruals and collateralized loan obligations.

This compares to a debt investment portfolio which represented 68.1% of our total portfolio at fair value with a weighted average annualized yield of approximately 8.3%, excluding nonaccruals and collateralized loan obligations, as of March 31, 2022.

Finally, the cost and fair value of our nonyielding equity portfolio as of June 30, 2022, decreased to $40.7 million and $37.6 million, respectively. This compares to the cost and fair value of $43.6 million and $58.7 million as of the prior quarter and $49.9 million and $73.7 million 1-year ago when we took over managing the company.

I’ll now turn the call over to Jason..

Thanks, Patrick. Turning to our financial results for the quarter ended June 30, 2022. Our net asset value was $101.1 million or $37.31 per share as compared to $106.2 million or $39.16 per share at the end of the first quarter of 2022 and $107.1 million or $39.48 per share as of December 31, 2021.

Net investment loss for the second quarter decreased to $900,000 as compared to net investment loss of $1.1 million reported in the first quarter of 2022. That said, net investment loss for the second quarter also included approximately $300,000 of incremental nonrecurring financing costs and professional fees.

Accordingly, these excluding -- excluding the impact of these nonrecurring items, we would have reported adjusted net investment loss of $600,000. Total investment income was $3.3 million for the second quarter of 2022 which is flat compared to prior quarter and a decrease from $5 million reported for the second quarter of 2021.

The decline from second quarter of 2021 was primarily due to delevering the portfolio. Total expenses for the second quarter of 2022 declined to $4.2 million from $4.4 million in the prior quarter and $5 million during the second quarter of 2021.

The decline in expenses driven primarily by lower interest and financing fees, management fees and other general and administrative costs.

For the second quarter of 2022, we reported a net investment loss of $900,000 compared to a net investment loss of $1.1 million in the prior quarter and net investment income of less than $100,000 during the second quarter of 2021.

Net realized gain on investments was $15.5 million for the second quarter of 2022 compared to a net realized loss of less than $100,000 in the prior quarter and a net realized gain of $6.9 million during the second quarter of 2021.

Cash and cash equivalents as of June 30, 2022, increased to $29.5 million as compared to $15.8 million as of March 31, 2022, primarily as a result of the Esports Holdings LLC refinancing and recapitalization transaction that closed on June 29, 2022.

For the 3 months ended June 30, 2022, the company reported a net decrease in net assets resulting from operations of $5 million or a net loss per share of $1.86.

Further, during the second quarter, we successfully completed our work on the legacy capital structure which will position the company for success and provide it with the flexibility to grow its balance sheet.

Specifically, during the second quarter of 2022, we issued 15 million convertible notes due April 2032 and bear interest at a fixed interest rate of 5.25%.

Additionally, during the quarter, we also amended our existing senior secured revolving credit agreement with KeyBank, increasing the commitment from $25 million to $75 million with an uncommitted accordion feature that allows us to borrow up to an additional $125 million. The amended KeyBank credit facility will mature on May 10, 2027.

Borrowings under the amended KeyBank credit facility will bear interest at a floating forward-looking term rate equal to 1 month SOFR plus 2.9%, subject to a 40 basis point over the floor during the 3-year revolving period and 1 month SOFR plus 3.25%, subject to a 40 basis points SOFR for thereafter.

This compares to the old facility which bore interest at 1-month LIBOR plus 3.5%, subject to a minimum rate of 4.25%. Our initial draw on the credit facility was $49.1 million.

The proceeds from these transactions were 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 matured on May 31, 2022. With that, I will turn the call back over to Ted Goldthorpe..

Thank you, Jason. We are proud of the significant milestones we've accomplished over the last year which has put us in a position where we can now focus entirely on returning the company to profitability and paying a regular dividend.

Our team is committed to achieving this goal and we expect to be -- we fully expect this to be evident in the financial performance of the company during the second half of this year. Thank you, everyone, for your support. This concludes our prepared remarks and I'll now turn the call over to the operator for any questions..

Your first question comes from the line of Christopher Nolan with Ladenburg Thalmann..

Patrick, on that realized gain, what was the company again? And was it related to a debt-to-equity swap?.

Yes. So it's Esports. It was related to -- yes, it was related to a restructuring of the company, whereby we exchanged our equity for a debt security -- to $16 million is the realized amount but some of that is unrealized swapping to realized. So the NAV impact or fair market value impact was a little over $3 million.

The remaining $13 million of that was previously unrealized gains..

So the incremental NAV when you say impact, you mean ….

Positive benefit. Of the 16, 3 is new. Yes. Of the 16, 3 is new, I'll call it..

Great. And then, the unrealized depreciation that was mostly a true-up on that..

Yes. Yes, yes..

Yes. So a good portion of that, right, flip from unrealized to realized and then there was the incremental mark on the portfolio which was due to our normal quarterly valuation process. ..

You got to love the BDC accounting.

And then, Ted, on your comments in terms of the outlook for the second half of the year, is it fair to read from that, that from your perspective right now, it seems like the company’s trend towards returning to profitability will be in a better position by year-end or close to profitability by year-end than it is now?.

Yes, exactly. So again, like the big focus for us was really fixing the capital structure and getting leverage down. And now it's really about getting income up. So it's cut a lot of costs. We run the vehicle up more efficiently now, as I mentioned.

And you should be -- you should begin to see us return to profitability and return to a position where we can start paying a dividend. I think the big milestone this quarter clearly was monetized our Esports equity which massively reduced not only our equity exposure but also took away concentration risk because it pays an outlier in terms of size.

So now our largest equity position is like 4%. And so yes, we feel very, very good about the second half of this year..

Next question comes from the line of Steven Martin with Slater Capital..

A couple of questions.

The unrealized loss of $19 million -- some of that was, as you were just talking about Esports flipping around, how much of it was portfolio mark-to-market? And how much of that might be recovered given where the market is now?.

Yes, Good question. Okay. Jason..

Yes. I would say about 13% was a true flip between unrealized and realized. And then the remainder was pretty much -- has unrealized indicates, right? It's basically looking at fair values on a future cash flow projections on outlooks on the performance of the underlying company.

And with the rebound in rates and credit spread some of that we would expect to come back..

Okay.

Can you talk about deployments and repayments subsequent to the end of the quarter?.

Yes, I would say similar to our other policy which I know you were on as well, we had some increased deployment activity subsequent to the quarter end.

I think the difference between the 2 would be for the most part of the core of the second quarter, the folks in Logan Ridge has been the refinancing of the liability structure and getting the KeyBank facility in place and you come need to have a relatively static portfolio to kind of do those things.

So there was, I would say, we still have some work to do subsequent to quarter end to increase investment activity because a lot of the transactions that occurred across our platform in July, I'll call it, have been things that were in the works for a while.

And so there's a little bit of timing mismatch on kind of loan grade availability in terms of loan rate availability in terms of putting out and deploying the capital. So I'd say we still have some work to do on Logan Ridge in terms of deploying cash and making new investments..

Does it make sense, given the spreads right now to utilize the excess capacity which you obviously have in the liquid credit market if you can’t put enough to work in the private credit market..

I mean the short answer is yes. The long answer is it's more complicated than that as everything is the facility has certain metrics that we -- certain metrics and borrowing base calculations that we need to fall within. And so the answer is yes, the Logan markets are attractive from a purely economical perspective.

But we also need to weigh that against assets that are eligible that we can utilize for the facility. And so there's a Venn Diagram of those things. But the short answer is yes. We would absolutely expect to utilize the liquid markets to -- for some period of time to invest out of Logan Ridge..

Okay.

And recognizing that there was a lot going on, on the debt side of Logan Ridge in Q2, can you give us an idea of what the pro forma interest expense might have looked like with the capital structure that’s in place now or the corollary to that is, what might the interest expense look like for Q3 given the current debt structure?.

Yes. I would say within the number that's presented for the quarter, there's about 230 of excess interest expense just due to duplicative debt being on the portfolio for the mechanics of it's like paying off the existing debt. So that $2.1 million has about 230 of, call it, onetime interest expense on it.

Going forward, just using the rates that were in place as of 630 , I would anticipate that, that number be closer to the $1.7 million on a quarterly run rate?.

Got you.

Anything material that was realized in the third quarter so far?.

Yes. I mean it depends on your definition of materiality. I'd say, in some respects, the answer is yes. We've realized some exits. I think one of them was disclosed by the purchasing entity we've exited very recently, our position in biology. So that is on our SOI.

Our exit value, if you will, is in line with our quarter end valuation as we had been expecting and knew that was in process as part of our quarterly valuation process. So you shouldn't expect any impact from that but that was an asset that was realized this quarter.

It was a $3.6 million, $3.8 million debt position ; again, it depends on the debt position materiality. But I'd say that's one item that's been kind of publicly disclosed -- and then I wouldn't think there's anything else that would rise to an unusual materiality threshold..

No. was on the March 31, you had debt and preferred and you marked the preferred down to zero.

So that was a nonrecovery so to speak?.

That's correct..

Got you. So that would be part of which -- that would have been part of the….

No, that's part of the unrealized because as of 630 , it hadn't been realized to be part of the unrealized number that will theoretically get reversed out, you'll reverse the unrealized and booked to realize for Q3 but that's part of the unrealized Q2 number..

So that’s part of that $19 million?.

Yes, that's correct..

There are no further questions in queue at this time..

Again, for dialing into our morning call. And we look forward to speaking to you guys in mid-November and we wish everybody a really good end of summer. And -- and we’ll talk to you in a couple of weeks. Thank you so much..

Ladies and gentlemen, this concludes today's conference call. You may now disconnect..